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Allowance For Credit Losses

6 Months Ended

Jun. 30, 2011

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

The FHLBank has established an allowance methodology for each of its portfolio segments: credit products; government-guaranteed or insured mortgage loans held for portfolio; conventional mortgage loans held for portfolio; and the direct financing lease receivable.

Credit products: The FHLBank manages its credit exposure to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with conservative collateral/lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBank lends to its members in accordance with Federal statutes and Finance Agency regulations. Specifically, the FHLBank complies with the Federal Home Loan Bank Act of 1932, as amended (Bank Act), which requires the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the par value or market value of the collateral. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, small farm loans and small agri-business loans. The FHLBank's capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the borrower. The FHLBank can call for additional or substitute collateral to protect its security interest. The FHLBank's management believes that these policies effectively manage the FHLBank's credit risk from credit products.

Based upon the financial condition of the member, the FHLBank either allows a member to retain physical possession of the collateral assigned to it, or requires the member to specifically assign or place physical possession of the collateral with the FHLBank or its safekeeping agent. The FHLBank perfects its security interest in all pledged collateral. The Bank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each borrower's financial strength, the FHLBank considers the type and level of collateral to be the primary indicator of credit quality on its credit products. As of June 30, 2011 and December 31, 2010, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. As of June 30, 2011 and December 31, 2010, the FHLBank did not have any advances that were past due, on nonaccrual status or considered impaired. In addition, there have been no troubled debt restructurings related to credit products during the six-month periods ended June 30, 2011 and 2010.

Based upon the collateral held as security, its credit extension, and collateral policies, management's credit analysis and the repayment history on credit products, the FHLBank has not recorded any allowance for credit losses as of June 30, 2011 and December 31, 2010. As of June 30, 2011 and December 31, 2010, no liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded. For additional information on the FHLBank's off-balance sheet credit exposure see Note 15.

Mortgage Loans – Government-guaranteed or Insured: The FHLBank invests in government-guaranteed or insured fixed rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are mortgage loans insured or guaranteed by FHA, VA, RHS and/or HUD. The servicer provides and maintains insurance or a guaranty from the applicable government agency. Additionally, 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 mortgage government loans. Any losses incurred on such loans that are not recovered from issuer or guarantor are absorbed by the servicers. Therefore, the FHLBank only has credit risk for these loans if the servicer fails to pay for losses not covered by FHA or HUD insurance, or VA or RHS guarantees. Based on the FHLBank's assessment of its servicers, it did not establish an allowance for credit losses on government-guaranteed or insured mortgage loans.

Mortgage Loans – Conventional: The allowances for conventional loans are determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data and prevailing economic conditions. The measurement of the allowance for loan losses may consist of: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; (3) reviewing homogeneous pools of residential mortgage loans; and/or (4) estimating credit losses in the remaining portfolio.

The FHLBank's allowance for credit losses factors in the credit enhancements associated with conventional mortgage loans under the MPF Program. Specifically, the determination of the allowance generally factors in the primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and credit enhancement (CE) amount. Any incurred losses that would be recovered from the credit enhancements are not reserved as part of the FHLBank's allowance for loan losses. In such cases, a receivable is established to reflect the expected recovery from CE fees.

For conventional mortgage loans, credit losses that are not paid by PMI are allocated to the FHLBank up to an agreed upon amount, referred to as the First Loss Account (FLA). The FLA functions as a tracking mechanism for determining the point after which the participating member is required to cover losses. The FHLBank pays the participating member a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the second layer of losses up to an agreed-upon CE amount. Performance-based fees may be withheld to cover losses allocated to the FHLBank. As of June 30, 2011 and December 31, 2010, the FHLBank's exposure under the FLA, excluding amounts that may be recovered through performance-based CE fees was $22,317,000 and $20,938,000, respectively. The FHLBank records CE fees paid to the participating members as a reduction to mortgage interest income. CE fees totaled $887,000 and $704,000 for the three-month periods ended June 30, 2011 and 2010, respectively. CE fees totaled $1,719,000 and $1,236,000 for the six-month periods ended June 30, 2011 and 2010, respectively.

Mortgage Loans Evaluated at the Individual Master Commitment Level: The credit risk analysis of all conventional loans is performed at the individual master commitment level to properly determine the credit enhancements available to recover losses on mortgage loans under each individual master commitment.

Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, applies estimated loss severities and incorporates the credit enhancements of the mortgage loan programs. Migration analysis is a methodology for determining, through the FHLBank's experience over a historical period, the rate of loss incurred on pools of similar loans. The FHLBank applies migration analysis to loans based on the following categories: (1) loans in foreclosure; (2) nonaccrual loans; (3) delinquent loans; and (4) all other remaining loans. The FHLBank then estimates how many loans in these categories may migrate to a realized loss position and applies a loss severity factor to estimate losses incurred as of the Statement of Condition date.

Individually Evaluated Mortgage Loans: Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no CE from a PFI to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual loan basis. The FHLBank applies an appropriate loss severity rate, which is used to estimate the fair value of the collateral. The resulting incurred loss is equal to the carrying value of the loan less the estimated fair value of the collateral less estimated selling costs.

Charge-off Policy: The FHLBank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.

Direct Financing Lease Receivable: The FHLBank has a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, the FHLBank has all rights and remedies under the lease agreement as well as all rights and remedies available under the member's Advance, Pledge and Security Agreement. Consequently, the FHLBank can apply any excess collateral securing credit products to any shortfall in the leasing arrangement.

Roll-forward of Allowance for Credit Losses: As of June 30, 2011, the FHLBank determined that an allowance for credit losses was only necessary on conventional mortgage loans held for portfolio. The following table presents roll-forwards of the allowance for credit losses for the three- and six-month periods ended June 30, 2011 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of June 30, 2011 (in thousands):

	Conventional Loans	Government-Guaranteed or Insured Loans	Credit Products	Direct Financing Lease Receivable	Total
Allowance for credit losses:
Balance, beginning of three-month period	$3,099	$0	$0	$0	$3,099
Charge-offs	(23)	0	0	0	(23)
Provision for credit losses	344	0	0	0	344
Balance, end of three-month period	$3,420	$0	$0	$0	$3,420

Balance, beginning of six-month period	$2,911	$0	$0	$0	$2,911
Charge-offs	(400)	0	0	0	(400)
Provision for credit losses	909	0	0	0	909
Balance, end of six-month period	$3,420	$0	$0	$0	$3,420

Ending allowance balance, individually evaluated for impairment	$0	$0	$0	$0	$0
Ending allowance balance, collectively evaluated for impairment	$3,420	$0	$0	$0	$3,420

Recorded investment¹, end of period:
Individually evaluated for impairment²	$0	$0	$17,663,002	$28,268	$17,691,270
Collectively evaluated for impairment	$4,072,715	$528,533	$0	$0	$4,601,248

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¹	The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
²	No financing receivables individually evaluated for impairment were determined to be impaired.

The following table presents roll-forwards of the allowance for credit losses on conventional mortgage loans held for portfolio for the three- and six-month periods ended June 30, 2010 (in thousands):

Allowance for Credit Losses	Three-month Period Ended 06/30/2010	Six-month Period Ended 06/30/2010
Balance, beginning of period	$2,553	$1,897
Charge-offs	(214)	(317)
Provision for credit losses	197	956
Balance, end of period	$2,536	$2,536

Credit Quality Indicators: The FHLBank's key credit quality indicators include: (1) past due loans; (2) nonaccrual loans; (3) loans in process of foreclosure; and (4) impaired loans, all of which are used, either on an individual or pool basis, to determine the allowance for credit losses.

Non-accrual Loans: The FHLBank places a conventional mortgage loan on non-accrual status if it is determined that either: (1) the collection of interest or principal is doubtful; or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements). For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBank records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual when: (1) none of its contractual principal and interest is due and unpaid, and the FHLBank expects repayment of the remaining contractual principal and interest; or (2) it otherwise becomes well secured and in the process of collection.

The following table summarizes the delinquency aging and key credit quality indicators for all of the FHLBank's portfolio segments as of June 30, 2011 (dollar amounts in thousands):

	Conventional Loans	Government-Guaranteed or Insured Loans	Credit Products	Direct Financing Lease Receivable	Total
Recorded investment¹:
Past due 30-59 days delinquent	$26,822	$14,650	$0	$0	$41,472
Past due 60-89 days delinquent	11,233	5,863	0	0	17,096
Past due 90 days or more delinquent	21,984	7,836	0	0	29,820
Total past due	60,039	28,349	0	0	88,388
Total current loans	4,012,676	500,184	17,663,002	28,268	22,204,130
Total recorded investment	$4,072,715	$528,533	$17,663,002	$28,268	$22,292,518

Other delinquency statistics:
In process of foreclosure, included above²	$14,982	$4,137	$0	$0	$19,119
Serious delinquency rate³	0.6%	1.5%	0.0%	0.0%	0.1%
Past due 90 days or more still accruing interest	$0	$7,836	$0	$0	$7,836
Loans on non-accrual status	$29,191	$0	$0	$0	$29,191
Troubled debt restructurings⁴	$213	$0	$0	$0	$213

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¹	The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
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 dependent on their delinquency status.
³	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
⁴	Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The following table summarizes the key credit quality indicators for the FHLBank's mortgage loans as of December 31, 2010 (in thousands):

	Conventional Loans	Government-Guaranteed or Insured Loans	Credit Products	Direct Financing Lease Receivable	Total
Recorded investment¹:
Past due 30-59 days delinquent	$32,466	$12,826	$0	$0	$45,292
Past due 60-89 days delinquent	10,006	3,580	0	0	13,586
Past due 90 days or more delinquent	22,296	9,812	0	0	32,108
Total past due	64,768	26,218	0	0	90,986
Total current loans	3,658,735	450,384	18,951,222	29,123	23,089,464
Total recorded investment	$3,723,503	$476,602	$18,951,222	$29,123	$23,180,450

Other delinquency statistics:
In process of foreclosure, included above²	$12,789	$3,393	$0	$0	$16,182
Serious delinquency rate³	0.6%	2.1%	0.0%	0.0%	0.1%
Past due 90 days or more still accruing interest	$0	$9,812	$0	$0	$9,812
Loans on non-accrual status	$25,837	$0	$0	$0	$25,837
Troubled debt restructurings⁴	$222	$0	$0	$0	$222

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¹	The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
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 dependent on their delinquency status.
³	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
⁴	Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The FHLBank had $2,977,000 and $4,498,000 classified as real estate owned in other assets as of June 30, 2011 and December 31, 2010, respectively.

Purchases, Sales and Reclassifications: During the three- and six-month periods ended June 30, 2011, the FHLBank had no significant purchases or sales of financing receivables. Additionally, no financing receivables were reclassified to held for sale.