10-Q 1 fhlb09301210q.htm FORM 10-Q FHLB 093012 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, 2012
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, 2012
 
Class B Stock, par value $100
 
20,225,781
 
 
 
 
 
 
 
 
 



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 








PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in thousands, except capital stock par value)
(Unaudited)

 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and due from banks
$
204,937

 
$
240,156

Interest-bearing deposits
4,033

 
6,337

Securities purchased under agreements to resell (Note 3)
4,900,000

 
600,000

Federal funds sold
1,330,000

 
2,115,000

Investment securities
 
 
 
Trading securities (Note 4)
759,372

 
1,365,121

Available-for-sale securities (Note 5)
4,879,777

 
5,355,564

Held-to-maturity securities (fair value of $3,680,104 and $5,380,021) (Note 6)
3,504,292

 
5,195,200

Total investment securities
9,143,441

 
11,915,885

Advances (Note 8)
25,831,052

 
26,591,023

Mortgage loans held for portfolio, net
 
 
 
Mortgage loans held for portfolio (Note 9)
7,132,090

 
7,156,933

Allowance for credit losses on mortgage loans (Note 10)
(16,366
)
 
(18,963
)
Total mortgage loans held for portfolio, net
7,115,724

 
7,137,970

Accrued interest receivable
77,418

 
73,009

Premises, software, and equipment, net
12,398

 
12,391

Derivative assets (Note 11)
8,239

 
1,452

Other assets
31,488

 
40,090

TOTAL ASSETS
$
48,658,730

 
$
48,733,313

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
1,001,798

 
$
643,428

Non-interest-bearing
195,643

 
106,667

Total deposits
1,197,441

 
750,095

Consolidated obligations (Note 12)
 
 
 
Discount notes (includes $962,048 and $3,474,596 at fair value under the fair value option)
14,158,026

 
6,809,766

Bonds (includes $1,868,105 and $2,694,687 at fair value under the fair value option)
30,108,040

 
38,012,320

Total consolidated obligations
44,266,066

 
44,822,086

Mandatorily redeemable capital stock (Note 13)
10,343

 
6,169

Accrued interest payable
130,241

 
155,241

Affordable Housing Program (AHP) Payable
36,424

 
38,849

Derivative liabilities (Note 11)
103,458

 
116,806

Other liabilities
116,716

 
31,653

TOTAL LIABILITIES
45,860,689

 
45,920,899

Commitments and contingencies (Note 15)

 

CAPITAL (Note 13)
 
 
 
Capital stock - Class B putable ($100 par value); 20,244 and 21,089 shares issued and outstanding
2,024,360

 
2,108,878

Retained earnings
 
 
 
Unrestricted
582,722

 
562,442

Restricted
22,837

 
6,533

Total retained earnings
605,559

 
568,975

Accumulated other comprehensive income
168,122

 
134,561

TOTAL CAPITAL
2,798,041

 
2,812,414

TOTAL LIABILITIES AND CAPITAL
$
48,658,730

 
$
48,733,313

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

3


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
60,087

 
$
61,913

 
$
187,442

 
$
197,164

Prepayment fees on advances, net
5,900

 
1,490

 
24,083

 
8,397

Interest-bearing deposits
167

 
129

 
498

 
262

Securities purchased under agreements to resell
1,067

 
144

 
2,482

 
968

Federal funds sold
640

 
395

 
1,787

 
2,188

Investment securities
 
 
 
 
 
 
 
Trading securities
5,622

 
6,177

 
17,834

 
18,479

Available-for-sale securities
18,812

 
19,764

 
57,868

 
76,135

Held-to-maturity securities
26,807

 
44,487

 
90,558

 
143,135

Mortgage loans
70,639

 
81,969

 
217,916

 
247,880

Total interest income
189,741

 
216,468

 
600,468

 
694,608

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
Discount notes
3,674

 
1,388

 
7,879

 
4,516

Bonds
126,561

 
149,626

 
407,884

 
513,171

Deposits
133

 
97

 
308

 
409

Borrowings from other FHLBanks
1

 

 
1

 

Mandatorily redeemable capital stock
52

 
48

 
179

 
160

Total interest expense
130,421

 
151,159

 
416,251

 
518,256

NET INTEREST INCOME
59,320

 
65,309

 
184,217

 
176,352

Provision for credit losses on mortgage loans

 
1,968

 

 
9,155

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
59,320

 
63,341

 
184,217

 
167,197

OTHER (LOSS) INCOME
 
 
 
 
 
 
 
Service fees
319

 
280

 
933

 
857

Net gain on trading securities
11,950

 
35,868

 
26,871

 
40,341

Net gain on sale of held-to-maturity securities

 
6,532

 

 
6,532

Net gain (loss) on consolidated obligations held at fair value
738

 
(2,503
)
 
2,961

 
(3,864
)
Net loss on derivatives and hedging activities
(11,361
)
 
(90,250
)
 
(32,953
)
 
(104,339
)
Net loss on extinguishment of debt
(25,866
)
 

 
(48,605
)
 
(4,602
)
Other, net
(329
)
 
206

 
1,540

 
1,166

Total other loss
(24,549
)
 
(49,867
)
 
(49,253
)
 
(63,909
)
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
7,700

 
7,777

 
24,025

 
24,052

Other operating expenses
5,129

 
4,544

 
14,779

 
12,749

Federal Housing Finance Agency
1,075

 
1,151

 
3,454

 
3,665

Office of Finance
676

 
722

 
2,111

 
2,236

Total other expense
14,580

 
14,194

 
44,369

 
42,702

INCOME (LOSS) BEFORE ASSESSMENTS
20,191

 
(720
)
 
90,595

 
60,586

AHP
2,025

 
(67
)
 
9,078

 
4,962

REFCORP

 

 

 
11,129

Total assessments
2,025

 
(67
)
 
9,078

 
16,091

NET INCOME (LOSS)
$
18,166

 
$
(653
)
 
$
81,517

 
$
44,495

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

4



FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income (loss)
$
18,166

 
$
(653
)
 
$
81,517

 
$
44,495

Other comprehensive income
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
18,467

 
41,846

 
33,270

 
44,068

Pension and postretirement benefits
107

 
59

 
291

 
163

Total other comprehensive income
18,574

 
41,905

 
33,561

 
44,231

TOTAL COMPREHENSIVE INCOME
$
36,740

 
$
41,252

 
$
115,078

 
$
88,726

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




5


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in thousands)
(Unaudited)

 
Capital Stock
Class B (putable)
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE DECEMBER 31, 2010
21,830

 
$
2,183,028

 
$
556,013

 
$

 
$
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

 

 
44,495

 

 
44,495

 
44,231

 
88,726

Cash dividends on capital stock

 

 
(48,729
)
 

 
(48,729
)
 

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

 
$
2,107,337

 
$
551,779

 
$

 
$
551,779

 
$
134,762

 
$
2,793,878

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2011
21,089

 
$
2,108,878

 
$
562,442

 
$
6,533

 
$
568,975

 
$
134,561

 
$
2,812,414

Proceeds from issuance of capital stock
8,677

 
867,668

 

 

 

 

 
867,668

Repurchase/redemption of capital stock
(9,447
)
 
(944,673
)
 

 

 

 

 
(944,673
)
Net shares reclassified to mandatorily redeemable capital stock
(75
)
 
(7,513
)
 

 

 

 

 
(7,513
)
Comprehensive income

 

 
65,213

 
16,304

 
81,517

 
33,561

 
115,078

Cash dividends on capital stock

 

 
(44,933
)
 

 
(44,933
)
 

 
(44,933
)
BALANCE SEPTEMBER 30, 2012
20,244

 
$
2,024,360

 
$
582,722

 
$
22,837

 
$
605,559

 
$
168,122

 
$
2,798,041

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




6


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

 
Nine Months Ended
 
September 30,
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
Net income
$
81,517

 
$
44,495

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
332,617

 
1,901

Net gain on trading securities
(26,871
)
 
(40,341
)
Net gain on sale of held-to-maturity securities

 
(6,532
)
Net (gain) loss on consolidated obligations held at fair value
(2,961
)
 
3,864

Net change in derivatives and hedging activities
(253,799
)
 
260,188

Net loss on extinguishment of debt
48,605

 
4,602

Other adjustments
(1,620
)
 
2,960

Net change in:
 
 
 
Accrued interest receivable
(4,291
)
 
(3,868
)
Other assets
8,689

 
11,797

Accrued interest payable
(24,977
)
 
(3,831
)
Other liabilities
1,028

 
(15,392
)
Total adjustments
76,420

 
215,348

Net cash provided by operating activities
157,937

 
259,843

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
220,904

 
(583,537
)
Securities purchased under agreements to resell
(4,300,000
)
 
50,000

Federal funds sold
785,000

 
1,335,000

Premises, software, and equipment
(1,882
)
 
(4,122
)
Trading securities
 
 
 
Proceeds from sales and maturities of long-term
1,010,660

 
210,973

Purchases of long-term
(295,415
)
 
(56,353
)
Available-for-sale securities
 
 
 
Proceeds from maturities of long-term
1,618,173

 
906,984

Purchases of long-term
(1,095,753
)
 
(143,234
)
Held-to-maturity securities
 
 
 
Net decrease in short-term
340,000

 
335,000

Proceeds from sales and maturities of long-term
1,350,452

 
1,431,179

Advances
 
 
 
Principal collected
36,196,408

 
29,859,994

Originated
(35,740,185
)
 
(27,457,454
)
Mortgage loans held for portfolio
 
 
 
Principal collected
1,669,472

 
1,043,228

Originated or purchased
(1,674,486
)
 
(987,737
)
Proceeds from sales of foreclosed assets
22,079

 
28,528

Net cash provided by investing activities
105,427

 
5,968,449

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

7


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in thousands)
(Unaudited)

 
Nine Months Ended
 
September 30,
 
2012
 
2011
FINANCING ACTIVITIES
 
 
 
Net change in deposits
457,796

 
(263,900
)
Net payments on derivative contracts with financing elements
(6,927
)
 
(7,423
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
237,611,755

 
297,671,202

Bonds
15,666,208

 
28,622,787

Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(230,263,866
)
 
(299,208,386
)
Bonds
(23,638,272
)
 
(32,707,392
)
Proceeds from issuance of capital stock
867,668

 
307,459

Payments for repurchase/redemption of mandatorily redeemable capital stock
(3,339
)
 
(1,166
)
Payments for repurchase/redemption of capital stock
(944,673
)
 
(382,482
)
Cash dividends paid
(44,933
)
 
(48,729
)
Net cash used in financing activities
(298,583
)
 
(6,018,030
)
Net (decrease) increase in cash and due from banks
(35,219
)
 
210,262

Cash and due from banks at beginning of the period
240,156

 
105,741

Cash and due from banks at end of the period
$
204,937

 
$
316,003

 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
Interest paid
$
880,235

 
$
1,082,164

AHP payments
$
11,503

 
$
10,415

REFCORP assessments
$

 
$
23,596

Transfers of mortgage loans to real estate owned
$
16,431

 
$
25,644

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


8


FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

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 subject to a cap of $10.0 million and a floor of $10,000. 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, included in mandatorily redeemable 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 U.S. (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, 2011, which are contained in the Bank's 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2012 (2011 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, 2012.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2011 Form 10-K.

Reclassifications

Certain amounts in the Bank's 2011 financial statements have been reclassified to conform to the presentation for the nine months ended September 30, 2012.


9


Revisions to Prior Period Amounts

During the first quarter of 2012, the Bank identified certain classification errors in its previously reported Statement of Cash Flows for the year ended December 31, 2011 contained in the 2011 Form 10-K. These classification errors were limited to the 2011 Annual Statement of Cash Flows and had no impact on the Bank's Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 included in this report. Management has determined after evaluating the quantitative and qualitative aspects of the classification errors that such errors were not material to the previously issued Statement of Cash Flows. The Bank will correct these classification errors in its 2012 Form 10-K filing.

The following table summarizes the revisions to be made to the Bank's Statement of Cash Flows for the year ended December 31, 2011 in the 2012 Form 10-K (dollars in thousands):
 
Previously Reported
 
Revised
Operating Activities
 
 
 
Net change in other assets
$
(5,158
)
 
$
12,215

Net cash provided by operating activities
251,218

 
268,591

Financing Activities
 
 
 
Net proceeds from issuance of discount notes
325,051,279

 
325,050,230

Net proceeds from issuance of bonds
35,592,738

 
35,575,286

Payments for maturing discount notes
(325,451,943
)
 
(325,450,815
)
Net cash used in financing activities
(6,791,810
)
 
(6,809,183
)

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED 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 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 statement of income. 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 the components of other comprehensive income in the statement of changes in stockholders' equity.

The Bank elected the two-statement approach noted above on January 1, 2012 and applied this guidance retrospectively for all periods presented. The adoption of this guidance was limited to the presentation of the Bank's interim and annual financial statements and did not affect its financial condition, results of operations, or cash flows. On December 23, 2011, the FASB issued guidance to defer the effective date of the new requirement to present reclassifications of items out of accumulated other comprehensive income in the statement of income. This deferral became effective for the Bank on January 1, 2012 and did not affect the Bank's adoption of the remaining guidance contained in the new accounting standard for the presentation of comprehensive income.


10


Fair Value Measurements and Disclosures

On May 12, 2011, the FASB and the International Accounting Standards Board (IASB) 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 guidance within GAAP or International Financial Reporting Standards (IFRS); 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 became effective for the Bank on January 1, 2012 and was applied prospectively. The adoption of this guidance resulted in increased financial statement disclosures, but did not affect 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 became effective for the Bank on January 1, 2012 and was applied prospectively to transactions or modifications of existing transactions occurring on or after that date. The Bank's adoption of this guidance did not affect its financial condition, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

Finance Agency Advisory Bulletin on Asset Classification

On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02). AB 2012-02 establishes a standard and uniform methodology for classifying assets and prescribes the timing of asset charge-offs, excluding investment securities. The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 states that it was effective upon issuance. The FHLBanks are currently assessing the provisions of AB 2012-02 in coordination with the Finance Agency and therefore the Bank has not yet determined when it will implement this guidance or the effect, if any, that this guidance will have on its financial condition, results of operations, or cash flows.

Disclosures about Offsetting Assets and Liabilities

On December 16, 2011, the FASB and the IASB issued common disclosure requirements intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a company's financial position, whether a company's financial statements are prepared on the basis of GAAP or IFRS. This guidance will require entities to disclose both gross and net information about financial instruments, including derivative instruments, which are either offset on their statement of condition or subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for interim and annual periods beginning on January 1, 2013 and will be applied retrospectively for all comparative periods presented. 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.

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 Statements of Condition. These investments 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 decrease accordingly.


11


Note 4 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Non-mortgage-backed securities
 
 
 
Temporary Liquidity Guarantee Program (TLGP) debentures1
$

 
$
1,006,883

Taxable municipal bonds2
296,653

 
285,999

Other U.S. obligations3
313,147

 
8,521

Government-sponsored enterprise obligations4
65,111

 
63,718

Total non-mortgage-backed securities
674,911

 
1,365,121

Mortgage-backed securities
 
 
 
Government-sponsored enterprises5
84,461

 

Total fair value
$
759,372

 
$
1,365,121


1 
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government. 
2 
Represents U.S. Government subsidized Build American Bonds. 
3 
Represents Export-Import Bank and U.S. Department of Transportation Maritime Administration bonds. 
4 
Represents Tennessee Valley Authority (TVA) bonds. 
5 
Represents a Fannie Mae security. 

Interest Rate Payment Terms

The following table summarizes the Bank's trading securities by interest rate payment terms (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Fixed rate
$
759,372

 
$
659,626

Variable rate

 
705,495

Total fair value
$
759,372

 
$
1,365,121


At September 30, 2012 and December 31, 2011, 89 and 100 percent of the Bank's fixed rate trading securities were swapped to a variable rate index through the use of interest rate swaps accounted for as derivatives in economic hedge relationships.

Net Gain on Trading Securities

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Holding gain on trading securities
$
11,950

 
$
34,895

 
$
26,871

 
$
39,368

Realized gain on sale of trading securities

 
973

 

 
973

Net gain on trading securities
$
11,950

 
$
35,868

 
$
26,871

 
$
40,341


The Bank did not sell any trading securities during the three and nine months ended September 30, 2012. 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.


12


Note 5 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities at September 30, 2012 were as follows (dollars in thousands):
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Taxable municipal bonds2
$
195,521

 
$
5,851

 
$

 
$
201,372

Other U.S. obligations3
155,167

 
11,976

 

 
167,143

Government-sponsored enterprise obligations4
558,884

 
49,125

 
613

 
607,396

Other5
199,707

 
1,739

 

 
201,446

Total non-mortgage-backed securities
1,109,279

 
68,691

 
613

 
1,177,357

Mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprises6
3,599,988

 
103,442

 
1,010

 
3,702,420

Total
$
4,709,267

 
$
172,133

 
$
1,623

 
$
4,879,777


AFS securities at December 31, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP debentures7
$
563,989

 
$
405

 
$

 
$
564,394

Taxable municipal bonds2
191,030

 
1,575

 
721

 
191,884

Other U.S. obligations3
165,221

 
6,916

 

 
172,137

Government-sponsored enterprise obligations4
509,793

 
46,973

 
97

 
556,669

Other5
50,205

 
690

 

 
50,895

Total non-mortgage-backed securities
1,480,238

 
56,559

 
818

 
1,535,979

Mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprises6
3,738,086

 
83,767

 
2,268

 
3,819,585

Total
$
5,218,324

 
$
140,326

 
$
3,086

 
$
5,355,564


1 
Amortized cost includes adjustments made to the cost basis of an investment for principal repayments, amortization, accretion, and fair value hedge accounting adjustments. 
2 
Represents U.S. Government subsidized Build America Bonds and State of Iowa IJOBS Program Special Obligations. 
3 
Represents Export-Import Bank bonds. 
4 
Represents Fannie Mae, Freddie Mac, TVA, and Federal Farm Credit Bank (FFCB) bonds. 
5 
Represents Private Export Funding Corporation (PEFCO) bonds. 
6 
Represents Fannie Mae and Freddie Mac securities. 
7 
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government. 

Interest Rate Payment Terms

The following table summarizes the Bank's AFS securities by interest rate payment terms (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Fixed rate
$
1,561,432

 
$
1,437,386

Variable rate
3,147,835

 
3,780,938

Total amortized cost
$
4,709,267

 
$
5,218,324


At September 30, 2012 and December 31, 2011, 38 and 35 percent of the Bank's fixed rate AFS securities were swapped to a variable rate index through the use of interest rate swaps accounted for as derivatives in fair value hedge relationships.


13


Unrealized Losses

The following table summarizes AFS securities with unrealized losses at September 30, 2012. The unrealized losses are aggregated by major security type and 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
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise obligations
$
86,865

 
$
306

 
$
22,321

 
$
307

 
$
109,186

 
$
613

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
197,199

 
600

 
290,589

 
410

 
487,788

 
1,010

Total
$
284,064

 
$
906

 
$
312,910

 
$
717

 
$
596,974

 
$
1,623


The following table summarizes AFS securities with unrealized losses at December 31, 2011. The unrealized losses are aggregated by major security type and 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
$
105,222

 
$
721

 
$

 
$

 
$
105,222

 
$
721

Government-sponsored enterprise obligations

 

 
22,942

 
97

 
22,942

 
97

Total non-mortgage-backed securities
105,222

 
721

 
22,942

 
97

 
128,164

 
818

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
115,477

 
39

 
384,044

 
2,229

 
499,521

 
2,268

Total
$
220,699

 
$
760

 
$
406,986

 
$
2,326

 
$
627,685

 
$
3,086


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, 2012
 
December 31, 2011
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$

 
$

 
$
563,989

 
$
564,394

Due after one year through five years
 
345,174

 
364,092

 
157,805

 
169,702

Due after five years through ten years
 
474,235

 
511,301

 
356,277

 
392,426

Due after ten years
 
289,870

 
301,964

 
402,167

 
409,457

Total non-mortgage-backed securities
 
1,109,279

 
1,177,357

 
1,480,238

 
1,535,979

Mortgage-backed securities
 
3,599,988

 
3,702,420

 
3,738,086

 
3,819,585

Total
 
$
4,709,267

 
$
4,879,777

 
$
5,218,324

 
$
5,355,564


Prepayment Fees

During the three and nine months ended September 30, 2012, the Bank did not receive any prepayment fees on AFS securities. 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 mortgage-backed security 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.


14


Note 6 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities at September 30, 2012 were as follows (dollars in thousands):
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprise obligations2
$
308,890

 
$
88,727

 
$

 
$
397,617

State or local housing agency obligations3
89,525

 
9,611

 

 
99,136

Other4
1,443

 

 

 
1,443

Total non-mortgage-backed securities
399,858

 
98,338

 

 
498,196

Mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprises5
3,050,123

 
78,899

 
204

 
3,128,818

Other U.S. obligations6
11,467

 
48

 

 
11,515

Private-label
42,844

 
568

 
1,837

 
41,575

Total mortgage-backed securities
3,104,434

 
79,515

 
2,041

 
3,181,908

Total
$
3,504,292

 
$
177,853

 
$
2,041

 
$
3,680,104

 
HTM securities at December 31, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
340,000

 
$

 
$
36

 
$
339,964

TLGP debentures7
1,250

 
7

 

 
1,257

Government-sponsored enterprise obligations2
310,060

 
74,243

 

 
384,303

State or local housing agency obligations3
101,547

 
7,897

 

 
109,444

Other4
1,196

 

 

 
1,196

Total non-mortgage-backed securities
754,053

 
82,147

 
36

 
836,164

Mortgage-backed securities
 
 
 
 
 
 
 
Government-sponsored enterprises5
4,378,340

 
108,604

 
1,716

 
4,485,228

Other U.S. obligations6
14,109

 
38

 

 
14,147

Private-label
48,698

 
205

 
4,421

 
44,482

Total mortgage-backed securities
4,441,147

 
108,847

 
6,137

 
4,543,857

Total
$
5,195,200

 
$
190,994

 
$
6,173

 
$
5,380,021


1 
Amortized cost includes adjustments made to the cost basis of an investment for principal repayments, amortization, and accretion. 
2 
Represents TVA and FFCB bonds. 
3 
Represents Housing Finance Authority bonds that were purchased by the Bank from housing associates within its district. 
4 
Represents an investment in a Small Business Investment Company. 
5 
Represents Fannie Mae and Freddie Mac securities. 
6 
Represents Government National Mortgage Associated (Ginnie Mae) securities and Small Business Administration Pool Certificates that are backed by the full faith and credit of the U.S. Government. 
7 
Represents corporate debentures issued by the Bank's members that are backed by the full faith and credit of the U.S. Government. 

 

15


Unrealized Losses

The following table summarizes the HTM securities with unrealized losses at September 30, 2012. 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
$

 
$

 
$
167,377

 
$
204

 
$
167,377

 
$
204

Private-label

 

 
26,694

 
1,837

 
26,694

 
1,837

Total mortgage-backed securities
$

 
$

 
$
194,071

 
$
2,041

 
$
194,071

 
$
2,041

 
The following table summarizes the HTM securities with unrealized losses at December 31, 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
 
 
 
 
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
339,964

 
$
36

 
$

 
$

 
$
339,964

 
$
36

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises

 

 
326,162

 
1,716

 
326,162

 
1,716

Private-label

 

 
26,118

 
4,421

 
26,118

 
4,421

Total mortgage-backed securities

 

 
352,280

 
6,137

 
352,280

 
6,137

Total
$
339,964

 
$
36

 
$
352,280

 
$
6,137

 
$
692,244

 
$
6,173


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, 2012
 
December 31, 2011
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$

 
$

 
$
341,250

 
$
341,221

Due after one year through five years
 
1,443

 
1,443

 
1,196

 
1,196

Due after ten years
 
398,415

 
496,753

 
411,607

 
493,747

Total non-mortgage-backed securities
 
399,858

 
498,196

 
754,053

 
836,164

Mortgage-backed securities
 
3,104,434

 
3,181,908

 
4,441,147

 
4,543,857

Total
 
$
3,504,292

 
$
3,680,104

 
$
5,195,200

 
$
5,380,021


Net Gain on Sale of HTM Securities

The Bank did not sell any HTM securities during the three and nine months ended September 30, 2012. 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 a net gain 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.


16


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 Mortgage-Backed Securities

On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label mortgage-backed securities (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.

At September 30, 2012, 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. CBSAs refer 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, 2012 assumed current-to-trough home price declines ranging from 0 percent (for those housing markets that are believed to have reached their trough) to 4 percent. For those markets where further home price declines are anticipated, the declines were projected to occur over the 3 to 9 month period beginning July 1, 2012. For the vast majority of markets where further home price declines are anticipated, the declines were projected to range from 1 percent to 2 percent over the three month period beginning July 1, 2012. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market.

The following table presents projected home price recovery by months at September 30, 2012:
 
 
Recovery Range of Annualized Rates %
Months
 
Minimum
 
Maximum
1 - 6
 
0.0
 
2.8
7 - 18
 
0.0
 
3.0
19 - 24
 
1.0
 
4.0
25 - 30
 
2.0
 
4.0
31 - 42
 
2.0
 
5.0
43 - 66
 
2.0
 
6.0
Thereafter
 
2.3
 
5.6

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 allocated the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities was derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero. The projected cash flows were 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.


17


The Bank compared 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 existed. At September 30, 2012 and December 31, 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 its private-label MBS and it is not more likely than not that the Bank will be required to sell its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at September 30, 2012 and December 31, 2011.

All Other Investment Securities

On a quarterly basis, the Bank reviews all remaining AFS and HTM securities in an unrealized loss position. At September 30, 2012 and December 31, 2011, the Bank determined that the unrealized losses on these securities were due primarily to interest rate volatility. Because 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, it did not consider any of its other investment securities to be other-than-temporarily impaired at September 30, 2012 and December 31, 2011.

In addition, the Bank determined the following for its other investment securities in an unrealized loss position at September 30, 2012 and December 31, 2011:

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. The creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements are sufficient to protect the Bank from losses based on current expectations.

Negotiable certificates of deposit. The creditworthiness of the issuers is sufficient to protect the Bank from losses based on current expectations.

Note 8 — Advances

Redemption Terms

The following table summarizes the Bank's advances outstanding by year of contractual maturity (dollars in thousands):
 
 
September 30, 2012
 
December 31, 2011
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
472

 
3.33
 
$
397

 
3.39
Due in one year or less
 
9,770,907

 
1.08
 
6,156,242

 
1.42
Due after one year through two years
 
2,834,628

 
1.70
 
5,640,451

 
1.78
Due after two years through three years
 
1,778,006

 
1.71
 
1,175,120

 
2.53
Due after three years through four years
 
1,991,044

 
2.53
 
1,744,798

 
2.20
Due after four years through five years
 
2,833,307

 
2.34
 
3,057,813

 
2.95
Thereafter
 
5,998,251

 
1.99
 
7,888,017

 
2.62
Total par value
 
25,206,615

 
1.67
 
25,662,838

 
2.15
Premiums
 
173

 
 
 
186

 
 
Discounts
 
(3,556
)
 
 
 
(1
)
 
 
Fair value hedging adjustments
 
 
 
 
 
 
 
 
Cumulative fair value gains on existing hedges
 
588,519

 
 
 
841,783

 
 
Basis adjustments from terminated or ineffective hedges
 
39,301

 
 
 
86,217

 
 
Total
 
$
25,831,052

 
 
 
$
26,591,023

 
 


18


The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) without incurring prepayment fees (callable advances). In exchange for receiving the right to call the advance on a predetermined call date, the borrower pays a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. If the call option is exercised, replacement funding may be available. Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At September 30, 2012 and December 31, 2011, the Bank had callable advances outstanding totaling $5.5 billion and $5.6 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, 2012 and December 31, 2011, the Bank had putable advances outstanding totaling $3.3 billion and $3.7 billion.

Interest Rate Payment Terms

The following table summarizes the Bank's advances by interest rate payment terms (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Fixed rate
$
16,803,318

 
$
17,959,406

Variable rate
8,403,297

 
7,703,432

Total par value
$
25,206,615

 
$
25,662,838


At September 30, 2012 and December 31, 2011, 52 and 57 percent of the Bank's fixed rate advances were swapped to a variable rate index through the use of interest rate swaps accounted for as derivatives in fair value or economic hedge relationships. At September 30, 2012 and December 31, 2011, two and three percent of the Bank's variable rate advances were swapped to another variable rate index through the use of interest rate swaps accounted for as derivatives in economic hedge relationships.

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 financially indifferent to the prepayment of the advance. These prepayment fees are recorded net of amortization of fair value hedging adjustments and deferrals on advance modifications through "Prepayment fees on advances, net" in the Statements of Income. 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,
 
2012
 
2011
 
2012
 
2011
Gross prepayment fees
$
13,121

 
$
2,302

 
$
353,295

 
$
14,907

Amortization of fair value hedging adjustments
(7,447
)
 
(926
)
 
(329,793
)
 
(6,908
)
Amortization of deferrals on advance modifications
226

 
114

 
581

 
398

Prepayment fees on advances, net
$
5,900

 
$
1,490

 
$
24,083

 
$
8,397


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 single family 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.


19


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,
2012
 
December 31,
2011
Fixed rate, medium-term single family mortgages
$
1,895,094

 
$
1,795,914

Fixed rate, long-term single family mortgages
5,158,841

 
5,308,476

Total unpaid principal balance
7,053,935

 
7,104,390

Premiums
84,587

 
70,844

Discounts
(23,487
)
 
(30,666
)
Basis adjustments from mortgage loan commitments
17,055

 
12,365

Allowance for credit losses
(16,366
)
 
(18,963
)
Total mortgage loans held for portfolio, net
$
7,115,724

 
$
7,137,970


The following table presents the Bank's mortgage loans held for portfolio by type (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Conventional loans
$
6,550,742

 
$
6,678,048

Government-insured loans
503,193

 
426,342

Total unpaid principal balance
$
7,053,935

 
$
7,104,390

    
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 approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and 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 Bank is required by regulation 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 unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with the Bank, and (iv) 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 provides that the Bank has a lien on each member'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 makes changes to its collateral guidelines.


20


The Bank's hierarchy of pledged assets 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 by filing Uniform Commercial Code financing statements or taking physical possession of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket lien, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower's obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower's obligation. With respect to non-blanket lien borrowers (typically insurance companies and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or mortgages to it or its safekeeping agent.

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, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, none of the Bank's credit products were troubled debt restructurings (TDRs) at September 30, 2012 and December 31, 2011.

Based upon the Bank's collateral and 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, 2012 and December 31, 2011. Accordingly, the Bank has not recorded any allowance for credit losses.

At September 30, 2012 and December 31, 2011, 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 principal 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, 2012 and December 31, 2011. Furthermore, due to the government guarantee or insurance, these mortgage loans are not placed on non-accrual status.


21


Conventional Mortgage Loans

The Bank's management of credit risk in the MPF program involves several layers of legal 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. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage loan interest income. Credit enhancement fees paid totaled $6.0 million and $7.5 million during the nine months ended September 30, 2012 and 2011. 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 to offset these losses. The FLA balance for all master commitments was $128.0 million and $124.4 million at September 30, 2012 and December 31, 2011.

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.

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 conventional mortgage loans for impairment on an individual 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 the majority of its conventional mortgage loan portfolio for impairment and estimates an allowance for credit losses based upon factors that vary by MPF product. These factors include, but are not limited to, (i) loan delinquencies, (ii) loans migrating to real estate owned (REO), (iii) actual historical loss severities, and (iv) certain quantifiable economic factors, such as unemployment rates and home prices.

The Bank utilizes a roll-rate methodology when estimating its allowance for credit losses. This methodology projects loans migrating to REO status based on historical average rates of delinquency. The Bank then applies a loss severity factor to calculate an estimate of credit losses.

Individually Identified Conventional Mortgage Loans. The Bank individually evaluates certain conventional mortgage loans for impairment, including TDRs granted under the Bank's temporary loan modification plan and collateral-dependent loans. TDRs occur when the Bank grants a concession to a borrower that it would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. The Bank's TDRs generally involve modifying the borrower's monthly payment for a period of up to 36 months. The Bank generally measures impairment of TDRs based on the present value of expected future cash flows discounted at the loan's effective interest rate. Collateral-dependent loans are loans in which repayment is expected to be provided solely by the sale of the underlying collateral. The Bank measures impairment of collateral-dependent loans based on the estimated fair value of the underlying collateral less selling costs.

Estimating Additional Credit Loss in the Conventional Mortgage Loan Portfolio. The Bank may make an adjustment for certain limitations in its estimation of credit losses. This adjustment recognizes the imprecise nature of an estimate and represents a subjective management judgment that is intended to cover losses resulting from other macroeconomic factors that may not be captured in the collective methodology previously described at the balance sheet date.


22


Performance-Based Credit Enhancement Fees. The Bank reserves for estimated credit losses after taking into consideration performance-based credit enhancement fees available for recapture from the PFIs. Performance-based credit enhancement fees available for recapture 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 that are in the process of recapture.

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 losses while other master commitments may not. At September 30, 2012, the Bank determined there was an insignificant amount of performance-based credit enhancement fees available for recapture from the PFIs. As such, it did not factor credit enhancement fees into its estimate of the allowance for credit losses. The following table shows the impact of performance-based credit enhancement fees available for recapture on the Bank's estimate of the allowance for credit losses (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Estimate of credit losses before performance-based credit enhancement fees
$
16,366

 
$
19,549

Less: Performance-based credit enhancement fees available for recapture

 
(586
)
Allowance for credit losses
$
16,366

 
$
18,963


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 (dollars in thousands):