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EX-32 - EX 32 - Federal Home Loan Bank of Indianapolisex32march312011.htm
EX-31.2 - EX 31.2 - Federal Home Loan Bank of Indianapolisex312march312011.htm
EX-31.3 - EX 31.3 - Federal Home Loan Bank of Indianapolisex313march312011.htm
EX-31.1 - EX 31.1 - Federal Home Loan Bank of Indianapolisex311march312011.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, 2011
 
OR
 
o 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            o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).
 
o  Yes            o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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
o  Accelerated filer
x Non-accelerated filer (Do not check if a smaller reporting company)
o  Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes            x  No
 
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, 2011
 
Class B Stock, par value $100
22,439,461
 

Table of Contents
Page
 
 
Number
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 6.
Glossary
 
 
Exhibit 31.1
 
 
Exhibit 31.2
 
 
Exhibit 31.3
 
 
Exhibit 32
 
 
 

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts and shares in thousands, except par value)
 
March 31,
2011
 
December 31,
2010
Assets:
 
 
 
Cash and Due from Banks
$
315,013
 
 
$
11,676
 
Interest-Bearing Deposits
53
 
 
3
 
Securities Purchased Under Agreements to Resell
125,000
 
 
750,000
 
Federal Funds Sold
7,521,000
 
 
7,325,000
 
Available-for-Sale Securities (a) (Note 3)
3,169,248
 
 
3,237,916
 
Held-to-Maturity Securities (b) (Note 4)
8,458,946
 
 
8,471,827
 
Advances (Note 6)
17,679,028
 
 
18,275,364
 
Mortgage Loans Held for Portfolio, net (Notes 7 and 8)
6,468,203
 
 
6,702,576
 
Accrued Interest Receivable
97,888
 
 
98,924
 
Premises, Software, and Equipment, net
10,600
 
 
10,830
 
Derivative Assets, net (Note 9)
14,491
 
 
6,173
 
Other Assets
41,162
 
 
39,584
 
Total Assets
$
43,900,632
 
 
$
44,929,873
 
Liabilities:
 
 
 
 
Deposits (Note 10):
 
 
 
 
Interest-Bearing
$
623,987
 
 
$
574,894
 
Non-Interest-Bearing
9,979
 
 
10,034
 
Total Deposits
633,966
 
 
584,928
 
Consolidated Obligations (Note 11):
 
 
 
 
Discount Notes
8,489,292
 
 
8,924,687
 
Bonds
31,286,589
 
 
31,875,237
 
Total Consolidated Obligations, net
39,775,881
 
 
40,799,924
 
Accrued Interest Payable
144,368
 
 
133,862
 
Affordable Housing Program Payable
34,861
 
 
35,648
 
Payable to Resolution Funding Corporation
4,905
 
 
10,325
 
Derivative Liabilities, net (Note 9)
575,411
 
 
657,030
 
Mandatorily Redeemable Capital Stock (Note 12)
658,363
 
 
658,363
 
Other Liabilities
81,814
 
 
102,422
 
Total Liabilities
41,909,569
 
 
42,982,502
 
Commitments and Contingencies (Note 15)
 
 
 
 
Capital (Note 12):
 
 
 
 
Capital Stock Putable (at par value of $100 per share):
 
 
 
Class B-1 issued and outstanding shares: 16,117 and 16,072, respectively
1,611,609
 
 
1,607,116
 
Class B-2 issued and outstanding shares: 26 and 29, respectively
2,694
 
 
2,944
 
     Total Capital Stock Putable
1,614,303
 
 
1,610,060
 
Retained Earnings
436,869
 
 
427,557
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 3)
(352
)
 
(4,615
)
Net Non-Credit Portion of Other-Than-Temporary Impairment Losses:
 
 
 
Available-for-Sale Securities (Note 3)
(44,294
)
 
(68,806
)
Held-to-Maturity Securities (Note 4)
(5,986
)
 
(7,056
)
Pension and Postretirement Benefits
(9,477
)
 
(9,769
)
Total Accumulated Other Comprehensive Income (Loss)
(60,109
)
 
(90,246
)
Total Capital
1,991,063
 
 
1,947,371
 
Total Liabilities and Capital
$
43,900,632
 
 
$
44,929,873
 
 
(a)    Amortized cost: $3,069,172 and $3,146,617 at March 31, 2011, and December 31, 2010, respectively
(b)    Estimated fair values: $8,479,349 and $8,513,391 at March 31, 2011, and December 31, 2010, 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)
 
Three Months Ended 
 
March 31,
 
2011
 
2010
Interest Income:
 
 
 
Advances
$
41,148
 
 
$
50,434
 
Prepayment Fees on Advances, net
1,134
 
 
693
 
Interest-Bearing Deposits
10
 
 
36
 
Securities Purchased Under Agreements to Resell
589
 
 
169
 
Federal Funds Sold
2,941
 
 
2,533
 
Available-for-Sale Securities
14,877
 
 
1,621
 
Held-to-Maturity Securities
45,513
 
 
63,431
 
Mortgage Loans Held for Portfolio, net
80,129
 
 
90,655
 
Other, net
521
 
 
359
 
Total Interest Income
186,862
 
 
209,931
 
Interest Expense:
 
 
 
Consolidated Obligation Discount Notes
3,199
 
 
2,465
 
Consolidated Obligation Bonds
118,520
 
 
142,162
 
Deposits
73
 
 
78
 
Mandatorily Redeemable Capital Stock
4,825
 
 
3,579
 
Total Interest Expense
126,617
 
 
148,284
 
Net Interest Income
60,245
 
 
61,647
 
Provision for Credit Losses
976
 
 
 
Net Interest Income After Provision for Credit Losses
59,269
 
 
61,647
 
Other Income (Loss):
 
 
 
Total Other-Than-Temporary Impairment Losses
(2,972
)
 
(14,453
)
Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss), net
(15,409
)
 
8,387
 
Net Other-Than-Temporary Impairment Losses
(18,381
)
 
(6,066
)
Net Gains (Losses) on Derivatives and Hedging Activities
(127
)
 
(1,175
)
Service Fees
263
 
 
301
 
Standby Letters of Credit Fees
338
 
 
363
 
Loss on Extinguishment of Debt
(397
)
 
 
Other, net
182
 
 
262
 
Total Other Income (Loss)
(18,122
)
 
(6,315
)
Other Expenses:
 
 
 
Compensation and Benefits
8,743
 
 
6,704
 
Other Operating Expenses
2,830
 
 
2,934
 
Federal Housing Finance Agency
916
 
 
599
 
Office of Finance
821
 
 
465
 
Other
255
 
 
284
 
Total Other Expenses
13,565
 
 
10,986
 
Income Before Assessments
27,582
 
 
44,346
 
Assessments:
 
 
 
Affordable Housing Program
2,744
 
 
3,985
 
Resolution Funding Corporation
4,968
 
 
8,072
 
Total Assessments
7,712
 
 
12,057
 
Net Income
$
19,870
 
 
$
32,289
 

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
Class B-1
Putable
 
Capital Stock
Class B-2
Putable
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Capital
 
 
Shares
 
 
Par Value
 
 
Shares
 
 
Par Value
 
 
 
 
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 Gains (Losses) 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends on Capital Stock (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 Capital, continued
(Unaudited, $ amounts and shares in thousands)
 
 
Capital Stock
Class B-1
Putable
 
Capital Stock
Class B-2
Putable
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Capital
 
 
Shares
 
 
Par Value
 
 
Shares
 
 
Par Value
 
 
 
 
Balance, December 31, 2010
 
16,072
 
 
$
1,607,116
 
 
29
 
 
$
2,944
 
 
$
427,557
 
 
$
(90,246
)
 
$
1,947,371
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from Sale of Capital Stock
 
142
 
 
14,243
 
 
 
 
 
 
 
 
 
 
14,243
 
Repurchase/Redemption of Capital Stock
 
(100
)
 
(10,000
)
 
 
 
 
 
 
 
 
 
(10,000
)
Transfers of Capital Stock
 
3
 
 
250
 
 
(3
)
 
(250
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
 
 
19,870
 
 
 
 
19,870
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
4,263
 
 
4,263
 
Non-Credit Portion of Other-Than-Temporary Impairment Losses on Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
(2,331
)
 
(2,331
)
Reclassification of Non-Credit Losses to Other Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
17,740
 
 
17,740
 
Subsequent Net Unrealized Gains
 
 
 
 
 
 
 
 
 
 
 
9,103
 
 
9,103
 
Net Non-Credit Portion
 
 
 
 
 
 
 
 
 
 
 
24,512
 
 
24,512
 
Accretion of Non-Credit Portion of Other-Than-Temporary-Impairment Losses on Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
1,070
 
 
1,070
 
Net Non-Credit Portion
 
 
 
 
 
 
 
 
 
 
 
1,070
 
 
1,070
 
Pension and Postretirement Benefits
 
 
 
 
 
 
 
 
 
 
 
292
 
 
292
 
Total Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
19,870
 
 
30,137
 
 
50,007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends on Capital Stock (2.50% annualized)
 
 
 
 
 
 
 
 
 
(10,558
)
 
 
 
(10,558
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2011
 
16,117
 
 
$
1,611,609
 
 
26
 
 
$
2,694
 
 
$
436,869
 
 
$
(60,109
)
 
$
1,991,063
 
 

The accompanying notes are an integral part of these financial statements.
 
4 

 

Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
 
Three Months Ended
 
March 31,
 
2011
 
2010
Operating Activities:
 
 
 
Net Income
$
19,870
 
 
$
32,289
 
Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activities:
 
 
 
Depreciation and Amortization
9,260
 
 
(20,036
)
Net Other-Than-Temporary Impairment Losses
18,381
 
 
6,066
 
Loss on Extinguishment of Debt
397
 
 
 
Provision for Credit Losses
976
 
 
 
(Gain) Loss on Derivative and Hedging Activities
(2,359
)
 
2,207
 
Net Change in:
 
 
 
Accrued Interest Receivable
1,040
 
 
4,025
 
Net Accrued Interest on Derivatives
12,517
 
 
51,659
 
Other Assets
(438
)
 
440
 
Affordable Housing Program Payable, including Discount on Advances
(787
)
 
1,452
 
Accrued Interest Payable
10,506
 
 
(23,020
)
Payable to Resolution Funding Corporation
(5,420
)
 
1,674
 
Other Liabilities
(1,395
)
 
(1,327
)
Total Adjustments, net
42,678
 
 
23,140
 
Net Cash provided by Operating Activities
62,548
 
 
55,429
 
Investing Activities:
 
 
 
Net Change in:
 
 
 
Interest-Bearing Deposits
15,600
 
 
(23,157
)
Securities Purchased Under Agreements to Resell
625,000
 
 
 
Federal Funds Sold
(196,000
)
 
(1,351,000
)
Premises, Software, and Equipment
(161
)
 
(103
)
Available-for-Sale Securities:
 
 
 
Proceeds from Maturities
57,053
 
 
 
Held-to-Maturity Securities:
 
 
 
Net (Increase) Decrease in Short-Term
 
 
(411,000
)
Proceeds from Maturities of Long-Term
515,645
 
 
491,928
 
Purchases of Long-Term
(524,794
)
 
(533,425
)
Advances:
 
 
 
Principal Collected
4,613,298
 
 
5,115,810
 
Made to Members
(4,110,957
)
 
(4,223,897
)
Mortgage Loans Held for Portfolio:
 
 
 
Principal Collected
413,076
 
 
361,959
 
Purchases
(180,668
)
 
(82,207
)
Proceeds from Sales of Foreclosed Properties
 
 
(33
)
Other Federal Home Loan Banks:
 
 
 
Principal Collected on Loans
50,000
 
 
25,735
 
Loans Made
(50,000
)
 
(60,735
)
Net Cash provided by (used in) Investing Activities
1,227,092
 
 
(690,125
)
 
 

The accompanying notes are an integral part of these financial statements.
 
5 

 

Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
 
Three Months Ended
 
March 31,
 
2011
 
2010
Financing Activities:
 
 
 
Net Change in Deposits
49,038
 
 
(271,786
)
Net Proceeds (Payments) on Derivative Contracts with Financing Elements
(26,438
)
 
(42,543
)
Net Proceeds from Issuance of Consolidated Obligations:
 
 
 
Discount Notes
159,640,997
 
 
147,423,048
 
Bonds
4,526,882
 
 
8,110,390
 
Payments for Maturing and Retiring Consolidated Obligations:
 
 
 
Discount Notes
(160,076,190
)
 
(142,136,272
)
Bonds
(5,094,277
)
 
(12,750,900
)
Proceeds from Sale of Capital Stock
14,243
 
 
4,212
 
Payments for Redemption of Mandatorily Redeemable Capital Stock
 
 
(2,813
)
Payments for Repurchase/Redemption of Capital Stock
(10,000
)
 
 
Cash Dividends Paid
(10,558
)
 
(8,691
)
Net Cash provided by (used in) Financing Activities
(986,303
)
 
324,645
 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
303,337
 
 
(310,051
)
Cash and Cash Equivalents at Beginning of the Period
11,676
 
 
1,722,077
 
Cash and Cash Equivalents at End of the Period
$
315,013
 
 
$
1,412,026
 
Supplemental Disclosures:
 
 
 
Interest Paid
$
113,663
 
 
$
174,687
 
Affordable Housing Program Payments, net
3,531
 
 
2,533
 
Resolution Funding Corporation Assessments Paid
10,387
 
 
6,399
 
 

The accompanying notes are an integral part of these financial statements.
 
6 

 
 
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements

 
Note 1 - Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying interim financial statements of the Federal Home Loan Bank of Indianapolis are unaudited and have been prepared in accordance with GAAP for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. The interim financial statements presented herein should be read in conjunction with our audited financial statements and notes thereto, which are included in our 2010 Form 10-K.
 
Our significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements in the 2010 Form 10-K. There have been no significant changes to these policies as of March 31, 2011.
 
The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of our 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.
 
All dollar amounts included in the Notes are presented in thousands, unless otherwise indicated. We use certain acronyms and terms throughout this Form 10-Q which are defined in the Glossary of Terms located after Item 6. Exhibits. Unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis.
 
Reclassifications. We have reclassified certain amounts from the prior periods to conform to the current period presentation. These reclassifications had no effect on Net Income, Total Assets, or Total Capital.
 
Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. Actual results could differ significantly from these estimates.
 
Variable Interest Entities. We have investments in VIEs that include, but are not limited to, senior interests in private-label MBS and ABS. The carrying amounts and classification of the assets that relate to the VIEs are included in HTM and AFS securities on the Statement of Condition. We have no liabilities related to these VIEs. The maximum loss exposure for these VIEs is limited to the carrying value of our investments in the VIEs.
 
If we determine we are the primary beneficiary of a VIE, we would be required to consolidate that VIE. On an ongoing basis, we perform a quarterly evaluation to determine whether we are the primary beneficiary in any VIEs. To perform this evaluation, we consider whether we possess both of the following characteristics:
 
the power to direct the VIE's activities that most significantly affect the VIE's economic performance; and
the obligation to absorb the VIE's losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
 
Based on an evaluation of the above characteristics, we have determined that consolidation is not required for our VIEs as of March 31, 2011. In addition, we have not provided financial or other support (explicitly or implicitly) during the three months ended March 31, 2011. Furthermore, we were not previously contractually required to provide, nor do we intend to provide such support in the future.
 
Office of Finance Expenses. Effective January 1, 2011, our proportionate share of the Office of Finance operating and capital expenditures is calculated using a formula that is based upon two components as follows: (i) two-thirds based on our share of Consolidated Obligations outstanding, updated every month, and (ii) one-third based on equal pro-rata share among the 12 FHLBanks. These regular assessments are determined on a monthly basis. In addition, we are apportioned special assessments using the same calculation for specific system-wide expenditures related to audit fees and rating agency annual relationship fees. Any ratings agency subscription fees are assessed as incurred on a per user basis and directly to the applicable FHLBank(s).
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Prior to January 1, 2011, we were assessed for the costs of operating the Office of Finance based equally on each FHLBank's percentage of capital stock, percentage of Consolidated Obligations issued and percentage of Consolidated Obligations outstanding.
 
Subsequent Events. In preparing this Form 10-Q, we have evaluated events and considered transactions through the time of filing our first quarter 2011 Form 10-Q with the SEC.
 
Note 2 - Recently Adopted and Issued Accounting Guidance
 
Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements. On January 21, 2010, the FASB issued amended guidance for fair value measurements and disclosures. We adopted this amended guidance as of January 1, 2010, except for required disclosures about purchases, sales, issuances, and settlements in the rollforward of activity for Level 3 fair value measurements, which we adopted as of January 1, 2011. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not have a material effect on our financial condition, results of operations or cash flows. See Note 14 Estimated Fair Values for additional disclosures required under this amended guidance.
 
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the FASB issued amended guidance to enhance disclosures about an entity's allowance for credit losses and the credit quality of its financing receivables. The required disclosures as of the end of a reporting period became effective for interim and annual reporting periods as of December 31, 2010. The required disclosures about activity that occurs during a reporting period became effective for interim and annual reporting periods as of January 1, 2011. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not have a material effect on our financial condition, results of operations or cash flows. See Note 8 - Allowance for Credit Losses for additional disclosures required under this amended guidance.
 
A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. On January 19, 2011, the FASB issued guidance to defer temporarily the effective date of disclosures about troubled debt restructurings required by the amended guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The effective date for these new disclosures will be coordinated with the effective date of the guidance for determining what constitutes a troubled debt restructuring. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
 
On April 5, 2011, the FASB issued guidance to clarify which debt modifications constitute troubled debt restructurings. This guidance is intended to help creditors determine whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for presenting previously deferred disclosures related to troubled debt restructurings. This guidance is effective for interim and annual periods beginning on or after July 1, 2011, and applies retrospectively to troubled debt restructurings occurring on or after the beginning of the annual period of adoption. Early adoption is permitted. The adoption of this amended guidance may result in increased annual and interim financial statement disclosures, but is not expected to have a material effect on our financial condition, results of operations or cash flows.
 
Reconsideration of Effective Control for Repurchase Agreements. On April 29, 2011, the FASB issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes from the assessment of effective control: (i) the criterion requiring the transferor to have the ability to repurchase or redeem financial assets before their maturity on substantially the agreed terms, even in the event of the transferee's default, and (ii) the collateral maintenance implementation guidance related to that criterion. This guidance is effective for interim and annual periods beginning on or after January 1, 2012. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We are currently evaluating the effect of the adoption of this amended guidance on our financial condition, results of operations or cash flows.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Note 3 - Available-for-Sale Securities
 
Major Security Types. AFS securities include AAA-rated agency debentures issued or guaranteed by GSEs but purchased from non-member counterparties. Also included are corporate debentures guaranteed by the FDIC and backed by the full faith and credit of the U.S. government under the TLGP, as well as private-label RMBS.  Our AFS securities, along with the impact of OTTI, of which a portion is reported in AOCI, were as follows.
 
 
 
 
OTTI
 
Gross
 
Gross
 
 
 
 
Amortized
 
Recognized
 
Unrealized
 
Unrealized
 
Estimated
March 31, 2011
 
Cost (1)
 
in AOCI
 
Gains
 
Losses
 
Fair Value
GSE debentures
 
$
1,768,679
 
 
$
 
 
$
148,638
 
 
$
(4,587
)
 
$
1,912,730
 
TLGP debentures
 
323,360
 
 
 
 
319
 
 
 
 
323,679
 
Private-label RMBS
 
977,133
 
 
(188,430
)
 
144,411
 
 
(275
)
 
932,839
 
Total AFS securities
 
$
3,069,172
 
 
$
(188,430
)
 
$
293,368
 
 
$
(4,862
)
 
$
3,169,248
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
1,771,077
 
 
$
 
 
$
163,110
 
 
$
(3,929
)
 
$
1,930,258
 
TLGP debentures
 
324,193
 
 
 
 
924
 
 
 
 
325,117
 
Private-label RMBS
 
1,051,347
 
 
(203,839
)
 
135,501
 
 
(468
)
 
982,541
 
Total AFS securities
 
$
3,146,617
 
 
$
(203,839
)
 
$
299,535
 
 
$
(4,397
)
 
$
3,237,916
 
 
(1)    Amortized cost of AFS securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and, if applicable, OTTI recognized in earnings (credit losses).
 
At March 31, 2011, and December 31, 2010, 86% and 85%, respectively, of our fixed-rate AFS at amortized cost were swapped to a variable rate and none of our variable-rate AFS were swapped to a different variable-rate index.
 
Premiums and Discounts. At March 31, 2011, and December 31, 2010, the amortized cost of our MBS classified as AFS included OTTI credit losses, OTTI-related accretion adjustments, and net purchased premiums totaling $139,335 and $122,173, respectively.
 
Reconciliations of Amounts in AOCI. Subsequent increases and decreases in the fair value of previously OTTI AFS securities are netted against the non-credit component of OTTI in AOCI. The following tables reconcile the Statement of Condition presentation.
 
Net Unrealized Gains (Losses) on AFS Securities
 
March 31,
2011
 
December 31,
2010
Net unrealized gains on AFS securities
 
$
288,506
 
 
$
295,138
 
Less:
 
 
 
 
Subsequent net unrealized gains on previously OTTI AFS securities
 
144,136
 
 
135,033
 
Fair value hedging gain recognized in earnings
 
144,722
 
 
164,720
 
Net Unrealized Gains (Losses) on AFS Securities recognized in AOCI (before derivative and hedging adjustments)
 
$
(352
)
 
$
(4,615
)
 
Net Non-Credit Portion of OTTI Losses on AFS Securities
 
March 31,
2011
 
December 31,
2010
OTTI Recognized in AOCI
 
$
(188,430
)
 
$
(203,839
)
Subsequent net unrealized gains on previously OTTI AFS securities
 
144,136
 
 
135,033
 
Net Non-Credit Portion of Other-Than-Temporary Impairment Losses on Available-for-Sale Securities
 
$
(44,294
)
 
$
(68,806
)
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Unrealized Loss Positions. The following table details impaired AFS securities, 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, 2011
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses (1)
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
102,986
 
 
$
(4,587
)
 
$
 
 
$
 
 
$
102,986
 
 
$
(4,587
)
TLGP debentures
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-MBS
 
102,986
 
 
(4,587
)
 
 
 
 
 
102,986
 
 
(4,587
)
Private-label RMBS
 
 
 
 
 
643,969
 
 
(55,150
)
 
643,969
 
 
(55,150
)
Total impaired AFS securities
 
$
102,986
 
 
$
(4,587
)
 
$
643,969
 
 
$
(55,150
)
 
$
746,955
 
 
$
(59,737
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
103,652
 
 
$
(3,929
)
 
$
 
 
$
 
 
$
103,652
 
 
$
(3,929
)
TLGP debentures
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-MBS
 
103,652
 
 
(3,929
)
 
 
 
 
 
103,652
 
 
(3,929
)
Private-label RMBS
 
 
 
 
 
777,955
 
 
(75,825
)
 
777,955
 
 
(75,825
)
Total impaired AFS securities
 
$
103,652
 
 
$
(3,929
)
 
$
777,955
 
 
$
(75,825
)
 
$
881,607
 
 
$
(79,754
)
 
(1)    As a result of OTTI accounting guidance, the total unrealized losses on private-label RMBS will not agree to the gross unrealized losses on private-label RMBS in the major security types table above.
 
Redemption Terms. The amortized cost and estimated fair value of AFS securities by contractual maturity are detailed below. MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
 
March 31, 2011
 
December 31, 2010
 
 
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
 
323,360
 
 
323,679
 
 
324,193
 
 
325,117
 
Due after five years through ten years
 
1,768,679
 
 
1,912,730
 
 
1,771,077
 
 
1,930,258
 
Due after ten years
 
 
 
 
 
 
 
 
Total Non-MBS
 
2,092,039
 
 
2,236,409
 
 
2,095,270
 
 
2,255,375
 
Total MBS
 
977,133
 
 
932,839
 
 
1,051,347
 
 
982,541
 
Total AFS securities
 
$
3,069,172
 
 
$
3,169,248
 
 
$
3,146,617
 
 
$
3,237,916
 
 
Realized Gains and Losses.  There were no sales of AFS securities during the three months ended March 31, 2011, or 2010.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Note 4 - Held-to-Maturity Securities
 
Major Security Types. HTM securities consist primarily of MBS, ABS, and TLGP debentures.  Our MBS include RMBS and our ABS include both manufactured housing and home equity loans.  Our MBS and ABS include private-label securities. Our HTM securities also include agency debentures issued by GSEs.
 
Our HTM securities, along with the impact of OTTI, of which a portion is reported in AOCI, were as follows:
 
 
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
OTTI
 
 
 
Unrecognized
 
Unrecognized
 
Estimated
 
 
Amortized
 
Recognized
 
Carrying
 
Holding
 
Holding
 
Fair
March 31, 2011
 
Cost (1)
 
In AOCI
 
Value (2)
 
Gains (3)
 
Losses (3)
 
Value
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
293,931
 
 
$
 
 
$
293,931
 
 
$
1,041
 
 
$
 
 
$
294,972
 
TLGP debentures
 
1,980,664
 
 
 
 
1,980,664
 
 
4,030
 
 
 
 
1,984,694
 
Total Non-MBS and ABS
 
2,274,595
 
 
 
 
2,274,595
 
 
5,071
 
 
 
 
2,279,666
 
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. Obligations -guaranteed RMBS
 
2,309,082
 
 
 
 
2,309,082
 
 
17,678
 
 
(7,588
)
 
2,319,172
 
GSE RMBS
 
3,254,007
 
 
 
 
3,254,007
 
 
45,099
 
 
(33,680
)
 
3,265,426
 
Private-label RMBS
 
605,782
 
 
(5,986
)
 
599,796
 
 
6,390
 
 
(10,285
)
 
595,901
 
Private-label ABS
 
21,466
 
 
 
 
21,466
 
 
 
 
(2,282
)
 
19,184
 
Total MBS and ABS
 
6,190,337
 
 
(5,986
)
 
6,184,351
 
 
69,167
 
 
(53,835
)
 
6,199,683
 
Total HTM securities
 
$
8,464,932
 
 
$
(5,986
)
 
$
8,458,946
 
 
$
74,238
 
 
$
(53,835
)
 
$
8,479,349
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
294,121
 
 
$
 
 
$
294,121
 
 
$
300
 
 
$
(214
)
 
$
294,207
 
TLGP debentures
 
2,065,994
 
 
 
 
2,065,994
 
 
4,530
 
 
(3
)
 
2,070,521
 
Total Non-MBS and ABS
 
2,360,115
 
 
 
 
2,360,115
 
 
4,830
 
 
(217
)
 
2,364,728
 
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. Obligations -guaranteed RMBS
 
2,326,958
 
 
 
 
2,326,958
 
 
31,773
 
 
(7,849
)
 
2,350,882
 
GSE RMBS
 
3,044,129
 
 
 
 
3,044,129
 
 
53,049
 
 
(24,933
)
 
3,072,245
 
Private-label RMBS
 
725,493
 
 
(7,056
)
 
718,437
 
 
5,665
 
 
(18,277
)
 
705,825
 
Private-label ABS
 
22,188
 
 
 
 
22,188
 
 
 
 
(2,477
)
 
19,711
 
Total MBS and ABS
 
6,118,768
 
 
(7,056
)
 
6,111,712
 
 
90,487
 
 
(53,536
)
 
6,148,663
 
Total HTM securities
 
$
8,478,883
 
 
$
(7,056
)
 
$
8,471,827
 
 
$
95,317
 
 
$
(53,753
)
 
$
8,513,391
 
 
(1)    Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and, if applicable, OTTI recognized in earnings (credit losses).
(2)    Carrying value of HTM securities represents amortized cost after adjustment for non-credit impairment recognized in AOCI.
(3)    Gross unrecognized holding gains (losses) represent the difference between estimated fair value and carrying value.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Premiums and Discounts. The following table details the net (discounts) premiums included in the amortized cost of our HTM securities:
Net (Discounts) Premiums
 
March 31,
2011
 
December 31,
2010
Non-MBS and ABS:
 
 
 
 
Net purchased premiums
 
$
1,630
 
 
$
2,150
 
Total Non-MBS and ABS
 
1,630
 
 
2,150
 
MBS and ABS:
 
 
 
 
 
Net purchased premiums
 
59,771
 
 
62,503
 
OTTI related credit losses
 
(1,143
)
 
(1,143
)
OTTI related accretion adjustments
 
19
 
 
34
 
Other - net discounts reclassified into credit losses
 
(393
)
 
(393
)
Total MBS and ABS
 
58,254
 
 
61,001
 
Total HTM securities, net (discounts) premiums included in amortized cost
 
$
59,884
 
 
$
63,151
 
 
Unrealized Loss Positions. The following tables detail impaired HTM securities, 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, 2011
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses (1)
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
TLGP debentures
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-MBS and ABS
 
 
 
 
 
 
 
 
 
 
 
 
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. Obligations - guaranteed RMBS
 
882,273
 
 
(7,588
)
 
 
 
 
 
882,273
 
 
(7,588
)
GSE RMBS
 
1,686,141
 
 
(33,680
)
 
 
 
 
 
1,686,141
 
 
(33,680
)
Private-label RMBS
 
104,630
 
 
(253
)
 
429,426
 
 
(10,537
)
 
534,056
 
 
(10,790
)
Private-label ABS
 
 
 
 
 
19,183
 
 
(2,282
)
 
19,183
 
 
(2,282
)
Total MBS and ABS
 
2,673,044
 
 
(41,521
)
 
448,609
 
 
(12,819
)
 
3,121,653
 
 
(54,340
)
Total impaired HTM securities
 
$
2,673,044
 
 
$
(41,521
)
 
$
448,609
 
 
$
(12,819
)
 
$
3,121,653
 
 
$
(54,340
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
168,779
 
 
$
(214
)
 
$
 
 
$
 
 
$
168,779
 
 
$
(214
)
TLGP debentures
 
68,764
 
 
(3
)
 
 
 
 
 
68,764
 
 
(3
)
Total Non-MBS and ABS
 
237,543
 
 
(217
)
 
 
 
 
 
237,543
 
 
(217
)
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. Obligations - guaranteed RMBS
 
994,667
 
 
(7,849
)
 
 
 
 
 
994,667
 
 
(7,849
)
GSE RMBS
 
1,034,990
 
 
(24,933
)
 
 
 
 
 
1,034,990
 
 
(24,933
)
Private-label RMBS
 
51,012
 
 
(223
)
 
546,135
 
 
(20,466
)
 
597,147
 
 
(20,689
)
Private-label ABS
 
 
 
 
 
19,711
 
 
(2,477
)
 
19,711
 
 
(2,477
)
Total MBS and ABS
 
2,080,669
 
 
(33,005
)
 
565,846
 
 
(22,943
)
 
2,646,515
 
 
(55,948
)
Total impaired HTM securities
 
$
2,318,212
 
 
$
(33,222
)
 
$
565,846
 
 
$
(22,943
)
 
$
2,884,058
 
 
$
(56,165
)
 
(1)    As a result of OTTI accounting guidance, the total unrealized losses on private-label RMBS will not agree to the gross unrecognized holding losses on private-label RMBS in the major security types table above.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Redemption Terms. The amortized cost and estimated fair value of non-MBS and ABS by contractual maturity are detailed 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, 2011
 
December 31, 2010
 
 
 
 
 
 
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
 
$
1,027,313
 
 
$
1,027,313
 
 
$
1,029,744
 
 
$
306,826
 
 
$
306,826
 
 
$
307,306
 
Due after one year through five years
 
1,247,282
 
 
1,247,282
 
 
1,249,922
 
 
2,053,289
 
 
2,053,289
 
 
2,057,422
 
Due after five years through ten years
 
 
 
 
 
 
 
 
 
 
 
 
Due after ten years
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-MBS and ABS
 
2,274,595
 
 
2,274,595
 
 
2,279,666
 
 
2,360,115
 
 
2,360,115
 
 
2,364,728
 
Total MBS and ABS
 
6,190,337
 
 
6,184,351
 
 
6,199,683
 
 
6,118,768
 
 
6,111,712
 
 
6,148,663
 
Total HTM securities
 
$
8,464,932
 
 
$
8,458,946
 
 
$
8,479,349
 
 
$
8,478,883
 
 
$
8,471,827
 
 
$
8,513,391
 
 
(1)    Carrying value of HTM securities represents amortized cost after adjustment for non-credit impairment recognized in AOCI.
 
Realized Gains and Losses.  There were no sales of HTM securities during the three months ended March 31, 2011, or 2010.
 
Note 5 - Other-Than-Temporary Impairment Analysis
 
In addition to all previously OTTI securities, we evaluate our individual AFS and HTM securities that are in an unrealized loss position for OTTI on a quarterly basis as described in our 2010 Form 10-K.
 
OTTI Evaluation Process and Results - Private-label RMBS and ABS.
 
Our evaluation includes estimating the cash flows that we are likely to collect based on an assessment of the structure of each security and certain assumptions such as:
 
the remaining payment terms for the security;
prepayment speeds and 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.
 
A significant modeling assumption is the forecast of future housing price changes for the relevant states and core-based statistical areas, which are based upon an assessment of the individual housing markets. Our housing price forecast assumes core-based statistical areas level current-to-trough home price declines ranging from 0% (for those housing markets that are believed to have reached their trough) to 10%. For those markets for which further home price declines are anticipated, such declines were projected to occur over the 3- to 9-month period beginning January 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market.  Under those recovery paths, home prices were projected to increase from the trough within a range of 0% to 2.8% in the first year, 0% to 3.0% in the second year, 1.5% to 4.0% in the third year, 2.0% to 5.0% in the fourth year, 2.0% to 6.0% in each of the fifth and sixth years, and 2.3% to 5.6% in each subsequent year.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

For those securities for which an OTTI was determined to have occurred during the three months ended March 31, 2011, the following table presents the significant modeling assumptions used to determine the amount of credit loss recognized in earnings during this period as well as the related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of the private-label RMBS in each category shown. The classification (prime or Alt-A) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.
 
 
 
Significant Modeling Assumptions for OTTI private-label RMBS
 
Current Credit
 
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Enhancement
 
 
Weighted
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Weighted
 
 
 
 
Average
 
Range
 
Average
 
Range
 
Average
 
Range
 
Average
 
Range
Year of Securitization
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
Prime:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
6.6
 
 
5.2 - 8.7
 
44.9
 
 
31.1 - 62.3
 
41.5
 
 
37.7 - 45.9
 
4.5
 
 
0.4 - 11.6
2006
 
5.1
 
 
  5.1 - 5.1
 
22.0
 
 
22.0 - 22.0
 
36.4
 
 
36.4 - 36.4
 
3.3
 
 
3.3 - 3.3
2005
 
9.3
 
 
 7.5 - 10.5
 
43.9
 
 
34.5 - 49.9
 
36.5
 
 
34.0 - 43.6
 
8.8
 
 
4.9 - 10.1
Total Prime
 
8.0
 
 
5.1 - 10.5
 
43.4
 
 
22.0 - 62.3
 
38.6
 
 
34.0 - 45.9
 
6.8
 
 
0.4 - 11.6
Alt-A:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2006
 
10.6
 
 
10.6 - 10.6
 
24.5
 
 
24.5 - 24.5
 
45.1
 
 
45.1 - 45.1
 
4.5
 
 
4.5 - 4.5
2005
 
7.3
 
 
7.3 - 7.3
 
42.0
 
 
42.0 - 42.0
 
42.7
 
 
42.7 - 42.7
 
3.5
 
 
3.5 - 3.5
Total Alt-A
 
8.7
 
 
7.3 - 10.6
 
34.6
 
 
24.5 - 42.0
 
43.7
 
 
42.7 - 45.1
 
3.9
 
 
3.5 - 4.5
Total OTTI private-label RMBS
 
8.1
 
 
5.1 - 10.6
 
42.8
 
 
22.0 - 62.3
 
39.0
 
 
34.0 - 45.9
 
6.5
 
 
0.4 - 11.6
 
Results of OTTI Evaluation Process - Private-label RMBS and ABS. As a result of our evaluations, for the three months ended March 31, 2011, and 2010, we recognized OTTI credit losses on 16 and 13 private-label RMBS, respectively, after we determined that it was likely that we would not recover the entire amortized cost of each of these securities.
 
The table below details the credit losses and net OTTI reclassified to (from) OCI for the three months ended March 31, 2011, and 2010.  Securities are listed based on the originator's classification at the time of origination or based on the classification by the NRSROs upon issuance.
 
 
 OTTI
 
Net OTTI
 
Total
 
 
Related to
 
Reclassified
 
OTTI
Three Months Ended March 31, 2011
 
Credit Loss
 
to (from) OCI
 
Losses
Private-label RMBS - prime
 
$
17,740
 
 
$
(17,740
)
 
$
 
Private-label RMBS - Alt-A
 
641
 
 
2,331
 
 
2,972
 
Total OTTI securities
 
$
18,381
 
 
$
(15,409
)
 
$
2,972
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2010
 
 
 
 
 
 
Private-label RMBS - prime
 
$
5,790
 
 
$
8,663
 
 
$
14,453
 
Private-label RMBS - Alt-A
 
276
 
 
(276
)
 
 
Total OTTI securities
 
$
6,066
 
 
$
8,387
 
 
$
14,453
 
 
For the three months ended March 31, 2011, and 2010, we accreted $1,070 and $13,776, respectively, of non-credit impairment from AOCI to the carrying value of HTM securities. For the three months ended March 31, 2011, and 2010, we accreted (i.e., increased income) $1,204 and amortized (i.e., decreased income) $1,257, respectively, of credit impairment included in the amortized cost of private-label RMBS to Net Interest Income.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

The following table details a reconciliation of the non-credit losses recognized in Other Income (Loss).
 
 
Three Months Ended March 31,
Reconciliation of Non-credit Losses
 
2011
 
2010
Amount reclassified from non-credit losses in AOCI
 
$
(17,740
)
 
$
(5,782
)
Non-credit losses recognized in OCI
 
2,331
 
 
14,169
 
Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss)
 
$
(15,409
)
 
$
8,387
 
 
The following table details a rollforward of the cumulative credit losses recognized in Other Income (Loss). The rollforward excludes the portion of OTTI losses that were recognized in OCI.
 
Credit Loss Rollfoward
 
Three Months Ended
March 31, 2011
 
 Year Ended
December 31, 2010
Balance at Beginning of Period
 
$
110,747
 
 
$
60,291
 
Additions:
 
 
 
 
Credit losses for which OTTI was not previously recognized
 
 
 
4,243
 
Additional credit losses for which OTTI was previously recognized
 
18,381
 
 
65,558
 
Reductions:
 
 
 
 
Credit losses on securities sold, matured, paid down or prepaid
 
 
 
(18,433
)
Increases in cash flows expected to be collected, recognized over the remaining life of the securities
 
(641
)
 
(912
)
Balance at End of Period
 
$
128,487
 
 
$
110,747
 
 
The following table presents the March 31, 2011, balances and classifications of the securities with OTTI losses during the three months ended March 31, 2011. The table also details the balances and classifications of our securities for which an OTTI loss has been recognized during the life of the securities, which represents securities impaired prior to 2011, as well as during 2011. We classify private-label MBS as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on the classification by the NRSROs upon issuance of the MBS.
 
 
March 31, 2011
 
 
HTM Securities
 
AFS Securities
 
 
 
 
 
 
 
 
Estimated
 
 
 
 
 
Estimated
OTTI Three Months Ended
 
UPB
 
Amortized Cost
 
Carrying Value
 
Fair
Value
 
UPB
 
Amortized Cost
 
Fair
Value
Private-label RMBS - prime
 
$
 
 
$
 
 
$
 
 
$
 
 
$
840,181
 
 
$
737,368
 
 
$
709,987
 
Private-label RMBS - Alt-A
 
 
 
 
 
 
 
 
 
37,959
 
 
31,826
 
 
23,083
 
Total OTTI securities
 
$
 
 
$
 
 
$
 
 
$
 
 
$
878,140
 
 
$
769,194
 
 
$
733,070
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTTI Life-to-Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private-label RMBS - prime
 
$
36,802
 
 
$
35,285
 
 
$
29,299
 
 
$
35,213
 
 
$
1,066,652
 
 
$
933,940
 
 
$
899,069
 
Private-label RMBS - Alt-A
 
 
 
 
 
 
 
 
 
49,815
 
 
43,193
 
 
33,770
 
Total OTTI securities
 
$
36,802
 
 
$
35,285
 
 
$
29,299
 
 
$
35,213
 
 
$
1,116,467
 
 
$
977,133
 
 
$
932,839
 
Total MBS and ABS
 
 
 
$
6,190,337
 
 
$
6,184,351
 
 
$
6,199,683
 
 
 
 
$
977,133
 
 
$
932,839
 
Total securities
 
 
 
$
8,464,932
 
 
$
8,458,946
 
 
$
8,479,349
 
 
 
 
$
3,069,172
 
 
$
3,169,248
 
 
OTTI Evaluation Process and Results - All Other AFS and HTM Securities.  
 
The remainder of our AFS and HTM securities have experienced net unrealized losses and a decrease in fair value due to illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets. However, the decline is considered temporary as we expect to recover the entire amortized cost basis on the remaining AFS and HTM securities in unrealized loss positions 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 each security's remaining amortized cost basis.


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Other U.S. Obligations and GSE Securities. For other U.S. obligations and non-MBS and MBS GSEs, 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, 2011, all of these gross unrealized losses are temporary.
 
Note 6 - Advances
 
We had Advances (secured loans) outstanding, including AHP Advances, with interest rates ranging from 0.20% to 8.34%, as detailed below.
 
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amount
 
WAIR %
 
Amount
 
WAIR %
Overdrawn demand and overnight deposit accounts
 
$
 
 
2.48
 
 
$
1,394
 
 
2.50
 
Due in 1 year or less
 
2,018,133
 
 
3.22
 
 
2,850,291
 
 
2.81
 
Due after 1 year through 2 years
 
2,793,979
 
 
2.82
 
 
1,784,681
 
 
3.29
 
Due after 2 years through 3 years
 
2,104,767
 
 
3.69
 
 
2,646,696
 
 
3.52
 
Due after 3 years through 4 years
 
1,232,465
 
 
3.15
 
 
1,394,515
 
 
3.09
 
Due after 4 years through 5 years
 
2,851,977
 
 
3.51
 
 
2,565,321
 
 
3.66
 
Thereafter
 
6,134,175
 
 
2.44
 
 
6,394,940
 
 
2.44
 
Total Advances, par value
 
17,135,496
 
 
2.98
 
 
17,637,838
 
 
2.98
 
Unamortized discount on AHP Advances
 
(91
)
 
 
 
 
(104
)
 
 
 
Unamortized discount on Advances
 
(816
)
 
 
 
 
(880
)
 
 
 
Hedging adjustments
 
401,690
 
 
 
 
 
489,180
 
 
 
 
Unamortized deferred prepayment fees
 
142,749
 
 
 
 
 
149,330
 
 
 
 
Total Advances
 
$
17,679,028
 
 
 
 
 
$
18,275,364
 
 
 
 
 
We offer Advances to members that provide a member the right, based upon predetermined option exercise dates, to call the Advance prior to maturity without incurring prepayment or termination fees (callable Advances). At March 31, 2011, and December 31, 2010, we had callable Advances of $3,098,525 and $3,610,325, respectively. All other Advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to the prepayment of the Advance.
 
We offer putable and convertible Advances which contain embedded options. Under the terms of a putable Advance, we may put or extinguish the fixed-rate Advance on predetermined exercise dates, and offer, subject to certain conditions, replacement funding at prevailing market rates. At March 31, 2011, and December 31, 2010, we had putable Advances outstanding totaling $2,056,500 and $2,136,950, respectively. Under the terms of a convertible Advance, we may convert an Advance from one interest-payment term structure to another. We had no convertible Advances at March 31, 2011, or December 31, 2010.
 
The following table details Advances by the earlier of the year of contractual maturity or next call date and next put date:
 
 
Year of Contractual Maturity or Next Call Date
 
Year of Contractual Maturity or Next Put Date
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
 
2011
 
2010
 
2011
 
2010
Overdrawn demand and overnight deposit accounts
 
$
 
 
$
1,394
 
 
$
 
 
$
1,394
 
Due in 1 year or less
 
4,133,483
 
 
4,301,641
 
 
2,852,883
 
 
3,725,041
 
Due after 1 year through 2 years
 
2,994,979
 
 
2,684,681
 
 
2,521,729
 
 
1,561,681
 
Due after 2 years through 3 years
 
2,079,767
 
 
2,606,696
 
 
2,041,267
 
 
2,513,946
 
Due after 3 years through 4 years
 
1,202,465
 
 
1,347,515
 
 
1,194,465
 
 
1,341,515
 
Due after 4 years through 5 years
 
2,684,977
 
 
2,480,321
 
 
2,630,477
 
 
2,343,821
 
Thereafter
 
4,039,825
 
 
4,215,590
 
 
5,894,675
 
 
6,150,440
 
Total Advances, par value
 
$
17,135,496
 
 
$
17,637,838
 
 
$
17,135,496
 
 
$
17,637,838
 
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

The following table details interest-rate payment terms for Advances:
 
 
March 31, 2011
 
December 31, 2010
Interest-Rate Payment Terms
 
Par Value
 
Amount Swapped
(Par Value)
 
% Swapped
 
Par Value
 
Amount Swapped
(Par Value)
 
% Swapped
Total Fixed-rate
 
$
13,868,117
 
 
$
11,051,966
 
 
80
%
 
$
13,763,437
 
 
$
10,845,833
 
 
79
%
Total Variable-rate
 
3,267,379
 
 
10,000
 
 
%
 
3,874,401
 
 
10,000
 
 
%
Total Advances, par value
 
$
17,135,496
 
 
$
11,061,966
 
 
65
%
 
$
17,637,838
 
 
$
10,855,833
 
 
62
%
 
Prepayment Fees. When a borrower prepays an Advance, we could suffer lower future income if the principal portion of the prepaid Advance is reinvested in lower-yielding assets that continue to be funded by higher-costing debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an Advance. Gross Advance prepayment fees (i.e., excluding any associated hedging basis adjustments) received from borrowers were $1,175 and $3,509 for the three months ended March 31, 2011, and 2010, respectively. In cases in which we fund a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance and the Advance meets the accounting criteria to qualify as a modification of the prepaid Advance, the net prepayment fee on the prepaid Advance is deferred, recorded in the basis of the modified Advance, and amortized into Interest Income over the life of the modified Advance using the level-yield method. We deferred $594 and $0 of the gross Advance prepayment fees for the three months ended March 31, 2011, and 2010, respectively, to be recognized in Interest Income in the future.
 
Credit Risk Exposure and Security Terms.  We lend to financial institutions involved in housing finance within our district according to Federal statutes, including the Bank Act. The Bank Act requires each FHLBank to hold, or have access to, collateral to secure its Advances.
 
At March 31, 2011, and December 31, 2010, we had $5.2 billion and $5.5 billion, respectively, of Advances outstanding that were greater than or equal to $1 billion for a single borrower. These Advances, representing 29% and 31%, respectively, of total Advances outstanding on those dates, were made to two borrowers. At March 31, 2011, and December 31, 2010, we held $10.0 billion and $10.9 billion, respectively, UPB of collateral to cover the Advances to these institutions.
 
We have the policies and procedures in place to appropriately manage credit risk. Such policies and procedures include requirements for physical possession or control of pledged collateral, restrictions on borrowing, verifications of collateral and continuous monitoring of borrowings and the borrower's financial condition and creditworthiness. We expect to collect all amounts due according to the contractual terms of our Advances, based on the collateral pledged to us as security for Advances, our credit analyses of our members' financial condition and our credit extension and collateral policies. For information related to our credit risk on Advances and allowance for credit losses, see Note 8 – Allowance for Credit Losses.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Note 7 - Mortgage Loans Held for Portfolio
 
Through the MPP, we hold mortgage loans that are purchased from PFIs. These loans are primarily serviced by PFIs or an approved mortgage servicer.  These mortgage loans are credit-enhanced as described below or guaranteed or insured by Federal agencies.
 
The following tables detail information on Mortgage Loans Held for Portfolio:
Mortgage Loans Held for Portfolio by Term
 
March 31,
2011
 
December 31,
2010
Fixed-rate medium-term (1) mortgages
 
$
890,488
 
 
$
928,797
 
Fixed-rate long-term (2) mortgages
 
5,538,471
 
 
5,735,744
 
Total Mortgage Loans Held for Portfolio, UPB
 
6,428,959
 
 
6,664,541
 
Unamortized premiums
 
62,079
 
 
61,181
 
Unamortized discounts
 
(29,635
)
 
(30,592
)
Hedging adjustments
 
7,800
 
 
7,946
 
Allowance for loan losses, net
 
(1,000
)
 
(500
)
Total Mortgage Loans Held for Portfolio
 
$
6,468,203
 
 
$
6,702,576
 
 
(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.
 
Mortgage Loans Held for Portfolio by Type
 
March 31,
2011
 
December 31,
2010
Conventional
 
$
5,353,767
 
 
$
5,653,969
 
FHA
 
1,075,192
 
 
1,010,572
 
Total Mortgage Loans Held for Portfolio, UPB
 
$
6,428,959
 
 
$
6,664,541
 
 
The conventional mortgage loans under the MPP are supported by some combination of PMI, SMI, and the LRA, in addition to the associated property as collateral.  The LRA funds, to the extent available, are used to offset any losses that may occur.  Where applicable, a portion of the periodic interest payments on the loans 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 PMI until the LRA is exhausted.  After the LRA is exhausted, pools covered by SMI are protected 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. In November 2010, we began offering an MPP replacement product (MPP Advantage), which eliminated the SMI policy coverage and replaced it with a supplemental LRA account.
 
For information related to our credit risk on mortgage loans and allowance for credit losses, see Note 8 – Allowance for Credit Losses.
 
Note 8 — Allowance for Credit Losses
 
We have established an allowance methodology for each of our portfolio segments: credit products; government-guaranteed or insured Mortgage Loans Held for Portfolio; conventional Mortgage Loans Held for Portfolio; term securities purchased under agreements to resell; and term federal funds sold. A description of the allowance methodologies related to our portfolio segments is disclosed in Note 10 - Allowance for Credit Losses in our 2010 Form 10-K.
 
Credit Products. Using a risk-based approach and taking into consideration each borrower's financial strength, we consider the types and level of collateral to be the primary tool for managing credit products. At March 31, 2011, and December 31, 2010, we had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of our outstanding extensions of credit.
 


 

At March 31, 2011, and December 31, 2010, we did not have any credit products that were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the three months ended March 31, 2011, or March 31, 2010.
 
Based upon the collateral held as security, our credit extension and collateral policies, our credit analysis and the repayment history on credit products, we have not recorded any allowance for credit losses on credit products or any liability to reflect an allowance for credit losses for off-balance sheet credit exposures at March 31, 2011, or December 31, 2010. For additional information about off-balance sheet credit exposure, see Note 15 – Commitments and Contingencies.
 
Mortgage Loans Government-guaranteed or Insured. Based upon our assessment of our servicers, we did not establish an allowance for credit losses for government-guaranteed or insured mortgage loans at March 31, 2011, or December 31, 2010. Further, due to the government guarantee or insurance, these mortgage loans are not placed on nonaccrual status.
 
Mortgage Loans – Conventional.
 
Collectively Evaluated Mortgage Loans. Our credit risk analysis includes collectively evaluating conventional loans for impairment within each pool purchased under the MPP. This credit risk analysis considers MPP pool-specific attribute data, estimated liquidation value of real estate collateral held, estimated costs associated with maintaining and disposing of the collateral, and credit enhancements. The measurement of our allowance for loan losses consists of evaluating (i) homogeneous pools of delinquent residential mortgage loans; (ii) any remaining exposure to loans paid in full by the servicers; and (iii) the current portion of the loan portfolio.
 
Rollforward of Allowance for Loan Losses on Mortgage Loans. The table below presents a rollforward of our allowance for loan losses on conventional mortgage loans for the three months ended March 31, 2011, and the recorded investment in mortgage loans collectively evaluated for impairment at March 31, 2011. We did not have any allowance for loan losses as of March 31, 2010. We did not have any loans individually assessed for impairment at March 31, 2011. The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts (which may include the basis adjustment related to any gain or loss on a delivery commitment prior to being funded) and direct write-downs. The recorded investment is not net of any valuation allowance.
Allowance for Loan Losses:
 
 
Balance, January 1, 2011
 
$
500
 
   Charge-offs
 
(476
)
   Recoveries
 
 
   Provision (reversal) for loan losses
 
976
 
Balance, March 31, 2011
 
$
1,000
 
 
 
 
Recorded Investment:
 
 
   Conventional loans collectively evaluated for impairment
 
$
5,390,587
 
Total recorded investment
 
$
5,390,587
 
 
Credit Enhancements. Our allowance for loan losses considers the credit enhancements associated with conventional mortgage loans under the MPP. Specifically, the determination of the allowance generally factors in PMI, SMI, and LRA, including pooled LRA for those members participating in an aggregate MPP pool. Any incurred losses that would be recovered from the credit enhancements are not reserved as part of our allowance for loan losses.
 
The following table details the changes in the LRA:
 
 
Three Months Ended
 
Year Ended
LRA Activity
 
March 31, 2011
 
December 31, 2010
Balance of LRA at beginning of period
 
$
21,141
 
 
$
23,754
 
Additions
 
1,873
 
 
4,738
 
Claims
 
(2,829
)
 
(6,526
)
Scheduled distributions
 
(372
)
 
(825
)
Balance of LRA at end of period
 
$
19,813
 
 
$
21,141
 


 

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans (movement of loans through the various stages of delinquency), non-accrual loans, loans in process of foreclosure, and impaired loans. The table below summarizes our key credit quality indicators for mortgage loans at March 31, 2011, and December 31, 2010:
 
 
 
March 31, 2011
 
Mortgage Loans Held for Portfolio
 
Conventional Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
 
$
82,803
 
 
$
38,094
 
 
$
120,897
 
Past due 60-89 days delinquent
 
29,420
 
 
6,341
 
 
35,761
 
Past due 90 days or more delinquent
 
128,588
 
 
951
 
 
129,539
 
Total past due
 
240,811
 
 
45,386
 
 
286,197
 
Total current loans
 
5,149,776
 
 
1,060,424
 
 
6,210,200
 
Total mortgage loans, recorded investment
 
5,390,587
 
 
1,105,810
 
 
6,496,397
 
Net unamortized premiums
 
(7,153
)
 
(25,291
)
 
(32,444
)
Hedging adjustments
 
(6,671
)
 
(1,129
)
 
(7,800
)
Accrued interest receivable
 
(22,996
)
 
(4,198
)
 
(27,194
)
Total Mortgage Loans Held for Portfolio, UPB
 
$
5,353,767
 
 
$
1,075,192
 
 
$
6,428,959
 
 
 
 
 
 
 
 
Other delinquency statistics
 
 
 
 
 
 
In process of foreclosure, included above  (1)
 
$
90,904
 
 
$
 
 
$
90,904
 
Serious delinquency rate (2)
 
2.39
%
 
0.09
%
 
1.99
%
Past due 90 days or more still accruing interest
 
$
128,588
 
 
$
951
 
 
$
129,539
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
Mortgage Loans Held for Portfolio
 
Conventional Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
 
$
87,520
 
 
$
39,155
 
 
$
126,675
 
Past due 60-89 days delinquent
 
30,568
 
 
5,819
 
 
36,387
 
Past due 90 days or more delinquent
 
127,449
 
 
914
 
 
128,363
 
Total past due
 
245,537
 
 
45,888
 
 
291,425
 
Total current loans
 
5,445,115
 
 
994,744
 
 
6,439,859
 
Total mortgage loans, recorded investment 
 
5,690,652
 
 
1,040,632
 
 
6,731,284
 
Net unamortized premiums
 
(5,732
)
 
(24,857
)
 
(30,589
)
Hedging adjustments
 
(6,701
)
 
(1,245
)
 
(7,946
)
Accrued interest receivable
 
(24,250
)
 
(3,958
)
 
(28,208
)
Total Mortgage Loans Held for Portfolio, UPB
 
$
5,653,969
 
 
$
1,010,572
 
 
$
6,664,541
 
 
 
 
 
 
 
 
Other delinquency statistics
 
 
 
 
 
 
In process of foreclosure, included above  (1)
 
$
85,803
 
 
$
 
 
$
85,803
 
Serious delinquency rate (2)
 
2.24
%
 
0.09
%
 
1.91
%
Past due 90 days or more still accruing interest
 
$
127,449
 
 
$
914
 
 
$
128,363
 
 
(1)    Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due categories depending on their delinquency status.
(2)    Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class recorded investment.
 
We did not have any MPP loans classified as real estate owned at March 31, 2011, or December 31, 2010, as the servicers foreclose in their name and then pay off the delinquent loans at the completion of the foreclosure or liquidate the foreclosed properties. Subsequently the servicers may submit claims to us for any losses. We did not have any non-accrual loans at March 31, 2011, or December 31, 2010, based on our analysis of loans being well secured and in the process of collection as a result of the credit enhancements and schedule/scheduled settlement. In addition, there were no troubled debt restructurings related to mortgage loans during the three months ended March 31, 2011, or 2010.
 


 

Term Securities Purchased Under Agreements to Resell and Term Federal Funds Sold. We held no term Securities Purchased Under Agreements to Resell at March 31, 2011, or December 31, 2010. All investments in Federal Funds Sold as of March 31, 2011, and December 31, 2010, were repaid according to the contractual terms.
 
Note 9 - Derivative and Hedging Activities
 
Managing Credit Risk on Derivatives. We are subject to credit risk due to potential nonperformance by counterparties to the derivative agreements. The degree of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. We manage counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies and Finance Agency regulations. We require collateral agreements on all derivatives that establish collateral delivery thresholds. 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. Based on credit analyses and collateral requirements, our management does not anticipate any credit losses on our derivative agreements. See Note 14 – Estimated Fair Values for discussion regarding our fair value methodology for derivative assets/liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.
 
The following table presents our credit risk exposure on derivative instruments, excluding circumstances where a counterparty's pledged collateral to us exceeds our net position. Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and of cash collateral held or placed with the same counterparties.
 
March 31,
2011
 
December 31,
2010
Total net exposure at fair value
$
14,491
 
 
$
6,173
 
Cash collateral held
 
 
 
   Net positive exposure after cash collateral
14,491
 
 
6,173
 
Other collateral
 
 
 
   Net exposure after collateral
$
14,491
 
 
$
6,173
 
 
The net exposure at fair value includes accrued interest receivable of $623 and accrued interest payable of $249 at March 31, 2011, and December 31, 2010, respectively.
 
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.  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, 2011, was $584,920 for which we have posted collateral, including accrued interest, of $9,723 in the normal course of business.  In addition, we held other derivative instruments in a net liability position of $214 that are not subject to credit support agreements containing credit-risk related contingent features.  If our credit rating had been lowered by a major credit rating agency (from AAA to AA+) we could have been required to deliver up to an additional $469,352 of collateral (at fair value) to our derivative counterparties at March 31, 2011. Our senior credit rating was not lowered during the previous 12 months, but our outlook was lowered from stable to negative on April 20, 2011. This rating action reflects the revision of the outlook on the long-term sovereign credit rating on the United States of America from stable to negative. In the application of the Government Related Entities criteria, our rating is constrained by the long-term sovereign rating of the United States.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Financial Statement Effect and Additional Financial Information.
 
Derivative Notional Amounts.  The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid.
 
The following table presents the fair value of derivative instruments. For purposes of this disclosure, the derivative values include the fair values of derivatives and the related accrued interest.
 
 
Notional
 
Fair Value
 
Fair Value
 
 
Amount of
 
of Derivative
 
of Derivative
March 31, 2011
 
Derivatives
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest-rate swaps
 
$
33,278,816
 
 
$
203,728
 
 
$
776,183
 
Interest-rate futures/forwards
 
 
 
 
 
 
Total derivatives designated as hedging instruments
 
33,278,816
 
 
203,728
 
 
776,183
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
 
687,492
 
 
144
 
 
1,180
 
Interest-rate caps/floors
 
183,000
 
 
3,045
 
 
 
Interest-rate futures/forwards
 
22,900
 
 
 
 
149
 
Mortgage delivery commitments
 
21,771
 
 
17
 
 
65
 
Total derivatives not designated as hedging instruments
 
915,163
 
 
3,206
 
 
1,394
 
Total derivatives before adjustments
 
$
34,193,979
 
 
206,934
 
 
777,577
 
Netting adjustments
 
 
 
 
(192,443
)
 
(192,443
)
Cash collateral and related accrued interest
 
 
 
 
 
 
(9,723
)
Total adjustments (1)
 
 
 
 
(192,443
)
 
(202,166
)
Total derivatives, net
 
 
 
 
$
14,491
 
 
$
575,411
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest-rate swaps
 
$
32,667,683
 
 
$
197,382
 
 
$
873,504
 
Interest-rate futures/forwards
 
 
 
 
 
 
Total derivatives designated as hedging instruments
 
32,667,683
 
 
197,382
 
 
873,504
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
 
497,596
 
 
364
 
 
1,350
 
Interest-rate caps/floors
 
75,000
 
 
1,369
 
 
 
Interest-rate futures/forwards
 
126,085
 
 
241
 
 
542
 
Mortgage delivery commitments
 
57,063
 
 
275
 
 
469
 
Total derivatives not designated as hedging instruments
 
755,744
 
 
2,249
 
 
2,361
 
Total derivatives before adjustments
 
$
33,423,427
 
 
199,631
 
 
875,865
 
Netting adjustments
 
 
 
 
(193,458
)
 
(193,458
)
Cash collateral and related accrued interest
 
 
 
 
 
 
(25,377
)
Total adjustments (1)
 
 
 
 
(193,458
)
 
(218,835
)
Total derivatives, net
 
 
 
 
$
6,173
 
 
$
657,030
 
 
(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.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

The following table details the components of Net Gains (Losses) on Derivatives and Hedging Activities reported in Other Income (Loss):
 
 
Three Months Ended March 31,
Net Gains (Losses) on Derivatives and Hedging Activities by Type
 
2011
 
2010
Net gain (loss) related to fair-value hedge ineffectiveness:
 
 
 
 
Interest-rate swaps
 
$
85
 
 
$
(1,408
)
Interest-rate futures/forwards
 
(45
)
 
 
Total net gain (loss) related to fair value hedge ineffectiveness
 
40
 
 
(1,408
)
Net gain (loss) for derivatives not designated as hedging instruments:
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
Interest-rate swaps
 
168
 
 
(406
)
Interest-rate caps/floors
 
(333
)
 
 
Interest-rate futures/forwards
 
69
 
 
(543
)
Net interest settlements
 
23
 
 
935
 
Mortgage delivery commitments
 
(94
)
 
247
 
Total net gain (loss) for derivatives not designated as hedging instruments
 
(167
)
 
233
 
Net Gains (Losses) on Derivatives and Hedging Activities
 
$
(127
)
 
$
(1,175
)
 
The following table details, 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:
 
 
Gain (Loss)
 
Gain (Loss)
 
Net Fair-
 
 
Effect on
 
 
on
 
on Hedged
 
Value Hedge
 
 
Net Interest
Three Months Ended March 31, 2011
 
Derivative
 
Item
 
Ineffectiveness
 
 
Income (1)
Advances
 
$
62,247
 
 
$
(61,611
)
 
$
636
 
 
 
$
(81,394
)
CO Bonds
 
(21,829
)
 
21,110
 
 
(719
)
 
 
32,174
 
MPP (2)
 
(422
)
 
377
 
 
(45
)
 
 
(281
)
AFS
 
20,164
 
 
(19,996
)
 
168
 
 
 
(17,764
)
Total
 
$
60,160
 
 
$
(60,120
)
 
$
40
 
 
 
$
(67,265
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2010
 
 
 
 
 
 
 
 
 
Advances
 
$
(24,676
)
 
$
23,432
 
 
$
(1,244
)
 
 
$
(136,053
)
CO Bonds
 
247
 
 
(200
)
 
47
 
 
 
64,652
 
MPP (2)
 
 
 
 
 
 
 
 
 
AFS
 
(26,712
)
 
26,501
 
 
(211
)
 
 
(17,053
)
Total
 
$
(51,141
)
 
$
49,733
 
 
$
(1,408
)
 
 
$
(88,454
)
 
(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.
(2)    The effect of MPP hedges on Net Interest Income includes derivatives and the related hedged items in both fair-value and economic hedging relationships.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Note 10 - Deposits
 
Demand, overnight, and other deposits pay interest based on a daily interest rate. Time deposits pay interest based on a fixed rate determined at the issuance of the deposit.
 
The following table details Interest-Bearing and Non-Interest-Bearing Deposits:
Type of Deposits
 
March 31,
2011
 
December 31,
2010
Interest-Bearing:
 
 
 
 
Demand and overnight
 
$
608,965
 
 
$
559,872
 
Time
 
15,000
 
 
15,000
 
Other
 
22
 
 
22
 
Total Interest-Bearing
 
623,987
 
 
574,894
 
Non-Interest-Bearing:  (1)
 
 
 
 
 
 
Other
 
9,979
 
 
10,034
 
Total Non-Interest Bearing
 
9,979
 
 
10,034
 
Total Deposits
 
$
633,966
 
 
$
584,928
 
 
(1)    Non-Interest-Bearing includes pass-through deposit reserves from members.
 
Note 11 - Consolidated Obligations
 
Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability regulation of the Finance Agency authorizes it to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of March 31, 2011, or through the filing date of this report, we do not believe that it is probable that we will be asked to do so. The par values of the 12 FHLBanks' outstanding Consolidated Obligations, including Consolidated Obligations held by other FHLBanks, were approximately $766.0 billion and $796.4 billion at March 31, 2011, and December 31, 2010, respectively.
 
The following tables detail our participation in CO Bonds outstanding:
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amount
 
WAIR%
 
Amount
 
WAIR%
Due in 1 year or less
 
$
14,949,770
 
 
0.80
 
 
$
15,976,170
 
 
0.72
 
Due after 1 year through 2 years
 
3,435,600
 
 
1.66
 
 
2,967,550
 
 
2.14
 
Due after 2 years through 3 years
 
2,245,625
 
 
2.17
 
 
2,520,405
 
 
2.25
 
Due after 3 years through 4 years
 
1,396,500
 
 
2.87
 
 
1,586,900
 
 
2.81
 
Due after 4 years through 5 years
 
2,086,250
 
 
2.27
 
 
1,771,350
 
 
2.24
 
Thereafter
 
7,099,350
 
 
4.06
 
 
6,957,350
 
 
4.08
 
Total CO Bonds, par value
 
31,213,095
 
 
1.93
 
 
31,779,725
 
 
1.90
 
Unamortized bond premiums
 
46,729
 
 
 
 
 
48,504
 
 
 
 
Unamortized bond discounts
 
(22,549
)
 
 
 
 
(23,421
)
 
 
 
Hedging adjustments
 
49,314
 
 
 
 
 
70,429
 
 
 
 
Total CO Bonds
 
$
31,286,589
 
 
 
 
 
$
31,875,237
 
 
 
 
 
Consolidated Obligations are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that use a variety of indices for interest-rate resets including LIBOR, treasury bills, prime, and others. At March 31, 2011, and December 31, 2010, 61% and 62%, respectively, of our fixed-rate CO Bonds at par were swapped to a variable rate. At both period ends, 100% of our variable-rate CO Bonds were swapped to a different variable rate index.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

The following tables summarize our participation in CO Bonds outstanding by feature and contractual maturity or next call date:
Redemption Feature
 
March 31,
2011
 
December 31,
2010
Non-callable
 
$
22,479,095
 
 
$
23,801,725
 
Callable
 
8,734,000
 
 
7,978,000
 
Total CO Bonds, par value
 
$
31,213,095
 
 
$
31,779,725
 
Year of Contractual Maturity or Next Call Date
 
March 31,
2011
 
December 31,
2010
Due in 1 year or less
 
$
22,929,770
 
 
$
23,217,170
 
Due after 1 year through 2 years
 
2,447,600
 
 
2,357,550
 
Due after 2 years through 3 years
 
1,317,625
 
 
1,737,405
 
Due after 3 years through 4 years
 
956,500
 
 
946,900
 
Due after 4 years through 5 years
 
532,250
 
 
469,350
 
Thereafter
 
3,029,350
 
 
3,051,350
 
Total CO Bonds, par value
 
$
31,213,095
 
 
$
31,779,725
 
 
Discount Notes. Our participation in Discount Notes, all of which are due within one year, was as follows:
Discount Notes
 
March 31,
2011
 
December 31,
2010
Book value
 
$
8,489,292
 
 
$
8,924,687
 
Par value
 
8,490,601
 
 
8,926,179
 
Weighted average effective interest rate
 
0.14
%
 
0.15
%
 
At March 31, 2011, and December 31, 2010, 8% and 5%, respectively, of our fixed-rate Discount Notes at par were swapped to a variable rate.
 
Note 12 - Capital
    
We are subject to capital requirements under our capital plan and the Finance Agency rules and regulations.
 
For regulatory purposes, AOCI is not considered capital; MRCS, however, is considered capital.
 
As detailed in the following table, we were in compliance with the Finance Agency's capital requirements at March 31, 2011, and December 31, 2010.
 
 
March 31, 2011
 
December 31, 2010
Regulatory Capital Requirements
 
Required
 
Actual
 
Required
 
Actual
Risk-based capital
 
$
927,012
 
 
$
2,709,535
 
 
$
927,965
 
 
$
2,695,980
 
Regulatory permanent capital-to-asset ratio
 
4.00
%
 
6.17
%
 
4.00
%
 
6.00
%
Regulatory permanent capital
 
$
1,756,025
 
 
$
2,709,535
 
 
$
1,797,195
 
 
$
2,695,980
 
Leverage ratio
 
5.00
%
 
9.26
%
 
5.00
%
 
9.00
%
Leverage capital
 
$
2,195,032
 
 
$
4,064,302
 
 
$
2,246,494
 
 
$
4,043,970
 
 
Mandatorily Redeemable Capital Stock. At March 31, 2011, and December 31, 2010, we had $658,363 in capital stock subject to mandatory redemption.  These amounts have been classified as a liability in the Statements of Condition. For the three months ended March 31, 2011, and 2010, dividends on MRCS of $4,825 and $3,579, respectively, were recorded as Interest Expense.
 
There were 31 former members holding MRCS at both March 31, 2011, and December 31, 2010, which includes eight institutions acquired by the FDIC in its capacity as receiver. As of March 31, 2011, there was $114,802 of MRCS contractually due within the following 12 month period.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Excess Capital Stock.  Excess stock is defined as the amount of stock held by a member or former member in excess of that institution's minimum stock requirement.  Finance Agency rules limit the ability of an FHLBank to create member excess stock under certain circumstances including if excess stock exceeds 1% of Total Assets or if the issuance of excess stock would cause excess stock to exceed 1% of Total Assets.  Our excess stock totaled $1.2 billion and $1.1 billion at March 31, 2011, and December 31, 2010, respectively, which exceeded 1% of our Total Assets.  Therefore, we are currently not permitted to issue new excess stock to members or distribute stock dividends.
 
Stock Redemption Requests. At March 31, 2011, there was $19,669 of stock not considered MRCS that is subject to a redemption request within the next 12 months.
 
Note 13 - Segment Information
 
We have identified two primary operating segments:
 
Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), 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.
 
The following table details our financial performance by operating segment:
 
 
Three Months Ended
March 31, 2011
 
Traditional
 
MPP
 
Total
Net Interest Income
 
$
34,679
 
 
$
25,566
 
 
$
60,245
 
Provision for Credit Losses
 
 
 
(976
)
 
(976
)
Other Income (Loss)
 
(18,052
)
 
(70
)
 
(18,122
)
Other Expenses
 
12,956
 
 
609
 
 
13,565
 
Income Before Assessments
 
3,671
 
 
23,911
 
 
27,582
 
Total Assessments
 
1,368
 
 
6,344
 
 
7,712
 
Net Income
 
$
2,303
 
 
$
17,567
 
 
$
19,870
 
 
 
 
 
 
 
 
March 31, 2010
 
 
 
 
 
 
Net Interest Income
 
$
39,297
 
 
$
22,350
 
 
$
61,647
 
Provision for Credit Losses
 
 
 
 
 
 
Other Income (Loss)
 
(6,019
)
 
(296
)
 
(6,315
)
Other Expenses
 
10,395
 
 
591
 
 
10,986
 
Income Before Assessments
 
22,883
 
 
21,463
 
 
44,346
 
Total Assessments
 
6,363
 
 
5,694
 
 
12,057
 
Net Income
 
$
16,520
 
 
$
15,769
 
 
$
32,289
 
 
The following table details asset balances by segment:
Asset Balances by Segment
 
Traditional
 
MPP
 
Total
March 31, 2011
 
$
37,432,429
 
 
$
6,468,203
 
 
$
43,900,632
 
December 31, 2010
 
38,227,297
 
 
6,702,576
 
 
44,929,873
 
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Note 14 - Estimated Fair Values
 
The fair value amounts, recorded on the Statements of Condition and presented in the note disclosures, have been determined 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, 2011, and December 31, 2010. Although we use our best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates.
 
The fair value summary table 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 and liabilities.
 
 
March 31, 2011
 
December 31, 2010
 
 
Carrying
 
Estimated
 
Carrying
 
Estimated
Financial Instruments
 
Value
 
Fair Value
 
Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash and Due from Banks
 
$
315,013
 
 
$
315,013
 
 
$
11,676
 
 
$
11,676
 
Interest-Bearing Deposits
 
53
 
 
53
 
 
3
 
 
3
 
Securities Purchased Under Agreements to Resell
 
125,000
 
 
125,000
 
 
750,000
 
 
750,000
 
Federal Funds Sold
 
7,521,000
 
 
7,521,044
 
 
7,325,000
 
 
7,325,100
 
AFS securities
 
3,169,248
 
 
3,169,248
 
 
3,237,916
 
 
3,237,916
 
HTM securities
 
8,458,946
 
 
8,479,349
 
 
8,471,827
 
 
8,513,391
 
Advances
 
17,679,028
 
 
17,768,377
 
 
18,275,364
 
 
18,354,184
 
Mortgage Loans Held for Portfolio, net
 
6,468,203
 
 
6,736,180
 
 
6,702,576
 
 
7,017,784
 
Accrued Interest Receivable
 
97,888
 
 
97,888
 
 
98,924
 
 
98,924
 
Derivative Assets
 
14,491
 
 
14,491
 
 
6,173
 
 
6,173
 
Rabbi Trust assets (included in Other Assets)
 
13,413
 
 
13,413
 
 
12,893
 
 
12,893
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deposits
 
633,966
 
 
633,966
 
 
584,928
 
 
584,928
 
Consolidated Obligations:
 
 
 
 
 
 
 
 
Discount Notes
 
8,489,292
 
 
8,489,429
 
 
8,924,687
 
 
8,924,782
 
CO Bonds
 
31,286,589
 
 
31,515,207
 
 
31,875,237
 
 
32,147,040
 
Accrued Interest Payable
 
144,368
 
 
144,368
 
 
133,862
 
 
133,862
 
Derivative Liabilities
 
575,411
 
 
575,411
 
 
657,030
 
 
657,030
 
MRCS
 
658,363
 
 
658,363
 
 
658,363
 
 
658,363
 
 
Fair Value Hierarchy.  We record AFS securities, Derivative Assets, Rabbi Trust assets (publicly-traded mutual funds), and Derivative Liabilities at fair value. The fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value for assets and liabilities that are carried at fair value, both on a recurring and non-recurring basis, on the Statement of Condition.  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.  
 
A description of the application of the fair value hierarchy is disclosed in our 2010 Form 10-K, and no changes have been made in the current year.
 
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 at fair value at the beginning of the quarter in which the changes occur.
 
Valuation Techniques and Significant Inputs. A description of the valuation techniques and significant inputs is disclosed in our 2010 Form 10-K, and no changes have been made in the current year, except as disclosed below.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Investment securities – non-MBS.  The estimated fair value is determined using market-observable price quotes from dealers or third-party pricing services, such as the Composite Bloomberg Bond Trade screen, thus falling under the market approach. This price represents executable prices for identical assets.
 
Fair Value on a Recurring Basis. The following tables detail the fair value of financial assets and liabilities by level within the fair value hierarchy which are recorded on a recurring basis on our Statements of Condition:
 
 
 
 
 
 
 
 
 
 
Netting
March 31, 2011
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Adjustment (1)
AFS securities:
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
1,912,730
 
 
$
 
 
$
1,912,730
 
 
$
 
 
$
 
TLGP debentures
 
323,679
 
 
 
 
323,679
 
 
 
 
 
Private-label RMBS
 
932,839
 
 
 
 
 
 
932,839
 
 
 
Total AFS securities
 
3,169,248
 
 
 
 
2,236,409
 
 
932,839
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
14,474
 
 
 
 
206,917
 
 
 
 
(192,443
)
Interest-rate futures/forwards
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
17
 
 
 
 
17
 
 
 
 
 
Total Derivative Assets
 
14,491
 
 
 
 
206,934
 
 
 
 
(192,443
)
Rabbi Trust (included in Other Assets)
 
13,413
 
 
13,413
 
 
 
 
 
 
 
Total assets at fair value
 
$
3,197,152
 
 
$
13,413
 
 
$
2,443,343
 
 
$
932,839
 
 
$
(192,443
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
$
575,197
 
 
$
 
 
$
777,363
 
 
$
 
 
$
(202,166
)
Interest-rate futures/forwards
 
149
 
 
 
 
149
 
 
 
 
 
Mortgage delivery commitments
 
65
 
 
 
 
65
 
 
 
 
 
Total Derivative Liabilities
 
575,411
 
 
 
 
777,577
 
 
 
 
(202,166
)
Total liabilities at fair value
 
$
575,411
 
 
$
 
 
$
777,577
 
 
$
 
 
$
(202,166
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
AFS securities:
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
1,930,258
 
 
$
 
 
$
1,930,258
 
 
$
 
 
$
 
TLGP debentures
 
325,117
 
 
 
 
325,117
 
 
 
 
 
Private-label RMBS
 
982,541
 
 
 
 
 
 
982,541
 
 
 
Total AFS securities
 
3,237,916
 
 
 
 
2,255,375
 
 
982,541
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
5,657
 
 
 
 
199,115
 
 
 
 
(193,458
)
Interest-rate futures/forwards
 
241
 
 
 
 
241
 
 
 
 
 
Mortgage delivery commitments
 
275
 
 
 
 
275
 
 
 
 
 
Total Derivative Assets
 
6,173
 
 
 
 
199,631
 
 
 
 
(193,458
)
Rabbi Trust (included in Other Assets)
 
12,893
 
 
12,893
 
 
 
 
 
 
 
Total assets at fair value
 
$
3,256,982
 
 
$
12,893
 
 
$
2,455,006
 
 
$
982,541
 
 
$
(193,458
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
$
656,018
 
 
$
 
 
$
874,854
 
 
$
 
 
$
(218,836
)
Interest-rate futures/forwards
 
543
 
 
 
 
543
 
 
 
 
 
Mortgage delivery commitments
 
469
 
 
 
 
469
 
 
 
 
 
Total Derivative Liabilities
 
657,030
 
 
 
 
875,866
 
 
 
 
(218,836
)
Total liabilities at fair value
 
$
657,030
 
 
$
 
 
$
875,866
 
 
$
 
 
$
(218,836
)
 
(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.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

The table below presents a reconciliation of our AFS Private-label RMBS measured at fair value on a recurring basis by using Level 3 significant inputs. We did not measure our AFS Private-label RMBS at fair value on a recurring basis during the three months ended March 31, 2010.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
AFS Private-label RMBS
Balance at December 31, 2010
 
$
982,541
 
Total realized and unrealized gains (losses):
 
 
Included in net gains on sale of AFS securities
 
 
Included in net gains (losses) on changes in fair value included in Other Income (Loss)
 
(17,161
)
Included in AOCI
 
24,512
 
Purchases, issuances, sales and settlements:
 
 
Purchases
 
 
Issuances
 
 
Sales
 
 
Settlements
 
(57,053
)
Transfers from HTM to AFS securities
 
 
Balance at March 31, 2011
 
$
932,839
 
 
 
 
Total amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period, included in net gains (losses) on changes in fair value
 
$
(17,161
)
 
Fair Value on a Nonrecurring Basis. We measure certain HTM securities at fair value on a nonrecurring basis. These assets are not carried 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). These amounts fall under Level 3 in the fair value hierarchy.
 
As of March 31, 2011, and December 31, 2010, none of our HTM securities were carried at fair value.
 
Note 15 - Commitments and Contingencies
 
The following table summarizes our off-balance-sheet commitments at their notional amounts:
 
 
March 31, 2011
 
December 31, 2010
By Commitment
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1) 
 
$
45,582
 
 
$
456,160
 
 
$
501,742
 
 
$
41,616
 
 
$
485,220
 
 
$
526,836
 
Unused lines of credit
 
778,246
 
 
 
 
778,246
 
 
762,418
 
 
 
 
762,418
 
Commitments to fund additional Advances (2)
 
32,850
 
 
 
 
32,850
 
 
15,633
 
 
 
 
15,633
 
Commitment to fund or purchase mortgage loans
 
21,771
 
 
 
 
21,771
 
 
57,063
 
 
 
 
57,063
 
Unsettled CO Bonds, at par (3)
 
1,090,000
 
 
 
 
1,090,000
 
 
412,000
 
 
 
 
412,000
 
Unsettled Discount Notes, at par
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)    We had no outstanding commitments to issue standby letters of credit at March 31, 2011, or December 31, 2010.
(2)    Commitments to fund additional Advances are generally for periods up to 6 months.
(3)    Unsettled CO Bonds of $1,065,000 and $250,000, at March 31, 2011, and December 31, 2010, respectively, were hedged with associated interest-rate swaps.
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
 

Commitments to Extend Credit. Standby letters of credit are executed for members for a fee. A standby letter of credit is a 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. The original terms of these standby letters of credit, including related commitments, range from less than three months to 20 years, including a final expiration in 2029. The carrying value of guarantees related to standby letters of credit is recorded in Other Liabilities and was $6,746 and $5,859 at March 31, 2011, and December 31, 2010, 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. Based on credit analyses performed by us as well as collateral requirements, we have not deemed it necessary to record any additional liability on these commitments. Commitments to extend credit are fully collateralized at the time of issuance. See Note 6 – Advances for more information.
 
Commitments to Fund or Purchase Mortgage Loans. Commitments that unconditionally obligate us to purchase mortgage loans are generally for periods not to exceed 91 days. Such commitments are reported as Derivative Assets or Derivative Liabilities at their fair value.
 
Pledged Collateral. We generally execute derivatives with large banks and major broker-dealers and generally enter into bilateral pledge (collateral) agreements.  We had pledged $15,550 and $31,200 of cash collateral, at par, at March 31, 2011, and December 31, 2010, respectively. At March 31, 2011, and December 31, 2010, we had not pledged any securities as collateral.
 
Legal Proceedings. We are subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, 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.
 
Further discussion of other commitments and contingencies is provided in Note 6 – Advances; Note 7 – Mortgage Loans Held for Portfolio; Note 9 – Derivative and Hedging Activities; Note 11 – Consolidated Obligations; Note 12 – Capital; and Note 14 – Estimated Fair Value.
 
Note 16 - Transactions with Related Parties
 
Transactions with Related Parties. For purposes of these financial statements, we define related parties as those members and former members and their affiliates with capital stock outstanding in excess of 10% of our total outstanding Capital Stock and MRCS. Transactions with such members are entered into in the normal course of business and are subject to the same eligibility and credit criteria, as well as the same terms and conditions as other similar transactions and do not involve more than the normal risk of collectability.
 
The following table sets forth significant outstanding balances with respect to transactions with related parties.
Related Party Activity
 
March 31,
2011
 
December 31,
2010
Advances, par value
 
$
4,300,000
 
 
$
4,626,477
 
% of Total Advances, par value
 
25
%
 
26
%
Mortgage Loans Held for Portfolio, UPB
 
$
2,765,772
 
 
$
2,863,456
 
% of Total Mortgage Loans Held for Portfolio, UPB
 
43
%
 
43
%
Capital Stock, including MRCS
 
$
618,807
 
 
$
618,807
 
% of Total Capital Stock, including MRCS
 
27
%
 
27
%
 


 
 
Notes to Financial Statements, continued
(Unaudited, $ 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.  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:
Balances with directors' financial institutions
 
March 31,
2011
 
December 31,
2010
Advances, par value
 
$
734,605
 
 
$
4,408,276
 
% of Total Advances, par value
 
4
%
 
25
%
Mortgage Loans Held for Portfolio, UPB
 
$
41,139
 
 
$
758,879
 
% of Total Mortgage Loans Held for Portfolio, UPB
 
1
%
 
11
%
Capital Stock, including MRCS
 
$
82,441
 
 
$
406,555
 
% of Total Capital Stock, including MRCS
 
4
%
 
18
%
 
During the three months ended March 31, 2011, and 2010, we acquired mortgage loans from directors' financial institutions, presented as of the date of the directors' appointments and resignations, as follows:
 
 
Three Months Ended March 31,
 
 
2011
 
2010
Mortgage Loans purchased from directors' financial institutions
 
$
2,254
 
 
$
2,192
 
 


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Presentation.  This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 2010 Form 10-K and the financial statements and related footnotes contained in Item 1. Financial Statements. We use certain acronyms and terms throughout this Form 10-Q which are defined in the Glossary of Terms located after Item 6. Exhibits.
 
As used in this Form 10-Q, unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis.
 
Amounts less than one million may not be reflected in this report and may not appear to agree to the Statement of Income due to rounding in previous quarters.  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 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:
 
changes in our members' deposit flows and credit demands;
membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters;
changes in the general level of housing activity in the United States, the level of refinancing activity and consumer product preferences; and
competitive forces, including, without limitation, other sources of funding available to our members;
 
our ability to introduce new products and services and successfully manage the risks associated with our products and services, including new types of collateral securing Advances;
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 FHLBanks and/or investors in the Consolidated Obligations of the 12 FHLBanks;
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 FHLBanks' credit ratings that could adversely impact the pricing and marketability of our Consolidated Obligations, products, or services;
risk of loss should one or more of the FHLBanks be unable to repay its participation in the Consolidated Obligations, or otherwise be unable to meet its financial obligations;
ability to attract and retain skilled individuals in order to fulfill an anticipated increase in staffing needs due to the evolving regulatory environment;
ability to develop and support technology and information systems 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.
 
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 our mission by providing products and services to our members in a safe, sound, and profitable manner, and by generating a competitive return on their capital investment. See Item 1. Business - Background Information in our 2010 Form 10-K for more information.
 
We group 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, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), and deposits; and
MPP, which consists of mortgage loans purchased from our members.
 
Our principal source of funding is the proceeds from the sale to the public of FHLBank debt instruments, called Consolidated Obligations, which are the joint and several obligation of all 12 FHLBanks.  We obtain additional funds from deposits, other borrowings, and the sale of capital stock to our members.
 
Our primary source of revenue is interest earned on Advances, long- and short-term investments, and mortgage loans purchased from our members.
 
Our Net Interest Income 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, 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 ended in June 2009. Many of the effects of this recession and the world-wide financial crisis continued during the first quarter of 2011, including serious pressures on earnings and capital at many financial institutions, high unemployment rates, high levels of mortgage delinquencies and foreclosures, and depressed housing prices. Delays in processing problem loans contributed to the backlog of distressed properties that has been building up, putting ongoing downward pressure on home prices.
 
According to a press release issued by the FOMC of the Federal Reserve on April 27, 2011, there are signs that the economic recovery is proceeding at a moderate pace, and overall conditions in the labor market are improving gradually.  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 promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the FOMC decided to continue to expand its holdings of securities as announced in November. In particular, the FOMC is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete its purchases of $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The FOMC will regularly


 

review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.
 
Economic data for Indiana and Michigan continue to generally compare unfavorably to national data. The Bureau of Labor Statistics reported that Michigan's preliminary unemployment rate declined to 10.3% for March 2011, while Indiana's preliminary rate decreased to 8.5%, compared to the U.S. rate of 8.8%. Lender Processing Services reported that Indiana had a non-current mortgage rate (loans past due 30 days or more) of 14.3%, and Michigan had a non-current mortgage rate of 13.4% for February 2011, placing both states above the national rate of 13.0%.
 
In its most recent forecast, the Center for Econometric Research at Indiana University stated that its current forecast for the Indiana economy has turned more optimistic for both employment and the growth rate of personal income. The most recent forecast published by the Research Seminar in Quantitative Economics at the University of Michigan states that Michigan recorded a stronger recovery in jobs than the nation from the low point in the third quarter of 2009 until now. However, the University of Michigan economists expect state job growth to to be less than national job growth through 2012. We believe the overall economic outlook for our district is showing some signs of improvement but 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 FHLBanks in the form of Consolidated Obligations, which include CO Bonds and Discount Notes.  Our funding operations depend on debt issued by the Office of Finance, and the issuance of our debt is affected by events in the capital markets.  
 
During the first three months of 2011, the Federal Reserve purchased an additional $320 billion in U.S. Treasury securities as part of its efforts to support interest rates. Market participants are focused on the potential impact of the conclusion of this program on interest rates and the debt markets in general. On February 11, 2011, the U.S. Treasury published "Reforming America's Housing Finance Market: A Report to Congress," a white paper outlining the current U.S. housing finance system and broad steps to move to a new housing finance system. Although the white paper primarily focused on Fannie Mae and Freddie Mac, it did suggest some changes to the FHLBank System. These events did not appear to have a negative impact on our funding costs, as FHLBank funding costs have generally improved since mid-February.
 
Taxable money market fund assets declined by $62 billion during the first quarter of 2011. As a subset of those assets, taxable money market fund investments allocated to the "U.S. Other Agency" category declined by $36 billion during the first quarter of 2011. The SEC's final rule on money market fund reform, which included amendments to SEC Rule 2a-7, became effective on May 5, 2010, with certain aspects of the rule phased in over the remainder of 2010. 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.
 
However, our Discount Notes with remaining maturities of 60 days or less are included in the definition of weekly liquid assets, which has helped maintain investor demand for shorter-term Discount Notes.
 
On April 20, 2011, S&P announced that it affirmed the AAA rating on the FHLBank System's Consolidated Obligations but revised its outlook on our Consolidated Obligations from stable to negative. S&P also affirmed our Bank's AAA issuer credit rating while revising its outlook from stable to negative. These ratings actions reflect S&P's revision of the outlook on the long-term sovereign credit rating of the U.S. government from stable to negative. Due to our status as a GSE and the application of S&P's government-related entity criteria, our issuer rating is constrained by the long-term sovereign credit rating of the U.S. government. The change in outlook has not had a material impact on our funding costs. On April 21, 2011, Moody's announced that it maintains its stable outlook on the Aaa rating of the U.S. government.
 
Our Consolidated Obligations continued to decrease during the first quarter of 2011, declining by $1.0 billion or 3% to $39.8 billion at March 31, 2011. This decrease was primarily due to our lower funding needs resulting from the decline in Advances.
 


 

Summary of Operating Results
 
Our overall results are dependent on the market environment, as well as our members' demand for wholesale funding and sales 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. In addition, certain members may also 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 using either wholesale or retail borrowing.  Conversely, slow economic growth has tended to decrease our members' wholesale borrowing activity.  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.  Advances declined during the first quarter of 2011 due to repayments and decreased demand related to various economic factors such as growth in our members' deposits and low loan demand at our members' institutions.  Mortgage Loans Held for Portfolio also decreased as purchases of mortgage loans were not large enough to fully offset the reduction due to repayments.  
 
The market turmoil in 2008 and 2009 created opportunities to generate spreads well above historic levels on certain types of transactions.  The frequency and level of high-spread investment opportunities diminished during 2010 and spreads on our Advances and short-term investments began to normalize.  We expect Net Interest Income to decline in 2011 if spreads on our mortgage-related assets revert to normal levels. However, these spreads could be influenced by unexpected changes in the market environment.
 


 

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): 
 
 
As of and for the Three Months Ended
 
 
March 31,
2011
 
December 31,
2010
 
September 30,
2010
 
June 30,
2010
 
March 31,
2010
Statement of Condition:
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
43,901
 
 
$
44,930
 
 
$
44,862
 
 
$
45,639
 
 
$
47,072
 
Advances
 
17,679
 
 
18,275
 
 
18,914
 
 
19,989
 
 
21,582
 
Investments (1)
 
19,274
 
 
19,785
 
 
19,294
 
 
18,734
 
 
16,860
 
Mortgage Loans Held for Portfolio
 
6,469
 
 
6,703
 
 
6,487
 
 
6,749
 
 
6,990
 
Allowance for Loan Losses
 
(1
)
 
(1
)
 
 
 
 
 
 
Discount Notes
 
8,489
 
 
8,925
 
 
9,728
 
 
7,434
 
 
11,537
 
CO Bonds
 
31,287
 
 
31,875
 
 
30,548
 
 
33,616
 
 
31,267
 
Total Consolidated Obligations, net
 
39,776
 
 
40,800
 
 
40,276
 
 
41,050
 
 
42,804
 
MRCS
 
658
 
 
658
 
 
782
 
 
781
 
 
751
 
Capital Stock, Class B Putable
 
1,614
 
 
1,610
 
 
1,733
 
 
1,731
 
 
1,732
 
Retained Earnings
 
437
 
 
427
 
 
396
 
 
351
 
 
373
 
AOCI
 
(60
)
 
(90
)
 
(255
)
 
(264
)
 
(344
)
Total Capital
 
1,991
 
 
1,947
 
 
1,874
 
 
1,818
 
 
1,761
 
 
 
 
 
 
 
 
 
 
 
 
Statement of Income:
 
 
 
 
 
 
 
 
 
 
Net Interest Income
 
60
 
 
67
 
 
82
 
 
56
 
 
62
 
Provision for Credit Losses
 
1
 
 
1
 
 
 
 
 
 
 
Net OTTI Credit Losses
 
(18
)
 
(2
)
 
(2)
 
 
(62
)
 
(6
)
Other Income (Loss), excluding Net OTTI Credit Losses
 
 
 
11
 
 
1
 
 
 
 
(1
)
Other Expenses
 
13
 
 
19
 
 
14
 
 
11
 
 
11
 
Total Assessments
 
8
 
 
15
 
 
18
 
 
(4
)
 
12
 
Net Income (Loss)
 
20
 
 
41
 
 
51
 
 
(13
)
 
32
 
 
 
 
 
 
 
 
 
 
 
 
Selected Financial Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average equity (3)
 
4.08
%
 
8.76
%
 
10.96
%
 
(2.90
)%
 
7.42
%
Return on average assets
 
0.18
%
 
0.35
%
 
0.45
%
 
(0.11
)%
 
0.28
%
Dividend payout ratio (4)
 
53.14
%
 
21.40
%
 
12.67
%
 
NM (4)
 
 
26.92
%
Net interest margin (5)
 
0.55
%
 
0.58
%
 
0.73
%
 
0.47
 %
 
0.53
%
Total Capital ratio (at period end) (6)
 
4.54
%
 
4.33
%
 
4.18
%
 
3.98
 %
 
3.74
%
Total regulatory capital ratio (at period end) (7)
 
6.17
%
 
6.00
%
 
6.49
%
 
6.27
 %
 
6.07
%
Average Equity to Average Assets
 
4.43
%
 
4.03
%
 
4.09
%
 
3.77
 %
 
3.74
%
Weighted average dividend rate, Class B stock (8)
 
2.50
%
 
2.00
%
 
1.50
%
 
2.00
 %
 
2.00
%
Par amount of outstanding Consolidated Obligations for all 12 FHLBanks
 
$
765,980
 
 
$
796,374
 
 
$
806,006
 
 
$
846,481
 
 
$
870,928
 
 
(1)    Investments consist of HTM securities, AFS securities, Interest-Bearing Deposits, Federal Funds Sold, Securities Purchased Under Agreements to Resell, and Loans to Other FHLBanks.
(2)    Due to the rounding of quarterly and year-to-date amounts, the actual amount of $0.6 million is shown as zero for the three months ended September 30, 2010.
(3)    Return on average equity is Net Income (Loss) expressed as a percentage of average total capital.
(4)    The dividend payout ratio is calculated by dividing dividends paid in cash during the period by Net Income (Loss) for the period. This ratio is not meaningful for the three months ended June 30, 2010, due to our Net Loss for that period.
(5)    Net interest margin is Net Interest Income expressed as a percentage of average earning assets.
(6)    Total Capital ratio is Capital Stock plus Retained Earnings and AOCI as a percentage of period-end Total Assets.


 

(7)    Total regulatory capital ratio is Capital Stock plus Retained Earnings and MRCS as a percentage of period-end Total Assets.
(8)    Weighted average dividend rates are dividends paid in cash during the period divided by the average of Capital Stock eligible for dividends (i.e., excludes MRCS).
 
Results of Operations for the Three Months Ended March 31, 2011, and 2010
 
Net Income
 
Net Income was $19.9 million for the three months ended March 31, 2011, a decrease of $12.4 million or 38% compared to the same period in 2010. The decrease was primarily due to higher OTTI credit losses on our private-label mortgage-backed securities recognized in Other Income (Loss) that totaled $18.4 million for the first quarter of 2011, compared to $6.1 million for the same period in 2010. Non-credit losses of $17.7 million and $5.8 million, respectively, were reclassified from AOCI to Other Income (Loss). Net Interest Income After Provision for Credit Losses decreased by $2.4 million or 4% for the three months ended March 31, 2011, compared to the same period in 2010.
 
The following table presents the comparative highlights of our results of operations ($ amounts in millions):
 
 
Three Months Ended March 31,
        
 
    
 
 
 
$
 
%
Comparative Highlights
 
2011
 
2010
 
change
 
change
Net Interest Income After Provision for Credit Losses
 
$
59
 
 
$
62
 
 
$
(3
)
 
(4
)%
Other Income (Loss)
 
(18
)
 
(7
)
 
(11
)
 
(187
)%
Other Expenses
 
13
 
 
11
 
 
2
 
 
24
 %
Income Before Assessments
 
28
 
 
44
 
 
(16
)
 
(38
)%
Total Assessments
 
8
 
 
12
 
 
(4
)
 
(36
)%
Net Income
 
$
20
 
 
$
32
 
 
$
(12
)
 
(38
)%
 
Analysis of Results of Operations for the Three Months Ended March 31, 2011, and 2010
 
Net Interest Income After Provision for Credit Losses. 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) the amount earned on the excess of interest-earning assets over interest-bearing liabilities. The sum of these two components, when expressed as a percentage of the average balance of interest-earning assets, equals the net interest margin. 
 
See Net Gains (Losses) on Derivatives and Hedging Activities herein for information on the net effect of derivatives on our Net Interest Income.
 
Items that decreased Net Interest Income After Provision for Credit Losses for the three months ended March 31, 2011, compared to the same period in 2010, included:
 
lower average balances of Advances and Mortgage Loans Held for Portfolio, as shown in the table below;
narrower spreads on Advances and short-term investments;
higher interest expense on MRCS; and
the provision for losses on Mortgage Loans Held for Portfolio.
 
These decreases were partially offset by:
 
higher prepayment fee income on Advances;
higher average balances of Investment Securities, as shown in the table below; and
wider spreads on mortgage-related assets, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment.
 


 

The following tables present average balances, interest income and expense, and average yields of our major categories of interest-earning assets and the sources funding those interest-earning assets ($ amounts in millions): 
 
Three Months Ended March 31,
 
2011
 
2010
 
Average
Balance
 
Interest
Income/
Expense
 
Avg.
Yield
 
Average
Balance
 
Interest
Income/
Expense
 
Avg.
Yield
Assets:
 
 
 
 
 
 
 
 
 
 
 
Federal Funds Sold and Securities Purchased Under Agreements to Resell
$
7,898
 
 
$
4
 
 
0.18
%
 
$
7,978
 
 
$
3
 
 
0.14
%
Investment Securities (1)
11,605
 
 
60
 
 
2.11
%
 
9,841
 
 
65
 
 
2.68
%
Advances (2)
17,923
 
 
42
 
 
0.96
%
 
22,040
 
 
51
 
 
0.94
%
Mortgage Loans Held for Portfolio (2)
6,596
 
 
80
 
 
4.93
%
 
7,141
 
 
91
 
 
5.15
%
Other Assets (interest-earning) (3)
39
 
 
1
 
 
5.46
%
 
120
 
 
 
 
1.33
%
Total interest-earning assets
44,061
 
 
187
 
 
1.72
%
 
47,120
 
 
210
 
 
1.81
%
Other Assets (4)
487
 
 
 
 
 
 
108
 
 
 
 
 
Total Assets
$
44,548
 
 
 
 
 
 
$
47,228
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Capital:
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Deposits
$
699
 
 
 
 
0.04
%
 
$
914
 
 
 
 
0.03
%
Discount Notes
8,611
 
 
3
 
 
0.15
%
 
8,058
 
 
2
 
 
0.12
%
CO Bonds (2)
31,509
 
 
119
 
 
1.53
%
 
34,350
 
 
142
 
 
1.68
%
MRCS
658
 
 
5
 
 
2.97
%
 
755
 
 
4
 
 
1.92
%
Other Borrowings
 
 
 
 
%
 
 
 
 
 
%
Total interest-bearing liabilities
41,477
 
 
127
 
 
1.24
%
 
44,077
 
 
148
 
 
1.36
%
Other Liabilities
1,096
 
 
 
 
 
 
1,385
 
 
 
 
 
Total Capital
1,975
 
 
 
 
 
 
1,766
 
 
 
 
 
Total Liabilities and Capital
$
44,548
 
 
 
 
 
 
$
47,228
 
 
 
 
 
Net Interest Income and net spread on interest-earning assets less interest-bearing liabilities
 
 
$
60
 
 
0.48
%
 
 
 
$
62
 
 
0.45
%
Net interest margin
0.55
%
 
 
 
 
 
0.53
%
 
 
 
 
Average interest-earning assets to interest-bearing liabilities
1.06
 
 
 
 
 
 
1.07
 
 
 
 
 
 
(1)    The average balances of investment securities are reflected at amortized cost; therefore, the resulting yields do not reflect changes in fair value that are reflected as a component of AOCI, nor do they include the effect of OTTI related to non-credit losses. Interest income/expense includes the effect of associated interest-rate exchange agreements.
(2)    Total interest and effective yield/rate includes all other components of interest, including the impact of net interest payments or receipts on derivatives, hedge accounting amortization, and Advance prepayment fees.
(3)    Other Assets (interest-earning) consists of Interest-Bearing Deposits, Loans to Other FHLBanks, and Rabbi Trust assets.
(4)    Includes the non-credit portion of OTTI losses on AFS and HTM securities for purposes of the average balance sheet presentation.
 


 

The following table summarizes changes in Interest Income and Interest Expense between the three months ended March 31, 2011, and 2010 ($ amounts in millions):
 
 
Three Months Ended March 31,
 
2011 over 2010
 
Volume
 
Rate
 
Total
Increase (Decrease) in Interest Income:
 
 
 
 
 
 
 
 
Federal Funds Sold and Securities Purchased Under Agreements to Resell
$
 
 
$
1
 
 
$
1
 
Investment Securities
11
 
 
(16
)
 
(5
)
Advances
(10
)
 
1
 
 
(9
)
Mortgage Loans Held for Portfolio
(7
)
 
(4
)
 
(11
)
Other Assets, net
 
 
1
 
 
1
 
Total
(6
)
 
(17
)
 
(23
)
Increase (Decrease) in Interest Expense:
 
 
 
 
 
 
 
 
Interest-Bearing Deposits
 
 
 
 
 
Discount Notes
 
 
1
 
 
1
 
CO Bonds
(11
)
 
(12
)
 
(23
)
MRCS
 
 
1
 
 
1
 
   Other Borrowings
 
 
 
 
 
Total
(11
)
 
(10
)
 
(21
)
Increase (Decrease) in Net Interest Income Before Provision for Credit Losses
$
5
 
 
$
(7
)
 
$
(2
)
 
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 are 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, 2011, and 2010 ($ amounts in millions): 
 
 
Three Months Ended
 
 
March 31,
Components of Other Income (Loss)
 
2011
 
2010
Total OTTI Losses
 
$
(3
)
 
$
(14
)
Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss)
 
(15
)
 
8
 
Net OTTI Losses
 
(18
)
 
(6
)
Net Gains (Losses) on Derivatives and Hedging Activities
 
 
 
(1
)
Service Fees
 
 
 
 
Standby Letters of Credit Fees
 
 
 
 
Loss on Extinguishment of Debt
 
 
 
 
Other, net
 
 
 
 
Total Other Income (Loss)
 
$
(18
)
 
$
(7
)
 
The unfavorable change in Other Income (Loss) for the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to the higher credit losses on certain private-label RMBS described in Results of OTTI Evaluation Process below. The net effect of derivatives on our Net Interest Income and Other Income (Loss) is presented in Net Gains (Losses) on Derivatives and Hedging Activities below.
 


 

Results of OTTI Evaluation Process. As a result of our evaluations, during the three months ended March 31, 2011, and 2010, we recognized OTTI losses on 16 and 13 private-label RMBS, respectively.  These securities had an aggregate UPB of $0.9 billion and $0.7 billion, respectively.  We determined that we would not recover the entire amortized cost of these securities, and, therefore, we recognized OTTI credit losses as shown in the table below ($ amounts in millions).
 
 
 
 
Impairment
 
 
 
 
Impairment Related to
 
Related to All Other
 
Total
Three Months Ended March 31, 2011
 
Credit Loss
 
Factors
 
Impairment
Impairment on securities for which OTTI was not previously recognized
 
$
 
 
$
 
 
$
 
Additional impairment on securities for which OTTI was previously recognized
 
18
 
 
(15
)
 
3
 
Total
 
$
18
 
 
$
(15
)
 
$
3
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2010
 
 
 
 
 
 
Impairment on securities for which OTTI was not previously recognized
 
$
 
 
$
14
 
 
$
14
 
Additional impairment on securities for which OTTI was previously recognized
 
6
 
 
(6
)
 
 
Total
 
$
6
 
 
$
8
 
 
$
14
 
 
Net Gains (Losses) on Derivatives and Hedging Activities. The table below presents the net effect of derivatives on Net Interest Income and on Other Income (Loss), within the line Net Gains (Losses) on Derivatives and Hedging Activities, by type of hedge and hedged item ($ amounts in millions).
 
Three Months Ended March 31, 2011
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Discount Notes
 
Total
Net Interest Income:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
 
$
 
 
$
3
 
 
$
 
 
$
 
 
$
 
 
$
3
 
Net interest settlements included in net interest income (2)
 
(81
)
 
(21
)
 
 
 
32
 
 
 
 
(70
)
Total Net Interest Income
 
(81
)
 
(18
)
 
 
 
32
 
 
 
 
(67
)
Net Gains (Losses) on Derivatives and Hedging Activities:
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
 
1
 
 
 
 
 
 
(1
)
 
 
 
 
Gains (losses) on derivatives not receiving hedge accounting
 
 
 
 
 
 
 
 
 
 
 
 
Net Gains (Losses) on Derivatives and Hedging Activities
 
1
 
 
 
 
 
 
(1
)
 
 
 
 
Total net effect of derivatives and hedging activities
 
$
(80
)
 
$
(18
)
 
$
 
 
$
31
 
 
$
 
 
$
(67
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Income:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
 
$
 
 
$
2
 
 
$
 
 
$
1
 
 
$
 
 
$
3
 
Net interest settlements included in net interest income (2)
 
(136
)
 
(19
)
 
 
 
63
 
 
 
 
(92
)
Total Net Interest Income
 
(136
)
 
(17
)
 
 
 
64
 
 
 
 
(89
)
Net Gains (Losses) on Derivatives and Hedging Activities:
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Gains (losses) on derivatives not receiving hedge accounting
 
 
 
 
 
 
 
 
 
 
 
 
Net Gains (Losses) on Derivatives and Hedging Activities
 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Total net effect of derivatives and hedging activities
 
$
(137
)
 
$
(17
)
 
$
 
 
$
64
 
 
$
 
 
$
(90
)
 
(1)    Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2)    Represents interest income/expense on derivatives included in Net Interest Income.
 


 

Other Expenses
 
The following table presents a breakdown of Other Expenses for the three months ended March 31, 2011, and 2010 ($ amounts in millions):
 
 
Three Months Ended
March 31,
 
 
2011
 
2010
Compensation and Benefits
 
$
9
 
 
$
7
 
Other Operating Expenses
 
2
 
 
3
 
Finance Agency and Office of Finance Expenses
 
2
 
 
1
 
Other
 
 
 
 
Total Other Expenses
 
$
13
 
 
$
11
 
 
The increase in Other Expenses for the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to increased compensation and benefit expenses, which were mainly attributable to additional staff needed to support systems enhancements and compliance-related initiatives, as well as increased retirement plan costs due to a lower discount rate used to calculate the benefit obligation.
 
AHP and REFCORP Assessments
 
AHP and REFCORP contributions are statutorily required and are calculated simultaneously because of their interdependence.
 
AHP.  The FHLBanks 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 FHLBank's required annual AHP contribution is limited to its annual net earnings.  Our AHP expense for the three months ended March 31, 2011, was $2.7 million, compared to $4.0 million of AHP expense for the same period in 2010.
 
REFCORP.  Each FHLBank 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, 2011, was $5.0 million, compared to $8.1 million for the same period in 2010.
 
The decreases in both AHP and REFCORP expense for the quarter ended March 31, 2011, are directly attributable to the lower level of Income Before Assessments for the quarter ended March 31, 2011, compared to the same period in 2010.
 
The FHLBanks will continue to be obligated to pay the REFCORP assessment until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) with a final maturity date of April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied.
 
However, the aggregate payments made by the FHLBanks through the first quarter of 2011 have exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening the remaining term as of March 31, 2011, to July 15, 2011. This date assumes that the FHLBanks will pay the remaining $73.4 million for the second quarter of 2011. See Liquidity and Capital Resources - Joint Capital Enhancement Agreement for information about the JCE Agreement that will become operational once our REFCORP obligation has been satisfied.
 
Business Segments
 
Our products and services are grouped within two business segments: Traditional and MPP.
 


 

The Traditional business segment includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreement to Resell, AFS securities, and HTM securities) and deposits. The following table sets forth our financial performance for this operating segment ($ amounts in millions): 
 
 
Three Months Ended March 31,
Traditional Segment
 
2011
 
2010
Net Interest Income After Provision for Credit Losses
 
$
35
 
 
$
39
 
Provision for Credit Losses
 
 
 
 
Other Income (Loss)
 
(18
)
 
(6
)
Other Expenses
 
12
 
 
10
 
Income Before Assessments
 
5
 
 
23
 
Total Assessments
 
2
 
 
6
 
Net Income
 
$
3
 
 
$
17
 
 
The decrease in Net Income for the Traditional segment for the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to the following factors:
 
a decrease in Net Interest Income After Provision for Credit Losses primarily resulting from lower average balances of Advances, partially offset by higher prepayment fees on Advances; and
a decrease in Other Income (Loss) substantially due to the higher credit losses on certain private-label RMBS, as described in Results of Operations for the Three Months Ended March 31, 2011, and 2010 - Other Income - Results of OTTI Evaluation Process herein.
 
These decreases were partially offset by lower Total Assessments, which were directly attributable to the lower Income Before Assessments.
 
The MPP business segment consists of mortgage loans purchased from our members. The following table sets forth our financial performance for this operating segment ($ amounts in millions): 
 
 
Three Months Ended March 31,
MPP Segment
 
2011
 
2010
Net Interest Income After Provision for Credit Losses
 
$
25
 
 
$
23
 
Provision for Credit Losses
 
(1
)
 
 
Other Income (Loss)
 
 
 
(1
)
Other Expenses
 
1
 
 
1
 
Income Before Assessments
 
23
 
 
21
 
Total Assessments
 
6
 
 
6
 
Net Income
 
$
17
 
 
$
15
 
 
The increase in Net Income for the MPP segment for the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to higher Net Interest Income After Provision for Credit Losses resulting from higher spreads attributable to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment, partially offset by the lower average balance of MPP loans.
 
Analysis of Financial Condition
 
Total Assets were $43.9 billion as of March 31, 2011, a decrease of 2% compared to December 31, 2010.  This $1.0 billion decrease was primarily due to net decreases of $0.6 billion in Advances and $0.2 billion in Mortgage Loans Held for Portfolio.
 
Total Liabilities were $41.9 billion at March 31, 2011, a decrease of 3% compared to December 31, 2010. This $1.1 billion decrease was primarily due to a decrease of $1.0 billion in Consolidated Obligations, which typically fluctuate in relation to our Total Assets.
 


 

Advances
 
Advances totaled $17.7 billion at March 31, 2011, a decrease of 3% compared to December 31, 2010. This decrease was primarily due to repayments and our members' reduced need for liquidity in the current economic environment.  In general, Advances fluctuate in accordance with our members' funding needs related to their deposit levels, mortgage pipelines, investment opportunities, available collateral, other balance sheet strategies, and the cost of alternative funding opportunities.
 
A breakdown of Advances by primary product line is provided below ($ amounts in millions): 
 
 
March 31, 2011
 
December 31, 2010
 
 
 
 
% of
 
 
 
% of
By Primary Product Line
 
Amount
 
Total
 
Amount
 
Total
Fixed-rate
 
 
 
 
 
 
 
 
Fixed-rate (1)
 
$
11,799
 
 
69
%
 
$
11,959
 
 
68
%
Amortizing/mortgage matched  (2)
 
2,024
 
 
12
%
 
1,789
 
 
10
%
Other
 
45
 
 
%
 
15
 
 
%
Total fixed-rate
 
13,868
 
 
81
%
 
13,763
 
 
78
%
Adjustable/variable-rate indexed  (3)
 
3,267
 
 
19
%
 
3,875
 
 
22
%
Total Advances, par value
 
17,135
 
 
100
%
 
17,638
 
 
100
%
Total Adjustments (unamortized discounts, hedging and other)
 
544
 
 
 
 
637
 
 
 
Total Advances
 
$
17,679
 
 
 
 
$
18,275
 
 
 
 
(1)    Includes fixed-rate bullet and putable Advances
(2)    Includes fixed-rate amortizing Advances
(3)    Includes adjustable-rate and variable-rate Advances
 
Cash and Investments
 
The following table provides balances, at carrying value, for our cash and investments ($ amounts in millions):
Components of Cash and Investments
 
March 31,
2011
 
December 31,
2010
Cash
 
$
315
 
 
$
12
 
Interest-Bearing Deposits
 
 
 
 
Securities Purchased Under Agreements to Resell
 
125
 
 
750
 
Federal Funds Sold
 
7,521
 
 
7,325
 
Total Cash and Short-term Investments
 
7,961
 
 
8,087
 
AFS securities:
 
 
 
 
GSE debentures
 
1,912
 
 
1,930
 
TLGP debentures
 
324
 
 
325
 
Private-label MBS
 
933
 
 
983
 
Total AFS securities
 
3,169
 
 
3,238
 
HTM securities:
 
 
 
 
 
 
GSE debentures
 
294
 
 
294
 
TLGP debentures
 
1,981
 
 
2,066
 
Other U.S. Obligations - guaranteed RMBS
 
2,309
 
 
2,327
 
GSE RMBS
 
3,254
 
 
3,044
 
Private-label MBS
 
600
 
 
719
 
Private-label ABS
 
21
 
 
22
 
Total HTM securities
 
8,459
 
 
8,472
 
Total Investment Securities
 
11,628
 
 
11,710
 
Total Cash and Investments, carrying value
 
$
19,589
 
 
$
19,797
 
 
Cash and Short-Term Investments
 
Cash and short-term investments totaled $8.0 billion at March 31, 2011, a decrease of 2% compared to December 31, 2010.  This decrease was primarily due to a decrease of $0.6 billion in Securities Purchased Under Agreements to Resell,


 

partially offset by an increase of $0.2 billion in Federal Funds Sold and an increase of $0.3 billion in cash. The composition of our short-term investment portfolio is influenced by the availability of short-term investments at attractive interest rates, relative to our cost of funds. The maturities of the short-term investments provide cash flows to support our ongoing liquidity needs.
 
Mortgage Loans Held for Portfolio
 
We purchase mortgage loans from our members through our MPP.  At March 31, 2011, we held $6.5 billion of MPP loans, a decrease of 4%, compared to December 31, 2010.  The decrease was primarily due to repayments of outstanding mortgage loans exceeding the purchases of new loans. In general, the volume of mortgage loans purchased through the MPP is affected by several factors, including the general level of housing activity in the U.S., the level of refinancing activity, and consumer product preferences. 
 
Deposits (Liabilities)
 
Total Deposits were $0.6 billion at March 31, 2011, a decrease of 8% compared to December 31, 2010.  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, 2011, the carrying values of our Discount Notes and CO Bonds totaled $8.5 billion and $31.3 billion, respectively, compared to $8.9 billion and $31.9 billion, respectively, at December 31, 2010.  The overall balance of our Consolidated Obligations fluctuates in relation to our Total Assets.  
 
Derivatives
 
As of March 31, 2011, and December 31, 2010, we had Derivative Assets, net of collateral held or posted including accrued interest, with fair values of $14.5 million and $6.2 million, respectively, and Derivative Liabilities, net of collateral held or posted including accrued interest, with fair values of $575.4 million and $657.0 million, respectively.  These fair values reflect the impact of interest-rate changes.  
 
Capital
 
Total Capital was $2.0 billion at March 31, 2011, an increase of 2% compared to December 31, 2010.  This increase was primarily due to an increase in Retained Earnings of $9.3 million and an increase in AOCI of $30.1 million. The improvement in AOCI was mainly attributable to Other Comprehensive Income, which included unrealized gains of $4.3 million on AFS securities, the non-credit portion of OTTI losses of $6.8 million on AFS securities, and the reclassification of OTTI credit losses of $17.7 million from AOCI to Other Income (Loss). 
 
Liquidity and Capital Resources
 
Our cash and short-term investments portfolio, which included Federal Funds Sold and Securities Purchased Under Agreements to Resell, totaled $8.0 billion at March 31, 2011, compared to $8.1 billion at December 31, 2010.  The maturities of the short-term investments provide cash flows to support our ongoing liquidity needs. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our 2010 Form 10-K for more detailed information. We have not identified any known trends, demands, commitments, events or uncertainties that are likely to materially increase or decrease our liquidity.
 
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 Statement of Condition.  
 
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.  As of March 31, 2011, and December 31, 2010, our risk-based capital requirement was $0.9 billion, compared to permanent capital of $2.7 billion.
 
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, 2011, our regulatory capital ratio was 6.17%, and our leverage ratio was 9.26%.
 
Capital Distributions.  We may, but are not required to, pay dividends on our stock. Dividends are non-cumulative and may be paid in cash or Class B Capital Stock out of previously retained earnings and current net earnings, as authorized by our board of directors and subject to Finance Agency regulations. No dividend may be declared or paid if we are or would be, as a result of such payment, in violation of our minimum capital requirements. Moreover, we may not pay dividends if any principal or interest due on any Consolidated Obligations issued on behalf of any of the FHLBanks has not been paid in full, or under certain circumstances, if we fail to satisfy liquidity requirements under applicable Finance Agency regulations. 
 
Our Capital Plan divides our Class B stock into two sub-series: Class B-1 and Class B-2. The difference between the two sub-series is that Class B-2 is required stock that is subject to a redemption request and pays a lower dividend. The Class B-2 stock dividend is presently calculated at 80% of the amount of the Class B-1 dividend and can only be changed by amendment of our Capital Plan by our board of directors with approval of the Finance Agency.
 
On April 27, 2011, our board of directors declared a cash dividend of 2.50% (annualized) on our Capital Stock Putable-Class B-1 and of 2.00% (annualized) on our Capital Stock Putable-Class B-2.  
 
Joint Capital Enhancement Agreement. Effective February 28, 2011, we entered into a JCE Agreement with the other 11 FHLBanks. The JCE Agreement provides that, upon satisfaction of the FHLBanks' obligations to REFCORP, each FHLBank will, on a quarterly basis, allocate at least 20% of its Net Income to an RRE Account. Under the JCE Agreement, each FHLBank will be required to make allocations to its RRE Account up to 1% of its total outstanding Consolidated Obligations, which for this purpose is based on the most recent quarter's average carrying value of Total Consolidated Obligations, consisting of all Consolidated Obligations, excluding fair value option and hedging adjustments, for which an FHLBank is the primary obligor.
The JCE Agreement further requires each FHLBank to submit an application to the Finance Agency for approval to amend its Capital Plan or Capital Plan submission, as applicable, consistent with the terms of the JCE Agreement. Under the JCE Agreement, if the FHLBanks' REFCORP obligation terminates before the Finance Agency has approved all proposed Capital Plan amendments submitted pursuant to the JCE Agreement, each FHLBank will nevertheless be required to commence the required allocation to its RRE Account beginning as of the end of the calendar quarter in which the final payments are made by the FHLBanks with respect to their REFCORP obligations. Depending on the earnings of the FHLBanks, the REFCORP obligations could be satisfied as of the end of the second quarter of 2011, with a final payment due on July 15, 2011. As of the date of this report, representatives of the Bank have been in discussions with the Finance Agency on amending our Capital Plan to incorporate the terms of the JCE Agreement. Such discussions regarding the proposed Capital Plan amendments could result in amendments to the JCE Agreement, including, among other things, possible revisions to the termination provisions. For additional information, please refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Joint Capital Enhancement Agreement in our 2010 Form 10-K.
Mandatorily Redeemable Capital Stock.  At March 31, 2011, and December 31, 2010, we had $658.4 million in capital stock subject to mandatory redemption. See Note 12 - Capital - Notes to Financial Statements for additional information.
 
Excess Stock. Excess stock is capital stock that is not required as a condition of membership or to support services to members or former members.  In general, the level of excess stock fluctuates with our members' demand for Advances.  Finance Agency regulations prohibit an FHLBank from issuing new excess stock if the amount of excess stock outstanding exceeds 1% of our Total Assets.  At March 31, 2011, our outstanding excess stock of $1.2 billion was equal to 3% of our Total Assets.  Therefore, we are currently not permitted to distribute stock dividends.  
 
Off-Balance Sheet Arrangements
 
See Note 15 - Commitments and Contingencies - 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 reporting period.  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 particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.  These policies are:
 
OTTI Analysis;
Provision for Credit Losses;
Accounting for Derivatives and Hedging Activities;
Fair Value Estimates; and
Accounting for Premiums and Discounts and Other Costs Associated with Originating or Acquiring Mortgage Loans, MBS, and ABS.
 
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 earnings results, financial position and cash flows.
 
A full discussion of these critical accounting policies and estimates can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations section under the caption Critical Accounting Policies and Estimates in our 2010 Form 10-K.  See below for additional information regarding certain of these policies.
 
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.
 
This more stressful 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 this scenario, current-to-trough home price declines were projected to range from 5% to 15% over the three- to nine-month period beginning January 1, 2011.  Thereafter, home prices were projected to increase from the trough within a range of 0% to 1.9% in the first year, 0% to 2% in the second year, 1% to 2.7% in the third year, 1.3% to 3.4% in the fourth year, 1.3% to 4% in each of the fifth and sixth years, and 1.5% to 3.8% in each subsequent year.
 
The adverse scenario and associated results do not represent our current expectations, and therefore should not be construed as a prediction of our future results, market conditions or the actual performance of these securities. Rather, the results from this hypothetical stress test scenario provide a measure of the credit losses that we might incur if home price declines (and subsequent recoveries) are more adverse than those projected in our OTTI assessment.
 
The following table shows the base case scenario and what the impact on OTTI would have been under the more adverse home price scenario for the three months ended March 31, 2011 ($ amounts in millions):
 
 
Three Months Ended March 31, 2011
 
 
As Reported
 
Using Adverse Housing Price Scenario
 
 
Number of
 
 
 
Impairment
 
Number of
 
 
 
Impairment
 
 
Securities
 
 
 
Related to
 
Securities
 
 
 
Related to
NRSRO Classification
 
Impaired
 
UPB
 
Credit Loss
 
Impaired
 
UPB
 
Credit Loss
Prime
 
15
 
 
$
840
 
 
$
(17
)
 
19
 
 
$
1,060
 
 
$
(51
)
Alt-A
 
1
 
 
38
 
 
(1
)
 
2
 
 
50
 
 
(2
)
Total
 
16
 
 
$
878
 
 
$
(18
)
 
21
 
 
$
1,110
 
 
$
(53
)
  
 


 

Additional information about OTTI of our Private-label MBS and ABS is provided in Risk Management-Credit Risk Management-Investments herein, and in Note 5 - Notes to Financial Statements.
 
Provision for Credit Losses
 
Advances.  At March 31, 2011, 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.  Based on our analysis, using the most recent 12 months weighted-average recovery rate through March 31, 2011, of approximately 54% of the original appraised value, further reduced by estimated liquidation costs, and after consideration of PMI, LRA, and SMI, we recorded $1.0 million of allowance for loan losses on our conventional mortgage loans at March 31, 2011.  We recorded no allowance 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 down to a 50% recovery rate would have increased our allowance to approximately $4.0 million at March 31, 2011.
 
Recent Accounting and Regulatory Developments
 
Accounting Developments
 
See Note 2 - Recently Adopted and Issued Accounting Guidance - 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
 
The legislative and regulatory environment for the Bank continues to change as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Act and as Congress begins to debate proposals for housing finance and GSE reform.
 
Dodd-Frank Act
 
As discussed under Legislative and Regulatory Developments in our 2010 Form 10-K, the Dodd-Frank Act will likely impact the FHLBanks' business operations, funding costs, rights, obligations, and/or the environment in which the FHLBanks carry out their housing finance mission. Certain regulatory actions during the period covered by this report resulting from the Dodd-Frank Act that may have an important impact on the Bank are summarized below, although the full effect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized.
 
New Requirements for our Derivative Transactions
 
The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by us to hedge interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or in new swap execution facilities. Such cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared trades have the potential to make derivative transactions more costly.
 
The Dodd-Frank Act also changes the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While we expect to continue to enter into uncleared trades on a bilateral basis, such trades are expected to be subject to new regulatory requirements, including new mandatory reporting requirements, new documentation requirements and new minimum margin and capital requirements imposed by bank and other federal regulators. Under the proposed margin rules, we will have to post both initial margin and variation margin to our swap dealer counterparties, but may be eligible in both instances for modest unsecured thresholds as "low risk financial end users." Pursuant to additional proposed Finance Agency provisions, we will be required to collect both initial margin and variation margin from our swap dealer counterparties, without any thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by the Bank, thus making uncleared trades more costly.
 


 

The CFTC has issued a proposed rule requiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer basis.  However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of the clearing member. Such commingling would put our collateral at risk in the event of a default by another customer of our clearing member. To the extent that the CFTC's final rule places our posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, we may be adversely impacted.
 
The Dodd-Frank Act requires swap dealers and certain other large users of derivatives to register as "swap dealers" or "major swap participants," as the case may be, with the CFTC and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, it does not appear likely that we will be required to register as a "major swap participant," although this registration remains a possibility. Also, based on the definitions in the proposed rules, it does not appear likely that we will be required to register as a "swap dealer" as a result of the derivative transactions that we enter into with dealer counterparties for the purpose of hedging and managing our interest rate risk, which constitute the majority of our derivative transactions. However, based on the proposed rules, it is possible that we could be required to register with the CFTC as a swap dealer based on the intermediated "swaps" that, as a matter of policy, we may enter into with our members.
 
It is also unclear how the final rule will treat certain advance products with members that may contain features that operate in a similar manner to certain derivatives, such as interest-rate caps, floors and options. The CFTC and SEC have issued joint proposed rules further defining the term "swap" under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance clarify that certain products will or will not be regulated as "swaps." However, at this time it remains unclear whether certain transactions between the Bank and our members will be treated as "swaps." Depending on how the terms "swap" and "swap dealer" are defined in the final regulations, we may be faced with the business decision of whether to continue to offer "swaps" to member customers if those transactions would require us to register as a swap dealer. Designation as a swap dealer would subject us to significant additional regulation and cost including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements and additional swap-based capital and margin requirements. If we are designated in the final rule as a swap dealer, however, the proposed regulation would permit us to apply to the CFTC to limit such designation to those specified activities for which we are acting as a swap dealer. Upon such limited designation, our hedging activities would not be subject to the full requirements that will generally be imposed on traditional swap dealers.
 
We, together with the other FHLBanks, are actively participating in the development of the regulations under the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. It is not expected that final rules implementing the Dodd-Frank Act will become effective until the latter half of 2011, and delays beyond that time are possible.
 
Regulation of Certain Nonbank Financial Companies
 
Federal Reserve Board Proposed Rule on Regulatory Oversight of Nonbank Financial Companies. On February 11, 2011, the Federal Reserve Board issued a proposed rule that would define certain key terms to determine which nonbank financial companies will be subject to the Federal Reserve's regulatory oversight. The proposed rule provides that a company is "predominantly engaged in financial activities" if:
 
the annual gross financial revenue of the company represents 85% or more of the company's gross revenue in either of its two most recent completed fiscal years; or
the company's total financial assets represent 85% or more of the company's total assets as of the end of either of its two most recently completed fiscal years.
 
We would be predominantly engaged in financial activities under either prong of the proposed test. In pertinent part to us, the proposed rule also defines "significant nonbank financial company" to mean a nonbank financial company that had $50 billion or more in total assets as of the end of its most recently completed fiscal year. If we are determined to be a nonbank financial company subject to the Federal Reserve's regulatory oversight, then our operations and business may be affected by such oversight. Comments on this proposed rule were due by March 30, 2011.
 


 

Financial Stability Oversight Council Notice of Proposed Rulemaking on Authority to Supervise and Regulate Certain Nonbank Financial Companies. On January 26, 2011, the Oversight Council issued a proposed rule that would implement its authority to subject nonbank financial companies to the supervision of the Federal Reserve Board and to certain prudential standards. The proposed rule defines "nonbank financial company" broadly enough to likely cover us. Also, under the proposed rule, the Oversight Council will consider certain factors in determining whether to subject a nonbank financial company to supervision and prudential standards. Some factors identified include: the availability of substitutes for the financial services and products the entity provides, as well as the entity's size; interconnectedness with other financial firms; leverage; liquidity risk and maturity mismatch; and existing regulatory scrutiny.
 
If we are determined to be a nonbank financial company subject to the Oversight Council's regulatory requirements, then our operations and business are likely to be affected. Comments on this proposed rule were due by February 25, 2011.
 
Oversight Council Recommendations on Implementing the Volcker Rule. In January 2011, the Oversight Council issued recommendations for implementing certain prohibitions on proprietary trading, commonly referred to as the Volcker Rule. Institutions subject to the Volcker Rule may be subject to various limits with regard to their proprietary trading and various regulatory requirements to ensure compliance. If we are made subject to the Volcker Rule, then we may be subject to additional limitations, beyond Finance Agency regulations, on the composition of our investment portfolio. These limitations may result in less profitable investment alternatives. Further, complying with related regulatory requirements would be likely to increase our incremental costs. Consolidated Obligations generally are exempt from the operation of this rule, subject to certain limitations, including the absence of conflicts of interest and certain financial risks.
 
FDIC Regulatory Actions
 
FDIC Interim Final Rule on Dodd-Frank Act's Orderly Liquidation Resolution Authority. On January 25, 2011, the FDIC issued an interim final rule on how the FDIC would treat certain creditor claims under the new "orderly liquidation" authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company, not including FDIC-insured depository institutions, in instances where the failure of the company and its liquidation under other insolvency statutes (such as bankruptcy) would pose a significant risk to the financial stability of the United States. The interim final rule provides, among other things:
 
a valuation standard for collateral on secured claims;
that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral;
a clarification of the treatment for contingent claims; and
that secured obligations collateralized with U.S. government obligations will be valued at fair market value. 
 
Valuing most collateral at fair value, rather than par, could adversely impact the value of our investments in the event of the issuer's insolvency. Comments on this interim final rule were due by March 28, 2011.
 
FDIC Final Rule on Assessment System. On February 25, 2011, the FDIC issued a final rule to revise the assessment system applicable to FDIC-insured financial institutions. The rule, among other things, implements a provision in the Dodd-Frank Act to redefine the assessment base used for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic deposits to average consolidated total assets minus average tangible equity. This rule became effective on April 1, 2011, so FHLBank advances are now included in our members' assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank advances, in excess of 25% of an institution's domestic deposits since these are now part of the assessment base. To the extent that additional assessments increase the cost of Advances for some members, our Advances demand may be negatively impacted.
 


 

Joint Regulatory Actions
 
Proposed Rule on Incentive-based Compensation Arrangements. On April 14, 2011, seven federal financial regulators, including the Finance Agency, published a proposed rule that would prohibit "covered financial institutions" from entering into incentive-based compensation arrangements that encourage inappropriate risks. Applicable to the FHLBanks and the Office of Finance, the rule would:
 
prohibit excessive compensation;
prohibit incentive compensation that could lead to material financial loss;
require an annual report;
require policies and procedures; and
require mandatory deferrals of 50% of incentive compensation over three years for executive officers.
 
Covered persons under the rule would include senior management responsible for the oversight of firm-wide activities or material business lines and non-executive employees or groups of those employees whose activities may expose the institution to a material loss. Under the proposed rule, covered financial institutions would be required to comply with three key risk management principles related to the design and governance of incentive-based compensation: balanced design, independent risk management controls and strong governance.
 
In addition, the proposed rule identifies four methods to balance compensation design and make it more sensitive to risk: risk adjustment of awards, deferral of payment, longer performance periods and reduced sensitivity to short-term performance. Larger covered financial institutions, like the Bank, would also be subject to a mandatory 50% deferral of incentive-based compensation for executive officers and board oversight of incentive-based compensation for certain risk-taking employees who are not executive officers. If adopted as proposed, the rule would impact the design of the Bank's compensation policies and practices, including its incentive compensation plans. Comments on the proposed rule are due by May 31, 2011.
 
Proposed Rule on Credit Risk Retention for Asset-Backed Securities. On April 29, 2011, the federal banking agencies, the Finance Agency, the Department of Housing and Urban Development and the SEC jointly issued a proposed rule, which proposes requiring sponsors of asset-backed securities to retain a minimum of 5% economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy certain qualifications. The proposed rule lists criteria for qualified residential mortgages, commercial real estate, automobile loans and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rulemaking as those underwriting and product features which, based on historical data, are associated with low risk even in periods of declining housing prices and high unemployment. Key issues in the proposed rule include: (i) the appropriate terms for treatment as a qualified residential mortgage; (ii) the extent to which Fannie Mae- and Freddie Mac-related securitizations will be exempt from the risk retention rules; and (iii) the possibility of creating a category of high-quality non-qualified residential mortgage loans that would have less than a 5% risk retention requirement. If adopted as proposed, the rule could reduce the number of loans originated by our members, which could negatively impact member demand for our products. Comments on this proposed rule are due by June 10, 2011.
 
Housing Finance and GSE Reform
 
In the wake of the financial crisis and related housing problems, both Congress and the Administration are considering changes to the U.S. housing finance structure, specifically reforming or eliminating Fannie Mae and Freddie Mac. These efforts may have implications for the FHLBanks.
 
On February 11, 2011, the U.S. Treasury and the U.S. Department of Housing and Urban Development issued a report to Congress entitled "Reforming America's Housing Finance Market." The report's primary focus is to provide options for Congressional consideration regarding the long-term structure of housing finance, including reforms specific to Fannie Mae and Freddie Mac. In addition, the Obama Administration noted it would work, in consultation with the Finance Agency and Congress, to restrict the areas of mortgage finance in which Fannie Mae, Freddie Mac and the FHLBanks operate so that overall government support of the mortgage market will be substantially reduced over time.
 


 

Although the FHLBanks are not the primary focus of this report, they are recognized as playing a vital role in helping smaller financial institutions access liquidity and capital to compete in an increasingly competitive marketplace. The report suggests the following possible reforms for the FHLBank System:
 
focus the FHLBanks on small- and medium-sized financial institutions;
restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLBank;
limit the level of outstanding advances to larger members; and
reduce FHLBank investment portfolios and their composition, focusing FHLBanks on providing liquidity for insured depository institutions.  
 
The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market.
 
In response to the report, several bills have been introduced in Congress. While none propose specific changes to the FHLBanks, we could nonetheless be affected in numerous ways by changes to the U.S. housing finance structure or to Fannie Mae and Freddie Mac. For example, the FHLBanks traditionally have allocated a significant portion of their investment portfolio to investments in Fannie Mae and Freddie Mac debt securities.  Accordingly, the FHLBanks' investment strategies would likely be affected by a winding down of those entities.  Winding down these two GSEs, or limiting the amount of
mortgages they purchase, also could increase demand for FHLBank advances if FHLBank members respond by retaining more of their mortgage loans in portfolio and use advances to fund the loans.
 
It is also possible that Congress will consider any or all of the specific changes to the FHLBanks suggested by the Administration's proposal. If legislation is enacted incorporating these changes, the FHLBanks could be significantly limited in their ability to make advances to their members and subject to additional limitations on their investment authority. Additionally, if Congress enacts legislation encouraging the development of a covered bond market, FHLBank advances could be reduced over time if larger members use covered bonds as an alternative form of wholesale mortgage financing.
 
The potential effect of housing finance and GSE reform on the FHLBanks is unknown at this time and will depend on the legislation, if any, that is ultimately enacted.
 
Finance Agency Regulatory Actions
 
Final Rule on Temporary Increases in Minimum Capital Levels.  On March 3, 2011, the Finance Agency issued a final rule authorizing the Director of the Finance Agency to increase the minimum capital level for an FHLBank if the Director determines that the current level is insufficient to address such FHLBank's risks.  The rule provides the factors that the Director may consider in making this determination, including the FHLBank's:
               
current or anticipated declines in the value of assets;
ability to access liquidity and funding;
credit, market, operational and other risks;
current or projected declines in its capital;
material compliance with regulations, written orders, or agreements;
housing finance market conditions;
level of retained earnings;
initiatives, operations, products or practices that entail heightened risk;
ratio of market value of equity to the par value of capital stock; and/or
other conditions as identified by the Director.
 
The rule provides that the Director shall consider the need to maintain, modify or rescind any such increase no less than every 12 months.  If we were required to increase significantly our minimum capital level, we may need to reduce or suspend dividends in order to increase retained earnings to satisfy such increase.  Alternatively, we could satisfy an increased capital requirement by disposing of assets to decrease the size of our balance sheet relative to total outstanding stock, which may adversely impact our results of operations and financial condition and ability to achieve our mission. This rule became effective April 4, 2011.  
 


 

Final Rule on FHLBank Liabilities. On April 4, 2011, the Finance Agency issued a final rule that, among other things:
 
reorganizes and re-adopts Finance Board regulations dealing with Consolidated Obligations, as well as related regulations concerning other authorized FHLBank liabilities and book entry procedures for Consolidated Obligations;
implements recent statutory amendments that removed the Finance Agency's authority to issue Consolidated Obligations;
specifies that the FHLBanks issue Consolidated Obligations that are the joint and several obligations of the FHLBanks as provided for in the Bank Act, rather than in regulations; and
provides that Consolidated Obligations are issued under Section 11(c) of the Bank Act, rather than under Section 11(a).
 
This rule is not expected to have any adverse impact on the FHLBanks' joint and several liability for the principal and interest payments on Consolidated Obligations. This rule became effective May 4, 2011.
 
Regulatory Policy Guidance on Reporting of Fraudulent Financial Instruments. On January 27, 2010, the Finance Agency issued a regulation requiring the FHLBanks to report to the Finance Agency upon the discovery of any fraud or possible fraud related to the purchase or sale of financial instruments or loans. On March 29, 2011, the Finance Agency issued immediately effective final guidance (Regulatory Policy Guidance 2011-01) that sets forth fraud reporting requirements for the FHLBanks under the regulation. The guidance, among other things, provides examples of fraud that should be reported to the Finance Agency and the Finance Agency's Office of Inspector General. In addition, the guidance requires FHLBanks to establish and maintain effective internal controls, policies, procedures and operational training to discover and report fraud or possible fraud. Although complying with the guidance will increase our regulatory reporting, we do not expect any material incremental costs or adverse impact to our business.
 
Proposed Rule on Private Transfer Fee Covenants. On February 8, 2011, the Finance Agency issued a proposed rule that would restrict the FHLBanks from purchasing, investing in, or taking security interests in, mortgage loans on properties encumbered by private transfer fee covenants, securities backed by such mortgage loans, and securities backed by the income stream from such covenants, with certain exceptions. Excepted transfer fee covenants would include covenants to pay private transfer fees to covered associations (including organizations comprising owners of homes, condominiums, or cooperatives or certain other tax-exempt organizations) that use such fees exclusively for the direct benefit of the property. The foregoing restrictions would apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, securities backed by such mortgages, and securities issued after that date that are backed by revenue from private transfer fees regardless of when the covenants were created. We would be required to comply with the regulation within 120 days of the publication of the final rule. To the extent that a final rule limits the type of collateral we accept for advances and the type of loans eligible for purchase under the MPP, our business may be adversely impacted. Comments on the proposed rule were due by April 11, 2011.
 
Advance Notice of Proposed Rulemaking on Use of NRSRO Credit Ratings. On January 31, 2011, the Finance Agency issued an advanced notice of proposed rulemaking that would implement a Dodd-Frank Act provision requiring all federal agencies to remove regulations that require use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific Finance Agency regulations applicable to FHLBanks, including risk-based capital requirements, prudential requirements, investments, and Consolidated Obligations. Comments on this advance notice of rulemaking were due on March 17, 2011.
 
Advance Notice of Proposed Rulemaking on FHLBank Membership. On December 27, 2010, the Finance Agency issued an advance notice of proposed rulemaking relating to its regulations on FHLBank membership to ensure such regulations maintain a nexus between FHLBank membership and the housing and community development mission of the FHLBanks. For additional information, please refer to the Legislative and Regulatory Developments section in our 2010 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 because risk is an inherent part of our business activities.   Although we are unable to eliminate these risks, we are able to manage them effectively 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 2010 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.
 
Advances. We manage our exposure to credit risk on Advances through a combination of our security interest in assets pledged by the borrowing member and ongoing reviews of each borrower's financial condition.  However, our credit risk is magnified due to the concentration of Advances in a few borrowers. As of March 31, 2011, our top three borrowers held 35% 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 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, 2011, our unsecured credit exposure, including accrued interest related to short-term investment securities and money-market instruments, was $7.5 billion to 18 counterparties and issuers, of which $4.7 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 S&P of AA or higher.
 
Long-Term Investments.  Our long-term investments include corporate debentures guaranteed by the FDIC and backed by the full faith and credit of the U.S. government under the TLGP, corporate debentures issued by the GSEs, RMBS guaranteed by the housing GSEs (Fannie Mae and Freddie Mac), and other U.S. obligations - guaranteed RMBS (Ginnie Mae).
 
Our long-term investments also include Private-label MBS and ABS. We are subject to secured credit risk related to Private-label MBS and ABS 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.
 
Investments in MBS and ABS may be purchased as long as the investments are rated AAA at the time of purchase. Finance Agency policy provides that the total book value of our investments in MBS and ABS 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 on the day we purchase the securities.  These investments, as a percentage of total regulatory capital, were 263% at March 31, 2011, and December 31, 2010.  Generally, our goal is to maintain these investments near the 300% limit.


 

Our Private-label MBS and ABS are backed by collateral, with the top five states including California (52%), New York (6%), Florida (5%), Virginia (3%), and New Jersey (3%).
 
Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's and Fitch.  Rating modifiers are ignored when determining the applicable rating level for a given counterparty. 
 
The following tables present the carrying value by credit ratings of our investments, grouped by category ($ amounts in millions):
 
 
 
 
 
 
 
 
 
 
Below
 
 
 
 
 
 
 
 
 
 
 
 
Investment
 
 
March 31, 2011
 
AAA
 
AA
 
A
 
BBB
 
Grade
 
Total
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Deposits
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
Securities Purchased Under Agreements to Resell
 
125
 
 
 
 
 
 
 
 
 
 
125
 
Federal Funds Sold
 
 
 
5,415
 
 
2,106
 
 
 
 
 
 
7,521
 
Total Short-term investments
 
125
 
 
5,415
 
 
2,106
 
 
 
 
 
 
7,646
 
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
1,912
 
 
 
 
 
 
 
 
 
 
1,912
 
TLGP debentures
 
324
 
 
 
 
 
 
 
 
 
 
324
 
Private-label MBS 
 
 
 
 
 
 
 
 
 
933
 
 
933
 
Total AFS securities
 
2,236
 
 
 
 
 
 
 
 
933
 
 
3,169
 
HTM securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
269
 
 
25
 
 
 
 
 
 
 
 
294
 
TLGP debentures
 
1,981
 
 
 
 
 
 
 
 
 
 
1,981
 
Other U.S. Obligations - guaranteed RMBS
 
2,309
 
 
 
 
 
 
 
 
 
 
2,309
 
GSE RMBS
 
3,254
 
 
 
 
 
 
 
 
 
 
3,254
 
Private-label MBS
 
400
 
 
59
 
 
42
 
 
11
 
 
88
 
 
600
 
Private-label ABS
 
 
 
18
 
 
 
 
 
 
3
 
 
21
 
Total HTM securities
 
8,213
 
 
102
 
 
42
 
 
11
 
 
91
 
 
8,459
 
Total investments, carrying value
 
$
10,574
 
 
$
5,517
 
 
$
2,148
 
 
$
11
 
 
$
1,024
 
 
$
19,274
 
Percentage of total
 
55
%
 
29
%
 
11
%
 
%
 
5
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Deposits
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
Securities Purchased Under Agreements to Resell
 
750
 
 
 
 
 
 
 
 
 
 
750
 
Federal Funds Sold
 
 
 
5,343
 
 
1,982
 
 
 
 
 
 
7,325
 
Total Short-term investments
 
750
 
 
5,343
 
 
1,982
 
 
 
 
 
 
8,075
 
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
1,930
 
 
 
 
 
 
 
 
 
 
1,930
 
TLGP debentures
 
325
 
 
 
 
 
 
 
 
 
 
325
 
Private-label MBS
 
 
 
 
 
 
 
 
 
983
 
 
983
 
Total AFS securities
 
2,255
 
 
 
 
 
 
 
 
983
 
 
3,238
 
HTM securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
269
 
 
25
 
 
 
 
 
 
 
 
294
 
TLGP debentures
 
2,066
 
 
 
 
 
 
 
 
 
 
2,066
 
Other U.S. Obligations - guaranteed RMBS
 
2,327
 
 
 
 
 
 
 
 
 
 
2,327
 
GSE RMBS
 
3,044
 
 
 
 
 
 
 
 
 
 
3,044
 
Private-label MBS
 
479
 
 
82
 
 
35
 
 
16
 
 
107
 
 
719
 
Private-label ABS
 
 
 
19
 
 
 
 
 
 
3
 
 
22
 
Total HTM securities
 
8,185
 
 
126
 
 
35
 
 
16
 
 
110
 
 
8,472
 
Total investments, carrying value
 
$
11,190
 
 
$
5,469
 
 
$
2,017
 
 
$
16
 
 
$
1,093
 
 
$
19,785
 
Percentage of total
 
57
%
 
28
%
 
10
%
 
%
 
5
%
 
100
%
 


 

The following table presents the carrying values and fair values at March 31, 2011, of three private-label RMBS downgraded during the period from April 1, 2011, to April 30, 2011. There were no other downgrades of MBS and ABS or unsecured counterparties during this period. ($ amounts in millions):
 
 
To AA
 
To BBB
 
To BB
Private-label RMBS
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
   Downgraded from AAA
 
$
1
 
 
$
1
 
 
$
16
 
 
$
16
 
 
$
 
 
$
 
   Downgraded from A
 
 
 
 
 
 
 
 
 
25
 
 
24
 
Total
 
$
1
 
 
$
1
 
 
$
16
 
 
$
16
 
 
$
25
 
 
$
24
 
 
The following table presents the carrying values and fair values at March 31, 2011, of eight private-label RMBS and one unsecured counterparty whose investment ratings were on negative watch as of April 30, 2011. No other private-label MBS and ABS or unsecured counterparties were placed on negative watch ($ amounts in millions):
 
 
Private-label RMBS
 
Short-term Investments
Investment ratings
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
   AAA
 
$
73
 
 
$
72
 
 
$
 
 
$
 
   AA
 
2
 
 
2
 
 
100
 
 
100
 
Total
 
$
75
 
 
$
74
 
 
$
100
 
 
$
100
 
 
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.  We do not hold any collateralized debt obligations.  All MBS and ABS were rated AAA at the date of purchase.  
 


 

The tables below present for our prime, Alt-A and subprime securities the UPB, amortized cost, fair value, and other collateral information by credit ratings and year of securitization as of March 31, 2011, based on the lowest of Moody's, S&P, or comparable Fitch ratings ($ amounts in millions):
 
 
2004
 
 
 
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
 
Prime
 
prior
 
2005
 
2006
 
2007
 
Total
Private-label RMBS:
 
 
 
 
 
 
 
 
 
 
AAA-rated
 
$
350
 
 
$
25
 
 
$
 
 
$
 
 
$
375
 
AA-rated
 
2
 
 
53
 
 
 
 
 
 
55
 
A-rated
 
25
 
 
 
 
 
 
 
 
25
 
BBB-rated
 
 
 
10
 
 
 
 
 
 
10
 
Below investment grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BB-rated
 
 
 
12
 
 
 
 
 
 
12
 
B-rated
 
 
 
236
 
 
102
 
 
 
 
338
 
CCC-rated
 
 
 
200
 
 
59
 
 
104
 
 
363
 
CC-rated
 
 
 
42
 
 
37
 
 
123
 
 
202
 
C-rated
 
 
 
 
 
 
 
239
 
 
239
 
Total UPB
 
$
377
 
 
$
578
 
 
$
198
 
 
$
466
 
 
$
1,619
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
377
 
 
$
539
 
 
$
189
 
 
$
379
 
 
$
1,484
 
Gross unrealized losses (1)
 
(6
)
 
(35
)
 
(7
)
 
(6
)
 
(54
)
Fair value
 
371
 
 
504
 
 
182
 
 
384
 
 
1,441
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTTI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Related to credit losses
 
$
 
 
$
(11
)
 
$
 
 
$
(6
)
 
$
(17
)
Related to non-credit losses
 
 
 
11
 
 
 
 
6
 
 
17
 
Total OTTI losses
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to UPB
 
98
%
 
87
%
 
92
%
 
83
%
 
89
%
Original weighted average credit support
 
3
%
 
7
%
 
5
%
 
7
%
 
6
%
Current weighted average credit support
 
10
%
 
8
%
 
5
%
 
5
%
 
7
%
Weighted average collateral delinquency (2)
 
5
%
 
16
%
 
16
%
 
20
%
 
15
%
 
(1)    Gross unrealized losses represent the difference between estimated fair value and amortized cost where fair value is less than amortized cost. These amounts exclude gross unrealized gains.
(2)    Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by the UPB of the individual securities in the category based on their respective collateral delinquency.
 


 

 
 
2004
 
 
 
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
 
Alt-A
 
prior
 
2005
 
2006
 
2007
 
Total
Private-label RMBS:
 
 
 
 
 
 
 
 
 
 
AAA-rated
 
$
27
 
 
$
 
 
$
 
 
$
 
 
$
27
 
AA-rated
 
4
 
 
 
 
 
 
 
 
4
 
A-rated
 
17
 
 
 
 
 
 
 
 
17
 
BBB-rated
 
 
 
 
 
 
 
 
 
 
Below investment grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BB-rated
 
 
 
8
 
 
 
 
 
 
8
 
B-rated
 
 
 
 
 
 
 
 
 
 
CCC-rated
 
 
 
50
 
 
 
 
 
 
50
 
CC-rated
 
 
 
 
 
 
 
 
 
 
C-rated
 
 
 
 
 
 
 
 
 
 
Total UPB
 
$
48
 
 
$
58
 
 
$
 
 
$
 
 
$
106
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
47
 
 
$
52
 
 
$
 
 
$
 
 
$
99
 
Gross unrealized losses (1)
 
(2
)
 
(10
)
 
 
 
 
 
(12
)
Fair value
 
45
 
 
42
 
 
 
 
 
 
87
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTTI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Related to credit losses
 
$
 
 
$
(1
)
 
$
 
 
$
 
 
$
(1
)
Related to non-credit losses
 
 
 
(2
)
 
 
 
 
 
(2
)
Total OTTI losses
 
$
 
 
$
(3
)
 
$
 
 
$
 
 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to UPB
 
96
%
 
72
%
 
%
 
%
 
83
%
Original weighted average credit support
 
3
%
 
6
%
 
%
 
%
 
5
%
Current weighted average credit support
 
9
%
 
3
%
 
%
 
%
 
6
%
Weighted average collateral delinquency (2)
 
7
%
 
16
%
 
%
 
%
 
12
%
 
(1)    Gross unrealized losses represent the difference between estimated fair value and amortized cost where fair value is less than amortized cost. These amounts exclude gross unrealized gains.
(2)    Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by the UPB of the individual securities in the category based on their respective collateral delinquency.
 


 

 
 
2004
 
 
 
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
 
Subprime
 
prior
 
2005
 
2006
 
2007
 
Total
Home equity loan investments:
 
 
 
 
 
 
 
 
 
 
Below investment grade:
 
 
 
 
 
 
 
 
 
 
B-rated
 
$
3
 
 
$
 
 
$
 
 
$
 
 
$
3
 
Total UPB
 
$
3
 
 
$
 
 
$
 
 
$
 
 
$
3
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
3
 
 
$
 
 
$
 
 
$
 
 
$
3
 
Gross unrealized losses (1)
 
(1
)
 
 
 
 
 
 
 
(1
)
Fair value
 
2
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
 
OTTI:
 
 
 
 
 
 
 
 
 
 
Related to credit losses
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
Related to non-credit losses
 
 
 
 
 
 
 
 
 
 
Total OTTI losses
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to UPB
 
57
%
 
%
 
%
 
%
 
57
%
Original weighted average credit support
 
100
%
 
%
 
%
 
%
 
100
%
Current weighted average credit support
 
100
%
 
%
 
%
 
%
 
100
%
Weighted average collateral delinquency (2)
 
35
%
 
%
 
%
 
%
 
35
%
 
 
 
 
 
 
 
 
 
 
 
Manufactured housing loan investments:
 
 
 
 
 
 
 
 
 
 
AA-rated
 
$
19
 
 
$
 
 
$
 
 
$
 
 
$
19
 
Total UPB
 
$
19
 
 
$
 
 
$
 
 
$
 
 
$
19
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
18
 
 
$
 
 
$
 
 
$
 
 
$
18
 
Gross unrealized losses (1)
 
(1
)
 
 
 
 
 
 
 
(1
)
Fair value
 
17
 
 
 
 
 
 
 
 
17
 
 
 
 
 
 
 
 
 
 
 
 
OTTI:
 
 
 
 
 
 
 
 
 
 
Related to credit losses
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
Related to non-credit losses
 
 
 
 
 
 
 
 
 
 
Total OTTI losses
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to UPB
 
94
%
 
%
 
%
 
%
 
94
%
Original weighted average credit support
 
28
%
 
%
 
%
 
%
 
28
%
Current weighted average credit support
 
28
%
 
%
 
%
 
%
 
28
%
Weighted average collateral delinquency (2)
 
2
%
 
%
 
%
 
%
 
2
%
 
(1)    Gross unrealized losses represent the difference between estimated fair value and amortized cost where fair value is less than amortized cost. These amounts exclude gross unrealized gains.
(2)    Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by the UPB of the individual securities in the category based on their respective collateral delinquency.
 


 

The following table presents the UPB of our Private-label MBS and ABS by collateral type ($ amounts in millions): 
 
 
March 31, 2011
 
December 31, 2010
 
 
Fixed
 
Variable
 
 
 
Fixed
 
Variable
 
 
Collateral Type
 
Rate
 
Rate (1)(2)
 
Total
 
Rate
 
Rate (1)(2)
 
Total
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Prime loans
 
$
835
 
 
$
784
 
 
$
1,619
 
 
$
985
 
 
$
800
 
 
$
1,785
 
Alt-A loans
 
106
 
 
 
 
106
 
 
118
 
 
 
 
118
 
Subprime loans
 
 
 
 
 
 
 
 
 
 
 
 
Total RMBS
 
941
 
 
784
 
 
1,725
 
 
1,103
 
 
800
 
 
1,903
 
Home Equity Loans ABS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime loans
 
 
 
3
 
 
3
 
 
 
 
3
 
 
3
 
Total Home Equity Loans ABS
 
 
 
3
 
 
3
 
 
 
 
3
 
 
3
 
Manufactured Housing ABS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime Loans
 
19
 
 
 
 
19
 
 
19
 
 
 
 
19
 
Total Manufactured Housing ABS
 
19
 
 
 
 
19
 
 
19
 
 
 
 
19
 
Total Private-label MBS and ABS, at UPB
 
$
960
 
 
$
787
 
 
$
1,747
 
 
$
1,122
 
 
$
803
 
 
$
1,925
 
 
(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.
 
The table below summarizes, by loan type, certain characteristics of private-label RMBS, manufactured housing loans and home equity loans in a gross unrealized loss position at March 31, 2011. The lowest ratings available for each security are reported as of April 30, 2011, based on the security's UPB at March 31, 2011 ($ amounts in millions):
 
 
 
 
 
 
 
 
 
 
 
 
April 30, 2011 Ratings Based on
 
 
March 31, 2011
 
March 31, 2011 UPB (3) (4)
 
 
 
 
 
 
Gross
 
Collateral
 
 
 
 
 
 
 
Below
 
 
 
 
 
 
Amortized
 
Unrealized
 
Delinquency
 
 
 
 
 
Investment
 
Investment
 
 
By Loan Type (1)
 
UPB
 
Cost
 
Losses 
 
Rate (2)
 
AAA
 
AAA
 
Grade
 
Grade
 
Watchlist
Private-label RMBS backed by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime - 1st lien
 
$
1,223
 
 
$
1,149
 
 
$
(54
)
 
14
%
 
27
%
 
26
%
 
7
%
 
67
%
 
6
%
Alt-A other - 1st lien
 
102
 
 
95
 
 
(12
)
 
12
%
 
26
%
 
26
%
 
17
%
 
57
%
 
%
Total private-label RMBS
 
1,325
 
 
1,244
 
 
(66
)
 
13
%
 
27
%
 
26
%
 
7
%
 
67
%
 
6
%
Subprime Manufactured housing ABS loans backed by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
 
19
 
 
18
 
 
(1
)
 
2
%
 
%
 
%
 
100
%
 
%
 
%
Total Subprime Manufactured housing ABS loans
 
19
 
 
18
 
 
(1
)
 
2
%
 
%
 
%
 
100
%
 
%
 
%
Subprime Home Equity ABS  loans backed by: (5)
 
 
 
 
 
 
 
  
 
  
  
 
  
  
 
  
 
 
 
 
 
 
 
2nd lien
 
3
 
 
3
 
 
(1
)
 
35
%
 
%
 
%
 
%
 
100
%
 
%
Total Subprime Home Equity ABS loans
 
3
 
 
3
 
 
(1
)
 
35
%
 
%
 
%
 
%
 
100
%
 
%
Total Private-label MBS and ABS
 
$
1,347
 
 
$
1,265
 
 
$
(68
)
 
13
%
 
27
%
 
25
%
 
9
%
 
66
%
 
6
%
 
(1)    We classify our private-label RMBS, manufactured housing loans and home equity loan investments as prime, Alt-A and subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS.
(2)    Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by the UPB of the individual securities in the category based on their respective collateral delinquency.
(3)    Excludes paydowns in full subsequent to March 31, 2011.


 

(4)    Represents the lowest ratings available for each security based on the lowest of Moody's, S&P or comparable Fitch ratings.
(5)    The credit support for the home equity loans is provided by MBIA Insurance Corporation. This insurance company had a credit rating of B as of April 30, 2011, based on the lower of Moody's and S&P ratings.
 
OTTI Evaluation Process.  We evaluate our individual AFS and HTM securities that are in an unrealized loss position for OTTI on a quarterly basis as described in Note 7 - Other-Than-Temporary Impairment Analysis in our Notes to Financial Statements contained in our 2010 Form 10-K.
 
As of March 31, 2011, our investments in MBS and ABS classified as HTM had gross unrealized losses totaling $54.3 million, of which $13.1 million 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 the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their amortized cost. As of March 31, 2011, our investments in private-label RMBS classified as AFS had gross unrealized losses recognized in AOCI of $55.2 million.
 
OTTI calculations are performed on an individual security basis where the projected losses of each security vary according to the changes in assumptions. Certain estimates were refined and certain assumptions were adjusted this quarter, particularly related to prime loans. These changes were based on current and forecasted economic trends affecting the underlying loans. Such trends include continued high unemployment, ongoing downward pressure on housing prices, and limited refinancing opportunities for many borrowers whose houses are now worth less than the balance of their mortgages.
 
The following table presents the significant modeling assumptions used to determine if an OTTI is considered to have occurred during the first quarter of 2011, as well as related current credit enhancement for all private-label RMBS (i.e., excludes ABS) outstanding as of March 31, 2011. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label RMBS in each category shown. While there is no universally accepted definition of prime, Alt-A or subprime, the classification in the table below is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.  
 
 
Significant Modeling Assumptions for all Private-label RMBS
 
Current Credit
 
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Enhancement
 
 
Weighted
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Weighted
 
 
 
 
Average
 
Range
 
Average
 
Range
 
Average
 
Range
 
Average
 
Range
Year of Securitization
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
Prime:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
7.1
 
 
5.2 - 8.8
 
45.2
 
 
31.1 - 62.3
 
41.7
 
 
37.7 - 45.9
 
5.2
 
 
0.4 - 11.6
2006
 
7.5
 
 
3.6 - 11.2
 
20.3
 
 
1.2 - 25.3
 
39.4
 
 
21.7 - 43.5
 
4.9
 
 
3.3 - 7.4
2005
 
8.9
 
 
5.1 - 12.5
 
35.9
 
 
0.8 - 49.9
 
35.2
 
 
20.0 - 43.6
 
8.3
 
 
4.0 - 11.2
2004 and prior
 
15.2
 
 
5.6 - 35.8
 
5.9
 
 
0.0 - 26.4
 
24.4
 
 
0.0 - 49.3
 
9.6
 
 
2.4 - 52.9
Total Prime
 
9.7
 
 
3.6 - 35.8
 
29.8
 
 
0.0 - 62.3
 
35.0
 
 
0.0 - 49.3
 
7.3
 
 
0.4 - 52.9
Alt-A:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2006
 
10.6
 
 
10.6 - 10.6
 
24.5
 
 
24.5 - 24.5
 
45.1
 
 
45.1 - 45.1
 
4.5
 
 
4.5 - 4.5
2005
 
8.3
 
 
7.3 - 11.8
 
39.1
 
 
29.9 - 42.0
 
41.0
 
 
35.4 - 42.7
 
3.5
 
 
3.5 - 3.7
2004 and prior
 
12.6
 
 
10.5 - 14.3
 
6.8
 
 
1.7 - 9.6
 
25.6
 
 
19.6 - 38.9
 
9.3
 
 
4.2 - 15.7
Total Alt-A
 
10.5
 
 
7.3 - 14.3
 
23.6
 
 
1.7 - 42.0
 
36.0
 
 
19.6 - 45.1
 
5.9
 
 
3.5 - 15.7
Total private-label RMBS
 
9.8
 
 
3.6 - 35.8
 
29.4
 
 
0.0 - 62.3
 
35.1
 
 
0.0 - 49.3
 
7.2
 
 
0.4 - 52.9
 


 

The following table presents the significant modeling assumptions used for all non-agency home equity loans as of March 31, 2011. Disclosures on current credit enhancements are not considered meaningful for home equity loans as these investments are third-party insured. The calculated averages represent the dollar-weighted averages in each category shown. While there is no universally accepted definition of prime, Alt-A or subprime, the classification in the table below is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.
 
 
Significant Modeling Assumptions for all Home Equity Loans
 
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
 
Weighted
 
 
 
Weighted
 
 
 
Weighted
 
 
 
 
Average
 
Range
 
Average
 
Range
 
Average
 
Range
Year of Securitization
 
%
 
%
 
%
 
%
 
%
 
%
Subprime 2004 and prior
 
17.2
 
17.0 - 17.6
 
19.4
 
12.4 - 23.2
 
58.3
 
47.4 - 64.2
Total home equity loans
 
17.2
 
17.0 - 17.6
 
19.4
 
12.4 - 23.2
 
58.3
 
47.4 - 64.2
 
We continue to actively monitor the credit quality of our Private-label MBS and ABS, which depends on the actual performance of the underlying loan collateral as well as our future modeling assumptions. Many factors could influence our future modeling assumptions including economic, financial market and housing market conditions. If performance of the underlying loan collateral deteriorates and/or our modeling assumptions become more pessimistic, we could record additional losses on our portfolio.
 
For our Private-label MBS and ABS that were not OTTI as of March 31, 2011, 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, 2011, the unrealized losses on the remaining Private-label MBS and ABS are temporary.
 
For other U.S. obligations, non-MBS and MBS GSEs, and TLGP securities, 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, 2011, any gross unrealized losses on these securities were temporary.
 
MPP.  We are exposed to credit risk on loans purchased from members through the MPP.  Each loan 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 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 17% of our outstanding MPP loans, at par.  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 loan-to-value 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 loan-to-value ratio of between 65% and 80% based upon the original appraisal, original loan-to-value 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, 2011, we were the beneficiary of PMI coverage on $0.8 billion or 14% 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 lower mortgage insurance company ratings. This expectation is based on the credit-enhancement features of our master commitments (exclusive of primary 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 coverage amount on seriously delinquent loans held in our portfolio as of March 31, 2011, and the mortgage insurance company credit ratings as of April 30, 2011 ($ amounts in millions):
 
 
 
 
 
 
Seriously Delinquent Loans with Primary Mortgage Insurance (2)
 
 
 
 
Credit
 
 
 
 
 
 
Credit
 
Rating
 
 
 
PMI Coverage
Mortgage Insurance Company
 
Rating (1)
 
Outlook (1)
 
UPB
 
Outstanding
Mortgage Guaranty Insurance Corporation
 
B
 
Negative
 
$
8
 
 
$
2
 
Republic Mortgage Insurance Corporation
 
BB
 
Negative
 
6
 
 
2
 
Radian Guaranty, Inc.
 
B
 
Negative
 
5
 
 
1
 
United Guaranty Residential Insurance Corporation
 
BBB
 
Stable
 
3
 
 
1
 
Genworth Mortgage Insurance Corporation
 
BB
 
Negative
 
3
 
 
1
 
All Others
 
NR, BBB, B
 
N/A
 
2
 
 
1
 
Total
 
 
 
 
 
$
27
 
 
$
8
 
 
(1)    Represents the lowest credit rating and outlook of S&P, Moody's or Fitch stated in terms of the S&P equivalent as of April 30, 2011.
(2)    Seriously delinquent loans includes loans that are 90 days or more past due or in the process of foreclosure.
 
Lender Risk Account.  We use either a "spread LRA" or a "fixed LRA" for credit enhancement. For each pool of conventional loans acquired prior to December 2010, we established a spread LRA in combination with SMI.  The spread LRA is funded through a reduction to our net yield earned on the loans, and the corresponding purchase price paid to the PFI reflects the reduced net yield to us. The fixed LRA is funded through an adjustment to the corresponding price paid to the PFI. As these funds are collected, either from the remittances or a reduction in purchase price, they are held by us and used to reimburse losses incurred by us or the SMI provider, if applicable, within each pool. If the LRA funds are not used to cover losses, the remaining funds in the LRA are returned to the member in accordance with the Master Commitment Contracts.
 
The LRA is recorded in Other Liabilities in the Statements of Condition and totaled $19.8 million at March 31, 2011, and $21.1 million at December 31, 2010.  The LRA for each Master Commitment Contract is segregated. 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 - Mortgage Loans Held for Portfolio - Notes to Financial Statements for more information.
 
Supplemental Mortgage Insurance.  For pools of loans acquired prior to December 2010, we have credit protection from loss on each loan, where eligible, through SMI, which provides sufficient insurance to cover credit losses to approximately 50% of the property's original value, subject, in certain cases, to an aggregate stop-loss provision in the SMI policy. The aggregate loss/benefit limit or "stop-loss" is only on Master Commitment Contracts that equal or exceed $35 million. The stop-loss is equal to the total initial principal balance of loans under the Master Commitment Contract multiplied by the stop-loss percentage, as is then in effect, and represents the maximum aggregate amount payable by the SMI provider under the SMI policy for that pool. We do not have SMI coverage on loans purchased after December 2010.
 
Even with the stop-loss provision, the aggregate of the LRA and the amount payable by the SMI provider under an SMI stop-loss contract will be equal to or greater than the amount of credit enhancement required for the pool to have an implied credit rating of at least AA at the time of purchase. Non-credit losses, such as uninsured property damage losses which are not covered by the SMI, can be recovered from the LRA to the extent that there has been no credit loss claim on those LRA funds. We will absorb losses beyond that level.
 


 

Credit Risk Exposure to Supplemental Mortgage Insurance Providers.  As of March 31, 2011, we were the beneficiary of SMI coverage on mortgage pools with a total UPB of $5.3 billion. Two mortgage insurance companies provide all of the coverage under these policies. The following table shows the related SMI credit enhancement as of March 31, 2011, and December 31, 2010 ($ amounts in millions):
 
Mortgage Insurance Company
 
March 31, 2011
 
December 31, 2010
Mortgage Guaranty Insurance Corporation
 
$
224
 
 
$
237
 
Genworth Mortgage Insurance Corporation
 
79
 
 
78
 
Total
 
$
303
 
 
$
315
 
 
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.  With the deterioration in the mortgage markets, we have been unable to meet the Finance Agency regulation's rating requirement because no mortgage insurers that underwrite SMI are currently rated in the second highest rating category or better by any NRSRO.  In fact, none of the mortgage insurance companies providing SMI coverage to us at this time were rated higher than BBB as of April 30, 2011. On November 29, 2010, we began offering MPP Advantage, which utilizes an enhanced fixed LRA account for additional credit enhancement for new MPP business consistent with Finance Agency regulations, instead of utilizing coverage from an SMI provider. Additional information is provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments - Other Legislative and Regulatory Developments in our 2010 Form 10-K.
 
Loan Characteristics.  The mortgage loans purchased through the MPP are currently dispersed across 50 states and the District of Columbia.  No single zip code represented more than 1% of MPP loans outstanding at March 31, 2011, or December 31, 2010.  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 primary sources of nationwide mortgages.  The median outstanding balance of our MPP loans was approximately $133 thousand and $134 thousand at March 31, 2011, and December 31, 2010, respectively. 
 
Credit Performance.  The UPB of our conventional and FHA loans 90 days or more past due and accruing interest, as well as any allowance for loan losses, are presented in the table below ($ amounts in millions):
 
 
March 31,
2011
 
December 31,
2010
Real estate mortgages past due 90 days or more and still accruing interest
 
$
129
 
 
$
127
 
Allowance for loan losses
 
1
 
 
1
 
 
The allowance for loan losses includes our best estimate of losses that would not be recovered from the credit enhancements. This estimate incorporates potential claims by servicers for any losses on approximately $15 million of principal that has been paid in full by the servicers through March 31, 2011.
 
We did not have any non-accrual loans at March 31, 2011, or December 31, 2010, based on our analysis of loans being well secured and in the process of collection as a result of the credit enhancements and scheduled/scheduled settlement. In addition, there were no troubled debt restructurings related to mortgage loans during the three months ended March 31, 2011, or 2010.
 
The serious delinquency rate for FHA mortgages was 0.09% at both March 31, 2011, and December 31, 2010.  We rely on insurance provided by the FHA, which generally provides coverage for 100% of the principal balance of the underlying mortgage loan and defaulted interest at the debenture rate.  However, we would receive defaulted interest at the contractual rate from the servicer. The serious delinquency rate for conventional mortgages was 2.39% at March 31, 2011, compared to 2.24% at December 31, 2010. Both rates were below the national serious delinquency rate. See Note 8 - Allowance for Credit Losses - Notes to Financial Statements for more information.
 


 

Derivatives.  A primary credit risk posed by derivative transactions is 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, this generally indicates that 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. If our credit rating had been lowered by a major credit rating agency (from AAA to AA+) we could have been required to deliver up to an additional $469.4 million of collateral (at fair value) to our derivative counterparties at March 31, 2011.
 
The following tables summarize key information on derivative counterparties on a settlement date basis using credit ratings based on the lower of S&P or Moody's ($ amounts in millions).
 
 
 
 
Credit Exposure
 
Other
 
 
 
 
Total
 
Net of Cash
 
Collateral
 
Net Credit
March 31, 2011
 
Notional
 
Collateral
 
Held
 
Exposure
AA
 
$
14,427
 
 
$
14
 
 
$
 
 
$
14
 
A
 
19,722
 
 
 
 
 
 
 
Unrated
 
23
 
 
 
 
 
 
 
Subtotal
 
34,172
 
 
14
 
 
 
 
14
 
Member institutions (1)
 
22
 
 
 
 
 
 
 
Total
 
$
34,194
 
 
$
14
 
 
$
 
 
$
14
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
AA
 
$
14,691
 
 
$
6
 
 
$
 
 
$
6
 
A
 
18,549
 
 
 
 
 
 
 
Unrated
 
126
 
 
 
 
 
 
 
Subtotal
 
33,366
 
 
6
 
 
 
 
6
 
Member institutions (1)
 
57
 
 
 
 
 
 
 
Total
 
$
33,423
 
 
$
6
 
 
$
 
 
$
6
 
 
(1)    The member institutions line includes mortgage delivery commitments and derivatives with members where we are acting as an intermediary. Collateral held with respect to derivatives with member institutions represents the minimum amount of eligible collateral physically held by or on behalf of the FHLBank or eligible collateral assigned to the FHLBank, as evidenced by a written security agreement, and held by the member institution for the benefit of the FHLBank.
 
AHP. Our AHP requires members and project sponsors to make commitments with respect to the usage of the AHP grants to assist very low-, low-, and moderate-income families, as defined by regulation. If these commitments are not met, we may have an obligation to recapture these funds from the member or project sponsor to replenish the AHP fund. This credit exposure is addressed in part by evaluating project feasibility at the time of an award and the member’s ongoing monitoring of AHP projects.
 


 

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 or our net earnings will decline as a result of changes in interest rates or financial market volatility.  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 measurements, including duration of equity, duration gaps, convexity, value at risk, market risk metric (one-month VaR), earnings at risk, and changes in market value of equity, to calculate potential market exposure. 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. Detailed information about some of these market risk measurements is provided below.
 
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 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 which are subject to internal policy guidelines:
 
 
-200 basis points*
 
0 basis points
 
+200 basis points
March 31, 2011
 
(0.3) years
 
0.6 years
 
2.5 years
December 31, 2010
 
(1.0) years
 
0.6 years
 
2.9 years
 
*    Our internal policy guidelines provide for the calculation of the duration of equity in a low-rate environment to be based on the Finance Agency Advisory Bulletin 03-09, as modified September 3, 2008. Under these guidelines, our duration of equity was 0.6 years at March 31, 2011, and 0.6 years at December 31, 2010.
 
We were in compliance with the duration of equity limits established at both dates.
 
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 (0.7) months at March 31, 2011, compared to (0.6) months at December 31, 2010.
 


 

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, 2011, callable debt funding mortgage assets as a percentage of the net mortgage portfolio equaled 35%, compared to 34% at the end of 2010.  The negative convexity on the mortgage assets is mitigated by the negative convexity of underlying callable debt.
 
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% confidence interval, based on these historical prices and market rates. Market risk-based capital estimates are presented below ($ amounts in million).
VaR
 
 
March 31, 2011
 
$
305
 
December 31, 2010
 
286
 
 
Changes in the Ratio of 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 ratio of 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 the ratio of market value to book value of equity from the base rates: 
 
-200 bps
 
+200 bps
March 31, 2011
1.5
%
 
(3.4
)%
December 31, 2010
0.1
%
 
(4.0
)%
 
 


 

ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed under the 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. As of March 31, 2011, we conducted an evaluation, under the supervision, and with the participation, of our management, including our Chief Executive Officer (the principal executive officer), Chief Operating 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 disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Operating Officer-Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.
 
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, that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Limitations on the Effectiveness of Controls
 
We do not expect that our disclosure controls and procedures and other internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Additionally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.


 

Part II.  OTHER INFORMATION
 
Item 1.  LEGAL PROCEEDINGS
 
As previously disclosed in our quarterly report on Form 10-Q for the quarter ended September 30, 2008, Lehman Brothers Holding Company, the guarantor for one of our former derivatives counterparties, Lehman Brothers Special Financing ("Lehman"), declared bankruptcy on September 15, 2008. We provided notice of default based on the bankruptcy to Lehman Brothers Holding Company on September 22, 2008, and designated September 25, 2008, as the early termination date under the International Swaps and Derivatives Association Master Agreement. On the early termination date, we had $5.4 billion notional of derivatives transactions outstanding with Lehman and no collateral posted to Lehman. The close-out provisions of the International Swaps and Derivatives Master Agreement required us to pay Lehman a termination fee of approximately $95.6 million, which we remitted to Lehman on September 25, 2008. Lehman's bankruptcy remains pending in the United States Bankruptcy Court Southern District of New York as Chapter 11 Case No. 08-13555(JMP).
In December 2010, the Lehman bankruptcy estate advised us that it disputed the termination fee amount and that the bankruptcy estate was entitled to an additional $1.471 million, which is the difference between the termination fee we previously paid Lehman and the market value fee we received on the replacement swaps. 
On May 9, 2011, we received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $1.471 million, plus interest accruing since the early termination date, at Lehman's cost of funds plus 1%. Lehman asserts such accrued interest, as of May 9, 2011, amounts to approximately $650 thousand. While we believe that we fully satisfied our obligation to Lehman and intend to vigorously defend this matter, we are unable at this time to predict the timing or ultimate outcome of this matter.
We are unaware of any other potential claims that could be material.
 
Item 1A.  RISK FACTORS
 
Except for an update to the following Risk Factor, there have been no material changes in the risk factors described in Item 1A of our 2010 Form 10-K.
 
Our Credit Rating or the Credit Rating of One or More of the Other FHLBanks Could be Lowered, Which Could Adversely Impact Our Cost of Funds or Ability to Enter Into Derivative Instrument Transactions on Acceptable Terms.
 
Our cost of issuing debt or our ability to enter into derivative instrument transactions on acceptable terms could be adversely affected if our credit rating or the credit ratings of one or more of the other FHLBanks are lowered. On April 20, 2011, S&P affirmed the long-term credit rating of AAA for 10 of the 12 FHLBanks but revised its outlook from stable to negative. The long-term credit ratings and outlooks on the FHLBanks of Chicago and Seattle were not affected.
 


 

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 May 21, 2010
 
 
 
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*+
 
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
 
 
 
10.3*+
 
Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2011, incorporated by reference to Exhibit 99.3 of our Current Report on Form 8-K filed on December 17, 2010
 
 
 
10.4*+
 
Federal Home Loan Bank of Indianapolis 2010 Long Term Incentive Plan, effective January 1, 2011, incorporated by reference to Exhibit 10.12 of our Annual Report on Form 10-K filed on March 18, 2011
 
 
 
10.5*+
 
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 on June 27, 2006
 
 
 
10.6*+
 
Federal Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to our Annual Report on Form 10-K filed on March 16, 2009
 
 
 
10.7*+
 
Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011, incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K filed on March 18, 2011
 
 
 
10.8*+
 
Form of Key Employee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010
 
 
 
10.9*+
 
Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011
 
 
 
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 Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 


 

Exhibit Number
 
Description
 
 
 
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, Executive Vice President - Chief Operating Officer - 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.
 


 

GLOSSARY OF TERMS
 
ABS: Asset-backed securities
Advances: Secured loans to members
AFS: Available-for-sale securities
AHP: Affordable Housing Program
AOCI: Accumulated Other Comprehensive Income (Loss)
Bank Act: Federal Home Loan Bank Act of 1932, as amended
CFTC: Commodity Futures Trading Commission
Consolidated Obligations: CO Bonds and Discount Notes
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted July 21, 2010
Exchange Act: Securities Exchange Act of 1934, as amended
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FOMC: Federal Open Market Committee
Federal Reserve: Federal Reserve Board
FHA: Federal Housing Administration
FHLBank: A Federal Home Loan Bank
FHLBanks: The 12 Federal Home Loan Banks or subset thereof
FHLBank System: The 12 FHLBanks and the Office of Finance
Finance Agency: Federal Housing Finance Agency
Finance Board: Federal Housing Finance Board
Fitch: Fitch Ratings, Inc.
Form 10-K: Annual Report on Form 10-K as filed with the SEC under the Securities Exchange Act of 1934
Form 10-Q: Quarterly Report on Form 10-Q
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally accepted accounting principles in the United States of America
Ginnie Mae: Government National Mortgage Association
GSE: Government-sponsored enterprise
HTM: Held-to-maturity securities
JCE Agreement: Joint Capital Enhancement Agreement
LIBOR: London Interbank Offered Rate
LRA: Lender risk account
MBS: Mortgage-backed securities
Moody's: Moody's Investor Service
MPP: Mortgage Purchase Program
MRCS: Mandatorily Redeemable Capital Stock
NRSRO: Nationally Recognized Statistical Rating Organization
OCI: Other Comprehensive Income
OTTI: Other-Than-Temporary-Impairment or other-than-temporarily impaired as the context indicates
Oversight Council: Financial Stability Oversight Council
PFI: Participating Financial Institution
PMI: Primary mortgage insurance
REFCORP: Resolution Funding Corporation
RMBS: Residential mortgage-backed securities
RRE Account: Separate Restricted Retained Earnings Account
S&P: Standard & Poor's Rating Service
SEC: Securities and Exchange Commission
SMI: Supplemental mortgage insurance
TLGP: The FDIC's Temporary Liquidity Guarantee Program
UPB: Unpaid principal balance
VaR: Value at risk
VIE: Variable Interest Entity
WAIR: Weighted average interest rate


 

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, 2011
By:
/s/ MILTON J. MILLER II
 
Name:  
Milton J. Miller II
 
Title:
President - Chief Executive Officer
 
 
 
 
 
 
May 12, 2011
By:
/s/ CINDY L. KONICH
 
Name:
Cindy L. Konich
 
Title:
Executive Vice President - Chief Operating Officer - Chief Financial Officer
 
 
 
 
 
 
May 12, 2011
By:
/s/ K. LOWELL SHORT, JR.
 
Name:
K. Lowell Short, Jr.
 
Title:
Senior Vice President - Chief Accounting Officer