10-Q 1 fhlb03311310q.htm FORM 10-Q FHLB 033113 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 March 31, 2013
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 April 30, 2013
 
Class B Stock, par value $100
 
20,654,733
 
 
 
 
 
 
 
 
 



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 








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)

 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Cash and due from banks
$
330,085

 
$
252,113

Interest-bearing deposits
3,528

 
3,238

Securities purchased under agreements to resell
5,445,000

 
3,425,000

Federal funds sold
1,410,000

 
960,000

Investment securities
 
 
 
Trading securities (Note 3)
1,133,907

 
1,145,430

Available-for-sale securities (Note 4)
5,274,841

 
4,859,806

Held-to-maturity securities (fair value of $2,768,916 and $3,198,129) (Note 5)
2,628,116

 
3,039,721

Total investment securities
9,036,864

 
9,044,957

Advances (Note 7)
24,801,694

 
26,613,915

Mortgage loans held for portfolio, net
 
 
 
Mortgage loans held for portfolio (Note 8)
6,786,454

 
6,967,603

Allowance for credit losses on mortgage loans (Note 9)
(15,253
)
 
(15,793
)
Total mortgage loans held for portfolio, net
6,771,201

 
6,951,810

Accrued interest receivable
74,161

 
66,410

Premises, software, and equipment, net
15,756

 
13,534

Derivative assets (Note 10)
6,183

 
3,813

Other assets
31,645

 
32,486

TOTAL ASSETS
$
47,926,117

 
$
47,367,276

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
922,498

 
$
872,852

Non-interest-bearing
176,275

 
211,892

Total deposits
1,098,773

 
1,084,744

Consolidated obligations (Note 11)
 
 
 
Discount notes
5,326,571

 
8,674,370

Bonds (includes $1,150,942 and $1,866,985 at fair value under the fair value option)
38,145,986

 
34,345,183

Total consolidated obligations
43,472,557

 
43,019,553

Mandatorily redeemable capital stock (Note 12)
10,890

 
9,561

Accrued interest payable
113,569

 
106,611

Affordable Housing Program payable
37,731

 
36,720

Derivative liabilities (Note 10)
90,937

 
100,700

Other liabilities
348,741

 
175,086

TOTAL LIABILITIES
45,173,198

 
44,532,975

Commitments and contingencies (Note 14)

 

CAPITAL (Note 12)
 
 
 
Capital stock - Class B putable ($100 par value); 19,699 and 20,627 shares issued and outstanding
1,969,855

 
2,062,714

Retained earnings
 
 
 
Unrestricted
601,886

 
593,129

Restricted
34,288

 
28,820

Total retained earnings
636,174

 
621,949

Accumulated other comprehensive income
146,890

 
149,638

TOTAL CAPITAL
2,752,919

 
2,834,301

TOTAL LIABILITIES AND CAPITAL
$
47,926,117

 
$
47,367,276

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)

 
For the Three Months Ended
 
March 31,
 
2013
 
2012
INTEREST INCOME
 
 
 
Advances
$
48,439

 
$
65,671

Prepayment fees on advances, net
1,821

 
16,870

Interest-bearing deposits
149

 
170

Securities purchased under agreements to resell
1,669

 
522

Federal funds sold
440

 
484

Investment securities
 
 
 
Trading securities
8,171

 
6,607

Available-for-sale securities
17,121

 
20,258

Held-to-maturity securities
19,786

 
33,691

Mortgage loans held for portfolio
65,693

 
74,683

Total interest income
163,289

 
218,956

INTEREST EXPENSE
 
 
 
Consolidated obligations
 
 
 
Discount notes
2,307

 
1,935

Bonds
107,596

 
147,072

Deposits
37

 
47

Mandatorily redeemable capital stock
58

 
46

Total interest expense
109,998

 
149,100

NET INTEREST INCOME
53,291

 
69,856

OTHER (LOSS) INCOME
 
 
 
Net loss on trading securities
(6,928
)
 
(6,620
)
Net gain on consolidated obligations held at fair value
643

 
1,852

Net gain on derivatives and hedging activities
10,930

 
20,987

Net loss on extinguishment of debt
(15,123
)
 
(22,739
)
Other, net
1,361

 
1,602

Total other loss
(9,117
)
 
(4,918
)
OTHER EXPENSE
 
 
 
Compensation and benefits
7,220

 
8,264

Contractual services
1,810

 
1,390

Other operating expenses
3,034

 
3,037

Federal Housing Finance Agency
976

 
1,304

Office of Finance
749

 
721

Total other expense
13,789

 
14,716

INCOME BEFORE ASSESSMENTS
30,385

 
50,222

Affordable Housing Program assessments
3,044

 
5,027

NET INCOME
$
27,341

 
$
45,195

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)

 
For the Three Months Ended
 
March 31,
 
2013
 
2012
Net income
$
27,341

 
$
45,195

Other comprehensive (loss) income
 
 
 
Net unrealized losses on available-for-sale securities
(2,972
)
 
(3,193)

Pension and postretirement benefits
224

 
92

Total other comprehensive loss
(2,748
)
 
(3,101)

TOTAL COMPREHENSIVE INCOME
$
24,593

 
$
42,094

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, 2011
21,089

 
$
2,108,878

 
$
562,442

 
$
6,533

 
$
568,975

 
$
134,561

 
$
2,812,414

Proceeds from issuance of capital stock
2,703

 
270,364

 

 

 

 

 
270,364

Repurchase/redemption of capital stock
(3,045
)
 
(304,532
)
 

 

 

 

 
(304,532
)
Net shares reclassified to mandatorily redeemable capital stock
(10
)
 
(996
)
 

 

 

 

 
(996
)
Comprehensive income (loss)

 

 
36,156

 
9,039

 
45,195

 
(3,101
)
 
42,094

Cash dividends on capital stock

 

 
(15,891
)
 

 
(15,891
)
 

 
(15,891
)
BALANCE MARCH 31, 2012
20,737

 
$
2,073,714

 
$
582,707

 
$
15,572

 
$
598,279

 
$
131,460

 
$
2,803,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2012
20,627

 
$
2,062,714

 
$
593,129

 
$
28,820

 
$
621,949

 
$
149,638

 
$
2,834,301

Proceeds from issuance of capital stock
2,322

 
232,180

 

 

 

 

 
232,180

Repurchase/redemption of capital stock
(3,170
)
 
(316,977
)
 

 

 

 

 
(316,977
)
Net shares reclassified to mandatorily redeemable capital stock
(80
)
 
(8,062
)
 

 

 

 

 
(8,062
)
Comprehensive income (loss)

 

 
21,873

 
5,468

 
27,341

 
(2,748
)
 
24,593

Cash dividends on capital stock

 

 
(13,116
)
 

 
(13,116
)
 

 
(13,116
)
BALANCE MARCH 31, 2013
19,699

 
$
1,969,855

 
$
601,886

 
$
34,288

 
$
636,174

 
$
146,890

 
$
2,752,919

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)

 
For the Three Months Ended
 
March 31,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
27,341

 
$
45,195

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
(3,405
)
 
322,213

Net loss on trading securities
6,928

 
6,620

Net gain on consolidated obligations held at fair value
(643
)
 
(1,852
)
Net change in derivatives and hedging activities
(5,702
)
 
(354,872
)
Net loss on extinguishment of debt
15,123

 
22,739

Other adjustments
4,700

 
1,681

Net change in:
 
 
 
Accrued interest receivable
(7,389
)
 
(6,888
)
Other assets
1,715

 
3,046

Accrued interest payable
6,556

 
4,394

Other liabilities
(4,754
)
 
1,228

Total adjustments
13,129

 
(1,691
)
Net cash provided by operating activities
40,470

 
43,504

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
20,010

 
331,359

Securities purchased under agreements to resell
(2,020,000
)
 
(1,250,000
)
Federal funds sold
(450,000
)
 
550,000

Premises, software, and equipment
(2,836
)
 
(449
)
Trading securities
 
 
 
Proceeds from maturities of long-term
4,595

 
725,170

Purchases of long-term
(140,579
)
 

Available-for-sale securities
 
 
 
Proceeds from maturities of long-term
272,647

 
331,809

Purchases of long-term
(374,076
)
 
(334,350
)
Held-to-maturity securities
 
 
 
Net decrease in short-term

 
105,000

Proceeds from maturities of long-term
411,323

 
459,533

Advances
 
 
 
Principal collected
12,788,054

 
11,554,660

Originated
(11,031,485
)
 
(11,936,398
)
Mortgage loans held for portfolio
 
 
 
Principal collected
526,708

 
531,205

Originated or purchased
(359,206
)
 
(559,528
)
Proceeds from sales of foreclosed assets
6,986

 
7,783

Net cash (used in) provided by investing activities
(347,859
)
 
515,794

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)

 
For the Three Months Ended
 
March 31,
 
2013
 
2012
FINANCING ACTIVITIES
 
 
 
Net change in deposits
15,530

 
132,762

Net payments on derivative contracts with financing elements
(1,984
)
 
(2,367
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
20,614,205

 
56,160,775

Bonds
11,575,042

 
8,013,676

Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(23,960,336
)
 
(57,243,926
)
Bonds
(7,659,844
)
 
(7,508,412
)
Bonds transferred to other FHLBanks
(92,606
)
 

Proceeds from issuance of capital stock
232,180

 
270,364

Payments for repurchase/redemption of mandatorily redeemable capital stock
(6,733
)
 
(275
)
Payments for repurchase/redemption of capital stock
(316,977
)
 
(304,532
)
Cash dividends paid
(13,116
)
 
(15,891
)
Net cash provided by (used in) financing activities
385,361

 
(497,826
)
Net increase in cash and due from banks
77,972

 
61,472

Cash and due from banks at beginning of the period
252,113

 
240,156

Cash and due from banks at end of the period
$
330,085

 
$
301,628

 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
Interest paid
$
215,318

 
$
302,805

Affordable Housing Program payments
$
2,033

 
$
2,715

Transfers of mortgage loans to real estate owned
$
5,168

 
$
7,083

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 FHLBanks' 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 are government-sponsored enterprises (GSEs) that 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 (CDFIs) 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 unaudited financial statements 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, 2012, which are contained in the Bank's 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2013 (2012 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary 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, 2013.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2012 Form 10-K, with the exception of one policy noted below.
 
Financial Instruments with Legal Right of Offset

The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that are subject to enforceable master netting arrangements or similar agreements. The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has the legal right of offset under these master agreements. The Bank does not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

9



The net exposure for these financial instruments can change on a daily basis and therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of the individual master agreement between the Bank and its derivative counterparty. Additional information regarding these agreements is provided in “Note 10 — Derivatives and Hedging Activities.” Based on the fair value of the related collateral held, the Bank's securities purchased under agreements to resell were fully collateralized for the periods presented. Additional information about the Bank's securities purchased under agreements to resell is disclosed in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2012 Form 10-K.

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Presentation of Comprehensive Income

On February 5, 2013, the Financial Accounting Standards Board (FASB) issued guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income (AOCI). This guidance does not change the current requirements for reporting net income or comprehensive income in financial statements. However, it does require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements where net income is presented or in the footnotes, significant amounts reclassified out of AOCI. These amounts would be presented based on the respective lines of net income only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity would be required to cross-reference to other required disclosures that provide additional detail about these amounts. This guidance became effective for interim and annual periods beginning on January 1, 2013 and was applied prospectively. The adoption of this 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.

Disclosures about Offsetting Assets and Liabilities

On December 16, 2011, the FASB and the International Accounting Standards Board (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 International Financial Reporting Standards (IFRS). This guidance was amended on January 31, 2013 to clarify that its scope includes only certain financial instruments that are either offset on the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. An entity is required to disclose both gross and net information about derivative, repurchase, and security lending instruments that meet these criteria. This guidance, as amended, became effective for interim and annual periods beginning on January 1, 2013 and was applied retrospectively for all comparative periods presented. The adoption of this 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.

ISSUED ACCOUNTING GUIDANCE

Joint and Several Liability Arrangements

On February 28, 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligations as well as other information about the obligations. This guidance is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity's fiscal year of adoption. This guidance is not expected to materially affect the Bank's financial condition, results of operations, or cash flows.


10


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. However, the Finance Agency issued additional guidance that extends the effective date of AB 2012-02 to January 1, 2014. The Bank is currently assessing the provisions of AB 2012-02 and has not yet determined the effect that this guidance will have on its financial condition, results of operations, or cash flows.

Note 3 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
March 31,
2013
 
December 31,
2012
Non-mortgage-backed securities
 
 
 
Other U.S. obligations
$
302,646

 
$
309,540

GSE obligations
63,457

 
64,445

Other1
295,017

 
294,933

Total non-mortgage-backed securities
661,120

 
668,918

Mortgage-backed securities
 
 
 
GSE - residential
472,787

 
476,512

Total fair value
$
1,133,907

 
$
1,145,430


1
Consists of taxable municipal bonds.

Net Loss on Trading Securities

During the three months ended March 31, 2013 and 2012, the Bank recorded net holding losses of $6.9 million and $6.6 million on its trading securities. The Bank did not sell any trading securities during the three months ended March 31, 2013 and 2012.


11


Note 4 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities were as follows (dollars in thousands):
 
March 31, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
148,333

 
$
11,762

 
$

 
$
160,095

GSE obligations
507,724

 
45,376

 
(804
)
 
552,296

State or local housing agency obligations
8,204

 

 
(116
)
 
8,088

Other2
386,100

 
13,361

 

 
399,461

Total non-mortgage-backed securities
1,050,361

 
70,499

 
(920
)
 
1,119,940

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
4,074,671

 
82,935

 
(2,705
)
 
4,154,901

Total
$
5,125,032

 
$
153,434

 
$
(3,625
)
 
$
5,274,841


 
December 31, 2012
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
151,764

 
$
11,451

 
$

 
$
163,215

GSE obligations
509,941

 
46,637

 
(747
)
 
555,831

State or local housing agency obligations
8,351

 
50

 

 
8,401

Other2
391,814

 
8,596

 

 
400,410

Total non-mortgage-backed securities
1,061,870

 
66,734

 
(747
)
 
1,127,857

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
3,645,155

 
88,595

 
(1,801
)
 
3,731,949

Total
$
4,707,025

 
$
155,329

 
$
(2,548
)
 
$
4,859,806


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
Consists of Private Export Funding Corporation and taxable municipal bonds.


12


Unrealized Losses

The following tables summarize AFS securities with unrealized losses. 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):
 
March 31, 2013
 
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
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
$
11,752

 
$
(82
)
 
$
49,365

 
$
(722
)
 
$
61,117

 
$
(804
)
State or local housing agency obligations
8,088

 
(116
)
 

 

 
8,088

 
(116
)
Total non-mortgage-backed securities
19,840

 
(198
)
 
49,365

 
(722
)
 
69,205

 
(920
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
693,989

 
(2,325
)
 
226,096

 
(380
)
 
920,085

 
(2,705
)
Total
$
713,829

 
$
(2,523
)
 
$
275,461

 
$
(1,102
)
 
$
989,290

 
$
(3,625
)

 
December 31, 2012
 
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
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
$
39,483

 
$
(357
)
 
$
22,095

 
$
(390
)
 
$
61,578

 
$
(747
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
154,914

 
(1,395
)
 
257,974

 
(406
)
 
412,888

 
(1,801
)
Total
$
194,397

 
$
(1,752
)
 
$
280,069

 
$
(796
)
 
$
474,466

 
$
(2,548
)

Redemption Terms

The following table summarizes the amortized cost and fair value of AFS securities categorized by contractual maturity. 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 (dollars in thousands):
 
 
March 31, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
313,432

 
$
329,967

 
$
314,601

 
$
332,189

Due after five years through ten years
 
535,993

 
579,097

 
542,448

 
583,674

Due after ten years
 
200,936

 
210,876

 
204,821

 
211,994

Total non-mortgage-backed securities
 
1,050,361

 
1,119,940

 
1,061,870

 
1,127,857

Mortgage-backed securities
 
4,074,671

 
4,154,901

 
3,645,155

 
3,731,949

Total
 
$
5,125,032

 
$
5,274,841

 
$
4,707,025

 
$
4,859,806



13


Note 5 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities were as follows (dollars in thousands):
 
March 31, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
308,089

 
$
81,919

 
$

 
$
390,008

State or local housing agency obligations
81,570

 
7,526

 

 
89,096

Other2
1,795

 

 

 
1,795

Total non-mortgage-backed securities
391,454

 
89,445

 

 
480,899

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
7,070

 
32

 

 
7,102

Other U.S. obligations - commercial
2,780

 
10

 

 
2,790

GSE - residential
2,188,754

 
52,017

 
(197
)
 
2,240,574

Private-label - residential
38,058

 
432

 
(939
)
 
37,551

Total mortgage-backed securities
2,236,662

 
52,491

 
(1,136
)
 
2,288,017

Total
$
2,628,116

 
$
141,936

 
$
(1,136
)
 
$
2,768,916


 
December 31, 2012
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
308,496

 
$
86,601

 
$

 
$
395,097

State or local housing agency obligations
87,659

 
8,930

 

 
96,589

Other2
1,795

 

 

 
1,795

Total non-mortgage-backed securities
397,950

 
95,531

 

 
493,481

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
7,756

 
32

 

 
7,788

Other U.S. obligations - commercial
2,884

 
10

 

 
2,894

GSE - residential
2,590,195

 
63,902

 
(226
)
 
2,653,871

Private-label - residential
40,936

 
480

 
(1,321
)
 
40,095

Total mortgage-backed securities
2,641,771

 
64,424

 
(1,547
)
 
2,704,648

Total
$
3,039,721

 
$
159,955

 
$
(1,547
)
 
$
3,198,129


1
Amortized cost includes adjustments made to the cost basis of an investment for principal repayments, amortization, and accretion.

2
Consists of an investment in a Small Business Investment Company.


14


Unrealized Losses

The following tables summarize HTM securities with unrealized losses. 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):
 
March 31, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
$

 
$

 
$
145,813

 
$
(197
)
 
$
145,813

 
$
(197
)
Private-label - residential

 

 
24,859

 
(939
)
 
24,859

 
(939
)
Total mortgage-backed securities
$

 
$

 
$
170,672

 
$
(1,136
)
 
$
170,672

 
$
(1,136
)
 
December 31, 2012
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
$

 
$

 
$
156,945

 
$
(226
)
 
$
156,945

 
$
(226
)
Private-label - residential

 

 
26,277

 
(1,321
)
 
26,277

 
(1,321
)
Total mortgage-backed securities
$

 
$

 
$
183,222

 
$
(1,547
)
 
$
183,222

 
$
(1,547
)

Redemption Terms

The following table summarizes the amortized cost and fair value of HTM securities categorized by contractual maturity. 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 (dollars in thousands):
 
 
March 31, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
1,795

 
$
1,795

 
$
1,795

 
$
1,795

Due after ten years
 
389,659

 
479,104

 
396,155

 
491,686

Total non-mortgage-backed securities
 
391,454

 
480,899

 
397,950

 
493,481

Mortgage-backed securities
 
2,236,662

 
2,288,017

 
2,641,771

 
2,704,648

Total
 
$
2,628,116

 
$
2,768,916

 
$
3,039,721

 
$
3,198,129


Note 6 — 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 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.


15


As of March 31, 2013, 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 OTTI Governance Committee developed a housing price forecast with seven short-term projections with changes ranging from declines of four percent to increases of four percent over the twelve month period beginning January 1, 2013. For the vast majority of markets, the short-term forecast had changes ranging from declines of one percent to increases of one percent. Thereafter, home prices were projected to recover using one of five different recovery paths.

The following table presents projected home price recovery by months at March 31, 2013:
 
 
Recovery Range % (Annualized Rates)
Months
 
Minimum
 
Maximum
1 - 6
 
0.0
 
3.0
7 - 12
 
1.0
 
4.0
13 - 18
 
2.0
 
4.0
19 - 30
 
2.0
 
5.0
31 - 42
 
2.0
 
6.0
43 - 54
 
2.0
 
6.0
Thereafter
 
2.3
 
5.6

The month-by-month projections of future loan performance derived from the first model, which reflected 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 reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.

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 March 31, 2013, 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 March 31, 2013.


16


All Other Investment Securities

On a quarterly basis, the Bank reviews all remaining AFS and HTM securities in an unrealized loss position to determine whether they are other-than temporarily impaired. The following was determined for the Bank's other investment securities in an unrealized loss position at March 31, 2013:

GSE securities. The unrealized losses 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 these securities to be other-than-temporarily impaired at March 31, 2013. Additionally, the strength of the issuers' guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations.

State housing agency obligation. The unrealized loss was due to changes in interest rates, credit spreads, and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligation. The Bank does not intend to sell the security nor is it more likely than not that it will be required to sell the security before recovery of its amortized cost basis. As such, the Bank did not consider this security to be other-than-temporarily impaired at March 31, 2013. Additionally, the creditworthiness of the issuer and the strength of the underlying collateral and credit enhancements was sufficient to protect the Bank from losses based on current expectations.

Note 7 — Advances

Redemption Terms

The following table summarizes the Bank's advances outstanding by year of contractual maturity (dollars in thousands):
 
 
March 31, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
49

 
3.31
 
$
35

 
3.32
Due in one year or less
 
7,876,985

 
1.04
 
10,306,571

 
1.03
Due after one year through two years
 
2,821,413

 
1.10
 
1,900,515

 
1.59
Due after two years through three years
 
2,421,154

 
1.66
 
2,289,104

 
1.62
Due after three years through four years
 
2,189,020

 
2.21
 
2,096,668

 
2.34
Due after four years through five years
 
3,246,398

 
2.62
 
2,893,016

 
2.49
Thereafter
 
5,743,176

 
1.42
 
6,568,855

 
1.58
Total par value
 
24,298,195

 
1.52
 
26,054,764

 
1.53
Premiums
 
165

 
 
 
169

 
 
Discounts
 
(9,068
)
 
 
 
(3,247
)
 
 
Fair value hedging adjustments
 
512,402

 
 
 
562,229

 
 
Total
 
$
24,801,694

 
 
 
$
26,613,915

 
 

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, noncallable, 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 March 31, 2013 and December 31, 2012, the Bank had callable advances outstanding totaling $6.3 billion and $5.7 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 March 31, 2013 and December 31, 2012, the Bank had putable advances outstanding totaling $2.8 billion and $2.9 billion.


17


Prepayment Fees

The Bank charges a prepayment fee for advances that a borrower elects to terminate prior to the 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. Prepayment fees are recorded net of fair value hedging adjustments in the Statements of Income.

The following table summarizes the Bank's prepayment fees on advances, net (dollars in thousands):
 
For the Three Months Ended
 
March 31,
 
2013
 
2012
Gross prepayment fee income
$
2,524

 
$
338,785

Fair value hedging adjustments
(703
)
 
(321,915
)
Prepayment fees on advances, net
$
1,821

 
$
16,870


For information related to the Bank's credit risk exposure on advances, refer to "Note 9 — Allowance for Credit Losses."

Note 8 — 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 generally 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.

The following table presents information on the Bank's mortgage loans held for portfolio (dollars in thousands):
 
March 31,
2013
 
December 31,
2012
Fixed rate, medium-term single family mortgages1
$
1,820,411

 
$
1,880,646

Fixed rate, long-term single family mortgages
4,886,204

 
5,005,194

Total unpaid principal balance
6,706,615

 
6,885,840

Premiums
84,309

 
86,112

Discounts
(19,297
)
 
(21,277
)
Basis adjustments from mortgage loan commitments
14,827

 
16,928

Total mortgage loans held for portfolio
6,786,454

 
6,967,603

Allowance for credit losses
(15,253
)
 
(15,793
)
Total mortgage loans held for portfolio, net
$
6,771,201

 
$
6,951,810


1
Medium-term is defined as a term of 15 years or less.

The following table presents the Bank's mortgage loans held for portfolio by type (dollars in thousands):
 
March 31,
2013
 
December 31,
2012
Conventional loans
$
6,185,922

 
$
6,372,542

Government-insured loans
520,693

 
513,298

Total unpaid principal balance
$
6,706,615

 
$
6,885,840

    
For information related to the Bank's credit risk exposure on mortgage loans held for portfolio, refer to "Note 9 — Allowance for Credit Losses."


18


Note 9 — Allowance for Credit Losses

The Bank has established an allowance for credit losses methodology for each of its financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell.

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 Government National Mortgage Association 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 and 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.

Borrowers may pledge collateral to the Bank by executing a blanket lien, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control 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 that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket lien borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

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 March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012.

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 March 31, 2013 and December 31, 2012. Accordingly, the Bank has not recorded any allowance for credit losses.


19


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 or guaranteed 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 its government-insured mortgage loans at March 31, 2013 and December 31, 2012. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

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). At the time of origination, PMI is required 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 $1.1 million and $2.3 million during the three months ended March 31, 2013 and 2012. 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 $84.6 million and $126.0 million at March 31, 2013 and December 31, 2012.

Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time a mortgage loan is purchased 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). PFIs may either pledge collateral or purchase supplemental mortgage insurance (SMI) from mortgage insurers to secure this obligation. If at any time the Bank cancels all or a portion of its SMI policies, the respective PFI is no longer required to retain a portion of the credit risk on the mortgage loans purchased by the Bank. In those instances, the Bank holds additional retained earnings to protect against losses and no credit enhancement fees are paid to the PFI.

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, if available.

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.


20


Individually Identified Conventional Mortgage Loans. The Bank individually evaluates certain conventional mortgage loans for impairment, including TDRs 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 include loans granted under its temporary loan modification plan and loans discharged under Chapter 7 bankruptcy. 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 considers TDRs where principal or interest is 60 days or more past due to be collateral-dependent. 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.

Performance-Based Credit Enhancement Fees. When reserving for estimated credit losses, the Bank may take 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 March 31, 2013 and December 31, 2012, the Bank determined that the amount of performance-based credit enhancement fees available for recapture from the PFIs at the master commitment level was immaterial. As such, it did not factor credit enhancement fees into its estimate of the allowance for credit losses.

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):
 
For the Three Months Ended
 
March 31,
 
2013
 
2012
Balance, beginning of period
$
15,793

 
$
18,963

Charge-offs
(540
)
 
(898
)
Balance, end of period
$
15,253

 
$
18,065


The following table summarizes the allowance for credit losses and recorded investment of the Bank's conventional mortgage loan portfolio by impairment methodology (dollars in thousands):
 
March 31,
2013
 
December 31,
2012
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
4,887

 
$
5,444

Individually evaluated for impairment
10,366

 
10,349

Total allowance for credit losses
$
15,253

 
$
15,793

Recorded investment1
 
 
 
Collectively evaluated for impairment
$
6,234,947

 
$
6,415,718

Individually evaluated for impairment, with or without a related allowance
51,102

 
59,344

Total recorded investment
$
6,286,049

 
$
6,475,062


1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.


21


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 (dollars in thousands):
 
March 31, 2013
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
76,869

 
$
15,873

 
$
92,742

Past due 60 - 89 days
24,094

 
4,162

 
28,256

Past due 90 -179 days
22,696

 
2,774

 
25,470

Past due 180 days or more
59,501

 
3,252

 
62,753

Total past due loans
183,160

 
26,061

 
209,221

Total current loans
6,102,889

 
509,245

 
6,612,134

Total recorded investment of mortgage loans1
$
6,286,049

 
$
535,306

 
$
6,821,355

 
 
 
 
 
 
In process of foreclosure (included above)2
$
48,425

 
$
768

 
$
49,193

Serious delinquency rate3
1.3
%
 
1.1
%
 
1.3
%
Past due 90 days or more and still accruing interest4
$

 
$
6,026

 
$
6,026

Non-accrual mortgage loans5
$
84,630

 
$

 
$
84,630


 
December 31, 2012
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
77,568

 
$
17,582

 
$
95,150

Past due 60 - 89 days
24,809

 
4,849

 
29,658

Past due 90 -179 days
21,483

 
2,193

 
23,676

Past due 180 days or more
64,920

 
3,099

 
68,019

Total past due loans
188,780

 
27,723

 
216,503

Total current loans
6,286,282

 
500,112

 
6,786,394

Total recorded investment of mortgage loans1
$
6,475,062

 
$
527,835

 
$
7,002,897

 
 
 
 
 
 
In process of foreclosure (included above)2
$
56,692

 
$
878

 
$
57,570

Serious delinquency rate3
1.4
%
 
1.0
%
 
1.3
%
Past due 90 days or more and still accruing interest4
$

 
$
5,292

 
$
5,292

Non-accrual mortgage loans5
$
88,992

 
$

 
$
88,992


1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.

2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.

3
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment.

4
Represents government-insured mortgage loans that are 90 days or more past due.

5
Represents conventional mortgage loans that are 90 days or more past due and/or TDRs.


22


Individually Evaluated Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank considers all TDRs and collateral-dependent loans (i.e., loans in which repayment is expected to be provided solely by the sale of the underlying collateral) to be impaired.

The following table summarizes the recorded investment and related allowance of the Bank's individually evaluated impaired loans (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
Impaired loans with an allowance
$
50,121

 
$
10,366

 
$
58,145

 
$
10,349

Impaired loans without an allowance
981

 

 
1,199

 

Total
$
51,102

 
$
10,366

 
$
59,344

 
$
10,349


The Bank did not recognize any interest income on impaired loans during the three months ended March 31, 2013 and 2012. The average recorded investment on impaired loans with an allowance was $54.1 million and $69.9 million during the three months ended March 31, 2013 and 2012. The average recorded investment on impaired loans without an allowance was $1.1 million and $0.6 million during the three months ended March 31, 2013 and 2012.

Real Estate Owned. At March 31, 2013 and December 31, 2012, the Bank had $15.8 million and $16.4 million of REO recorded as a component of "Other assets" in the Statements of Condition.

Term Securities Purchased Under Agreements to Resell

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must 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. If a resale agreement is deemed impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. At March 31, 2013 and December 31, 2012, based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for term securities purchased under agreements to resell.

Off-Balance Sheet Credit Exposures

At March 31, 2013 and December 31, 2012, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the Bank's off-balance sheet credit exposures, see "Note 14 — Commitments and Contingencies."

Note 10 — Derivatives and Hedging Activities

Nature of Business Activity

The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank's interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank's Enterprise Risk Management Policy (ERMP) establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.


23


The most common ways in which the Bank uses derivatives are to:
 
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;

preserve a favorable interest rate spread between the yield of an asset (e.g., advance) and the cost of the related liability (e.g., consolidated obligation). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;

mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., mortgage assets) and liabilities; and

manage embedded options in assets and liabilities.

Application of Derivatives
 
Derivative instruments are used by the Bank in two ways:
 
as a fair value hedge of an associated financial instrument or firm commitment; or

as an economic hedge to manage certain defined risks in its Statements of Condition. These hedges are primarily used to manage mismatches between the coupon features of the Bank's assets and liabilities and offset prepayment risk in certain assets.

Derivative instruments are used by the Bank when they are considered to be cost-effective in achieving the Bank's financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Types of Derivatives

The Bank may use the following derivative instruments:

interest rate swaps;

swaptions;

interest rate caps and floors;
 
options; and

future/forward contracts.

Types of Hedged Items

The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities in the Statements of Condition or firm commitments. The Bank also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives it uses in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives are expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.


24


The Bank may have the following types of hedged items:

advances;

investment securities;
       
mortgage loans;
  
consolidated obligations; and
  
firm commitments.

Financial Statement Effect and Additional Financial Information

The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged. The following tables summarize the Bank's fair value of derivative instruments. For purposes of this disclosure, the derivative values include fair value of derivatives and related accrued interest (dollars in thousands):
 
March 31, 2013
Fair Value of Derivative Instruments
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
Interest rate swaps
$
32,898,184

 
$
106,167

 
$
562,422

Derivatives not designated as hedging instruments
 
 
 
 
 
Interest rate swaps
2,909,966

 
26,790

 
62,656

Interest rate caps
3,450,000

 
3,916

 

Forward settlement agreements (TBAs)
104,000

 
43

 
206

Mortgage delivery commitments
104,417

 
207

 
41

Total derivatives not designated as hedging instruments
6,568,383

 
30,956

 
62,903

Total derivatives before netting and collateral adjustments
$
39,466,567

 
137,123

 
625,325

Netting adjustments
 
 
(125,839
)
 
(125,839
)
Cash collateral and related accrued interest
 
 
(5,101
)
 
(408,549
)
Total netting adjustments and cash collateral1
 
 
(130,940
)
 
(534,388
)
Derivative assets and liabilities
 
 
$
6,183

 
$
90,937

 
December 31, 2012
Fair Value of Derivative Instruments
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
Interest rate swaps
$
23,648,999

 
$
118,157

 
$
604,525

Derivatives not designated as hedging instruments
 
 
 
 
 
Interest rate swaps
4,368,562

 
32,702

 
71,330

Interest rate caps
3,450,000

 
2,868

 

Forward settlement agreements (TBAs)
93,500

 
58

 
128

Mortgage delivery commitments
96,220

 
104

 
54

Total derivatives not designated as hedging instruments
8,008,282

 
35,732

 
71,512

Total derivatives before netting and collateral adjustments
$
31,657,281

 
153,889

 
676,037

Netting adjustments
 
 
(146,474
)
 
(146,474
)
Cash collateral and related accrued interest
 
 
(3,602
)
 
(428,863
)
Total netting adjustments and cash collateral1
 
 
(150,076
)
 
(575,337
)
Derivative assets and liabilities
 
 
$
3,813

 
$
100,700


1
Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same counterparties.

25



The following table summarizes the components of “Net gain on derivatives and hedging activities” as presented in the Statements of Income (dollars in thousands):
 
For the Three Months Ended
 
March 31,
 
2013