10-Q 1 fhlb09301110q.htm FORM 10-Q FHLB 093011 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 September 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 October 31, 2011
 
Class B Stock, par value $100
 
21,069,103
 
 
 
 
 
 
 
 
 

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)
 
September 30,
2011
 
December 31,
2010
ASSETS
 
 
 
Cash and due from banks
$
316,003

 
$
105,741

Interest-bearing deposits
7,457

 
8,919

Securities purchased under agreements to resell (Note 3)
1,500,000

 
1,550,000

Federal funds sold
690,000

 
2,025,000

Investment securities
 
 
 
Trading securities (Note 4)
1,358,263

 
1,472,542

Available-for-sale securities (Note 5)
5,673,263

 
6,356,903

Held-to-maturity securities (fair value of $5,677,925 and $7,395,340 at September 30, 2011 and December 31, 2010) (Note 6)
5,467,300

 
7,226,116

Total investment securities
12,498,826

 
15,055,561

Advances (Note 8)
27,068,840

 
29,252,529

Mortgage loans held for portfolio (Note 9)
7,350,537

 
7,434,446

Less allowance for credit losses on mortgage loans (Note 10)
(20,000
)
 
(13,000
)
Mortgage loans held for portfolio, net
7,330,537

 
7,421,446

Accrued interest receivable
83,153

 
79,314

Premises, software, and equipment, net
11,745

 
9,196

Derivative assets (Note 11)
10,633

 
11,927

Other assets
39,625

 
49,251

TOTAL ASSETS
$
49,556,819

 
$
55,568,884

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
779,273

 
$
1,069,986

Non-interest-bearing
136,131

 
110,667

Total deposits
915,404

 
1,180,653

Consolidated obligations (Note 12)
 
 
 
Discount notes (includes $2,387,390 and $0 at fair value under the fair value option at September 30, 2011 and December 31, 2010)
5,671,533

 
7,208,276

Bonds (includes $1,642,282 and $2,816,850 at fair value under the fair value option at September 30, 2011 and December 31, 2010)
39,782,064

 
43,790,568

Total consolidated obligations
45,453,597

 
50,998,844

Mandatorily redeemable capital stock (Note 13)
6,337

 
6,835

Accrued interest payable
185,859

 
187,091

Affordable Housing Program (AHP) Payable
39,055

 
44,508

Payable to REFCORP (Note 13)

 
12,467

Derivative liabilities (Note 11)
129,589

 
278,447

Other liabilities
33,100

 
30,467

TOTAL LIABILITIES
46,762,941

 
52,739,312

Commitments and contingencies (Note 15)
 
 
 
CAPITAL (Note 13)
 
 
 
Capital stock - Class B putable ($100 par value) authorized, issued, and outstanding
21,073 and 21,830 shares at September 30, 2011 and December 31, 2010
2,107,337

 
2,183,028

Retained earnings
551,779

 
556,013

Accumulated other comprehensive income
 
 
 
Net unrealized gain on available-for-sale securities (Note 5)
136,290

 
92,222

Pension and postretirement benefits
(1,528
)
 
(1,691
)
Total accumulated other comprehensive income
134,762

 
90,531

TOTAL CAPITAL
2,793,878

 
2,829,572

TOTAL LIABILITIES AND CAPITAL
$
49,556,819

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
61,913

 
$
98,989

 
$
197,164

 
$
307,543

Prepayment fees on advances, net
1,490

 
133,521

 
8,397

 
152,435

Interest-bearing deposits
129

 
111

 
262

 
254

Securities purchased under agreements to resell
144

 
913

 
968

 
1,493

Federal funds sold
395

 
542

 
2,188

 
3,845

Investment securities
 
 
 
 
 
 
 
Trading securities
6,177

 
7,648

 
18,479

 
33,320

Available-for-sale securities
19,764

 
24,225

 
76,135

 
74,102

Held-to-maturity securities
44,487

 
62,110

 
143,135

 
166,598

Mortgage loans held for portfolio
81,969

 
88,997

 
247,880

 
272,567

Total interest income
216,468

 
417,056

 
694,608

 
1,012,157

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
Discount notes
1,388

 
2,667

 
4,516

 
7,221

Bonds
149,626

 
210,138

 
513,171

 
675,300

Deposits
97

 
350

 
409

 
873

Borrowings from other FHLBanks

 

 

 
2

Mandatorily redeemable capital stock
48

 
32

 
160

 
106

Total interest expense
151,159

 
213,187

 
518,256

 
683,502

NET INTEREST INCOME
65,309

 
203,869

 
176,352

 
328,655

Provision for credit losses on mortgage loans held for portfolio
1,968

 
1,695

 
9,155

 
5,647

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
63,341

 
202,174

 
167,197

 
323,008

OTHER (LOSS) INCOME
 
 
 
 
 
 
 
Service fees
280

 
380

 
857

 
1,238

Net gain on trading securities
35,868

 
7,925

 
40,341

 
61,557

Net gain on sale of held-to-maturity securities
6,532

 

 
6,532

 

Net (loss) gain on consolidated obligations held at fair value
(2,503
)
 
3,027

 
(3,864
)
 
1,882

Net loss on derivatives and hedging activities
(90,250
)
 
(23,562
)
 
(104,339
)
 
(112,792
)
Net loss on extinguishment of debt

 
(127,308
)
 
(4,602
)
 
(131,335
)
Other, net
206

 
2,941

 
1,166

 
7,733

Total other loss
(49,867
)
 
(136,597
)
 
(63,909
)
 
(171,717
)
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
7,777

 
7,386

 
24,052

 
22,678

Other operating expenses
4,544

 
3,197

 
12,749

 
11,969

Federal Housing Finance Agency
1,151

 
637

 
3,665

 
1,994

Office of Finance
722

 
414

 
2,236

 
1,456

Total other expense
14,194

 
11,634

 
42,702

 
38,097

(LOSS) INCOME BEFORE ASSESSMENTS
(720
)
 
53,943

 
60,586

 
113,194

AHP
(67
)
 
4,406

 
4,962

 
9,251

REFCORP

 
9,908

 
11,129

 
20,789

Total assessments
(67
)
 
14,314

 
16,091

 
30,040

NET (LOSS) INCOME
$
(653
)
 
$
39,629

 
$
44,495

 
$
83,154


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
3,633

 
363,246

 

 

 
363,246

Repurchase/redemption of capital stock
(5,234
)
 
(523,356
)
 

 

 
(523,356
)
Net shares reclassified to mandatorily redeemable capital stock
(41
)
 
(4,083
)
 

 

 
(4,083
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
83,154

 

 
83,154

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

 

 

 
180,345

 
180,345

Pension and postretirement benefits

 

 

 
140

 
140

Total comprehensive income
 
 
 
 
 
 
 
 
263,639

Cash dividends on capital stock

 

 
(38,012
)
 

 
(38,012
)
BALANCE SEPTEMBER 30, 2010
22,962

 
$
2,296,226

 
$
529,213

 
$
146,550

 
$
2,971,989

 
 
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2010
21,830

 
$
2,183,028

 
$
556,013

 
$
90,531

 
$
2,829,572

Proceeds from issuance of capital stock
3,075

 
307,459

 

 

 
307,459

Repurchase/redemption of capital stock
(3,825
)
 
(382,482
)
 

 

 
(382,482
)
Net shares reclassified to mandatorily redeemable capital stock
(7
)
 
(668
)
 

 

 
(668
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
44,495

 

 
44,495

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

 

 

 
44,068

 
44,068

Pension and postretirement benefits

 

 

 
163

 
163

Total comprehensive income
 
 
 
 
 
 
 
 
88,726

Cash dividends on capital stock

 

 
(48,729
)
 

 
(48,729
)
BALANCE SEPTEMBER 30, 2011
21,073

 
$
2,107,337

 
$
551,779

 
$
134,762

 
$
2,793,878


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)
 
Nine Months Ended September 30,
 
2011
 
2010
OPERATING ACTIVITIES
 
 
 
Net income
$
44,495

 
$
83,154

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
1,901

 
37,861

Net gain on trading securities
(40,341
)
 
(61,557
)
Net gain on sale of held-to-maturity securities
(6,532
)
 

Net loss (gain) on consolidated obligations held at fair value
3,864

 
(1,882
)
Net change in derivatives and hedging activities
258,985

 
(24,198
)
Net loss on extinguishment of debt
4,602

 
131,335

Other adjustments
2,960

 
3,032

Net change in:
 
 
 
Accrued interest receivable
(8,588
)
 
(50,297
)
Other assets
11,797

 
1,228

Accrued interest payable
2,092

 
18,742

Other liabilities
(15,392
)
 
4,082

Total adjustments
215,348

 
58,346

Net cash provided by operating activities
259,843

 
141,500

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(583,537
)
 
(125,781
)
Securities purchased under agreements to resell
50,000

 
(2,250,000
)
Federal funds sold
1,335,000

 
1,097,000

Premises, software, and equipment
(4,122
)
 
(2,063
)
Trading securities
 
 
 
Proceeds from sales and maturities of long-term
210,973

 
2,999,401

Purchases of long-term
(56,353
)
 

Available-for-sale securities
 
 
 
Proceeds from sales and maturities of long-term
906,984

 
1,589,609

Purchases of long-term
(143,234
)
 
(189,880
)
Held-to-maturity securities
 
 
 
Net decrease (increase) in short-term
335,000

 
(335,000
)
Proceeds from sales and maturities of long-term
1,431,179

 
1,819,314

Purchases of long-term

 
(3,904,199
)
Advances
 
 
 
Principal collected
29,859,994

 
30,921,415

Originated
(27,457,454
)
 
(26,859,854
)
Mortgage loans held for portfolio
 
 
 
Principal collected
1,043,228

 
1,061,580

Originated or purchased
(987,737
)
 
(920,359
)
Proceeds from sales of foreclosed assets
28,528

 
17,183

Net cash provided by investing activities
5,968,449

 
4,918,366


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)
 
Nine Months Ended September 30,
 
2011
 
2010
FINANCING ACTIVITIES
 
 
 
Net change in deposits
(263,900
)
 
337,399

Net (payments) proceeds on derivative contracts with financing elements
(7,423
)
 
20,725

Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
297,671,202

 
247,309,644

Bonds
28,622,787

 
31,276,702

Payments for maturing, transferring, and retiring consolidated obligations
 
 
 
Discount notes
(299,208,386
)
 
(249,251,189
)
Bonds
(32,707,392
)
 
(34,739,734
)
Proceeds from issuance of capital stock
307,459

 
363,246

Payments for repurchase/redemption of mandatorily redeemable capital stock
(1,166
)
 
(7,732
)
Payments for repurchase/redemption of capital stock
(382,482
)
 
(523,356
)
Cash dividends paid
(48,729
)
 
(38,012
)
Net cash used in financing activities
(6,018,030
)
 
(5,252,307
)
 
 
 
 
Net increase (decrease) in cash and due from banks
210,262

 
(192,441
)
Cash and due from banks at beginning of the period
105,741

 
298,841

Cash and due from banks at end of the period
$
316,003

 
$
106,400

 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,082,164

 
$
1,366,257

AHP
$
10,415

 
$
8,526

REFCORP
$
23,596

 
$
21,006

Unpaid principal balance transferred from mortgage loans held for portfolio to real estate owned
$
25,644

 
$
21,323


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 the Bank's Statements 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 disclosures required by GAAP for annual financial statements 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 preparation 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


Reclassifications

Certain amounts in the Bank's 2010 financial statements and footnotes have been reclassified to conform to the presentation for the three and nine months ended September 30, 2011.

Note 2 — Recently Adopted and Issued Accounting Guidance

Disclosures about an Employer's Participation in a Multiemployer Plan

On September 21, 2011, the Financial Accounting Standards Board (FASB) issued guidance to enhance disclosures about an employer's participation in a multiemployer plan. The enhanced disclosures will allow financial statement users to better understand the financial health of all significant plans in which an employer participates. The guidance is effective for annual periods ending after December 15, 2011 (December 31, 2011 for the Bank) and should be applied retrospectively for all periods presented. Early adoption is permitted. The Bank plans to adopt this guidance on December 31, 2011. The adoption of this guidance will result in increased annual financial statement disclosures but will not affect the Bank's financial condition, results of operations, or cash flows.
 
Presentation of Comprehensive Income

On June 16, 2011, the 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 total other comprehensive income, as well as total comprehensive income. In a two-statement approach, an entity is required to present the components of net income and total net income in its income statement. A 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 adoption of this guidance will result in increased interim and annual financial statement disclosures, but will not affect the Bank's 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 interim and annual 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 adoption is not permitted. The adoption of this guidance may result in increased interim and annual financial statement disclosures, but is not expected to have a material effect on the Bank's financial condition, results of operations, or cash flows.


9


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 adoption of this guidance is not expected to have a material effect on the Bank's 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.

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 became effective for interim and annual periods beginning on July 1, 2011. The adoption of this guidance did not affect the Bank's financial condition, results of operations, cash flows, or financial statement disclosures.

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 periods ending on December 31, 2010. The required disclosures about activity that occurs during a reporting period became effective for interim and annual reporting periods beginning on 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.

10


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 loans and are classified as assets in the Statements 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. If the market value of the underlying securities decreases below the market value required as collateral, then the counterparty is required to 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):
 
September 30,
2011
 
December 31,
2010
TLGP1
$
1,008,311

 
$
1,213,481

Taxable municipal bonds2
285,746

 
259,061

Government-sponsored enterprise obligations3
64,206

 

Total
$
1,358,263

 
$
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 September 30, 2011 and December 31, 2010, 48 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 components of “Net gain on trading securities” as presented in the Statements of Income (dollars in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Realized gain on sale of trading securities
$
973

 
$
4,882

 
$
973

 
$
28,586

Holding gain on trading securities
34,895

 
3,043

 
39,368

 
32,971

Net gain on trading securities
$
35,868

 
$
7,925

 
$
40,341

 
$
61,557


Sales

During the three and nine months ended September 30, 2011, the Bank sold a trading security with a par value of $10.0 million and realized a net gain of $1.0 million. During the three and nine months ended September 30, 2010, the Bank sold trading securities with a total par value of $0.2 billion and $3.0 billion and realized net gains of $4.9 million and $28.6 million.


11


Note 5 — Available-for-Sale Securities

Major Security Types

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

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP2
$
656,831

 
$
949

 
$
48

 
$
657,732

Taxable municipal bonds3
173,420

 
17,045

 

 
190,465

Other U.S. obligations4
168,519

 
7,440

 

 
175,959

Government-sponsored enterprise obligations5
487,080

 
66,197

 

 
553,277

Other6
49,844

 
47

 

 
49,891

Total non-mortgage-backed securities
1,535,694

 
91,678

 
48

 
1,627,324

Mortgage-backed securities7
 
 
 
 
 
 
 
Government-sponsored enterprises8
3,961,857

 
86,939

 
2,857

 
4,045,939

Total
$
5,497,551

 
$
178,617

 
$
2,905

 
$
5,673,263

    
AFS securities at December 31, 2010 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
1
 
Gross
Unrealized
Losses
9
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP2
$
563,688

 
$
2,006

 
$

 
$
565,694

Taxable municipal bonds3
173,421

 
277

 
9,093

 
164,605

Other U.S. obligations4
178,325

 
323

 
2,168

 
176,480

Government-sponsored enterprise obligations5
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 $39.4 million and $10.1 million of fair value hedging adjustments at September 30, 2011 and December 31, 2010.
2
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government.
3
Represents investments in U.S. Government subsidized Build America Bonds and State of Iowa IJOBS Program Special Obligations.
4
Represents Export-Import Bank bonds.
5
Represents TVA and Federal Farm Credit Bank (FFCB) bonds.
6
Represents Private Export Funding Corporation bonds.
7
The amortized cost of the Bank's AFS mortgage-backed securities (MBS) includes net discounts of $0.8 million and $0.6 million at September 30, 2011 and December 31, 2010.
8
Represents Fannie Mae and Freddie Mac securities.
9
Gross unrealized losses include $9.0 million of fair value hedging adjustments at December 31, 2010.

At September 30, 2011 and December 31, 2010, 27 and 24 percent of the Bank's AFS securities were fixed rate and 31 and 28 percent of these fixed rate securities were swapped to a variable rate index through the use of an interest rate swap accounted for as a fair value derivative.

12


The following table summarizes the AFS securities with unrealized losses at September 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
 
 
 
 
 
 
 
 
 
 
 
TLGP
$
93,095

 
$
48

 
$

 
$

 
$
93,095

 
$
48

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
144,749

 
147

 
409,511

 
2,710

 
554,260

 
2,857

Total
$
237,844

 
$
195

 
$
409,511

 
$
2,710

 
$
647,355

 
$
2,905


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.
 
 
September 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
656,831

 
$
657,732

 
$

 
$

Due after one year through five years
 
76,768

 
84,675

 
640,825

 
648,106

Due after five years through ten years
 
391,206

 
444,883

 
390,812

 
417,558

Due after ten years
 
410,889

 
440,034

 
372,650

 
364,354

Total non-mortgage-backed securities
 
1,535,694

 
1,627,324

 
1,404,287

 
1,430,018

Mortgage-backed securities
 
3,961,857

 
4,045,939

 
4,859,274

 
4,926,885

Total
 
$
5,497,551

 
$
5,673,263

 
$
6,263,561

 
$
6,356,903


Prepayment Fees

During the three months ended September 30, 2011, the Bank did not receive any prepayment fees on AFS securities. During the nine months ended September 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 Statements of Income. During the three and nine months ended September 30, 2010, the Bank did not receive any prepayment fees on AFS securities.


13


Sales

During the three and nine months ended September 30, 2011, the Bank did not sell any AFS securities. During the three months ended September 30, 2010, the Bank did not sell any AFS securities. During the nine months ended September 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 September 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
$
310,435

 
$
71,152

 
$

 
$
381,587

State or local housing agency obligations2
92,309

 
7,268

 

 
99,577

TLGP3
1,250

 
15

 

 
1,265

Other4
1,659

 

 

 
1,659

Total non-mortgage-backed securities
405,653

 
78,435

 

 
484,088

Mortgage-backed securities5
 
 
 
 
 
 
 
Government-sponsored enterprises6
4,980,799

 
138,585

 
1,997

 
5,117,387

Other U.S. obligations7
28,994

 
95

 
1

 
29,088

Private-label8
51,854

 
213

 
4,705

 
47,362

Total mortgage-backed securities
5,061,647

 
138,893

 
6,703

 
5,193,837

Total
$
5,467,300

 
$
217,328

 
$
6,703

 
$
5,677,925

 
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 $3.0 million and $7.9 million at September 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 $21.2 million and $25.8 million of Mortgage Partnership Finance shared funding certificates at September 30, 2011 and December 31, 2010.
 

14


The following table summarizes the HTM securities with unrealized losses at September 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
$
2,038

 
$
1

 
$
342,622

 
$
1,996

 
$
344,660

 
$
1,997

Other U.S. obligations

 

 
607

 
1

 
607

 
1

Private-label

 

 
27,452

 
4,705

 
27,452

 
4,705

Total mortgage-backed securities
$
2,038

 
$
1

 
$
370,681

 
$
6,702

 
$
372,719

 
$
6,703

 
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.
 
 
September 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
1,250

 
$
1,265

 
$
335,000

 
$
334,966

Due after one year through five years
 
1,659

 
1,659

 
1,250

 
1,282

Due after five years through ten years
 

 

 
1,920

 
1,923

Due after ten years
 
402,744

 
481,164

 
420,574

 
447,387

Total non-mortgage-backed securities
 
405,653

 
484,088

 
758,744

 
785,558

Mortgage-backed securities
 
5,061,647

 
5,193,837

 
6,467,372

 
6,609,782

Total
 
$
5,467,300

 
$
5,677,925

 
$
7,226,116

 
$
7,395,340


Sales

During the three and nine months ended September 30, 2011, the Bank sold HTM securities with a total par value of $205.3 million and realized net gains of $6.5 million. The HTM securities sold had less than 15 percent of the acquired principal outstanding at the time of sale. As such, the sales were considered maturities for purposes of security classification and did not impact the Bank's ability and intent to hold the remaining HTM securities through their stated maturities. During the three and nine months ended September 30, 2010, the Bank did not sell any HTM securities.

15


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

The Bank engages other designated FHLBanks to perform cash flow analyses on its private-label MBS in order to determine whether the entire amortized cost bases of these securities are expected to be recovered. To ensure consistency in the determination of OTTI, an OTTI Governance Committee, comprised of representation from all 12 FHLBanks, is responsible for reviewing and approving the key modeling assumptions, inputs, and methodologies used by the designated FHLBanks when generating the cash flow projections.

For the period ended September 30, 2011, the Bank obtained cash flow analyses for all of its private-label MBS from its designated FHLBanks. The cash flow analyses used two third-party models. The first third-party model considered 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 was 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. A CBSA must contain at least one urban area with a population of 10,000 or more people. The housing price forecast as of September 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 July 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 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, were 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 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 a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path described in the prior paragraph.

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 September 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 September 30, 2011 and December 31, 2010.

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 general disruption in the U.S. markets. However, the losses are considered temporary as the Bank expects to recover the amortized cost bases on these securities 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.


16


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

TLGP investments, 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 is 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 is 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 in an unrealized loss position to be other-than-temporarily impaired at September 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):
 
 
September 30, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate %
 
Amount
 
Weighted
Average
Interest
Rate %
Overdrawn demand deposit accounts
 
$
38

 
3.36
 
$
208

 
3.29
Due in one year or less
 
5,646,745

 
1.54
 
6,782,825

 
1.76
Due after one year through two years
 
5,831,903

 
1.64
 
3,923,100

 
2.20
Due after two years through three years
 
2,004,729

 
2.14
 
5,647,503

 
1.75
Due after three years through four years
 
1,519,540

 
2.10
 
908,824

 
2.81
Due after four years through five years
 
2,329,855

 
2.89
 
1,640,803

 
2.23
Thereafter
 
8,767,091

 
2.67
 
9,599,178

 
2.96
Total par value
 
26,099,901

 
2.14
 
28,502,441

 
2.29
Premiums
 
195

 
 
 
237

 
 
Discounts
 
(1
)
 
 
 
(2
)
 
 
Fair value hedging adjustments
 
 
 
 
 
 
 
 
Cumulative fair value gain on existing hedges
 
899,645

 
 
 
663,079

 
 
Basis adjustments from terminated and ineffective hedges
 
69,100

 
 
 
86,774

 
 
Total
 
$
27,068,840

 
 
 
$
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 September 30, 2011 and December 31, 2010, the Bank had callable advances outstanding totaling $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 September 30, 2011 and December 31, 2010, the Bank had putable advances outstanding totaling $3.9 billion and $4.8 billion.

Interest Rate Payment Terms

The following table summarizes the Bank's advances by interest rate payment terms (dollars in thousands):
 
September 30,
2011
 
December 31,
2010
Fixed rate
$
18,123,828

 
$
19,932,279

Variable rate
7,976,073

 
8,570,162

Total par value
$
26,099,901

 
$
28,502,441



17


At September 30, 2011 and December 31, 2010, 61 and 59 percent of the Bank's fixed rate advances were swapped to a variable rate index through the use of an interest rate swap accounted for as a fair value or economic derivative. At September 30, 2011 and December 31, 2010, three and two percent of the Bank's variable rate advances were swapped to another variable rate index through the use of an interest rate swap accounted for as an economic derivative.

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 Statements 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
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Gross prepayment fees
$
2,302

 
$
171,831

 
$
14,907

 
$
192,349

Fair value hedging adjustments
(926
)
 
(38,348
)
 
(6,908
)
 
(40,025
)
Deferrals on advance modifications
114

 
38

 
398

 
111

Prepayment fees on advances, net
$
1,490

 
$
133,521

 
$
8,397

 
$
152,435


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):
 
September 30,
2011
 
December 31,
2010
Real Estate:
 
 
 
Fixed rate, medium-term single family mortgages
$
1,840,868

 
$
1,874,606

Fixed rate, long-term single family mortgages
5,461,781

 
5,528,714

Total unpaid principal balance
7,302,649

 
7,403,320

Premiums
68,633

 
63,975

Discounts
(33,497
)
 
(40,474
)
Basis adjustments from mortgage loan commitments
12,752

 
7,625

Allowance for credit losses
(20,000
)
 
(13,000
)
Total mortgage loans held for portfolio, net
$
7,330,537

 
$
7,421,446



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The following table presents additional information on the Bank's mortgage loans held for portfolio (dollars in thousands):
 
September 30,
2011
 
December 31,
2010
Conventional loans
$
6,898,156

 
$
7,033,089

Government-insured loans
404,493

 
370,231

Total unpaid principal balance
$
7,302,649

 
$
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 for credit losses methodology for each of its financing receivable portfolio segments: 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, term securities purchased under agreements to resell, and term Federal funds sold.

Credit Products

The Bank manages its credit exposure to credit products through an integrated approach that 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 detailed 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 periodically evaluates and may make changes to its collateral guidelines from time to time.

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.

Taking into consideration each borrower's financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At September 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.

At September 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 nine months ended September 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 September 30, 2011 and December 31, 2010. Accordingly, the Bank has not recorded any allowance for credit losses.

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At September 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 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 September 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 recovered through the recapture of performance-based credit enhancement fees from the PFI (discussed further below) or absorbed by the Bank. The first loss account balance for all master commitments was $123.0 million and $124.8 million at September 30, 2011 and December 31, 2010.

Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation to absorb certain 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 (NRSRO) at the time a mortgage loan is purchased. PFIs are required to either collateralize their credit enhancement obligation with the Bank or purchase supplemental mortgage insurance (SMI) from mortgage insurers. In exchange for absorbing certain losses in excess of the FLA, the Bank pays the PFI a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage loan interest income. Credit enhancement fees paid totaled $7.5 million and $8.8 million during the nine months ended September 30, 2011 and 2010.

The Bank utilizes an allowance for credit losses to reserve for estimated losses in its conventional mortgage loan portfolio at the balance sheet date. The measurement of the Bank's allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing individual conventional mortgage loans for impairment on a specific basis, (iii) estimating additional credit losses in the conventional mortgage loan portfolio, and (iv) considering the recapture of performance-based credit enhancement fees from the PFI.

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 vary based upon the MPF product. Quantitative factors include, but are not limited to, (i) loan delinquencies, (ii) loans migrating to real estate owned (REO), and (iii) actual historical loss severities. Qualitative factors include, but are not limited to, changes in national and local economic trends impacting housing markets.


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The Bank's allowance for credit losses at each balance sheet date is based on its estimate of probable losses over the loss emergence period. The Bank utilizes a roll-rate methodology when estimating its allowance for credit losses. The methodology projects loans migrating to REO status based on a historical 12-month average. The Bank then applies a loss severity factor to calculate an estimate of credit losses.

Specifically Identified Conventional Mortgage Loans. Certain conventional mortgage loans, including troubled debt restructurings granted under the Bank's temporary loan modification plan, should be specifically identified for purposes of calculating the allowance for credit losses. At September 30, 2011 and December 31, 2010, the unpaid principal balance of the Bank's troubled debt restructurings amounted to $0.9 million and $0.3 million. Due to immateriality, management determined that it was not necessary to specifically evaluate these loans for impairment as the estimated allowance under the collectively evaluated approach approximated the estimated allowance necessary under the specific approach.

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

Performance-Based Credit Enhancement Fees. The Bank reserves for estimated credit losses after considering the recapture of performance-based credit enhancement fees from the PFI. Performance-based credit enhancement fees available to recapture losses consist of accrued performance-based credit enhancement fees to be paid to the PFIs and projected performance-based credit enhancement fees to be paid to the PFIs over the next 12 months, less any losses incurred or expected to be incurred.

The following table shows the impact of the recapture of performance-based credit enhancement fees on the Bank's estimate of the allowance for credit losses (dollars in thousands). Available performance-based credit enhancement fees cannot be shared between master commitments and, as a result, some master commitments may have sufficient performance-based credit enhancement fees to recapture all losses while other master commitments may not.
 
September 30,
2011
 
December 31,
2010
Estimate of credit losses before performance-based credit enhancement fees
$
20,726

 
$
14,925

Less: Performance-based credit enhancement fees available for recapture
(726
)
 
(1,925
)
Allowance for credit losses
$
20,000

 
$
13,000


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 loan portfolio as well as the recorded investment in conventional mortgage loans (dollars in thousands):
 
September 30,
2011
 
December 31,
2010
Balance, beginning of period
$
13,000

 
$
1,887

Charge-offs
(2,155
)
 
(1,005
)
Provision for credit losses
9,155

 
12,118

Balance, end of period
$
20,000

 
$
13,000

 
 
 
 
Recorded investment of mortgage loans collectively evaluated for impairment1
$
6,977,366

 
$
7,097,943

1
The recorded investment of a mortgage loan is the unpaid principal balance, adjusted for accrued interest, unamortized premiums, discounts and basis adjustments, and direct write-downs.

During the nine months ended September 30, 2011, the Bank recorded a provision for credit losses of $9.2 million, bringing its allowance for credit losses to $20.0 million at September 30, 2011. The provision recorded was primarily driven by increased loss severities, management's expectation that loans migrating to REO and loss severities will likely increase in the future, and decreased availability of performance-based credit enhancement fees resulting from an increase in charge-off activity and a decline in master commitment balances. In addition, during the first quarter of 2011, the Bank refined its allowance for credit losses model to incorporate a more precise estimation for forecasting future delinquencies and loans migrating to REO status.


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Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The tables below summarize the Bank's key credit quality indicators for mortgage loans (dollar amounts in thousands):
 
September 30, 2011
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
82,844

 
$
13,911

 
$
96,755

Past due 60 - 89 days
29,490

 
5,740

 
35,230

Past due 90 days or more
95,770

 
5,343

 
101,113

Total past due loans
208,104

 
24,994

 
233,098

Total current loans
6,769,262

 
388,029

 
7,157,291

Total recorded investment of mortgage loans1
$
6,977,366

 
$
413,023

 
$
7,390,389

 
 
 
 
 
 
In process of foreclosure (included above)2
$
68,814

 
$
695

 
$
69,509

Serious delinquency rate3
1.4
%
 
1.3
%
 
1.4
%
Past due 90 days or more and still accruing interest4
$

 
$
5,343

 
$
5,343

Non-accrual mortgage loans5
$
96,500

 
$

 
$
96,500


 
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
6,867,137

 
349,104