10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-51845

FEDERAL HOME LOAN BANK OF ATLANTA

(Exact name of registrant as specified in its charter)

 

Federally chartered corporation

      

56-6000442

    
(State or other jurisdiction of incorporation or organization)     

(I.R.S. Employer

Identification No.)

  

1475 Peachtree Street, NE, Atlanta, Ga.

       

30309

    
(Address of principal executive offices)      (Zip Code)   

Registrant’s telephone number, including area code: (404) 888-8000

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 for the past 90 days.

x  Yes    ¨  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨  Yes    ¨  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  ¨   Accelerated filer  ¨   Non-accelerated filer   x    Smaller reporting company  ¨
    (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes    x  No

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of October 31, 2009, was 82,946,718.


Table of Contents

Table of Contents

 

PART I.

   FINANCIAL INFORMATION    1

Item 1.

   Financial Statements    1
       STATEMENTS OF CONDITION (Unaudited)    1
       STATEMENTS OF INCOME (Unaudited)    2
       STATEMENTS OF CAPITAL (Unaudited)    3
       STATEMENTS OF CASH FLOWS (Unaudited)    4
       NOTES TO FINANCIAL STATEMENTS    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    40

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    79

Item 4.

   Controls and Procedures    83

Item 4T.

   Controls and Procedures    83

PART II.

   OTHER INFORMATION    84

Item 1.

   Legal Proceedings    84

Item 1A.

   Risk Factors    84

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    84

Item 3.

   Defaults Upon Senior Securities    84

Item 4.

   Submission of Matters to a Vote of Security Holders    85

Item 5.

   Other Information    86

Item 6.

   Exhibits    87
SIGNATURES    88


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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CONDITION

(Unaudited)

(In thousands, except par value)

 

     As of  
     September 30, 2009     December 31, 2008  

ASSETS

    

Cash and due from banks

       $ 10,719          $ 27,841   

Deposit with other FHLBanks

     2,526        2,888   

Federal funds sold

     10,560,000        10,769,000   

Trading securities (includes $284,622 and $1,104,434 pledged as collateral as of September 30, 2009 and December 31, 2008, respectively, that may be repledged and includes other FHLBanks’ bonds of $77,500 and $300,135 as of September 30, 2009 and December 31, 2008, respectively)

     3,603,770        4,485,929   

Available-for-sale securities

     1,800,590          

Held-to-maturity securities, net (fair value of $17,276,211 and $19,593,615 as of September 30, 2009 and December 31, 2008, respectively)

     18,198,303        23,118,123   

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $1,108 and $856 as of September 30, 2009 and December 31, 2008, respectively

     2,644,259        3,251,074   

Advances, net

     125,822,803        165,855,546   

Accrued interest receivable

     540,129        775,083   

Premises and equipment, net

     31,960        29,383   

Derivative assets

     39,520        91,406   

Other assets

     155,701        158,067   
                

TOTAL ASSETS

       $ 163,410,280          $ 208,564,340   
                

LIABILITIES

    

Interest-bearing deposits

       $ 3,352,592          $ 3,572,709   

Consolidated obligations, net:

    

Discount notes

     28,418,499        55,194,777   

Bonds

     121,776,760        138,181,334   
                

Total consolidated obligations, net

     150,195,259        193,376,111   
                

Mandatorily redeemable capital stock

     130,173        44,428   

Accrued interest payable

     777,521        1,039,002   

Affordable Housing Program

     123,465        139,300   

Payable to REFCORP

     939          

Derivative liabilities

     578,014        1,413,792   

Other liabilities

     88,263        86,062   
                

Total liabilities

     155,246,226        199,671,404   
                

Commitments and contingencies (Note 14)

    

CAPITAL

    

Capital stock Class B putable ($100 par value) issued and outstanding shares:

    

Subclass B1 issued and outstanding shares: 15,360 and 14,671 as of September 30, 2009 and December 31, 2008 , respectively

     1,536,043        1,467,092   

Subclass B2 issued and outstanding shares: 66,203 and 69,959 as of September 30, 2009 and December 31, 2008, respectively

     6,620,268        6,995,903   
                

Total capital stock Class B putable

     8,156,311        8,462,995   

Retained earnings

     798,903        434,883   

Accumulated other comprehensive loss

     (791,160     (4,942
                

Total capital

     8,164,054        8,892,936   
                

TOTAL LIABILITIES AND CAPITAL

       $ 163,410,280          $ 208,564,340   
                

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

INTEREST INCOME

        

Advances

       $ 97,404          $ 1,040,858          $ 800,243          $ 3,566,369   

Prepayment fees on advances, net

     1,917        714        12,186        3,428   

Interest-bearing deposits

     1,580        1,846        6,179        24,753   

Federal funds sold

     4,060        76,584        17,690        216,959   

Trading securities

     47,186        80,073        151,482        226,567   

Available-for-sale securities

     35,059               69,760          

Held-to-maturity securities

     207,467        303,680        707,696        877,774   

Mortgage loans held for portfolio

     36,033        45,331        117,761        138,540   

Loans to other FHLBanks

            27        2        77   
                                

Total interest income

     430,706        1,549,113        1,882,999        5,054,467   
                                

INTEREST EXPENSE

        

Consolidated obligations:

        

Discount notes

     15,867        237,442        254,070        687,187   

Bonds

     311,761        1,049,116        1,381,707        3,575,479   

Deposits

     711        23,051        3,339        102,694   

Loans from other FHLBanks

     1        1        5        13   

Securities sold under agreements to repurchase

            1,324               1,324   

Mandatorily redeemable capital stock

     (292     268        1,518        1,391   

Other borrowings

     8        50        25        179   
                                

Total interest expense

     328,056        1,311,252        1,640,664        4,368,267   
                                

NET INTEREST INCOME

     102,650        237,861        242,335        686,200   

Provision (reversal) for credit losses on mortgage loans held for portfolio

     230        (135     251        15   
                                

NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES

     102,420        237,996        242,084        686,185   
                                

OTHER INCOME (LOSS)

        

Total other-than-temporary impairment losses

     (104,793     (87,344     (1,206,515     (87,344

Portion of impairment losses recognized in other comprehensive loss

     (23,176            943,436          
                                

Net impairment losses recognized in earnings

     (127,969     (87,344     (263,079     (87,344
                                

Service fees

     415        539        1,451        1,799   

Net gains (losses) on trading securities

     24,766        31,070        (82,884     (50,968

Net gains (losses) on derivatives and hedging activities

     44,333        (45,299     461,583        (51,219

Other

     741        (129     1,235        (73
                                

Total other (loss) income

     (57,714     (101,163     118,306        (187,805
                                

OTHER EXPENSE

        

Compensation and benefits

     14,918        15,668        45,536        47,966   

Other operating expenses

     12,066        10,751        32,107        27,100   

Finance Agency

     1,386        1,480        4,299        4,665   

Office of Finance

     1,014        852        3,524        3,090   

Provision for credit losses on receivable

            170,486               170,486   

Other

     246        321        799        1,001   
                                

Total other expense

     29,630        199,558        86,265        254,308   
                                

INCOME (LOSS) BEFORE ASSESSMENTS

     15,076        (62,725     274,125        244,072   
                                

Affordable Housing Program

     1,200        (5,093     22,532        20,066   

REFCORP

     2,776        (11,526     50,319        44,801   
                                

Total assessments

     3,976        (16,619     72,851        64,867   
                                

NET INCOME (LOSS)

       $ 11,100          $ (46,106       $ 201,274          $ 179,205   
                                

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Unaudited)

(In thousands)

 

     Capital Stock Class B Putable     Retained
Earnings
    Accumulated Other
Comprehensive Loss
    Total Capital  
     Shares     Par Value        

BALANCE, DECEMBER 31, 2007

   75,560          $ 7,556,016          $ 468,779          $ (2,559       $ 8,022,236   

Issuance of capital stock

   46,112        4,611,210                      4,611,210   

Repurchase/redemption of capital stock

   (34,434     (3,443,391                   (3,443,391

Net shares reclassified to mandatorily redeemable capital stock

   (235     (23,505                   (23,505

Comprehensive income:

          

Net income

                 179,205               179,205   

Other comprehensive income

                        5        5   
                

Total comprehensive income

                               179,210   
                

Cash dividends on capital stock

                 (287,677            (287,677
                                      

BALANCE, SEPTEMBER 30, 2008

   87,003          $ 8,700,330          $ 360,307          $ (2,554       $ 9,058,083   
                                      

BALANCE, DECEMBER 31, 2008

   84,630          $ 8,462,995          $ 434,883          $ (4,942       $ 8,892,936   

Cumulative effect of adjustment to opening balance relating to other-than-temporary impairment guidance

                 178,520        (178,520       

Issuance of capital stock

   9,002        900,152                      900,152   

Repurchase/redemption of capital stock

   (11,111     (1,111,109                   (1,111,109

Net shares reclassified to mandatorily redeemable capital stock

   (958     (95,727                   (95,727

Comprehensive loss:

          

Net income

                 201,274               201,274   

Other comprehensive loss

                        (607,698     (607,698
                

Total comprehensive loss

                               (406,424
                

Cash dividends on capital stock

                 (15,774            (15,774
                                      

BALANCE, SEPTEMBER 30, 2009

   81,563          $ 8,156,311          $ 798,903          $ (791,160       $ 8,164,054   
                                      

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Nine Months Ended September 30,  
     2009     2008  

OPERATING ACTIVITIES

    

Net income

       $ 201,274          $ 179,205   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization:

    

Net premiums and discounts on consolidated obligations

     (166,365     153,977   

Net premiums and discounts on investments

     (14,934     (9,575

Net premiums and discounts on mortgage loans

     (1,187     744   

Concessions on consolidated obligations

     29,510        39,388   

Net deferred loss on derivatives

     269        247   

Premises and equipment

     2,182        2,202   

Capitalized software

     3,883        3,522   

Other

     (38,986     6,457   

Provision for credit losses on mortgage loans held for the portfolio

     251        15   

Provision for credit losses on receivable

            170,486   

Net realized gains from redemption of held-to-maturity securities

            (401

Loss on disposal of capitalized software

            322   

Loss (gain) due to change in net fair value adjustment on derivative and hedging activities

     513,311        (123,614

Fair value adjustment on trading securities

     108,915        14,985   

Net impairment losses recognized in earnings

     263,079        87,344   

Net change in:

    

Accrued interest receivable

     235,207        59,660   

Other assets

     1,608        (25,174

Affordable Housing Program liability

     (16,671     (18,167

Accrued interest payable

     (261,476     (288,644

Payable to REFCORP

     939        (42,207

Other liabilities

     2,311        184   
                

Total adjustments

     661,846        31,751   
                

Net cash provided by operating activities

     863,120        210,956   
                

INVESTING ACTIVITIES

    

Net change in:

    

Interest-bearing deposits

     2,188,634        (1,251,151

Federal funds sold

     209,000        (1,940,100

Deposits with other FHLBanks

     362        344   

Trading Securities:

    

Proceeds from sales

     300,000        1,900,000   

Proceeds from maturities

     477,865        550,000   

Purchases

            (2,978,941

Held-to-maturity securities:

    

Net change in short-term

            800,000   

Proceeds

     3,860,833        2,690,512   

Purchases

     (1,765,215     (5,405,075

Available-for-sale securities:

    

Proceeds from maturities

     162,189          

Advances:

    

Proceeds from principal collected

     91,020,632        135,095,543   

Made

     (54,500,667     (156,253,231

Mortgage loans held for portfolio:

    

Proceeds from principal collected

     607,712        354,417   

Purchases

            (165,290

Capital expenditures:

    

Purchase of premises and equipment

     (4,805     (372

Purchase of software

     (5,596     (3,900
                

Net cash provided by (used in) investing activities

     42,550,944        (26,607,244
                

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

 

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     Nine Months Ended September 30,  
     2009     2008  

FINANCING ACTIVITIES

    

Net change in:

    

Deposits

     (187,307     811,958   

Securities sold under agreement to repurchase

            259,414   

Net (payments) proceeds from derivatives containing a financing element

     (796,448     945,338   

Proceeds from issuance of consolidated obligations:

    

Discount notes

     106,734,269        269,256,294   

Bonds

     68,039,932        95,512,887   

Bonds transferred from other FHLBanks

     517,689          

Payments for debt issuance costs

     (27,101     (29,614

Payments for maturing and retiring consolidated obligations:

    

Discount notes

     (133,296,092     (242,112,421

Bonds

     (84,179,415     (99,040,105

Proceeds from issuance of capital stock

     900,152        4,611,210   

Payments for repurchase/redemption of capital stock

     (1,111,109     (3,443,391

Payments for repurchase/redemption of mandatorily redeemable capital stock

     (9,982     (43,589

Cash dividends paid

     (15,774     (342,659
                

Net cash (used in) provided by financing activities

     (43,431,186     26,385,322   
                

Net decrease in cash and cash equivalents

     (17,122     (10,966

Cash and cash equivalents at beginning of the period

     27,841        18,927   
                

Cash and cash equivalents at end of the period

       $ 10,719          $ 7,961   
                

Supplemental disclosures of cash flow information:

    

Cash paid for:

    

Interest paid

       $ 1,615,012          $ 3,947,579   
                

AHP assessments paid, net

       $ 38,367          $ 37,951   
                

REFCORP assessments paid

       $ 35,352          $ 87,008   
                

Noncash investing and financing activities:

    

Dividends declared but not paid

       $          $ 58,946   
                

Net shares reclassified to mandatorily redeemable capital stock

       $ 95,727          $ 23,505   
                

Transfer of held-to-maturity securities to available-for-sale securities

       $ 1,876,620          $   
                

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

 

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FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (the “Bank”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2009, or for other interim periods. The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2008, which are contained in the Bank’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2009 (“Form 10-K”).

Bank management has performed an evaluation of subsequent events through November 12, 2009, which is the date the Bank’s interim financial statements were issued, and believes that there are no material subsequent events requiring additional disclosure or recognition in these interim financial statements other than those discussed in Note 16 to these interim financial statements.

Summary of Significant Accounting Policies

Investment Securities. The Bank classifies certain investments acquired for purposes of liquidity and asset-liability management as trading investments and carries these securities at their estimated fair value. The Bank records changes in the fair value of these investments in other income (loss) as “Net gains (losses) on trading securities,” along with gains and losses on sales of investment securities using the specific identification method. The Bank does not participate in speculative trading practices in these investments and generally holds them until maturity, except to the extent management deems necessary to manage the Bank’s liquidity position.

The Bank classifies certain securities as available-for-sale and carries these securities at their estimated fair value. Unrealized gains and losses are reflected as an element of accumulated other comprehensive loss in the Statements of Capital. The Bank intends to hold its available-for-sale securities for an indefinite period of time, but may sell them prior to maturity in response to changes in interest rates, changes in prepayment risk, or other factors.

The Bank carries at cost, and classifies as held-to-maturity, investments for which it has both the ability and intent to hold to maturity, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are computed using the contractual level-yield method (the “contractual method”), adjusted for actual prepayments. The

 

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contractual method recognizes the income effects of premiums and discounts in a manner that effectively is proportionate to the actual behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

Certain changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security to another investment classification due to certain changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness, is not considered to be inconsistent with its original classification. During the nine-month period ended September 30, 2009, the Bank transferred certain private-label mortgage-backed securities (“MBS”) from its held-to-maturity portfolio to an available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The objective of the transfer was to recognize management’s intent to hold these securities for an indefinite period of time, but that management may choose to sell them prior to maturity in response to changes in interest rates, changes in prepayment risk, or other factors.

The Bank evaluates its individual available-for-sale and held-to-maturity investment securities for other-than-temporary impairment on at least a quarterly basis. The Bank recognizes an other-than-temporary impairment loss when the Bank determines it will not recover the entire amortized cost basis of a security. Securities in the Bank’s private-label MBS portfolio are evaluated by estimating the projected cash flows using a model that incorporates projections and assumptions based on the structure of the security and certain economic environment assumptions such as delinquency and default rates, loss severity, home price appreciation, interest rates, and securities prepayment speeds while factoring in the underlying collateral and credit enhancement.

If, as a result of the projected cash flow analysis, the present value of the expected cash flows is less than the amortized cost basis, an impairment is considered to be other than temporary. The amount of the other-than-temporary impairment loss is separated into two components: (1) the amount of the total impairment related to credit loss; and (2) the amount of the total impairment related to all other factors. The portion of the other-than-temporary impairment loss that is attributable to the credit loss (that is, the difference between the present value of the cash flows expected to be collected and the amortized cost basis) is recognized in other income (loss). If the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis, the portion of the impairment loss that is not attributable to the credit loss is recognized through other comprehensive loss.

If the Bank determines that an other-than-temporary impairment exists, the Bank accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment loss at an amortized cost basis equal to the previous amortized cost basis less the other-than-temporary impairment recognized in income. For debt securities classified as held-to-maturity, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted into interest income prospectively over the remaining life of the security.

A description of the Bank’s other significant accounting policies is included in Note 1 to the 2008 audited financial statements contained in the Bank’s Form 10-K. There have been no material changes to these policies as of September 30, 2009, except as disclosed above.

 

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Note 2—Recently Issued and Adopted Accounting Guidance

Accounting Standards Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is not intended to change current GAAP; rather, its intent is to organize all accounting literature by topic in one place in order to enable users to quickly identify appropriate GAAP. The Codification modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. The Codification does not replace or affect guidance issued by the SEC, which will continue to apply to SEC registrants. Following the establishment of the Codification, the FASB will not issue new standards in the form of Statement of Accounting Standards, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Rather, Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions regarding the changes to the Codification. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Bank adopted the Codification for the interim period ended September 30, 2009. As the Codification is not intended to change or alter previous GAAP, its adoption did not have any effect on the Bank’s financial condition or results of operations.

Enhanced Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the FASB issued guidance requiring enhanced disclosures about an entity’s derivative instruments and hedging activities including: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under GAAP; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application allowed. The Bank adopted this guidance on January 1, 2009. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations. The required enhanced disclosures are included in Note 12 to these financial statements.

Recognition and Presentation of Other-Than-Temporary Impairments. In April 2009, the FASB issued guidance revising the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as available-for-sale and held-to-maturity. This guidance is intended to bring greater consistency to the timing of impairment recognition, and to provide greater clarity to investors about the credit and noncredit components of other-than-temporarily impaired debt securities that are not expected to be sold. For debt securities, impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell the security). Further, an impairment is considered to be other-than-temporary if the entity’s best estimate of the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a “credit loss”). Previously, an other-than-temporary impairment was deemed to have occurred if it was probable that an investor would be unable to collect all amounts due according to the contractual terms of a debt security.

 

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If an other-than-temporary impairment has occurred because an entity intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment must be recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost.

In instances in which a determination is made that a credit loss exists but an entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the previous amortized cost basis less any current-period credit loss), the other-than-temporary impairment is separated into (i) the amount of the total impairment related to the credit loss (i.e., the credit component) and (ii) the amount of the total impairment related to all other factors (i.e., the noncredit component). The credit component is recognized in earnings and the noncredit component is recognized in other comprehensive loss. The total other-than-temporary impairment is required to be presented in the statement of income with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive loss. Previously, in all cases, if an impairment was determined to be other-than-temporary, an impairment loss was recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date of the reporting period for which the assessment was made.

The noncredit component of any other-than-temporary impairment losses recognized in other comprehensive loss for debt securities classified as held-to-maturity is accreted over the remaining life of the debt security (in a prospective manner based on the amount and timing of future estimated cash flows) as an increase in the carrying value of the security unless and until the security is sold, the security matures, or there is an additional other-than-temporary impairment that is recognized in earnings. In instances in which an additional other-than-temporary impairment is recognized in earnings, the amount of the credit loss is reclassified from accumulated other comprehensive loss to earnings. Further, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying amount exceeds its fair value, an additional noncredit impairment is concurrently recognized in other comprehensive loss. Conversely, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying value is less than its fair value, the carrying value of the security is not increased. In periods subsequent to the recognition of an other-than-temporary impairment loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the other-than-temporary impairment at an amount equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings.

This other-than-temporary impairment guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance is to be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted. For debt securities held at the beginning of the interim period of adoption for which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the entity shall recognize the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive loss. If an entity elects to early adopt this other-than-temporary impairment guidance, it must also concurrently adopt recently issued guidance regarding the determination of fair value when there has been a significant decrease in the volume and level of activity for an asset or liability or price quotations are associated with transactions that are not orderly (discussed

 

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below). The Bank elected to early adopt the other-than-temporary impairment guidance effective January 1, 2009, and recognized the effects of applying this other-than-temporary impairment guidance as a change in accounting principle. The Bank recognized the $178.5 million cumulative effect of initially applying this other-than-temporary impairment guidance as an adjustment to retained earnings at January 1, 2009, with a corresponding adjustment to accumulated other comprehensive loss.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. In April 2009, the FASB issued guidance which clarifies the approach to, and provides additional factors to consider in, measuring fair value when there has been a significant decrease in the volume and level of activity for an asset or liability or price quotations are associated with transactions that are not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement under GAAP remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current conditions. In addition, the guidance requires enhanced disclosures regarding fair value measurements. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If an entity elects to early adopt this guidance, it must also concurrently adopt the other-than-temporary impairment guidance. The Bank elected to early adopt this guidance effective January 1, 2009 and the adoption did not have a material effect on the Bank’s financial condition or results of operations. The required enhanced disclosures are presented in Note 13 to these financial statements.

Interim Disclosures about Fair Value of Financial Instruments. In April 2009, the FASB issued guidance amending the disclosure requirements for the fair value of financial instruments, including disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments, in interim financial statements as well as in annual financial statements. Previously, these disclosures were required only in annual financial statements. In addition, the guidance requires disclosure in interim and annual financial statements of any changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments. The guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this guidance only if it also concurrently adopts guidance discussed in the previous paragraph regarding fair value and the other-than-temporary impairment guidance. The Bank elected to early adopt this guidance effective January 1, 2009 and the adoption did not have any effect on the Bank’s financial condition or results of operations. The required interim period disclosures are presented in Note 13 to these financial statements.

Subsequent Events. In May 2009, the FASB issued guidance establishing general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth: (1) the period after the balance sheet date during which management must evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity must recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity must make about events or transactions that occurred after the balance sheet date. In addition, the guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date (that is, whether that date represents the date the financial statements were issued or were available to be issued). This guidance does not apply to subsequent events or transactions that are specifically addressed in other applicable GAAP. This guidance is effective for

 

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interim or annual financial periods ending after June 15, 2009. The Bank adopted this guidance for the interim period ended June 30, 2009. The adoption of this guidance did not have any effect on the Bank’s financial condition or results of operations. The required disclosures are presented in Note 1 to these financial statements.

Accounting for the Consolidation of Variable Interest Entities. In June 2009, the FASB issued guidance to improve financial reporting by enterprises involved with variable interest entities (VIEs) and to provide more relevant and reliable information to users of financial statements. This guidance amends the manner in which entities evaluate whether consolidation is required for VIEs. An entity must first perform a qualitative analysis in determining whether it must consolidate a VIE, and if the qualitative analysis is not determinative, the entity must perform a quantitative analysis. The guidance also requires that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Bank has no VIEs and the adoption of this guidance will have no effect on the Bank’s financial condition or results of operations.

Accounting for Transfers of Financial Assets. In June 2009, the FASB issued guidance to change how entities account for transfers of financial assets by (1) eliminating the concept of a qualifying special-purpose entity, (2) defining the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, (3) clarifying the isolation analysis to ensure that an entity considers all of its continuing involvements with transferred financial assets to determine whether a transfer may be accounted for as a sale, (4) eliminating an exception that currently permits an entity to derecognize certain transferred mortgage loans when that entity has not surrendered control over those loans, and (5) requiring enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

Measuring the Fair Value of Liabilities. In August 2009, the FASB issued guidance on how to estimate the fair value of a liability in a hypothetical transaction (assuming the transfer of a liability to a third party), as currently required by GAAP. The purpose of this guidance is to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. The guidance is effective for the first reporting period (including interim periods) beginning after issuance (October 1, 2009 for the Bank). Entities also may elect to early adopt this guidance if financial statements have not been issued. Bank management does not believe that the adoption of this guidance will have a material effect on the Bank’s financial condition or results of operations.

 

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Note 3—Trading Securities

Major Security Types. Trading securities were as follows (in thousands):

 

     As of September 30, 2009    As of December 31, 2008

Government-sponsored enterprises debt obligations

       $ 3,515,678        $ 4,171,725

Other FHLBanks’ bonds

     77,500      300,135

State or local housing agency obligations

     10,592      14,069
             

Total

       $ 3,603,770        $ 4,485,929
             

Net gains (losses) on trading securities held on September 30, 2009 and 2008 consist of a change in net unrealized holding gains (losses) of $26.9 million and $(68.5) million for the three- and nine-month periods ended September 30, 2009, respectively, compared to net unrealized holding gains (losses) of $11.7 million and $(40.7) million for the same periods ended September 30, 2008, respectively.

Other Federal Home Loan Banks’ (“FHLBanks”) Consolidated Obligation Bonds. The following table details the Bank’s investment in other FHLBanks’ consolidated obligation bonds by primary obligor (in thousands):

 

     As of September 30, 2009    As of December 31, 2008

Other FHLBanks’ bonds:

     

FHLBank Dallas

       $        $ 82,300

FHLBank Chicago

     77,500      89,128
             
     77,500      171,428

FHLBank TAP Program*

          128,707
             

Total

       $ 77,500        $ 300,135
             

 

* Under this program, the FHLBanks can offer debt obligations representing aggregations of smaller bond issues into larger bond issues that may have greater market liquidity. Because of the aggregation of smaller issues, there is more than one primary obligor.

Note 4—Available-for-sale Securities

During the nine-month period ended September 30, 2009, the Bank transferred certain private-label MBS from its held-to-maturity portfolio to its available-for-sale portfolio. These securities represent private-label MBS in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss. The Bank believes the other-than-temporary impairment loss constitutes evidence of a significant deterioration in the issuer’s creditworthiness. The Bank has no current plans to sell these securities nor is the Bank under any requirement to sell these securities.

 

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The following table presents information on private-label MBS transferred during the nine-month period ended September 30, 2009 (in thousands). The amounts below represent the values as of the transfer date.

 

     Amortized
Cost
   Other-Than-
Temporary
Impairment
Recognized in Other
Accumulated
Comprehensive Loss
   Estimated
Fair Value

Transferred at March 31, 2009

        

Private-label MBS

       $ 2,386,459        $ 781,938        $ 1,604,521

Transferred at June 30, 2009

        

Private-label MBS

     313,544      157,588      155,956

Transferred at September 30, 2009

        

Private-label MBS

     211,515      95,372      116,143
                    

Total

       $ 2,911,518        $ 1,034,898        $ 1,876,620
                    

Major Security Types. Available-for-sale securities were as follows (in thousands):

 

     As of September 30, 2009
     Amortized
Cost
   Other-Than-
Temporary
Impairment
Recognized in
Accumulated Other
Comprehensive Loss
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value

Mortgage-backed securities:

              

Private label

       $ 2,586,990        $ 786,400        $        $        $ 1,800,590
                                  

Total

       $ 2,586,990        $ 786,400        $        $        $ 1,800,590
                                  

The Bank did not have any available-for-sale securities as of December 31, 2008.

The following table summarizes the available-for-sale securities with unrealized losses (dollar amounts in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

 

     As of September 30, 2009
     Less than 12 Months    12 Months or More    Total
     Number
of

Positions
   Fair
Value
   Unrealized
Losses
   Number
of

Positions
   Fair Value    Unrealized
Losses
   Number
of

Positions
   Fair
Value
   Unrealized
Losses

Mortgage-backed securities:

                          

Private label

          $        $    24        $ 1,800,590        $ 786,400    24        $ 1,800,590        $ 786,400
                                                        

Total

          $        $    24        $ 1,800,590        $ 786,400    24        $ 1,800,590        $ 786,400
                                                        

 

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A summary of available-for-sale MBS issued by members or affiliates of members follows (in thousands):

 

     As of September 30, 2009
     Amortized
Cost
   Other-Than-Temporary
Impairment Recognized
in Other Accumulated
Comprehensive Loss
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value

Bank of America Corporation, Charlotte, NC

       $ 216,351        $ 45,488        $        $        $ 170,863
                                  

Total

       $ 216,351        $ 45,488        $        $        $ 170,863
                                  

The amortized cost of the Bank’s MBS classified as available-for-sale includes $1.2 million in net premiums as of September 30, 2009.

Note 5—Held-to-maturity Securities

Major Security Types. Held-to-maturity securities were as follows (in thousands):

 

     As of September 30, 2009    As of December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value

State or local housing agency obligations

       $ 121,363        $ 3,153        $        $ 124,516        $ 101,105        $ 3,605        $        $ 104,710

Mortgage-backed securities:

                       

U.S. agency obligations-guaranteed

     656,784      764      3,665      653,883      38,545      260      367      38,438

Government-sponsored enterprises

     6,962,340      266,364      10,827      7,217,877      7,060,082      117,494      3,467      7,174,109

Private label

     10,457,816      8,571      1,186,452      9,279,935      15,918,391      6,246      3,648,279      12,276,358
                                                       

Total

       $ 18,198,303        $ 278,852        $ 1,200,944        $ 17,276,211        $ 23,118,123        $ 127,605        $ 3,652,113        $ 19,593,615
                                                       

The following tables summarize the held-to-maturity securities with unrealized losses (dollar amounts in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

 

     As of September 30, 2009
     Less than 12 Months    12 Months or More    Total
     Number
of

Positions
   Fair
Value
   Unrealized
Losses
   Number
of

Positions
   Fair
Value
   Unrealized
Losses
   Number
of

positions
   Fair
Value
   Unrealized
Losses

Mortgage-backed securities:

                          

U.S. agency obligations -guaranteed

   3        $ 618,095        $ 3,648    1        $ 1,521        $ 17    4        $ 619,616        $ 3,665

Government-sponsored enterprises

   5      648,217      10,509    1      40,843      318    6      689,060      10,827

Private label

   2      52,269      8,363    193      8,546,025      1,178,089    195      8,598,294      1,186,452
                                                        

Total

   10        $ 1,318,581        $ 22,520    195        $ 8,588,389        $ 1,178,424    205        $ 9,906,970        $ 1,200,944
                                                        

 

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     As of December 31, 2008
     Less than 12 Months    12 Months or More    Total
     Number
of

Positions
   Fair Value    Unrealized
Losses
   Number
of

Positions
   Fair Value    Unrealized
Losses
   Number
of
positions
   Fair Value    Unrealized
Losses

Mortgage-backed securities:

                          

U.S. agency obligations-guaranteed

   32        $ 25,580        $ 367           $        $    32        $ 25,580        $ 367

Government-sponsored enterprises

   4      557,822      3,467                 4      557,822      3,467

Private label

   93      4,635,936      1,647,200    150      7,371,486      2,001,079    243      12,007,422      3,648,279
                                                        

Total

   129        $ 5,219,338        $ 1,651,034    150        $ 7,371,486        $ 2,001,079    279        $ 12,590,824        $ 3,652,113
                                                        

A summary of held-to-maturity MBS issued by members or affiliates of members follows (in thousands):

 

     As of September 30, 2009    As of December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value

Countrywide Financial Corporation, Calabasas, CA*

       $        $        $        $        $ 4,675,435        $ 6,062        $ 1,195,018        $ 3,486,479

Bank of America Corporation, Charlotte, NC

     1,403,379      241      170,176      1,233,444      2,060,873           488,315      1,572,558
                                                       

Total

       $ 1,403,379        $ 241        $ 170,176        $ 1,233,444        $ 6,736,308        $ 6,062        $ 1,683,333        $ 5,059,037
                                                       

 

* Effective April 27, 2009, Bank of America Corporation converted Countrywide into a national bank and merged it into Bank of America, N.A., a member of the Bank.

Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity are shown below (in thousands). Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

 

     As of September 30, 2009    As of December 31, 2008
     Amortized Cost    Estimated
Fair Value
   Amortized Cost    Estimated
Fair Value

Year of maturity:

           

Due in one year or less

       $ 3,330        $ 3,392        $ 1,705        $ 1,721

Due after one year through five years

     100,855      103,596      71,465      74,197

Due after 10 years

     17,178      17,528      27,935      28,792
                           
     121,363      124,516      101,105      104,710

Mortgage-backed securities

     18,076,940      17,151,695      23,017,018      19,488,905
                           

Total

       $ 18,198,303        $ 17,276,211        $ 23,118,123        $ 19,593,615
                           

The amortized cost of the Bank’s MBS classified as held-to-maturity includes net discounts of $55.1 million and $145.7 million as of September 30, 2009 and December 31, 2008, respectively.

 

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Note 6—Other-than-temporary Impairment

Mortgage-backed Securities. The Bank’s investments in MBS consist of agency guaranteed securities and senior tranches of private-label MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.

The Bank’s investments in private-label MBS were rated “AAA” (or its equivalent) by a nationally recognized statistical rating organization (“NRSRO”), such as Moody’s Investors Service (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”), at purchase date. The “AAA”-rated securities achieved their ratings through credit enhancement, over-collateralization and senior-subordinated shifting interest features; the latter results in subordination of payments by junior classes to ensure cash flows to the senior classes. Some of the ratings on the Bank’s private-label MBS have changed since their purchase date.

Non-Private-label MBS. The unrealized losses related to U.S. agency MBS and government-sponsored enterprises MBS are caused by interest rate changes and not credit quality. These securities are guaranteed by government agencies or government-sponsored enterprises and Bank management does not expect these securities to be settled at a price less than the amortized cost basis. In addition, the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. The Bank does not consider these investments to be other-than-temporarily impaired as of September 30, 2009.

Private-label MBS. The Bank evaluates its individual private-label MBS holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired.

To assess whether the entire amortized cost bases of its private-label MBS will be recovered, the Bank performed a cash flow analysis for each of its private-label MBS. In performing the cash flow analysis for each of these securities, the Bank used two third party models. The first model considers 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 is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed current-to-trough home price declines ranging from zero percent to 20 percent over the next nine to 15 months (resulting in peak-to-trough home price declines of up to 58 percent). Thereafter, home prices are projected to remain flat for the first six months following the trough, increase by 0.5 percent for the following six months, increase by three percent in the second year and increase by four percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the

 

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securitization structure in accordance with its prescribed cash flow and loss allocation rules. The model classifies securities, as noted in the below table, based on current characteristics and performance, which may be different from the securities’ classification as determined by the originator at the time of origination. For those securities for which an other-than-temporary impairment was determined to have occurred as of September 30, 2009 (that is, a determination was made that less than all of the entire amortized cost bases will likely be recovered), the following table represents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings:

 

     Significant Inputs
     Prepayment Rate    Default Rates    Loss Severities
     Weighted
Average
%
   Range %    Weighted
Average
%
   Range %    Weighted
Average
%
   Range %

Year of Securitization

                 

Alt-A:

                 

2007

   9.1    7.6 to 11.8    51.9    45.9 to 61.9    43.3    39.0 to 47.8

2006

   10.4    8.7 to 13.2    51.6    47.0 to 57.1    45.3    42.9 to 48.7

2005

   10.0    5.8 to 13.5    50.0    19.8 to 82.5    46.6    37.9 to 55.8
                             

Total

   9.7    5.8 to 13.5    51.2    19.8 to 82.5    44.9    37.9 to 55.8
                             

Based on the Bank’s impairment analysis for the three- and nine-month periods ended September 30, 2009, the Bank recognized a total other-than-temporary impairment loss of $104.8 million and $1.2 billion, respectively. The credit related portion of $128.0 million and $263.1 million for the three- and nine-month periods ended September 30, 2009, respectively, of this other-than-temporary impairment loss is reported in the Statements of Income as “Net impairment losses recognized in earnings.” The noncredit related portion of $(23.2) million and $943.4 million for the three- and nine-month periods ended September 30, 2009, respectively, of the other-than-temporary impairment loss is recorded as a component of other comprehensive loss. When previously impaired securities increase in fair value but experience a subsequent credit loss, the amount of the credit loss is reclassified from other comprehensive loss into earnings. This reclassification may result in negative noncredit losses being presented on the Statements of Income. For the three- and nine-month periods ended September 30, 2008, the Bank recognized in earnings a total other-than-temporary impairment loss of $87.3 million.

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for which a portion of the other-than-temporary loss was recognized in accumulated other comprehensive loss (in thousands):

 

     Three Months Ended
September 30, 2009
   Nine Months Ended
September 30, 2009

Beginning balance of credit losses previously recognized in earnings

       $ 139,996        $ 4,886

Amount related to credit loss for which an other-than-temporary impairment was not previously recognized

     3,330      218,283

Amount related to credit loss for which an other-than-temporary impairment was previously recognized

     124,639      44,796
             

Ending balance of cumulative credit losses recognized in earnings

       $ 267,965        $ 267,965
             

 

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The remainder of the Bank’s private-label MBS that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and general disruption in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank expects to recover the amortized cost basis of the securities, the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the securities before the anticipated recovery of the securities’ remaining amortized cost basis, which may be at maturity. The assessment is based on the fact that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

Note 7—Advances

Redemption Terms. The Bank had advances outstanding, as summarized below (in thousands):

 

     As of September 30, 2009     As of December 31, 2008  

Year of contractual maturity:

    

Overdrawn demand deposit accounts

       $ 18,512          $ 550   

Due in one year or less

     34,883,583        39,739,223   

Due after one year through two years

     27,905,593        34,187,680   

Due after two years through three years

     13,071,585        23,761,810   

Due after three years through four years

     10,593,723        17,692,714   

Due after four years through five years

     7,742,045        10,566,914   

Due after five years

     25,536,566        30,320,265   
                

Total par value

     119,751,607        156,269,156   

Discount on AHP* advances

     (13,739     (14,028

Discount on EDGE** advances

     (12,706     (13,253

Hedging adjustments

     6,103,049        9,617,925   

Deferred commitment fees

     (5,408     (4,254
                

Total

       $ 125,822,803          $ 165,855,546   
                

 

* The Affordable Housing Program
** The Economic Development and Growth Enhancement Program

The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date (in thousands):

 

     As of September 30, 2009

Year of contractual maturity or next convert date:

  

Overdrawn demand deposit accounts

       $ 18,512

Due or convertible in one year or less

     50,005,838

Due or convertible after one year through two years

     28,264,053

Due or convertible after two years through three years

     9,815,320

Due or convertible after three years through four years

     9,563,623

Due or convertible after four years through five years

     7,341,745

Due or convertible after five years

     14,742,516
      

Total par value

       $ 119,751,607
      

Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial condition, and prior repayment history, no allowance for credit losses on advances was deemed necessary by management, as of September 30, 2009 and December 31, 2008, respectively. No advance was past due as of September 30, 2009 or December 31, 2008.

 

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The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions and credit unions and further concentrated in certain larger borrowing relationships. As of September 30, 2009 and December 31, 2008, the concentration of the Bank’s advances was $80.7 billion and $102.7 billion, respectively, to its 10 largest borrowers, and this represented 67.4 percent and 65.7 percent, respectively, of total advances.

Interest-rate Payment Terms. The following table details interest-rate payment terms for advances (in thousands):

 

     As of September 30, 2009    As of December 31, 2008

Interest-rate Payment Terms:

     

Fixed-rate

       $ 103,163,244        $ 127,322,930

Variable-rate

     16,588,363      28,946,226
             

Total par value

       $ 119,751,607        $ 156,269,156
             

Note 8—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the FHLBanks and are backed only by the financial resources of the FHLBanks. The FHLBanks Office of Finance (“Office of Finance”) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.

Interest-rate Payment Terms. The following table details consolidated obligation bonds by interest-rate payment type (in thousands):

 

     As of September 30, 2009    As of December 31, 2008

Interest-rate Payment Terms:

     

Fixed-rate

       $ 93,560,515        $ 101,202,430

Simple variable-rate

     13,562,000      28,004,900

Step

     12,701,570      6,023,000

Variable-rate that converts to fixed-rate

     100,000      225,000

Zero-coupon

     93,060      168,060

Variable-rate capped floater

     50,000      100,000

Fixed-rate that converts to variable-rate

          15,000
             

Total par value

       $ 120,067,145        $ 135,738,390
             

 

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Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity (dollar amounts in thousands):

 

     As of September 30, 2009    As of December 31, 2008
     Amount     Weighted-
average
Interest
Rate (%)
   Amount     Weighted-
average
Interest
Rate (%)

Year of contractual maturity:

         

Due in one year or less

       $ 63,237,245      1.48        $ 73,667,975      2.63

Due after one year through two years

     19,736,565      2.04      22,242,000      3.40

Due after two years through three years

     9,562,350      2.39      8,245,900      3.90

Due after three years through four years

     8,834,665      3.93      5,402,015      4.57

Due after four years through five years

     8,206,820      3.84      13,548,750      4.13

Due after five years

     10,489,500      4.80      12,631,750      5.13
                     

Total par value

     120,067,145      2.28      135,738,390      3.30

Premiums

     120,697           100,767     

Discounts

     (62,279        (109,228  

Hedging adjustments

     1,651,657           2,452,134     

Deferred net losses on terminated hedges

     (460        (729  
                     

Total

       $ 121,776,760             $ 138,181,334     
                     

The Bank’s consolidated obligation bonds outstanding included (in thousands):

 

     As of September 30, 2009    As of December 31, 2008

Types of consolidated bonds:

     

Noncallable

       $ 85,312,075        $ 92,597,640

Callable

     34,755,070      43,140,750
             

Total par value

       $ 120,067,145        $ 135,738,390
             

The following table summarizes consolidated obligation bonds outstanding, by year of contractual maturity or, for callable consolidated obligation bonds, next call date (in thousands):

 

     As of September 30, 2009

Year of contractual maturity or next call date:

  

Due or callable in one year or less

       $ 82,708,245

Due or callable after one year through two years

     15,164,135

Due or callable after two years through three years

     3,992,350

Due or callable after three years through four years

     6,204,665

Due or callable after four years through five years

     4,509,250

Due or callable after five years

     7,488,500
      

Total par value

       $ 120,067,145
      

 

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Consolidated Obligation Discount Notes. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows (dollar amounts in thousands):

 

     Book Value    Par Value    Average Interest Rate (%)

As of September 30, 2009

       $ 28,418,499        $ 28,431,688    0.62
                  

As of December 31, 2008

       $ 55,194,777        $ 55,393,546    1.73
                  

Note 9—Capital and Mandatorily Redeemable Capital Stock

Capital. The Bank was in compliance with the Federal Housing Finance Agency (“Finance Agency”) regulatory capital rules and requirements, as shown in the following table (dollar amounts in thousands):

 

     As of September 30, 2009    As of December 31, 2008
     Required    Actual    Required    Actual

Regulatory capital requirements:

           

Risk based capital

   $ 3,996,460    $ 9,085,387    $ 5,715,678    $ 8,942,306

Total capital-to-assets ratio

     4.00%      5.56%      4.00%      4.29%

Total regulatory capital*

   $ 6,536,411    $ 9,085,387    $ 8,342,574    $ 8,942,306

Leverage ratio

     5.00%      8.34%      5.00%      6.43%

Leverage capital

   $ 8,170,514    $ 13,628,081    $ 10,428,217    $ 13,413,459

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $130.2 million and $44.4 million in mandatorily redeemable capital stock at September 30, 2009 and December 31, 2008, respectively.

Mandatorily Redeemable Capital Stock. The following table provides the number of stockholders and the activity in mandatorily redeemable capital stock (dollar amounts in thousands):

 

     Three Months Ended September 30,  
     2009      2008  
     Number of
Stockholders
     Amount      Number of
Stockholders
     Amount  

Balance, beginning of period*

   28       $ 106,237       10       $ 35,382   

Capital stock subject to mandatory redemption reclassified from equity during the period due to:

           

Attainment of nonmember status

   13         215,413       4         6,720   

Withdrawal

   2         147                 

Repurchase/redemption of mandatorily redeemable capital stock

                 (3      (6,648

Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member

   (9      (191,624              
                               

Balance, end of period

   34       $ 130,173       11       $ 35,454   
                               

 

* The beginning balance of number of stockholders for the three-month period ended September 30, 2009 has been reduced by one due to the merger of two nonmembers during the period. There was no change to the corresponding dollar amount of mandatorily redeemable capital stock.

 

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     Nine Months Ended September 30,  
     2009      2008  
     Number of
Stockholders
     Amount      Number of
Stockholders
     Amount  

Balance, beginning of period

   13           $ 44,428       11           $ 55,538   

Capital stock subject to mandatory redemption reclassified from equity during the period due to:

           

Attainment of nonmember status

   33         2,389,374       6         24,073   

Withdrawal

   7         1,545                 

Other redemptions

   3         3,607                 

Repurchase/redemption of mandatorily redeemable capital stock

   (7      (9,982    (5      (43,589

Capital stock no longer subject to redemption due to the transfer of stock from a nonmember to a member

   (15      (2,298,799    (1      (568
                               

Balance, end of period

   34           $ 130,173       11           $ 35,454   
                               

The Bank reclassified $1.8 billion in capital stock held by Countrywide Bank, FSB (“Countrywide”), from capital to mandatorily redeemable capital stock upon termination of its membership with the Bank during the first quarter of 2009. Bank of America Corporation converted Countrywide into a national bank and merged it into Bank of America, N.A., a member of the Bank, on April 27, 2009. Upon the merger, the mandatorily redeemable capital stock of Countrywide became capital stock of Bank of America, N.A. under the Bank’s Capital Plan and was reclassified from mandatorily redeemable capital stock to capital stock.

The following table shows the amount of mandatorily redeemable capital stock by year of redemption (in thousands).

 

     As of September 30, 2009    As of December 31, 2008

Contractual year of redemption:

     

Due in one year or less

   $ —      $ 3,764

Due after one year through two years

     416      3,578

Due after two years through three years

     9,670      3,831

Due after three years through four years

     4,545      8,948

Due after four years through five years

     96,487      2,700

Due after five years

     19,055      21,607
             

Total

   $ 130,173    $ 44,428
             

The Bank is not required to redeem activity-based stock until the later of the expiration of the redemption period, which is five years after notification is received, or until the activity no longer remains outstanding. During 2008, it was the Bank’s practice, if, as a result of a member’s activity no longer remaining outstanding, a member’s activity-based stock became excess capital stock, the Bank would, in general, promptly repurchase the member’s excess stock, subject to certain limitations and thresholds in the Bank’s capital plan. During the first quarter of 2009, the Bank notified members of an increase in the excess stock threshold amount from $100 thousand to $2.5 billion and a change from the automatic daily repurchase of excess stock to a quarterly evaluation process.

 

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Note 10— Accumulated Other Comprehensive (Loss) Income

Components comprising other comprehensive (loss) income were as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Benefit plans:

        

Amortization of net loss

       $ 210          $ 169          $ 635          $ 515   

Amortization of net prior service credit

     (160     (185     (484     (542

Amortization of net transition obligation

     11        9        31        32   
                                

Benefit plans, net

     61        (7     182        5   
                                

Noncredit portion of other-than-temporary losses on available-for-sale securities:

        

Change in unrealized losses on available-for-sale securities

     243,304               92,751          

Reclassification adjustment of noncredit portion of impairment losses included in net income related to available-for-sale securities

     124,639               161,600          
                                

Noncredit portion of other-than-temporary impairment losses on available-for-sale securities, net

     367,943               254,351          
                                

Noncredit portion of other-than-temporary impairment losses on held-to-maturity securities

     (95,372            (862,231       
                                

Other comprehensive income (loss)

       $ 272,632          $ (7       $ (607,698   $ 5   
                                

Components comprising accumulated other comprehensive loss were as follows (in thousands):

 

     Benefit
Plans
    Available-for-sale
Noncredit Other-
Than-Temporary-
Impairment
Losses
    Held-to-maturity
Noncredit Other-
Than-Temporary-
Impairment
Losses
    Total  

Balance at December 31, 2008

   $ (4,942   $      $      $ (4,942

Cumulative effect adjustment to opening balance relating to other-than-temporary-impairment guidance

                   (178,520     (178,520

Net change during the period

     182        254,351        (862,231     (607,698

Reclassification of noncredit portion of other-than-temporary impairment losses on held-to-maturity to available-for-sale securities

            (1,040,751     1,040,751          
                                

Balance at September 30, 2009

   $ (4,760   $ (786,400   $      $ (791,160
                                

The amount shown in the above table as the noncredit portion of other-than-temporary impairment losses does not directly correspond to the amount reported on the Statements of Income as “Portion of impairment losses recognized in other comprehensive loss.” The balance shown in the above table reflects all fair value changes related to available-for-sale securities for which an other-than-temporary impairment loss has been recorded, including fair value changes for available-for-sale securities impaired in previous reporting periods. The above noncredit portion of other-than-temporary losses includes subsequent increases in fair value in previously impaired available-for-sale securities, which are not reflected in the amounts reported on the Statements of Income.

 

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Note 11—Employee Retirement Plans

Components of the net periodic benefit cost for the Bank’s supplemental defined benefit pension plan were as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Service cost

       $ 143          $ 111          $ 427          $ 346   

Interest cost

     173        141        521        421   

Amortization of prior service credit

     (10     (34     (32     (90

Amortization of net loss

     150        93        453        288   
                                

Net periodic benefit cost

       $ 456          $ 311          $ 1,369          $ 965   
                                

Components of the net periodic benefit cost for the Bank’s postretirement health benefit plan were as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Service cost

       $ 76          $ 70          $ 230          $ 213   

Interest cost

     105        96        313        291   

Amortization of net transition

     11        9        31        32   

Amortization of prior service credit

     (150     (151     (452     (452

Amortization of net loss

     60        76        182        227   
                                

Net periodic benefit cost

       $ 102          $ 100          $ 304          $ 311   
                                

Note 12—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 funding sources which finance these assets.

The Bank enters into derivatives to manage the interest-rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the Bank’s risk management objectives, and to act as an intermediary between its members and counterparties. Finance Agency regulations and the Bank’s risk management policy prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. The Bank may use derivatives only to reduce funding costs for consolidated obligations and to manage its interest-rate risk, mortgage prepayment risk and foreign currency risk positions. Derivatives are an integral part of the Bank’s financial management strategy.

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 bond;

 

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preserve a favorable interest-rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation bond used to fund the advance);

   

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

   

protect the value of existing asset or liability positions;

   

manage embedded options in assets and liabilities; and

   

as part of its overall asset/liability management.

Types of Derivatives

The Bank’s risk management policy establishes guidelines for its use of derivatives. The Bank may enter into interest-rate swaps, swaptions, interest-rate cap and floor agreements, calls, puts and forward contracts (collectively derivatives) to manage its exposure to changes in interest rates. 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. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.

One strategy the Bank uses to manage interest-rate risk is to acquire and maintain a portfolio of assets and liabilities which, together with their associated interest-rate derivatives, are reasonably matched with respect to the expected maturities or repricing of the assets and liabilities. The Bank also may use interest-rate derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments (such as advances, mortgage loans, MBS, and consolidated obligations) to achieve risk management objectives.

The Bank uses either derivative strategies or embedded options in its funding to minimize hedging costs. Swaps, swaptions, caps and floors are used to manage interest-rate exposure.

Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable rate received by the Bank in most interest-rate swap agreements is London Interbank Offered Rate (“LIBOR”).

Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank when it is planning to lend or borrow funds in the future against future interest rate changes. The Bank purchases both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

 

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Interest-Rate Caps and Floors. In a cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or “cap”) price. In a floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or “floor”) price. Caps and floors are designed as protection against the interest rate on a variable-rate asset or liability rising above or falling below a certain level.

Foreign Currencies. At times, the Bank has issued some consolidated obligations denominated in currencies other than U.S. dollars. The Bank uses forward exchange contracts to hedge currency risk on such consolidated obligations. These contracts exchange different currencies at specified rates on specified dates in the future. These contracts effectively simulate the conversion of consolidated obligations denominated in foreign currencies into ones denominated in U.S. dollars. As of September 30, 2009 and December 31, 2008, there were no outstanding consolidated obligations denominated in foreign currencies.

Application of Derivatives

General. The Bank may use derivatives to, in effect, adjust the maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses derivatives in three ways: (1) as a fair value hedge of an underlying financial instrument or a firm commitment; (2) as an intermediary transaction; or (3) as a non-qualifying hedge for purposes of asset/liability management. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, the Bank also uses derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset exactly other derivatives executed with members (when the Bank serves as an intermediary) and to reduce funding costs.

The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Bank management uses derivatives when they are considered to be the most cost-effective alternative to achieve the Bank’s financial and risk management objectives. Accordingly, the Bank may enter into derivatives that do not qualify for hedge accounting (non-qualifying hedge).

Types of Assets and Liabilities Hedged

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 (1) assets and liabilities on the Statements of Condition, or (2) firm commitments. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that it uses in hedging relationships have been effective in offsetting changes in the fair value of hedged items attributable to the risk being hedged and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

 

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Consolidated Obligations. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The Bank enters into derivatives to hedge the interest-rate risk associated with its specific debt issuances. The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation. In addition, the Bank requires collateral on derivatives at specified levels correlated to counterparty credit ratings. For instance, in a typical transaction, fixed-rate consolidated obligations are issued for the Bank, and the Bank simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to the Bank designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. The Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances (typically one- or three-month LIBOR). These transactions are treated as fair-value hedges. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than otherwise would be available through the issuance of simple fixed-rate consolidated obligations in the capital markets.

Advances. The Bank offers a variety of advance structures to meet members’ funding needs. These advances may have maturities of up to 30 years with variable or fixed rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances in order to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed-rate advance or a variable-rate advance with embedded options, the Bank simultaneously will execute a derivative with terms that offset the terms and embedded options in the advance. For example, the Bank may hedge a fixed-rate advance with an interest-rate swap where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the fixed-rate advance to a variable-rate advance.

Mortgage Assets. The Bank has invested in fixed-rate mortgage assets. The prepayment options embedded in mortgage assets may result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. Finance Agency regulation limits this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life changes under certain interest-rate shock scenarios and by establishing limitations on duration of equity and change in market value of equity. The Bank manages prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the Bank may use derivatives to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the Bank replaces the mortgages with lower-yielding assets and if the Bank’s higher funding costs are not reduced concomitantly.

The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may use derivatives to match the expected prepayment characteristics of the mortgages.

Options (interest-rate caps, interest-rate floors and/or options) also may be used to hedge prepayment risk on the mortgages, many of which are not identified to specific mortgages and, therefore, do not receive fair-value or cash-flow hedge accounting treatment. The options are marked-to-market through current-period earnings and presented in the Statements of Income as “Net gains (losses) on derivatives and hedging activities.” The Bank also may purchase interest-rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid non-qualifying hedges against the prepayment risk of the loans, they do not receive either fair-value or cash-flow hedge accounting.

 

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The Bank analyzes the duration, convexity, and earnings risk of the mortgage portfolio on a regular basis under various rate scenarios.

Firm Commitment Strategies. Certain mortgage purchase commitments are considered derivatives. Mortgage purchase commitments are recorded on the balance sheet at fair value, with changes in fair value recognized in current-period earnings. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

The Bank also may enter into a fair value hedge of a firm commitment for a forward starting advance through the use of an interest-rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance using the level-yield method.

Investments. The Bank invests in U.S. agency obligations, MBS, and the taxable portion of state or local housing finance agency obligations. The interest-rate and prepayment risks associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage the prepayment and interest-rate risks by funding investment securities with consolidated obligations that have call features, or by hedging the prepayment risk with caps or floors, or by adjusting the duration of the securities by using derivatives to modify the cash flows of the securities. Investment securities may be classified as trading, available-for-sale or held-to-maturity.

The Bank also may manage the risk arising from changing market prices and volatility of investment securities classified as trading by entering into derivatives (non-qualifying hedges) that offset the changes in fair value of the securities. The market value changes of both the trading securities and the associated derivatives are included in “Other Income (Loss)” in the Statements of Income and presented as part of the “Net gains (losses) on trading securities” and “Net gains (losses) on derivatives and hedging activities.”

The Bank is not a derivative dealer and thus does not trade derivatives for short-term profit.

Managing Credit Risk on Derivatives

The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The amount of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policies and regulations. Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of September 30, 2009.

The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional

 

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amount. The Bank requires collateral agreements that establish collateral delivery thresholds for all derivatives. The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral, if any, is of no value to the Bank. As of September 30, 2009, the Bank has not sold or repledged any such collateral.

As of September 30, 2009 and December 31, 2008, the Bank’s maximum credit risk, as defined above, was approximately $142.1 million and $117.7 million, respectively. These totals include $85.9 million and $12.0 million, respectively, of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities by counterparty. Cash held by the Bank as collateral for derivatives was $102.6 million and $69.7 million as of September 30, 2009 and December 31, 2008, respectively. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement and held by the member institution for the benefit of the Bank.

Certain of the Bank’s derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position at September 30, 2009 was $4.7 billion for which the Bank has posted collateral of $4.4 billion in the normal course of business. If the Bank’s credit ratings had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered and the Bank would have been required to deliver up to an additional $160.0 million of collateral (at fair value) to its derivatives counterparties at September 30, 2009. However, the Bank’s credit rating has not changed during the previous 12 months.

The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell and distribute consolidated obligations. Note 14 discusses assets pledged by the Bank to these counterparties.

Intermediation. To assist its members in meeting their hedging needs, the Bank acts as an intermediary between the members and other counterparties by entering into offsetting derivatives. This intermediation allows smaller members indirect access to the derivatives market.

Derivatives in which the Bank is an intermediary may arise when the Bank: (1) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of its members, and (2) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to either advances, investments or consolidated obligations.

Total notional principal of derivatives for the Bank as an intermediary was $2.3 billion and $2.5 billion at September 30, 2009 and December 31, 2008, respectively.

Financial Statement Effect and Additional Financial Information

Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid.

 

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The following table summarizes fair value of derivative instruments without effect of netting arrangements or collateral as of September 30, 2009 (in thousands). For purposes of this disclosure, the derivative values include fair value of derivatives and related accrued interest.

 

     As of September 30, 2009  
     Notional
Amount of
Derivatives
   Derivative
Assets
    Derivative
Liabilities
 

Derivatives in hedging relationships:

       

Interest rate swaps

       $ 198,809,410        $ 2,221,051          $ (6,285,651
                       

Total derivatives in hedging relationships

     198,809,410      2,221,051        (6,285,651
                       

Derivatives not designated as hedging instruments:

       

Interest rate swaps

     7,282,236      16,793        (557,299

Interest rate caps or floors

     4,500,000      43,597        (23,947
                       

Total derivatives not designated as hedging instruments

     11,782,236      60,390        (581,246
                       

Total derivatives before netting and collateral adjustments

       $ 210,591,646      2,281,441        (6,866,897
           

Netting adjustments

        (2,139,351     2,139,351   

Cash collateral and related accrued interest

        (102,570     4,149,532   
                   

Total collateral and netting adjustments *

        (2,241,921     6,288,883   
                   

Derivative assets and derivative liabilities

          $ 39,520          $ (578,014
                   

 

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

 

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The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income (in thousands).

 

     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 
     Amount of Gain (Loss)
Recognized in Net
Gains (Losses) on
Derivatives and
Hedging Activities
    Amount of Gain (Loss)
Recognized in Net
Gains (Losses) on
Derivatives and
Hedging Activities
 

Derivatives and hedged items in fair value hedging relationships:

    

Interest rate swaps

       $ 114,901          $ 412,000   
                

Total net gain related to fair value hedge ineffectiveness

     114,901        412,000   
                

Derivatives not designated as hedging instruments:

    

Economic hedges:

    

Interest rate swaps

     (73,388     43,745   

Interest rate caps or floors

     2,811        5,975   

Interest rate futures/forwards

     —          (146

Intermediary transactions:

    

Interest rate swaps

     9        (1

Interest rate caps or floors

     —          10   
                

Total net (loss)gain related to derivatives not designated as hedging instruments

     (70,568     49,583   
                

Net gains on derivatives and hedging activities

       $ 44,333          $ 461,583   
                

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income (in thousands).

 

     Three Months Ended September 30, 2009  
Hedged Item Type:    Gain/(Loss) on
Derivative
    Gain/(Loss) on
Hedged Item
    Net Fair Value Hedge
Ineffectiveness
    Effect of
Derivatives on Net
Interest Income *
 

Advances

       $ (21,707       $ 177,107          $ 155,400          $ (941,688

Consolidated obligations:

        

Bonds

     102,036        (133,685     (31,649     379,526   

Discount notes

     (10,924     2,074        (8,850     40,348   
                                

Total

       $ 69,405          $ 45,496          $ 114,901          $ (521,814
                                

 

* The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.

 

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     Nine Months Ended September 30, 2009  
Hedged Item Type:    Gain/
(Loss) on
Derivative
    Gain/(Loss) on
Hedged Item
    Net Fair
Value Hedge
Ineffectiveness
    Effect of
Derivatives
on Net
Interest
Income *
 

Advances

   $ 3,412,428      $ (2,980,741   $ 431,687      $ (2,576,436

Consolidated obligations:

        

Bonds

     (766,624     750,715        (15,909     1,084,613   

Discount notes

     (26,042     22,264        (3,778     78,451   
                                

Total

   $ 2,619,762      $ (2,207,762   $ 412,000      $ (1,413,372
                                

 

* The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.

Note 13—Estimated Fair Values

The Bank records trading securities, available-for-sale securities and derivative assets and liabilities at fair value. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.

A fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. The fair value hierarchy defines fair value in terms of a price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the “fair value hierarchy” to the Bank’s financial assets and financial liabilities that are carried at fair value.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2009, the Bank did not carry any financial assets or liabilities at fair value hierarchy Level 1.

 

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Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of September 30, 2009, the types of financial assets and liabilities the Bank carried at fair value hierarchy Level 2 included trading securities and derivatives.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions. As of September 30, 2009, the Bank carried available-for-sale securities at fair value hierarchy Level 3.

The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair Value on a Recurring Basis. The following tables present for each fair value hierarchy level, the Bank’s financial assets and financial liabilities that are measured at fair value on a recurring basis on its Statements of Condition (in thousands):

 

     As of September 30, 2009  
     Fair Value Measurements Using             
     Level 1    Level 2     Level 3    Netting
Adjustment*
    Total  

Assets

            

Trading securities:

            

Government-sponsored enterprises debt obligations

       $        $ 3,515,678          $        $          $ 3,515,678   

Other FHLBanks’ bonds

          77,500                    77,500   

State or local housing agency obligations

          10,592                    10,592   

Available-for-sale:

            

Private-label MBS

                 1,800,590             1,800,590   

Derivative assets

          2,281,441             (2,241,921     39,520   
                                      

Total assets at fair value

       $        $ 5,885,211          $ 1,800,590        $ (2,241,921       $ 5,443,880   
                                      

Liabilities

            

Derivative liabilities

       $        $ (6,866,897       $        $ 6,288,883          $ (578,014
                                      

Total liabilities at fair value

       $        $ (6,866,897       $        $ 6,288,883          $ (578,014
                                      

 

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

 

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     As of December 31, 2008  
     Fair Value Measurements Using             
     Level 1    Level 2     Level 3    Netting
Adjustment*
    Total  

Assets

            

Trading securities

       $        $ 4,485,929          $        $          $ 4,485,929   

Derivative assets

          2,813,328             (2,721,922     91,406   
                                      

Total assets at fair value

       $        $ 7,299,257          $        $ (2,721,922       $ 4,577,335   
                                      

Liabilities

            

Derivative liabilities

       $        $ (10,404,378       $        $ 8,990,586          $ (1,413,792
                                      

Total liabilities at fair value

       $        $ (10,404,378       $        $ 8,990,586          $ (1,413,792
                                      

 

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

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and/or out of Level 3 at fair value in the quarter in which the changes occur.

The following table presents a reconciliation of available-for-sale securities that are measured at fair value using significant unobservable inputs (Level 3) (in thousands):

 

     Three Months Ended
September 30, 2009
     Nine Months Ended
September 30, 2009
 

Balance, beginning of the period

       $ 1,536,608           $   

Transfer of private-label MBS from held-to-maturity to available-for-sale

     116,143         1,876,620   

Total gains (losses) realized and unrealized:

     

Included in net impairment losses recognized in earnings

     (124,639      (161,600

Included in other comprehensive loss

     272,478         85,570   
                 

Balance, end of the period

       $ 1,800,590           $ 1,800,590   
                 

Described below are the Bank’s fair value measurement methodologies for financial assets and liabilities measured or disclosed at fair value.

Cash and due from banks and interest-bearing deposits. The estimated fair value approximates the recorded book balance.

Trading securities. The estimated fair value of trading securities is determined based on independent market-based prices received from a third party pricing service, excluding accrued interest. The Bank’s principal markets for securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in that market. When prices are not available, the estimated fair value is determined by calculating the present value of the expected future cash flows based on market observable inputs obtained from an outside source that are input into the Bank’s valuation model.

 

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Private-label MBS. The fair value of the Bank’s private-label MBS is determined by reference to prices from four third-party broker/dealers or pricing services and by a discounted cash flow approach. The significant reduction in transaction volumes and widening credit spreads led the Bank to conclude that the prices received from pricing services, which were derived from the third-party’s proprietary models, were reflective of significant unobservable inputs. Because of the significant unobservable inputs used by the pricing services, the Bank considered these to be Level 3 inputs.

Due to the reduced market activity for the Bank’s private-label MBS, the Bank may also determine prices for certain securities using a discounted cash flow approach. This discounted cash flow model uses cash flows adjusted for credit factors calculated by a third-party model and discounted at a rate incorporating interest-rate and market liquidity factors. Other significant inputs include loan default rates, prepayment speeds, and loss severity rates. Due to the unobservable nature of the inputs, the discounted cash flow model is classified as Level 3.

The Bank evaluates the reasonableness of the two above Level 3 indicators of prices for its private-label MBS and determines whether multiple inputs from different pricing sources would collectively provide the best evidence of fair value as of September 30, 2009. Generally, the Bank uses prices obtained from four third-party pricing services to determine the fair value of its private-label MBS. When the Bank is unable to obtain a sufficient number of prices from third-party vendors (generally less than two third-party prices), the Bank utilizes prices determined by a discounted cash flow model to determine the fair value of the private-label MBS.

Agency MBS and Other Held-to-maturity Securities. The estimated fair value of agency MBS and other held-to-maturity securities is generally determined based on market-based prices received from third party pricing services, excluding accrued interest. The prices received from four third-party pricing services are generally non-binding. The Bank’s principal markets for securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in that market. In obtaining such valuation information from third parties, the Bank generally evaluates the prices for reasonableness in order to determine whether such valuations are representative of an exit price in the Bank’s principal markets.

Federal funds sold. The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms and represent market observable rates.

Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the replacement advance rates based on the market observable LIBOR curve for advances with similar terms as of September 30, 2009 and December 31, 2008, respectively. In accordance with the advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances, thereby removing prepayment risk from the fair value calculation.

Mortgage loans held for portfolio. The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans available in the pass-through securities market. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

 

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Accrued interest receivable and payable. The estimated fair value approximates the recorded book value.

Derivative assets and liabilities. The Bank calculates the fair value of derivatives using a present value of future cash flows discounted by a market observable rate, predominately LIBOR. The fair values are based on a AA credit rating, which is maintained through the use of collateral agreements.

Derivative instruments are primarily transacted in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank and each derivative counterparty have bilateral collateral thresholds that take into account both the Bank’s and the counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between the Bank and its derivative counterparties was mitigated to an immaterial level and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities on the Statements of Condition at September 30, 2009 and December 31, 2008.

Deposits. The Bank determines estimated fair values of Bank deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on LIBOR.

Borrowings. The Bank determines the estimated fair value of borrowings by calculating the present value of expected future cash flows from the borrowings and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on market observable rates, predominantly LIBOR.

Consolidated obligations. The Bank calculates the fair value of consolidated obligation bonds and discount notes by using the present value of future cash flows using a cost of funds as the discount rate. The cost of funds discount curves are based primarily on the market observable LIBOR and to some extent on the Office of Finance cost of funds curve, which also is market observable.

Mandatorily redeemable capital stock. The fair value of mandatorily redeemable capital stock is par value, including estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.

Commitments to extend credit for mortgage loans. Mortgage loan purchase commitments are recorded as derivatives at their fair values.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at September 30, 2009 and December 31, 2008. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.

 

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For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair value. The Fair Value Summary Table does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

The carrying values and estimated fair values of the Bank’s financial instruments as of September 30, 2009 and December 31, 2008 were as follows (in thousands):

Fair Value Summary Table

 

     September 30, 2009     December 31, 2008  

Financial Instruments

   Carrying
Value
    Estimated
Fair Value
    Carrying
Value
    Estimated
Fair Value
 

Assets:

        

Cash and due from banks

       $ 10,719          $ 10,719          $ 27,841          $ 27,841   

Deposits with other FHLBanks

     2,526        2,526        2,888        2,888   

Federal funds sold

     10,560,000        10,560,020        10,769,000        10,769,763   

Trading securities

     3,603,770        3,603,770        4,485,929        4,485,929   

Available-for-sale securities

     1,800,590        1,800,590                 

Held-to-maturity securities

     18,198,303        17,276,211        23,118,123        19,593,615   

Mortgage loans held for portfolio, net

     2,644,259        2,757,309        3,251,074        3,348,375   

Advances, net

     125,822,803        125,863,311        165,855,546        165,772,958   

Accrued interest receivable

     540,129        540,129        775,083        775,083   

Derivative assets

     39,520        39,520        91,406        91,406   

Liabilities:

        

Deposits

     (3,352,592     (3,352,583     (3,572,709     (3,572,475

Consolidated obligations, net:

        

Discount notes

     (28,418,499     (28,421,187     (55,194,777     (55,365,686

Bonds

     (121,776,760     (122,542,424     (138,181,334     (138,740,905

Mandatorily redeemable capital stock

     (130,173     (130,173     (44,428     (44,428

Accrued interest payable

     (777,521     (777,521     (1,039,002     (1,039,002

Derivative liabilities

     (578,014     (578,014     (1,413,792     (1,413,792

 

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Note 14—Commitments and Contingencies

As described in Note 8, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Finance Agency, under 12 CFR Section 966.9(d), may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank.

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was approximately $825.1 billion and $1.1 trillion as of September 30, 2009 and December 31, 2008, respectively, exclusive of the outstanding consolidated obligations for which the Bank is the primary obligor.

During the third quarter of 2008, each FHLBank entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (“GSECF”), as authorized by the Housing and Economic Recovery Act of 2008 (“Housing Act”). The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF are considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings are agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and MBS issued by Fannie Mae or Freddie Mac. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral, updated on a weekly basis. As of September 30, 2009, the Bank has provided the U.S. Treasury with a listing of collateral amounting to $16.5 billion, which provides for maximum borrowings of $14.4 billion. The amount of collateral available can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of September 30, 2009 the Bank has not drawn on this available source of liquidity. The GSECF is scheduled to expire on December 31, 2009.

The Bank’s outstanding standby letters of credit were as follows:

 

     As of September 30, 2009    As of December 31, 2008

Outstanding notional (in thousands)

       $            13,606,229        $            10,231,656

Original terms

   Less than three months to 16 years    Less than three months to 15 years

Final expiration year

   2025    2023

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $36.5 million and $35.0 million as of September 30, 2009 and December 31, 2008, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the guaranteed entity. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit that results in an internal credit rating, which focuses primarily on an institution’s overall financial health and takes into account quality of assets,

 

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earnings and capital position. In general, borrowers categorized into the higher risk rating categories have more restrictions on the types of collateral they may use to secure standby letters of credit, may be required to maintain higher collateral maintenance levels and deliver loan collateral and may face more stringent collateral reporting requirements.

The Bank did not have any commitments that unconditionally obligate the Bank to purchase closed mortgage loans as of September 30, 2009 and December 31, 2008. Commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives at their fair values.

The Bank executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of September 30, 2009 and December 31, 2008, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to derivatives, securities with a carrying value of $284.6 million and $1.1 billion, respectively, which can be sold or repledged by those counterparties.

At September 30, 2009, the Bank had committed to the issuance of $3.2 billion (par value) in consolidated obligation bonds, of which $3.2 billion were hedged with associated interest rate swaps, and no commitments to issue consolidated obligation discount notes. At December 31, 2008, the Bank had committed to the issuance of $3.0 billion (par value) in consolidated obligation bonds of which $2.8 billion were hedged with associated interest rate swaps, and $100.2 million (par value) in consolidated obligation discount notes of which $99.2 million were hedged with associated interest rate swaps that had traded but not yet settled.

The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

Note 15—Transactions with Members and their Affiliates and with Housing Associates

The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock are able to receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible “housing associates” under the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. All transactions with members are entered into in the ordinary course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Bank of America, N.A., which held 23.2 percent of the Bank’s total regulatory capital stock as of September 30, 2009, was considered a related party. Total advances outstanding to Bank of America, N.A. were $38.9 billion and $3.8 billion as of September 30, 2009 and December 31, 2008, respectively. The total advance balance at September 30, 2009 includes the assumption of Countrywide’s advances by Bank of America, N.A. Total deposits held in the name of Bank of America were $100

 

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thousand as of September 30, 2009 and December 31, 2008. No mortgage loans were acquired from Bank of America, N.A. during the nine-month periods ended September 30, 2009 and 2008. No mortgage-backed securities were acquired from Bank of America, N.A. during the nine-month periods ended September 30, 2009 and September 30, 2008.

Note 16—Subsequent Events

On October 29, 2009, the Bank’s board of directors declared a cash dividend for the third quarter of 2009 in the amount of $8.4 million. The Bank paid the third quarter 2009 dividend on November 2, 2009.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Some of the statements made in this quarterly report on Form 10-Q may be “forward-looking statements,” which include statements with respect to the plans, objectives, expectations, estimates and future performance of the Bank and involve known and unknown risks, uncertainties, and other factors, many of which may be beyond the Bank’s control and which may cause the Bank’s actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. The reader can identify these forward-looking statements through the Bank’s use of words such as “may,” “will,” “anticipate,” “hope,” “project,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “could,” “intend,” “seek,” “target,” and other similar words and expressions of the future. Such forward-looking statements include statements regarding any one or more of the following topics:

 

 

The Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix

 

Future performance, including profitability, developments, or market forecasts

 

Forward-looking accounting and financial statement effects.

The forward-looking statements may not be realized due to a variety of factors, including, without limitation, those risk factors provided under Item 1A of the Bank’s Form 10-K and those risk factors presented under Item 1A in Part II of this quarterly report on Form 10-Q.

All written or oral statements that are made by or are attributable to the Bank are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. The Bank has no obligation and does not undertake publicly to update, revise, or correct any of the forward-looking statements after the date of this quarterly report, or after the respective dates on which these statements otherwise are made, whether as a result of new information, future events, or otherwise.

 

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The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the third quarter and the first nine months ended September 30, 2009 and 2008. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in the report, as well as the Bank’s audited financial statements for the year ended December 31, 2008.

Executive Summary

General Overview

The Bank is a cooperative whose primary business activity is providing loans, which the Bank refers to as “advances,” to its members and eligible housing associates. The Bank also makes grants and subsidized advances under the AHP, and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (“COs”) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank delivers competitively-priced credit to help its members meet the credit needs of their communities.

Financial Condition

As of September 30, 2009, total assets were $163.4 billion, a decrease of $45.2 billion, or 21.7 percent, from December 31, 2008. This decrease was due primarily to a $40.0 billion, or 24.1 percent, decrease in advances and a $4.9 billion, or 21.3 percent, decrease in held-to-maturity securities during the period. Advances, the largest asset on the Bank’s balance sheet, decreased during the period due to maturing advances, prepayments as a result of member failures and decreased demand for advances by the Bank’s members. The decrease in held-to-maturity securities during the period was due primarily to $3.9 billion in proceeds received for principal repayments and maturities, the continued decline in the Bank’s purchase of MBS, and total other-than-temporary impairment losses of $963.7 million recorded on held-to-maturity securities which were subsequently transferred to the Bank’s available-for-sale portfolio. Available-for-sale securities were $1.8 billion as of September 30, 2009 compared to $0 as of December 31, 2008. These securities represent private-label MBS previously held in the Bank’s held-to-maturity portfolio for which the Bank has recorded an other-than-temporary impairment loss and subsequently transferred to the Bank’s available-for-sale portfolio.

As of September 30, 2009, total liabilities were $155.2 billion, a decrease of $44.4 billion, or 22.3 percent, from December 31, 2008. This decrease was due primarily to a $43.2 billion, or 22.3 percent, decrease in COs during the period. The decrease in COs corresponds to the decrease in demand for advances by the Bank’s members during the period.

Total capital was $8.2 billion at September 30, 2009, a decrease of $728.9 million, or 8.20 percent, from December 31, 2008. This decrease was due to a $786.2 million increase in accumulated other comprehensive loss and a $306.7 million decrease in capital stock, which was partially offset by a $364.0 million increase in retained earnings during the period. The increase in accumulated other comprehensive loss was due primarily to the adoption of other-than-temporary impairment guidance as of January 1, 2009, which resulted in a $178.5 million cumulative effect adjustment to retained earnings (increase) and

 

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other comprehensive loss (increase) as of the date of adoption and the recording of $607.7 million in other comprehensive loss during the first nine months of 2009 due primarily to the noncredit portion of other-than-temporary impairment losses on the Bank’s private-label MBS. The decrease in capital stock was due to the repurchase/redemption of $1.1 billion in capital stock and the reclassification of $95.7 million in capital stock to mandatorily redeemable capital stock, which was partially offset by the issuance of $900.2 million in capital stock during the period. The Bank’s retained earnings were $798.9 million as of September 30, 2009, an increase of $364.0 million, or 83.7 percent, from December 31, 2008. The increase in retained earnings was due to the adoption of other-than-temporary impairment guidance, as previously discussed, and the recording of $201.3 million in net income for the first nine months of 2009. These increases were partially offset by the payment during the third quarter of 2009 of $15.8 million in dividends for the second quarter of 2009.

Results of Operations

The Bank recorded net income of $11.1 million for the third quarter of 2009, an increase of $57.2 million, or 124 percent, from a net loss of $46.1 million for the same period in 2008. The increase in net income during the period was due primarily to a $169.9 million decrease in other expense and net gains on derivatives and hedging activities of $44.3 million for the third quarter of 2009 compared to net losses on derivatives and hedging activities of $45.3 million for the same period in 2008, offset by a $135.2 million decrease in net interest income, a $40.6 million increase in net impairment losses recognized in earnings, and a $20.6 million increase in total assessments. The decrease in other expense is due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from Lehman Brothers Special Financing Inc. (“LBSF”), with a corresponding charge to other expense, during the third quarter of 2008. The increase in net gains on derivatives and hedging activities resulted from a decrease in LIBOR during the period and mark-to-market gains on swaps in discontinued hedging relationships. The decrease in net interest income during the period was due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid during the third quarter of 2009 and amortization related to discontinued hedging activities, as well as a decrease in interest rates and the size of the Bank’s balance sheet.

The Bank recorded net income of $201.3 million for the first nine months of 2009, an increase of $22.1 million, or 12.3 percent, from net income of $179.2 million for the same period in 2008. The increase in net income during the period was due primarily to a $168.0 million decrease in other expense and net gains on derivatives and hedging activities of $461.6 million for the first nine months of 2009 compared to net losses on derivatives and hedging activities of $51.2 million for the same period in 2008, offset by a $443.9 million decrease in net interest income, a $175.7 million increase in net impairment losses recognized in earnings, and a $31.9 million increase in net losses on trading securities. As discussed above, the decrease in other expense is due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from LBSF, with a corresponding charge to other expense, during the third quarter of 2008. The increase in net gains on derivatives and hedging activities resulted from a decrease in LIBOR during the period and mark-to-market gains on swaps in discontinued hedging relationships. The decrease in net interest income during the period was due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid during the first nine months of 2009 and amortization related to discontinued hedging activities, as well as a decrease in interest rates and the size of the Bank’s balance sheet. The increase in net losses on trading securities is due primarily to the impact of changes in interest rates on trading securities during the period.

One way in which the Bank analyzes its performance is by comparing its annualized return on equity (“ROE”) to three-month average LIBOR. The Bank’s ROE was 0.55 percent for the third quarter of

 

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2009, compared to a negative 2.13 percent for the third quarter of 2008. ROE increased between the periods primarily as a result of increased net income, as discussed above, and a decrease in average capital. ROE spread to three-month average LIBOR increased between the periods, equaling 0.14 percent for the third quarter of 2009 as compared to a negative 5.04 percent for the third quarter of 2008. The increase in this spread was due primarily to the increased ROE and a decrease in three-month LIBOR during the period.

The Bank’s annualized ROE was 3.45 percent for the first nine months of 2009, compared to 2.84 percent for the same period in 2008. ROE increased between the periods primarily as a result of increased net income, as discussed above, and a decreased in average capital. ROE spread to three-month average LIBOR increased between the periods, equaling 2.62 percent for the first nine months of 2009 as compared to a negative 0.14 percent for the same period in 2008. The increase in this spread was due primarily to an increase in ROE and a decrease in three-month LIBOR during the period.

The Bank’s interest rate spread decreased by 15 basis points and 20 basis points for the third quarter and the first nine months of 2009, respectively, compared to the same periods in 2008. The decrease in interest rate spread during these periods was due primarily to lower yields on advances due to the write-off of hedging-related basis adjustments on advances that were prepaid during the third quarter of 2009.

Credit Risk and Capital Management

As a result of recent market conditions, delinquency and foreclosure rates have increased significantly nationwide. Additionally, home prices have fallen in many areas, increasing the likelihood and magnitude of potential losses to lenders of foreclosed real estate. These trends may continue throughout 2009 and into the foreseeable future. The uncertainty as to the depth and duration of these trends has led to a significant reduction in the market values of MBS. During the third quarter and first nine months of 2009, the Bank recorded net impairment losses recognized in earnings of $128.0 million and $263.1 million, respectively, related to private-label MBS in the Bank’s held-to-maturity and available-for-sale securities portfolios, compared to $87.3 million during the third quarter and first nine months of 2008 related to private-label MBS in the Bank’s held-to-maturity securities portfolio. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and that the Bank may record additional material other-than-temporary impairment losses in future periods, which could affect the Bank’s financial condition and results of operations.

According to the Federal Deposit Insurance Corporation (the “FDIC”), during the third quarter of 2009, 50 FDIC-insured institutions were closed and the FDIC was named receiver, compared to 24 institutions that were closed during the second quarter of 2009 and 21 institutions that were closed during the first quarter of 2009. Of the 50 FDIC-insured institutions that were closed during the third quarter of 2009, 16 were members of the Bank. Between October 1, 2009 and October 31, 2009, three FDIC-insured member institutions were closed and the FDIC was named receiver. All outstanding advances to those institutions placed into FDIC receivership were either paid in full or assumed by another member institution under purchase and assumption agreements between the assuming institution and the FDIC. There has been no material effect to the Bank’s financial condition or results of operations as a result of these closures.

At the time of its closure, each member institution that was placed into FDIC receivership during 2009 was assigned a credit risk rating of 10 by the Bank (10 being the greatest amount of credit risk). As of September 30, 2009, 132 borrowers were assigned a credit risk rating of 10 by the Bank, compared to 50 at December 31, 2008. As of October 31, 2009, 145

 

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borrowers were assigned a credit risk rating of 10 by the Bank. Credit risk ratings are assigned and updated based in part on financial information available only on a trailing basis. In general, borrowers in credit risk rating categories nine and 10 may have more restrictions on credit availability and the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, and may face more stringent collateral reporting requirements under the Bank’s credit and collateral policies. The Bank regularly reviews its credit and collateral policies. The failure of a material number of the Bank’s members could have a material negative effect on the Bank’s financial condition and results of operations.

The Bank has never experienced a credit loss on an advance. The FHLBank Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), other than claims and rights that (1) would be entitled to priority under otherwise applicable law and (2) are held by actual bona fide purchasers for value or by actual secured parties that are secured by actual perfected security interests.

On March 25, 2009, the Bank announced that due to the ongoing uncertainty in financial markets, the Bank no longer would provide dividend guidance prior to the end of each quarter. The Bank expects to make any dividend determination after the end of each quarter and after quarterly results are known. On October 29, 2009 the Bank’s board of directors declared a cash dividend for the third quarter of 2009 at an annualized dividend rate of 0.41 percent, which the Bank paid on November 2, 2009. On August 10, 2009, the Bank’s board of directors declared a cash dividend for the second quarter of 2009 at an annualized dividend rate of 0.84 percent, which was paid on August 14, 2009. In each case, the dividend rate was equal to the average three-month LIBOR for the respective quarter. The Bank did not pay a dividend for the first quarter of 2009. Given the continued volatility in the financial markets and the Bank’s conservative financial management approach in light of these conditions, future dividends, if any, may continue to be affected, which may adversely affect member demand for advances or reduce the attractiveness of Bank membership, which could negatively affect the Bank’s financial condition and results of operations.

On February 27, 2009 the Bank announced certain capital management changes that the Bank believes will facilitate capital management. These changes included an increase in the Subclass B1 membership stock requirement cap from $25 million to $26 million and a change in the process for evaluating and approving excess activity-based stock repurchases from a daily to a quarterly review cycle. While the Bank took these steps to manage capital until markets improve, these changes could affect demand for member advances or reduce the attractiveness of Bank membership, which could negatively affect the Bank’s financial condition and results of operations.

Business Outlook

The continued instability of the markets, along with a number of responsive actions by the government, could continue to impact negatively the Bank’s funding costs, ability to issue long-term debt, and advance demand.

Advance Demand

On November 21, 2008, the FDIC adopted the final rule implementing the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP is a program pursuant to which the FDIC guaranteed new senior unsecured debt issued prior to October 31, 2009 by domestic banks and thrift institutions. This

 

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program has affected, and may continue to affect, member demand for advances, by providing members with an alternative source of funding. On March 17, 2009, the FDIC announced that in order to gradually phase out the program, it would impose a surcharge on debt issued on or after April 1, 2009 with a maturity of one year or more. On October 23, 2009, the FDIC adopted a final rule providing for expiration of the debt guarantee component of TLGP as previously announced but establishing a limited, six-month emergency guarantee facility upon expiration of the debt guarantee component on October 31, 2009.

On February 27, 2009, the FDIC approved a final rule to raise an insured institution’s base assessment rate based upon its ratio of secured liabilities to domestic deposits. Under the rule, an institution’s ratio of secured liabilities to domestic deposits (if greater than 25 percent) would increase its assessment rate, but the resulting base assessment rate after any such increase could be no more than 50 percent greater than it was before the adjustment. The rule became effective on April 1, 2009. Because all of the Bank’s advances are secured liabilities, the rule may affect member demand for advances.

While advance demand increased significantly during the year ended December 31, 2008 as a result of the general illiquidity of markets, outstanding advances decreased during the third quarter of 2009 and the Bank expects that outstanding advances will continue to decrease during 2009 in light of maturing advances, prepayments as a result of member closures, an anticipated reduced need for funding by the Bank’s members in light of their increased deposits, slower loan growth and the government programs discussed above. Further, to the extent that the Bank does not pay dividends or pays dividends at less than historical spreads, such action may adversely affect member demand for advances.

Debt Issuance

On October 7, 2008, federal bank and thrift regulatory agencies announced that they would request public comment on proposed regulatory action to lower the risk weight for select obligations of Fannie Mae and Freddie Mac from 20 percent to 10 percent. The agencies also requested comment on whether to reduce the risk weight for FHLBank debt in the same manner. This regulation, if adopted without a corresponding change in the risk weight for FHLBank debt, could result in higher investor demand for Fannie Mae and Freddie Mac debt securities relative to similar FHLBank debt securities.

To the extent that the FHLBanks’ cost of funds increases, member institutions, in turn, experience higher costs for advance borrowings. During the second half of 2008 and the first quarter of 2009, the Bank experienced difficulty in issuing attractively-priced long-term debt. The continuation of this trend could have a material adverse effect on the Bank’s results of operations. However, the Bank expects that its funding needs in 2009 will be less than its funding needs in 2008 due to its anticipated decrease in advance demand. During the third quarter of 2009, the Bank experienced an improvement in its funding costs and ability to issue longer-term and structured debt compared to the third quarter of 2008, as the decrease in LIBOR rates during the period caused investors to seek this type of debt, as compared to discount notes, for additional yields. Nonetheless, to the extent that the Bank’s cost of funds or liquidity is affected negatively for an extended period of time, the Bank’s business and ability to offer advances could be materially adversely affected.

Management expects to continue to use interest-rate derivatives to hedge the Bank’s MBS and mortgage portfolios. These derivatives assist in mitigating interest-rate and prepayment risk. However, to the extent that they do not qualify for hedge accounting treatment under GAAP, their use could result in earnings volatility. Management also uses derivative instruments to hedge other macro-level risks that do not

 

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qualify for hedge accounting treatment under GAAP. However, management seeks to contain the magnitude of mark-to-market adjustments by limiting the use of derivative instruments to hedge macro-level risks.

Financial Condition

The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance by the Office of Finance on the Bank’s behalf of debt securities in the form of COs.

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollar amounts in thousands). These items are discussed in more detail below:

 

     As of September 30, 2009     As of December 31, 2008     Increase/(Decrease)  
     Amount     Percent of
Total
    Amount     Percent of
Total
    Amount     Percent  

Advances, net

       $ 125,822,803      77.00          $ 165,855,546      79.52          $ (40,032,743   (24.14

Long-term investments

     23,602,663      14.44        27,604,052      13.24        (4,001,389   (14.50

Federal funds sold

     10,560,000      6.46        10,769,000      5.16        (209,000   (1.94

Mortgage loans, net

     2,644,259      1.62        3,251,074      1.56        (606,815   (18.67

Deposits with other FHLBanks

     2,526             2,888             (362   (12.53

Other assets

     778,029      0.48        1,081,780      0.52        (303,751   (28.08
                                          

Total assets

       $ 163,410,280      100.00          $ 208,564,340      100.00          $ (45,154,060   (21.65
                                          

Consolidated obligations, net:

            

Bonds

       $ 121,776,760      78.44          $ 138,181,334      69.20          $ (16,404,574   (11.87

Discount notes

     28,418,499      18.31        55,194,777      27.64        (26,776,278   (48.51

Deposits

     3,352,592      2.16        3,572,709      1.79        (220,117   (6.16

Other liabilities

     1,698,375      1.09        2,722,584      1.37        (1,024,209   (37.62
                                          

Total liabilities

       $ 155,246,226      100.00          $ 199,671,404      100.00          $ (44,425,178   (22.25
                                          

Capital stock

       $ 8,156,311      99.90          $ 8,462,995      95.17          $ (306,684   (3.62

Retained earnings

     798,903      9.79        434,883      4.89        364,020      83.71   

Accumulated other comprehensive loss

     (791,160   (9.69     (4,942   (0.06     (786,218   (15,908.90
                                          

Total capital

       $ 8,164,054      100.00          $ 8,892,936      100.00          $ (728,882   (8.20
                                          

Advances

Advances were $125.8 billion at September 30, 2009, a decrease of $40.0 billion, or 24.1 percent, from December 31, 2008. This decrease was due to maturing advances, prepayments as a result of member failures and decreased demand for advances by the Bank’s members. The decreased demand for advances by the Bank’s members was primarily a result of their increased deposits, slower loan growth and government programs that provide them with alternative sources of funding. At September 30, 2009, 86.1 percent of the Bank’s advances were fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of advances to convert the rates on them, in effect, into a short-term interest rate, usually based on LIBOR. Of the par value of $119.8 billion of advances outstanding as of September 30, 2009, $96.2 billion, or 80.4 percent, had their terms reconfigured through the use of interest rate exchange agreements. The comparable notional amount of such outstanding derivatives at December 31, 2008 was $118.9 billion, or 76.1 percent, of the par value of advances. The majority of the Bank’s variable-

 

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rate advances were indexed to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate and CMS (constant maturity swap) rates.

The concentration of the Bank’s advances to its 10 largest borrowing institutions was as follows (dollar amounts in billions):

 

     Advances to 10
Largest Borrowing
Institutions
   Percent of Total Advances
Outstanding (%)

September 30, 2009

       $ 80.7    67.4

December 31, 2008

     102.7    65.7

Investments

The Bank maintains a portfolio of investments for liquidity purposes, to provide for the availability of funds to meet member credit needs and to provide additional earnings. Investment income also enhances the Bank’s capacity to meet its commitment to affordable housing and community investment, to cover operating expenses, and to satisfy the Bank’s annual Resolution Funding Corporation (“REFCORP”) assessment.

The Bank’s short-term investments consist of overnight and term federal funds and interest-bearing deposits. The Bank’s long-term investments consist of MBS issued by government-sponsored mortgage agencies or private securities that, at purchase, carried the highest rating from Moody’s or S&P, securities issued by the U.S. government or U.S. government agencies, state and local housing agency obligations, and consolidated obligations issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets. The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollar amounts in thousands):

 

               Increase/ (Decrease)  
     As of September 30, 2009    As of December 31, 2008    Amount     Percent  

Short-term investments:

          

Deposits with other FHLBanks

       $ 2,526        $ 2,888        $ (362   (12.53

Federal funds sold

     10,560,000      10,769,000      (209,000   (1.94
                            

Total short-term investments

       $ 10,562,526        $ 10,771,888        $ (209,362   (1.94
                            

Long-term investments:

          

Trading securities:

          

Government-sponsored enterprises debt obligations

       $ 3,515,678        $ 4,171,725        $ (656,047   (15.73

Other FHLBanks’ bonds

     77,500      300,135      (222,635   (74.18

State or local housing agency obligations

     10,592      14,069      (3,477   (24.71

Available-for-sale securities:

          

Mortgage-backed securities:

          

Private label

     1,800,590           1,800,590      100.00   

Held-to-maturity securities:

          

State or local housing agency obligations

     121,363      101,105      20,258      20.04   

Mortgage-backed securities:

          

U.S. agency obligations-guaranteed

     656,784      38,545      618,239      1,603.94   

Government-sponsored enterprises

     6,962,340      7,060,082      (97,742   (1.38

Private label

     10,457,816      15,918,391      (5,460,575   (34.30
                            

Total long-term investments

       $ 23,602,663        $ 27,604,052        $ (4,001,389   (14.50
                            

 

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Short-term investments were $10.6 billion at September 30, 2009, a decrease of $209.4 million, or 1.94 percent, from December 31, 2008. The decrease in short-term investments was due to a $659.0 million decrease in overnight federal funds during the period as market conditions improved and the Bank’s need for this source of liquidity eased. This decrease was partially offset by a $450.0 million increase in term federal funds during the period. Currently, the Bank expects its federal funds holdings to stabilize at this level for the near-term.

Long-term investments were $23.6 billion at September 30, 2009, a decrease of $4.0 billion, or 14.5 percent, from December 31, 2008. The decrease in long-term investments was due primarily to principal prepayments and maturities and the continued decline in the Bank’s purchase of MBS during this same period. In addition, during the third quarter and first nine months of 2009, the Bank recorded total other-than-temporary impairment losses of $104.8 million and $1.2 billion, respectively, related to its private-label MBS, of which $128.0 million and $263.1 million, respectively, was recognized in earnings.

The Finance Agency limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total book value of MBS owned by the FHLBank generally may not exceed 300 percent or, in certain circumstances 600 percent, of the FHLBank’s previous month-end capital plus its mandatorily redeemable capital stock on the day it purchases the securities. In light of current market conditions, the Bank attempts to maintain this ratio at 250 percent to 275 percent to help to maximize and stabilize earnings. These investments amounted to 240 percent and 258 percent of total capital plus mandatorily redeemable capital stock at September 30, 2009 and December 31, 2008, respectively. The Bank was below its target range at September 30, 2009 due to the lack of quality MBS at attractive prices.

The Bank had a total of 24 securities classified as available-for-sale in an unrealized loss position, with total gross unrealized losses of $786.4 million as of September 30, 2009. The Bank had a total of 205 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $1.2 billion as of September 30, 2009. As of December 31, 2008, the Bank had a total of 279 securities classified as held-to-maturity in an unrealized loss position, with total gross unrealized losses of $3.7 billion.

The Bank evaluates its individual investment securities holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. The Bank recognizes an other-than-temporary impairment loss when the Bank determines it will not recover the entire amortized cost basis of a security. Securities in the Bank’s private-label MBS portfolio are evaluated by estimating the present value of cash flows the Bank expects to collect based on the structure of the security and certain economic environment assumptions, such as delinquency and default rates, loss severity, home price appreciation, interest rates, and securities prepayment speeds, while factoring in underlying collateral and credit enhancement.

On April 28, 2009 and May 7, 2009, the Finance Agency provided the FHLBanks with guidance on the process for determining other-than-temporary impairment with respect to private-label MBS and the Bank’s adoption of recent FASB guidance governing the accounting for other-than-temporary impairment in the first quarter of 2009. The goal of the Finance Agency guidance is to promote consistency in the determination of other-than-temporary impairment for private-label MBS among all FHLBanks. Recognizing that many of the FHLBanks desired to early adopt the FASB other-than-temporary impairment guidance, the Finance Agency guidance also required that all FHLBanks early adopt the FASB other-than-temporary impairment

 

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guidance in order to achieve consistency among the 12 FHLBanks and to follow certain guidelines for determining other-than-temporary impairment. The Bank adopted the FASB other-than-temporary impairment guidance, applied in accordance with the Finance Agency guidance as further described below, effective January 1, 2009.

Beginning with the second quarter of 2009, consistent with the objectives in the Finance Agency guidance, the FHLBanks formed an Other-than-Temporary Impairment Governance Committee (the “OTTI Committee”) with the responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining other-than-temporary impairment for private-label MBS. The OTTI Committee charter was approved on June 11, 2009 and provides a formal process by which the FHLBanks can provide input on and approve the assumptions.

In accordance with Finance Agency guidance, the Bank engaged FHLBank Dallas to perform the cash flow analysis underlying its other-than-temporary impairment determination. Each FHLBank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold common private-label MBS are required to consult with one another to ensure that any decision that a commonly held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks. With respect to such commonly-owned securities (of which there were 19 at September 30, 2009), FHLBank San Francisco performed the cash flow analysis underlying the Bank’s other-than-temporary impairment determination.

In order to promote consistency in the application of the assumptions and implementation of the other-than-temporary impairment methodology, the FHLBanks have established control procedures whereby the FHLBanks performing cash flow analysis select a sample group of private-label MBS and each performs cash flow analyses on all such test MBS, using the assumptions approved by the OTTI Committee. These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve consistency among their respective cash flow models.

As of September 30, 2009, the Bank completed its other-than-temporary impairment analysis and made its other-than-temporary impairment determination utilizing the key modeling assumptions approved by the OTTI Committee (on which the Bank had representation). Based on the impairment analysis described above, the Bank recognized a total other-than-temporary impairment loss of $104.8 million and $1.2 billion related to 24 private-label MBS in its investment securities portfolio for the third quarter and first nine months of 2009, respectively. The total amount of other-than-temporary impairment is calculated as the difference between the security’s amortized cost basis and its fair value. The credit related portion of this other-than-temporary impairment loss of $128.0 million and $263.1 million for the third quarter and first nine months of 2009, respectively, is reported in the Statements of Income as “Net impairment losses recognized in earnings,” while the noncredit portion of $(23.2) million and $943.4 million for the third quarter and first nine months of 2009, respectively, is recorded as a component of other comprehensive loss. When previously impaired securities increase in fair value but experience a subsequent credit loss, the amount of the credit loss is reclassified from other comprehensive loss into earnings. This reclassification may result in negative noncredit losses being presented on the Statements of Income. The credit related portion of the other-than-temporary impairment loss was due to forecasted further declines in home prices, increases in delinquencies, default rates, and projected losses on home mortgage loans, and decreases in the prepayments of such home mortgage loans, and actual

 

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deterioration in the performance of the loans underlying the Bank’s private-label MBS portfolio. The remainder of the Bank’s investment securities portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank presently expects to collect all contractual cash flows and the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, which may be at maturity. This assessment is based on the determination that the Bank has sufficient capital and liquidity to operate its business and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would require the Bank to sell these securities.

During the third quarter of 2009, in an effort to achieve consistency among all the FHLBanks in determining fair value of commonly owned private label MBS, the FHLBanks formed a MBS Pricing Governance Committee with the responsibility for developing a fair value methodology that participating FHLBanks may adopt. The methodology approved by the MBS Pricing Governance Committee is consistent with the Bank’s existing methodology to estimate the fair value of private label MBS.

Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio were $2.6 billion at September 30, 2009, a decrease of $606.8 million, or 18.7 percent, from December 31, 2008. The decrease in mortgage loans held was due to the maturity of these assets during the period. In 2006, the Bank ceased purchasing assets under the Affordable Multifamily Participation Program, and in 2008 the Bank ceased purchasing assets under the Mortgage Partnership Finance Program (“MPF Program”). Early in the third quarter of 2008, the Bank suspended acquisitions of mortgage loans under the Mortgage Purchase Program (“MPP”). If the Bank does not resume purchasing mortgage loans under these programs, each of the existing mortgage loans held for portfolio will mature according to the terms of its note. The Bank purchased loans with maturity dates extending out to 2038.

As of September 30, 2009 and December 31, 2008, the Bank’s mortgage loan portfolio was concentrated in the southeastern United States because those members selling loans to the Bank were located primarily in that region. The following table provides the percentage of unpaid principal balance of MPF Program and MPP loans held for portfolio for the five largest state concentrations.

As of September 30, 2009

 

     Percent of Total
Unpaid Principal
Balance

South Carolina

   22.91

Florida

   18.12

North Carolina

   15.85

Georgia

   14.63

Virginia

   9.87

All other

   18.62
    

Total

   100.00
    

 

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Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes. Consolidated obligation issuances financed 91.9 percent of the $163.4 billion in total assets at September 30, 2009, remaining relatively stable from the financing ratio of 92.7 percent as of December 31, 2008.

Consolidated obligation bonds were $121.8 billion at September 30, 2009, a decrease of $16.4 billion, or 11.9 percent, from December 31, 2008. Consolidated obligation discount notes were $28.4 billion at September 30, 2009, a decrease of $26.8 billion, or 48.5 percent, from December 31, 2008. The decrease in consolidated obligations corresponds to the decrease in demand for advances by the Bank’s members during the period and the increase in liquidity from advance prepayments as a result of member failures. Also reflected is a slight shift in investor demand towards consolidated obligation bonds from consolidated obligation discount notes. Consolidated obligation bonds outstanding at September 30, 2009 and December 31, 2008 were primarily fixed-rate. However, the Bank often simultaneously enters into derivatives with the issuance of consolidated obligation bonds to convert the rates on them, in effect, into short-term interest rates, usually based on LIBOR. Of the par value of $120.1 billion of consolidated obligation bonds outstanding as of September 30, 2009, $88.2 billion, or 73.5 percent, had their terms reconfigured through the use of interest rate exchange agreements. The comparable notional amount of such outstanding derivatives at December 31, 2008 was $92.7 billion, or 68.3 percent, of the par value of consolidated obligation bonds.

Deposits

The Bank offers demand accounts to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate. Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried with the Bank. Deposits totaled $3.4 billion as of September 30, 2009, compared to $3.6 billion as of December 31, 2008.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of September 30, 2009.

Other Liabilities

Other liabilities were $1.7 billion at September 30, 2009, a decrease of $1.0 billion, or 37.6 percent, from December 31, 2008. This decrease during the period was due primarily to a $835.8 million decrease in derivative liabilities due to the interaction of interest rates on associated derivatives and a $261.5 million decrease in accrued interest payable related to the decrease in consolidated obligations.

 

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Capital and Retained Earnings

Total capital was $8.2 billion at September 30, 2009, a decrease of $728.9 million, or 8.20 percent, from December 31, 2008. This decrease was due to a $786.2 million increase in accumulated other comprehensive loss, a $306.7 million decrease in capital stock, partially offset by a $364.0 million increase in retained earnings during the period. The increase in accumulated other comprehensive loss was due primarily to the adoption of other-than-temporary impairment guidance as of January 1, 2009, which resulted in a $178.5 million cumulative effect adjustment to retained earnings (increase) and other comprehensive loss (increase) as of the date of adoption and the recording of $607.7 million in other comprehensive loss during the first nine months of 2009 due primarily to the noncredit portion of other-than-temporary impairment losses on the Bank’s private-label MBS. The decrease in capital stock was due to the repurchase/redemption of $1.1 billion in capital stock in the first and second quarters of 2009 and the reclassification of $95.7 million in capital stock to mandatorily redeemable capital stock, partially offset by the issuance of $900.2 million in capital stock during the period. The Bank’s retained earnings were $798.9 million as of September 30, 2009, an increase of $364.0 million, or 83.7 percent, from December 31, 2008. The increase in retained earnings was due to the adoption of other-than-temporary impairment guidance, as previously discussed, and the recording of $201.3 million in net income for the first nine months of 2009. These increases were partially offset by the payment of $15.8 million in dividends during the third quarter of 2009.

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with these regulatory capital rules and requirements as shown in the following table (dollar amounts in thousands):

 

     As of September 30, 2009     As of December 31, 2008  
     Required     Actual     Required     Actual  

Regulatory capital requirements:

        

Risk based capital

       $ 3,996,460          $ 9,085,387          $ 5,715,678          $ 8,942,306   

Total capital-to-assets ratio

     4.00     5.56     4.00     4.29

Total regulatory capital*

       $ 6,536,411          $ 9,085,387          $ 8,342,574          $ 8,942,306   

Leverage ratio

     5.00     8.34     5.00     6.43

Leverage capital

       $ 8,170,514          $ 13,628,081          $ 10,428,217          $ 13,413,459   

 

* Mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $130.2 million and $44.4 million in mandatorily redeemable capital stock at September 30, 2009 and December 31, 2008, respectively.

As required by the Housing Act, effective on January 30, 2009, the Director of the Finance Agency issued an interim final rule that established criteria based on the amount and type of capital held by an FHLBank for four capital classifications as follows:

 

   

Adequately Capitalized - FHLBank meets both risk-based and minimum capital requirements

   

Undercapitalized - FHLBank does not meet one or both of its risk-based or minimum capital requirements

   

Significantly Undercapitalized - FHLBank has less than 75 percent of one or both of its risk-based or minimum capital requirements

   

Critically Undercapitalized - FHLBank total capital is two percent or less of total assets

 

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Under the regulation, the Director will make a capital classification for each FHLBank at least quarterly and notify the FHLBank in writing of any proposed action and provide an opportunity for the FHLBank to submit information relevant to such action. The Director is permitted to make discretionary classifications. An FHLBank must provide written notice to the Finance Agency within 10 days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level required to maintain its most recent capital classification or reclassification. The regulation delineates the types of prompt corrective actions the Director may order in the event an FHLBank is not adequately capitalized, including submission of a capital restoration plan by the FHLBank and restrictions on its dividends, stock redemptions, executive compensation, new business activities, or any other actions the Director determines will ensure safe and sound operations and capital compliance by the FHLBank. On August 4, 2009, the Finance Agency issued its final rule implementing the foregoing capital classification and prompt corrective action regulation substantively similar to the interim final rule. On September 30, 2009, the Bank received notification from the Director that, based on June 30, 2009 data, the Bank meets the definition of “adequately capitalized.”

As of September 30, 2009, the Bank had capital stock subject to mandatory redemption from 34 members and former members, consisting of B1 membership stock and B2 activity-based stock, compared to 13 members and former members as of December 31, 2008. The Bank is not required to redeem or repurchase such stock until the expiration of the five-year redemption period or, with respect to activity-based stock, until the later of the expiration of the five-year redemption period or the activity no longer remains outstanding. During 2008, if activity-based stock became excess stock as a result of an activity no longer remaining outstanding, the Bank generally repurchased the excess activity-based stock if the dollar amount of excess stock exceeded the threshold specified by the Bank, which in 2008 was $100 thousand. The Bank’s excess stock threshold and standard repurchase practice may be changed at the Bank’s discretion with proper notice to members. On February 27, 2009, the Bank notified members of an increase in the excess stock threshold amount to $2.5 billion and a change from the automatic daily repurchase of excess stock to a quarterly evaluation process. As of September 30, 2009 and December 31, 2008, the Bank’s activity-based stock included $1.4 billion and $13.2 million, respectively, of excess shares subject to repurchase by the Bank at its discretion.

Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the third quarter and first nine months of 2009 and 2008, and provides information regarding the changes during the periods (dollar amounts in thousands):

 

     Three Months Ended
September 30,
    Increase/
(Decrease)
    Increase/
(Decrease) %
    Nine Months Ended
September 30,
    Increase/
(Decrease)
    Increase/
(Decrease) %
 
     2009     2008         2009    2008      

Net interest income

       $ 102,650          $ 237,861          $ (135,211   (56.84       $ 242,335        $ 686,200          $ (443,865   (64.68

Other income (loss)

     (57,714     (101,163     43,449      42.95        118,306      (187,805     306,111      162.99   

Other expense

     29,630        199,558        (169,928   (85.15     86,265      254,308        (168,043   (66.08

Total assessments

     3,976        (16,619     20,595      123.92        72,851      64,867        7,984      12.31   

Net income (loss)

     11,100        (46,106     57,206      124.07        201,274      179,205        22,069      12.31   

 

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The Bank recorded net income of $11.1 million for the third quarter of 2009, an increase of $57.2 million, or 124 percent, from a net loss of $46.1 million for the same period in 2008. The increase in net income during the period was due primarily to a $169.9 million decrease in other expense and net gains on derivatives and hedging activities of $44.3 million for the third quarter of 2009 compared to net losses on derivatives and hedging activities of $45.3 million for the same period in 2008, offset by a $135.2 million decrease in net interest income, a $40.6 million increase in net impairment losses recognized in earnings, and a $20.6 million increase in total assessments. The decrease in other expense is due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from LBSF, with a corresponding charge to other expense, during the third quarter of 2008. The increase in net gains on derivatives and hedging activities resulted from a decrease in LIBOR during the period and mark-to-market gains on swaps in discontinued hedging relationships. The decrease in net interest income during the period was due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid during the third quarter of 2009 and amortization related to discontinued hedging activities, as well as a decrease in interest rates and the size of the Bank’s balance sheet.

The Bank recorded net income of $201.3 million for the first nine months of 2009, an increase of $22.1 million, or 12.3 percent, from net income of $179.2 million for the same period in 2008. The increase in net income during the period was due primarily to a $168.0 million decrease in other expense and net gains on derivatives and hedging activities of $461.6 million for the first nine months of 2009 compared to net losses on derivatives and hedging activities of $51.2 million for the same period in 2008, offset by a $443.9 million decrease in net interest income, a $175.7 million increase in net impairment losses recognized in earnings, and a $31.9 million increase in net losses on trading securities. As discussed above, the decrease in other expense is due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from LBSF, with a corresponding charge to other expense, during the third quarter of 2008. The increase in net gains on derivatives and hedging activities resulted from a decrease in LIBOR during the period and mark-to-market gains on swaps in discontinued hedging relationships. The decrease in net interest income during the period was due primarily to the write-off of hedging-related basis adjustments on advances that were prepaid during the first nine months of 2009 and amortization related to discontinued hedging activities, as well as a decrease in interest rates and the size of the Bank’s balance sheet. The increase in net losses on trading securities is due primarily to the impact of changes in interest rates on trading securities during the period.

Net Interest Income

A primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on consolidated obligations, deposits, and other borrowings. Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees and derivative instruments and hedging activities related adjustments.

Net interest income was $102.7 million for the third quarter of 2009, a decrease of $135.2 million, or 56.8 percent, from the same period in 2008. The Bank’s net interest income for the first nine months of 2009 was $242.3 million, a decrease of $443.9 million, or 64.7 percent, from net interest income of $686.2 million for the same period in 2008. The decrease in net interest income was due primarily to the accelerated write-off of hedging-related basis adjustments due to the prepayment of advances as well as other hedging related adjustments.

 

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Table of Contents

The following tables present spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the third quarter and first nine months of 2009 and 2008 (dollar amounts in thousands). The interest rate spread is affected by the inclusion or exclusion of net interest income/expense associated with the Bank’s derivatives. For example, if the derivatives qualify for fair-value hedge accounting under GAAP, the net interest income/expense associated with the derivative is included in net interest income and in the calculation of interest rate spread. If the derivatives do not qualify for fair-value hedge accounting under GAAP, the net interest income/expense associated with the derivatives is excluded from net interest income and the calculation of the interest rate spread. Amortization associated with hedging-related basis adjustments also are reflected in net interest income, which affect interest rate spread. As noted in the below tables, during the third quarter and first nine months of 2009, compared to the same periods in 2008, the interest rate spread decreased by 15 basis points and 20 basis points, respectively. The decrease in interest rate spread during the periods is due primarily to large write-offs of basis adjustments associated with hedging on prepaid advances reducing interest income as well as other hedging-related adjustments.

Spread and Yield Analysis

 

     Three Months Ended September 30,
     2009    2008
     Average
Balance
   Interest    Yield/
Rate (%)
   Average
Balance
   Interest    Yield/
Rate (%)

Assets

                 

Federal funds sold

       $ 9,025,966        $ 4,060    0.18        $ 13,493,273        $ 76,584    2.26

Interest-bearing deposits (1)

     3,883,319      1,580    0.16      355,859      1,846    2.06

Certificate of deposits

                  959,783      6,738    2.79

Long-term investments (2)

     24,345,252      289,712    4.72      30,075,105      377,015    4.99

Advances

     130,126,657      99,321    0.30      151,194,235      1,041,572    2.74

Mortgage loans held for portfolio (3)

     2,730,663      36,033    5.24      3,382,666      45,331    5.33

Loans to other FHLBanks

                  6,565      27    1.64
                                 

Total interest-earning assets

     170,111,857      430,706    1.00      199,467,486      1,549,113    3.09
                         

Allowance for credit losses on mortgage loans

     (964)            (892)