Attached files
file | filename |
---|---|
EX-31.1 - Federal Home Loan Bank of Indianapolis | v184043_ex31-1.htm |
EX-32 - Federal Home Loan Bank of Indianapolis | v184043_ex32.htm |
EX-31.2 - Federal Home Loan Bank of Indianapolis | v184043_ex31-2.htm |
EX-31.3 - Federal Home Loan Bank of Indianapolis | v184043_ex31-3.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2010
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
File Number: 000-51404
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact
name of registrant as specified in its charter)
Federally
chartered corporation
(State or other jurisdiction of incorporation or organization)
|
35-6001443
(I.R.S. employer identification number)
|
|
8250
Woodfield Crossing Boulevard
Indianapolis,
IN
(Address
of principal executive offices)
|
46240
(Zip
code)
|
(317)
465-0200
(Registrant’s
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
for the past 90 days.
x Yes ¨ 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨ Yes ¨ 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 definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
o Large
accelerated filer
|
¨ Accelerated
filer
|
x Non-accelerated
filer (Do not check if a smaller reporting company)
|
¨ Smaller
reporting company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
¨ Yes x No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Shares
outstanding
as of April
30, 2010
|
|
Class
B Stock, par value $100
|
|
25,014,202
|
Table
of Contents
Page
Number
|
||
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
FINANCIAL
STATEMENTS (unaudited)
|
|
Statements
of Condition as of March 31, 2010, and December 31, 2009
|
1
|
|
Statements
of Income for the Three Months Ended March 31, 2010, and
2009
|
2
|
|
Statements
of Capital for the Three Months Ended March 31, 2010, and
2009
|
3
|
|
Statements
of Cash Flows for the Three Months Ended March 31, 2010, and
2009
|
4
|
|
Notes
to Interim Unaudited Financial Statements (unaudited):
|
||
Note 1
– Basis of Presentation
|
6
|
|
Note 2
– Recently Issued Accounting Standards &
Interpretations
|
6
|
|
Note 3
– Available-for-Sale Securities
|
8
|
|
Note 4
– Held-to-Maturity Securities
|
9
|
|
Note 5
– Other-Than-Temporary Impairment Analysis
|
13
|
|
Note 6
– Advances
|
16
|
|
Note 7
– Mortgage Loans Held for Portfolio
|
18
|
|
Note 8
– Derivative and Hedging Activities
|
19
|
|
Note 9
– Deposits
|
23
|
|
Note
10 – Consolidated Obligations
|
23
|
|
Note
11 – Capital
|
25
|
|
Note
12 – Segment Information
|
27
|
|
Note
13 – Estimated Fair Values
|
28
|
|
Note
14 – Commitments and Contingencies
|
33
|
|
Note
15 – Transactions with Shareholders
|
34
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
Special
Note Regarding Forward-looking Statements
|
36
|
|
Executive
Summary
|
37
|
|
Summary
of Selected Financial Data
|
41
|
|
Results
of Operations for the Three Months Ended March 31, 2010, and
2009
|
42
|
|
Business
Segments
|
46
|
|
Analysis
of Financial Condition
|
47
|
|
Liquidity
and Capital Resources
|
49
|
|
Off-Balance
Sheet Arrangements
|
51
|
|
Critical
Accounting Policies and Estimates
|
51
|
|
Recent
Accounting and Regulatory Developments
|
53
|
|
Risk
Management
|
56
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
69
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
73
|
PART
II.
|
OTHER
INFORMATION
|
|
Item
1A.
|
RISK
FACTORS
|
73
|
Item
6.
|
EXHIBITS
|
74
|
Signatures
|
76
|
|
Exhibit
31.1
|
|
|
Exhibit
31.2
|
||
Exhibit
31.3
|
||
Exhibit
32
|
As used
in this Form 10-Q, unless the context otherwise requires, the terms “we,”
“us,” “our,” “FHLBI,” and the “Bank” refer to the Federal Home Loan Bank of
Indianapolis.
Federal
Home Loan Bank of Indianapolis
Statements
of Condition
(Unaudited,
$ amounts and shares in thousands, except par value)
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Assets:
|
||||||||
Cash
and Due from Banks
|
$ | 1,412,026 | $ | 1,722,077 | ||||
Interest-Bearing
Deposits, members and non-members
|
43 | 25 | ||||||
Federal
Funds Sold, members and non-members
|
6,883,000 | 5,532,000 | ||||||
Available-for-Sale
Securities (a)
(Note 3)
|
1,764,316 | 1,760,714 | ||||||
Held-to-Maturity
Securities (b)
(Note 4)
|
8,177,769 | 7,701,151 | ||||||
Advances
(Note 6)
|
21,581,565 | 22,442,904 | ||||||
Mortgage
Loans Held for Portfolio, net (Note 7)
|
6,990,015 | 7,271,895 | ||||||
Loans
to Other Federal Home Loan Banks
|
35,000 | - | ||||||
Accrued
Interest Receivable
|
110,217 | 114,246 | ||||||
Premises,
Software, and Equipment, net
|
10,547 | 10,786 | ||||||
Derivative
Assets, net (Note 8)
|
5,944 | 1,714 | ||||||
Other
Assets
|
101,260 | 41,554 | ||||||
Total
Assets
|
$ | 47,071,702 | $ | 46,599,066 | ||||
Liabilities:
|
||||||||
Deposits
(Note 9):
|
||||||||
Interest-Bearing
Deposits
|
$ | 546,353 | $ | 821,431 | ||||
Non-Interest-Bearing
Deposits
|
2,769 | 3,420 | ||||||
Total
Deposits
|
549,122 | 824,851 | ||||||
Consolidated
Obligations, net (Note 10):
|
||||||||
Discount
Notes
|
11,536,974 | 6,250,093 | ||||||
Bonds
|
31,267,356 | 35,907,789 | ||||||
Total
Consolidated Obligations, net
|
42,804,330 | 42,157,882 | ||||||
Accrued
Interest Payable
|
188,483 | 211,504 | ||||||
Affordable
Housing Program Payable
|
38,781 | 37,329 | ||||||
Payable
to Resolution Funding Corporation
|
8,207 | 6,533 | ||||||
Derivative
Liabilities, net (Note 8)
|
764,359 | 712,716 | ||||||
Mandatorily
Redeemable Capital Stock (Note 11)
|
750,697 | 755,660 | ||||||
Other
Liabilities
|
206,373 | 146,180 | ||||||
Total
Liabilities
|
45,310,352 | 44,852,655 | ||||||
Commitments
and Contingencies (Note 14)
|
||||||||
Capital (Note
11):
|
||||||||
Capital
Stock Class B-1 Putable ($100 par value) issued and
outstanding
|
||||||||
shares:
17,324 and 17,260, respectively
|
1,732,362 | 1,726,000 | ||||||
Capital
Stock Class B-2 Putable ($100 par value) no shares issued or
outstanding
|
- | - | ||||||
Total
Capital Stock Putable
|
1,732,362 | 1,726,000 | ||||||
Retained
Earnings
|
372,611 | 349,013 | ||||||
Accumulated
Other Comprehensive Income (Loss):
|
||||||||
Net
Unrealized Gains (Losses) on Available-for-Sale Securities,
before
|
||||||||
Derivative
and Hedging Adjustments (Note 3)
|
(18,466 | ) | 2,140 | |||||
Net
Non-Credit Portion of Other-Than-Temporary Impairment Losses
on
|
||||||||
Held-to-Maturity
Securities (Note 5)
|
(318,652 | ) | (324,041 | ) | ||||
Pension
and Postretirement Benefits
|
(6,505 | ) | (6,701 | ) | ||||
Total
Accumulated Other Comprehensive Income (Loss)
|
(343,623 | ) | (328,602 | ) | ||||
Total
Capital
|
1,761,350 | 1,746,411 | ||||||
Total
Liabilities and Capital
|
$ | 47,071,702 | $ | 46,599,066 |
(a)
Amortized cost: $1,670,626 and $1,672,918 at March 31, 2010, and December 31,
2009, respectively
(b)
Estimated fair values: $8,278,152 and $7,690,482 at March 31, 2010, and December
31, 2009, respectively
The
accompanying notes are an integral part of these financial
statements.
1
Federal
Home Loan Bank of Indianapolis
Statements
of Income
(Unaudited,
$ amounts in thousands)
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Interest
Income:
|
||||||||
Advances
|
$ | 50,434 | $ | 151,324 | ||||
Prepayment
Fees on Advances, net
|
693 | 150 | ||||||
Interest-Bearing
Deposits, members and non-members
|
36 | 106 | ||||||
Federal
Funds Sold, members and non-members
|
2,533 | 10,536 | ||||||
Available-for-Sale
Securities
|
1,621 | 7,895 | ||||||
Held-to-Maturity
Securities
|
63,431 | 76,739 | ||||||
Mortgage
Loans Held for Portfolio, net
|
90,655 | 113,316 | ||||||
Other
Interest Income
|
528 | - | ||||||
Total
Interest Income
|
209,931 | 360,066 | ||||||
Interest
Expense:
|
||||||||
Deposits
|
78 | 330 | ||||||
Consolidated
Obligation Bonds
|
142,162 | 238,122 | ||||||
Discount
Notes
|
2,465 | 56,197 | ||||||
Mandatorily
Redeemable Capital Stock
|
3,579 | 3,933 | ||||||
Other
Interest Expense
|
- | 1 | ||||||
Total
Interest Expense
|
148,284 | 298,583 | ||||||
Net
Interest Income
|
61,647 | 61,483 | ||||||
Other
Income (Loss):
|
||||||||
Total
Other-Than-Temporary Impairment Losses
|
(14,453 | ) | (147,292 | ) | ||||
Portion
of Impairment Losses Recognized in Other
|
||||||||
Comprehensive
Income (Loss), net
|
8,387 | 128,742 | ||||||
Net
Other-Than-Temporary Impairment Losses
|
(6,066 | ) | (18,550 | ) | ||||
Net
Gains (Losses) on Derivatives and Hedging Activities
|
(1,175 | ) | (1,243 | ) | ||||
Service
Fees
|
301 | 283 | ||||||
Standby
Letters of Credit Fees
|
363 | 186 | ||||||
Other,
net
|
262 | 242 | ||||||
Total
Other Income (Loss)
|
(6,315 | ) | (19,082 | ) | ||||
Other
Expenses:
|
||||||||
Compensation
and Benefits
|
6,704 | 8,155 | ||||||
Other
Operating Expenses
|
2,934 | 2,873 | ||||||
Finance
Agency/Finance Board
|
599 | 452 | ||||||
Office
of Finance
|
465 | 449 | ||||||
Other
|
284 | 316 | ||||||
Total
Other Expenses
|
10,986 | 12,245 | ||||||
Income
Before Assessments
|
44,346 | 30,156 | ||||||
Assessments:
|
||||||||
Affordable
Housing Program
|
3,985 | 2,863 | ||||||
Resolution
Funding Corporation
|
8,072 | 5,459 | ||||||
Total
Assessments
|
12,057 | 8,322 | ||||||
Net
Income
|
$ | 32,289 | $ | 21,834 |
The
accompanying notes are an integral part of these financial
statements.
2
Federal
Home Loan Bank of Indianapolis
Statements
of Capital
(Unaudited,
$ amounts and shares in thousands)
Capital Stock
|
Capital Stock
|
Accumulated
|
||||||||||||||||||||||||||
Class B-1
|
Class B-2
|
Other
|
||||||||||||||||||||||||||
Putable
|
Putable
|
Retained
|
Comprehensive
|
Total
|
||||||||||||||||||||||||
Shares
|
Par Value
|
Shares
|
Par Value
|
Earnings
|
Income (Loss)
|
Capital
|
||||||||||||||||||||||
Balance,
December 31, 2008
|
18,792 | $ | 1,879,179 | 2 | $ | 196 | $ | 282,731 | $ | (71,398 | ) | $ | 2,090,708 | |||||||||||||||
Proceeds
from Sale of Capital Stock
|
178 | 17,775 | - | - | 17,775 | |||||||||||||||||||||||
Transfers
of Capital Stock
|
2 | 195 | (2 | ) | (195 | ) | - | |||||||||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||||||
Net
Income
|
21,834 | 21,834 | ||||||||||||||||||||||||||
Other
Comprehensive Income (Loss):
|
||||||||||||||||||||||||||||
Net
Unrealized Gain (Loss) on Available-
|
||||||||||||||||||||||||||||
for-Sale
Securities
|
(1,968 | ) | (1,968 | ) | ||||||||||||||||||||||||
Non-Credit
Portion of Other-Than-
|
||||||||||||||||||||||||||||
Temporary
Impairment Losses on
|
||||||||||||||||||||||||||||
Held-to-Maturity
Securities
|
(128,742 | ) | (128,742 | ) | ||||||||||||||||||||||||
Reclassification
of Non-Credit
|
||||||||||||||||||||||||||||
Losses
to Other Income (Loss)
|
- | - | ||||||||||||||||||||||||||
Net
Non-Credit Portion Before Accretion
|
(128,742 | ) | (128,742 | ) | ||||||||||||||||||||||||
Accretion
of Non-Credit Portion
|
- | - | ||||||||||||||||||||||||||
Net
Non-Credit Portion
|
(128,742 | ) | (128,742 | ) | ||||||||||||||||||||||||
Pension
and Postretirement Benefits
|
1,657 | 1,657 | ||||||||||||||||||||||||||
Total
Comprehensive Income (Loss)
|
21,834 | (129,053 | ) | (107,219 | ) | |||||||||||||||||||||||
Distributions
on Mandatorily Redeemable
|
||||||||||||||||||||||||||||
Capital
Stock
|
- | - | ||||||||||||||||||||||||||
Dividends
on Capital Stock:
|
||||||||||||||||||||||||||||
Cash
(3.85% annualized)
|
(18,651 | ) | (18,651 | ) | ||||||||||||||||||||||||
Balance,
March 31, 2009
|
18,972 | $ | 1,897,149 | - | $ | 1 | $ | 285,914 | $ | (200,451 | ) | $ | 1,982,613 | |||||||||||||||
Balance,
December 31, 2009
|
17,260 | $ | 1,726,000 | - | $ | - | $ | 349,013 | $ | (328,602 | ) | $ | 1,746,411 | |||||||||||||||
Proceeds
from Sale of Capital Stock
|
42 | 4,212 | - | - | 4,212 | |||||||||||||||||||||||
Net
Shares Reclassified from Mandatorily
|
||||||||||||||||||||||||||||
Redeemable
Capital Stock
|
22 | 2,150 | - | - | 2,150 | |||||||||||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||||||
Net
Income
|
32,289 | 32,289 | ||||||||||||||||||||||||||
Other
Comprehensive Income (Loss):
|
||||||||||||||||||||||||||||
Net
Unrealized Gain (Loss) on Available-
|
||||||||||||||||||||||||||||
for-Sale
Securities
|
(20,606 | ) | (20,606 | ) | ||||||||||||||||||||||||
Non-Credit
Portion of Other-Than-
|
||||||||||||||||||||||||||||
Temporary
Impairment Losses on
|
||||||||||||||||||||||||||||
Held-to-Maturity
Securities
|
(14,169 | ) | (14,169 | ) | ||||||||||||||||||||||||
Reclassification
of Non-Credit
|
||||||||||||||||||||||||||||
Losses
to Other Income (Loss)
|
5,782 | 5,782 | ||||||||||||||||||||||||||
Net
Non-Credit Portion Before Accretion
|
(8,387 | ) | (8,387 | ) | ||||||||||||||||||||||||
Accretion
of Non-Credit Portion
|
13,776 | 13,776 | ||||||||||||||||||||||||||
Net
Non-Credit Portion
|
5,389 | 5,389 | ||||||||||||||||||||||||||
Pension
and Postretirement Benefits
|
196 | 196 | ||||||||||||||||||||||||||
Total
Comprehensive Income (Loss)
|
32,289 | (15,021 | ) | 17,268 | ||||||||||||||||||||||||
Distributions
on Mandatorily Redeemable
|
||||||||||||||||||||||||||||
Capital
Stock
|
- | - | ||||||||||||||||||||||||||
Dividends
on Capital Stock:
|
||||||||||||||||||||||||||||
Cash
(2.00% annualized)
|
(8,691 | ) | (8,691 | ) | ||||||||||||||||||||||||
Balance,
March 31, 2010
|
17,324 | $ | 1,732,362 | - | $ | - | $ | 372,611 | $ | (343,623 | ) | $ | 1,761,350 |
The
accompanying notes are an integral part of these financial
statements.
3
Federal
Home Loan Bank of Indianapolis
Statements
of Cash Flows
(Unaudited,
$ amounts in thousands)
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
Activities:
|
||||||||
Net
Income
|
$ | 32,289 | $ | 21,834 | ||||
Adjustments
to Reconcile Net Income to Net Cash provided by (used in)
|
||||||||
Operating
Activities:
|
||||||||
Depreciation
and Amortization
|
(20,036 | ) | (32,625 | ) | ||||
Net
Other-Than-Temporary Impairment Losses
|
6,066 | 18,550 | ||||||
(Gain)
Loss on Derivative and Hedging Activities
|
2,207 | 7,745 | ||||||
Net
Change in:
|
||||||||
Accrued
Interest Receivable
|
4,025 | 14,456 | ||||||
Net
Accrued Interest on Derivatives
|
51,659 | 43,242 | ||||||
Other
Assets
|
440 | (41 | ) | |||||
Accrued
Interest Payable
|
(23,020 | ) | (29,428 | ) | ||||
Other
Liabilities
|
1,799 | (14,714 | ) | |||||
Total
Adjustments
|
23,140 | 7,185 | ||||||
Net
Cash provided by (used in) Operating Activities
|
55,429 | 29,019 | ||||||
Investing
Activities:
|
||||||||
Net
Change in:
|
||||||||
Interest-Bearing
Deposits, members and non-members
|
(23,157 | ) | 60,870 | |||||
Federal
Funds Sold, members and non-members
|
(1,351,000 | ) | (2,591,000 | ) | ||||
Premises,
Software, and Equipment
|
(103 | ) | (187 | ) | ||||
Held-to-Maturity
Securities:
|
||||||||
Net
(Increase) Decrease in Short-Term Held-to-Maturity
Securities
|
(411,000 | ) | - | |||||
Proceeds
from Maturities of Long-Term Held-to-Maturity Securities
|
491,928 | 608,184 | ||||||
Purchases
of Long-Term Held-to-Maturity Securities
|
(533,425 | ) | (1,611,468 | ) | ||||
Advances:
|
||||||||
Principal
Collected
|
5,115,810 | 9,270,503 | ||||||
Made
to Members
|
(4,223,897 | ) | (6,040,914 | ) | ||||
Mortgage
Loans Held for Portfolio:
|
||||||||
Principal
Collected
|
361,959 | 542,770 | ||||||
Purchases
|
(82,207 | ) | (199,080 | ) | ||||
Payments
(Proceeds) from Sales of Foreclosed Properties
|
(33 | ) | 1 | |||||
Other
Federal Home Loan Banks:
|
||||||||
Principal
Collected on Loans
|
25,735 | - | ||||||
Loans
Made
|
(60,735 | ) | - | |||||
Net
Cash provided by (used in) Investing Activities
|
$ | (690,125 | ) | $ | 39,679 |
The
accompanying notes are an integral part of these financial
statements.
4
Federal
Home Loan Bank of Indianapolis
Statements of Cash Flows,
continued
(Unaudited,
$ amounts in thousands)
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Financing
Activities:
|
||||||||
Net
Change in:
|
||||||||
Deposits
|
$ | (271,786 | ) | $ | 233,286 | |||
Net
Proceeds (Payments) on Derivative Contracts with Financing
Elements
|
(42,543 | ) | (25,806 | ) | ||||
Net
Proceeds from Issuance of Consolidated Obligations:
|
||||||||
Discount
Notes
|
147,423,048 | 25,833,344 | ||||||
Consolidated
Obligation Bonds
|
8,110,390 | 10,890,633 | ||||||
Payments
for Maturing and Retiring Consolidated Obligations:
|
||||||||
Discount
Notes
|
(142,136,272 | ) | (28,629,577 | ) | ||||
Consolidated
Obligation Bonds
|
(12,750,900 | ) | (9,226,250 | ) | ||||
Proceeds
from Sale of Capital Stock
|
4,212 | 17,775 | ||||||
Payments
for Redemption of Mandatorily Redeemable Capital Stock
|
(2,813 | ) | (731 | ) | ||||
Cash
Dividends Paid
|
(8,691 | ) | (18,651 | ) | ||||
Net
Cash provided by (used in) Financing Activities
|
324,645 | (925,977 | ) | |||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(310,051 | ) | (857,279 | ) | ||||
Cash
and Cash Equivalents at Beginning of the Period
|
1,722,077 | 870,810 | ||||||
Cash
and Cash Equivalents at End of the Period
|
$ | 1,412,026 | $ | 13,531 | ||||
Supplemental
Disclosures:
|
||||||||
Interest
Paid
|
$ | 174,687 | $ | 323,959 | ||||
Affordable
Housing Program Payments, net
|
2,533 | 1,061 | ||||||
Resolution
Funding Corporation Assessments Paid
|
6,399 | 17,024 |
The
accompanying notes are an integral part of these financial
statements.
5
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements
($
amounts in thousands unless otherwise indicated)
Note
1 — Basis of Presentation
The
accompanying interim financial statements of the Federal Home Loan Bank of
Indianapolis (“Bank”)
are unaudited and have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial
information and with the instructions provided by Article 10, Rule 10-01 of
Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly,
they do not include all of the information and disclosures required by GAAP for
complete financial statements. The financial statements contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of the Bank’s financial position, results of operations and cash flows
for the interim periods presented. All such adjustments were of a
normal recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full fiscal year or any other interim period.
The
interim financial statements presented herein should be read in conjunction with
the Bank’s audited financial statements and notes thereto, which are included in
the Bank’s Annual Report on Form 10-K as filed with the SEC under the Securities
Exchange Act of 1934 on March 19, 2010 (“2009 Form 10-K”). The
Bank’s significant accounting policies and certain other disclosures are set
forth in the notes to the audited financial statements in the 2009 Form
10-K. There have been no significant changes to these policies as of
March 31, 2010.
We have
reclassified certain amounts from the prior periods to conform to the 2010
presentation. These reclassifications had no effect on Net Income or
Capital.
All
dollar amounts included in the notes are presented in thousands, unless
otherwise indicated.
Use of
Estimates. The
preparation of financial statements in accordance with GAAP requires management
to make assumptions and estimates. These assumptions and estimates
may affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of income and
expenses. Actual results could differ significantly from these
estimates.
Subsequent
Events. We
have evaluated events and transactions through the time of filing our first
quarter 2010 Form 10-Q with the SEC, and believe there have been no material
subsequent events requiring additional disclosure or recognition in the
financial statements.
Note
2 — Recently Issued Accounting Standards & Interpretations
Accounting for
Transfers of Financial Assets. On June 12, 2009, the Financial
Accounting Standards Board (“FASB”) issued guidance
intended to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement in transferred financial
assets. Key provisions of the guidance include: (i) the removal of
the concept of qualifying special purpose entities; (ii) the introduction of the
concept of a participating interest, in circumstances in which a portion of a
financial asset has been transferred; and (iii) the requirement that to qualify
for sale accounting, the transferor must evaluate whether it maintains effective
control over transferred financial assets either directly or
indirectly. The guidance also requires enhanced disclosures about
transfers of financial assets and a transferor’s continuing
involvement. This guidance is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after
November 15, 2009 (January 1, 2010, for us), for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. We adopted this guidance as of
January 1, 2010. Our adoption of this guidance did not have
a material effect on our financial condition, results of operations or cash
flows.
6
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
Accounting for
the Consolidation of Variable Interest Entities. On June 12,
2009, the FASB issued guidance intended to improve financial reporting by
enterprises involved with variable interest entities (“VIEs”), by providing more
relevant and reliable information to users of financial
statements. This guidance amends the manner in which entities
evaluate whether consolidation is required for VIEs. An entity must
first perform a qualitative analysis in determining whether it must consolidate
a VIE, and if the qualitative analysis is not determinative, the entity must
perform a quantitative analysis. The guidance also requires that an
entity continually evaluate VIEs for consolidation, rather than making such an
assessment based upon the occurrence of triggering events. Additionally,
the guidance requires enhanced disclosures about how an entity’s involvement
with a VIE affects its financial statements and its exposure to
risks. We adopted this guidance as of January 1, 2010. Our
adoption of this guidance did not have a material effect on our financial
condition, results of operations or cash flows.
Fair Value
Measurements and Disclosures — Improving Disclosures about Fair Value
Measurements. On January 21,
2010, the FASB issued amended guidance for the fair value measurements and
disclosures. The update requires a reporting entity to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and to describe the reasons for the transfers. Furthermore, this
update requires a reporting entity to present separately information about
purchases, sales, issuances, and settlements in the reconciliation for fair
value measurements using significant unobservable inputs; clarifies existing
fair value disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value; and amends guidance on
employers’ disclosures about postretirement benefit plan assets to require that
disclosures be provided by classes of assets instead of by major categories of
assets. The new guidance is effective for interim and annual reporting periods
beginning after December 15, 2009 (January 1, 2010, for us), except for the
disclosures about purchases, sales, issuances, and settlements in the
reconciliation in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010 (January 1,
2011, for us), and for interim periods within those fiscal years. In the period
of initial adoption, entities will not be required to provide the amended
disclosures for any previous periods presented for comparative purposes. Early
adoption was permitted. We adopted this guidance as of January 1, 2010 with the
exception of the required changes noted above related to the reconciliation of
Level 3 fair values. Its adoption resulted in increased annual and
interim financial statement disclosures but did not have a material effect on
our results of operations, financial condition, or cash flows.
Scope Exception
Related to Embedded Credit Derivatives. On March 5, 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, entities that have
contracts containing an embedded credit derivative feature in a form other than
such subordination will need to assess those embedded credit derivatives to
determine if bifurcation and separate accounting as a derivative is
required. This guidance is effective at the beginning of the first
interim reporting period beginning after June 15, 2010 (July 1, 2010, for
us). Early adoption is permitted at the beginning of an entity’s
first interim reporting period beginning after issuance of this
guidance. We are currently evaluating the effect that the
adoption of this guidance may have on our financial condition, results of
operations and cash flows.
7
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
Note
3 — Available-for-Sale Securities
Major Security
Types. Available-for-Sale
Securities (“AFS”)
include AAA-rated agency debentures issued or guaranteed by Government Sponsored
Enterprises (“GSEs”)
purchased from non-member counterparties. These GSEs include Federal
Home Loan Mortgage Corporation (“Freddie Mac”) and Federal
National Mortgage Association (“Fannie Mae”). AFS
were as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
March 31, 2010
|
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
GSEs
|
$ | 1,670,626 | $ | 93,690 | $ | - | $ | 1,764,316 | ||||||||
Total
AFS
|
$ | 1,670,626 | $ | 93,690 | $ | - | $ | 1,764,316 |
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
December 31, 2009
|
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
GSEs
|
$ | 1,672,918 | $ | 87,796 | $ | - | $ | 1,760,714 | ||||||||
Total
AFS
|
$ | 1,672,918 | $ | 87,796 | $ | - | $ | 1,760,714 |
Gross
unrealized gains as of March 31, 2010, include unrealized losses on AFS of
$18,466 and a hedging gain of $112,156. Gross unrealized gains as of
December 31, 2009, include unrealized gains on AFS of $2,140 and a hedging gain
of $85,656. The unrealized gains and losses on AFS are included in
Accumulated Other Comprehensive Income (Loss) (“AOCI”) and the changes in fair
value are included in Net Gains (Losses) on Derivatives and Hedging Activities
in the Statements of Income.
Redemption
Terms. The amortized cost and
estimated fair value of AFS by contractual maturity are shown
below.
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|||||||||||||
Year of Contractual
Maturity
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
Due
in one year or less
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Due
after one year through five years
|
- | - | - | - | ||||||||||||
Due
after five years through ten years
|
1,670,626 | 1,764,316 | 1,672,918 | 1,760,714 | ||||||||||||
Due
after ten years
|
- | - | - | - | ||||||||||||
Total
AFS
|
$ | 1,670,626 | $ | 1,764,316 | $ | 1,672,918 | $ | 1,760,714 |
Interest Rate
Payment Terms. All of the AFS pay a
fixed rate of interest ranging from 4.88% to 5.50%.
Realized Gains
and Losses. There were no sales of AFS during the three months
ended March 31, 2010, or 2009.
8
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
Note
4 — Held-to-Maturity Securities
Major Security
Types. Held-to-Maturity Securities (“HTM”) consist primarily of
mortgage-backed securities (“MBS”) and asset-backed
securities (“ABS”) and
corporate debentures guaranteed by the Federal Deposit Insurance Corporation
(“FDIC”) and backed by
the full faith and credit of the United States under the Temporary Liquidity
Guarantee Program (“TLGP”). Our MBS
include residential MBS (“RMBS”) and commercial MBS
(“CMBS”). Our
ABS include both manufactured housing and home equity
loans. Private-label MBS and ABS in our portfolio refer to our
private-label RMBS, CMBS and ABS (“Private-label MBS and ABS”).
Our HTM also include certificates of deposit (“CDs”) and bank notes, state or
local housing finance agency obligations, and corporate debentures issued by
GSEs.
Our HTM
were as follows:
OTTI
|
Gross
|
Gross
|
||||||||||||||||||||||
Recognized
|
Unrecognized
|
Unrecognized
|
Estimated
|
|||||||||||||||||||||
Amortized
|
In
|
Carrying
|
Holding
|
Holding
|
Fair
|
|||||||||||||||||||
March 31, 2010
|
Cost (1)
|
AOCI
|
Value (2)
|
Gains (3)
|
Losses (3)
|
Value
|
||||||||||||||||||
Non-MBS
and ABS:
|
||||||||||||||||||||||||
GSE
debentures
|
$ | 125,705 | $ | - | $ | 125,705 | $ | 465 | $ | - | $ | 126,170 | ||||||||||||
State
or local housing
|
||||||||||||||||||||||||
finance
agency obligations
|
- | - | - | - | - | - | ||||||||||||||||||
CDs
|
411,000 | - | 411,000 | - | (1 | ) | 410,999 | |||||||||||||||||
TLGP
|
2,066,986 | - | 2,066,986 | 6,845 | (1 | ) | 2,073,830 | |||||||||||||||||
Total
Non-MBS and ABS
|
2,603,691 | - | 2,603,691 | 7,310 | (2 | ) | 2,610,999 | |||||||||||||||||
MBS
and ABS:
|
||||||||||||||||||||||||
Other
U.S. Obligations –
|
||||||||||||||||||||||||
guaranteed
RMBS
|
1,403,144 | - | 1,403,144 | 18,897 | - | 1,422,041 | ||||||||||||||||||
GSE
RMBS
|
1,974,994 | - | 1,974,994 | 60,562 | (1,924 | ) | 2,033,632 | |||||||||||||||||
Private-label
RMBS
|
2,490,372 | (318,652 | ) | 2,171,720 | 94,169 | (73,226 | ) | 2,192,663 | ||||||||||||||||
Private-label
CMBS
|
- | - | - | - | - | - | ||||||||||||||||||
Private-label
ABS
|
24,220 | - | 24,220 | - | (5,403 | ) | 18,817 | |||||||||||||||||
Total
MBS and ABS
|
5,892,730 | (318,652 | ) | 5,574,078 | 173,628 | (80,553 | ) | 5,667,153 | ||||||||||||||||
Total
HTM
|
$ | 8,496,421 | $ | (318,652 | ) | $ | 8,177,769 | $ | 180,938 | $ | (80,555 | ) | $ | 8,278,152 |
9
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
OTTI
|
Gross
|
Gross
|
||||||||||||||||||||||
Recognized
|
Unrecognized
|
Unrecognized
|
Estimated
|
|||||||||||||||||||||
Amortized
|
In
|
Carrying
|
Holding
|
Holding
|
Fair
|
|||||||||||||||||||
December 31, 2009
|
Cost (1)
|
AOCI
|
Value (2)
|
Gains (3)
|
Losses (3)
|
Value
|
||||||||||||||||||
Non-MBS
and ABS:
|
||||||||||||||||||||||||
GSE
debentures
|
$ | 125,893 | $ | - | $ | 125,893 | $ | 446 | $ | - | $ | 126,339 | ||||||||||||
State
or local housing
|
||||||||||||||||||||||||
finance
agency obligations
|
260 | - | 260 | - | - | 260 | ||||||||||||||||||
CDs
|
- | - | - | - | - | - | ||||||||||||||||||
TLGP
|
2,067,311 | - | 2,067,311 | 8,407 | (26 | ) | 2,075,692 | |||||||||||||||||
Total
Non-MBS and ABS
|
2,193,464 | - | 2,193,464 | 8,853 | (26 | ) | 2,202,291 | |||||||||||||||||
MBS
and ABS:
|
||||||||||||||||||||||||
Other
U.S. Obligations –
|
||||||||||||||||||||||||
guaranteed
RMBS
|
865,160 | - | 865,160 | 164 | (7,965 | ) | 857,359 | |||||||||||||||||
GSE
RMBS
|
2,136,381 | - | 2,136,381 | 58,880 | (2,985 | ) | 2,192,276 | |||||||||||||||||
Private-label
RMBS
|
2,805,348 | (324,041 | ) | 2,481,307 | 56,915 | (116,891 | ) | 2,421,331 | ||||||||||||||||
Private-label
CMBS
|
- | - | - | - | - | - | ||||||||||||||||||
Private-label
ABS
|
24,839 | - | 24,839 | - | (7,614 | ) | 17,225 | |||||||||||||||||
Total
MBS and ABS
|
5,831,728 | (324,041 | ) | 5,507,687 | 115,959 | (135,455 | ) | 5,488,191 | ||||||||||||||||
Total
HTM
|
$ | 8,025,192 | $ | (324,041 | ) | $ | 7,701,151 | $ | 124,812 | $ | (135,481 | ) | $ | 7,690,482 |
|
(1)
|
Amortized
cost of HTM includes adjustments made to the cost basis of an investment
for accretion, amortization, collection of cash, and/or previous
other-than-temporary-impairment (“OTTI”) losses recognized
in earnings. OTTI may also refer to “Other-than-Temporarily
Impaired” as the context indicates.
|
|
(2)
|
Carrying
value of HTM represents amortized cost after adjustment for non-credit
related impairment recognized in
AOCI.
|
|
(3)
|
Gross
unrecognized holding gains (losses) represent the difference between
estimated fair value and carrying
value.
|
10
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
The
following tables summarize the HTM with unrealized losses, which are aggregated
by major security type and length of time that individual securities have been
in a continuous unrealized loss position.
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
March 31, 2010
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses (1)
|
||||||||||||||||||
Non-MBS
and ABS:
|
||||||||||||||||||||||||
CDs
|
$ | 220,999 | $ | (1 | ) | $ | - | $ | - | $ | 220,999 | $ | (1 | ) | ||||||||||
TLGP
|
14,356 | (1 | ) | - | - | 14,356 | (1 | ) | ||||||||||||||||
Total
Non-MBS and ABS
|
235,355 | (2 | ) | - | - | 235,355 | (2 | ) | ||||||||||||||||
MBS
and ABS:
|
||||||||||||||||||||||||
Other
U.S. Obligations –
|
||||||||||||||||||||||||
guaranteed
RMBS
|
- | - | - | - | - | - | ||||||||||||||||||
GSE
RMBS
|
186,809 | (1,924 | ) | - | - | 186,809 | (1,924 | ) | ||||||||||||||||
Private-label
RMBS
|
- | - | 2,156,861 | (297,796 | ) | 2,156,861 | (297,796 | ) | ||||||||||||||||
Private-label
CMBS
|
- | - | - | - | - | - | ||||||||||||||||||
Private-label
ABS
|
- | - | 18,817 | (5,403 | ) | 18,817 | (5,403 | ) | ||||||||||||||||
Total
MBS and ABS
|
186,809 | (1,924 | ) | 2,175,678 | (303,199 | ) | 2,362,487 | (305,123 | ) | |||||||||||||||
Total
HTM Impaired
|
$ | 422,164 | $ | (1,926 | ) | $ | 2,175,678 | $ | (303,199 | ) | $ | 2,597,842 | $ | (305,125 | ) |
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
December 31, 2009
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses (1)
|
||||||||||||||||||
Non-MBS
and ABS:
|
||||||||||||||||||||||||
CDs
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
TLGP
|
46,263 | (26 | ) | - | - | 46,263 | (26 | ) | ||||||||||||||||
Total
Non-MBS and ABS
|
46,263 | (26 | ) | - | - | 46,263 | (26 | ) | ||||||||||||||||
MBS
and ABS:
|
||||||||||||||||||||||||
Other
U.S. Obligations –
|
||||||||||||||||||||||||
guaranteed
RMBS
|
746,222 | (7,965 | ) | - | - | 746,222 | (7,965 | ) | ||||||||||||||||
GSE
RMBS
|
280,660 | (2,985 | ) | - | - | 280,660 | (2,985 | ) | ||||||||||||||||
Private-label
RMBS
|
- | - | 2,421,331 | (384,017 | ) | 2,421,331 | (384,017 | ) | ||||||||||||||||
Private-label
CMBS
|
- | - | - | - | - | - | ||||||||||||||||||
Private-label
ABS
|
- | - | 17,225 | (7,614 | ) | 17,225 | (7,614 | ) | ||||||||||||||||
Total
MBS and ABS
|
1,026,882 | (10,950 | ) | 2,438,556 | (391,631 | ) | 3,465,438 | (402,581 | ) | |||||||||||||||
Total
HTM Impaired
|
$ | 1,073,145 | $ | (10,976 | ) | $ | 2,438,556 | $ | (391,631 | ) | $ | 3,511,701 | $ | (402,607 | ) |
|
(1)
|
The
unrealized losses at March 31, 2010, of $305,125 include OTTI recognized
in AOCI of $318,652, gross unrecognized holding losses of $80,555, and
gross unrecognized holding gains on OTTI securities (due to an increase in
price since their previous OTTI) of $94,082. Comparatively, the
unrealized losses at December 31, 2009, of $402,607 include OTTI
recognized in AOCI of $324,041, gross unrecognized holding losses of
$135,481, and gross unrecognized holding gains on OTTI securities (due to
an increase in price since their previous OTTI) of
$56,915.
|
11
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
Redemption
Terms. The
amortized cost and estimated fair value of HTM by contractual maturity are shown
below. Expected maturities of some securities may 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
|
|||||||||||||||||||||||
Estimated
|
Estimated
|
|||||||||||||||||||||||
Amortized
|
Carrying
|
Fair
|
Amortized
|
Carrying
|
Fair
|
|||||||||||||||||||
Year of Contractual
Maturity
|
Cost (1)
|
Value (1)
|
Value
|
Cost (1)
|
Value (1)
|
Value
|
||||||||||||||||||
Non-MBS
and ABS:
|
||||||||||||||||||||||||
Due
in one year or less
|
$ | 596,000 | $ | 596,000 | $ | 596,251 | $ | - | $ | - | $ | - | ||||||||||||
Due
after one year through five years
|
2,007,691 | 2,007,691 | 2,014,748 | 2,193,204 | 2,193,204 | 2,202,031 | ||||||||||||||||||
Due
after five years through ten years
|
- | - | - | - | - | - | ||||||||||||||||||
Due
after ten years
|
- | - | - | 260 | 260 | 260 | ||||||||||||||||||
Total
Non-MBS and ABS
|
2,603,691 | 2,603,691 | 2,610,999 | 2,193,464 | 2,193,464 | 2,202,291 | ||||||||||||||||||
Total
MBS and ABS
|
5,892,730 | 5,574,078 | 5,667,153 | 5,831,728 | 5,507,687 | 5,488,191 | ||||||||||||||||||
Total
HTM
|
$ | 8,496,421 | $ | 8,177,769 | $ | 8,278,152 | $ | 8,025,192 | $ | 7,701,151 | $ | 7,690,482 |
|
(1)
|
Carrying
value of HTM represents amortized cost after adjustment for non-credit
related impairment recognized in
AOCI.
|
Interest Rate
Payment Terms. The following table
details interest rate payment terms for investment securities classified as HTM,
at amortized cost:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Non-MBS
and ABS:
|
||||||||
Fixed-rate
|
$ | 436,705 | $ | 26,153 | ||||
Variable-rate
|
2,166,986 | 2,167,311 | ||||||
Total
Non-MBS and ABS
|
2,603,691 | 2,193,464 | ||||||
MBS
and ABS:
|
||||||||
Pass-through
securities:
|
||||||||
Fixed-rate
|
1,084,168 | 727,887 | ||||||
Variable-rate
|
335,118 | 424,400 | ||||||
Collateralized
mortgage obligations:
|
||||||||
Fixed-rate
|
3,010,053 | 3,333,691 | ||||||
Variable-rate
|
1,463,391 | 1,345,750 | ||||||
Total
MBS and ABS
|
5,892,730 | 5,831,728 | ||||||
Total
HTM, at amortized cost
|
$ | 8,496,421 | $ | 8,025,192 |
Variable-rate
pass-through securities include hybrid adjustable mortgage securities of
$335,118 and $424,400 at March 31, 2010, and December 31, 2009,
respectively. Variable-rate collateralized mortgage obligations
include hybrid adjustable mortgage securities of $876,273 and $1,009,130 at
March 31, 2010, and December 31, 2009, respectively.
12
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
The
following table reflects the net (discounts) premiums included in the amortized
cost of our HTM:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Non-MBS
and ABS:
|
||||||||
Net
purchased (discounts) premiums
|
$ | 3,726 | $ | 4,239 | ||||
Total
Non-MBS and ABS
|
3,726 | 4,239 | ||||||
MBS
and ABS:
|
||||||||
Net
purchased (discounts) premiums
|
55,987 | 36,429 | ||||||
OTTI
related credit losses
|
(66,357 | ) | (60,291 | ) | ||||
OTTI
related accretion adjustments
|
(2,790 | ) | (1,533 | ) | ||||
Other
- net discounts reclassified into credit losses
|
(5,686 | ) | (5,142 | ) | ||||
Total
MBS and ABS
|
(18,846 | ) | (30,537 | ) | ||||
Total
HTM, net (discounts) premiums included in amortized cost
|
$ | (15,120 | ) | $ | (26,298 | ) |
Realized Gains
and Losses. There were no sales of HTM during the three months
ended March 31, 2010, or 2009.
Note
5 — Other-Than-Temporary Impairment Analysis
OTTI Evaluation
Process. We evaluate our individual AFS and HTM that are in an
unrealized loss position for OTTI on a quarterly basis as described in our 2009
Form 10-K.
Our
evaluation includes an estimate of cash flows that we are likely to collect
based on an assessment of each individual security, the structure of the
security and certain assumptions as determined by the FHLB OTTI Governance
Committee, such as the prepayment speeds, default rates, loss severity on the
collateral supporting our security based on underlying loan-level borrower and
loan characteristics, expected housing price changes, and interest-rate
assumptions, to determine whether any principal losses will occur.
A
significant input is the forecast of future housing price changes for the
relevant states and core based statistical areas (“CBSA”), which are based on an
assessment of the relevant housing markets. Our housing price
forecast assumed CBSA level current-to-trough home price declines ranging from
0% to 12% over the 6 to 12 month period beginning January 1,
2010. Thereafter, home prices are projected to remain flat in the
first six months, increase 0.5% in the next six months, 3% in the second year
and 4% in each subsequent year.
The
results of our cash flow analysis can vary significantly with changes in
assumptions and expectations.
Results of OTTI
Evaluation Process. For our agency MBS and investments in
corporate debentures issued under the TLGP, we determined that the strength of
the issuers’ guarantees through direct obligations or support from the U.S.
government is sufficient to protect us from losses based on current
expectations. As a result, we have determined that, as of March 31,
2010, all of the gross unrealized losses on our agency MBS and TLGP investments
are temporary. The declines in market value of these securities are
not attributable to credit quality, we do not intend to sell the investments,
and it is not more likely than not that we will be required to sell the
investments before recovery of their amortized cost. As a result, we
do not consider any of these investments to be OTTI at March 31,
2010.
Based on
our evaluations, for the three months ended March 31, 2010, we recognized OTTI
losses for 13 securities. We do not intend to sell these securities,
and it is not more likely than not that we will be required to sell these
securities before our anticipated recovery of each security’s remaining
amortized cost. However, we determined that we would not recover the
entire amortized cost of these securities.
13
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
For the
13 securities for which an OTTI was determined to have occurred during the three
months ended March 31, 2010, the following table presents a summary of
the significant inputs used to determine the amount of credit loss recognized in
earnings during this period as well as the related current credit enhancement.
Credit enhancement includes subordinated tranches and over-collateralization, if
any, in a security structure that will generally absorb losses before we will
experience a shortfall of cash flows on the security. The calculated averages
represent the dollar-weighted averages of all the private-label RMBS in each
category shown. The classification (prime or Alt-A) is based on the model used
to run the estimated cash flows for the security, which may not necessarily be
the same as the classification at the time of origination.
Significant Inputs for OTTI private-label RMBS
|
Current Credit
|
|||||||||||||||||||||||||||||||
Prepayment Rates
|
Default Rates
|
Loss Severities
|
Enhancement
|
|||||||||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||
Year of
|
Average
|
Range
|
Average
|
Range
|
Average
|
Range
|
Average
|
Range
|
||||||||||||||||||||||||
Securitization
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
||||||||||||||||||||||||
Prime:
|
||||||||||||||||||||||||||||||||
2007
|
6.0 | 5.6 - 6.1 | 22.3 | 18.6 - 28.9 | 41.5 | 39.9 - 43.9 | 4.2 | 2.8 - 7.2 | ||||||||||||||||||||||||
2005
|
12.7 | 12.6 - 12.7 | 19.0 | 16.9 - 20.1 | 50.4 | 48.4 - 53.7 | 9.2 | 8.4 - 9.7 | ||||||||||||||||||||||||
Total
Prime
|
8.4 | 5.6 - 12.7 | 21.1 | 16.9 - 28.9 | 44.7 | 39.9 - 53.7 | 6.1 | 2.8 - 9.7 | ||||||||||||||||||||||||
Alt-A:
|
||||||||||||||||||||||||||||||||
2007
|
11.3 | 10.6 - 11.8 | 49.3 | 46.1 - 53.3 | 45.7 | 44.9 - 46.9 | 8.1 | 3.4 - 13.0 | ||||||||||||||||||||||||
2006
|
10.7 | 10.7 - 10.7 | 20.3 | 20.3 - 20.3 | 38.9 | 38.9 - 38.9 | 4.7 | 4.7 - 4.7 | ||||||||||||||||||||||||
2005
|
9.9 | 6.9 - 13.0 | 43.3 | 42.7 - 43.9 | 44.4 | 38.9 - 50.3 | 6.7 | 6.7 - 6.8 | ||||||||||||||||||||||||
Total
Alt-A
|
10.9 | 6.9 - 13.0 | 44.3 | 20.3 - 53.3 | 44.6 | 38.9 - 50.3 | 7.3 | 3.4 - 13.0 | ||||||||||||||||||||||||
Total
OTTI private-label RMBS
|
9.5 | 5.6 - 13.0 | 31.7 | 16.9 - 53.3 | 44.7 | 38.9 - 53.7 | 6.6 | 2.8 - 13.0 |
The
following table displays the classification of our 13 securities for which an
OTTI loss was recognized during the three months ended March 31, 2010, based on
our impairment analysis of our investment portfolio at March 31,
2010. Securities are classified based on the classification (prime or
Alt-A) by the Nationally Recognized Statistical Rating Organizations (“NRSRO”) upon
issuance.
Unpaid
|
Estimated
|
|||||||||||||||
Principal
|
Amortized
|
Carrying
|
Fair
|
|||||||||||||
March 31, 2010
|
Balance
|
Cost
|
Value
|
Value
|
||||||||||||
OTTI
HTM:
|
||||||||||||||||
Private-label
RMBS – prime
|
$ | 703,061 | $ | 662,423 | $ | 514,238 | $ | 560,787 | ||||||||
Private-label
RMBS – Alt-A
|
44,861 | 41,327 | 33,865 | 34,478 | ||||||||||||
Total
OTTI HTM
|
$ | 747,922 | $ | 703,750 | $ | 548,103 | $ | 595,265 | ||||||||
Total
HTM MBS and ABS
|
$ | 5,915,302 | $ | 5,892,730 | $ | 5,574,078 | $ | 5,667,153 | ||||||||
Total
HTM
|
$ | 8,515,267 | $ | 8,496,421 | $ | 8,177,769 | $ | 8,278,152 |
14
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
The
following table displays the classification of our 23 securities for which an
OTTI loss was recognized during the life of the securities, which represents
securities impaired prior to 2010 as well as during the three months ended March
31, 2010.
Unpaid
|
Estimated
|
|||||||||||||||
Principal
|
Amortized
|
Carrying
|
Fair
|
|||||||||||||
March 31, 2010
|
Balance
|
Cost
|
Value
|
Value
|
||||||||||||
OTTI
HTM:
|
||||||||||||||||
Private-label
RMBS – prime
|
$ | 1,324,164 | $ | 1,253,166 | $ | 943,526 | $ | 1,036,937 | ||||||||
Private-label
RMBS – Alt-A
|
67,181 | 63,346 | 54,334 | 55,005 | ||||||||||||
Total
OTTI HTM
|
$ | 1,391,345 | $ | 1,316,512 | $ | 997,860 | $ | 1,091,942 | ||||||||
Total
HTM MBS and ABS
|
$ | 5,915,302 | $ | 5,892,730 | $ | 5,574,078 | $ | 5,667,153 | ||||||||
Total
HTM
|
$ | 8,515,267 | $ | 8,496,421 | $ | 8,177,769 | $ | 8,278,152 |
The table
below displays the credit and non-credit OTTI losses on our
securities. Securities are classified based on the classification by
the NRSROs upon issuance.
Net
|
Total
|
|||||||||||
Credit
|
Non-Credit
|
OTTI
|
||||||||||
For the Three Months Ended March 31,
2010
|
Losses
|
Losses
|
Losses
|
|||||||||
OTTI
HTM:
|
||||||||||||
Private-label
RMBS – prime
|
$ | 5,790 | $ | 8,663 | $ | 14,453 | ||||||
Private-label
RMBS – Alt-A
|
276 | (276 | ) | - | ||||||||
Total
OTTI HTM
|
$ | 6,066 | $ | 8,387 | $ | 14,453 |
Net
|
Total
|
|||||||||||
Credit
|
Non-Credit
|
OTTI
|
||||||||||
For the Three Months Ended March 31,
2009
|
Losses
|
Losses
|
Losses
|
|||||||||
OTTI
HTM:
|
||||||||||||
Private-label
RMBS – prime
|
$ | 18,550 | $ | 128,742 | $ | 147,292 | ||||||
Private-label
RMBS – Alt-A
|
- | - | - | |||||||||
Total
OTTI HTM
|
$ | 18,550 | $ | 128,742 | $ | 147,292 |
For the
three months ended March 31, 2010, we accreted $13,776 of non-credit losses from
AOCI to the carrying value of HTM, compared to $0 for the three months ended
March 31, 2009.
For
previously impaired securities that were further impaired in the current
quarter, and for which the current fair value is greater than the fair value at
the time of the previous impairment, an amount equal to all or a portion of the
current quarter credit loss is reclassified out of non-credit losses in AOCI and
into Other Income (Loss). This amount totaled $5,782 for the three
months ended March 31, 2010, and $0 for the three months ended March 31,
2009.
15
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
The
following table presents a rollforward by quarter of the cumulative credit
losses recognized in Other Income (Loss). The rollforward excludes
the portion of OTTI losses that were recognized in AOCI.
For the Three Months Ended March 31,
2010
|
Amount
|
|||
Balance
as of January 1, 2010
|
$ | 60,291 | ||
Additions:
|
||||
Credit
losses for which OTTI was not previously recognized
|
180 | |||
Additional
OTTI credit losses on securities for which an OTTI charge was previously
recognized
|
5,886 | |||
Reductions
|
- | |||
Balance
as of March 31, 2010
|
$ | 66,357 | ||
For
the Three Months Ended March 31, 2009
|
Amount
|
|||
Balance
as of January 1, 2009
|
$ | - | ||
Additions:
|
||||
Credit
losses for which OTTI was not previously recognized
|
18,550 | |||
Additional
OTTI credit losses on securities for which an OTTI charge was previously
recognized
|
- | |||
Reductions
|
- | |||
Balance
as of March 31, 2009
|
$ | 18,550 |
The
remaining unrealized losses in our HTM portfolio are due to illiquidity in the
marketplace, credit deterioration, and interest rate volatility in the U.S.
mortgage markets. However, the losses are considered temporary as we
expect to recover the entire amortized cost on the remaining HTM in an
unrealized loss position and neither intend to sell these securities nor
consider it more likely than not that we will be required to sell these
securities before our anticipated recovery of the remaining amortized
cost.
Note
6 — Advances
Redemption
Terms. We had Advances
(secured loans) outstanding, including Affordable Housing Program (“AHP”) Advances, at interest
rates ranging from 0.17% to 8.34%, as summarized below.
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Year of Contractual Maturity
|
Amount
|
WAIR(1) %
|
Amount
|
WAIR(1) %
|
||||||||||||
Overdrawn
demand and overnight deposit accounts
|
$ | 149 | 2.49 | $ | - | - | ||||||||||
Due
in 1 year or less
|
4,701,070 | 3.76 | 5,045,723 | 3.65 | ||||||||||||
Due
after 1 year through 2 years
|
2,853,362 | 4.01 | 2,842,987 | 4.13 | ||||||||||||
Due
after 2 years through 3 years
|
4,321,553 | 3.69 | 4,152,585 | 4.01 | ||||||||||||
Due
after 3 years through 4 years
|
1,956,506 | 3.89 | 2,495,969 | 3.70 | ||||||||||||
Due
after 4 years through 5 years
|
894,611 | 3.61 | 1,003,680 | 3.57 | ||||||||||||
Thereafter
|
6,090,748 | 2.77 | 6,168,969 | 2.81 | ||||||||||||
Total
Advances, par value
|
20,817,999 | 3.50 | 21,709,913 | 3.55 | ||||||||||||
Unamortized
discount on AHP Advances
|
(143 | ) | (156 | ) | ||||||||||||
Unamortized
discount on Advances
|
(213 | ) | (243 | ) | ||||||||||||
Hedging
adjustments
|
755,548 | 724,297 | ||||||||||||||
Other
adjustments
(2)
|
8,374 | 9,093 | ||||||||||||||
Total
Advances
|
$ | 21,581,565 | $ | 22,442,904 |
|
(1)
|
Weighted
Average Interest Rate.
|
|
(2)
|
Other
adjustments include deferred prepayment fees being recognized through the
payments on the new advance.
|
16
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
We offer
Advances to members that may be prepaid on pertinent dates (call dates) without
incurring prepayment or termination fees (callable Advances). Other
Advances may only be prepaid by paying a fee (prepayment fee) that makes us
financially indifferent to the prepayment of the Advance. At March
31, 2010, and December 31, 2009, we had callable Advances of $3,411,795 and
$3,494,781, respectively.
The
following table summarizes Advances by the earlier of the year of contractual
maturity or next call date:
March 31,
|
December 31,
|
|||||||
Year
of Contractual Maturity or Next Call Date
|
2010
|
2009
|
||||||
Overdrawn
demand and overnight deposit accounts
|
$ | 149 | $ | - | ||||
Due
in 1 year or less
|
6,153,420 | 6,478,573 | ||||||
Due
after 1 year through 2 years
|
3,512,362 | 2,732,487 | ||||||
Due
after 2 years through 3 years
|
4,430,553 | 5,027,585 | ||||||
Due
after 3 years through 4 years
|
1,936,506 | 2,495,969 | ||||||
Due
after 4 years through 5 years
|
864,611 | 976,680 | ||||||
Thereafter
|
3,920,398 | 3,998,619 | ||||||
Total
Advances, par value
|
$ | 20,817,999 | $ |
21,709,913
|
We also
offer putable and convertible Advances. Putable Advances allow us to terminate
the Advance at predetermined exercise dates, which we would typically exercise
when interest rates increase. At March 31, 2010, and December 31, 2009, we had
putable Advances outstanding totaling $4,982,500 and $5,240,500, respectively.
Convertible Advances allow us to convert to/from a fixed-rate Advance from/to a
variable-rate Advance at the current market rate or another structure after an
agreed-upon lockout period. At March 31, 2010, and December 31, 2009, we had no
convertible Advances outstanding.
The
following table summarizes Advances by the earlier of the year of contractual
maturity or next put date:
March 31,
|
December 31,
|
|||||||
Year of Contractual Maturity or Next Put
Date
|
2010
|
2009
|
||||||
Overdrawn
demand and overnight deposit accounts
|
$ | 149 | $ | - | ||||
Due
in 1 year or less
|
7,625,520 | 8,075,673 | ||||||
Due
after 1 year through 2 years
|
2,751,862 | 2,763,487 | ||||||
Due
after 2 years through 3 years
|
2,169,103 | 2,034,385 | ||||||
Due
after 3 years through 4 years
|
1,840,006 | 2,232,719 | ||||||
Due
after 4 years through 5 years
|
856,611 | 950,680 | ||||||
Thereafter
|
5,574,748 | 5,652,969 | ||||||
Total
Advances, par value
|
$ | 20,817,999 | $ | 21,709,913 |
17
Federal
Home Loan Bank of Indianapolis
Notes
to Interim Unaudited Financial Statements,
continued
($
amounts in thousands unless otherwise indicated)
Advance
Concentrations. The following table presents borrowers holding $1.0
billion or more of our total par value of Advances:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Advances
|
Percent of
|
Advances
|
Percent of
|
|||||||||||||
Borrower
|
Outstanding
|
Total
|
Outstanding
|
Total
|
||||||||||||
Flagstar
Bank, FSB
|
$ | 3,900,000 | 18.7 | % | $ | 3,900,000 | 18.0 | % | ||||||||
Jackson
National Life Insurance Company
|
1,750,000 | 8.4 | % | 1,750,000 | 8.1 | % | ||||||||||
Bank
of America, N.A.
|
1,450,000 | 7.0 | % | 1,450,000 | 6.7 | % | ||||||||||
Citizens
Bank, Flint, Michigan
|
1,104,889 | 5.3 | % | 1,279,917 | 5.9 | % | ||||||||||
Total
|
$ | 8,204,889 | 39.4 | % | $ | 8,379,917 | 38.7 | % | ||||||||
Total
Advances, par value
|
$ | 20,817,999 | 100.0 | % | $ | 21,709,913 | 100.0 | % |
At March
31, 2010, and December 31, 2009, we held $16,414,097 and $17,178,561 unpaid
principal balance of collateral, respectively, to cover the Advances to these
four institutions, and therefore we do not expect to incur any credit losses on
these Advances. (See Note 15 for more information on transactions
with related parties.)
Interest Rate
Payment Terms. The following table
details interest rate payment terms for Advances:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
||||||||
Fixed-rate
|
$ | 17,196,767 | $ | 17,974,562 | ||||
Variable-rate
|
3,621,232 | 3,735,351 | ||||||
Total
Advances, par value
|
$ | 20,817,999 | $ | 21,709,913 |
Note
7 — Mortgage Loans Held for Portfolio
Through
the Mortgage Purchase Program (“MPP”), we hold mortgage loans
that are purchased from and primarily serviced by Participating Financial
Institutions (“PFIs”). These
mortgage loans are credit-enhanced by PFIs and supplemental mortgage insurance
(“SMI”) or guaranteed or
insured by Federal agencies. The following table presents information
on Mortgage Loans Held for Portfolio:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Fixed-rate
medium-term(1)
mortgages
|
$ | 1,021,895 | $ | 1,068,593 | ||||
Fixed-rate
long-term(2)
mortgages
|
5,954,762 | 6,188,534 | ||||||
Total
Mortgage Loans Held for Portfolio, par value
|
6,976,657 | 7,257,127 | ||||||
Unamortized
premiums
|
37,483 | 39,907 | ||||||
Unamortized
discounts
|
(34,247 | ) | (36,062 | ) | ||||
Hedging
adjustments
|
10,122 | 10,923 | ||||||
Total
Mortgage Loans Held for Portfolio
|
$ | 6,990,015 | $ | 7,271,895 |
|
(1)
|
Medium-term
is defined as an original term of 15 years or
less.
|
(2)
|
Long-term
is defined as an original term greater than 15
years.
|
18
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
following table details the type of Mortgage Loans Held for
Portfolio:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Conventional
loans
|
$ | 6,457,162 | $ | 6,667,919 | ||||
Federal
Housing Administration ("FHA")
|
519,495 | 589,208 | ||||||
Total
Mortgage Loans Held for Portfolio, par value
|
$ | 6,976,657 | $ | 7,257,127 |
For
managing the inherent credit risk in conventional MPP, a portion of the periodic
interest payments on the loans is deposited into the lender risk account (“LRA”) and another portion is
used to pay the premium on SMI. When a credit loss occurs on an MPP
pool, the accumulated LRA for that pool is used to cover the credit loss in
excess of homeowners’ equity and private mortgage insurance (“PMI”) until the LRA is
exhausted. After the LRA is exhausted, the SMI protects against
credit losses down to approximately 50% of the property’s original value subject
to, in certain cases, an aggregate stop-loss provision in the SMI
policy. LRA funds not used are returned to the member (or to the
group of members participating in an aggregate MPP pool) over time.
The
following table presents the changes in the LRA:
Three Months
|
Year Ended
|
|||||||
Ended March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Balance
of LRA at beginning of period
|
$ | 23,754 | $ | 21,892 | ||||
Collected
through periodic interest payments
|
1,223 | 5,352 | ||||||
Disbursed
for mortgage loan losses
|
(2,242 | ) | (2,193 | ) | ||||
Returned
to members
|
(233 | ) | (1,297 | ) | ||||
Balance
of LRA at end of period
|
$ | 22,502 | $ | 23,754 |
Mortgage
loans are considered impaired when, by collectively evaluating groups of smaller
balance homogenous loans, and using current, historical and projected
information and events, it is probable that we will be unable to collect all
principal and interest amounts due according to the contractual terms of the
mortgage loan agreement. At March 31, 2010, and December 31, 2009, we
had no investments in mortgage loans which were considered
impaired. Therefore, the allowance for credit losses was $0 at March
31, 2010, and December 31, 2009. The provision for credit losses was
$0 for each of the three months ended March 31, 2010, and 2009.
Note
8 — Derivative and Hedging Activities
Managing
Credit Risk of Derivatives
At March
31, 2010, and December 31, 2009, our maximum credit risk of derivatives, as
defined in the 2009 Form 10-K, was approximately $5,944 and $1,714,
respectively, which include $7,761 and $689, respectively, of net accrued
interest receivable. In determining maximum credit risk, we consider
accrued interest receivables and payables, and the legal right to offset
derivative assets and liabilities by counterparty. We held no
securities or collateral at March 31, 2010, and December 31, 2009, for net
uncollateralized balances of $5,944 and $1,714. Additionally,
collateral related to derivatives with member institutions includes collateral
assigned to us, as evidenced by a written security agreement, and held by the
member institution for our benefit.
19
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
We have
credit support agreements that contain provisions requiring us to post
additional collateral with our counterparties if there is deterioration in our
credit rating. If our credit rating is lowered by a major credit
rating agency, we could be required to deliver additional collateral on
derivative instruments in net liability positions. Our senior credit
rating was not lowered during the previous 12 months. However, the
aggregate fair value of all derivative instruments with credit-risk related
contingent features that were in a net liability position (before cash
collateral and related accrued interest on cash collateral) at March 31, 2010,
was $863,865 for which we have posted collateral, including accrued interest, of
$99,668 in the normal course of business. In addition, we held other
derivative instruments in a net liability position of $161 that are not subject
to credit support agreements containing credit-risk related contingent
features. If our credit rating had been lowered from its current
rating (to the next lower rating), we could have been required to deliver up to
an additional $615,028 of collateral (at fair value) to our derivative
counterparties at March 31, 2010.
We
transact most of our derivatives with large banks and major
broker-dealers. Some of these banks and broker-dealers or their
affiliates buy, sell, and distribute Consolidated Obligations (“COs” or “Consolidated Obligations”),
consisting of Consolidated Obligation Bonds (“CO Bonds”) and Discount Notes
(“Discount
Notes”). Note 14 discusses assets pledged by us to these
counterparties. We are not a derivative dealer and thus do not trade
derivatives for short-term profit.
Financial
Statement Impact and Additional Financial Information
Derivative
Notional Amounts. The notional
amount of derivatives serves as a factor in determining periodic interest
payments or cash flows received and paid.
20
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Fair Value
Amounts. The following tables summarize the notional amount
and fair value of derivative instruments. For purposes of these tables, the fair
values include related accrued interest as reported on the Statements of
Condition.
March 31, 2010
|
||||||||||||
Notional
|
Fair Value
|
Fair Value
|
||||||||||
Amount of
|
of Derivative
|
of Derivative
|
||||||||||
Derivatives
|
Assets
|
Liabilities
|
||||||||||
Derivatives
designated as hedging instruments:
|
||||||||||||
Interest
rate swaps
|
$ | 31,569,955 | $ | 167,703 | $ | 1,026,637 | ||||||
Total
derivatives designated as hedging instruments
|
31,569,955 | 167,703 | 1,026,637 | |||||||||
Derivatives
not designated as hedging instruments:
|
||||||||||||
Interest
rate swaps
|
151,203 | 1,767 | 880 | |||||||||
Interest
rate futures/forwards
|
22,800 | 125 | - | |||||||||
Mortgage
delivery commitments
|
21,715 | - | 161 | |||||||||
Total
derivatives not designated as hedging instruments
|
195,718 | 1,892 | 1,041 | |||||||||
Total
derivatives before adjustments
|
$ | 31,765,673 | 169,595 | 1,027,678 | ||||||||
Netting
adjustments
|
(163,651 | ) | (163,651 | ) | ||||||||
Cash
collateral and related accrued interest
|
- | (99,668 | ) | |||||||||
Total
adjustments (1)
|
(163,651 | ) | (263,319 | ) | ||||||||
Total
derivatives
|
$ | 5,944 | $ | 764,359 |
December 31, 2009
|
||||||||||||
Notional
|
Fair Value
|
Fair Value
|
||||||||||
Amount of
|
of Derivative
|
of Derivative
|
||||||||||
Derivatives
|
Assets
|
Liabilities
|
||||||||||
Derivatives
designated as hedging instruments:
|
||||||||||||
Interest
rate swaps
|
$ | 36,317,525 | $ | 196,671 | $ | 988,424 | ||||||
Total
derivatives designated as hedging instruments
|
36,317,525 | 196,671 | 988,424 | |||||||||
Derivatives
not designated as hedging instruments:
|
||||||||||||
Interest
rate swaps
|
36,227 | 615 | 485 | |||||||||
Interest
rate futures/forwards
|
41,100 | 765 | - | |||||||||
Mortgage
delivery commitments
|
38,328 | 4 | 617 | |||||||||
Total
derivatives not designated as hedging instruments
|
115,655 | 1,384 | 1,102 | |||||||||
Total
derivatives before adjustments
|
$ | 36,433,180 | 198,055 | 989,526 | ||||||||
Netting
adjustments
|
(196,341 | ) | (196,341 | ) | ||||||||
Cash
collateral and related accrued interest
|
- | (80,469 | ) | |||||||||
Total
adjustments (1)
|
(196,341 | ) | (276,810 | ) | ||||||||
Total
derivatives
|
$ | 1,714 | $ | 712,716 |
|
(1)
|
Amounts
represent the effect of legally enforceable master netting agreements that
allow us to settle positive and negative positions and also cash
collateral held or placed with the same
counterparties.
|
21
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
following table presents the components of Net Gains (Losses) on Derivatives and
Hedging Activities reported in Other Income (Loss):
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
gain (loss) related to fair value hedge ineffectiveness:
|
||||||||
Interest
rate swaps
|
$ | (1,408 | ) | $ | (1,314 | ) | ||
Total
net gain (loss) related to fair value hedge
ineffectiveness
|
(1,408 | ) | (1,314 | ) | ||||
Net
gain (loss) related to derivatives not designated as hedging
instruments:
|
||||||||
Economic
hedges:
|
||||||||
Interest
rate swaps
|
529 | 983 | ||||||
Interest
rate futures/forwards
|
(543 | ) | (630 | ) | ||||
Mortgage
delivery commitments
|
247 | (282 | ) | |||||
Total
net gain (loss) related to derivatives not designated as
|
||||||||
hedging
instruments
|
233 | 71 | ||||||
Net
Gains (Losses) on Derivatives and Hedging Activities
|
$ | (1,175 | ) | $ | (1,243 | ) |
The
following tables present, by type of hedged item, the gains (losses) on
derivatives and the related hedged items in fair-value hedging relationships and
the effect of those derivatives on Net Interest Income for the three months
ended March 31, 2010, and 2009:
For the Three Months Ended March 31, 2010
|
||||||||||||||||
Gain
|
Gain
|
Net
|
Effect of
|
|||||||||||||
(Loss)
|
(Loss) on
|
Fair Value
|
Derivatives on
|
|||||||||||||
on
|
Hedged
|
Hedge
|
Net Interest
|
|||||||||||||
Hedged Item Type
|
Derivative
|
Item
|
Ineffectiveness
|
Income (1)
|
||||||||||||
Advances
|
$ | (24,676 | ) | $ | 23,432 | $ | (1,244 | ) | $ | (136,053 | ) | |||||
CO
Bonds
|
247 | (200 | ) | 47 | 64,652 | |||||||||||
AFS
|
(26,712 | ) | 26,501 | (211 | ) | (17,053 | ) | |||||||||
Total
|
$ | (51,141 | ) | $ | 49,733 | $ | (1,408 | ) | $ | (88,454 | ) |
For the Three Months Ended March 31, 2009
|
||||||||||||||||
Gain
|
Gain
|
Net
|
Effect of
|
|||||||||||||
(Loss)
|
(Loss) on
|
Fair Value
|
Derivatives on
|
|||||||||||||
on
|
Hedged
|
Hedge
|
Net Interest
|
|||||||||||||
Hedged Item Type
|
Derivative
|
Item
|
Ineffectiveness
|
Income (1)
|
||||||||||||
Advances
|
$ | 60,174 | $ | (75,688 | ) | $ | (15,514 | ) | $ | (116,275 | ) | |||||
CO
Bonds
|
(57,579 | ) | 74,702 | 17,123 | 38,058 | |||||||||||
AFS
|
28,199 | (31,122 | ) | (2,923 | ) | (10,874 | ) | |||||||||
Total
|
$ | 30,794 | $ | (32,108 | ) | $ | (1,314 | ) | $ | (89,091 | ) |
|
(1)
|
The
net interest on derivatives in fair value hedging relationships is
presented in the Interest Income / Interest Expense line item of the
respective hedged item.
|
22
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Note
9 — Deposits
Deposits
classified as demand, overnight, and other, pay interest based on a daily
interest rate. Time deposits pay interest based on a fixed rate
determined at the time of the deposit. The following table details
the weighted average interest rates paid on average Interest-Bearing
Deposits:
Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Weighted
average interest rates
|
0.03 | % | 0.13 | % |
The
following table details Interest-Bearing Deposits and Non-Interest-Bearing
Deposits:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Interest-Bearing
Deposits:
|
||||||||
Demand
and overnight
|
$ | 531,331 | $ | 806,185 | ||||
Time
|
15,000 | 15,224 | ||||||
Other
|
22 | 22 | ||||||
Total
Interest-Bearing Deposits
|
546,353 | 821,431 | ||||||
Non-Interest-Bearing
Deposits (1):
|
||||||||
Other
|
2,769 | 3,420 | ||||||
Total
Non-Interest Bearing Deposits
|
2,769 | 3,420 | ||||||
Total
Deposits
|
$ | 549,122 | $ | 824,851 |
|
(1)
|
Non-Interest-Bearing
Deposits includes pass-through deposit reserves from
members.
|
The
aggregate amount of time deposits with a denomination of $100 thousand or more
was $15,000 and $15,224 as of March 31, 2010, and December 31, 2009,
respectively.
Note
10 — Consolidated Obligations
The
following table details CO Bonds by interest-rate payment type:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Fixed-rate
|
$ | 28,294,700 | $ | 30,959,600 | ||||
Step-up
|
1,380,000 | 1,690,000 | ||||||
Simple
variable-rate
|
1,300,000 | 2,916,000 | ||||||
Conversion
|
175,000 | 225,000 | ||||||
Total
CO Bonds, par value
|
$ | 31,149,700 | $ | 35,790,600 |
23
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Redemption
Terms. The following is a summary of our participation in CO
Bonds outstanding:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Year of Contractual Maturity
|
Amount
|
WAIR%
|
Amount
|
WAIR%
|
||||||||||||
Due
in 1 year or less
|
$ | 10,537,550 | 1.36 | $ | 17,740,550 | 1.25 | ||||||||||
Due
after 1 year through 2 years
|
6,558,750 | 1.77 | 4,353,650 | 1.92 | ||||||||||||
Due
after 2 years through 3 years
|
2,970,600 | 2.26 | 2,943,550 | 2.61 | ||||||||||||
Due
after 3 years through 4 years
|
1,913,700 | 2.95 | 1,998,750 | 2.98 | ||||||||||||
Due
after 4 years through 5 years
|
2,320,250 | 3.24 | 1,981,900 | 3.26 | ||||||||||||
Thereafter
|
6,848,850 | 4.55 | 6,772,200 | 4.69 | ||||||||||||
Total
CO Bonds, par value
|
31,149,700 | 2.47 | 35,790,600 | 2.30 | ||||||||||||
Unamortized
bond premiums
|
35,621 | 35,729 | ||||||||||||||
Unamortized
bond discounts
|
(24,452 | ) | (24,947 | ) | ||||||||||||
Hedging
adjustments
|
106,487 | 106,407 | ||||||||||||||
Total
CO Bonds
|
$ | 31,267,356 | $ | 35,907,789 |
Our
outstanding CO Bonds at March 31, 2010, and December 31, 2009,
include:
March 31,
|
December 31,
|
|||||||
By Redemption Feature
|
2010
|
2009
|
||||||
Non-callable
or non-putable
|
$ | 17,882,700 | $ | 25,530,600 | ||||
Callable
|
13,267,000 | 10,260,000 | ||||||
Total
CO Bonds, par value
|
$ | 31,149,700 | $ | 35,790,600 |
The
following table summarizes our CO Bonds outstanding by the earlier of the year
of contractual maturity or next call date:
March 31,
|
December 31,
|
|||||||
Year of Contractual Maturity or Next Call
Date
|
2010
|
2009
|
||||||
Due
in 1 year or less
|
$ | 21,943,550 | $ | 26,744,550 | ||||
Due
after 1 year through 2 years
|
3,363,750 | 3,168,650 | ||||||
Due
after 2 years through 3 years
|
1,711,600 | 1,594,550 | ||||||
Due
after 3 years through 4 years
|
931,700 | 1,206,750 | ||||||
Due
after 4 years through 5 years
|
835,250 | 676,900 | ||||||
Thereafter
|
2,363,850 | 2,399,200 | ||||||
Total
CO Bonds, par value
|
$ | 31,149,700 | $ | 35,790,600 |
24
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Our
participation in Discount Notes, all of which are due within one year, was as
follows:
March 31, 2010
|
December 31, 2009
|
|||||||
Book
value
|
$ | 11,536,974 | $ | 6,250,093 | ||||
Par
value
|
11,538,638 | 6,251,677 | ||||||
WAIR
|
0.12 | % | 0.12 | % |
Note
11 — Capital
We are
subject to three capital requirements under our capital plan and the Federal
Housing Finance Agency (“Finance Agency”) rules and
regulations.
As shown
in the following table, we were in compliance with the Finance Agency’s capital
requirements at March 31, 2010, and
December 31, 2009.
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Regulatory Capital
Requirements
|
Required
|
Actual
|
Required
|
Actual
|
||||||||||||
Risk-based
capital
|
$ | 919,213 | $ | 2,855,670 | $ | 888,918 | $ | 2,830,673 | ||||||||
Regulatory
permanent capital-to-asset ratio
|
4.00 | % | 6.07 | % | 4.00 | % | 6.07 | % | ||||||||
Regulatory
permanent capital
|
$ | 1,882,868 | $ | 2,855,670 | $ | 1,863,963 | $ | 2,830,673 | ||||||||
Leverage
ratio
|
5.00 | % | 9.10 | % | 5.00 | % | 9.11 | % | ||||||||
Leverage
capital
|
$ | 2,353,585 | $ | 4,283,505 | $ | 2,329,953 | $ | 4,246,009 |
Mandatorily
Redeemable Capital Stock (“MRCS”) is considered capital
for regulatory purposes. AOCI is not considered capital, i.e., does
not increase or decrease capital, for regulatory purposes.
Mandatorily
Redeemable Capital Stock. We reclassify capital stock subject
to redemption from capital to liability once a member withdraws from membership,
or attains non-member status by merger or acquisition, charter termination, or
involuntary termination from membership. Shares of capital stock
meeting these definitions are reclassified to a liability at fair
value. Dividends declared on capital stock classified as a liability
are accrued at the expected dividend rate and reported as Interest Expense in
the Statements of Income, and were $3,579 and $3,933 for the three months ended
March 31, 2010, and 2009, respectively. The
redemption of MRCS is reported as a financing cash outflow in the Statements of
Cash Flows.
At March
31, 2010, and December 31, 2009, we had $750,697 and $755,660, respectively, in
capital stock subject to mandatory redemption with payment subject to a
five-year waiting period. We anticipate these redemptions will occur
after the five-year waiting period. These amounts have been
classified as a liability in the Statements of Condition.
25
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
following table summarizes the activities in MRCS:
Three Months
|
Year Ended
|
|||||||
Ended March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Beginning
of period
|
$ | 755,660 | $ | 539,111 | ||||
Due
to mergers and acquisitions
|
- | 220,389 | ||||||
Due
to change in status
|
(2,150 | ) | - | |||||
Redemptions/repurchases
during the period
|
(2,813 | ) | (4,160 | ) | ||||
Accrued
dividends
|
- | 320 | ||||||
End
of period
|
$ | 750,697 | $ | 755,660 |
The
number of former members holding MRCS was 28 and 29 at March 31, 2010, and
December 31, 2009, respectively, which includes six and five institutions,
respectively, acquired by the FDIC in its capacity as receiver.
The
following table shows the amount of MRCS by year of redemption. The
year of redemption in the table is the later of the end of the five-year
redemption period, or the maturity date of the activity to which the stock is
related, if the stock represents the activity-based stock purchase requirement
of a non-member (a former member that withdrew from membership, merged into a
non-member or was otherwise acquired by a non-member). Consistent
with the current capital plan, we are not required to redeem activity-based
stock until the later of the expiration of the notice of redemption or until the
activity to which the capital stock relates no longer remains
outstanding. If activity-based stock becomes excess stock as a result
of an activity no longer remaining outstanding, we may redeem the excess
stock at management’s discretion, subject to the Statutory and Regulatory
Restrictions on Capital Stock Redemption discussed in our 2009 Form
10-K.
March 31,
|
December 31,
|
|||||||
Year of Redemption
|
2010
|
2009
|
||||||
Year
1 (1)
|
$ | 1,582 | $ | 4,395 | ||||
Year
2
|
138,923 | 138,923 | ||||||
Year
3
|
54,664 | 14,422 | ||||||
Year
4
|
337,289 | 379,681 | ||||||
Year
5
|
218,239 | 218,239 | ||||||
Total
MRCS
|
$ | 750,697 | $ | 755,660 |
|
(1)
|
Includes
$500 MRCS that has reached the end of the five-year redemption period but
for which credit products remain outstanding. Accordingly,
these shares of stock will not be redeemed until the credit products are
no longer outstanding.
|
Excess Capital
Stock. Excess stock is defined as the amount of stock held in
excess of that institution’s minimum stock requirement. Finance
Agency rules limit the ability of an FHLB to create member excess stock under
certain circumstances. We may not pay dividends in the form of
capital stock or issue new excess stock to members if our excess stock exceeds
one percent of our Total Assets or if the issuance of excess stock would cause
our excess stock to exceed one percent of our Total Assets. Our
excess stock exceeded one percent of our Total Assets at
March 31, 2010, and December 31, 2009. Therefore, we are
currently not permitted to distribute stock dividends.
26
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Stock Redemption
Requests. The following table
shows the amount of non-MRCS stock subject to a redemption request by year of
redemption:
March 31,
|
December 31,
|
|||||||
Year of Redemption
|
2010
|
2009
|
||||||
Year
1
|
$ | 10,000 | $ | - | ||||
Year
2
|
19,825 | 29,825 | ||||||
Year
3
|
2,750 | 2,750 | ||||||
Year
4
|
- | - | ||||||
Year
5
|
98,500 | 98,500 | ||||||
Total
stock subject to redemption requests
|
$ | 131,075 | $ | 131,075 |
Note
12 — Segment Information
We have
identified two primary operating segments as defined in our 2009 Form
10-K:
|
·
|
Credit
Services, Investments and Deposit Products (“Traditional”), which
includes credit services (such as Advances, letters of credit and lines of
credit), investments (including Federal Funds Sold, AFS, HTM), and
deposits; and
|
|
·
|
MPP,
which consists of mortgage loans purchased from our
members.
|
We have
not symmetrically allocated assets to each segment based upon financial results
as it is impracticable to measure the performance of our segments from a total
assets perspective. As a result, there is asymmetrical information
presented in the tables below including, among other items, the allocation of
depreciation without an allocation of the depreciable assets, derivatives and
hedging earnings adjustments with no corresponding allocation to derivative
assets, if any, and the recording of interest income with no allocation to
accrued interest receivable.
27
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
following tables set forth our financial performance by operating
segment:
For the Three Months Ended March 31,
2010
|
Traditional
|
MPP
|
Total
|
|||||||||
Net
Interest Income
|
$ | 39,297 | $ | 22,350 | $ | 61,647 | ||||||
Other
Income (Loss)
|
(6,019 | ) | (296 | ) | (6,315 | ) | ||||||
Other
Expenses
|
10,395 | 591 | 10,986 | |||||||||
Income
Before Assessments
|
22,883 | 21,463 | 44,346 | |||||||||
AHP
|
2,233 | 1,752 | 3,985 | |||||||||
REFCORP
(1)
|
4,130 | 3,942 | 8,072 | |||||||||
Total
Assessments
|
6,363 | 5,694 | 12,057 | |||||||||
Net
Income
|
$ | 16,520 | $ | 15,769 | $ | 32,289 | ||||||
For the Three Months Ended March 31,
2009
|
Traditional
|
MPP
|
Total
|
|||||||||
Net
Interest Income
|
$ | 37,577 | $ | 23,906 | $ | 61,483 | ||||||
Other
Income (Loss)
|
(18,170 | ) | (912 | ) | (19,082 | ) | ||||||
Other
Expenses
|
11,582 | 663 | 12,245 | |||||||||
Income
Before Assessments
|
7,825 | 22,331 | 30,156 | |||||||||
AHP
|
1,040 | 1,823 | 2,863 | |||||||||
REFCORP
(1)
|
1,357 | 4,102 | 5,459 | |||||||||
Total
Assessments
|
2,397 | 5,925 | 8,322 | |||||||||
Net
Income
|
$ | 5,428 | $ | 16,406 | $ | 21,834 |
|
(1)
|
Resolution
Funding Corporation (“REFCORP”)
|
Note
13 — Estimated Fair Values
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 market observability of the fair value measurement for the
asset or liability. Fair value is the price in an orderly transaction
between market participants to sell an asset or transfer a liability in the
principal (or most advantageous) market for the asset or liability at the
measurement date (an exit price). In order to determine the fair
value or the exit price, entities must determine the unit of account, highest
and best use, principal market, and market participants. These
determinations allow the reporting entity to define the inputs for fair value
and level of hierarchy.
Outlined
below is the application of the fair value hierarchy to our financial assets and
financial liabilities that are carried at fair value.
Level 1 – We carry Rabbi Trust
assets (publicly-traded mutual funds) at Level 1 fair value in Other Assets on
our Statements of Condition. These assets were acquired to fund
non-qualified benefit plans.
Level 2 – We carry AFS,
Derivative Assets and Derivative Liabilities at Level 2 fair value on our
Statements of Condition.
28
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Level 3 – We carry certain HTM
at Level 3 fair value on our Statements of Condition.
We
utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Fair value is first
determined based on quoted market prices or market-based prices, where
available. If quoted market prices or market-based prices are not
available, fair value is determined based on valuation models that use
market-based information available to us as inputs to the models.
Fair Value on a
Recurring Basis. Described below are our fair value
measurement methodologies for assets and liabilities carried at fair value on a
recurring basis:
|
·
|
Rabbi
Trust assets (publicly-traded mutual funds) – The estimated fair values
are based on quoted market prices (unadjusted) for identical assets in
active markets.
|
|
·
|
AFS
– The estimated fair values are based on a Bloomberg composite of
executable prices from participating dealers. The fair values
of these assets fall within the Level 2 hierarchy as we consider the
assets to trade in markets where there is not enough volume or depth to be
considered active.
|
|
·
|
Derivative
Assets and Derivative Liabilities – The estimated fair values are based on
the U.S. dollar swap curve, swaption values, or Fannie Mae to-be-announced
(“TBA”)
values. Derivative market values are compared each month to market
values provided by the derivative counterparties, and significant
differences are investigated, based on certain criteria, and
analyzed.
|
29
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
following tables present, for each hierarchy level, our assets and liabilities
that are measured at fair value on a recurring basis on our Statements of
Condition:
March 31, 2010
|
||||||||||||||||||||
Netting
|
||||||||||||||||||||
Fair Value Measurements
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Adjustment (1)
|
|||||||||||||||
Assets
|
||||||||||||||||||||
AFS:
|
||||||||||||||||||||
GSEs
|
$ | 1,764,316 | $ | - | $ | 1,764,316 | $ | - | $ | - | ||||||||||
Derivative
Assets:
|
||||||||||||||||||||
Interest
rate swaps
|
5,819 | - | 169,470 | - | (163,651 | ) | ||||||||||||||
Interest
rate futures/forwards
|
125 | - | 125 | - | - | |||||||||||||||
Mortgage
delivery commitments
|
- | - | - | - | - | |||||||||||||||
Total
Derivative Assets
|
5,944 | - | 169,595 | - | (163,651 | ) | ||||||||||||||
Rabbi
Trust (included in Other Assets)
|
14,683 | 14,683 | - | - | - | |||||||||||||||
Total
assets at fair value
|
$ | 1,784,943 | $ | 14,683 | $ | 1,933,911 | $ | - | $ | (163,651 | ) | |||||||||
Liabilities
|
||||||||||||||||||||
Derivative
Liabilities
|
||||||||||||||||||||
Interest
rate swaps
|
$ | 764,198 | $ | - | $ | 1,027,517 | $ | - | $ | (263,319 | ) | |||||||||
Interest
rate futures/forwards
|
- | - | - | - | - | |||||||||||||||
Mortgage
delivery commitments
|
161 | - | 161 | - | - | |||||||||||||||
Total
Derivative Liabilities
|
764,359 | - | 1,027,678 | - | (263,319 | ) | ||||||||||||||
Total
liabilities at fair value
|
$ | 764,359 | $ | - | $ | 1,027,678 | $ | - | $ | (263,319 | ) |
December 31, 2009
|
||||||||||||||||||||
Netting
|
||||||||||||||||||||
Fair Value Measurements
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Adjustment (1)
|
|||||||||||||||
Assets
|
||||||||||||||||||||
AFS:
|
||||||||||||||||||||
GSEs
|
$ | 1,760,714 | $ | - | $ | 1,760,714 | $ | - | $ | - | ||||||||||
Derivative
Assets
|
1,714 | - | 198,055 | - | (196,341 | ) | ||||||||||||||
Rabbi
Trust (included in Other Assets)
|
14,591 | 14,591 | - | - | - | |||||||||||||||
Total
assets at fair value
|
$ | 1,777,019 | $ | 14,591 | $ | 1,958,769 | $ | - | $ | (196,341 | ) | |||||||||
Liabilities
|
||||||||||||||||||||
Derivative
Liabilities
|
$ | 712,716 | $ | - | $ | 989,526 | $ | - | $ | (276,810 | ) | |||||||||
Total
liabilities at fair value
|
$ | 712,716 | $ | - | $ | 989,526 | $ | - | $ | (276,810 | ) |
|
(1)
|
Amounts
represent the effect of legally enforceable master netting agreements that
allow us to settle positive and negative positions and also cash
collateral and related accrued interest held or placed with the same
counterparties.
|
30
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
For
instruments carried at fair value, we review 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 of the current level at fair value in the quarter in which the
changes occur, as applicable.
Fair Value on a
Nonrecurring Basis. We measure certain HTM
at fair value on a nonrecurring basis. These assets are not measured at fair
value on an ongoing basis, but are subject to fair value adjustments only in
certain circumstances (e.g., when there is evidence of OTTI).
We
recorded certain HTM at fair value and recognized OTTI charges on those HTM
during the three months ended March 31, 2010, and 2009, which were included in
Other Income (Loss) on the Statements of Income.
The
following table summarizes the values of the assets recorded at fair value on a
nonrecurring basis:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Carrying
value prior to write-down
|
$ | 145,663 | $ | 670,162 | ||||
Fair
value at period-end date
|
131,210 | 513,234 |
The
following table presents HTM by level within the fair value hierarchy for which
a nonrecurring change in fair value was recorded:
Fair Value Measurements
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
HTM
OTTI private-label RMBS - March 31, 2010
|
$ | 131,210 | $ | - | $ | - | $ | 131,210 | ||||||||
HTM
OTTI private-label RMBS - December 31, 2009
|
513,234 | - | - | 513,234 |
Significant
Inputs of Recurring and Non-Recurring Fair Value
Measurements. The following represents the significant inputs
used to determine fair value of those instruments carried on the Statements of
Condition at fair value, which are classified as Level 2 or Level 3 within the
fair value hierarchy. These disclosures do not differentiate between
recurring and non-recurring fair value measurements.
Investment securities –
non-MBS. The fair value of non-MBS investment securities that are
carried on the Statement of Condition at fair value (AFS GSEs) is determined
using a market-observable price quote from a third-party pricing service
(Bloomberg CBBT screen), thus falling under the market approach. The
CBBT price represents executable prices for identical assets.
Investment securities – MBS.
For our MBS holdings, our 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. We establish a price for
each of our 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 some type of 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
including, but not limited to, a comparison to the prices for 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.
31
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
As of
March 31, 2010, all of our MBS holdings held at fair value were priced using
this valuation technique. The relative proximity of the prices
received supports our conclusion that the final computed prices are reasonable
estimates of fair value. Based on the current lack of significant
market activity for private-label RMBS, the non-recurring 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 generally
determined using discounted cash-flow analysis (the income approach) and
comparisons to similar instruments (the market approach). The
discounted cash-flow model uses an income approach based on market-observable
inputs as its basis (inputs that are actively quoted and can be validated to
external sources). Inputs by class of derivative are as
follows:
Interest
rate swaps:
|
·
|
London
Interbank Offered Rate (“LIBOR”) swap curve,
and
|
|
·
|
Volatility
assumption. Market-based expectations of future interest rate volatility
implied from current market prices for similar
options.
|
Interest
rate futures/forwards and mortgage delivery commitments:
|
·
|
TBA
securities prices. Market-based prices of TBAs by coupon class
and expected term until settlement.
|
Estimated Fair
Value Methodologies and Techniques. We determine estimated fair value
amounts by using available market information and our best judgment of
appropriate valuation methods. These estimates are based on pertinent
information available to us at March 31, 2010, and December 31, 2009. Although
we use our best judgment in estimating the fair value of these financial
instruments, there are inherent limitations in any estimation technique or
valuation methodology. For example, because an active secondary market does not
exist for a portion of our 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 our judgment
of how a market participant would estimate the fair values. The fair value
summary table included herein does not represent an estimate of our overall
market value as a going concern, which would take into account future business
opportunities and the net profitability of assets versus
liabilities.
A
description of the fair value methodologies is disclosed in our 2009 Form 10-K,
and no changes have been made in the current quarter.
Sensitivity of
Estimates. Estimates of the fair value of our financial instruments, such
as Advances with options, mortgage instruments, derivatives with embedded
options and CO Bonds with options using the methods described in our 2009 Form
10-K, are highly subjective and require judgments regarding significant matter
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. These
estimates are susceptible to material near term changes because they are made as
of a specific point in time.
32
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
The
carrying value and estimated fair values of our financial instruments were as
follows:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
Financial Instruments
|
Value
|
Fair Value
|
Value
|
Fair Value
|
||||||||||||
Assets
|
||||||||||||||||
Cash
and Due from Banks
|
$ | 1,412,026 | $ | 1,412,026 | $ | 1,722,077 | $ | 1,722,077 | ||||||||
Interest-Bearing
Deposits
|
43 | 43 | 25 | 25 | ||||||||||||
Federal
Funds Sold
|
6,883,000 | 6,883,047 | 5,532,000 | 5,532,253 | ||||||||||||
AFS
|
1,764,316 | 1,764,316 | 1,760,714 | 1,760,714 | ||||||||||||
HTM
|
8,177,769 | 8,278,152 | 7,701,151 | 7,690,482 | ||||||||||||
Advances
|
21,581,565 | 21,672,291 | 22,442,904 | 22,537,027 | ||||||||||||
Mortgage
Loans Held for Portfolio
|
6,990,015 | 7,275,921 | 7,271,895 | 7,531,415 | ||||||||||||
Accrued
Interest Receivable
|
110,217 | 110,217 | 114,246 | 114,246 | ||||||||||||
Derivative
Assets
|
5,944 | 5,944 | 1,714 | 1,714 | ||||||||||||
Rabbi
Trust assets (included in Other Assets)
|
14,683 | 14,683 | 14,591 | 14,591 | ||||||||||||
Liabilities
|
||||||||||||||||
Deposits
|
549,122 | 549,122 | 824,851 | 824,851 | ||||||||||||
Consolidated
Obligations:
|
||||||||||||||||
Discount
Notes
|
11,536,974 | 11,536,826 | 6,250,093 | 6,250,558 | ||||||||||||
CO
Bonds
|
31,267,356 | 31,531,110 | 35,907,789 | 36,054,510 | ||||||||||||
Accrued
Interest Payable
|
188,483 | 188,483 | 211,504 | 211,504 | ||||||||||||
Derivative
Liabilities
|
764,359 | 764,359 | 712,716 | 712,716 | ||||||||||||
MRCS
|
750,697 | 750,697 | 755,660 | 755,660 |
Note
14 — Commitments and Contingencies
Consolidated
Obligations are backed only by the financial resources of the 12 Federal Home
Loan Banks (“FHLBs”).
The joint and several liability regulation of the Finance Agency authorizes it
to require any FHLB to repay all or a portion of the principal and interest on
Consolidated Obligations for which another FHLB is the primary
obligor. No FHLB has ever been asked or required to repay the
principal or interest on any Consolidated Obligation on behalf of another FHLB,
and as of March 31, 2010, and through the filing date of this report, we do not
believe that it is probable that we will be asked to do so.
We have
determined that it is not necessary to recognize a liability for the fair value
of our 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
FHLBs. The FHLBs have no control over the amount of the guaranty or
the determination of how each FHLB would perform under the joint and several
obligations. Accordingly, we do not recognize a liability for our
joint and several obligations related to Consolidated Obligations issued for the
benefit of other FHLBs. The par values of the outstanding
Consolidated Obligations for all 12 FHLBs were approximately $870.9 billion and
$930.6 billion at March 31, 2010, and December 31, 2009,
respectively.
Commitments
that legally bind us for additional Advances totaled approximately $6,646 and
$37,681 at March 31, 2010, and December 31, 2009,
respectively. Commitments generally are for periods up to 6 months
and will be funded provided the member meets our collateral and underwriting
requirements. Based on credit analyses performed by our management as well
as collateral requirements, we have not deemed it necessary to record any
additional liability on these commitments.
33
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Standby
letters of credit are executed for members for a fee. A standby
letter of credit is a short-term financing arrangement between us and one of our
members. If we are required to make payment for a beneficiary’s draw,
the payment amount is converted into a collateralized Advance to the
member. Outstanding standby letters of credit were as
follows:
March 31, 2010
|
December 31, 2009
|
|||||||
Outstanding
notional
|
$ | 570,988 | $ | 589,654 | ||||
Original
terms
|
6
months – 20 years
|
3 months – 20 years
|
||||||
Final
expiration year
|
2029
|
2029
|
The value
of the guarantees related to standby letters of credit are reported in Other
Liabilities and amount to $5,505 and $4,969 at March 31, 2010, and December 31,
2009, respectively. Based on credit analyses performed by our management as well
as collateral requirements, we have not deemed it necessary to record any
additional liability on these commitments. Commitments are fully collateralized
at the time of issuance. Outstanding commitments that unconditionally obligated
us for additional letters of credit were $20,779 and $0 at March 31, 2010, and
December 31, 2009, respectively.
We
monitor the creditworthiness of our standby letters of credit based on an
evaluation of our members. We have established parameters for the
measurement, review, classification, and monitoring of credit risk related to
these standby letters of credit.
We had
$213,162 and $170,580 of unused lines of credit available to members at
March 31, 2010, and December 31, 2009, respectively.
Commitments
that unconditionally obligate us to purchase mortgage loans totaled $21,715 and
$38,328 at March 31, 2010, and December 31, 2009, respectively. Commitments are
generally for periods not to exceed 91 days. Such commitments are reported as
Derivative Assets or Derivative Liabilities at their fair value.
We
generally execute derivatives with large banks and major broker-dealers and
generally enter into bilateral pledge (collateral) agreements. We had
pledged $103,596 and $80,457 of collateral, at par, at March 31, 2010, and
December 31, 2009, respectively.
As of
March 31, 2010, we had committed to issue $588,000 par value of CO Bonds, of
which $455,000 were hedged with associated interest rate swaps, and $12,132 par
value of Discount Notes that had traded but not settled. This compares to
$1,994,500 par value of CO Bonds, of which $1,650,000 were hedged with
associated interest rate swaps, and no Discount Notes that had traded but not
settled as of December 31, 2009.
We are
subject to legal proceedings arising in the normal course of business.
Management does not anticipate that the ultimate liability, if any, arising out
of these matters will have a material effect on our financial condition or
results of operations. We are not aware of any pending or threatened litigation
against us at this time.
Notes 6,
7, 8, 10, 11, and 13 discuss other commitments and contingencies.
Note
15 — Transactions with Shareholders
Our
activities with shareholders are summarized below and have been identified in
the Statements of Condition, Statements of Income, and Statements of Cash
Flows.
In the
normal course of business, we have invested in Federal Funds Sold and other
short-term investments with shareholders or their affiliates.
34
Federal
Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial
Statements, continued
($
amounts in thousands unless otherwise indicated)
Transactions with
Directors’ Financial Institutions. We provide, in
the ordinary course of business, products and services to members whose officers
or directors serve on our board of directors (“Directors’ Financial
Institutions”). Finance Agency regulations require that
transactions with Directors’ Financial Institutions be made on the same terms as
those with any other member. We had Advances, Mortgage Loans Held for
Portfolio, and Capital Stock outstanding (including MRCS) to Directors’
Financial Institutions as follows:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Advances,
par value
|
$ | 4,835,784 | $ | 4,889,358 | ||||
%
of Advances, outstanding
|
23.2 | % | 22.5 | % | ||||
Mortgage
Loans Held for Portfolio, par value
|
$ | 207,035 | $ | 216,217 | ||||
%
of Mortgage Loans Held for Portfolio, outstanding
|
3.0 | % | 3.0 | % | ||||
Capital
Stock, including MRCS, par value
|
$ | 449,579 | $ | 453,813 | ||||
%
of Capital Stock, including MRCS, outstanding
|
18.1 | % | 18.3 | % |
During
the three months ended March 31, 2010, and 2009, we acquired mortgage loans from
Directors’ Financial Institutions, presented as of the date of the directors’
appointments and resignations, as follows:
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Mortgage
Loans purchased from Directors' Financial Institutions
|
$ | 2,192 | $ | 5,337 |
35
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation. Unless
otherwise stated, amounts disclosed in this report represent values rounded to
the nearest million; therefore, amounts less than one million may not be
reflected in this report. Amounts used to calculate changes are based
on numbers in the thousands. Accordingly, recalculations based upon
the disclosed amounts (millions) may not produce the same results.
Special
Note Regarding Forward-looking Statements
Statements
in this Quarterly Report on Form 10-Q, including statements describing our
objectives, projections, estimates or future predictions may be “forward-looking
statements.” These statements may use forward-looking terminology,
such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,”
“expects,” “will,” or their negatives or other variations on these
terms. We caution that, by their nature, forward-looking statements
involve risk or uncertainty and that actual results either 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 the timing and volume of market activity,
inflation or deflation, changes in the value of global currencies, and
changes in the financial condition of market
participants;
|
|
·
|
volatility
of market prices, rates, and indices that could affect the value of
collateral we hold as security for the obligations of our members and
counterparties;
|
|
·
|
demand
for our Advances and purchases of mortgage loans resulting
from:
|
|
o
|
changes
in our members’ deposit flows and credit
demands;
|
|
o
|
membership
changes, including, but not limited to, mergers, acquisitions and
consolidations of charters;
|
|
o
|
changes
in the general level of housing activity in the United States, the level
of refinancing activity and consumer product
preferences;
|
|
o
|
our
ability to introduce new products and services and successfully manage the
risks associated with those products and services, including new types of
collateral securing Advances and securitizations;
and
|
|
o
|
competitive
forces, including without limitation other sources of funding available to
our members;
|
|
·
|
changes
in mortgage asset prepayment patterns, delinquency rates and housing
values;
|
|
·
|
political
events, including legislative, regulatory, or other developments, and
judicial rulings that affect us, our status as a secured creditor, our
members, counterparties, one or more of the FHLBs and/or investors in the
Consolidated Obligations of the 12
FHLBs;
|
|
·
|
changes
in our ability to raise capital market funding, including changes in
credit ratings and the level of government guarantees provided to other
United States and international financial institutions; and competition
from other entities borrowing funds in the capital
markets;
|
|
·
|
negative
adjustments in the FHLB’s NRSRO ratings that could adversely impact the
marketability of our Consolidated Obligations, products, or
services;
|
|
·
|
risk
of loss should one or more of the FHLBs be unable to repay its
participation in the Consolidated Obligations, or an FHLB is otherwise
unable meet its financial
obligations;
|
|
·
|
ability
to attract and retain skilled
individuals;
|
|
·
|
ability
to develop and support technology and information systems, including the
Internet, sufficient to effectively manage the risks of our
business;
|
|
·
|
changes
in terms of interest rate exchange agreements and similar
agreements;
|
|
·
|
risk
of loss arising from natural disasters, acts of war or acts of terrorism;
and
|
|
·
|
changes
in or differing interpretations of accounting
guidance.
|
Although
we undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make through reports
filed with the SEC in the future, including Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
36
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
related footnotes contained in this Quarterly Report on Form 10-Q and our 2009
Form 10-K.
Executive
Summary
Overview
We are a
regional wholesale bank that makes Advances, purchases mortgages and other
investments, and provides other financial services to our member financial
institutions. These member financial institutions can consist of
federally-insured depository institutions (including commercial banks, thrifts,
and credit unions), community development financial institutions and insurance
companies. All member financial institutions are required to purchase
shares of our Class B Capital Stock as a condition of membership. Our
public policy mission is to facilitate and expand the availability of financing
for housing and community development. We seek to achieve this by
providing services to our members in a safe, sound, and profitable manner, and
by generating a competitive return on their capital investment.
We manage
our business by grouping our products and services within two business
segments:
|
·
|
Traditional,
which includes credit services (such as Advances, letters of credit, and
lines of credit), investments (including Federal Funds Sold, AFS, and
HTM), and deposits; and
|
|
·
|
MPP,
which consists of mortgage loans purchased from our
members.
|
Our
primary source of revenue is interest earned on:
|
·
|
Advances;
|
|
·
|
long-
and short-term investments; and
|
|
·
|
mortgage
loans acquired from our members.
|
Our
principal source of funding is the proceeds from the sale to the public of FHLB
debt instruments, called Consolidated Obligations or COs, which are the joint
and several obligation of all 12 FHLBs. We obtain additional funds
from deposits, other borrowings, and the sale of capital stock to our
members.
Our
profitability is primarily determined by the interest rate spread between the
interest rate earned on our assets and the interest rate paid on our share of
the Consolidated Obligations. We use funding and hedging strategies
to mitigate the related interest-rate risk.
The
Economy and the Financial Services Industry
Our
financial condition and results of operations are influenced by the general
state of the global and national economies and the local economies in our
district states of Indiana and Michigan and their impact on our member financial
institutions; the conditions in the financial, credit and mortgage markets; and
the prevailing level of interest rates. The U.S. economy entered a recession in
December 2007, which continued through 2008 and 2009. In addition, many of the
effects of the world-wide financial crisis, including high levels of mortgage
delinquencies and foreclosures, depressed housing prices, illiquidity in the
credit markets, stock market fluctuations, higher borrowing costs for many
financial institutions, serious pressures on earnings and capital at many
financial institutions, and high unemployment rates continued during the first
quarter of 2010. Although there were indications that the recession and
financial crisis began to abate in mid-2009, it is too soon to know if the
positive signs will be sustained.
37
According
to a press release issued by the Federal Open Market Committee (“FOMC”) of the Federal Reserve
Board on April 28, 2010, there are signs that economic activity has continued to
strengthen and that the labor market is beginning to improve. Growth
in household spending has picked up recently but remains constrained by high
unemployment, modest income growth, lower housing wealth, and tight credit.
Business spending on equipment and software has risen significantly; however,
investment in nonresidential structures is declining and employers remain
reluctant to add to payrolls. Housing starts have edged up but remain
at a depressed level. While bank lending continues to contract,
financial market conditions remain supportive of economic
growth. Although the pace of economic recovery is likely to be
moderate for a time, the FOMC anticipates a gradual return to higher levels of
resource utilization in a context of price stability. The FOMC indicated that it
will maintain the target range for the federal funds rate at 0.00-0.25%, as it
continues to anticipate that economic conditions, including low rates of
resource utilization, subdued inflation trends, and stable inflation
expectations, are likely to warrant exceptionally low levels of the federal
funds rate for an extended period.
To
provide support to mortgage lending and housing markets and to improve overall
conditions in private credit markets, the Federal Reserve purchased $1.25
trillion of agency MBS and about $175 billion of agency debt.
In light
of improved functioning of financial markets, the Federal Reserve has closed all
but one of the special liquidity facilities that it created to support markets
during the crisis. The only remaining such program, the Term Asset-Backed
Securities Loan Facility, is scheduled to close on June 30, 2010, for
loans backed by new-issue commercial MBS; it closed on March 31, 2010, for loans
backed by all other types of collateral.
Going
forward, we anticipate that this reduced level of public program support could
increase our funding costs and reduce the fair values of our MBS. See “Financial
Trends in the Capital Markets” below for more information on recent market
developments that impact the issuance and composition of our COs.
Economic
data for Indiana and Michigan continue to generally compare unfavorably to
national data, though Indiana had some good employment news in March. Indiana’s
nonfarm payroll increase of 16,600 during March was the fourth largest increase
in the U.S., while Michigan’s decrease of 9,700 was the largest decrease for the
month. The Bureau of Labor Statistics reported that Michigan’s
unemployment rate for March 2010 of 14.1% was the highest in the nation, while
Indiana’s rate of 9.9% exceeded the U.S. rate of 9.7%. Indiana and
Michigan experienced year-over-year manufacturing employment declines of 3.3%
and 5.7%, respectively. Michigan’s noncurrent mortgage rate for March
2010 of 12.9% was the tenth highest in the nation and Indiana’s noncurrent
mortgage rate of 12.7% exceeded the national rate of 12.4%, as reported by
Lender Processing Services. We believe the overall economic outlook
for our district will continue to trail the overall U.S. economy.
Financial
Trends in the Capital Markets
The
Office of Finance, our fiscal agent, issues debt in the global capital markets
on behalf of the 12 FHLBs in the form of Consolidated Obligations, including CO
Bonds and Discount Notes. The Office of Finance and the 12 FHLBs are
collectively known as the “FHLB
System.” Our funding operations depend on debt issued by the
Office of Finance, and the issuance of our debt is impacted by events in the
capital markets. The ongoing credit market crisis that began in
mid-2007 has had a significant impact on the FHLBs, including our access to
funding markets, funding costs, investor and dealer sponsorship, and the profile
of our outstanding debt.
The par
amount of our COs was $42.7 billion at March 31, 2010, an increase of $0.6
billion or 1.5%, compared to $42.0 billion at December 31,
2009. The outstanding balance of CO Bonds, at par, was 73.0% of total
COs, compared to 85.1% at December 31, 2009. CO Bonds as a percentage
of total COs fell as Discount Notes were used to fund Federal Funds Sold,
floating-rate securities in our HTM portfolio, and a portion of our swapped
Advances. During the first quarter of 2010, the agency debt markets
continued to function relatively well. However, by the end of this
quarter, our swapped funding levels had deteriorated due to several
factors:
|
·
|
The
Federal Reserve Bank of New York’s purchases of our COs, along with debt
issued by Fannie Mae and Freddie Mac, ended during the first quarter of
2010;
|
|
·
|
Fannie
Mae and Freddie Mac announced plans to purchase mortgage loans that are
120 days or more delinquent out of mortgage pools. The initial purchases
are scheduled to occur through May 2010, with additional delinquency
purchases as needed thereafter. As Fannie Mae and Freddie Mac may need to
raise additional funds for these loan purchases, funding costs in the
short end of the agency debt market may continue to be
affected;
|
38
|
·
|
Weighted-average
CO Bond funding costs deteriorated significantly and swapped funding
levels were driven lower by various factors, including the recent
compression of the interest-rate swap curve;
and
|
|
·
|
Redemptions
of CO Bonds outstanding increased.
|
On
February 1, 2010, several lending programs administered by the Federal Reserve
Bank of New York reached their scheduled expiration
dates. These programs included the Commercial Paper Funding
Facility, the Primary Dealer Credit Facility, and the Term Securities Lending
Facility. The expiration of these programs does not appear to have had a major
effect on the agency debt markets.
On March
4, 2010, the SEC published in the Federal Register its final
rule on money market fund reform which stipulated amendments to SEC Rule 2a-7.
The rule became effective on May 5, 2010, with certain aspects of the rule
phased in over the remainder of 2010. In its final rule, the SEC included FHLB
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 FHLB Discount Notes. However, this new rule combined with shrinking
yields in the money market sector has driven investors to seek riskier
investment categories that offer a higher rate of return. 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 $68 billion
since year-end 2009.
Analysis
of Operating Results
Our
overall prospects are dependent on the market environment and our members’
demand for wholesale funding and sales levels of mortgage loans. As
part of their overall business strategy, our members typically use wholesale
funding, in the form of Advances, along with other sources of funding, such as
retail deposits and excess liquidity, and certain members sell mortgage loans to
us.
Periods
of economic growth have led to significant use of wholesale funds by our
members, because businesses typically fund expansion by borrowing and/or
reducing deposit balances. Conversely, slow economic growth has
tended to decrease our members’ wholesale borrowing
activity. Advances declined during the first quarter of 2010 due to
decreased demand related to various economic factors such as growth in our
members’ deposits and reduced loan demand. Purchases of mortgage loans by
the MPP have also decreased. Member demand for Advances and the
MPP is also influenced by the steepness of the yield curve, as well as the
availability and cost of other sources of wholesale or government
funding.
Results
of Operations for the Three Months Ended March 31, 2010, and 2009
The
following table presents the comparative highlights of our results of operations
($ amounts in millions):
For the Three Months Ended March
31,
|
||||||||||||||||
|
|
$
|
%
|
|||||||||||||
Comparative Highlights
|
2010
|
2009
|
change
|
change
|
||||||||||||
Net
Interest Income
|
$ | 62 | $ | 61 | $ | 1 | 0.3 | % | ||||||||
Other
Income (Loss)
|
(7 | ) | (19 | ) | 12 | (66.9 | )% | |||||||||
Other
Expenses
|
11 | 12 | (1 | ) | (10.3 | )% | ||||||||||
Income
Before Assessments
|
44 | 30 | 14 | 47.1 | % | |||||||||||
AHP
|
4 | 3 | 1 | 39.2 | % | |||||||||||
REFCORP
|
8 | 5 | 3 | 47.9 | % | |||||||||||
Total
Assessments
|
12 | 8 | 4 | 44.9 | % | |||||||||||
Net
Income
|
$ | 32 | $ | 22 | $ | 10 | 47.9 | % |
The
increase in Net Income for the three months ended March 31, 2010, compared to
the same period in 2009, was primarily due to an increase in Other Income (Loss)
resulting from lower net OTTI losses, partially offset by an increase in Total
Assessments, which is directly attributable to the higher level of Income Before
Assessments. Net Interest Income for the quarter increased slightly,
as higher spreads were offset by a decrease in average interest-earning
assets.
39
On April
29, 2010, we announced a cash dividend on our Class B-1 Stock of 2.00%
(annualized) and Class B-2 Stock of 1.60% (annualized) based on our results for
the first quarter of 2010.
Financial
Condition
Total
Assets were $47.1 billion as of March 31, 2010, compared to $46.6 billion as of
December 31, 2009. This $0.5 billion increase was primarily due
to increases of $1.0 billion in cash and short-term investments and $0.5 billion
in HTM, partially offset by a net decrease of $0.9 billion in Advances and a
decrease of $0.3 billion in MPP.
The
overall balance of our Consolidated Obligations, which typically fluctuates in
relation to our Total Assets, equaled $42.8 billion at March 31, 2010, compared
to $42.2 billion at December 31, 2009, an increase of $0.6
billion.
40
Summary
of Selected Financial Data
The
following table presents a summary of certain financial information as of and
for the periods indicated ($ amounts in millions):
Financial Highlights
|
||||||||||||||||||||
As of and for the Three Months Ended
|
||||||||||||||||||||
March 31,
2010
|
December 31,
2009
|
September 30,
2009
|
June 30,
2009
|
March 31,
2009
|
||||||||||||||||
Statement of
Condition:
|
||||||||||||||||||||
Investments
(1)
|
$ | 16,825 | $ | 14,994 | $ | 16,381 | $ | 17,219 | $ | 19,470 | ||||||||||
Advances
|
21,582 | 22,443 | 24,432 | 25,987 | 27,899 | |||||||||||||||
Mortgage
Loans Held for Portfolio
|
6,990 | 7,272 | 7,508 | 7,885 | 8,436 | |||||||||||||||
Total
Assets
|
47,072 | 46,599 | 48,553 | 51,276 | 56,009 | |||||||||||||||
Discount
Notes
|
11,537 | 6,250 | 10,687 | 14,557 | 20,633 | |||||||||||||||
CO
Bonds
|
31,267 | 35,908 | 33,280 | 31,960 | 30,293 | |||||||||||||||
Total
Consolidated Obligations, net
|
42,804 | 42,158 | 43,967 | 46,517 | 50,926 | |||||||||||||||
MRCS
|
751 | 756 | 602 | 556 | 538 | |||||||||||||||
Capital
Stock, Class B Putable
|
1,732 | 1,726 | 1,875 | 1,908 | 1,897 | |||||||||||||||
Retained
Earnings
|
373 | 349 | 334 | 328 | 286 | |||||||||||||||
AOCI
|
(344 | ) | (329 | ) | (210 | ) | (165 | ) | (200 | ) | ||||||||||
Total
Capital
|
1,761 | 1,746 | 1,999 | 2,071 | 1,983 | |||||||||||||||
Statement of
Income:
|
||||||||||||||||||||
Net
Interest Income
|
62 | 65 | 66 | 80 | 61 | |||||||||||||||
Net
OTTI Losses
|
(6 | ) | (15 | ) | (24 | ) | (2 | ) | (19 | ) | ||||||||||
Other
Income (Loss), excluding Net OTTI Losses
|
(1 | ) | (1 | ) | (1 | ) | 4 | - | ||||||||||||
Other
Expenses
|
11 | 17 | 11 | 9 | 12 | |||||||||||||||
Total
Assessments
|
12 | 9 | 8 | 20 | 8 | |||||||||||||||
Net
Income
|
32 | 23 | 22 | 53 | 22 | |||||||||||||||
Selected Financial
Ratios:
|
||||||||||||||||||||
Return
on average equity (2)
|
7.42 | % | 5.11 | % | 4.09 | % | 10.42 | % | 4.18 | % | ||||||||||
Return
on average assets
|
0.28 | % | 0.20 | % | 0.17 | % | 0.39 | % | 0.15 | % | ||||||||||
Dividend
payout ratio (3)
|
26.92 | % | 39.08 | % | 71.61 | % | 19.59 | % | 85.42 | % | ||||||||||
Net
interest margin
(4)
|
0.53 | % | 0.55 | % | 0.52 | % | 0.60 | % | 0.44 | % | ||||||||||
Total
Capital ratio (at period end) (5)
|
3.74 | % | 3.75 | % | 4.12 | % | 4.04 | % | 3.54 | % | ||||||||||
Total
Regulatory capital ratio (at period end)
(6)
|
6.07 | % | 6.07 | % | 5.79 | % | 5.45 | % | 4.86 | % | ||||||||||
Average
Equity to Average Assets
|
3.74 | % | 3.90 | % | 4.18 | % | 3.78 | % | 3.67 | % | ||||||||||
Weighted
average dividend rate, Class B stock (7)
|
2.00 | % | 1.96 | % | 3.25 | % | 2.23 | % | 3.85 | % | ||||||||||
Par
amount of outstanding Consolidated Obligations for all 12
FHLBs
|
$ | 870,928 | $ | 930,617 | $ | 973,579 | $ | 1,055,863 | $ | 1,135,379 |
|
(1)
|
Investments
consist of HTM, AFS, Interest-Bearing Deposits, and Federal Funds
Sold.
|
|
(2)
|
Return
on average equity is Net Income expressed as a percentage of average total
capital.
|
|
(3)
|
The
dividend payout ratio is calculated by dividing dividends paid in cash
during the period by Net Income for the
period.
|
|
(4)
|
Net
interest margin is Net Interest Income expressed as a percentage of
average earning assets.
|
|
(5)
|
Total
Capital ratio is Capital Stock plus Retained Earnings and AOCI as a
percentage of period-end Total
Assets.
|
|
(6)
|
Total
Regulatory capital ratio is Capital Stock plus Retained Earnings and MRCS
as a percentage of period end Total
Assets.
|
|
(7)
|
Weighted
average dividend rates are dividends paid in cash divided by the average
of Capital Stock eligible for
dividends.
|
41
Results
of Operations for the Three Months Ended March 31, 2010, and 2009
Net
Income
Net
Income was $32.3 million for the three months ended March 31, 2010, an increase
of $10.5 million or 47.9%, compared to $21.8 million for the three months ended
March 31, 2009. The following factors contributed to this increase in Net
Income:
·
|
Other
Income (Loss) increased by $12.8 million primarily due to the lower credit
loss portion of the OTTI write-down of certain private-label RMBS, which
equaled $6.1 million for the quarter ended March 31, 2010, compared to
$18.6 million for the same period in 2009, as discussed in more detail in
“Other Income” herein; and
|
·
|
Net
Interest Income increased by $0.1 million. The factors
impacting Net Interest Income are addressed separately below under “Net
Interest Income.”
|
The
increases in Other Income (Loss) and Net Interest Income were partially offset
by an increase in Total Assessments of $3.7 million, which is directly
attributable to the higher level of Income Before Assessments.
Net
Interest Income
Net
Interest Income is our primary source of earnings. We generate Net
Interest Income from two components: (i) the net interest rate spread, and (ii)
funding interest-earning assets with interest-free capital. The sum of these two
components, when expressed as a percentage of the average balance of
interest-earning assets, equals the net interest margin. The portion
of our Net Interest Income that results from earnings on assets funded by
interest-free capital may be higher than other types of financial institutions,
such as commercial banks, because our net interest rate spread is relatively low
compared to other types of financial institutions.
Items
that increased the Net Interest Income for the three months ended March 31,
2010, compared to the same period in 2009, included:
·
|
wider
spreads on the interest-earning assets in our MBS and MPP portfolios,
primarily due to the replacement of higher-costing debt supporting
mortgage loans held for portfolio with lower-costing debt reflecting the
current low interest rate environment;
and
|
·
|
an
increase in prepayment fee income.
|
These
increases were partially offset by:
·
|
lower
average balances of interest-earning
assets;
|
·
|
a
lower average yield on interest-bearing assets funded by interest-free
capital; and
|
·
|
lower
spreads on Advances and short-term
investments.
|
42
The
following table presents average balances, income, and yields of major earning
asset categories and the sources funding those earning assets ($ amounts in
millions).
For the Three Months Ended March 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Federal
Funds Sold
|
$ | 7,550 | $ | 2 | 0.14 | % | $ | 10,373 | $ | 11 | 0.41 | % | ||||||||||||
AFS
(1)(2)
|
1,672 | 2 | 0.39 | % | 1,681 | 8 | 1.90 | % | ||||||||||||||||
HTM
(3)
|
8,169 | 63 | 3.15 | % | 6,722 | 77 | 4.63 | % | ||||||||||||||||
Advances
(1)
|
22,040 | 51 | 0.94 | % | 29,566 | 151 | 2.08 | % | ||||||||||||||||
Mortgage
Loans Held for Portfolio
|
7,141 | 91 | 5.15 | % | 8,675 | 113 | 5.30 | % | ||||||||||||||||
Other
Assets (interest earning) (4)
|
549 | 1 | 0.42 | % | 234 | - | 0.18 | % | ||||||||||||||||
Total
interest-earning assets
|
47,121 | 210 | 1.81 | % | 57,251 | 360 | 2.55 | % | ||||||||||||||||
Other
Assets (non-interest earning)
|
426 | 462 | ||||||||||||||||||||||
Fair
value adjustment on HTM (3)
|
(319 | ) | (1 | ) | ||||||||||||||||||||
Total
Assets
|
$ | 47,228 | $ | 57,712 | ||||||||||||||||||||
Liabilities
and Capital:
|
||||||||||||||||||||||||
Interest-Bearing
Deposits
|
$ | 914 | - | 0.03 | % | $ | 1,051 | 1 | 0.13 | % | ||||||||||||||
Discount
Notes
|
8,058 | 2 | 0.12 | % | 22,101 | 56 | 1.03 | % | ||||||||||||||||
CO
Bonds (1)
|
34,350 | 142 | 1.68 | % | 30,168 | 238 | 3.20 | % | ||||||||||||||||
MRCS
|
755 | 4 | 1.92 | % | 539 | 4 | 2.96 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
44,077 | 148 | 1.36 | % | 53,859 | 299 | 2.25 | % | ||||||||||||||||
Other
Liabilities
|
1,385 | 1,734 | ||||||||||||||||||||||
Total
Capital
|
1,766 | 2,119 | ||||||||||||||||||||||
Total
Liabilities and Capital
|
$ | 47,228 | $ | 57,712 | ||||||||||||||||||||
Net
Interest Income and net spread on interest-earning assets less
interest-bearing liabilities
|
$ | 62 | 0.45 | % | $ | 61 | 0.30 | % | ||||||||||||||||
Net
interest margin
|
0.53 | % | 0.44 | % | ||||||||||||||||||||
Average
interest-earning assets to
interest-bearing liabilities
|
1.07 | 1.06 |
|
(1)
|
Interest
income/expense and average rates include the effect of associated interest
rate exchange agreements to the extent such agreements qualify as fair
value hedges.
|
|
(2)
|
The
average balances of AFS are reflected at amortized cost; therefore, the
resulting yields do not reflect changes in fair
value.
|
|
(3)
|
Average
balances of HTM are reflected at amortized cost; therefore, the resulting
yields do not reflect changes in fair value, if
applicable.
|
|
(4)
|
Includes
Interest-Bearing Deposits, Securities Purchased Under Agreements to
Resell, Loans to Other FHLBs, and Rabbi Trust
assets.
|
43
The
following table summarizes changes in Interest Income and Interest Expense
between the three months ended March 31, 2010, and 2009 ($ amounts in
millions):
For the Three Months Ended March 31,
|
||||||||||||
2010 over 2009
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Increase
(decrease) in Interest Income:
|
||||||||||||
Advances
|
$ | (32 | ) | $ | (68 | ) | $ | (100 | ) | |||
Interest-Bearing
Deposits
|
- | - | - | |||||||||
Federal
Funds Sold
|
(2 | ) | (6 | ) | (8 | ) | ||||||
AFS
|
- | (6 | ) | (6 | ) | |||||||
HTM
|
15 | (28 | ) | (13 | ) | |||||||
Mortgage
Loans Held for Portfolio
|
(20 | ) | (3 | ) | (23 | ) | ||||||
Other
Interest Income
|
- | - | - | |||||||||
Total
|
(39 | ) | (111 | ) | (150 | ) | ||||||
Increase
(decrease) in Interest Expense:
|
||||||||||||
Deposits
|
- | (1 | ) | (1 | ) | |||||||
CO
Bonds
|
29 | (125 | ) | (96 | ) | |||||||
Discount
Notes
|
(23 | ) | (31 | ) | (54 | ) | ||||||
MRCS
|
2 | (2 | ) | - | ||||||||
Other
Interest Expense
|
- | - | - | |||||||||
Total
|
8 | (159 | ) | (151 | ) | |||||||
Increase
(decrease) in Net Interest Income
|
$ | (47 | ) | $ | 48 | $ | 1 |
Changes
in both volume and interest rates influence changes in Net Interest Income and
net interest margin. Changes in Interest Income and Interest Expense
that are not identifiable as either volume-related or rate-related, but rather
equally attributable to both volume and rate changes, have been allocated to the
volume and rate categories based upon the proportion of the volume and rate
changes.
Other
Income
The
following table presents a breakdown of Other Income (Loss) for the three months
ended March 31, 2010, and 2009 ($ amounts in millions):
For the Three Months
|
||||||||
Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Total
OTTI Losses
|
$ | (14 | ) | $ | (147 | ) | ||
Portion
of Impairment Losses Recognized in Other Comprehensive
|
||||||||
Income,
net
|
8 | 128 | ||||||
Net
OTTI Credit Losses
|
(6 | ) | (19 | ) | ||||
Net
Gains (Losses) on Derivatives and Hedging Activities
|
(1 | ) | (1 | ) | ||||
Service
Fees
|
- | 1 | ||||||
Standby
Letters of Credit Fees
|
- | - | ||||||
Other,
net
|
- | - | ||||||
Total
Other Income (Loss)
|
$ | (7 | ) | $ | (19 | ) |
The
favorable change in Other Income (Loss) for the three months ended March 31,
2010, compared to the same period in 2009, was primarily due to the lower credit
loss portion of the OTTI charge on certain private-label RMBS.
44
Results of OTTI Evaluation Process.
Based on our evaluations, we recognized OTTI losses for 13 securities for
the three months ended March 31, 2010, compared to four securities for the same
period in 2009. These securities had an aggregate amount of unpaid
principal balance in HTM private-label RMBS of $747.9 million and $323.5
million, respectively. We do not intend to sell these securities, and
it is not more likely than not (i.e., not likely) that we will be required
to sell these securities before our anticipated recovery of each security’s
remaining amortized cost. However, we determined that we would not
recover the entire amortized cost of these securities. Therefore, we
recognized net OTTI charges as shown in the table below.
For the
three months ended March 31, 2010, we accreted $13.8 million of previous
non-credit impairment from AOCI to the carrying value of HTM. No such
accretion was required for the three months ended March 31, 2009, as that
was the first period in which we recognized an OTTI charge. See “Risk
Management-Credit Risk Management-Investments-OTTI Evaluation Process” for more
information on our OTTI Evaluation Process.
We
recorded OTTI charges as follows ($ amounts in millions):
Impairment
|
||||||||||||
Impairment
|
Related to
|
|||||||||||
Related to
|
All Other
|
Total
|
||||||||||
For the Three Months Ended March 31, 2010
|
Credit Loss
|
Factors
|
Impairment
|
|||||||||
Impairment
on securities for which OTTI was not
|
||||||||||||
previously
recognized
|
$ | - | $ | 14 | $ | 14 | ||||||
Additional
impairment on securities for which
|
||||||||||||
OTTI
charge was previously recognized
|
6 | (6 | ) | - | ||||||||
Accretion
of impairment related to all other factors
|
- | (13 | ) | (13 | ) | |||||||
Totals
|
$ | 6 | $ | (5 | ) | $ | 1 |
Impairment
|
||||||||||||
Impairment
|
Related to
|
|||||||||||
Related to
|
All Other
|
Total
|
||||||||||
For the Three Months Ended March 31, 2009
|
Credit Loss
|
Factors
|
Impairment
|
|||||||||
Impairment
on securities for which OTTI was not
|
||||||||||||
previously
recognized
|
$ | 19 | $ | 128 | $ | 147 | ||||||
Additional
impairment on securities for which
|
||||||||||||
OTTI
charge was previously recognized
|
- | - | - | |||||||||
Accretion
of impairment related to all other factors
|
- | - | - | |||||||||
Totals
|
$ | 19 | $ | 128 | $ | 147 |
AHP
and REFCORP Assessments
AHP and
REFCORP contributions are statutorily required and are calculated simultaneously
because of their interdependence on each other.
AHP. The FHLBs are
required to set aside annually, in the aggregate, the greater of $100 million or
10% of their net earnings before Interest Expense on MRCS and after the REFCORP
assessments, to fund the AHP. Each FHLB’s required annual AHP
contribution is limited to its annual net earnings. Our AHP expense
for the three months ended March 31, 2010, was $4.0 million compared to $2.9
million for the same period in 2009.
45
REFCORP. Each FHLB is required
to pay to REFCORP 20% of net earnings after operating expenses and AHP
expense. Our REFCORP expense for the three months ended
March 31, 2010, was $8.1 million compared to $5.5 million for the same
period in 2009.
The
increases in both AHP and REFCORP are directly attributable to the increase in
Income Before Assessments.
Business
Segments
We manage
our business by grouping the income and expenses from our products and services
within two business segments: Traditional, which
includes credit services (such as Advances, letters of credit, and lines of
credit), investments (including Federal Funds Sold, AFS, and HTM) and deposits;
and MPP, which consists of mortgage loans purchased from our
members.
The
following tables set forth our financial performance by operating segment ($
amounts in millions):
For the Three Months
|
||||||||
Ended March 31,
|
||||||||
Traditional
Segment
|
2010
|
2009
|
||||||
Net
Interest Income
|
$ | 39 | $ | 37 | ||||
Other
Income (Loss)
|
(6 | ) | (18 | ) | ||||
Other
Expenses
|
10 | 11 | ||||||
Income
Before Assessments
|
23 | 8 | ||||||
AHP
|
2 | 1 | ||||||
REFCORP
|
4 | 1 | ||||||
Total
Assessments
|
6 | 2 | ||||||
Net
Income
|
$ | 17 | $ | 6 |
The
increase in Net Income for the Traditional segment for the three months ended
March 31, 2010, compared to the same period in 2009, was primarily due to the
following factors:
·
|
an
increase in Other Income (Loss) substantially due to the lower credit loss
portion of the OTTI write-down of certain private-label RMBS that is
described in more detail in “Results of Operations for the Three Months
Ended March 31, 2010, and 2009–Other Income–Results of OTTI Evaluation
Process” herein; and
|
·
|
an
increase in Net Interest Income primarily resulting from a higher average
balance of HTM securities and wider spreads on our
HTM.
|
These
increases were partially offset by higher Total Assessments which are directly
attributable to the higher level of Income Before Assessments.
For the Three Months
|
||||||||
Ended March 31,
|
||||||||
MPP Segment
|
2010
|
2009
|
||||||
Net
Interest Income
|
$ | 23 | $ | 24 | ||||
Other
Income (Loss)
|
(1 | ) | (1 | ) | ||||
Other
Expenses
|
1 | 1 | ||||||
Income
Before Assessments
|
21 | 22 | ||||||
AHP
|
2 | 2 | ||||||
REFCORP
|
4 | 4 | ||||||
Total
Assessments
|
6 | 6 | ||||||
Net
Income
|
$ | 15 | $ | 16 |
The
decrease in Net Interest Income for the MPP segment for the three months ended
March 31, 2010, compared to the same period in 2009, was primarily due to the
lower average balance of MPP loans, partially offset by wider
spreads.
46
Analysis
of Financial Condition
Advances
Advances
decreased by $0.9 billion or 3.8% during the first three months of 2010, to
$21.6 billion, compared to $22.4 billion at December 31, 2009. This
decrease was primarily caused by decreased demand for Advances from many of our
members. In general, Advances fluctuate in accordance with our
members’ funding needs related to their deposit levels, mortgage pipelines,
investment opportunities, other balance sheet strategies, and the cost of
alternative funding opportunities.
A
breakdown of Advances, at par value, by primary product line is provided below
($ amounts in millions):
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
% of
|
% of
|
|||||||||||||||
Amount
|
Total
|
Amount
|
Total
|
|||||||||||||
Fixed-rate
bullet
|
$ | 9,760 | 46.9 | % | $ | 10,149 | 46.8 | % | ||||||||
Putable
|
4,983 | 23.9 | % | 5,241 | 24.1 | % | ||||||||||
Adjustable-rate
|
3,242 | 15.6 | % | 3,205 | 14.8 | % | ||||||||||
Fixed-rate
amortizing
|
2,414 | 11.6 | % | 2,545 | 11.7 | % | ||||||||||
Variable-rate
|
379 | 1.8 | % | 530 | 2.4 | % | ||||||||||
Callable
|
40 | 0.2 | % | 40 | 0.2 | % | ||||||||||
Total
Advances, par value
|
$ | 20,818 | 100.0 | % | $ | 21,710 | 100.0 | % |
Cash
and Investments
The
following table provides balances, at carrying value, for our cash and
investments ($ amounts in millions):
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Percent of
|
Percent of
|
|||||||||||||||
Amount
|
Total
|
Amount
|
Total
|
|||||||||||||
Cash
and short-term investments:
|
||||||||||||||||
Cash
|
$ | 1,412 | 7.7 | % | $ | 1,722 | 10.3 | % | ||||||||
Interest-Bearing
Deposits
|
- | 0.0 | % | - | 0.0 | % | ||||||||||
Federal
Funds Sold
|
6,883 | 37.8 | % | 5,532 | 33.1 | % | ||||||||||
Total
cash and short-term investments
|
8,295 | 45.5 | % | 7,254 | 43.4 | % | ||||||||||
AFS
|
1,764 | 9.7 | % | 1,761 | 10.5 | % | ||||||||||
HTM:
|
||||||||||||||||
GSE
debentures
|
126 | 0.7 | % | 126 | 0.8 | % | ||||||||||
State
or local housing finance agency obligations
|
- | - | - | 0.0 | % | |||||||||||
CDs
|
411 | 2.3 | % | - | - | |||||||||||
TLGP
|
2,067 | 11.3 | % | 2,067 | 12.4 | % | ||||||||||
Other
U.S. Obligations - guaranteed RMBS
|
1,403 | 7.7 | % | 865 | 5.2 | % | ||||||||||
GSE
RMBS
|
1,975 | 10.8 | % | 2,137 | 12.8 | % | ||||||||||
Private-label
MBS
|
2,172 | 11.9 | % | 2,481 | 14.8 | % | ||||||||||
Private-label
ABS
|
24 | 0.1 | % | 25 | 0.1 | % | ||||||||||
Total
HTM
|
8,178 | 44.8 | % | 7,701 | 46.1 | % | ||||||||||
Total
cash and investments, carrying value
|
$ | 18,237 | 100.0 | % | $ | 16,716 | 100.0 | % |
Cash
and Short-Term Investments
As of
March 31, 2010, cash and short-term investments
totaled $8.3 billion, an increase of $1.0 billion compared to December 31,
2009. This increase was primarily due to an increase of $1.4 billion
in Federal Funds Sold to profitably utilize capital, partially offset by a
decrease of $0.3 billion in Cash and Due from Banks.
47
Held-to-Maturity
Securities
HTM
increased at March 31, 2010, compared to December 31, 2009, primarily due to
purchases of agency MBS. This increase was partially offset by
mortgage paydowns.
The
Finance Agency’s regulations provide that the total book value of our
investments in MBS and ABS on the day we purchase the securities must not exceed
300% of our total regulatory capital, consisting of Retained Earnings, Class B
Capital Stock, and MRCS, as of the previous month end. Our
investments in MBS and ABS, as a percentage of total regulatory capital, were
195.2% at March 31, 2010, and 194.6% at December 31, 2009. Generally,
our goal is to maintain our investments in MBS and ABS near the 300%
limit. However, our investments in MBS and ABS as a percentage of
total regulatory capital were less than 300% at March 31, 2010, and
December 31, 2009, because of the lack of favorable opportunities for the
purchase of MBS and ABS.
On March
24, 2008, the Finance Agency passed a resolution temporarily granting the FHLBs
the ability to purchase additional MBS and ABS, not to exceed 600% of total
regulatory capital in aggregate, in order to increase liquidity in the MBS
markets. We did not utilize this temporary authority prior to its
expiration on March 31, 2010.
We
performed an OTTI analysis and determined that we had private-label RMBS that
were OTTI at March 31, 2010. See “Investments–OTTI
Evaluation Process” in the Risk Management section herein for more information
on our OTTI analysis process. The general deterioration in the market
for Private-label MBS and ABS resulted in gross unrealized losses in our HTM
portfolio of $305.1 million at March 31, 2010, and $402.6 million at
December 31, 2009. See Note 4 in our Notes to Financial
Statements for detailed information about the unrealized losses.
Mortgage
Loans Held for Portfolio
We
purchase mortgage loans from our members through our MPP. At March
31, 2010, we held $7.0 billion in mortgage loans purchased from our members,
compared to $7.3 billion at December 31, 2009. A significant portion
of our outstanding MPP loans was purchased from previous sellers that are no
longer members. The decrease was primarily due to the prepayment of outstanding
mortgage loans. Some other factors that impact the volume of mortgage loans
purchased through the MPP include the general level of housing activity in the
U.S., the level of refinancing activity, and consumer product preferences. See “Item 1A. Risk
Factors” in our 2009 Form 10-K for more information.
See “Risk
Management–Credit Risk Management–MPP” herein for more information on our SMI
providers.
Deposits
(Liabilities)
Total
Deposits were $0.5 billion at March 31, 2010, compared to $0.8 billion at
December 31, 2009. These deposits represent a relatively
small portion of our funding, and they vary depending upon market factors, such
as the attractiveness of our deposit pricing relative to the rates available on
alternative money market instruments, members’ investment preferences with
respect to the maturity of their investments, and member liquidity.
Consolidated
Obligations
At March
31, 2010, the carrying values of our Discount Notes and CO Bonds totaled $11.5
billion and $31.3 billion, respectively, compared to $6.3 billion and $35.9
billion, respectively, at December 31, 2009. The overall balance
of our COs fluctuates in relation to our Total Assets. See “Executive
Summary – Financial Trends in the Capital Markets” herein for more information
on the issuance of COs.
Derivatives
As of March 31, 2010, and
December 31, 2009, we had Derivative Assets, net of collateral held or paid
including accrued interest, with market values of $5.9 million and $1.7 million,
respectively, and Derivative Liabilities, net of collateral held or paid
including accrued interest, with market values of $764.4 million and $712.7
million, respectively. These amounts reflect the impact of interest
rate changes. We record all derivative financial instruments on the
Statements of Condition at their fair value with changes in the fair value of
all derivatives, excluding collateral, recorded through
earnings.
48
Capital
Total
Capital was $1.761 billion at March 31, 2010, compared to $1.746 billion at
December 31, 2009. This increase was due to a net increase
of $23.6 million in Retained Earnings and an increase of $6.4 million in Capital
Stock, Class B-1 Putable, partially offset by a decrease of $15.0 million in
AOCI, i.e., an increase in Accumulated Other Comprehensive Losses.
Capital Stock,
Class B-1 Putable. Capital Stock, Class
B-1 Putable increased by $6.4 million at March 31, 2010, compared to December
31, 2009, due to proceeds of $4.2 million from the sale of capital stock and the
transfer of $2.2 million from MRCS to Capital Stock, Class B-1
Putable.
Retained
Earnings. Retained Earnings increased by $23.6 million at
March 31, 2010, compared to December 31, 2009. The increase
was due to Net Income of $32.3 million, partially offset by dividends paid of
$8.7 million.
Accumulated Other
Comprehensive Income (Loss). AOCI decreased by $15.0
million at March 31, 2010, compared to December 31, 2009. The
decrease was primarily due to the $20.6 million decrease in fair value of our
AFS, partially offset by the $5.4 million decrease in the net non-credit portion
of OTTI losses on our HTM.
Liquidity
and Capital Resources
Our cash
and short-term investments portfolio, which included Federal Funds Sold and
Interest-Bearing Deposits, totaled $8.3 billion at March 31, 2010, compared to
$7.3 billion at December 31, 2009. The maturities of the short-term
investments provide cash flows to support our ongoing liquidity
needs.
Changes in Cash
Flow. Net cash provided by operating activities was $55.4
million for the period ended March 31, 2010, compared to net cash provided
by operating activities of $29.0 million for the period ended March 31,
2009. The increase of $26.4 million resulted primarily
from increases in interest payables on COs and our payable to
REFCORP.
Capital
Resources
Total Regulatory
Capital. Our total regulatory capital consists of Retained
Earnings and total regulatory capital stock which includes Class B Capital Stock
and MRCS. MRCS is classified as a liability on our Statements of
Condition. See “Capital Adequacy” below for more
information.
Mandatorily
Redeemable Capital Stock. At March 31, 2010, we had $750.7
million in capital stock subject to mandatory redemption, compared to $755.7
million at December 31, 2009. The decrease in MRCS was due to
the redemption of $2.8 million of MRCS at the end of its five-year redemption
period and $2.2 million of MRCS that was reclassified to Capital Stock when the
stockholder became a member of our Bank. See Note 11 in our Notes to
Financial Statements for additional information on the redemption requests for
member capital stock.
49
Capital
Adequacy. We are required by Finance Agency regulations to
maintain sufficient permanent capital (defined as Class B Stock, MRCS, and
Retained Earnings) to meet the combined credit risk, market risk and operational
risk components of the risk-based capital requirement. The Finance Agency may
mandate us to maintain a greater amount of permanent capital than is required by
the risk-based capital requirements as defined. The following tables
present permanent capital and risk-based capital requirement amounts ($ amounts
in millions):
March 31,
|
December 31,
|
|||||||
Permanent Capital
|
2010
|
2009
|
||||||
MRCS
|
$ | 751 | $ | 756 | ||||
Capital
Stock
|
1,732 | 1,726 | ||||||
Retained
Earnings
|
373 | 349 | ||||||
Total
Permanent Capital
|
$ | 2,856 | $ | 2,831 |
March 31,
|
December 31,
|
|||||||
Risk-Based Capital Requirement
|
2010
|
2009
|
||||||
Credit
risk capital component
|
$ | 445 | $ | 401 | ||||
Market
risk capital component
|
262 | 283 | ||||||
Operations
risk capital component
|
212 | 205 | ||||||
Total
Risk-based Capital Requirement
|
$ | 919 | $ | 889 |
The
increase in the risk-based capital requirement from December 31, 2009, to
March 31, 2010, was due to increases in the credit risk and operations risk
capital components, partially offset by a decrease in the market risk capital
component. The credit risk capital component increased primarily as a
result of credit downgrades on many of our MBS. The market risk
capital component decreased due to an increase in the market value of total
regulatory capital. The operations risk capital component equals 30%
of the credit risk and market risk capital components.
In
addition, the Gramm-Leach-Bliley Act of 1999 and Finance Agency regulations
require us to maintain at all times a regulatory capital ratio of at least 4.00%
and a leverage ratio of at least 5.00%. At March 31, 2010, our
regulatory capital ratio was 6.07%, and our leverage ratio was
9.10%.
Excess
Stock. Excess stock is capital stock held by our members that
is not required as a condition of membership or to support services to members
or former members. As of March 31, 2010, $1.2 billion or 50% of
our total regulatory capital stock balance was comprised of excess stock,
compared to $1.2 billion or 49% at December 31, 2009. In
general, the level of excess stock fluctuates with our members’ demand for
Advances. The following table presents the composition of our excess
stock ($ amounts in millions):
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Member
capital stock not subject to redemption requests
|
$ | 508 | $ | 465 | ||||
Member
capital stock subject to redemption requests
|
131 | 131 | ||||||
MRCS
subject to redemption(1)
|
603 | 608 | ||||||
Total
excess capital stock
|
$ | 1,242 | $ | 1,204 |
|
(1)
|
This
amount does not include MRCS that is still supporting outstanding credit
products.
|
Capital
Distributions. Finance Agency regulations prohibit an FHLB
from issuing new excess stock if the amount of excess stock outstanding exceeds
1.0% of the Bank’s Total Assets. At March 31, 2010, our outstanding
excess stock of $1.2 billion was equal to 2.6% of our Total
Assets. Therefore, we are currently not permitted to distribute stock
dividends.
50
Cash
dividends on Class B Capital Stock were paid at an annualized rate of 2.00%
during the first quarter of 2010 and 3.85% during the first quarter of 2009
based on our earnings for the fourth quarters of 2009 and 2008,
respectively. Future dividends will continue to be determined based
on income earned each quarter, our Retained Earnings Policy, and capital
management considerations.
On April
29, 2010, our board of directors declared a cash dividend on our Capital
Stock–Class B-1 Putable of 2.00% (annualized) based on our results for the first
quarter of 2010. On May 13, 2009, our board of directors
declared a cash dividend on our Capital Stock–Class B-1 Putable of 2.25%
(annualized), based on our results for the first quarter of 2009.
Off-Balance
Sheet Arrangements
See Note
14 in our Notes to Financial Statements for information on our off-balance sheet
arrangements.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with GAAP requires management
to make a number of judgments, estimates, and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities (if applicable), and the reported amounts of income and expenses
during the reported period. We believe the application of our accounting
policies on a consistent basis enables us to provide financial statement users
with useful, reliable and timely information about our results of operations,
financial position and cash flows. We review these estimates and
assumptions based on historical experience, changes in business conditions and
other relevant factors we believe to be reasonable under the
circumstances. Changes in estimates and assumptions have the potential to
significantly affect our financial position and results of operations. In
any given reporting period, our actual results may differ from the estimates and
assumptions used in preparing our financial statements.
We have
identified five accounting policies that we believe are critical because they
require management to make subjective judgments about matters that are
inherently uncertain and because of the likelihood that materially different
amounts would be reported under different conditions or using different
assumptions. These policies are:
|
·
|
Accounting
for Derivatives and Hedging
Activities;
|
|
·
|
Accounting
for Premiums and Discounts and Other Costs Associated with Originating or
Acquiring Mortgage Loans, MBS and
ABS;
|
|
·
|
Provision
for Credit Losses;
|
|
·
|
Fair
Value Estimates; and
|
|
·
|
OTTI
Analysis.
|
A
discussion of these critical accounting policies and estimates can be found in
the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section under the caption “Critical Accounting Policies and
Estimates” of our 2009 Form 10-K. See below for additional
information regarding certain of these policies.
Accounting
for Premiums and Discounts and Other Costs Associated with Originating or
Acquiring Mortgage Loans, MBS, and ABS
The
estimated prepayment projections may have a material impact on the calculation
of the amortization of certain premiums and discounts. The periodic
retrospective adjustments, especially in an uncertain interest rate market, can
be the source of considerable income volatility in the MPP and MBS/ABS
portfolios.
Projected
prepayment speeds for mortgage assets are based on monthly implied forward
interest rates. We use implied forward interest rates because they
are the market’s consensus of future interest rates; they are the default set of
interest rates used to price and value financial instruments; and they are the
interest rates that can be hedged with various instruments. We use a
nationally-recognized prepayment model to determine prepayment speeds.
51
The
following table shows the impact to income for the three months ended March 31,
2010, for both MPP and MBS/ABS assuming a 25% and 50% increase in prepayment
speeds and a 25% and 50% decrease in prepayment speeds ($ amounts in
millions).
25%
|
50%
|
25%
|
50%
|
|||||||||||||
Increase
|
Increase
|
Decrease
|
Decrease
|
|||||||||||||
MPP
|
$ | (2 | ) | $ | (4 | ) | $ | 3 | $ | 6 | ||||||
MBS/ABS
|
1 | 2 | (2 | ) | (4 | ) |
Provision
for Credit Losses
Advances. At March 31,
2010, based on the collateral held as security for Advances, management’s credit
analyses and prior repayment history, no allowance for losses on Advances is
deemed necessary by management.
Mortgage Loans
Acquired under MPP. During the first
quarter of 2010, we had losses of $39 thousand on the MPP portfolio, which were
partially offset by $6 thousand of gains. It is possible that we
could experience additional losses in the future. Based on our
analysis, using an estimated liquidation value at March 31, 2010, of 55% of the
original appraised value, further reduced by estimated liquidation costs, and
after consideration of LRA, SMI, and other credit enhancements, we recorded no
allowance for credit losses on real estate mortgage loans at March 31,
2010. We have also performed our loan loss reserve analysis under
multiple scenarios whereby we changed various assumptions and have concluded
that a worsening of those assumptions would not change our conclusion that an
allowance for credit losses is not necessary at March 31, 2010.
Other-Than-Temporary
Impairment Analysis
In
addition to evaluating our Private-label MBS and ABS under a base case (or best
estimate) scenario, we also performed a cash-flow analysis for each of these
securities under a more adverse housing price scenario.
The more
adverse scenario was based on a housing price forecast that was 5 percentage
points lower at the trough than the base case scenario, followed by a flatter
recovery path. Under the more adverse scenario, current-to-trough home
price declines were projected to range from 5% to 17% over the 6 to 12 month
period beginning January 1, 2010. Thereafter, home prices were
projected to increase 0% in the first year, 1% in the second year, 2% in each of
the third and fourth years and 3% in each subsequent year.
The
following table shows the base case scenario and what the impact on OTTI would
have been under the more adverse housing price scenario ($ amounts in
millions):
Number
|
||||||||||||||||||||||||
of
|
||||||||||||||||||||||||
Impairment
|
Securities
|
Estimated
|
||||||||||||||||||||||
Related to
|
Impaired
|
Credit Loss
|
||||||||||||||||||||||
Number
|
Credit Loss
|
Using
|
Using
|
|||||||||||||||||||||
of
|
Unpaid
|
Included in
|
Adverse
|
Unpaid
|
Adverse
|
|||||||||||||||||||
For the Quarter Ended
|
Securities
|
Principal
|
Statement
|
HPI (1)
|
Principal
|
HPI (1)
|
||||||||||||||||||
March 31, 2010
|
Impaired
|
Balance
|
of Income
|
Scenario
|
Balance
|
Scenario
|
||||||||||||||||||
Prime
|
12 | $ | 703 | $ | 6 | 22 | $ | 1,407 | $ | 36 | ||||||||||||||
Alt-A
|
1 | 45 | - | 2 | 67 | 2 | ||||||||||||||||||
Total
|
13 | $ | 748 | $ | 6 | 24 | $ | 1,474 | $ | 38 |
|
(1)
|
Home
Price Index.
|
Additional
information about OTTI charges associated with our Private-label MBS and ABS is
provided in “Risk Management–Credit Risk Management–Investments” herein, and in
Note 5 in our Notes to Financial Statements.
52
Recent
Accounting and Regulatory Developments
Accounting
Developments
See Note
2 in our Notes to Financial Statements for a description of how recent
accounting developments may impact our results of operations or financial
condition.
Legislative
and Regulatory Developments
Housing and Economic
Recovery Act
FHLB Directors’
Eligibility, Elections, Compensation and Expenses. On April 5, 2010, the
Finance Agency published its adoption of a final rule that implements two
separate proposed rules relating to FHLB director eligibility and elections
(published December 1, 2009) and director compensation and expenses (published
October 23, 2009), respectively.
With
regard to director eligibility and elections, the Bank Act (as amended by the
Housing and Economic Recovery Act) requires that member directorships be
allocated among the states of each FHLB district in proportion to the amount of
FHLB stock owned by the members located in each state, and requires the Director
of the Finance Agency (“Director”) to conduct an
annual “designation of directorships” to allocate each member directorship to a
particular state. If the amount of FHLB stock owned by members in one
state changes relative to the amount of FHLB stock owned by members in another
state from one year to the next, the Director may re-allocate some member
directorships to another state, even if their terms have not
expired. In the event of a redesignation of a member directorship
from one state to another, the directorship in the previous state would
terminate, and a new directorship would begin in the successor state, which
would be filled by a vote of the members in that state and would have a term
equal in length to the remaining term of the terminated directorship, in order
to maintain the staggering of director terms. The final rule
clarifies that a newly created directorship with a term of less than four years
as a result of a redesignation would not be a “full term” for purposes of
implementing the term-limit provision of the Bank Act.
With
respect to director compensation and expenses, the final rule specifies that
each FHLB may pay its directors reasonable compensation for the time required of
them, and their necessary expenses, in the performance of their duties, as
determined by a compensation policy to be adopted annually by the FHLB’s board
of directors. Payments under the compensation policy may be based on
any factors that the board of directors determines reasonably to be appropriate,
subject to the requirements of the final rule. The compensation
policy is required to address the activities or functions for which director
attendance or participation is necessary and which may be compensated, and shall
explain and justify the methodology used to determine the amount of director
compensation. The compensation paid by an FHLB to a director is
required to reflect the amount of time the director spent on official FHLB
business, subject to reduction as necessary to reflect lesser attendance or
performance at board or committee meetings during a given
year. Pursuant to the final rule, the Director could determine that
the compensation and/or expenses to be paid to the directors are not
reasonable. In such case, the Director could order the FHLB to
refrain from making any further payments; provided, however, that such order
would only be applied prospectively and would not affect any compensation earned
but unpaid or expenses incurred but not yet reimbursed prior to the date of the
Director’s determination and order. To assist the Director in
reviewing the compensation and expenses of FHLB directors, each FHLB is required
to submit to the Director by specified deadlines: (i) the amount of compensation
and expenses paid to or for the benefit of each director for the immediately
preceding calendar year, (ii) the compensation anticipated to be paid to its
directors for the following calendar year, (iii) directors’ meeting attendance
data for the immediately preceding calendar year, and (iv) the FHLB’s written
compensation policy, along with all studies or other supporting materials upon
which the board of directors relied in determining the level of compensation and
expenses to pay to its directors.
We have
reviewed our director compensation and travel reimbursement policy in light of
the final rule, and have established procedures to facilitate our compliance
with the reporting requirements of the final rule. For additional
information concerning our directors’ compensation, please refer to “Item
10. Directors, Executive Officers and Corporate Governance” of our
2009 Form 10-K.
53
Other Regulatory
Developments
Nontraditional
and Subprime Residential Mortgage Loans. On July 1, 2008, the
Finance Board, a predecessor regulator to the Finance Agency, issued
Advisory Bulletin 2008-AB-02: “Application of Guidance on
Nontraditional and Subprime Residential Mortgage Loans to Specific FHLBank
Assets” (“AB
2008-02”), which supplements an earlier Finance Board directive (Advisory
Bulletin 2007-AB-01: “Nontraditional and Subprime
Residential Mortgage Loans") by providing written guidance regarding
mortgages purchased under the FHLB’s Acquired Member Assets (“AMA”) programs, investments in
private-label (non-agency) MBS and collateral securing Advances. AB 2008-02
relies in part on the standards imposed by the Federal banking agencies in the
Interagency Guidance on
Nontraditional Mortgage Product Risks dated October 4, 2006, and the
Statement on Subprime Mortgage
Lending dated July 10, 2007 (collectively, the “Interagency Guidance”).
Effective upon issuance, AB 2008-02 requires the following: (i) mortgage loan
commitments entered into by the FHLBs under the AMA programs must comply with
all aspects of the Interagency Guidance; (ii) purchases of private-label MBS
issued after July 10, 2007, by the FHLBs must be limited to securities in which
the underlying mortgage loans comply with all aspects of the Interagency
Guidance; and (iii) mortgages (and securities representing an interest in
mortgage loans) that were originated or acquired by a member after July 10,
2007, may be included in calculating the amount of Advances that can be made to
that member only if those mortgages comply with all aspects of the Interagency
Guidance; similarly, private-label MBS that were issued after July 10, 2007, may
be included in calculating the amount of Advances that can be made to a member
only if the underlying mortgages comply with all aspects of the Interagency
Guidance.
On April
6, 2010, the Finance Agency issued Advisory Bulletin 2010-AB-01: “Clarification of Advisory Bulletin
2008-AB-02: Application of Guidance on Nontraditional and Subprime Residential
Mortgage Loans to Specific FHLBank Assets” (“AB 2010-01”). AB
2010-01 provides additional guidance concerning certain matters addressed in
part in AB 2008-02. Specifically, AB 2010-01 clarifies that: (i)
private-label MBS that were either issued or acquired by an FHLB member
institution after July 10, 2007, may be considered eligible collateral in
calculating the amount of Advances that can be made to the member only if the
underlying mortgages comply with all aspects of the Interagency Guidance; (ii)
in order for an FHLB to accept (as eligible collateral for Advances)
private-label MBS issued or acquired after July 10, 2007, the member must have
enforceable representations and warranties that the underlying mortgages comply
with the Interagency Guidance; (iii) eligible collateral which is obtained by an
FHLB member from another member through merger or acquisition and which consists
of mortgage loans or private-label MBS will generally continue to be eligible
collateral for Advances, subject to the FHLB’s consultation with the Finance
Agency regarding the specific circumstances of the transaction between the
members; and (iv) AB 2008-02 generally applies to re-securitizations of
private-label MBS with a federal agency guaranty backed by the full faith and
credit of the U.S. government, and an FHLB may seek to accept such MBS as
eligible collateral by submitting a new business activity notice to the Finance
Agency that describes the MBS structure and guaranty.
We
continue to develop policies and procedures to ensure we are in compliance with
Finance Agency guidance concerning nontraditional and subprime mortgage
loans. After these policies are fully phased-in, they may ultimately
require some members to reduce their borrowings or provide substitute collateral
for currently pledged collateral that may not comply with Finance Agency
guidance. We continue to assess what, if any, impact the new guidance
will have on our MPP, private-label (non-agency) MBS, and Advances.
Regulatory Waiver
of SMI Rating Requirement for MPP Purchases. Section
955.3(b)(1)(ii)(A) of the Finance Agency’s AMA regulation requires FHLB members
that sell loans to FHLBs through an AMA program (such as MPP) to be legally
obligated at all times to maintain SMI with an insurer rated not lower than the
second highest rating category when SMI is used as a form of credit enhancement
in the AMA program. With prolonged deteriorations in the mortgage markets, it
remains difficult for us to meet this requirement because no mortgage insurers
that currently underwrite SMI are currently rated in the second highest rating
category or better by any NRSRO.
54
On August
6, 2009, the Director granted a temporary waiver of this rating requirement,
subject to certain limitations and conditions. In accordance with
this waiver, on April 8, 2010, we submitted to the Finance Agency a written
analysis of credit enhancement alternatives that would no longer rely on SMI for
our existing pools of loans. In addition, with respect to new MPP
business, on April 6, 2010, we filed a notice of new business activity with the
Finance Agency. This new business activity plan will utilize a
supplemental fixed LRA account for additional credit enhancement for new MPP
business consistent with Finance Agency regulations, in lieu of utilizing SMI
coverage. We continue to work with the Finance Agency to find a
solution to this regulatory issue for both new MPP business and our existing MPP
portfolio. For additional information, please refer to “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Recent Accounting and Regulatory Developments” in our
2009 Form 10-K.
Office of
Finance. On May 3, 2010, the Finance Agency published a final
rule regarding the Board of Directors of the Office of Finance. The
final rule generally follows the proposed rule (published August 4, 2009), but
with certain modifications.
The final
rule specifies that five independent directors, in addition to all of the FHLB
presidents, shall serve on the Office of Finance Board of
Directors. Under the final rule, a director, to be considered
independent, must not have any material relationship with an FHLB or the Office
of Finance (either directly, or as a partner, shareholder, or officer of an
organization with a material relationship) as determined under criteria set
forth in a policy to be adopted by the Office of Finance Board of
Directors. This “independence” policy should address when a financial
interest in, or other relationship with, an FHLB member institution would
constitute a material relationship with an FHLB or the Office of
Finance. In addition, this policy must, at a minimum: (i) provide
that an independent director may not be (or have been during the previous three
years) an officer, director or employee of an FHLB or of a member of an FHLB;
(ii) provide that a current officer or employee of the Office of Finance (or a
person who served in such capacity during the previous three years) may not
serve as an independent director; and (iii) prohibit from serving as an
independent director a person who is affiliated with any CO selling or dealer
group under contract with the Office of Finance, or who has a financial interest
in such group that exceeds the lesser of $250,000 or 0.01% of the group’s market
capitalization, or has combined financial interests of more than $1,000,000 in
more than one such group.
With
respect to the Audit Committee of the Office of Finance Board of Directors, the
final rule clarifies that the Audit Committee will be responsible for overseeing
the audit function of the Office of Finance and the preparation of (and the
accurate and meaningful combination of the information submitted by the FHLBs
in) the FHLB System’s combined financial reports. For
additional information, please refer to “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Recent Accounting and Regulatory Developments – Legislative and Regulatory
Developments—Other Regulatory Developments–Office of Finance” in our 2009 Form
10-K.
Membership
Rules. On April 28, 2010, Edward J. DeMarco, Acting Director
of the Finance Agency, delivered a speech to the 2010 FHLBs Directors Conference
entitled “The Benefits of FHLBank Membership.” Acting Director
DeMarco indicated in the speech that the Finance Agency will publish in 2010 an
advance notice of proposed rulemaking (“ANPR”) regarding FHLB
membership rules. Mr. DeMarco further indicated that the intent of
the ANPR will be to initiate public comment on “the appropriate approach to
refresh current membership rules in a way that strengthens ties between
membership and the [FHLB] System’s public purposes.” We cannot
determine at this time whether or how this ANPR or any resulting regulatory
changes with respect to FHLB membership may affect our financial results or
operations.
55
Finance Agency
Proposed Rule Regarding FHLB Investments. On May 4, 2010, the
Finance Agency published a notice of proposed rulemaking regarding FHLB
investments. Among other things, the proposed rule would: (i) move
the existing Finance Board investment regulations from 12 C.F.R. Part 956 to 12
C.F.R. Part 1267; and (ii) incorporate the current limitations on the level of
an FHLB’s MBS investments that are applicable to an FHLB as a matter of Finance
Agency financial management policy and order (including without limitation the
provision limiting the level of an FHLB's MBS investments to no more than 300%
of an FHLB's capital and the provision limiting an increase in an FHLB’s MBS
investments to no more than 50% of its total capital in any calendar
quarter). The proposal also requests comment on whether (i) more
restrictive limitations or other modifications relating to an FHLB's MBS
investments, including its private-label MBS investments, should be adopted as
part of a final regulation, and (ii) with respect to private-label MBS
investments, such limitations should be based on an FHLB's level of retained
earnings. Comments on the proposed rule are due on July 6,
2010.
Proposed
Legislation
As of the
filing of this Quarterly Report on Form 10-Q, legislation is pending before the
U.S. Senate concerning several aspects of the financial services
industry. These legislative proposals, which remain under debate by
public policy makers, generally address the subject matters of Wall Street and
banking reform that are included in a bill which passed the U.S. House of
Representatives in late 2009. The proposed Senate legislation, if
passed in its current form, could among other things: (i) impose significant
concentration limits (expressed as a percentage of an FHLB’s capital) on the
amount of Advances an FHLB could have outstanding to any one member; (ii) impose
certain limitations and restrictions on companies engaged in proprietary trading
in FHLB COs (while excluding other GSEs’ debt instruments from the scope of the
provisions); (iii) require that derivative transactions be conducted through a
clearinghouse and traded on a regulated securities exchange; and (iv) modify how
deposit insurance rates are calculated for depository institutions, many of
which are FHLB members. Although we cannot predict whether these
pending bills, or some form of them, will ultimately be enacted into law,
certain proposals, if enacted, could have a negative impact on our lending and
funding operations. For additional information on proposed
legislation, please refer to “Recent Accounting and Regulatory
Developments–Proposed Legislation” in our 2009 Form 10-K.
Risk
Management
We have
exposure to a number of risks in pursuing our business
objectives. These risks may be broadly classified as market, credit,
liquidity, operations, and business. Market risk is not discussed in
this section because it is discussed in detail in “Item 3. Quantitative and
Qualitative Disclosures about Market Risk.”
Active
risk management is an integral part of our operations. Our goal is
not to eliminate risk, which is an inherent part of our business activities, but
to manage risk by setting appropriate limits and developing internal processes
to ensure an appropriate risk profile. See “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Risk Management” in our 2009 Form 10-K for more detailed
information.
Credit
Risk Management
Credit
risk is the risk that members or other counterparties may be unable to meet
their contractual obligations to us, or that the values of those obligations
will decline as a result of deterioration in the members’ or other
counterparties’ creditworthiness. Credit risk arises when our funds
are extended, committed, invested or otherwise exposed through actual or implied
contractual agreements. We face credit risk on Advances and other
credit products, investments, mortgage loans, derivative financial instruments,
and AHP grants. The most important step in the management of credit
risk is the initial decision to extend credit. We also manage credit
risk by following established policies, evaluating the creditworthiness of our
members and counterparties, and utilizing collateral agreements and settlement
netting. Periodic monitoring of members and other counterparties is
performed for all areas where we are exposed to credit risk.
56
Advances. We manage our exposure
to credit risk on Advances through a combination of our secured interest in
assets pledged by the borrowing member and ongoing reviews of our borrowers’
financial condition. Credit risk can be magnified if the lender
concentrates its portfolio in a few borrowers. Because of our limited
territory, Indiana and Michigan, and because of continuing consolidation among
the financial institutions that comprise the members of the 12 FHLBs, we have
only a limited pool of large borrowers. As of March 31, 2010, our top
three borrowers held 34.1% of total Advances outstanding, at par.
Because
of this concentration in Advances, we perform frequent credit and collateral
reviews on our largest borrowers. In addition, we analyze the
implications to our financial management and profitability if we were to lose
the business of one or more of these borrowers.
Investments. We are also exposed to
credit risk through our investment portfolios. The Risk Management
Policy (“RMP”) approved
by our board of directors restricts the acquisition of investments to
high-quality, short-term money market instruments and highly-rated long-term
securities.
Short-Term
Investments. We place funds with large, high-quality financial
institutions with investment-grade long-term credit ratings on an unsecured
basis for terms of up to 275 days; most such placements typically mature within
90 days. At March 31, 2010, our unsecured credit exposure, including
accrued interest related to investment securities and money-market instruments,
was $6.9 billion to 18 counterparties and issuers, of which $5.0 billion was for
Federal Funds Sold that mature overnight. We actively monitor
counterparty creditworthiness, ratings, performance, and capital adequacy in an
effort to mitigate unsecured credit risk on the short-term investments, with
emphasis on the potential impacts from global economic
conditions. Unsecured transactions can only be conducted with
counterparties that are domiciled in countries that maintain a long-term
sovereign rating from Standard & Poor’s (“S&P”) of AA or
higher.
Long-Term
Investments. Our long-term investments primarily include
Private-label MBS and ABS, RMBS issued by GSEs and corporate debentures
guaranteed by the FDIC and backed by the full faith and credit of the U.S. under
the TLGP. Long-term investments also include corporate debentures
issued by GSEs, CDs, and state or local housing finance agency
obligations.
The
deterioration of the mortgage market has resulted in a higher risk of loss on
investments, particularly on our Private-label MBS and ABS. We are
also subject to secured credit risk related to state and local housing finance
agency obligations that are directly or indirectly supported by underlying
mortgage loans. Each of the securities contains one or more forms of
credit protection, including subordination, excess spread,
over-collateralization and/or an insurance wrap.
Our
Private-label MBS and ABS are backed by collateral primarily in the state of
California (49.0%). The next four largest states include New York
(6.6%), Florida (4.9%), Virginia (3.9%), and New Jersey (3.1%).
Applicable
rating levels are determined using the lowest relevant long-term rating from
S&P, Moody’s Investor Service (“Moody’s”) and Fitch Ratings
(“Fitch”). Rating
modifiers are ignored when determining the applicable rating level for a given
counterparty.
57
The
following tables present the carrying value by credit ratings of our
investments, grouped by category ($ amounts in millions):
Below
|
||||||||||||||||||||||||
Investment
|
||||||||||||||||||||||||
March 31, 2010
|
AAA
|
AA
|
A
|
BBB
|
Grade
|
Total
|
||||||||||||||||||
Investment
category:
|
||||||||||||||||||||||||
Short-term
investments:
|
||||||||||||||||||||||||
Interest-Bearing
Deposits
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Federal
Funds Sold
|
- | 4,713 | 2,170 | - | - | 6,883 | ||||||||||||||||||
Total
Short-term investments
|
- | 4,713 | 2,170 | - | - | 6,883 | ||||||||||||||||||
AFS
|
1,764 | - | - | - | - | 1,764 | ||||||||||||||||||
HTM:
|
||||||||||||||||||||||||
GSE
debentures
|
100 | 26 | - | - | - | 126 | ||||||||||||||||||
State
or local housing finance agency obligations
|
- | - | - | - | - | - | ||||||||||||||||||
CDs
|
- | 411 | - | - | - | 411 | ||||||||||||||||||
TLGP
|
2,067 | - | - | - | - | 2,067 | ||||||||||||||||||
Other
U.S. Obligations - guaranteed RMBS
|
1,403 | - | - | - | - | 1,403 | ||||||||||||||||||
GSE
RMBS
|
1,975 | - | - | - | - | 1,975 | ||||||||||||||||||
Private-label
MBS
|
745 | 140 | 90 | 154 | 1,043 | 2,172 | ||||||||||||||||||
Private-label
ABS
|
- | 20 | - | - | 4 | 24 | ||||||||||||||||||
Total
HTM
|
6,290 | 597 | 90 | 154 | 1,047 | 8,178 | ||||||||||||||||||
Total
investments, carrying value
|
$ | 8,054 | $ | 5,310 | $ | 2,260 | $ | 154 | $ | 1,047 | $ | 16,825 | ||||||||||||
Percentage
of total
|
48 | % | 32 | % | 13 | % | 1 | % | 6 | % | 100 | % |
Below
|
||||||||||||||||||||||||
Investment
|
||||||||||||||||||||||||
December 31, 2009
|
AAA
|
AA
|
A
|
BBB
|
Grade
|
Total
|
||||||||||||||||||
Investment
category:
|
||||||||||||||||||||||||
Short-term
investments:
|
||||||||||||||||||||||||
Interest-Bearing
Deposits
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Federal
Funds Sold
|
- | 4,226 | 1,306 | - | - | 5,532 | ||||||||||||||||||
Total
Short-term investments
|
- | 4,226 | 1,306 | - | - | 5,532 | ||||||||||||||||||
AFS
|
1,761 | - | - | - | - | 1,761 | ||||||||||||||||||
HTM:
|
||||||||||||||||||||||||
GSE
debentures
|
100 | 26 | - | - | - | 126 | ||||||||||||||||||
State
or local housing finance agency obligations
|
- | - | - | - | - | - | ||||||||||||||||||
TLGP
|
2,067 | - | - | - | - | 2,067 | ||||||||||||||||||
Other
U.S. Obligations - guaranteed RMBS
|
865 | - | - | - | - | 865 | ||||||||||||||||||
GSE
RMBS
|
2,137 | - | - | - | - | 2,137 | ||||||||||||||||||
Private-label
MBS
|
841 | 153 | 107 | 274 | 1,106 | 2,481 | ||||||||||||||||||
Private-label
ABS
|
- | 21 | - | - | 4 | 25 | ||||||||||||||||||
Total
HTM
|
6,010 | 200 | 107 | 274 | 1,110 | 7,701 | ||||||||||||||||||
Total
investments, carrying value
|
$ | 7,771 | $ | 4,426 | $ | 1,413 | $ | 274 | $ | 1,110 | $ | 14,994 | ||||||||||||
Percentage
of total
|
52 | % | 30 | % | 9 | % | 2 | % | 7 | % | 100 | % |
58
Private-Label MBS and
ABS. While there is no universally accepted definition of
prime, Alt-A or subprime underwriting standards, MBS and ABS are classified as
prime, Alt-A or subprime based on the originator’s classification at the time of
origination or based on classification by an NRSRO upon issuance. The
originator’s classification is used in preparing the following tables. We
do not hold any collateralized debt obligations. All MBS and ABS were
rated AAA at the date of purchase.
The table
below presents the carrying value of our Private-label MBS and ABS by credit
ratings as of March 31, 2010, based on the lowest of Moody’s, S&P,
or comparable Fitch ratings ($ amounts in millions):
Below
|
||||||||||||||||||||||||
Originator Classification and |
Investment
|
|||||||||||||||||||||||
Year of Securitization
|
AAA
|
AA
|
A
|
BBB
|
Grade (1)
|
Total
|
||||||||||||||||||
Prime
RMBS:
|
||||||||||||||||||||||||
2007
|
$ | - | $ | - | $ | - | $ | - | $ | 452 | $ | 452 | ||||||||||||
2006
|
- | - | - | 71 | 215 | 286 | ||||||||||||||||||
2005
|
36 | 109 | 57 | 60 | 322 | 584 | ||||||||||||||||||
2004
and prior
|
656 | 18 | 33 | - | - | 707 | ||||||||||||||||||
Sub-total
Prime RMBS
|
692 | 127 | 90 | 131 | 989 | 2,029 | ||||||||||||||||||
Alt-A
RMBS:
|
||||||||||||||||||||||||
2005
|
- | - | - | 23 | 54 | 77 | ||||||||||||||||||
2004
and prior
|
53 | 13 | - | - | - | 66 | ||||||||||||||||||
Sub-total
Alt-A RMBS
|
53 | 13 | - | 23 | 54 | 143 | ||||||||||||||||||
Subprime
RMBS:
|
||||||||||||||||||||||||
2004
and prior
|
- | - | - | - | - | - | ||||||||||||||||||
Sub-total
Subprime RMBS
|
- | - | - | - | - | - | ||||||||||||||||||
Subprime
Home Equity ABS:
|
||||||||||||||||||||||||
2004
and prior
|
- | - | - | - | 4 | 4 | ||||||||||||||||||
Sub-total
Home Equity ABS
|
- | - | - | - | 4 | 4 | ||||||||||||||||||
Subprime
Manufactured Housing ABS:
|
||||||||||||||||||||||||
2004
and prior
|
- | 20 | - | - | - | 20 | ||||||||||||||||||
Sub-total
Manufactured
|
||||||||||||||||||||||||
Housing
ABS
|
- | 20 | - | - | - | 20 | ||||||||||||||||||
Total
Private-label
|
||||||||||||||||||||||||
MBS
and ABS, carrying value
|
$ | 745 | $ | 160 | $ | 90 | $ | 154 | $ | 1,047 | $ | 2,196 |
|
(1)
|
Below
investment grade includes $236 million of B-rated securities, $537 million
of CCC-rated securities, $237 million of CC-rated securities, and $37
million of C-rated securities
|
From April 1, 2010, to May 7,
2010, there were four securities downgraded as summarized below ($ amounts in
millions):
Downgraded from AA
|
Downgraded from A
|
Downgraded from BBB
|
Total Downgraded
|
|||||||||||||||||||||||||||||
To BBB
|
To Below Investment Grade
|
To Below Investment Grade
|
||||||||||||||||||||||||||||||
Originator
Classification
|
Carrying Value
|
Fair value
|
Carrying Value
|
Fair value
|
Carrying Value
|
Fair value
|
Carrying Value
|
Fair value
|
||||||||||||||||||||||||
Prime
RMBS
|
$ | 28 | $ | 27 | $ | 19 | $ | 18 | $ | 93 | $ | 88 | $ | 140 | $ | 133 |
59
The
following table presents the weighted-average delinquency of the collateral
underlying our Private-label MBS and ABS by collateral type and credit rating ($
amounts in millions):
Weighted-
|
||||||||||||||||||||
Unpaid
|
Gross
|
Average
|
||||||||||||||||||
Principal
|
Amortized
|
Carrying
|
Unrealized
|
Collateral
|
||||||||||||||||
March 31, 2010
|
Balance
|
Cost
|
Value
|
Losses (1)
|
Delinquency (2)
|
|||||||||||||||
Prime
RMBS:
|
||||||||||||||||||||
Investment
grade:
|
||||||||||||||||||||
AAA-rated
|
$ | 694 | $ | 692 | $ | 692 | $ | (40 | ) | 3.1 | % | |||||||||
AA-rated
|
127 | 127 | 127 | (6 | ) | 5.7 | % | |||||||||||||
A-rated
|
90 | 90 | 90 | (6 | ) | 6.8 | % | |||||||||||||
BBB-rated
|
132 | 131 | 131 | (7 | ) | 6.7 | % | |||||||||||||
Sub-total
Prime RMBS investment grade
|
1,043 | 1,040 | 1,040 | (59 | ) | 4.2 | % | |||||||||||||
Below
investment grade:
|
||||||||||||||||||||
B-rated
|
300 | 297 | 232 | (64 | ) | 12.6 | % | |||||||||||||
CCC-rated
|
624 | 605 | 483 | (96 | ) | 13.5 | % | |||||||||||||
CC-rated
|
376 | 337 | 237 | (50 | ) | 22.3 | % | |||||||||||||
C-rated
|
70 | 60 | 37 | (12 | ) | 16.5 | % | |||||||||||||
Sub-total
Prime RMBS below investment grade
|
1,370 | 1,299 | 989 | (222 | ) | 15.8 | % | |||||||||||||
Total
Prime RMBS
|
2,413 | 2,339 | 2,029 | (281 | ) | 10.8 | % | |||||||||||||
Alt-A
RMBS:
|
||||||||||||||||||||
Investment
grade:
|
||||||||||||||||||||
AAA-rated
|
54 | 53 | 53 | (5 | ) | 6.1 | % | |||||||||||||
AA-rated
|
13 | 13 | 13 | (2 | ) | 8.7 | % | |||||||||||||
BBB-rated
|
23 | 23 | 23 | (1 | ) | 7.7 | % | |||||||||||||
Sub-total
Alt-A RMBS investment grade
|
90 | 89 | 89 | (8 | ) | 6.9 | % | |||||||||||||
Below
investment grade:
|
||||||||||||||||||||
CCC-rated
|
67 | 63 | 54 | (8 | ) | 17.2 | % | |||||||||||||
Sub-total
Alt-A RMBS below investment grade
|
67 | 63 | 54 | (8 | ) | 17.2 | % | |||||||||||||
Total
Alt-A RMBS
|
157 | 152 | 143 | (16 | ) | 11.3 | % | |||||||||||||
Subprime
RMBS: (3)
|
||||||||||||||||||||
Investment
grade:
|
||||||||||||||||||||
AAA-rated
|
- | - | - | - | 25.3 | % | ||||||||||||||
Total
Subprime RMBS
|
- | - | - | - | 25.3 | % | ||||||||||||||
Subprime
Home Equity ABS: (4)
|
||||||||||||||||||||
Below
investment grade:
|
||||||||||||||||||||
B-rated
|
4 | 4 | 4 | (2 | ) | 32.5 | % | |||||||||||||
Total
Home Equity ABS
|
4 | 4 | 4 | (2 | ) | 32.5 | % | |||||||||||||
Subprime
Manufactured Housing ABS: (3)
|
||||||||||||||||||||
Investment
grade:
|
||||||||||||||||||||
AA-rated
|
21 | 20 | 20 | (4 | ) | 2.0 | % | |||||||||||||
Total
Manufactured Housing ABS
|
21 | 20 | 20 | (4 | ) | 2.0 | % | |||||||||||||
Total
Private-label MBS and ABS
|
$ | 2,595 | $ | 2,515 | $ | 2,196 | $ | (303 | ) | 10.8 | % |
|
(1)
|
Gross
unrealized losses represent the difference between estimated fair value
and amortized cost.
|
|
(2)
|
Includes
delinquencies of 60 days and more, foreclosures, real estate owned and
bankruptcies, weighted by unpaid principal balance based on loan groups
for certain bonds.
|
|
(3)
|
We
held no securities in this classification rated below investment grade at
March 31, 2010.
|
|
(4)
|
Our
Home Equity ABS are all supported by second lien subprime
loans.
|
60
The
following table presents the unpaid principal balance of our Private-label MBS
and ABS by collateral type ($ amounts in millions):
March 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||||||||||
Rate
|
Rate (1)(2)
|
Total
|
Rate
|
Rate (1)(2)
|
Total
|
|||||||||||||||||||
RMBS:
|
||||||||||||||||||||||||
Prime
loans
|
$ | 1,482 | $ | 932 | $ | 2,414 | $ | 1,650 | $ | 1,060 | $ | 2,710 | ||||||||||||
Alt-A
loans
|
157 | - | 157 | 170 | - | 170 | ||||||||||||||||||
Subprime
loans
|
- | - | - | - | - | - | ||||||||||||||||||
Total
RMBS
|
1,639 | 932 | 2,571 | 1,820 | 1,060 | 2,880 | ||||||||||||||||||
Home
Equity Loans ABS:
|
||||||||||||||||||||||||
Subprime
loans
|
- | 4 | 4 | - | 4 | 4 | ||||||||||||||||||
Total
Home Equity Loans ABS
|
- | 4 | 4 | - | 4 | 4 | ||||||||||||||||||
Manufactured
Housing ABS:
|
||||||||||||||||||||||||
Subprime
Loans
|
20 | - | 20 | 21 | - | 21 | ||||||||||||||||||
Total
Manufactured Housing ABS
|
20 | - | 20 | 21 | - | 21 | ||||||||||||||||||
Total
Private-label MBS and ABS
|
$ | 1,659 | $ | 936 | $ | 2,595 | $ | 1,841 | $ | 1,064 | $ | 2,905 |
|
(1)
|
Variable-rate
Private-label MBS and ABS include those with a contractual coupon rate
that, prior to contractual maturity, is either scheduled to change or is
subject to change.
|
|
(2)
|
All
variable-rate RMBS prime loans are Hybrid Adjustable-Rate Mortgage
securities.
|
61
Estimated Fair Value. The
following table reflects the fair value as a percent of unpaid principal balance
by year of securitization on our Private-label MBS and ABS:
March
31,
|
December 31,
|
|||||||
Year of Securitization
|
2010
|
2009
|
||||||
Prime
RMBS:
|
||||||||
2007
|
77.7 | % | 75.0 | % | ||||
2006
|
86.9 | % | 84.4 | % | ||||
2005
|
82.7 | % | 82.3 | % | ||||
2004
and prior
|
94.0 | % | 93.1 | % | ||||
Weighted-average
of all prime RMBS
|
85.2 | % | 83.9 | % | ||||
Alt-A
RMBS:
|
||||||||
2005
|
85.7 | % | 87.5 | % | ||||
2004
and prior
|
87.0 | % | 86.7 | % | ||||
Weighted-average
of all Alt-A RMBS
|
86.2 | % | 87.1 | % | ||||
Subprime
RMBS:
|
||||||||
2004
and prior
|
98.1 | % | 96.3 | % | ||||
Weighted-average
of all subprime RMBS
|
98.1 | % | 96.3 | % | ||||
Subprime
Home Equity ABS:
|
||||||||
2004
and prior
|
51.7 | % | 56.3 | % | ||||
Weighted-average
of all Home Equity ABS
|
51.7 | % | 56.3 | % | ||||
Subprime
Manufactured Housing ABS:
|
||||||||
2004
and prior
|
81.9 | % | 71.2 | % | ||||
Weighted-average
of all Manufactured Housing ABS
|
81.9 | % | 71.2 | % | ||||
Weighted-average
of all Private-label MBS and ABS
|
85.2 | % | 83.9 | % |
OTTI Evaluation
Process. We evaluate our individual AFS and HTM that are in an
unrealized loss position for OTTI on a quarterly basis as described in Note 6 in
our Notes to Financial Statements contained in our 2009 Form 10-K.
As of
March 31, 2010, our investments in MBS classified as HTM had gross unrealized
losses totaling $305.1 million, $303.2 million of which were related to
Private-label MBS and ABS. These gross unrealized losses were primarily due to
significant uncertainty about the future condition of the mortgage market and
the economy, and continued deterioration in the credit performance of loan
collateral underlying these securities, causing these assets to be valued at
significant discounts to their acquisition cost.
We have
performed our OTTI analysis using key modeling assumptions approved by the FHLB
OTTI Governance Committee for 76 of our 81 RMBS. For the quarter
ended March 31, 2010, we contracted with the FHLB of Chicago to perform
cash-flow analysis for two of our subprime private-label RMBS with a total
unpaid principal balance of $4.0 million. We also contracted with the
FHLB of San Francisco to perform cash-flow analysis for one security held in
common with another FHLB with an unpaid principal balance of $6.4
million.
62
For one
private-label RMBS and one manufactured housing investment for which underlying
collateral data is not available, we used alternative procedures, as determined
by our Bank, to evaluate for OTTI. These securities, representing an
unpaid principal balance of $20.8 million as of March 31, 2010, were outside the
scope of the FHLB OTTI Governance Committee. We were able to perform
the necessary cash-flow analysis using a different third-party model and
determined that the securities were not OTTI at March 31, 2010.
Results of OTTI Evaluation
Process. Based on our evaluations, for the three months ended
March 31, 2010, we recognized OTTI credit losses of $6.1 million for 13
securities compared to credit losses of $18.6 million for four securities for
the three months ended March 31, 2009, as described in “Results of
Operation for the Three Months Ended March 31, 2010, and
2009.”
The
primary form of credit enhancement for our Private-label MBS and ABS is
subordination, where lower-rated tranches of an issue are the first to absorb
any losses generated by loans in the asset pool. As a result, the
higher-rated tranches suffer no loss until the subordinated tranches are fully
exhausted.
63
The
following table shows the credit characteristics of our Private-label MBS and
ABS ($ amounts in millions). The
calculated average credit enhancement percentages represent the dollar-weighted
averages of all the Private-label MBS and ABS in each category
shown.
Underlying Collateral
|
||||||||||||||||||||||||||||||||||||
Performance and Credit
|
||||||||||||||||||||||||||||||||||||
Enhancement Statistics
|
||||||||||||||||||||||||||||||||||||
Impairment
|
Weighted-
|
Weighted
|
||||||||||||||||||||||||||||||||||
Weighted-
|
Gross
|
Impairment
|
Related to
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
Average
|
Amortized
|
Carrying
|
Unrealized
|
Related to
|
All Other
|
Total
|
Credit
|
Collateral
|
||||||||||||||||||||||||||||
March 31, 2010
|
Price
|
Cost
|
Value
|
Losses (1)
|
Credit Loss
|
Factors
|
OTTI
|
Support
|
Delinquency (2)
|
|||||||||||||||||||||||||||
Prime
RMBS:
|
||||||||||||||||||||||||||||||||||||
2007
|
77.7 | $ | 614 | $ | 452 | $ | (92 | ) | $ | (5 | ) | $ | 2 | $ | (3 | ) | 6.3 | % | 17.8 | % | ||||||||||||||||
2006
|
86.9 | 325 | 286 | (38 | ) | - | - | - | 5.1 | % | 12.7 | % | ||||||||||||||||||||||||
2005
|
82.7 | 693 | 584 | (111 | ) | (1 | ) | (10 | ) | (11 | ) | 8.3 | % | 11.0 | % | |||||||||||||||||||||
2004
and prior
|
94.0 | 707 | 707 | (40 | ) | - | - | - | 7.7 | % | 3.1 | % | ||||||||||||||||||||||||
Sub-total
Prime RMBS
|
85.2 | 2,339 | 2,029 | (281 | ) | (6 | ) | (8 | ) | (14 | ) | 7.2 | % | 10.8 | % | |||||||||||||||||||||
Alt-A
RMBS:
|
||||||||||||||||||||||||||||||||||||
2005
|
85.7 | 86 | 77 | (8 | ) | - | - | - | 6.0 | % | 14.8 | % | ||||||||||||||||||||||||
2004
and prior
|
87.0 | 66 | 66 | (8 | ) | - | - | - | 8.9 | % | 6.6 | % | ||||||||||||||||||||||||
Sub-total
Alt-A RMBS
|
86.2 | 152 | 143 | (16 | ) | - | - | - | 7.2 | % | 11.3 | % | ||||||||||||||||||||||||
Subprime
RMBS: (3)
|
||||||||||||||||||||||||||||||||||||
2004
and prior
|
98.1 | - | - | - | - | - | - | 91.5 | % | 25.3 | % | |||||||||||||||||||||||||
Sub-total
Subprime RMBS
|
98.1 | - | - | - | - | - | - | 91.5 | % | 25.3 | % | |||||||||||||||||||||||||
Subprime
Home Equity ABS: (3)
|
||||||||||||||||||||||||||||||||||||
2004
and prior
|
51.7 | 4 | 4 | (2 | ) | - | - | - | 100.0 | % | 32.5 | % | ||||||||||||||||||||||||
Sub-total
Home Equity ABS
|
51.7 | 4 | 4 | (2 | ) | - | - | - | 100.0 | % | 32.5 | % | ||||||||||||||||||||||||
Subprime
Manufactured Housing ABS:
|
||||||||||||||||||||||||||||||||||||
2004
and prior
|
81.9 | 20 | 20 | (4 | ) | - | - | - | 27.5 | % | 2.0 | % | ||||||||||||||||||||||||
Sub-total
Manufactured
|
||||||||||||||||||||||||||||||||||||
Housing
ABS
|
81.9 | 20 | 20 | (4 | ) | - | - | - | 27.5 | % | 2.0 | % | ||||||||||||||||||||||||
Total
Private-label
|
||||||||||||||||||||||||||||||||||||
MBS
and ABS
|
85.2 | $ | 2,515 | $ | 2,196 | $ | (303 | ) | $ | (6 | ) | $ | (8 | ) | $ | (14 | ) | 7.5 | % | 10.8 | % |
|
(1)
|
Gross
unrealized losses represent the difference between estimated fair value
and amortized cost.
|
|
(2)
|
Includes
delinquencies of 60 days and more, foreclosures, real estate owned and
bankruptcies, weighted by unpaid principal balance based on loan groups
for certain bonds.
|
|
(3)
|
The
credit support for the home equity bonds is provided by MBIA Insurance
Corporation.
|
For our
Private-label MBS and ABS that were not OTTI as of March 31, 2010, we do not
intend to sell these securities; it is not more likely than not that we will be
required to sell these securities before our anticipated recovery of the
remaining amortized cost basis; and we expect to recover the remaining amortized
cost basis of these securities. As a result, we have determined that,
as of March 31, 2010, the unrealized losses on the remaining Private-label MBS
and ABS are temporary.
64
MPP. We are exposed to
credit risk on loans purchased from members through the MPP. All
loans we purchase must meet guidelines for our MPP or be specifically approved
as an exception based on compensating factors. For example, the
maximum loan-to-value (“LTV”) for any mortgage loan
purchased is 95%, and the borrowers must meet certain minimum credit scores
depending upon the type of property or loan.
Credit
Enhancements. FHA loans comprise 7.4% of our outstanding MPP
loans. These loans are backed by insurance provided by the FHA;
therefore, we do not require either LRA or SMI coverage for these
loans.
Credit
enhancements for conventional loans include (in order of priority):
·
|
PMI
(when applicable for the purchase of mortgages with an initial LTV ratio
of over 80% at the time of
purchase);
|
·
|
LRA;
and
|
·
|
SMI
(as applicable) purchased by the seller from a third-party provider naming
us as the beneficiary.
|
Primary Mortgage
Insurance. For a conventional loan, PMI, if applicable, covers
losses or exposure down to approximately an LTV ratio of between 65% and 80%
based upon the original appraisal, original LTV ratio, term, amount of PMI
coverage, and characteristics of the loan. We are exposed to credit
risk if a PMI provider fails to fulfill its claims payment obligations to
us. As of March 31, 2010, we were the beneficiary of PMI coverage on $0.8
billion or 11.8% of conventional mortgage loans. We have analyzed our
potential loss exposure to all of the mortgage insurance companies and do not
expect incremental losses due to the decline in mortgage insurance company
ratings. This expectation is based on the credit-enhancement features of our
master commitments (exclusive of mortgage insurance), the underwriting
characteristics of the loans that back our master commitments, the seasoning of
the loans that back these master commitments, and the strong performance of the
loans to date. We closely monitor the financial conditions of these mortgage
insurance companies.
The
following table shows the mortgage insurance companies and related PMI credit
enhancement on loans held in our portfolio as of March 31, 2010, and the
mortgage-insurance company ratings as of May 7, 2010 ($ amounts in
millions):
Percent
|
||||||||||||||||||
of Total
|
||||||||||||||||||
Balance of
|
Mortgage
|
|||||||||||||||||
Ratings
|
Loans with
|
Insurance
|
||||||||||||||||
Mortgage Insurance Company
|
S&P
|
Moody's
|
Fitch
|
PMI
|
PMI
|
Coverage
|
||||||||||||
Radian
Guaranty, Inc.
|
B+
|
Ba3
|
Not
rated
|
$ | 103 | $ | 27 | 13.5 | % | |||||||||
Genworth
Mortgage Insurance Corporation
|
BBB-
|
Baa2
|
Not
rated
|
93 | 25 | 12.2 | % | |||||||||||
CMG
Mortgage Insurance Co.
|
BBB
|
Not
rated
|
BBB
|
21 | 5 | 2.4 | % | |||||||||||
Mortgage
Guaranty Insurance Corporation ("MGIC")
|
B+
|
Ba3
|
Not
rated
|
252 | 66 | 33.0 | % | |||||||||||
PMI
Mortgage Insurance Co.
|
B+
|
B2
|
Not
rated
|
61 | 16 | 7.8 | % | |||||||||||
Republic
Mortgage Insurance Co.
|
BBB-
|
Ba1
|
BBB-
|
130 | 35 | 17.2 | % | |||||||||||
United
Guaranty Residential Insurance Company
|
BBB
|
A3
|
Not
rated
|
77 | 21 | 10.4 | % | |||||||||||
Triad
Guaranty Insurance Corporation
|
Not
rated
|
Not
rated
|
Not
rated
|
26 | 7 | 3.5 | % | |||||||||||
Total
|
$ | 763 | $ | 202 | 100.0 | % |
Lender Risk
Account. In the MPP, we establish an LRA for each conventional
pool of loans purchased that is funded over time from the monthly interest
payments on the mortgages in that pool. The LRA is recorded in Other
Liabilities in the Statements of Condition and totaled $22.5 million and $23.8
million at March 31, 2010, and December 31, 2009, respectively. These
funds are available to cover losses in excess of the borrower’s equity and PMI,
if any, on the conventional loans we have purchased. See Note 7 in
our Notes to Financial Statements for more information.
Supplemental Mortgage
Insurance. We have credit
protection from loss on each loan, where eligible, through
SMI. Together, the LRA and the SMI provide credit enhancement on the
pools of loans we purchase.
65
Credit Risk Exposure to Supplemental
Insurance Providers. As of March 31, 2010, we were the
beneficiary of SMI coverage on mortgage pools with a total unpaid principal
balance of $6.5 billion. Two mortgage insurance companies provide all of the
coverage under these policies. The table below shows the ratings of
these companies as of May 7, 2010:
Mortgage Insurance Company
|
S&P
|
Moody's
|
Fitch
|
||||
MGIC
|
B+
|
Ba3
|
Not
rated
|
||||
Genworth
Residential Mortgage Insurance Corporation of North Carolina ("Genworth")
|
BBB-
|
Baa2
|
Not
rated
|
Finance
Agency credit-risk-sharing regulations require us to use SMI providers that are
rated at least AA- at the time the loans are purchased. The loans
purchased are credit-enhanced to achieve an implied rating at an investment
grade level based upon an NRSRO model approved by the Finance
Agency. If there is evidence of a decline in the credit quality of a
mortgage pool, the regulations require us to re-evaluate the mortgage pool for
deterioration in credit quality and to allocate risk-based capital to cover any
potential credit quality issues. We are holding the required amount
of risk-based capital allocated to the MPP.
With the
deterioration in the mortgage markets, it is difficult for us to meet the
Finance Agency regulation’s rating requirement because no mortgage insurers that
currently underwrite SMI are currently rated in the second highest rating
category or better by any NRSRO. We are presently conducting all new
business with Genworth. We are in discussions with the Finance Agency
to determine the appropriate resolution of this issue. Additional
information about these discussions is provided in “Recent Accounting and
Regulatory Developments–Legislative and Regulatory Developments – Other
Regulatory Developments.”
Loan
Characteristics. The MPP mortgage loans held for portfolio are
currently dispersed across 50 states and the District of Columbia. As
of March 31, 2010, 40.7% of our outstanding MPP mortgage loans were concentrated
in the Midwest, compared to 39.9% at December 31, 2009. No single zip
code represented more than 1% of MPP loans outstanding at March 31, 2010, or
December 31, 2009. It is likely that the concentration of MPP loans
in our district states of Indiana and Michigan will increase in the future due
to the loss of our three largest sellers that were our greatest sources of
nationwide mortgages. The median outstanding balance of an MPP loan
was approximately $134 thousand and $135 thousand at March 31, 2010, and
December 31, 2009, respectively.
66
Credit
Performance. Our outstanding loans, non-accrual loans, and
loans 90 days or more past due and accruing interest, as well as the total
amount of interest income recognized and the total amount of interest received
on real estate mortgages, are presented in the tables below ($ amounts in
millions):
March
31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Mortgage
Loans Held for Portfolio
|
$ | 6,990 | $ | 7,272 | ||||
Non-accrual
loan participations
|
- | - | ||||||
Real
estate owned (1)
|
- | - | ||||||
Real
estate mortgages past due 90 days to 179 days
|
||||||||
and
still accruing interest
|
53 | 71 | ||||||
Foreclosures
(2)(3)
|
86 | 111 |
Three Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
March 31, 2010
|
March 31, 2009
|
|||||||
Interest
contractually due during the year
|
$ | 93 | $ | 114 | ||||
Interest
actually received during the year
|
93 | 114 | ||||||
Shortfall
(2)
|
$ | - | $ | - |
|
(1)
|
Loans
reflected as real estate owned include our residual participation in
conventional loans not part of the
MPP.
|
|
(2)
|
The
monthly delinquency information reported is provided by the servicer
through the master servicer one month after the actual mortgage loan
balance activity.
|
|
(3)
|
Foreclosures
include loans past due 180 days or more and still accruing
interest.
|
A summary
of real estate mortgages past due 90 days or more and still accruing interest
and the percentage of those loans to the total real estate mortgages outstanding
is presented below ($ amounts in millions):
March
31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Total
conventional mortgage loan delinquencies
|
$ | 42 | $ | 44 | ||||
Total
conventional mortgage loans outstanding, at par
|
6,457 | 6,668 | ||||||
Percentage
of delinquent conventional loans
|
0.65 | % | 0.66 | % | ||||
Total
conventional mortgage loans in foreclosure, at par
|
$ | 84 | $ | 77 | ||||
Percentage
of conventional loans in foreclosure (1)
|
1.30 | % | 1.16 | % | ||||
Total
FHA mortgage loan delinquencies
|
$ | 11 | $ | 27 | ||||
Total
FHA mortgage loans outstanding, at par
|
520 | 589 | ||||||
Percentage
of delinquent FHA loans
|
2.18 | % | 4.64 | % | ||||
Total
FHA mortgage loans in foreclosure, at par
|
$ | 2 | $ | 34 | ||||
Percentage
of FHA loans in foreclosure (1)
|
0.40 | % | 5.77 | % |
|
(1)
|
Foreclosures
include loans past due 180 days or more and still accruing
interest.
|
The
conventional delinquency ratios in the above table are below the national
average for conforming, fixed-rate mortgages as reported by the Mortgage Bankers
Association. A decline in the general economic conditions in the
U.S., and in particular Indiana and Michigan, could result in increased
delinquencies in our portfolio.
67
For FHA
mortgages, the delinquency rate is generally higher than for the conventional
mortgages held in our portfolio. We rely on insurance provided by the
FHA, which generally provides a 100% guarantee, as well as quality control
processes, to maintain the credit quality of this portfolio. During
the quarter ended March 31, 2010, our largest FHA servicer voluntarily purchased
nearly all of the FHA loans that were over 90 days delinquent from us, at par,
in accordance with program guidelines, resulting in decreases in the 90-day
delinquency ratio for FHA loans and the percentage of FHA loans in
foreclosure.
Derivatives. A primary risk
posed by derivative transactions is credit risk, i.e., the risk that a
counterparty will fail to meet its contractual obligations on a transaction,
forcing us to replace the derivative at market prices. The notional
amount of interest rate exchange agreements does not measure our true credit
risk exposure. Rather, when the net fair value of our interest rate
exchange agreements with a counterparty is positive, this generally indicates
that the counterparty owes us. When the net fair value of the
interest rate exchange agreements is negative, we owe the
counterparty. If a counterparty fails to perform, credit risk is
approximately equal to the aggregate fair value gain, if any, on the
interest rate exchange agreements.
The
following tables summarize key information on derivative
counterparties. They provide information on a settlement date basis
using credit ratings based on the lower of S&P or Moody’s ($ amounts in
millions).
Notional
|
Percentage
of
|
Credit
Exposure
|
Credit Exposure
|
|||||||||||||
March 31, 2010
|
Principal
|
Notional Principal
|
Before Collateral
|
Net of collateral
|
||||||||||||
AAA
|
$ | - | - | $ | - | $ | - | |||||||||
AA
|
14,338 | 45.1 | % | 3 | 3 | |||||||||||
A
|
17,383 | 54.7 | % | 2 | - | |||||||||||
Total
|
31,721 | 99.8 | % | 5 | 3 | |||||||||||
Others
(1)
|
45 | 0.2 | % | - | - | |||||||||||
Total
derivative notional and credit exposure
|
$ | 31,766 | 100.0 | % | $ | 5 | $ | 3 |
Notional
|
Percentage of
|
Credit Exposure
|
Credit Exposure
|
|||||||||||||
December 31, 2009
|
Principal
|
Notional Principal
|
Before Collateral
|
Net of collateral
|
||||||||||||
AAA
|
$ | - | - | $ | - | $ | - | |||||||||
AA
|
15,234 | 41.8 | % | 1 | 1 | |||||||||||
A
|
21,120 | 58.0 | % | - | - | |||||||||||
Total
|
36,354 | 99.8 | % | 1 | 1 | |||||||||||
Others
(1)
|
79 | 0.2 | % | 1 | 1 | |||||||||||
Total
derivative notional and credit exposure
|
$ | 36,433 | 100.0 | % | $ | 2 | $ | 2 |
|
(1)
|
Includes
the total notional and fair value exposure related to delivery
commitments.
|
68
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk is the risk that the market value or estimated fair value of our overall
portfolio of assets, liabilities, and derivatives will decline as a result of
changes in interest rates or financial market volatility, or that net earnings
will be significantly reduced by interest rate changes. The goal of
market risk management is to preserve our financial strength at all times,
including during periods of significant market volatility and across a wide
range of possible interest rate changes. We regularly assess our
exposure to changes in interest rates using a diverse set of analyses and
measures. As appropriate, we may rebalance our portfolio to help
attain risk management objectives.
Measuring
Market Risks
We
utilize multiple risk measurement methodologies to calculate potential market
exposure that include measuring duration, duration gaps, convexity, value at
risk, market risk metric (one-month Value-at-Risk (“VaR”), earnings at risk, and
changes in market value of equity. Periodically, stress tests are
conducted to measure and analyze the effects that extreme movements in the level
of interest rates and the shape of the yield curve would have on our risk
position.
Duration
of Equity
Duration
of equity is a measure of interest rate risk and a primary metric used to manage
our market risk exposure. It is an estimate of the percentage change
(expressed in years) in our market value of equity that could be caused by a 100
basis point (“bp”)
parallel upward or downward shift in the interest rate curves. We value our
portfolios using two main interest rate curves, the LIBOR curve and the CO
curve. The market value and interest rate sensitivity of each asset,
liability, and off balance sheet position is computed to determine our duration
of equity. We calculate duration of equity using the interest rate
curves as of the date of calculation and for scenarios where interest rate
curves are 200 bps higher or lower than the initial level. Our board
of directors determines acceptable ranges for duration of equity. A
negative duration of equity suggests adverse exposure to falling rates and a
favorable response to rising rates, while a positive duration suggests adverse
exposure to rising rates and a favorable response to falling rates.
The
following table summarizes the effective duration of equity levels for our total
position:
-200 bps
|
0 bps
|
+200 bps
|
||||
March
31, 2010
|
(6.5)
years
|
(1.9)
years
|
0.4
years
|
|||
December
31, 2009
|
(4.1)
years
|
(1.2)
years
|
0.8
years
|
We were
in compliance with the duration of equity limits established in the RMP at both
points in time.
Duration
Gap
The
duration gap is the difference between the effective duration of total assets
and the effective duration of total liabilities, adjusted for the effect of
derivatives. A positive duration gap signals an exposure to rising
interest rates because it indicates that the duration of assets exceeds the
duration of liabilities. A negative duration gap signals an exposure
to declining interest rates because the duration of assets is less than the
duration of liabilities. The duration gap was (2.2) months at March
31, 2010, compared to (1.8) months at December 31, 2009.
Convexity
Convexity
measures how fast duration changes as a function of interest rate
changes. Measurement of convexity is important because of the
optionality embedded in the mortgage and callable debt
portfolios. The mortgage portfolios exhibit negative convexity due to
the embedded prepayment options. Management routinely reviews
convexity and considers it when developing funding and hedging strategies for
the acquisition of mortgage-based assets. A primary strategy for
managing convexity risk arising from our mortgage portfolio is the issuance of
callable debt. At March 31, 2010, callable debt funding mortgage
assets as a percentage of the net mortgage portfolio equaled 48.0%, compared to
44.6% at the end of 2009. The negative convexity on the mortgage
assets is mitigated by the negative convexity of underlying callable
debt.
69
Market Risk-Based Capital
Requirement
We are
subject to the Finance Agency’s risk-based capital regulations. This
regulatory framework requires the maintenance of sufficient permanent capital to
meet the combined credit risk, market risk, and operations risk
components. Our permanent capital is defined by the Finance Agency as
Class B Stock (including MRCS) and Retained Earnings. The market
risk-based capital component is the sum of two factors. The first
factor is the market value of the portfolio at risk from movements in interest
rates that could occur during times of market stress. This estimation
is accomplished through an internal VaR based modeling approach that was
approved by the Finance Board (predecessor to the Finance Agency) before the
implementation of our Capital Plan. The second factor is the amount,
if any, by which the current market value of total regulatory capital is less
than 85% of the book value of total regulatory capital.
The VaR
approach used for calculating the first factor is primarily based upon
historical simulation methodology. The estimation incorporates
scenarios that reflect interest rate shifts, interest rate volatility, and
changes in the shape of the yield curve. These observations are based
on historical information from 1978 to the present. When calculating
the risk-based capital requirement, the VaR comprising the first factor of the
market risk component is defined as the potential dollar loss from adverse
market movements, for a holding period of 120 business days, with a 99.0%
confidence interval, based on these historical prices and market rates. Market
risk-based capital estimates were $262 million as of March 31, 2010, compared to
$283 million as of December 31, 2009.
Changes
in Market Value to Book Value of Equity between Base Rates and Shift
Scenarios
We
measure potential changes in the market value to book value of equity based on
the current month-end level of rates versus the market value to book value of
equity under large parallel rate shifts. This measurement provides
information related to the sensitivity of our interest rate
position. The table below provides changes in market value to book
value of equity from the base rates:
-200 bps
|
+200 bps
|
|||||||
March
31, 2010
|
-7.0 | % | 1.1 | % | ||||
December
31, 2009
|
-5.0 | % | 0.0 | % |
Use
of Derivative Hedges
We use
derivatives to hedge our market risk exposures. The primary
type of derivative used is interest rate exchange agreements or
swaps. Interest rate swaps increase the flexibility of our funding
alternatives by providing specific cash flows or characteristics that might not
be as readily available or cost-effective if obtained in the cash debt
market. We also use TBAs to temporarily hedge mortgage
positions. We do not speculate using derivatives and do not engage in
derivatives trading.
70
The
volume of derivative hedges is often expressed in terms of notional principal,
which is the amount upon which interest payments are calculated. The
following table highlights the notional amounts by type of derivative agreement
($ amounts in millions):
March 31,
|
December 31,
|
|||||||
Derivative Agreement Type
|
2010
|
2009
|
||||||
Debt
swaps:
|
||||||||
Bullet
|
$ | 9,139 | $ | 14,792 | ||||
Callable
|
5,620 | 4,155 | ||||||
Complex
|
1,985 | 2,075 | ||||||
Advances
swaps:
|
||||||||
Bullet
|
8,353 | 8,450 | ||||||
Putable
|
4,983 | 5,241 | ||||||
Callable
|
40 | 40 | ||||||
GSE
investment swaps
|
1,600 | 1,600 | ||||||
MBS
swaps
|
1 | 1 | ||||||
TBA
MPP hedges
|
23 | 41 | ||||||
Mandatory
delivery commitments
|
22 | 38 | ||||||
Total
|
$ | 31,766 | $ | 36,433 |
The above
table includes interest rate swaps, TBA MPP hedges, and mandatory delivery
commitments. Complex swaps include, but are not limited to, step-up
and range bonds. The level of different types of derivatives is
contingent upon and tends to vary with balance sheet size, Advances demand, MPP
purchase activity, and Consolidated Obligation issuance levels.
71
The table
below presents derivative instruments by hedged instrument ($ amounts in
millions).
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Total
|
Estimated
|
Total
|
Estimated
|
|||||||||||||
Hedged Instrument, Excluding Accrued Interest
|
Notional
|
Fair Value
|
Notional
|
Fair Value
|
||||||||||||
CO
Bonds:
|
||||||||||||||||
Fair
Value hedges
|
$ | 16,609 | $ | 102 | $ | 20,997 | $ | 101 | ||||||||
Economic
hedges
|
135 | - | 25 | - | ||||||||||||
Total
|
16,744 | 102 | 21,022 | 101 | ||||||||||||
Advances:
|
||||||||||||||||
Fair
value hedges
|
13,361 | (752 | ) | 13,721 | (719 | ) | ||||||||||
Economic
hedges
|
15 | (1 | ) | 10 | - | |||||||||||
Total
|
13,376 | (753 | ) | 13,731 | (719 | ) | ||||||||||
Investments:
|
||||||||||||||||
Fair
value hedges
|
1,600 | (183 | ) | 1,600 | (158 | ) | ||||||||||
Economic
hedges
|
1 | - | 1 | - | ||||||||||||
Total
|
1,601 | (183 | ) | 1,601 | (158 | ) | ||||||||||
MPP
loans:
|
||||||||||||||||
Economic
hedges
|
23 | - | 41 | 1 | ||||||||||||
Economic
(stand-alone delivery commitments)
|
22 | - | 38 | (1 | ) | |||||||||||
Total
|
45 | - | 79 | - | ||||||||||||
Total
derivatives
|
$ | 31,766 | $ | (834 | ) | $ | 36,433 | $ | (776 | ) | ||||||
Total
derivatives excluding accrued interest
|
$ | (834 | ) | $ | (776 | ) | ||||||||||
Accrued
interest, net
|
(24 | ) | (15 | ) | ||||||||||||
Cash
collateral held by/(from) counterparty, net
|
100 | 80 | ||||||||||||||
Net
derivative balance
|
$ | (758 | ) | $ | (711 | ) | ||||||||||
Derivative
Asset
|
$ | 6 | $ | 2 | ||||||||||||
Derivative
Liability
|
(764 | ) | (713 | ) | ||||||||||||
Net
derivative balance
|
$ | (758 | ) | $ | (711 | ) |
72
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We are
responsible for establishing and maintaining disclosure controls and procedures
(“DCP”) that are
designed to ensure that information required to be disclosed by us in the
reports filed by us under the Securities Exchange Act of 1934, as amended
(“Exchange Act”), is:
(a) recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms; and (b) accumulated and communicated to
our management, including our principal executive officer, principal financial
officer, and principal accounting officer, to allow timely decisions regarding
required disclosures. In designing and evaluating our DCP, we recognize that any
controls and procedures, no matter how well designed and implemented, can
provide only reasonable assurance of achieving the desired control objectives,
and that our management’s duties require it to make its best judgment regarding
the design of our DCP. As of March 31, 2010, we conducted an evaluation, under
the supervision (and with the participation) of our management, including our
Chief Executive Officer (the principal executive officer), Chief Financial
Officer (the principal financial officer) and Chief Accounting Officer (the
principal accounting officer), of the effectiveness of the design and operation
of our DCP pursuant to Rule 13a-15 of the Exchange Act. Based on that
evaluation, our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer concluded that our DCP were effective as of March 31,
2010.
Internal
Control Over Financial Reporting
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting, as defined in
rules 13a-15(f) and 15(d)-15(f) of the Exchange Act (“ICFR”), that occurred during
our most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our ICFR.
Part
II. OTHER INFORMATION
Item
1A. RISK FACTORS
There
have been no material changes in the risk factors described in Item 1A of our
2009 Form 10-K.
73
ITEM
6. EXHIBITS
EXHIBIT
INDEX
Exhibit Number
|
Description
|
|
3.1*
|
Organization
Certificate of the Federal
Home Loan Bank of Indianapolis, incorporated by reference to our
Registration Statement on Form 10 filed on February 14,
2006
|
|
3.2*
|
Bylaws
of the Federal Home Loan Bank of Indianapolis, incorporated by reference
to Exhibit 3.2 of our Current Report on Form 8-K filed on October 20,
2008
|
|
4*
|
Capital
Plan of the Federal Home Loan Bank of Indianapolis, incorporated by
reference to Exhibit 99.1 of our Current Report on Form 8-K filed on June
1, 2009
|
|
10.1*+
|
Federal
Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan,
incorporated by reference to Exhibit 99.1 of our Current Report on Form
8-K filed on August 13, 2009
|
|
10.2*+
|
Federal
Home Loan Bank of Indianapolis Supplemental Executive Thrift Plan (with
trust), as amended, incorporated by reference to our Quarterly Report on
Form 10-Q filed on September 29, 2006
|
|
10.3*+
|
Second
Amendment of Federal Home Loan Bank of Indianapolis Supplemental Executive
Thrift Plan (terminating such plan effective as of December 23, 2009),
incorporated by reference to Exhibit 10.3 of our Annual Report on Form
10-K filed on March 19, 2010
|
|
10.4*+
|
Federal
Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan
(with trust), as amended, incorporated by reference to our Quarterly
Report on Form 10-Q filed on November 13, 2007
|
|
10.5*+
|
|
First
Amendment of Federal Home Loan Bank of Indianapolis 2005 Supplemental
Executive Thrift Plan (as previously amended and restated) (terminating
such amended and restated plan effective as of December 23,
2009), incorporated by reference to Exhibit 10.5 of our Annual Report on
Form 10-K filed on March 19, 2010
|
10.6*+
|
Form
of Key Employee Severance Agreement for Executive Officers, incorporated
by reference to our Current Report on Form 8-K, filed on November 20,
2007
|
|
10.7*+
|
Federal
Home Loan Bank of Indianapolis Directors’ Deferred Compensation Plan (with
trust), as amended, incorporated by reference to our Quarterly Report on
Form 10-Q filed on September 29, 2006
|
|
10.8*+
|
|
Second
Amendment of Federal Home Loan Bank of Indianapolis Directors’ Deferred
Compensation Plan (terminating such plan effective as of
December 23, 2009), incorporated by reference to Exhibit 10.8 of our
Annual Report on Form 10-K filed on March 19,
2010
|
74
10.9*+
|
Federal
Home Loan Bank of Indianapolis 2005 Directors’ Deferred Compensation Plan
(with trust), as amended, incorporated by reference to our Quarterly
Report on Form 10-Q filed on November 13, 2007
|
|
10.10*+
|
First
Amendment of Federal Home Loan Bank of Indianapolis 2005 Directors’
Deferred Compensation Plan (as previously amended and restated)
(terminating such amended and restated plan effective as of December 23,
2009), incorporated by reference to Exhibit 10.10 of our Annual Report on
form 10-K filed on March 19, 2010
|
|
10.11*+
|
Directors’
Compensation and Travel Expense Reimbursement Policy effective January 1,
2010, incorporated by reference to our Current Report on Form 8-K, filed
on December 15, 2009
|
|
10.12*+
|
Federal
Home Loan Bank of Indianapolis 2010 Long Term Incentive Plan, effective
January 1, 2010, incorporated by reference to Exhibit 10.12 of our Annual
Report on Form 10-K filed on March 19, 2010
|
|
10.13*+
|
Federal
Home Loan Banks P&I Funding and Contingency Plan Agreement,
incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed with the Securities and Exchange Commission
on June 27, 2006
|
|
10.14*+
|
Federal
Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to
our Annual Report on Form 10-K filed with the SEC on March 16,
2009
|
|
10.15*+
|
Federal
Home Loan Bank of Indianapolis 2010 Executive Incentive Compensation Plan
(STI), effective January 1, 2010
|
|
31.1
|
Certification
of the President – Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of the Senior Vice President – Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
31.3
|
Certification
of the Senior Vice President – Chief Accounting Officer pursuant to
Section 302 of the Sarbanes – Oxley Act of 2002
|
|
32
|
|
Certification
of the President – Chief Executive Officer, Senior Vice President – Chief
Financial Officer, and Senior Vice President – Chief Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
* These
documents are incorporated by reference.
+
Management contract or compensatory plan or arrangement.
75
SIGNATURES
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
INDIANAPOLIS
|
||
May
12, 2010
|
By:
|
/s/
MILTON J. MILLER II
|
Name:
|
Milton
J. Miller II
|
|
Title:
|
President
– Chief Executive Officer
|
|
May
12, 2010
|
By:
|
/s/
CINDY L. KONICH
|
Name:
|
Cindy
L. Konich
|
|
Title:
|
Senior
Vice President – Chief Financial Officer
|
|
May
12, 2010
|
By:
|
/s/
K. LOWELL SHORT, JR.
|
Name:
|
K.
Lowell Short, Jr.
|
|
Title:
|
Senior
Vice President – Chief Accounting
Officer
|
76