10-Q 1 ind6301110q.htm FORM 10-Q IND 6/30/11 10Q



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

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

For the quarterly period ended June 30, 2011

OR

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

Commission File Number:  000-51404
 
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
35-6001443
(I.R.S. employer identification number)
8250 Woodfield Crossing Boulevard
Indianapolis, IN
(Address of principal executive offices)
 
46240
(Zip code)
(317) 465-0200
(Registrant's telephone number, including area code)

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            o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x   Yes            o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
o  Large accelerated filer
o  Accelerated filer
x Non-accelerated filer (Do not check if a smaller reporting company)
o  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes            x  No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Shares outstanding
as of July 31, 2011

Class B Stock, par value $100
20,152,531


Table of Contents
Page
 
 
Number
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 6.
Glossary
 
 
Exhibit 31.1
 
 
Exhibit 31.2
 
 
Exhibit 31.3
 
 
Exhibit 32
 
 




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts and shares in thousands, except par value)
 
June 30,
2011
 
December 31,
2010
Assets:
 
 
 
Cash and Due from Banks
$
1,539,157

 
$
11,676

Interest-Bearing Deposits
59

 
3

Securities Purchased Under Agreements to Resell

 
750,000

Federal Funds Sold
2,905,000

 
7,325,000

Available-for-Sale Securities (1) (Note 3)
3,084,813

 
3,237,916

Held-to-Maturity Securities (2) (Note 4)
8,633,802

 
8,471,827

Advances (Notes 6 and 8)
17,475,572

 
18,275,364

Mortgage Loans Held for Portfolio, net (Notes 7 and 8)
6,281,450

 
6,702,576

Accrued Interest Receivable
89,876

 
98,924

Premises, Software, and Equipment, net
10,937

 
10,830

Derivative Assets, net (Note 9)
177

 
6,173

Other Assets
37,666

 
39,584

Total Assets
$
40,058,509

 
$
44,929,873

Liabilities:
 

 
 
Deposits (Note 10):
 

 
 
Interest-Bearing
$
695,749

 
$
574,894

Non-Interest-Bearing
10,850

 
10,034

Total Deposits
706,599

 
584,928

Consolidated Obligations (Note 11):
 

 
 
Discount Notes
9,992,689

 
8,924,687

Bonds
26,068,239

 
31,875,237

Total Consolidated Obligations, net
36,060,928

 
40,799,924

Accrued Interest Payable
123,686

 
133,862

Affordable Housing Program Payable
32,689

 
35,648

Payable to Resolution Funding Corporation
5,930

 
10,325

Derivative Liabilities, net (Note 9)
679,000

 
657,030

Mandatorily Redeemable Capital Stock (Note 13)
515,130

 
658,363

Other Liabilities
50,988

 
102,422

Total Liabilities
38,174,950

 
42,982,502

Commitments and Contingencies (Note 17)


 


Capital (Notes 13 and 14):
 

 
 
Capital Stock Putable (at par value of $100 per share):
 
 
 
Class B-1 issued and outstanding shares: 14,866 and 16,072, respectively
1,486,534

 
1,607,116

Class B-2 issued and outstanding shares: 33 and 29, respectively
3,341

 
2,944

     Total Capital Stock Putable
1,489,875

 
1,610,060

Retained Earnings
451,314

 
427,557

Accumulated Other Comprehensive Income (Loss) (Note 14):
 

 
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 3)
5,534

 
(4,615
)
Net Non-Credit Portion of Other-Than-Temporary Impairment Losses:
 
 
 
Available-for-Sale Securities (Note 3)
(49,889
)
 
(68,806
)
Held-to-Maturity Securities (Note 4)
(5,154
)
 
(7,056
)
Pension and Postretirement Benefits
(8,121
)
 
(9,769
)
Total Accumulated Other Comprehensive Income (Loss)
(57,630
)
 
(90,246
)
Total Capital
1,883,559

 
1,947,371

Total Liabilities and Capital
$
40,058,509

 
$
44,929,873


(1)    Amortized cost: $2,944,213 and $3,146,617 at June 30, 2011, and December 31, 2010, respectively.
(2)    Estimated fair values: $8,701,206 and $8,513,391 at June 30, 2011, and December 31, 2010, respectively.

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

1



Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Interest Income:
 
 
 
 
 
 
 
Advances
$
39,465

 
$
49,526

 
$
80,613

 
$
99,960

Prepayment Fees on Advances, net
280

 
2,845

 
1,414

 
3,538

Interest-Bearing Deposits
8

 
59

 
18

 
95

Securities Purchased Under Agreements to Resell
94

 
762

 
683

 
931

Federal Funds Sold
1,973

 
4,490

 
4,914

 
7,023

Available-for-Sale Securities
13,113

 
1,862

 
27,990

 
3,483

Held-to-Maturity Securities
45,458

 
63,120

 
90,971

 
126,551

Mortgage Loans Held for Portfolio, net
76,532

 
83,396

 
156,661

 
174,051

Other, net
71

 
(524
)
 
592

 
(165
)
Total Interest Income
176,994

 
205,536

 
363,856

 
415,467

Interest Expense:
 
 
 
 
 
 
 
Consolidated Obligation Discount Notes
2,082

 
4,736

 
5,281

 
7,201

Consolidated Obligation Bonds
115,130

 
141,038

 
233,650

 
283,200

Deposits
60

 
83

 
133

 
161

Mandatorily Redeemable Capital Stock
3,737

 
3,612

 
8,562

 
7,191

Total Interest Expense
121,009

 
149,469

 
247,626

 
297,753

Net Interest Income
55,985

 
56,067

 
116,230

 
117,714

Provision for Credit Losses
1,183

 

 
2,159

 

Net Interest Income After Provision for Credit Losses
54,802

 
56,067

 
114,071

 
117,714

Other Income (Loss):
 
 
 
 
 
 
 
Total Other-Than-Temporary Impairment Losses

 
(7,826
)
 
(2,972
)
 
(22,279
)
Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss), net
(3,336
)
 
(53,868
)
 
(18,745
)
 
(45,481
)
Net Other-Than-Temporary Impairment Losses
(3,336
)
 
(61,694
)
 
(21,717
)
 
(67,760
)
Net Realized Losses from Sale of Available-for-Sale Securities
(1,943
)
 

 
(1,943
)
 

Net Gains (Losses) on Derivatives and Hedging Activities
(3,406
)
 
(893
)
 
(3,533
)
 
(2,068
)
Service Fees
265

 
314

 
528

 
615

Standby Letters of Credit Fees
462

 
396

 
800

 
759

Loss on Extinguishment of Debt

 

 
(397
)
 

Other, net
239

 
120

 
421

 
382

Total Other Income (Loss)
(7,719
)
 
(61,757
)
 
(25,841
)
 
(68,072
)
Other Expenses:
 
 
 
 
 
 
 
Compensation and Benefits
8,320

 
6,821

 
17,063

 
13,525

Other Operating Expenses
3,686

 
3,446

 
6,516

 
6,380

Federal Housing Finance Agency
860

 
533

 
1,776

 
1,132

Office of Finance
523

 
445

 
1,344

 
910

Other
259

 
278

 
514

 
562

Total Other Expenses
13,648

 
11,523

 
27,213

 
22,509

Income (Loss) Before Assessments
33,435

 
(17,213
)
 
61,017

 
27,133

Assessments:
 
 
 
 
 
 
 
Affordable Housing Program
3,111

 
(1,036
)
 
5,855

 
2,949

Resolution Funding Corporation
5,939

 
(3,235
)
 
10,907

 
4,837

Total Assessments, net
9,050

 
(4,271
)
 
16,762

 
7,786

Net Income (Loss)
$
24,385

 
$
(12,942
)
 
$
44,255

 
$
19,347


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

2



Federal Home Loan Bank of Indianapolis
Statements of Capital
(Unaudited, $ amounts and shares in thousands)
 
 
Capital Stock
Class B-1
Putable
 
Capital Stock
Class B-2
Putable
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Capital
 
 
Shares

 
Par Value

 
Shares

 
Par Value

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2009
 
17,260

 
$
1,726,000

 

 
$

 
$
349,013

 
$
(328,602
)
 
$
1,746,411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from Sale of Capital Stock
 
339

 
33,882

 

 

 
 
 
 
 
33,882

Transfers of Capital Stock
 
(46
)
 
(4,567
)
 
46

 
4,567

 
 
 
 
 

Net Shares Reclassified to Mandatorily Redeemable Capital Stock
 
(291
)
 
(29,061
)
 

 

 
 
 
 
 
(29,061
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
 
 
19,347

 
 
 
19,347

Other Comprehensive Income (Loss) (Note 14)
 
 
 
 
 
 
 
 
 
 
 
65,128

 
65,128

Total Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
19,347

 
65,128

 
84,475

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on Mandatorily Redeemable Capital Stock
 
 
 
 
 
 
 
 
 
(53
)
 
 
 
(53
)
Cash Dividends on Capital Stock (2.00% annualized)
 
 
 
 
 
 
 
 
 
(17,207
)
 
 
 
(17,207
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2010
 
17,262

 
$
1,726,254

 
46

 
$
4,567

 
$
351,100

 
$
(263,474
)
 
$
1,818,447

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 
16,072

 
$
1,607,116

 
29

 
$
2,944

 
$
427,557

 
$
(90,246
)
 
$
1,947,371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from Sale of Capital Stock
 
349

 
34,898

 

 

 
 
 
 
 
34,898

Repurchase/Redemption of Capital Stock
 
(1,497
)
 
(149,694
)
 

 

 
 
 
 
 
(149,694
)
Transfers of Capital Stock
 
(4
)
 
(397
)
 
4

 
397

 
 
 
 
 

Net Shares Reclassified to Mandatorily Redeemable Capital Stock
 
(54
)
 
(5,389
)
 

 

 
 
 
 
 
(5,389
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
 
 
44,255

 
 
 
44,255

Other Comprehensive Income (Loss) (Note 14)
 
 
 
 
 
 
 
 
 
 
 
32,616

 
32,616

Total Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
44,255

 
32,616

 
76,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on Mandatorily Redeemable Capital Stock
 
 
 
 
 
 
 
 
 
(11
)
 
 
 
(11
)
Cash Dividends on Capital Stock (2.50% annualized)
 
 
 
 
 
 
 
 
 
(20,487
)
 
 
 
(20,487
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2011
 
14,866

 
$
1,486,534

 
33

 
$
3,341

 
$
451,314

 
$
(57,630
)
 
$
1,883,559







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

3



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
 
Six Months Ended
 
June 30,
 
2011
 
2010
Operating Activities:
 
 
 
Net Income
$
44,255

 
$
19,347

Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activities:
 
 
 
Depreciation and Amortization
13,423

 
(18,210
)
Net Other-Than-Temporary Impairment Losses
21,717

 
67,760

Loss on Extinguishment of Debt
397

 

Provision for Credit Losses
2,159

 

(Gain) Loss on Sale of Available-for-Sale Securities
1,943

 

(Gain) Loss on Derivative and Hedging Activities
(776
)
 
2,744

Net Change in:
 
 
 
Accrued Interest Receivable
9,051

 
9,139

Net Accrued Interest on Derivatives
51,780

 
106,939

Other Assets
(138
)
 
326

Affordable Housing Program Payable, including discount on Advances
(2,959
)
 
(3,174
)
Accrued Interest Payable
(10,176
)
 
(51,870
)
Payable to Resolution Funding Corporation
(4,395
)
 
(8,691
)
Other Liabilities
(1,457
)
 
(543
)
Total Adjustments, net
80,569

 
104,420

Net Cash provided by (used in) Operating Activities
124,824

 
123,767

Investing Activities:
 
 
 
Net Change in:
 
 
 
Interest-Bearing Deposits
(10,956
)
 
(87,532
)
Securities Purchased Under Agreements to Resell
750,000

 

Federal Funds Sold
4,420,000

 
(2,817,000
)
Premises, Software, and Equipment
(894
)
 
(260
)
Available-for-Sale Securities:
 
 
 
Proceeds from Maturities
107,740

 

Proceeds from Sales
66,520

 

Held-to-Maturity Securities:
 
 
 
Net (Increase) Decrease in Short-Term

 
(105,000
)
Proceeds from Maturities of Long-Term
764,381

 
958,802

Purchases of Long-Term
(975,136
)
 
(1,490,976
)
Advances:
 
 
 
Principal Collected
7,954,850

 
10,336,792

Made to Members
(7,142,745
)
 
(7,773,621
)
Mortgage Loans Held for Portfolio:
 
 
 
Principal Collected
664,708

 
673,585

Purchases
(248,416
)
 
(158,107
)
Proceeds from Sales of Foreclosed Properties

 
(162
)
Other Federal Home Loan Banks:
 
 
 
Principal Collected on Loans
50,000

 
60,735

Loans Made
(50,000
)
 
(60,735
)
Net Cash provided by (used in) Investing Activities
6,350,052

 
(463,479
)
 


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

4



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
 
Six Months Ended
 
June 30,
 
2011
 
2010
Financing Activities:
 
 
 
Net Change in Deposits
121,672

 
(196,661
)
Net Proceeds (Payments) on Derivative Contracts with Financing Elements
(54,171
)
 
(81,799
)
Net Proceeds from Issuance of Consolidated Obligations:
 
 
 
Discount Notes
259,944,888

 
333,468,395

Bonds
9,923,131

 
19,678,279

Payments for Matured and Retired Consolidated Obligations:
 
 
 
Discount Notes
(258,875,922
)
 
(332,285,441
)
Bonds
(15,723,077
)
 
(21,971,100
)
Proceeds from Sale of Capital Stock
34,898

 
33,882

Payments for Redemption of Mandatorily Redeemable Capital Stock
(148,633
)
 
(3,333
)
Payments for Repurchase/Redemption of Capital Stock
(149,694
)
 

Cash Dividends Paid
(20,487
)
 
(17,207
)
Net Cash provided by (used in) Financing Activities
(4,947,395
)
 
(1,374,985
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
1,527,481

 
(1,714,697
)
Cash and Cash Equivalents at Beginning of the Period
11,676

 
1,722,077

Cash and Cash Equivalents at End of the Period
$
1,539,157

 
$
7,380

Supplemental Disclosures:
 
 
 
Interest Paid
$
259,993

 
$
348,541

Affordable Housing Program Payments, net
8,813

 
6,122

Resolution Funding Corporation Assessments Paid
15,302

 
13,529

 

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

5



Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 1 - Summary of Significant Accounting Policies

Basis of Presentation. The accompanying interim financial statements of the Federal Home Loan Bank of Indianapolis are unaudited and have been prepared in accordance with GAAP for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. The interim financial statements presented herein should be read in conjunction with our audited financial statements and notes thereto, which are included in our 2010 Form 10-K.

The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

Our significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements in Note 1 - Summary of Significant Accounting Policies in the 2010 Form 10-K. There have been no significant changes to these policies as of June 30, 2011.

All dollar amounts included in the notes are presented in thousands, unless otherwise indicated. We use certain acronyms and terms throughout this Form 10-Q which are defined in the Glossary of Terms located after Item 6. Exhibits. Unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis.

Reclassifications. We have reclassified certain amounts from the prior periods to conform to the current period presentation. These reclassifications had no effect on Net Income, Total Assets, or Total Capital.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. Actual results could differ significantly from these estimates.

Variable Interest Entities. We have investments in VIEs that include, but are not limited to, senior interests in private-label MBS and ABS. The carrying amounts of the investments are included in HTM and AFS securities on the Statement of Condition. We have no liabilities related to these VIEs. The maximum loss exposure to these VIEs is limited to the carrying value of our investments in the VIEs.

If we were to determine that we are the primary beneficiary of a VIE, we would be required to consolidate that VIE. On an ongoing basis, we perform a quarterly evaluation to determine whether we are the primary beneficiary in any VIE. To perform this evaluation, we consider whether we possess both of the following characteristics:

the power to direct the VIE's activities that most significantly affect the VIE's economic performance; and
the obligation to absorb the VIE's losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Based on an evaluation of the above characteristics, we have determined that consolidation is not required for our VIEs as of June 30, 2011. In addition, we have not provided financial or other support (explicitly or implicitly) to any VIE during the three or six months ended June 30, 2011. Furthermore, we were not previously contractually required to provide, nor do we intend to provide, such support to any VIE in the future.

Office of Finance Expenses. Effective January 1, 2011, our proportionate share of the Office of Finance operating and capital expenditures is calculated using a formula that is based upon two components as follows: (i) two-thirds based on our share of Consolidated Obligations outstanding and (ii) one-third based on equal pro-rata share among the 12 FHLBanks. These regular assessments are determined on a monthly basis. In addition, we are apportioned special assessments using the same calculation for specific system-wide expenditures related to audit fees and rating agency annual relationship fees. Any ratings agency subscription fees are assessed as incurred on a per user basis and directly to the applicable FHLBank(s).





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Prior to January 1, 2011, we were assessed for the costs of operating the Office of Finance based equally on each FHLBank's percentage of capital stock, percentage of Consolidated Obligations issued and percentage of Consolidated Obligations outstanding.

Subsequent Events. In preparing this Form 10-Q, we have evaluated events and considered transactions through the time of filing our second quarter 2011 Form 10-Q with the SEC.

Note 2 - Recently Adopted and Issued Accounting Guidance

Fair Value Measurements and Disclosures. On January 21, 2010, the FASB issued amended guidance for fair value measurements and disclosures. We adopted this amended guidance as of January 1, 2010, except for required disclosures about purchases, sales, issuances, and settlements in the rollforward of activity for Level 3 fair value measurements, which we adopted as of January 1, 2011. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not have a material effect on our financial condition, results of operations or cash flows. See Note 16 - Estimated Fair Values for additional disclosures required under this amended guidance.

On May 12, 2011, the FASB and the International Accounting Standards Board issued substantially converged guidance on fair value measurement and disclosure requirements. This guidance clarifies how fair value accounting should be applied where its use is already required or permitted by other standards within GAAP or International Financial Reporting Standards; these amendments do not require additional fair value measurements. This guidance generally represents clarifications to the application of existing fair value measurement and disclosure requirements, as well as some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for interim and annual periods beginning on January 1, 2012, and should be applied prospectively. Early application by public entities is not permitted. The adoption of this guidance may result in increased annual and interim financial statement disclosures, but is not expected to have a material effect on our financial condition, results of operations or cash flows.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the FASB issued amended guidance to enhance disclosures about the credit quality of an entity's financing receivables and the allowance for credit losses. The required disclosures as of the end of a reporting period became effective for interim and annual reporting periods as of December 31, 2010. The required disclosures about activity that occurs during a reporting period became effective for interim and annual reporting periods as of January 1, 2011. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not have a material effect on our financial condition, results of operations or cash flows. See Note 8 - Allowance for Credit Losses for additional disclosures required under this amended guidance.

A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. On January 19, 2011, the FASB issued guidance to defer temporarily the effective date of disclosures about troubled debt restructurings required by the amended guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The effective date for these new disclosures will be coordinated with the effective date of the guidance for determining what constitutes a troubled debt restructuring.

On April 5, 2011, the FASB issued guidance to clarify which debt modifications constitute troubled debt restructurings. This guidance is intended to help creditors determine whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for presenting previously deferred disclosures related to troubled debt restructurings. This guidance is effective for interim and annual periods beginning on or after July 1, 2011, and applies to troubled debt restructurings occurring on or after the beginning of the annual period of adoption. Early adoption is permitted. The adoption of this amended guidance may result in increased annual and interim financial statement disclosures but is not expected to have a material effect on our financial condition, results of operations or cash flows.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Reconsideration of Effective Control for Repurchase Agreements. On April 29, 2011, the FASB issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes from the assessment of effective control: (i) the criterion requiring the transferor to have the ability to repurchase or redeem financial assets before their maturity on substantially the agreed terms, even in the event of the transferee's default, and (ii) the collateral maintenance implementation guidance related to that criterion. This guidance is effective for interim and annual periods beginning on or after January 1, 2012. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We are currently evaluating the effect of the adoption of this amended guidance on our financial condition, results of operations and cash flows.

Presentation of Comprehensive Income. On June 16, 2011, the FASB issued guidance to increase the prominence of other comprehensive income in financial statements. This guidance requires an entity that reports items of other comprehensive income to present comprehensive income in either a single financial statement or in two consecutive financial statements. In a single continuous statement, an entity is required to present the components and amount of net income, the components of other comprehensive income and a total for other comprehensive income, as well as a total for comprehensive income. In a two-statement approach, an entity is required to present the components and amount of net income in its statement of net income. The statement of other comprehensive income should follow immediately and include the components of other comprehensive income as well as totals for both other comprehensive income and comprehensive income. This guidance eliminates the option to present other comprehensive income in the statement of changes in stockholders' equity. This guidance is effective for interim and annual periods beginning on January 1, 2012, and should be applied retrospectively for all periods presented. Early adoption is permitted. We plan to elect the two-statement approach noted above. The adoption of this guidance is expected to be limited to increased annual and interim financial statement disclosures and not affect our financial condition, results of operations or cash flows.

Note 3 - Available-for-Sale Securities

Major Security Types. AFS securities consist primarily of GSE debentures and RMBS. Our AFS securities were as follows:
 
 
 
 
OTTI
 
Gross
 
Gross
 
 
 
 
Amortized
 
Recognized
 
Unrealized
 
Unrealized
 
Estimated
June 30, 2011
 
Cost (1)
 
in AOCI
 
Gains
 
Losses
 
Fair Value
GSE debentures
 
$
1,766,230

 
$

 
$
190,025

 
$
(1,023
)
 
$
1,955,232

TLGP debentures
 
322,524

 

 
1,486

 

 
324,010

Private-label RMBS
 
855,459

 
(169,323
)
 
119,606

 
(171
)
 
805,571

Total AFS securities
 
$
2,944,213

 
$
(169,323
)
 
$
311,117

 
$
(1,194
)
 
$
3,084,813

 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
1,771,077

 
$

 
$
163,110

 
$
(3,929
)
 
$
1,930,258

TLGP debentures
 
324,193

 

 
924

 

 
325,117

Private-label RMBS
 
1,051,347

 
(203,839
)
 
135,501

 
(468
)
 
982,541

Total AFS securities
 
$
3,146,617

 
$
(203,839
)
 
$
299,535

 
$
(4,397
)
 
$
3,237,916


(1)    Amortized cost of AFS securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and, if applicable, OTTI recognized in earnings (credit losses).

At June 30, 2011, and December 31, 2010, 91% and 85%, respectively, of our fixed-rate AFS securities at amortized cost were swapped to a variable rate and none of our variable-rate AFS securities were swapped.

Premiums and Discounts. At June 30, 2011, and December 31, 2010, the amortized cost of our MBS classified as AFS securities included OTTI credit losses, OTTI-related accretion adjustments, and net discounts on OTTI securities totaling $125,106 and $122,173, respectively.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Reconciliations of Amounts in AOCI. Subsequent increases and decreases in the fair value of previously OTTI AFS securities are netted against the non-credit component of OTTI in AOCI in the Statement of Condition. The following tables reconcile the amounts in the AFS major security types table above to the Statement of Condition and AOCI rollforward presentation:

Net Unrealized Gains (Losses) on AFS Securities
 
June 30,
2011
 
December 31,
2010
Net unrealized gains
 
$
309,923

 
$
295,138

Less:
 
 
 
 
Subsequent net unrealized gains on previously OTTI securities
 
119,434

 
135,033

Unrealized gains on hedged items recognized in Other Income (Loss)
 
184,955

 
164,720

Net unrealized gains (losses) on AFS securities recognized in AOCI
 
$
5,534

 
$
(4,615
)

Net Non-Credit Portion of OTTI Losses on AFS Securities
 
June 30,
2011
 
December 31,
2010
OTTI Recognized in AOCI
 
$
(169,323
)
 
$
(203,839
)
Subsequent net unrealized gains on previously OTTI securities
 
119,434

 
135,033

Net non-credit portion of OTTI losses on AFS securities
 
$
(49,889
)
 
$
(68,806
)

Unrealized Loss Positions. The following table presents impaired AFS securities, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
June 30, 2011
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses (1)
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
106,543

 
$
(1,023
)
 
$

 
$

 
$
106,543

 
$
(1,023
)
TLGP debentures
 

 

 

 

 

 

Total Non-MBS
 
106,543

 
(1,023
)
 

 

 
106,543

 
(1,023
)
Private-label RMBS
 
107,805

 
(1,769
)
 
585,815

 
(54,432
)
 
693,620

 
(56,201
)
Total impaired AFS securities
 
$
214,348

 
$
(2,792
)
 
$
585,815

 
$
(54,432
)
 
$
800,163

 
$
(57,224
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
103,652

 
$
(3,929
)
 
$

 
$

 
$
103,652

 
$
(3,929
)
TLGP debentures
 

 

 

 

 

 

Total Non-MBS
 
103,652

 
(3,929
)
 

 

 
103,652

 
(3,929
)
Private-label RMBS
 

 

 
777,955

 
(75,825
)
 
777,955

 
(75,825
)
Total impaired AFS securities
 
$
103,652

 
$
(3,929
)
 
$
777,955

 
$
(75,825
)
 
$
881,607

 
$
(79,754
)

(1)    As a result of OTTI accounting guidance, the total unrealized losses on private-label RMBS will not agree to the gross unrealized losses on private-label RMBS in the major security types table above.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Redemption Terms. The amortized cost and estimated fair value of non-MBS AFS securities by contractual maturity are presented below. MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment fees.

 
 
June 30, 2011
 
December 31, 2010
 
 
Amortized
 
Estimated
 
Amortized
 
Estimated
Year of Contractual Maturity
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
 
$

 
$

 
$

 
$

Due after one year through five years
 
533,150

 
554,710

 
324,193

 
325,117

Due after five years through ten years
 
1,555,604

 
1,724,532

 
1,771,077

 
1,930,258

Due after ten years
 

 

 

 

Total Non-MBS
 
2,088,754

 
2,279,242

 
2,095,270

 
2,255,375

Total MBS
 
855,459

 
805,571

 
1,051,347

 
982,541

Total AFS securities
 
$
2,944,213

 
$
3,084,813

 
$
3,146,617

 
$
3,237,916


Realized Gains and Losses. The following table presents the proceeds, gross gains and losses, and previously recognized OTTI credit losses including accretion related to the sale of two AFS securities. We compute gains and losses on sales of investment securities using the specific identification method.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Sales of AFS Securities
 
2011
 
2010
 
2011
 
2010
Proceeds from sale
 
$
66,520

 
$

 
$
66,520

 
$

Previously recognized OTTI credit losses including accretion
 
16,585

 

 
16,585

 

 
 
 
 
 
 
 
 
 
Gross gains
 
$
904

 
$

 
$
904

 
$

Gross losses
 
(2,847
)
 

 
(2,847
)
 

Net Realized Losses from Sale of Available-for-Sale Securities
 
$
(1,943
)
 
$

 
$
(1,943
)
 
$


As of June 30, 2011, we had no intention to sell the remaining OTTI AFS securities, nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 4 - Held-to-Maturity Securities

Major Security Types. HTM securities consist primarily of MBS and TLGP debentures. Our HTM securities were as follows:
 
 
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
OTTI
 
 
 
Unrecognized
 
Unrecognized
 
Estimated
 
 
Amortized
 
Recognized
 
Carrying
 
Holding
 
Holding
 
Fair
June 30, 2011
 
Cost (1)
 
In AOCI
 
Value (2)
 
Gains (3)
 
Losses (3)
 
Value
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
293,738

 
$

 
$
293,738

 
$
644

 
$

 
$
294,382

TLGP debentures
 
1,980,332

 

 
1,980,332

 
3,608

 

 
1,983,940

Total Non-MBS and ABS
 
2,274,070

 

 
2,274,070

 
4,252

 

 
2,278,322

MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations -guaranteed RMBS
 
2,569,690

 

 
2,569,690

 
36,608

 
(9,205
)
 
2,597,093

GSE RMBS
 
3,245,341

 

 
3,245,341

 
57,368

 
(12,458
)
 
3,290,251

Private-label RMBS
 
528,990

 
(5,154
)
 
523,836

 
5,199

 
(10,846
)
 
518,189

Private-label ABS
 
20,865

 

 
20,865

 

 
(3,514
)
 
17,351

Total MBS and ABS
 
6,364,886

 
(5,154
)
 
6,359,732

 
99,175

 
(36,023
)
 
6,422,884

Total HTM securities
 
$
8,638,956

 
$
(5,154
)
 
$
8,633,802

 
$
103,427

 
$
(36,023
)
 
$
8,701,206

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
294,121

 
$

 
$
294,121

 
$
300

 
$
(214
)
 
$
294,207

TLGP debentures
 
2,065,994

 

 
2,065,994

 
4,530

 
(3
)
 
2,070,521

Total Non-MBS and ABS
 
2,360,115

 

 
2,360,115

 
4,830

 
(217
)
 
2,364,728

MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations -guaranteed RMBS
 
2,326,958

 

 
2,326,958

 
31,773

 
(7,849
)
 
2,350,882

GSE RMBS
 
3,044,129

 

 
3,044,129

 
53,049

 
(24,933
)
 
3,072,245

Private-label RMBS
 
725,493

 
(7,056
)
 
718,437

 
5,665

 
(18,277
)
 
705,825

Private-label ABS
 
22,188

 

 
22,188

 

 
(2,477
)
 
19,711

Total MBS and ABS
 
6,118,768

 
(7,056
)
 
6,111,712

 
90,487

 
(53,536
)
 
6,148,663

Total HTM securities
 
$
8,478,883

 
$
(7,056
)
 
$
8,471,827

 
$
95,317

 
$
(53,753
)
 
$
8,513,391


(1)    Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and, if applicable, OTTI recognized in earnings (credit losses).
(2)    Carrying value of HTM securities represents amortized cost after adjustment for non-credit OTTI recognized in AOCI.
(3)    Gross unrecognized holding gains (losses) represents the difference between estimated fair value and carrying value.

Premiums and Discounts. The following table presents the net (discounts) premiums included in the amortized cost of our HTM securities:
Net (Discounts) Premiums
 
June 30,
2011
 
December 31,
2010
Non-MBS and ABS:
 
 
 
 
Net purchased premiums
 
$
1,105

 
$
2,150

Total Non-MBS and ABS
 
1,105

 
2,150

MBS and ABS:
 
 
 
 

Net purchased premiums
 
59,105

 
62,503

OTTI related credit losses
 
(1,143
)
 
(1,143
)
OTTI related accretion adjustments
 
(1
)
 
34

Other - net discounts on OTTI securities
 
(393
)
 
(393
)
Total MBS and ABS
 
57,568

 
61,001

Total HTM securities, net (discounts) premiums included in amortized cost
 
$
58,673

 
$
63,151





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Unrealized Loss Positions. The following table presents impaired HTM securities, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
June 30, 2011
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses (1)
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$

 
$

 
$

 
$

 
$

 
$

TLGP debentures
 

 

 

 

 

 

Total Non-MBS and ABS
 

 

 

 

 

 

MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed RMBS
 
1,049,345

 
(9,205
)
 

 

 
1,049,345

 
(9,205
)
GSE RMBS
 
1,090,928

 
(12,458
)
 

 

 
1,090,928

 
(12,458
)
Private-label RMBS
 
98,961

 
(1,069
)
 
346,562

 
(10,635
)
 
445,523

 
(11,704
)
Private-label ABS
 

 

 
17,350

 
(3,514
)
 
17,350

 
(3,514
)
Total MBS and ABS
 
2,239,234

 
(22,732
)
 
363,912

 
(14,149
)
 
2,603,146

 
(36,881
)
Total impaired HTM securities
 
$
2,239,234

 
$
(22,732
)
 
$
363,912

 
$
(14,149
)
 
$
2,603,146

 
$
(36,881
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
168,779

 
$
(214
)
 
$

 
$

 
$
168,779

 
$
(214
)
TLGP debentures
 
68,764

 
(3
)
 

 

 
68,764

 
(3
)
Total Non-MBS and ABS
 
237,543

 
(217
)
 

 

 
237,543

 
(217
)
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed RMBS
 
994,667

 
(7,849
)
 

 

 
994,667

 
(7,849
)
GSE RMBS
 
1,034,990

 
(24,933
)
 

 

 
1,034,990

 
(24,933
)
Private-label RMBS
 
51,012

 
(223
)
 
546,135

 
(20,466
)
 
597,147

 
(20,689
)
Private-label ABS
 

 

 
19,711

 
(2,477
)
 
19,711

 
(2,477
)
Total MBS and ABS
 
2,080,669

 
(33,005
)
 
565,846

 
(22,943
)
 
2,646,515

 
(55,948
)
Total impaired HTM securities
 
$
2,318,212

 
$
(33,222
)
 
$
565,846

 
$
(22,943
)
 
$
2,884,058

 
$
(56,165
)

(1)    As a result of OTTI accounting guidance, the total unrealized losses on private-label RMBS will not agree to the gross unrecognized holding losses on private-label RMBS in the major security types table above.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Redemption Terms. The amortized cost, carrying value and estimated fair value of non-MBS and ABS HTM securities by contractual maturity are presented below. MBS and ABS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment fees.

 
 
June 30, 2011
 
December 31, 2010
 
 
 
 
 
 
Estimated
 
 
 
 
 
Estimated
 
 
Amortized
 
Carrying
 
Fair
 
Amortized
 
Carrying
 
Fair
Year of Contractual Maturity
 
Cost (1)
 
Value (2)
 
Value
 
Cost (1)
 
Value (2)
 
Value
Non-MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
1,786,310

 
$
1,786,310

 
$
1,789,857

 
$
306,826

 
$
306,826

 
$
307,306

Due after one year through five years
 
487,760

 
487,760

 
488,465

 
2,053,289

 
2,053,289

 
2,057,422

Due after five years through ten years
 

 

 

 

 

 

Due after ten years
 

 

 

 

 

 

Total Non-MBS and ABS
 
2,274,070

 
2,274,070

 
2,278,322

 
2,360,115

 
2,360,115

 
2,364,728

Total MBS and ABS
 
6,364,886

 
6,359,732

 
6,422,884

 
6,118,768

 
6,111,712

 
6,148,663

Total HTM securities
 
$
8,638,956

 
$
8,633,802

 
$
8,701,206

 
$
8,478,883

 
$
8,471,827

 
$
8,513,391


(1)    Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and, if applicable, OTTI recognized in earnings (credit losses).
(2)    Carrying value of HTM securities represents amortized cost after adjustment for non-credit OTTI recognized in AOCI.

Realized Gains and Losses.  There were no sales of HTM securities during the three or six months ended June 30, 2011, or 2010.

Note 5 - Other-Than-Temporary Impairment Analysis

We evaluate our individual AFS and HTM securities that have been previously OTTI or are in an unrealized loss position for OTTI on a quarterly basis. As part of our evaluation, we consider our intent to sell each of these securities and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we recognize an OTTI equal to the entire difference between the security's amortized cost basis and its fair value at the Statement of Condition date. For those securities that meet neither of these conditions, we perform an analysis to determine whether we expect to recover the entire amortized cost basis of the security as described in Note 7 - Other-Than-Temporary Impairment Analysis in our 2010 Form 10-K.

OTTI Evaluation Process and Results - Private-label RMBS and ABS

Our evaluation includes an estimation of the cash flows that we are likely to collect based on an assessment of the structure of each security and certain assumptions such as:

the remaining payment terms for the security;
prepayment speeds;
default rates;
loss severity on the collateral supporting our security based on underlying loan-level borrower and loan characteristics;
expected housing price changes; and
interest-rates.