Capital

9 Months Ended

Sep. 30, 2012

Capital [Abstract]

Capital

Capital

The Bank is subject to three capital requirements under its current capital plan structure and the Finance Agency rules and regulations: (1) risk-based capital; (2) total capital; and (3) leverage capital. See details regarding these requirements and the Bank’s capital plan in Note 17 to the audited financial statements in the Bank’s 2011 Form 10-K.

At September 30, 2012, the Bank was in compliance with all regulatory capital requirements. Mandatorily redeemable capital stock is considered capital for determining the Bank's compliance with its regulatory requirements. At September 30, 2012 and December 31, 2011, all of the Bank's capital stock outstanding was Class B stock.

The following table demonstrates the Bank’s compliance with these capital requirements at September 30, 2012 and December 31, 2011.

	September 30, 2012						December 31, 2011
(dollars in thousands)	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	1,014,193		$	3,790,778		$	1,062,070		$	3,870,876
Total capital-to-asset ratio	4.0		%	6.3		%	4.0		%	7.4		%
Total regulatory capital	2,405,620			3,790,778			2,079,771			3,870,876
Leverage ratio	5.0		%	9.5		%	5.0		%	11.2		%
Leverage capital	3,007,025			5,686,167			2,599,714			5,806,313

The decline in the ratios from December 31, 2011 to September 30, 2012 is primarily due to the repurchases of excess capital stock and the increase in assets. When the Finance Agency implemented the prompt corrective action provisions of the Housing Act, it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On September 26, 2012, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2012. In its determination, the Finance Agency expressed concerns regarding the Bank's capital position. The Finance Agency believes that the Bank's retained earnings are not sufficient and the poor quality of its private label MBS portfolio creates uncertainty about the Bank's earnings prospects and ability to build retained earnings at a satisfactory pace. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended September 30, 2012.

Capital Concentrations. The following tables present member holdings of 10% or more of the Bank’s total capital stock including mandatorily redeemable capital stock outstanding as of September 30, 2012 and December 31, 2011.

(dollars in thousands)	September 30, 2012
Member(1)	Capital Stock		% of Total
Sovereign Bank, N.A., Wilmington, DE	$	649,670	19.8	%
PNC Bank, N.A., Wilmington, DE	413,007		12.6	%

(dollars in thousands)	December 31, 2011
Member(1)	Capital Stock		% of Total
Sovereign Bank, N.A., Wilmington, DE	$	555,370	16.2	%
Ally Bank, Midvale, UT	383,865		11.2	%
ING Bank, FSB, Wilmington, DE	370,360		10.8	%

Note:

⁽¹⁾ For Bank membership purposes, principal place of business for Ally Bank is Horsham, PA.

For PNC Bank, the principal place of business is Pittsburgh, PA.

Mandatorily Redeemable Capital Stock. Each FHLBank is a cooperative whose member financial institutions and former members own all of the relevant FHLBank's capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at its $100 per share par value, as mandated by each FHLBank's capital plan.

At September 30, 2012 and December 31, 2011, the Bank had $188.1 million and $45.7 million, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements. For the three and nine months ended September 30, 2012, estimated dividends on mandatorily redeemable capital stock totaling $205 thousand and $319 thousand, respectively, were recorded as interest expense. No dividends were paid on mandatorily redeemable stock during 2011.

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the nine months endedSeptember 30, 2012 and 2011.

	Nine months ended September 30,
(in thousands)	2012			2011
Balance, beginning of the period	$	45,673		$	34,215
Capital stock subject to mandatory redemption reclassified from capital stock:
Due to withdrawals (includes mergers)	183,483			19,821
Redemption of mandatorily redeemable capital stock:
Withdrawals	—			(30		)
Other redemptions (1)	(41,028		)	(5,929		)
Balance, end of the period	$	188,128		$	48,077

Note:

⁽¹⁾ Reflects the impact on mandatorily redeemable capital stock related to partial excess capital stock repurchases.

As of September 30, 2012, the total mandatorily redeemable capital stock reflected balances for 13 institutions. Two institutions were taken over by the FDIC and their charters were dissolved. One institution voluntarily dissolved its charter with the Office of Thrift Supervision. Eight institutions were merged out of district and are considered nonmembers. One institution's charter was converted to an uninsured trust company, which is ineligible for membership. One institution has notified the Bank to voluntarily withdraw from membership and redeem their capital stock. These redemptions were not complete as of September 30, 2012.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at September 30, 2012 and December 31, 2011.

(in thousands)	September 30, 2012		December 31, 2011
Due in 1 year or less	$	58	$	—
Due after 1 year through 2 years	2,673		71
Due after 2 years through 3 years	19,749		3,276
Due after 3 years through 4 years	14,795		25,038
Due after 4 years through 5 years	150,853		17,288
Total	$	188,128	$	45,673

The year of redemption in the table above is the end of the five-year redemption period for the mandatorily redeemable capital stock. Under the Finance Agency regulations and the terms of the Bank's Capital Plan, capital stock supporting advances and other activity with the Bank (e.g., letters of credit, mortgage loans, etc.) is not redeemable prior to the payoff or maturity of the associated advance or other activity, which may extend beyond five years.

Dividends and Retained Earnings. As prescribed in the FHLBanks' amended JCEA, upon full satisfaction of the REFCORP obligation, each FHLBank is required to contribute 20% of its net income each quarter to a restricted retained earnings (RRE) account until the balance of that account equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. On August 5, 2011, the Finance Agency certified that the FHLBanks fully satisfied their REFCORP obligation. Therefore, starting in third quarter of 2011, the Bank allocated 20% of its net income to a separate RRE account. At September 30, 2012, retained earnings were $511.0 million, including $490.8 million of unrestricted retained earnings and $20.2 million of RRE.

The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of the Bank’s retained earnings. The Bank’s retained earnings policy and capital adequacy metric utilize this guidance.

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. During 2011, the Bank did not pay a dividend. In February, April, and July 2012, the Bank paid a dividend equal to an annual yield of 0.10%. On October 31, 2012, the Bank paid a dividend equal to an annual yield of 0.43%. The dividend in each period was calculated on stockholders' average balances for the previous quarter.

The Bank has executed partial repurchases of excess capital stock since the fourth quarter of 2010. The total amount of member excess capital stock at September 30, 2012 was $796.3 million. The Bank repurchased $477 million of excess capital stock in the nine months endedSeptember 30, 2012. The Bank also repurchased $300 million in excess capital stock on October 31, 2012.

The following table summarizes the changes in AOCI for the nine months endedSeptember 30, 2012 and 2011.

(in thousands)	Net Unrealized Gains(Losses) on AFS			Noncredit OTTI Gains(Losses) on AFS			Noncredit OTTI Gains(Losses) on HTM			Net Unrealized Gains (Losses) on Hedging Activities		Pension and Post-Retirement Plans			Total
December 31, 2011	$	5,891		$	(168,114	)	$	—		$	286	$	(428	)	$	(162,365	)
Net unrealized gains	29,792			34,361			—			—		—			64,153
Net change in fair value of OTTI securities	—			117,751			—			—		—			117,751
Noncredit component of OTTI losses	—			—			(662		)	—		—			(662		)
Reclassification adjustment of noncredit OTTI    losses included in net income	—			9,495			—			—		—			9,495
Noncredit OTTI losses transferred from HTM    to AFS	—			(662		)	662			—		—			—
Pension and post-retirement benefits	—			—			—			—		54			54
September 30, 2012	$	35,683		$	(7,169	)	$	—		$	286	$	(374	)	$	28,426
December 31, 2010	$	(962	)	$	(222,533	)	$	—		$	270	$	(116	)	$	(223,341	)
Net unrealized gains	4,186			7,446			—			—		—			11,632
Net change in fair value of OTTI securities	—			47,643			—			—		—			47,643
Noncredit component of OTTI losses	—			(86		)	(2,697		)	—		—			(2,783		)
Reclassification adjustment of noncredit OTTI    losses included in net income	—			37,089			—			—		—			37,089
Noncredit OTTI losses transferred from HTM    to AFS	—			(2,697		)	2,697			—		—			—
Reclassifications included in net income	—			(7,278		)	—			18		—			(7,260		)
Pension and post-retirement benefits	—			—			—			—		(12		)	(12		)
September 30, 2011	$	3,224		$	(140,416	)	$	—		$	288	$	(128	)	$	(137,032	)