10-Q 1 fhlb06301110q.htm FORM 10-Q FHLB 063011 10Q
 
 
 
 
 

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 June 30, 2011
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
Commission File Number: 000-51999
 

FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
 
 
 
 
Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
 


50309
(Zip code)
 

Registrant's telephone number, including area code: (515) 281-1000
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes 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 July 31, 2011
 
Class B Stock, par value $100
 
21,555,691
 
 
 
 
 
 
 
 
 

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except capital stock par value)
(Unaudited)
 
June 30,
2011
 
December 31,
2010
ASSETS
 
 
 
Cash and due from banks
$
668,916

 
$
105,741

Interest-bearing deposits
7,644

 
8,919

Securities purchased under agreements to resell (Note 3)
250,000

 
1,550,000

Federal funds sold
2,280,000

 
2,025,000

Investment securities
 
 
 
Trading securities (Note 4)
1,333,369

 
1,472,542

Available-for-sale securities (Note 5)
5,675,089

 
6,356,903

Held-to-maturity securities (estimated fair value of $6,241,106 and $7,395,340 at June 30, 2011 and December 31, 2010) (Note 6)
6,054,962

 
7,226,116

Total investment securities
13,063,420

 
15,055,561

Advances (Note 8)
27,939,298

 
29,252,529

Mortgage loans held for portfolio (Note 9)
7,244,459

 
7,434,446

Less allowance for credit losses on mortgage loans (Note 10)
(19,000
)
 
(13,000
)
Mortgage loans held for portfolio, net
7,225,459

 
7,421,446

Accrued interest receivable
77,128

 
79,314

Premises, software, and equipment, net
10,416

 
9,196

Derivative assets (Note 11)
576

 
11,927

Other assets
51,663

 
49,251

TOTAL ASSETS
$
51,574,520

 
$
55,568,884

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
920,113

 
$
1,069,986

Non-interest-bearing
61,327

 
110,667

Total deposits
981,440

 
1,180,653

Consolidated obligations (Note 12)
 
 
 
Discount notes (includes $416,794 and $0 at fair value under the fair value option at June 30, 2011 and December 31, 2010)
8,602,119

 
7,208,276

Bonds (includes $60,461 and $2,816,850 at fair value under the fair value option at June 30, 2011 and December 31, 2010)
38,567,859

 
43,790,568

Total consolidated obligations
47,169,978

 
50,998,844

Mandatorily redeemable capital stock (Note 13)
6,576

 
6,835

Accrued interest payable
170,997

 
187,091

Affordable Housing Program (AHP) Payable
43,083

 
44,508

Payable to REFCORP
4,629

 
12,467

Derivative liabilities (Note 11)
365,611

 
278,447

Other liabilities
31,140

 
30,467

TOTAL LIABILITIES
48,773,454

 
52,739,312

Commitments and contingencies (Note 15)
 
 
 
CAPITAL (Note 13)
 
 
 
Capital stock - Class B putable ($100 par value) authorized, issued, and outstanding
21,397 and 21,830 shares at June 30, 2011 and December 31, 2010
2,139,741

 
2,183,028

Retained earnings
568,468

 
556,013

Accumulated other comprehensive income
 
 
 
Net unrealized gain on available-for-sale securities (Note 5)
94,444

 
92,222

Pension and postretirement benefits
(1,587
)
 
(1,691
)
Total accumulated other comprehensive income
92,857

 
90,531

TOTAL CAPITAL
2,801,066

 
2,829,572

TOTAL LIABILITIES AND CAPITAL
$
51,574,520

 
$
55,568,884

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

3


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
65,262

 
$
101,038

 
$
135,251

 
$
208,554

Prepayment fees on advances, net
3,767

 
17,243

 
6,907

 
18,914

Interest-bearing deposits
62

 
83

 
133

 
143

Securities purchased under agreements to resell
249

 
460

 
824

 
580

Federal funds sold
822

 
1,787

 
1,793

 
3,303

Investment securities
 
 
 
 
 
 
 
Trading securities
5,838

 
10,147

 
12,302

 
25,672

Available-for-sale securities
20,392

 
24,936

 
56,371

 
49,877

Held-to-maturity securities
47,533

 
62,726

 
98,648

 
104,488

Mortgage loans held for portfolio
82,926

 
91,236

 
165,911

 
183,570

Total interest income
226,851

 
309,656

 
478,140

 
595,101

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
Discount notes
1,468

 
1,899

 
3,128

 
4,554

Bonds
176,309

 
235,047

 
363,545

 
465,162

Deposits
126

 
294

 
312

 
523

Borrowings from other FHLBanks

 
2

 

 
2

Mandatorily redeemable capital stock
49

 
34

 
112

 
74

Total interest expense
177,952

 
237,276

 
367,097

 
470,315

NET INTEREST INCOME
48,899

 
72,380

 
111,043

 
124,786

Provision for credit losses on mortgage loans held for portfolio
1,591

 
3,827

 
7,187

 
3,952

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
47,308

 
68,553

 
103,856

 
120,834

OTHER (LOSS) INCOME
 
 
 
 
 
 
 
Service fees
291

 
438

 
577

 
858

Net gain on trading securities
7,801

 
32,433

 
4,473

 
53,632

Net loss on consolidated obligations held at fair value
(364
)
 
(7,240
)
 
(1,361
)
 
(1,145
)
Net loss on derivatives and hedging activities
(16,073
)
 
(64,776
)
 
(14,089
)
 
(89,230
)
Net loss on extinguishment of debt

 

 
(4,602
)
 
(4,027
)
Other, net
824

 
1,532

 
960

 
4,792

Total other loss
(7,521
)
 
(37,613
)
 
(14,042
)
 
(35,120
)
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
7,904

 
7,542

 
16,275

 
15,292

Other operating expenses
4,144

 
4,367

 
8,205

 
8,772

Federal Housing Finance Agency
1,152

 
637

 
2,514

 
1,357

Office of Finance
680

 
434

 
1,514

 
1,042

Total other expense
13,880

 
12,980

 
28,508

 
26,463

INCOME BEFORE ASSESSMENTS
25,907

 
17,960

 
61,306

 
59,251

AHP
2,133

 
1,470

 
5,029

 
4,845

REFCORP
4,628

 
3,298

 
11,129

 
10,881

Total assessments
6,761

 
4,768

 
16,158

 
15,726

NET INCOME
$
19,146

 
$
13,192

 
$
45,148

 
$
43,525


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

4


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(In thousands)
(Unaudited)
 
Capital Stock
Class B (putable)
 
 
 
Accumulated Other Comprehensive Income
 
 
 
Shares
 
Par Value
 
Retained Earnings
 
 
Total
Capital
BALANCE DECEMBER 31, 2009
24,604

 
$
2,460,419

 
$
484,071

 
$
(33,935
)
 
$
2,910,555

Proceeds from issuance of capital stock
2,282

 
228,174

 

 

 
228,174

Repurchase/redemption of capital stock
(3,781
)
 
(378,074
)
 

 

 
(378,074
)
Net shares reclassified to mandatorily redeemable capital stock
(31
)
 
(3,087
)
 

 

 
(3,087
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
43,525

 

 
43,525

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Net unrealized gain on available-for-sale securities

 

 

 
136,521

 
136,521

Pension and postretirement benefits

 

 

 
97

 
97

Total comprehensive income
 
 
 
 
 
 
 
 
180,143

Cash dividends on capital stock

 

 
(26,459
)
 

 
(26,459
)
BALANCE JUNE 30, 2010
23,074

 
$
2,307,432

 
$
501,137

 
$
102,683

 
$
2,911,252

 
 
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2010
21,830

 
$
2,183,028

 
$
556,013

 
$
90,531

 
$
2,829,572

Proceeds from issuance of capital stock
2,123

 
212,319

 

 

 
212,319

Repurchase/redemption of capital stock
(2,552
)
 
(255,195
)
 

 

 
(255,195
)
Net shares reclassified to mandatorily redeemable capital stock
(4
)
 
(411
)
 

 

 
(411
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
45,148

 

 
45,148

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Net unrealized gain on available-for-sale securities

 

 

 
2,222

 
2,222

Pension and postretirement benefits

 

 

 
104

 
104

Total comprehensive income
 
 
 
 
 
 
 
 
47,474

Cash dividends on capital stock

 

 
(32,693
)
 

 
(32,693
)
BALANCE JUNE 30, 2011
21,397

 
$
2,139,741

 
$
568,468

 
$
92,857

 
$
2,801,066


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



5


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2011
 
2010
OPERATING ACTIVITIES
 
 
 
Net income
$
45,148

 
$
43,525

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Depreciation and amortization
4,869

 
2,102

Net gain on trading securities
(4,473
)
 
(53,632
)
Net loss on consolidated obligations held at fair value
1,361

 
1,145

Net change in derivatives and hedging activities
102,118

 
6,930

Net loss on extinguishment of debt
4,602

 
4,027

Other adjustments
3,155

 
2,612

Net change in:
 
 
 
Accrued interest receivable
2,103

 
(3,093
)
Other assets
7,074

 
(5,444
)
Accrued interest payable
(7,611
)
 
(1,460
)
Other liabilities
(8,487
)
 
1,122

Total adjustments
104,711

 
(45,691
)
Net cash provided by (used in) operating activities
149,859

 
(2,166
)
INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(68,925
)
 
(65,743
)
Securities purchased under agreements to resell
1,300,000

 
(250,000
)
Federal funds sold
(255,000
)
 
1,053,500

Premises, software, and equipment
(2,241
)
 
(1,257
)
Trading securities
 
 
 
Purchases
(56,354
)
 

Proceeds from sales and maturities
200,000

 
2,810,147

Available-for-sale securities
 
 
 
Proceeds from sales and maturities
686,988

 
1,238,318

Purchases

 
(172,968
)
Held-to-maturity securities
 
 
 
Net decrease (increase) in short-term
335,000

 
(300,000
)
Proceeds from maturities
836,631

 
1,343,392

Purchases

 
(3,904,199
)
Advances
 
 
 
Principal collected
20,059,564

 
17,788,475

Originated
(18,752,141
)
 
(14,330,235
)
Mortgage loans held for portfolio
 
 
 
Principal collected
721,149

 
574,100

Originated or purchased
(553,236
)
 
(405,881
)
Proceeds from sales of foreclosed assets
18,580

 
11,462

Net cash provided by investing activities
4,470,015

 
5,389,111


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


6


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2011
 
2010
FINANCING ACTIVITIES
 
 
 
Net change in deposits
(191,713
)
 
107,316

Net payments on derivative contracts with financing elements
(4,913
)
 
(5,582
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
278,968,158

 
202,001,654

Bonds
14,507,421

 
21,598,924

Payments for maturing, transferring, and retiring consolidated obligations
 
 
 
Discount notes
(277,573,507
)
 
(207,929,151
)
Bonds
(19,685,906
)
 
(21,180,529
)
Proceeds from issuance of capital stock
212,319

 
228,174

Payments for repurchase of mandatorily redeemable capital stock
(670
)
 
(4,806
)
Payments for repurchase/redemption of capital stock
(255,195
)
 
(378,074
)
Cash dividends paid
(32,693
)
 
(26,459
)
Net cash used in financing activities
(4,056,699
)
 
(5,588,533
)
 
 
 
 
Net increase (decrease) in cash and due from banks
563,175

 
(201,588
)
Cash and due from banks at beginning of the period
105,741

 
298,841

Cash and due from banks at end of the period
$
668,916

 
$
97,253

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
759,108

 
$
931,307

AHP
$
6,454

 
$
6,425

REFCORP
$
18,967

 
$
17,604

Unpaid principal balance transferred from mortgage loans held for portfolio to real estate owned
$
17,839

 
$
12,418


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

7


FEDERAL HOME LOAN BANK OF DES MOINES

CONDENSED NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation except real property taxes and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBank's Office of Finance, effective July 30, 2008. The Finance Agency's mission is to provide effective supervision, regulation, and housing mission oversight of the Enterprises and FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

The FHLBanks serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available, low cost source of funds to its member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Commercial banks, thrifts, credit unions, insurance companies, and community development financial institutions may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank.

The Bank's current members own nearly all of the outstanding capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on our Statement of Condition. All stockholders, including current members and former members, may receive dividends on their capital stock investment to the extent declared by the Bank's Board of Directors.

Note 1 — Basis of Presentation

The accompanying financial statements of the Bank are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information required by GAAP for full year information and should be read in conjunction with the audited financial statements for the year ended December 31, 2010, which are contained in the Bank's 2010 annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2011 (2010 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2010 Form 10-K, with the exception of one policy change noted below.

Office of Finance Expenses

The Bank is assessed for the costs of operating the Office of Finance. Effective January 1, 2011, the Office of Finance allocates its operating and capital expenditures to the FHLBanks as follows: (i) two-thirds based on each FHLBank's share of consolidated obligations outstanding and (ii) one-third based on equal pro-rata share (1/12th).

8


Note 2 — Recently Adopted and Issued Accounting Guidance

Presentation of Comprehensive Income

On June 16, 2011, the Financial Accounting Standards Board (FASB) issued guidance to increase the prominence of other comprehensive income in financial statements. This guidance requires an entity that reports items of other comprehensive income to present comprehensive income in either a single financial statement or in two consecutive financial statements. In a single continuous statement, an entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, as well as a total for comprehensive income. In a two-statement approach, an entity is required to present the components of net income and total net income in its statement of net income. The statement of other comprehensive income should follow immediately and include the components of other comprehensive income as well as totals for both other comprehensive income and comprehensive income. This guidance eliminates the option to present other comprehensive income in the statement of changes in stockholders' equity. This guidance is effective for interim and annual periods beginning on January 1, 2012 and should be applied retrospectively for all periods presented. Early adoption is permitted. The Bank plans to elect the two-statement approach noted above beginning on January 1, 2012. The Bank's adoption of this guidance is expected to be limited to the presentation of its annual and interim financial statements and not affect its financial condition, results of operations or cash flows.

Fair Value Measurements and Disclosures

On January 21, 2010, the FASB issued amended guidance for fair value measurements and disclosures. The Bank 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; the related guidance on these required disclosures was adopted as of January 1, 2011. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not affect the Bank's financial condition, results of operations or cash flows.

On May 12, 2011, the FASB and the International Accounting Standards Board issued substantially converged guidance on fair value measurement and disclosure requirements. This guidance clarifies how fair value accounting should be applied where its use is already required or permitted by other standards within GAAP or International Financial Reporting Standards; these amendments do not require additional fair value measurements. This guidance generally represents clarifications to the application of existing fair value measurement and disclosure requirements, as well as some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for interim and annual periods beginning on January 1, 2012 and should be applied prospectively. Early application by public entities is not permitted. The adoption of this guidance may result in increased annual and interim financial statement disclosures, but is not expected to have a material effect on the Bank's 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. This guidance amends the existing criteria for determining whether or not a transferor has retained effective control over financial assets transferred under a repurchase agreement. A secured borrowing is recorded when effective control over the transferred financial assets is maintained, while a sale is recorded when effective control over the transferred financial assets has not been maintained. 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 January 1, 2012 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Bank's adoption of this guidance is not expected to have a material effect on its financial condition, results of operations, or cash flows.

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 was deferred in order to be coordinated with the effective date of the guidance for determining what constitutes a troubled debt restructuring.


9


On April 5, 2011, the FASB issued guidance to clarify which debt modifications constitute troubled debt restructurings. The 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 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 Bank's adoption of this guidance is not expected to impact its financial statement disclosures or have a material effect on its financial condition, results of operations, or cash flows.

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 affect the Bank's financial condition, results of operations or cash flows.

Note 3 — Securities Purchased Under Agreements to Resell
The Bank periodically holds securities purchased under agreements to resell those securities. These amounts represent short-term secured investments and are classified as assets in the Statement of Condition. These securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty must either place an equivalent amount of additional securities in safekeeping in the name of the Bank or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will be decreased accordingly.

Note 4 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
June 30,
2011
 
December 31,
2010
TLGP1
$
1,010,633

 
$
1,213,481

Taxable municipal bonds2
267,722

 
259,061

Government-sponsored enterprise obligations3
55,014

 

Total
$
1,333,369

 
$
1,472,542

1
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government.
2
Represents investments in U.S. Government subsidized Build America Bonds.
3
Represents Tennessee Valley Authority (TVA) bonds.

At June 30, 2011 and December 31, 2010, 47 and 52 percent of the Bank's trading securities were fixed rate and all of these fixed rate securities were swapped to a variable rate index through the use of an interest rate swap accounted for as an economic derivative.

The following table summarizes the net gains on trading securities (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Realized gain on sale of trading securities
$

 
$
12,039

 
$

 
$
23,704

Holding gain on trading securities
7,801

 
20,394

 
4,473

 
29,928

Net gain on trading securities
$
7,801

 
$
32,433

 
$
4,473

 
$
53,632



10


Sales

During the three and six months ended June 30, 2011, the Bank did not sell any trading securities. During the three and six months ended June 30, 2010, the Bank sold trading securities with a par value of $1.8 billion and $2.8 billion and realized net gains of $12.0 million and $23.7 million.

Note 5 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities at June 30, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
1
 
Gross
Unrealized
Losses
2
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP3
$
563,688

 
$
1,583

 
$

 
$
565,271

Taxable municipal bonds4
173,420

 
767

 
2,235

 
171,952

Other U.S. obligations5
171,792

 
819

 
491

 
172,120

Government-sponsored enterprise obligations6
487,677

 
42,642

 

 
530,319

Total non-mortgage-backed securities
1,396,577

 
45,811

 
2,726

 
1,439,662

Mortgage-backed securities7
 
 
 
 
 
 
 
Government-sponsored enterprises8
4,178,483

 
59,550

 
2,606

 
4,235,427

Total
$
5,575,060

 
$
105,361

 
$
5,332

 
$
5,675,089

    
AFS securities at December 31, 2010 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
1
 
Gross
Unrealized
Losses
2
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP3
$
563,688

 
$
2,006

 
$

 
$
565,694

Taxable municipal bonds4
173,421

 
277

 
9,093

 
164,605

Other U.S. obligations5
178,325

 
323

 
2,168

 
176,480

Government-sponsored enterprise obligations6
488,853

 
34,386

 

 
523,239

Total non-mortgage-backed securities
1,404,287

 
36,992

 
11,261

 
1,430,018

Mortgage-backed securities7
 
 
 
 
 
 
 
Government-sponsored enterprises8
4,859,274

 
70,293

 
2,682

 
4,926,885

Total
$
6,263,561

 
$
107,285

 
$
13,943

 
$
6,356,903

1
Gross unrealized gains include $12.4 million and $10.1 million of fair value hedging adjustments at June 30, 2011 and December 31, 2010.
2
Gross unrealized losses include $6.8 million and $9.0 million of fair value hedging adjustments at June 30, 2011 and December 31, 2010.
3
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government.
4
Represents investments in U.S. Government subsidized Build America Bonds and State of Iowa IJOBS Program Special Obligations.
5
Represents Export-Import Bank bonds.
6
Represents TVA and Federal Farm Credit Bank (FFCB) bonds.
7
The amortized cost of the Bank's AFS mortgage-backed securities (MBS) includes net discounts $0.9 million and $0.6 million at June 30, 2011 and December 31, 2010.
8
Represents Fannie Mae and Freddie Mac securities.

At June 30, 2011 and December 31, 2010, 24 percent of the Bank's AFS securities were fixed rate and 30 and 28 percent of these fixed rate securities were swapped to a variable rate index.


11


The following table summarizes the AFS securities with unrealized losses at June 30, 2011. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal bonds
$
141,846

 
$
2,235

 
$

 
$

 
$
141,846

 
$
2,235

Other U.S. obligations
95,868

 
491

 

 

 
95,868

 
491

Total non-mortgage-backed securities
237,714

 
2,726

 

 

 
237,714

 
2,726

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
152,949

 
99

 
435,154

 
2,507

 
588,103

 
2,606

Total
$
390,663

 
$
2,825

 
$
435,154

 
$
2,507

 
$
825,817

 
$
5,332


The following table summarizes the AFS securities with unrealized losses at December 31, 2010. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal bonds
$
149,328

 
$
9,093

 
$

 
$

 
$
149,328

 
$
9,093

Other U.S. obligations
146,090

 
2,168

 

 

 
146,090

 
2,168

Total non-mortgage-backed securities
295,418

 
11,261

 

 

 
295,418

 
11,261

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises

 

 
505,769

 
2,682

 
505,769

 
2,682

Total
$
295,418

 
$
11,261

 
$
505,769

 
$
2,682

 
$
801,187

 
$
13,943


Redemption Terms

The following table summarizes the amortized cost and fair value of AFS securities categorized by contractual maturity (dollars in thousands). 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.
 
 
June 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
563,688

 
$
565,271

 
$

 
$

Due after one year through five years
 
76,893

 
83,118

 
640,825

 
648,106

Due after five years through ten years
 
391,670

 
425,725

 
390,812

 
417,558

Due after ten years
 
364,326

 
365,548

 
372,650

 
364,354

Total non-mortgage-backed securities
 
1,396,577

 
1,439,662

 
1,404,287

 
1,430,018

Mortgage-backed securities
 
4,178,483

 
4,235,427

 
4,859,274

 
4,926,885

Total
 
$
5,575,060

 
$
5,675,089

 
$
6,263,561

 
$
6,356,903


Prepayment Fees

During the three months ended June 30, 2011, the Bank did not receive any prepayment fees on AFS securities. During the six months ended June 30, 2011, an AFS MBS with an outstanding par value of $119.0 million was prepaid and the Bank received a $14.6 million prepayment fee. The prepayment fee was recorded as interest income on AFS securities in the Statement of Income. During the three and six months ended June 30, 2010, the Bank did not receive any prepayment fees on AFS securities.


12


Sales

During the three and six months ended June 30, 2011, the Bank did not sell any AFS securities. During the three and six months ended June 30, 2010, the Bank sold an AFS security at par of $91.0 million and therefore recognized no gain or loss on the sale.

Note 6 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities at June 30, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprise obligations1
$
310,812

 
$
24,785

 
$

 
$
335,597

State or local housing agency obligations2
97,675

 
2,701

 

 
100,376

TLGP3
1,250

 
18

 

 
1,268

Other4
2,411

 

 

 
2,411

Total non-mortgage-backed securities
412,148

 
27,504

 

 
439,652

Mortgage-backed securities5
 
 
 
 
 
 
 
Government-sponsored enterprises6
5,557,725

 
164,391

 
2,159

 
5,719,957

Other U.S. obligations7
30,626

 
98

 
2

 
30,722

Private-label8
54,463

 
229

 
3,917

 
50,775

Total mortgage-backed securities
5,642,814

 
164,718

 
6,078

 
5,801,454

Total
$
6,054,962

 
$
192,222

 
$
6,078

 
$
6,241,106

 
HTM securities at December 31, 2010 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
335,000

 
$

 
$
34

 
$
334,966

Government-sponsored enterprise obligations1
311,547

 
26,642

 

 
338,189

State or local housing agency obligations2
107,242

 
1,495

 
1,321

 
107,416

TLGP3
1,250

 
32

 

 
1,282

Other4
3,705

 

 

 
3,705

Total non-mortgage-backed securities
758,744

 
28,169

 
1,355

 
785,558

Mortgage-backed securities5
 
 
 
 
 
 
 
Government-sponsored enterprises6
6,374,093

 
148,914

 
2,056

 
6,520,951

Other U.S. obligations7
34,387

 
149

 
1

 
34,535

Private-label8
58,892

 

 
4,596

 
54,296

Total mortgage-backed securities
6,467,372

 
149,063

 
6,653

 
6,609,782

Total
$
7,226,116

 
$
177,232

 
$
8,008

 
$
7,395,340

1
Represents TVA and FFCB bonds.
2
Represents Housing Finance Authority (HFA) bonds that were purchased by the Bank from housing associates in the Bank's district.
3
Represents corporate debentures issued by the Bank's members that are backed by the full faith and credit of the U.S. Government.
4
Represents an investment in a Small Business Investment Company.
5
The amortized cost of the Bank's HTM MBS includes net discounts of $6.0 million and $7.9 million at June 30, 2011 and December 31, 2010.
6
Represents Fannie Mae and Freddie Mac securities.
7
Represents Government National Mortgage Association (Ginnie Mae) securities and Small Business Administration (SBA) Pool Certificates. SBA Pool Certificates represent undivided interests in pools of the guaranteed portions of SBA loans. The SBA's guarantee of the Pool Certificates is backed by the full faith and credit of the U.S. Government.
8
Includes $22.8 million and $25.8 million of Mortgage Partnership Finance shared funding certificates at June 30, 2011 and December 31, 2010.
 

13


The following table summarizes the HTM securities with unrealized losses at June 30, 2011. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
$
1,292

 
$

 
$
361,002

 
$
2,159

 
$
362,294

 
$
2,159

Other U.S. obligations

 

 
663

 
2

 
663

 
2

Private-label

 

 
29,304

 
3,917

 
29,304

 
3,917

Total mortgage-backed securities
$
1,292

 
$

 
$
390,969

 
$
6,078

 
$
392,261

 
$
6,078

 
The following table summarizes the HTM securities with unrealized losses at December 31, 2010. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
334,966

 
$
34

 
$

 
$

 
$
334,966

 
$
34

State or local housing agency obligations
62,549

 
1,321

 

 

 
62,549

 
1,321

Total non-mortgage-backed securities
397,515

 
1,355

 

 

 
397,515

 
1,355

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
217

 

 
403,347

 
2,056

 
403,564

 
2,056

Other U.S. obligations
322

 

 
799

 
1

 
1,121

 
1

Private-label
24,039

 
53

 
30,257

 
4,543

 
54,296

 
4,596

Total mortgage-backed securities
24,578

 
53

 
434,403

 
6,600

 
458,981

 
6,653

Total
$
422,093

 
$
1,408

 
$
434,403

 
$
6,600

 
$
856,496

 
$
8,008


Redemption Terms

The following table summarizes the amortized cost and fair value of HTM securities by contractual maturity (dollars in thousands). 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.
 
 
June 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
1,250

 
$
1,268

 
$
335,000

 
$
334,966

Due after one year through five years
 
2,411

 
2,411

 
1,250

 
1,282

Due after five years through ten years
 

 

 
1,920

 
1,923

Due after ten years
 
408,487

 
435,973

 
420,574

 
447,387

Total non-mortgage-backed securities
 
412,148

 
439,652

 
758,744

 
785,558

Mortgage-backed securities
 
5,642,814

 
5,801,454

 
6,467,372

 
6,609,782

Total
 
$
6,054,962

 
$
6,241,106

 
$
7,226,116

 
$
7,395,340




14


Note 7 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (OTTI) on at least a quarterly basis. As part of its OTTI evaluation, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired.

Private-Label MBS

For its private-label MBS, the Bank performs cash flow analyses to determine whether the entire amortized cost bases of these securities are expected to be recovered. The FHLBanks formed an OTTI Governance Committee, comprised of representation from all 12 FHLBanks, which is responsible for reviewing and approving the key modeling assumptions, inputs, and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. In accordance with this methodology, the Bank may engage another designated FHLBank to perform the cash flow analyses underlying its OTTI determination. In order to promote consistency in the application of the assumptions, inputs, and implementation of the OTTI methodology, the FHLBanks established control procedures whereby the FHLBanks performing the cash flow analyses select a sample group of private-label MBS and each perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve consistency among their respective cash flow models.

Utilizing this methodology, the Bank is responsible for making its own determination of impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies used. At June 30, 2011, the Bank obtained cash flow analyses from its designated FHLBanks for all of its private-label MBS. The cash flow analyses use two third-party models. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which is based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The Bank's housing price forecast as of June 30, 2011 assumed current-to-trough home price declines ranging from 0 percent (for those housing markets that are believed to have reached their trough) to 8 percent. 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 April 1, 2011 followed in each case by a 3-month period of flat prices. 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 within a range of 0 to 2.8 percent in the first year, 0 to 3 percent in the second year, 1.5 to 4 percent in the third year, 2 to 5 percent in the fourth year, 2 to 6 percent in each of the fifth and sixth years, and 2.3 to 5.6 percent in each subsequent year.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects an estimated scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described in the prior paragraph.

The Bank compares the present value of the cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss exists. At June 30, 2011, the Bank's cash flow analyses for private-label MBS did not project any credit losses. Even under an adverse scenario that delays recovery of the housing price index, no credit losses were projected. The Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before recovery of their amortized cost bases. As a result, the Bank did not consider any of these securities to be other-than-temporarily impaired at June 30, 2011 and December 31, 2010.


15


All Other Investment Securities

The remainder of the Bank's AFS and HTM securities in an unrealized loss position have experienced losses due to interest rate volatility and credit deterioration in the U.S. markets. However, the declines are considered temporary as the Bank expects to recover the amortized cost bases on its remaining AFS and HTM securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases.

In addition, the Bank determined the following for its other investment securities:

Other U.S. obligations and government-sponsored enterprise (GSE) securities. The strength of the issuers' guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations.

Taxable municipal bonds and state or local housing agency obligations. The creditworthiness of the issuers was sufficient to protect the Bank from losses based on current expectations.

As a result, the Bank did not consider any of its other investment securities to be other-than-temporarily impaired at June 30, 2011 and December 31, 2010.

Note 8 — Advances

Redemption Terms

The following table summarizes the Bank's advances outstanding by year of contractual maturity (dollars in thousands):
 
 
June 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate %
 
Amount
 
Weighted
Average
Interest
Rate %
Overdrawn demand deposit accounts
 
$
16

 
3.30
 
$
208

 
3.29
Due in one year or less
 
6,029,565

 
1.50
 
6,782,825

 
1.76
Due after one year through two years
 
5,433,414

 
1.88
 
3,923,100

 
2.20
Due after two years through three years
 
3,763,053

 
1.57
 
5,647,503

 
1.75
Due after three years through four years
 
879,457

 
3.14
 
908,824

 
2.81
Due after four years through five years
 
2,129,342

 
2.31
 
1,640,803

 
2.23
Thereafter
 
8,960,171

 
2.83
 
9,599,178

 
2.96
Total par value
 
27,195,018

 
2.14
 
28,502,441

 
2.29
Premiums
 
205

 
 
 
237

 
 
Discounts
 
(1
)
 
 
 
(2
)
 
 
Fair value hedging adjustments
 
 
 
 
 
 
 
 
Cumulative fair value gain on existing hedges
 
670,507

 
 
 
663,079

 
 
Basis adjustments from terminated hedges
 
73,569

 
 
 
86,774

 
 
Total
 
$
27,939,298

 
 
 
$
29,252,529

 
 

The Bank offers advances to members that may be prepaid on pertinent dates (call dates) without incurring prepayment fees (callable advances). At June 30, 2011 and December 31, 2010, the Bank had callable advances outstanding totaling $5.8 billion and $5.9 billion. The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance at predetermined exercise dates, which the Bank typically would exercise when interest rates increase, and the borrower may then apply for a new advance at the prevailing market rate. At June 30, 2011 and December 31, 2010, the Bank had putable advances outstanding totaling $4.0 billion and $4.8 billion.


16


Interest Rate Payment Terms

The following table summarizes the Bank's advances by interest rate payment type (dollars in thousands):
 
June 30,
2011
 
December 31,
2010
Fixed rate
$
18,733,517

 
$
19,932,279

Variable rate
8,461,501

 
8,570,162

Total par value
$
27,195,018

 
$
28,502,441


At June 30, 2011 and December 31, 2010, 63 and 59 percent of the Bank's fixed rate advances were swapped to a variable rate index and 2 percent of the Bank's variable rate advances were swapped to another variable rate index at each period end.

Prepayment Fees

The Bank charges a prepayment fee for advances that terminate prior to their stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank economically indifferent to the prepayment of the advance. These prepayment fees are presented net of fair value hedging adjustments and deferrals on advance modifications in the Statement of Income as "Prepayment fees on advances, net." The following table summarizes the Bank's prepayment fees on advances, net (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Gross prepayment fees
$
4,640

 
$
18,717

 
$
12,605

 
$
20,518

Fair value hedging adjustments
(1,001
)
 
(1,511
)
 
(5,982
)
 
(1,677
)
Deferrals on advance modifications
128

 
37

 
284

 
73

Prepayment fees on advances, net
$
3,767

 
$
17,243

 
$
6,907

 
$
18,914


For additional information related to the Bank's credit risk and security terms on advances, refer to "Note 10 — Allowance for Credit Losses."

Note 9 — Mortgage Loans Held for Portfolio

The Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) involves investment by the Bank in mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank's PFIs originate, service, and credit enhance mortgage loans that are sold to the Bank. PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the PFI to a designated mortgage service provider.

Mortgage loans with a contractual maturity of 15 years or less are classified as medium-term, and all other mortgage loans are classified as long-term. The following table presents information on the Bank's mortgage loans held for portfolio (dollars in thousands):
 
June 30,
2011
 
December 31,
2010
Real Estate:
 
 
 
Fixed rate, medium-term single family mortgages
$
1,830,312

 
$
1,874,606

Fixed rate, long-term single family mortgages
5,377,281

 
5,528,714

Total unpaid principal balance
7,207,593

 
7,403,320

Premiums
64,005

 
63,975

Discounts
(35,549
)
 
(40,474
)
Basis adjustments from mortgage loan commitments
8,410

 
7,625

Allowance for credit losses
(19,000
)
 
(13,000
)
Total mortgage loans held for portfolio, net
$
7,225,459

 
$
7,421,446



17


The following table details the unpaid principal balance of the Bank's mortgage loans held for portfolio (dollars in thousands):
 
June 30,
2011
 
December 31,
2010
Conventional loans
$
6,822,636

 
$
7,033,089

Government-insured loans
384,957

 
370,231

Total unpaid principal balance
$
7,207,593

 
$
7,403,320

    
For additional information related to the Bank's credit risk on mortgage loans held for portfolio, refer to "Note 10 — Allowance for Credit Losses."

Note 10 — Allowance for Credit Losses

The Bank has an allowance methodology for each of its portfolio segments of financing receivables: advances, letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, conventional mortgage loans held for portfolio, and term Federal funds sold.

Credit Products

The Bank manages its credit exposure to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition, and is coupled with collateral/lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends to its borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

The FHLBank Act requires the Bank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential property or securities representing a whole interest in such mortgages, (ii) securities issued, insured, or guaranteed by the U.S. Government or any of the government-sponsored housing enterprises, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, (iii) cash deposited with the Bank, (iv) Federal Family Education Loan Program guaranteed student loans, and (v) other real estate-related collateral acceptable to the Bank provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act requires the Bank to have a lien on each borrower's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures. Collateral arrangements may vary depending upon borrower credit quality, financial condition, performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest.

The Bank's hierarchy of pledging assets as collateral is to have the borrower execute a blanket lien, specifically assign the collateral, or place physical possession of the collateral with the Bank or its safekeeping agent. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a borrower priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each borrower's financial strength, the Bank considers the types and amount of collateral to be the primary tool for managing its credit exposure to credit products. At June 30, 2011 and December 31, 2010, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.


18


The Bank periodically evaluates and may make changes to its collateral guidelines. At June 30, 2011 and December 31, 2010, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, there have been no troubled debt restructurings related to credit products at the Bank during the six months ended June 30, 2011 and 2010.

Based upon the Bank's collateral/lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there are no probable credit losses on its credit products as of June 30, 2011 and December 31, 2010. Accordingly, the Bank has not recorded any allowance for credit losses.

At June 30, 2011 and December 31, 2010, no liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded. For additional information on the Bank's off-balance sheet credit exposure, see "Note 15 — Commitments and Contingencies."

Government-Insured Mortgage Loans

The Bank invests in government-insured fixed rate mortgage loans secured by one-to-four family residential properties. Government-insured mortgage loans are insured by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer provides and maintains insurance or a guaranty from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government mortgage loans. Any losses incurred on such mortgage loans that are not recovered from the issuer or guarantor are absorbed by the servicers. As a result, the Bank did not establish an allowance for credit losses for government-insured mortgage loans at June 30, 2011 and December 31, 2010. Furthermore, due to the government guarantee or insurance, these mortgage loans are not placed on non-accrual status.

Conventional Mortgage Loans

The Bank's management of credit risk in the MPF Program involves several layers of loss protection that are defined in agreements among the Bank and its participating PFIs. For the Bank's conventional MPF loans, the availability of loss protection may differ slightly among MPF products. The Bank's loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance (PMI). PMI is on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.

First Loss Account. The first loss account (FLA) is a memorandum account used to track the Bank's potential loss exposure under each master commitment prior to the PFI's credit enhancement obligation. If the Bank experiences losses in a master commitment, these losses will either be (i) recovered through the recapture of performance-based credit enhancement fees from the PFI or (ii) absorbed by the Bank. The first loss account balance for all master commitments was $122.7 million and $124.8 million at June 30, 2011 and December 31, 2010.

Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation to absorb losses in excess of the FLA in order to limit the Bank's loss exposure to that of an investor in an MBS that is rated the equivalent of AA by a nationally recognized statistical rating organization. PFIs are required to either collateralize their credit enhancement obligation with the Bank or purchase supplemental mortgage insurance (SMI) from mortgage insurers.
 
The Bank utilizes an allowance for credit losses to reserve for estimated losses after considering the recapture of performance based credit enhancement fees from the PFI. Credit enhancement fees available to recapture losses consist of accrued credit enhancement fees to be paid to the PFIs and projected credit enhancement fees to be paid to the PFIs over the next twelve months less any losses incurred or expected to be incurred. These estimated credit enhancement fees are calculated at a master commitment level and are only available to the specified master commitment. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage loan interest income. Credit enhancement fees paid (including performance based credit enhancement fees available to recapture under specified master commitments) totaled $5.2 million and $6.0 million during the six months ended June 30, 2011 and 2010.


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Specifically Identified Conventional Mortgage Loans. The Bank does not currently evaluate any individual conventional mortgage loans for impairment. Therefore, there is no allowance for credit losses on specifically identified conventional mortgage loans at June 30, 2011 and December 31, 2010.

Collectively Evaluated Conventional Mortgage Loans. The Bank collectively evaluates its conventional mortgage loan portfolio and estimates an allowance for credit losses based upon both quantitative and qualitative factors that may vary based upon the MPF product. Quantitative factors include, but are not limited to, a rolling twelve-month average of (i) loan delinquencies, (ii) loans migrating to real estate owned (REO), and (iii) actual historical loss severities, as well as credit enhancement fees available to recapture estimated losses assuming a declining portfolio balance adjusted for prepayments. Qualitative factors include, but are not limited to, changes in national and local economic trends.

Estimating Additional Credit Loss in the Conventional Mortgage Loan Portfolio. The Bank may include a margin for certain limitations in the allowance for credit losses model utilized to estimate credit losses. This margin recognizes the imprecise nature of the measurement process and represents a subjective management judgment that is intended to cover other inherent losses that may not be captured in the methodology described above at the balance sheet date.

Rollforward of the Allowance for Credit Losses on Conventional Mortgage Loans. The following table presents a rollforward of the allowance for credit losses on the Bank's conventional mortgage loans, all of which are collectively evaluated for impairment, as well as the recorded investment in conventional mortgage loans (dollars in thousands):
 
June 30,
2011
 
December 31,
2010
Balance, beginning of period
$
13,000

 
$
1,887

Charge-offs
(1,187
)
 
(1,005
)
Provision for credit losses
7,187

 
12,118

Balance, end of period
$
19,000

 
$
13,000

 
 
 
 
Recorded investment of mortgage loans collectively evaluated for impairment1
$
6,822,636

 
$
7,033,089

1
Recorded investment approximates the unpaid principal balance of mortgage loans.

During the six months ended June 30, 2011, the Bank recorded a provision for credit losses of $7.2 million, bringing its allowance for credit losses to $19.0 million at June 30, 2011. The provision recorded was driven by an increase in estimated losses resulting from increased actual loss severities, management's expectation that loans migrating to REO and loss severities will likely increase in the future, certain refinements made to the Bank's allowance for credit losses model during the first quarter of 2011, and decreased availability of credit enhancement fees. Estimated available credit enhancement fees decreased to $3.0 million at June 30, 2011 from $3.7 million at December 31, 2010 primarily due to an increase in charge-off activity.


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Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure. The tables below summarize the Bank's key credit quality indicators for mortgage loans (dollar amounts in thousands):
 
June 30, 2011
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
76,299

 
$
15,214

 
$
91,513

Past due 60 - 89 days
28,497

 
3,527

 
32,024

Past due 90 days or more
99,381

 
4,710

 
104,091

Total past due loans
204,177

 
23,451

 
227,628

Total current loans
6,618,459

 
361,506

 
6,979,965

Total recorded investment of mortgage loans1
6,822,636

 
384,957

 
$
7,207,593

 
 
 
 
 
 
In process of foreclosure (included above)2
$
73,358

 
$
650

 
$
74,008

 
 
 
 
 
 
Serious delinquency rate3
1.5
%
 
1.2
%
 
1.5
%
 
 
 
 
 
 
Past due 90 days or more and still accruing interest4
$

 
$
4,710

 
$
4,710

 
 
 
 
 
 
Non-accrual mortgage loans5
$
99,381

 
$

 
$
99,381

 
December 31, 2010
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
86,679

 
$
17,235

 
$
103,914

Past due 60 - 89 days
33,063

 
5,288

 
38,351

Past due 90 days or more
111,064

 
4,675

 
115,739

Total past due loans
230,806

 
27,198

 
258,004

Total current loans
6,802,283

 
343,033

 
7,145,316

Total recorded investment of mortgage loans1
$
7,033,089

 
$
370,231

 
$
7,403,320

 
 
 
 
 
 
In process of foreclosure (included above)2
$
78,981

 
$
258

 
$
79,239

 
 
 
 
 
 
Serious delinquency rate3
1.6
%
 
1.3
%
 
1.6
%