UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20102011
Or
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51404
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
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| Federally Chartered Corporation | | 35-6001443 |
| (State or other jurisdiction of incorporation) | | (IRS employer identification number) |
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| 8250 Woodfield Crossing Blvd. Indianapolis, IN | | 46240 |
| (Address of principal executive office) | | (Zip code) |
Telephone number, including area code:
(317) 465-0200
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
The Bank's Class B capital stock, par value $100 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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). ox Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. o
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. (Check one):
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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 Act).
o Yes x No
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 20102011, the aggregate par value of the stock held by members and former members of the registrant was approximately $2.5122.005 billion. At February 28, 201129, 2012, 22,692,15020,217,796 shares of stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Table of Contents
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| Item 1A. | | | | |
| Item 2. | | | | |
| Item 3. | | | | |
| Item 4. | | MINE SAFETY DISCLOSURES | | |
| Item 5. | | | | |
| Item 6. | | | | |
| Item 7. | | | | |
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| Item 7A. | | | | |
| Item 8. | | | | |
| Item 9. | | | | |
| Item 9A. | | | | |
Item 9B. | | | | |
| Item 10. | | | | |
| Item 11. | | | | |
| Item 12. | | | | |
| Item 13. | | | | |
| Item 14. | | | | |
| Item 15. | | | | |
As used in this Annual Report on Form 10-K ("Form 10-K"), unless the context otherwise requires, the terms "we," "us," "our," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis.
Unless otherwise stated, amounts disclosed in this Form 10-K represent values rounded to the nearest million; therefore, amounts less than one million may not be reflected in this Form 10-K and may not appear to agree to the Statement of Income due to rounding in previous quarters. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
Special Note Regarding Forward-lookingForward-Looking Statements
Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions for our future, may be "forward-looking statements." These statements may use forward-looking terms, such as "anticipates," "believes," "could," "estimates," "may," "should," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty, and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized.
These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions; volatility of market prices, rates, and indices; political, legislative, regulatory, or judicial events; war, terrorism or natural disasters; membership changes; competitive forces; changes in investor demand for Consolidated Obligations and/or the terms of interest rate exchange agreements and similar agreements; and timing and volume of market activity. This Form 10-K, including the Business section and Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with our financial statements and notes, which begin on page F-1.
ITEM 1. BUSINESS
As used in this Form 10-K, unless the context otherwise requires, the terms "we," "us," "our," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis. We use certain acronyms and terms throughout this Item 1 that are defined in the Glossary of Terms located in Item 15. Exhibits and Financial Statement Schedules.
Unless otherwise stated, amounts disclosed in this Item 1 are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected in Item 1 and, due to rounding, may not appear to agree to the amounts presented in thousands in the Financial Statements and Notes to Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
Background Information
The Federal Home Loan Bank of Indianapolis ("Bank") is one of 12 Federal Home Loan Banks (collectively, the "FHLBs""FHLBanks" or individually an "FHLB""FHLBank") organized under the authority of the Federal Home Loan Bank Act of 1932, as amended ("Bank Act").Act. We were chartered on October 12, 1932. As a cooperative institution, we are wholly-owned by our member financial institutions, which are also our primary customers. We provide a readily available, low-cost source of funds to our members. We do not lend directly to, or purchase mortgage loans directly from, the general public. All federally-insured depository institutions privately-insured(including commercial banks, thrifts and credit unions, community development financial institutions ("unions), CDFIs") certified by the CDFI Fund of the United States Treasury, and insurance companies that have a principal place of business located in Indiana or Michigan are eligible to become members of our Bank. Applicants for membership must meet certain requirements that demonstrate that they are engaged in residential housing finance. All member financial institutions are required to purchase shares of our Class B Capital Stock as a condition of membership. Only members canmay own our capital stock, except for stock held by former members or their legal successors during their stock redemption period.
The FHLBsFHLBanks are not government agencies and do not receive financial support from taxpayers. Each of the FHLBsFHLBanks is a government-sponsored enterprise ("GSE") and a federal instrumentality of the United States of America that operates as an independent entity with its own board of directors, management, and employees. A GSE is an entity that combines elements of private capital, public sponsorship, and public policy. The public sponsorship and public policy attributes of the FHLBsFHLBanks include:
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• | exemption from federal, state, and local taxation, except real estate taxes; |
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• | exemption from registration under the Securities Act of 1933 (the FHLBs are required by federal regulation to register a class of their equity securities under the Securities Exchange Act of 1934, as amended ("Exchange Act"));
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• | requirement that two-fifths of our directors be non-member "independent" directors and that two of these "independent" directors must have experience in consumer or community interests and the remaining directors must have demonstrated financial experience; |
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• | the U.S. Treasury's authority to purchase up to $4 billion of Consolidated Obligations (defined below) of the FHLBs; and |
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• | requirements to set aside up to 20% of annual net earnings after the Affordable Housing Program ("AHP") expense, to repay interest on Resolution Funding Corporation ("REFCORP") bonds issued to recapitalize the savings and loan industry's deposit insurance fund and resolve insolvent savings institutions, and to use 10% of annual net earnings before Interest Expense on Mandatorily Redeemable Capital Stock ("MRCS") and after the REFCORP assessment to fund the AHP, resulting in a statutory assessment of approximately 27% of our annual Income Before Assessments.
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exemption from federal, state, and local taxation, except real estate taxes;
exemption from registration under the Securities Act of 1933, as amended (the FHLBanks are required by federal regulation to register a class of their equity securities under the Exchange Act);
the requirement that at least two-fifths of our directors be non-member "independent" directors, that two of these "independent" directors must have experience in consumer or community interests, and that the remaining directors must have demonstrated financial experience;
the United States Treasury's authority to purchase up to $4 billion of Consolidated Obligations of the FHLBanks; and
the requirement to use 10% of annual net earnings before Interest Expense on MRCS to fund the AHP.
The primaryprincipal source of our fundsfunding is the proceeds from the sale to the public of FHLBFHLBank debt instruments, known as Consolidated Obligations, which consist of Consolidated Obligation Bonds ("CO Bonds") and Discount Notes. The Office of Finance ("Office of Finance") was established as a joint office of the FHLBsFHLBanks to facilitate the issuance and servicing of Consolidated Obligations. The 12 FHLBs,FHLBanks, along with the Office of Finance, comprise the Federal Home Loan Bank System ("FHLB System").FHLBank System. The U.S.United States government does not guarantee, directly or indirectly, theour Consolidated Obligations, which are the joint and several obligations of all 12 FHLBs.FHLBanks.
On July 30, 2008, the U.S.United States Congress enacted the Housing and Economic Recovery Act ("HERA") primarily to address the housing finance crisis, expand the Federal Housing Administration's ("FHA") financing authority and address GSE reform issues, among other matters. A significant provision of HERA created a new federal agency, the Federal Housing Finance Agency, ("Finance Agency") that has becomebecame the new federal regulator of the FHLBs, Federal National Mortgage Association ("FHLBanks, Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") effective on the date of enactment of HERA. Our former regulator, the Federal Housing Finance Board, ("Finance Board"), has been abolished, and Finance Board regulations, policies, and directives have been transferred to the Finance Agency. Consequently, unless the context requires otherwise, we will use the term "Finance Agency" herein to refer either to the Finance Agency established by HERA, or to its predecessor, the Finance Board. We are responsible for our share of theThe Finance Agency's operating expenses as determinedwith respect to the FHLBanks are funded by assessments on the FHLBanks. No tax dollars are used to support the operations of the Finance Agency.Agency relating to the FHLBanks.
On July 21, 2010, the U.S.United States Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") which, among other provisions: (1) creates(i) created an interagency oversight council (the "Oversight Council") that is charged with identifying and regulating systemically important financial institutions; (2)(ii) regulates the over-the-counter derivatives market; (3) imposes(iii) imposed new executive compensation proxy and disclosure requirements; (4) establishes(iv) established new
requirements for mortgage-backed securities ("MBS,"), including a risk-retention requirement; (5) reforms(v) reformed the credit rating agencies; (6)(vi) makes a number of changes to the federal deposit insurance system; and (7)(vii) creates a consumer financial protection bureau. Although the FHLBsFHLBanks were exempted from several notable provisions of the Dodd-Frank Act, the FHLBs'FHLBanks' business operations, funding costs, rights, obligations, and/or the environment in which the FHLBsFHLBanks carry out their housing-finance mission are likely to be impacted by the Dodd-Frank Act. For additional information concerning this legislation, please refer to "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of OperationOperations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments."Developments.
Business Segments
We manage our operations by grouping products and services within two business segments. These business segments are (1) Credit Services, Investments,(i) Traditional, which includes credit services (such as Advances, letters of credit, and Deposit Products ("Traditional");lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreement to Resell, AFS securities, and (2)HTM securities), correspondent services, and deposits; and (ii) the Mortgage Purchase Program ("MPP").MPP. The revenues, profit or loss, and total assets for each segment are disclosed in Notes to Financial Statements - Note 1819 - Segment Information in our Notes to Financial Statements..
TraditionalTraditional.
Credit Services.We offer our members a wide variety of credit services, to our members, including secured loans ("Advances,"), letters of credit, and lines of credit. We approve member credit requests based on the member's creditworthiness and financial condition, as well as its collateral position. All credit products must be fully collateralized by a member's pledge of eligible collateral assets, primarily one-to-four family residential mortgage loans, various types of securities, deposits in our Bank, and certain other real estate-related collateral ("ORERC,"), such as commercial MBS, commercial real estate loans and home equity loans, supplemented by a statutory lien provided under the Bank Act on each member's stock in our Bank. We also accept small business loans and farm real-estate loans as collateral from Community Financial Institutions ("CFIs"),CFIs, which are currentlywere defined by HERAfor 2011 as Federal Deposit Insurance Corporation ("FDIC") insuredFDIC-insured depository institutions with average total assets not exceeding $1.0$1.041 billion (subjectover the three years preceding the transaction date. As of January 1, 2012, the limit is $1.076 billion. This limit is subject to annual adjustment by the Finance Agency director based on the consumer price index) overindex and is rounded to the three years preceding the transaction date.nearest million.
We offer a wide array of fixed-rate and adjustable-rate Advances, our primary credit product. The maturities of Advances currently offered typically range from 1 day to 10 years, although the maximum maturity may be higher for certain types of Advances.longer in some instances. Members utilize Advances for a wide variety of purposes including:
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• | funding for single-family mortgages and multi-family mortgages held in portfolio, including both conforming and non-conforming mortgages (as determined in accordance with secondary market criteria); |
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• | temporary funding during the origination, packaging, and sale of mortgages into the secondary market; |
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• | funding for commercial loans and, especially with respect to CFIs, funding for small business, small farm, and small agri-business portfolio loans; |
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• | asset/liability management; |
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• | acquiring or holding MBS; |
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• | a cost-effective alternative to holding short-term investments to meet contingent liquidity needs; and |
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• | a competitively priced alternative source of funds, especially with respect to smaller members with less diverse funding sources. |
funding for single-family mortgages and multi-family mortgages held in portfolio, including both conforming and non-conforming mortgages (as determined in accordance with secondary market criteria);
temporary funding during the origination, packaging, and sale of mortgages into the secondary market;
funding for commercial loans and, especially with respect to CFIs, funding for small business, small farm, and small agri-business portfolio loans;
asset/liability management;
acquiring or holding MBS;
a cost-effective alternative to holding short-term investments to meet contingent liquidity needs; and
a competitively priced alternative source of funds, especially with respect to smaller members with less diverse funding sources.
We offer standby letters of credit, generally for up to 10 years in term, which carry AAA ratings.are rated Aaa by Moody's and AA+ by S&P. Letters of credit are performance contracts that guarantee the performance of a member to a third party and are subject to the same collateralization and borrowing limits that are applicable to Advances. A letter of credit may be offered to assist members in facilitating residential housing finance, community lending, asset/liability management, andor liquidity. Under Section 3023 of HERA, we were permitted to issue letters of credit through December 31, 2010, to guarantee tax-exempt bonds for economic development projects. On March 13, 2010, theThe Indiana General Assembly enacted a provision to amend Indiana Code 5-13 to allow an approved depository of Indiana public funds to collateralize public unit deposits with FHLBFHLBank letters of credit. As a result of this new legislation, on May 16, 2011, we now offerbegan offering a standby letter of credit product to collateralize Indiana public deposits, which will be available to our members once the Indiana Board for Depositories finalizes dates for issuing a collateral requirement.deposits.
We also offer lines of credit, which allow members to fund short-term cash needs without submitting a new application for each request for funds.
Advances. Members have access to a wide array of Advances and other credit products. Our primary Advance products include:
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• | Fixed-rate Bullet Advances, which have fixed rates throughout the term of the Advances. Terms of these Advances may be up to 30 years for our regular program and up to 20 years for our Community Investment Program ("CIP") Advances. These Advances are typically referred to as "bullet" Advances because no principal payment is due until maturity. Prepayments prior to maturity are subject to prepayment fees which make us financially indifferent to a prepayment. Interest is generally due on a monthly basis.
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• | Putable Advances, which include an option(s) sold by the member that allows us to terminate the fixed-rate Advance prior to maturity, which we normally would exercise when interest rates increase. Upon exercise of our option, the member must repay the putable Advance or convert to a floating rate instrument under the terms established at the time of the original issuance. Interest is generally due on a monthly basis.
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• | Fixed-rate Amortizing Advances, which are fixed-rate Advances that require principal payments either monthly or annually, based on a specified amortization schedule with a balloon payment of remaining principal at maturity. Regular program mortgage Advances are typically offered for terms up to 12 years and CIP amortizing Advances are offered for terms up to 20 years. Interest is generally due on a monthly basis.
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• | Adjustable-rate Advances, which are sometimes called "floaters," reprice periodically based on a variety of indices, but typically the London Interbank Offered Rate ("LIBOR"). Quarterly LIBOR floaters are the most common type of adjustable rate Advance we extend to our members. Terms of these Advances may be up to 30 years. Prepayment terms are agreed to before the Advance is extended, but most frequently no prepayment fees are required if a member prepays an adjustable rate on a reset date, after a pre-determined lock-out period, with the required notification. No principal payment is due prior to maturity. Interest is generally due on a monthly basis.
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• | Variable-rate Advances, which reprice daily. They may be borrowed on terms from one day to six months and may be prepaid on any given business day during that term without fee or penalty. No principal payment is due until maturity. Interest is generally due on a monthly basis.
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• | Callable Advances, which are fixed-rate Advances that give the member an option to prepay the Advance before maturity on call dates with no prepayment fee.
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Fixed-rate Bullet Advances, which have fixed rates throughout the term of the Advances. These Advances are typically referred to as "bullet" Advances because no principal payment is due until maturity. Prepayments prior to maturity are subject to prepayment fees. Interest is generally due on a monthly basis.
Putable Advances, which are fixed-rate Advances that give us an option to terminate the Advance prior to maturity. We would normally exercise the option to terminate the Advance when interest rates increase. Upon our exercise of the option, the member must repay the putable Advance or convert it to a floating rate instrument under the terms established at the time of the original issuance. Interest is generally due on a monthly basis.
Fixed-rate Amortizing Advances, which are fixed-rate Advances that require principal payments either monthly or annually, based on a specified amortization schedule with a balloon payment of remaining principal at maturity. Interest is generally due on a monthly basis.
Adjustable-rate Advances, which are sometimes called "floaters," reprice periodically based on a variety of indices, including LIBOR. Quarterly LIBOR floaters are the most common type of adjustable-rate Advance we extend to our members. Prepayment terms are agreed to before the Advance is extended. Most frequently, no prepayment fees are required if a member prepays an adjustable rate Advance on a reset date, after a pre-determined lock-out period, with the required notification. No principal payment is due prior to maturity. Interest is generally due on a monthly basis.
Variable-rate Advances, which reprice daily. They may be borrowed on terms from one day to six months and may be prepaid on any given business day during that term without fee or penalty. No principal payment is due until maturity. Interest is generally due on a monthly basis.
Callable Advances, which are fixed-rate Advances that give the member an option to prepay the Advance before maturity on call dates with no prepayment fee, which members normally would exercise when interest rates decrease.
We also offer customized Advances to meet the particular needs of our members. Our entire menu of Advance products is generally available to each creditworthy member, regardless of the member's asset size. Finance Agency regulations require us to price our credit products consistently and without discrimination to all members applying for Advances. We are also prohibited from pricing our Advances below our marginal cost of matching term and maturity funds in the marketplace, including embedded options, and the administrative cost associated with making such Advances to members. Therefore, Advances are typically priced at standard spreads above our cost of funds. Our board-approved credit policy allows us to offer lower rates on certain types of Advances transactions. DeterminationDeterminations of such rates isare based on factors such as volume, maturity, product type, funding availability and costs, and competitive factors in regard to other sources of funds.
We are generally limited to making Advances to members; however, by regulation, we are also permitted to make Advances to non-member housing associates ("Housing Associate").Associates. A Housing Associate is an approved lender under Title II of the National Housing Act of 1934 that is either a government agency or is chartered under federal or state law with rights and powers similar to those of a corporation. A Housing Associate must lend its own funds as its principal activity in the mortgage lending field and, although it must meet the same regulatory lending requirements as members, it may not purchase our stock and has no voting rights. We do not presently have Advances outstanding to any Housing Associates.
Advances ConcentrationConcentration.. Credit risk can be magnified if a lender's portfolio is concentrated in a few borrowers. At December 31, 20102011, our top five borrowers accounted for 46%50% of total Advances outstanding, at par. Because of this concentration in Advances, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we regularly analyze the implications to our financial management and profitability if we were to lose the business of one or more of these customers.
The following tables present the par value of Advances outstanding for our five largest borrowers ($ amounts in millions). As noted below, certainBank of our borrowersAmerica, N.A. and M&I Bank are no longer members. At our discretion, and provided the borrower meets our contractual requirements, non-member Advances to borrowers that are no longer members may remain outstanding until maturity. | | | December 31, 2011 | | | Advances Outstanding | | % of Total |
| Flagstar Bank, FSB | | | $ | 3,953 |
| | 22 | % |
| Jackson National Life Insurance Company | | | 1,915 |
| | 11 | % |
| Blue Cross Blue Shield of Michigan | | | 1,053 |
| | 6 | % |
| Guggenheim Life and Annuity Company | | | 1,038 |
| | 6 | % |
| American United Life Insurance Company | | | 832 |
| | 5 | % |
| Subtotal | | | 8,791 |
| | 50 | % |
| Others | | | 8,977 |
| | 50 | % |
| Total Advances, par value | | | $ | 17,768 |
| | 100 | % |
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| December 31, 2010 | | Advances Outstanding | | % of Total | | | | |
| Flagstar Bank, FSB | | $ | 3,726 | | | 21 | % | | $ | 3,726 |
| | 21 | % |
| Jackson National Life Insurance Company | | 1,765 | | | 10 | % | | 1,765 |
| | 10 | % |
Bank of America, N.A. (1) | | 900 | | | 5 | % | | 900 |
| | 5 | % |
| Citizens Bank, Flint, Michigan | | 804 | | | 5 | % | | 804 |
| | 5 | % |
M&I Bank (Marshall & Ilsley) (2) | | 800 | | | 5 | % | | 800 |
| | 5 | % |
| Sub-total | | 7,995 | | | 46 | % | |
| Subtotal | | | 7,995 |
| | 46 | % |
| Others | | 9,643 | | | 54 | % | | 9,643 |
| | 54 | % |
| Total Advances, par value | | $ | 17,638 | | | 100 | % | | $ | 17,638 |
| | 100 | % |
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| December 31, 2009 | | | | | |
| Flagstar Bank, FSB | | $ | 3,900 | | | 18 | % | |
| Jackson National Life Insurance Company | | 1,750 | | | 8 | % | |
Bank of America, N.A. (1) | | 1,450 | | | 7 | % | |
| Citizens Bank, Flint, Michigan | | 1,280 | | | 6 | % | |
M&I Bank (Marshall & Ilsley) (2) | | 800 | | | 4 | % | |
| Sub-total | | 9,180 | | | 43 | % | |
| Others | | 12,530 | | | 57 | % | |
| Total Advances, par value | | $ | 21,710 | | | 100 | % | |
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| (1) | The parent company of Bank of America, N.A. purchased the North American holding company of our member, LaSalle Bank Midwest, N.A. ("LaSalle Bank"Bank") on October 1, 2007. As of October 17, 2008, the LaSalle Bank charter was consolidated into a Bank of America Corporation charter (that of Bank of America, N.A.) located in another FHLBFHLBank district. Therefore, Bank of America, N.A. is a non-member borrower. |
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| (2) | On January 2, 2008, M&I Bank acquired our former member, First Indiana Bank, N.A. M&I Bank does not have a charter in our district and is not a member of our Bank. On July 5, 2011, BMO Financial Group completed the merger of M&I Bank with BMO Harris Bank N.A. |
As of December 31, 20102011, 5352 of our 410416 members had assets in excess of $1 billion, and together they comprised approximately 81%82% of the total member asset base, i.e., the total cumulative assets of our member institutions. As of December 31, 2010,2011, our member borrowers with the three largest Advance balances accounted for 22%23% of member assets and 36%39% of total Advances, at par. Our current largest non-member borrower, Bank of America, N.A., had outstanding Advances of $0.90.4 billion at December 31, 20102011, and $0.50.1 billion of these outstanding Advances will mature in 2011.2012.
For the years ended December 31, 20102011, and 20092010, we had gross interest earned on Advances, excluding the effects of interest-rate exchange agreements with non-member counterparties, from one customer, Flagstar Bank, FSB, that exceeded 10% of our Total Interest Income. We had Advances outstanding to and imputed interest income earned from Flagstar Bank, FSB as follows ($ amounts in millions): | | | | | As of and for the Years Ended December 31, | | As of and for the Years Ended December 31, |
| | | 2010 | | 2009 | | 2011 | | 2010 |
| Advances, at par | | $ | 3,726 | | | $ | 3,900 | | | $ | 3,953 |
| | $ | 3,726 |
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| % of Total Advances, outstanding | | 21 | % | | 18 | % | | 22 | % | | 21 | % |
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| Gross interest income earned | | $ | 155 | | | $ | 218 | | | $ | 118 |
| | $ | 155 |
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| % of Total Interest Income | | 18 | % | | 19 | % | | 17 | % | | 18 | % |
Collateral. All credit products extended to a member must be fully collateralized by the member's pledge of eligible assets. Each borrowing member and its affiliates that hold collateral are required to grant us a security interest in such collateral. All such security interests held by us are afforded a priority by the Competitive Equality Banking Act of 1987 over the claims of any party, including any receiver, conservator, trustee, or similar party having rights as a lien creditor, except for claims held by bona fide purchasers for value or by parties that are secured by prior perfected security interests, provided that such claims would otherwise be entitled to priority under applicable law. Moreover, with respect to federally insuredfederally-insured depository institution members, our claims are given certain preferences pursuant to the receivership provisions of the Federal Deposit Insurance Act. With respect to insurance company members, however, Congress provided in the McCarran-Ferguson Act of 1945 that state law generally governs the regulation of insurance and shall not be invalidated by federal law unless the federal law expressly regulates the business of insurance. Thus, if a court were to determine that the priority provision of Section 10(e) of the Bank Act conflicts with state insurance law applicable to our insurance company members, the court might then determine that the priority of our security interest would be governed by state law, not Section 10(e). Under these circumstances, the "super lien" priority protection afforded to our security interest under Section 10(e) may not fully apply when we lend to such insurance company members. However, we further protect our security interests in the collateral pledged by our members by filing Uniform Commercial Code ("UCC") UCC-1 financing statements, taking possession or control of such collateral, or taking other appropriate steps.
Collateral Status Categories. We take collateral on a blanket, specific listings or physical possession basis depending on the credit quality of the borrower, type of institution and our review of conflicting liens. The blanket basis is the least restrictive and allows the member to retain possession of the pledged collateral, provided that the member executes a written security agreement and agrees to hold the collateral for our benefit. Under specific listings status, the member maintains physical possession of the specific collateral pledged, but the member generally provides listings of loans pledged with detailed loan information such as loan amount, payments, maturity date, interest rate, LTV, collateral type, FICO®FICO® scores, etc. Members under physical possession are required to place the collateral in physical possession with our Bank or a third-party custodian in amounts sufficient to sufficiently secure all outstanding obligations.obligations, as described below.
Acceptable Collateral.Eligible Collateral. AcceptableEligible collateral includestypes include certain investment securities, one-to-four family first mortgage loans, deposits in our Bank, multi-family first mortgage loans, anddeposits in our Bank, certain ORERC assets, and small business and smallloans or farm real estate farm loans from CFIs.CFIs (authorized by the GLB Act amendment to the Bank Act). While we only extend credit based on the borrowing capacity for such approved collateral, our contractual arrangements typically allow us to take other assets as collateral to provide additional protection, including the borrower's stock in our Bank. We have an Anti-Predatory Lending Policy and a Subprime and Nontraditional Residential Mortgage Policy that establish guidelines for any subprime or nontraditional loans in our collateral. Loans that are delinquent or violate our Anti-Predatory Lending Policy or violate our Subprime and Nontraditional Residential Mortgage Policy for collateral and delinquent loans do not qualify as acceptable collateral and are required to be removed from any collateral value calculation.
We currently accept a majority of the collateral types authorized by the Gramm-Leach-Bliley Act of 1999 ("GLB Act") amendment to the Bank Act. Typically, Advances must be over-collateralized based on the type of collateral, with standard requirements ranging from 100% for deposits (cash) to 145% - 175% for residential mortgages held under blanket liens. Less traditional types of collateral such as home equity loans and commercial real estate loans have standard coverage ratios up to 250%. Over-collateralization requirements are applied using market values for collateral in listing and delivery status and using book value for collateral pledged on blanket status. In no event however, would market values on whole loan collateral exceed par. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management-Advances"Management - Advances for more information.
Collateral Review and Monitoring. We verify collateral balances by performing periodic, on-site collateral audits on each of our borrowing members, which allowsallow us to verify loan pledge eligibility, loan credit strength and loan documentation quality, as well as adherence to our Anti-Predatory Lending Policy, our Subprime and Nontraditional Residential Mortgage Policy, and other collateral policies. In addition, on-site collateral audit findings are used to adjust over-collateralization amounts to mitigate credit risk and collateral liquidity concerns.
Investments. We maintain a portfolio of investments, purchased from approved counterparties, members and their affiliates, or other FHLBs,FHLBanks, to provide liquidity, utilize balance sheet capacity and enhance our earnings. Our portfolio of short-term investments in highly-rated entities, principally short-term federal funds, ensures the availability of funds to meet our members' credit needs. The longer term investment portfolio typically provides higher returns and may consist of (i) securities issued by the U.S.United States government, and its agencies, otherand certain GSEs, (ii) MBS and asset-backed securities ("ABS") that are issued by government-sponsored mortgage agencies or private issuers, and (iii) securities that carry ratings from one or more of the Nationally Recognized Statistical Rating
Organizations ("NRSROs"):NRSROs: Moody's, Investor Service ("Moody's"), Standard and Poor's Rating Service ("S&P") or Fitch Ratings ("Fitch").Fitch. Our investments in housing GSEs are generally not guaranteed by the U.S.United States government.
All unsecured investments, such as federal funds, including those with our members or their affiliates, are subject to certain selection criteria. Each approved unsecured counterparty has an exposure limit, which is computed in the same manner regardless of the counterparty's status as a member, affiliate of a member or unrelated party. These criteria may result in a reduction ofdetermine the permissible amount of the unsecured investment or the permissibleand term of the investment. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management - Investments - Short-Term Investments for more information.
Investments in MBS are subject to specific issuer limitations. Under the Finance Agency's regulations, except for certain investments authorized under state trust law for our retirement plans, we are prohibited from investing in the following types of securities:
| |
• | instruments, such as common stock, that represent an equity ownership in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities; |
| |
• | instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks; |
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• | non-investment grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after their purchase; |
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• | whole mortgages or other whole loans, except for |
instruments, such as common stock that represent an equity ownership in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities;
instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
non-investment grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after their purchase;
whole mortgages or other whole loans, except for
| |
| ◦ | those acquired under the MPP or the Mortgage Partnership Finance Program;Program™; |
| |
| ◦ | certain investments targeted to low-income persons or communities; and |
| |
| ◦ | certain foreign housing loans authorized under Section 12(b) of the Bank Act; or |
| |
• | non-U.S. dollar denominated securities. |
non-United States dollar denominated securities.
Finance Agency policy further provides that the total book value of our investments in MBS and ABS must not exceed 300% of our total regulatory capital, consisting of Retained Earnings, Class B stock, Retained Earnings, and MRCS, as of the previous month end on the day we purchase the securities.investments, based on the capital amount most recently reported to the Finance Agency. If our outstanding investments in MBS and ABS exceed the limitation at any time, but were in compliance at the time we purchased the investments, we would not be considered out of compliance with the regulation, but we would not be permitted to purchase additional investments in MBS or ABS until these outstanding investments were within the capital limitation. These investments, as a percentage of total regulatory capital, were 294% at December 31, 2011. Generally, our goal is to maintain these investments near the 300% limit.
In addition, we are prohibited by regulation and internal policy from purchasing certain types of investments, such as interest-only or principal-only stripped MBS, collateralized mortgage obligations ("CMOs,"), real estate mortgage investment conduits ("REMICs") or ABS, residual-interest or interest-accrual classes of CMOs, REMICs, ABS and MBS, and CMOs or REMICs with underlying collateral containing pay option/negative amortization mortgage loans, unless those loans or securities are guaranteed by the U.S.United States government, Fannie Mae, Freddie Mac, or the Government National Mortgage Association ("Ginnie Mae").
Mae.
Further, we will not knowingly purchase any MBS or ABS that violatesviolate the provisions of our Anti-Predatory Lending Policy or our Subprime and Nontraditional Residential Mortgage Policy.
Deposit Products. Deposit products provide a portion of our funding resources, while also giving members a high quality earninghigh-quality asset that satisfies their regulatory liquidity requirements. We offer several types of deposit products to our members and other institutions including overnight and demand deposits. We may accept uninsured deposits from:
| |
• | institutions eligible to become members; |
| |
• | any institution for which we are providing correspondent services; |
| |
• | interest-rate swap counterparties; |
| |
• | other federal government instrumentalities. |
our members;
institutions eligible to become members;
any institution for which we are providing correspondent services;
interest-rate swap counterparties;
other FHLBanks; or
other federal government instrumentalities.
The following table showspresents the composition of our deposits ($ amounts in millions): | | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Types of Deposits | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
| Demand and overnight | | $ | 560 | | | 95 | % | | $ | 807 | | | 98 | % | | $ | 620 |
| | 99 | % | | $ | 560 |
| | 96 | % |
| Time | | 15 | | | 3 | % | | 15 | | | 2 | % | | — |
| | — | % | | 15 |
| | 2 | % |
| Other Non-Interest Bearing | | 10 | | | 2 | % | | 3 | | | — | % | | 9 |
| | 1 | % | | 10 |
| | 2 | % |
| Total Deposits | | $ | 585 | | | 100 | % | | $ | 825 | | | 100 | % | | $ | 629 |
| | 100 | % | | $ | 585 |
| | 100 | % |
To support deposits, the Bank Act requires us to have an amount equal to the current deposits invested in obligations of the United States, deposits in eligible banks or trust companies, or Advances with a maturity not exceeding five years.
As the following table shows, weWe were in compliance with the Bank Act liquidity requirements for depositsdeposits. The following table presents our excess liquidity deposit reserves as of the dates indicated ($ amounts in millions): | | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Liquidity deposit reserves | | $ | 18,611 | | | $ | 22,876 | | | $ | 17,500 |
| | $ | 18,611 |
|
| Less: Total Deposits | | 585 | | | 825 | | | 629 |
| | 585 |
|
| Excess liquidity deposit reserves | | $ | 18,026 | | | $ | 22,051 | | | $ | 16,871 |
| | $ | 18,026 |
|
Mortgage Purchase ProgramProgram.
Overview of the Mortgage Purchase Program.Overview. We began purchasing mortgage loans directly from our members through our MPP in the second quarter of 2001. Members that participate in the MPP are known as Participating Financial Institutions ("PFIs").PFIs. By regulation, we are not permitted to purchase loans from any PFI that is not a member of the FHLBFHLBank System, and we may not use a trust or other entity to purchase the loans for us. We purchase conforming, medium- or long-term, fixed-rate, fully amortizing, level payment loans predominantly for primary, owner-occupied, detached residences, including single-family properties, and two-, three-, and four-unit properties. Additionally, to a lesser degree, we purchase loans for primary, owner-occupied, attached residences (including condominiums and planned unit developments), second/vacation homes, and investment properties.
All of our mortgage loan purchases are governed by a Finance AgencyBoard regulation adopted in 2000, as amended. Prior to that time, the FHLBsFHLBanks could only purchase mortgage loans based upon individual approvals from the Finance Agency.Board. Further, while the regulation does not specifically limit us to purchasing fixed-rate loans, we would need to comply with the Finance Agency's regulation on new business activities to purchase adjustable-rate loans. The Finance Agency regulations provide that any material changes to mortgage purchase programs that have a different risk profile would need to be approved by the Finance Agency as a new business activity.
Under current regulations, all pools of mortgage loans purchased by us, other than government-insured mortgage loans, must have sufficient credit enhancement so that the pools of loans are at least investment grade. In accordance with FHFAFinance Agency regulations, we generally limit the pools of mortgage loans that we will purchase to those with an implied NRSRO credit rating of at least BBB. Risk-based capital is maintained against the pools
New Business Activity. BothOur original MPP, which we ceased offering in November 2010, relied on credit enhancement from LRA and SMI to achieve an implied credit rating, based on an NRSRO model, of our supplemental mortgage insurance ("SMI") providers, Mortgage Guaranty Insurance Corporation ("MGIC") and Genworth Residential Mortgage Insurance Corporation of North Carolina ("Genworth"), are rated below AA- by at least two of the three NRSROs. On April 6, 2010, we filed a notice of new business activityAA, in compliance with the Finance Agency relating to a new credit enhancement structure for our MPP, which was approved on June 4, 2010, with certain conditions.regulations. On November 29, 2010, we began offering MPP Advantage to our members.for new MPP Advantage usesbusiness, which utilizes an enhanced fixed lender riskLRA account ("LRA") for additional credit enhancement, resulting in an implied credit rating of at least BBB, consistent with Finance Agency regulations, instead of usingutilizing coverage from an SMI provider. The only substantive difference between the two programs is the credit enhancement structure. For both the original MPP and MPP Advantage, the funds in the LRA are used to pay losses for a particular pool of loans. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments-LegislativeDevelopments - Legislative and Regulatory Developments - Significant Finance Agency Regulatory Actions - Proposed Rules" for more information.
Loan Purchase Process. All loans we purchase must meet guidelines for our MPP or be specifically approved as an exception based on compensating factors. Our guidelines generally meet or exceed the underwriting standards of Fannie Mae and Freddie Mac. For example, the maximum loan-to-value ("LTV") ratio for any mortgage loan at the time of purchase is 95%, and borrowers must meet certain minimum credit scores depending upon the type of property or loan. Further, we will not knowingly purchase any loan that violates the provisions of our Anti-Predatory Lending Policy or our Subprime and Nontraditional Residential Mortgage Policy.
PFIs must complete all application documents, which are reviewed by our Credit Department. In addition, a PFI mustmust:
be an active originator of conventional mortgages and have servicing capabilities, if applicable, or use a servicer that we approve;
advise us if it has been the subject of any adverse action by either Fannie Mae or Freddie Mac; and
along with its parent company, if applicable, meet the following requirements:capital requirements of each state and federal regulatory agency with jurisdiction over the member's or parent company's activities.
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• | be an active originator of conventional mortgages and have servicing capabilities, if applicable, or use a servicer that we approve; |
| |
• | advise us if it has been the subject of any adverse action by either Fannie Mae or Freddie Mac; and |
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• | along with its parent company, if applicable, meet the capital requirements of each state and federal regulatory agency with jurisdiction over the member's or parent company's activities. |
Credit Enhancement.FHA mortgage loans are backed by insurance provided by the U.S.United States government and, therefore, no additional credit enhancements (such as an LRA or SMI) are required.
For conventional mortgage loans, the required credit enhancement required to reach the expected credit rating is determined by using an NRSRO credit risk model. As part of the credit enhancement, an LRA is then established in an amount sufficient to cover expected losses in excess of the borrower's equity and primary mortgage insurance ("PMI,"), if any.
Credit losses on defaulted mortgage loans in thea pool are paid from these sources, until they are exhausted, in the following order:
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• | SMI, if applicable; and |
borrower's equity;
PMI, if any;
LRA;
SMI, if applicable; and
our Bank.
LRA.We use either a "spread LRA" or a "fixed LRA" for credit enhancement. The spread LRA is used in combination with SMI for pools that are also credit enhanced with SMI.enhancement of conventional mortgage loans purchased under our original MPP, and the fixed LRA is being used for all acquisitions of new conventional mortgage loans purchased under MPP Advantage. The spread LRA is funded through a reduction to ourthe net yield earned on the loans, and the corresponding purchase price paid to the PFI reflects theour reduced net yield to us. The fixedyield. Under our original MPP, the LRA for each pool of loans is funded throughmonthly, at an adjustmentannual rate ranging from seven to ten basis points depending on the corresponding price paid toterms of the PFI. As these funds are collected, eitherMCC, from the monthly remittances or a reduction in the purchase price, they are held by usinterest spread received on outstanding loans and is used to reimburse losses incurred by uspay loan loss claims or is held until the SMI provider, if applicable.LRA accumulates to a required "release point." The release point is 30 to 50 basis points of the then outstanding principal balances of the loans in that pool, depending on the terms of the original contract. If the LRA exceeds the required release point, the excess amount is eligible for return to the member(s) that sold us the loans in that pool, subject to a minimum 5-year lock-out period and, in some instances, completion of the releases by the 11th year after loan acquisition. SMI provides an additional layer of credit enhancement beyond the LRA. Losses that exceed LRA funds are covered by SMI up to a severity of approximately 50% of the original property value of the loan, depending on the SMI contract terms. We absorb any losses in excess of LRA funds and SMI.
The LRA for MPP Advantage differs from our original program in that the funding of the LRA occurs at the time the loan is acquired and consists of a portion of the principal balance purchased. The LRA funding amount is currently 120 basis points of the principal balance of the loans in the pool. There is no SMI credit enhancement for MPP Advantage. Funds in the LRA not used to coverpay loan losses may be returned to the remainingseller subject to a release schedule detailed in each pool's contract based on the original LRA amount. No LRA funds in the LRA are returned to the member for the first 5 years after acquisition but such returns are available to be completed by the 26th year after loan acquisition. We absorb any losses in accordance with the Master Commitment Contracts.excess of LRA funds.
SMI. For pools of loans acquired prior to December 2010,under the original MPP, we entered into the insurance contracts directly with the SMI provider, butincluding a contract was written for each pool or aggregate pool. Pursuant to Finance Agency regulation, the PFI must be responsible for all expected credit losses on the mortgages sold to us. Therefore, the PFI was the purchaser of the SMI policy, and we are designated as the beneficiary. Although we remit the insurancepremium payments to the SMI provider, the paymentspremiums are the PFI's obligation. We collect the SMI premiums from the monthly mortgage remittances received from the PFIs or their designated servicer and remit them to the SMI provider as an administrative convenience.
On October 27,In 2006, the Finance AgencyBoard approved our proposal to offer pool aggregation under our MPP. Our pool aggregation program is designed to reduce the credit enhancement costs to small and mid-size members participating in the program. Members that participate in the MPP are allowed to pool their loans with similar pools of loans originated by other PFIs to create an aggregate pool of loanspools of approximately $100 million original UPB or greater each.greater. The cost of obtaining SMI for a pool of $100 million is less than the cost of obtaining SMI for smaller separate pools of loans. Pool aggregation has continued with MPP Advantage. The combination of small and mid-size members into one pool assists in the evaluation of the amount of LRA needed for the overall credit enhancement.
Earnings from the MPP.Our earnings from the MPP are comprised of the monthly interest payments we receive, which are computed on each loan at the mortgage note rate multiplied by the principal balance outstanding, adjusted for the following:
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• | the cost of the SMI, if applicable; |
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• | the net amortization of purchased loan premiums or discounts; and |
| |
• | the net amortization of terminated MPP hedge basis adjustments. |
servicing costs;
the cost of funding the LRA;
the cost of the SMI, if applicable;
the net amortization of purchased loan premiums or discounts;
the net amortization of terminated hedge basis adjustments; and
uninsured credit losses.
Conventional Loan Pricing.We consider the cost of the credit enhancement (LRA and SMI, if applicable) when we formulate conventional loan pricing. Each of these credit enhancement structures is accounted for not only in our expected return on acquired mortgage loans, but also in the risk review performed during the accumulation/pooling process. The pricing of each structure is dependent on a number of factors and is specific to the PFI or group of PFIs.
We receive a 0.25% to 0.75% fee on cash-out refinancing transactions.transactions depending on the initial LTV ratio. We also adjust the market price we pay for loans depending upon market conditions. We continue to evaluate the scope and rate of such fees as they evolve in the industry, and we may change our fee structure to be similar to those of the other GSEs. We do not pay the PFIsa PFI any fees other than the servicing fee discussed above when the PFI retains the servicing rights.
Servicing. We do not service the mortgage loans we purchase. PFIs may elect to retain servicing rights for the loans sold to us, or they may elect to sell servicing rights to an MPP-approved servicer. The servicers are responsible for all aspects of servicing, including, among other responsibilities, the administration of the foreclosure and claims processes from the date we purchase the loan until the loan has been fully satisfied. The MPP is designed and structured in a manner that requires loan servicers, when necessary, to foreclose and liquidate any acquired real estate in the servicer's name. Therefore, our practice is not to take or hold title to property. PFIs may make payments on a scheduled/scheduled basis, which means that we receive scheduled monthly principal and interest from the servicer, regardless of whether the mortgagee is making payments to the servicer, or on actual/actual basis, which means the servicers remit payments only as they are received from the borrowers.
In 2005,order to limit the cost of SMI coverage, we negotiated in 2005 with MGIC, and subsequently with Genworth, to obtain an aggregate loss/benefit limit or "stop-loss" on any Master Commitment ContractsMCCs that equal or exceed $35 million in order to limit the cost of SMI coverage.million. The stop-loss is equal to the total initial principal balance of loans under the Master Commitment ContractMCC multiplied by the stop-loss percentage, as is then in effect, and represents the maximum aggregate amount payable by the SMI provider under the SMI policy for that pool. Even with the stop-loss provision, the aggregate of the LRA and the amount payable by the SMI provider under an SMI stop-loss contract will be equal to or greater than the amount of credit enhancement required for the pool to have an implied S&P credit rating of at least AA at the time of purchase. Non-credit losses, such as uninsured property damage losses that are not covered by the SMI, can be recovered from the LRA to the extent that there are LRA funds available.
In 2008, JPMorgan Chase & Co. acquired the banking operations of our former approved servicer, Washington Mutual Bank, FA. Currently, JPMorgan Chase & Co. is the only approved servicer to which servicing rights may be sold when we originally purchase the mortgage loans. Those PFIs that retain servicing rights receive a monthly servicing fee, must be approved by us and undergo an audit by a third-party quality control contractor that advises the PFIs of any deficiencies in servicing procedures or processes and then notifynotifies us so that we can monitor theirthe PFIs' performance. The PFIs that retain servicing rights can sell those at a later date with our approval. Servicing activities, whether retained or released, are subject to review by our master servicer, Washington Mutual Mortgage Securities Corporation. If we deem servicing to be inadequate, we can require that the servicing of those loans be transferred to a servicer that is acceptable to us.
It is the servicer's responsibility to initiate loss claims on the loans. No payments from the LRA (other than excess amounts returned to the PFI over a period of time in accordance with each Master Commitment Contract)MCC) or SMI are made prior to the claims process. For loans that are credit enhancedcredit-enhanced with SMI, if it is determined that a loss is covered, the SMI provider pays the claim in full and seeks reimbursement from the LRA. The SMI provider is entitled to reimbursement for credit losses from funds available in the LRA that are equal to the aggregate amounts contributed to the LRA less any amounts paid for previous claims and any amounts that have been released to the PFI from the LRA or paid to us to cover prior claims. If the LRA is still being funded, the SMI provider could make claims against those payments as they are received up to the full reimbursable amount of the claim, and these amounts would be reflected as additional deductions from the LRA as they were
paid. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management - MPP" MPP for additional information.
MPP Concentration.Concentration. Our board of directors has established a limit that restricts MPP loans outstanding purchased from any one PFI to 50% of MPP loans outstanding. Loans previously purchased from a former member, Bank of America, N.A, contributed interest income that exceeded 10% of our Total Interest Income for the years ended December 31, 20102011, and 2009.2010. We had mortgage loans outstanding and imputed interest income earned on loans purchased from Bank of America, N.A. as follows ($ amounts in millions): | | | | | As of and for the Years Ended, | | As of and for the Years Ended |
| | | December 31, | | December 31, |
| | | 2010 | | 2009 | | 2011 | | 2010 |
| Mortgage Loans Held for Portfolio, par value | | $ | 2,142 | | | $ | 2,768 | | | $ | 1,641 |
| | $ | 2,142 |
|
| % of Mortgage Loans Held for Portfolio, outstanding | | 32 | % | | 38 | % | | 28 | % | | 32 | % |
| | | | | | | | | |
| Imputed interest income earned | | $ | 127 | | | $ | 162 | | | $ | 89 |
| | $ | 127 |
|
| % of Total Interest Income | | 15 | % | | 14 | % | | 13 | % | | 15 | % |
See the section entitled "ItemItem 1A. Risk Factors - Loss of One or More Large Customers Could Adversely Impact Our Profitability, Our Ability to Achieve Business Objectives, and Our Risk Concentration"Concentration for additional information.
Housing Goals. Finance Agency regulations require that low-income housing goals be established if total mortgage purchases exceed $2.5 billion annually. No low-income housing goals are currently in place because we did not purchase $2.5 billion of mortgages in 2011.
Funding Sources
The primary source of funds for each of the FHLBsFHLBanks is the sale of debt securities, known as Consolidated Obligations in the capital markets. The Finance Agency and the United States Secretary of the Treasury have oversight over the issuance of our debt through our agent, the Office of Finance. The Finance Agency's regulations govern the issuance of debt on our behalf and authorize us to issue Consolidated Obligations through our agent, the Office of Finance, under Section 11(a) of the Bank Act. All of the FHLBsFHLBanks are jointly and severally liable for the Consolidated Obligations issued under Section 11(a). No FHLBFHLBank is permitted to issue individual debt under Section 11(a) without the approval of the Finance Agency.
While Consolidated Obligations, which consist of CO Bonds and Discount Notes, are, by regulation, the joint and several obligations of the FHLBs,FHLBanks, the primary liability for Consolidated Obligations issued to provide funds for a particular FHLBFHLBank rests with that FHLB.FHLBank. Consolidated Obligations are backed only by the financial resources of the FHLBs,FHLBanks, and there has never been a default in the payment of any Consolidated Obligation. Although each FHLBFHLBank is a GSE, Consolidated Obligations are not obligations of, and are not guaranteed by, the U.S.United States government. The Moody's and S&P ratings forOur Consolidated Obligations ofare rated Aaa by Moody's and AAAAA+, respectively, reflect the likelihood of timely payment of principal and interest on the Consolidated Obligations. by S&P. The aggregate par amount of the FHLBFHLBank System's outstanding Consolidated Obligations was approximately$691.9 billion at December 31, 2011, and $796.4 billion at December 31, 2010, and $930.6 billion at December 31, 2009. The par amount of the Consolidated Obligations for which we are the primary obligor was $36.9 billion at December 31, 2011, and $40.7 billion at December 31, 2010, and $42.0 billion at December 31, 2009.
If the principal or interest on any Consolidated Obligation is not paid in full when due, we will not be allowed to pay dividends to, or redeem or repurchase shares of stock from, any of our members. The Finance Agency, in its discretion, may require us to make principal or interest payments due on any FHLB's Consolidated Obligations. To the extent that we make any payment on a Consolidated Obligation for which we are not the primary obligor, we are entitled to reimbursement from the FHLB that is the primary obligor. However, if the Finance Agency determines that such FHLB is unable to satisfy its obligations, the Finance Agency may allocate the outstanding liability among the remaining FHLBs on a pro-rata basis in proportion to each FHLB's participation in all Consolidated Obligations outstanding, or on any other basis the Finance Agency may determine.
We must maintain, free from any lien or pledge, an amount at least equal to the amount of Consolidated Obligations outstanding on our behalf from among the following types of assets:
| |
• | obligations of, or fully guaranteed by, the United States; |
cash;
obligations of, or fully guaranteed by, the United States;
Advances;
mortgages that have any guaranty, insurance, or commitment from the United States or any agency of the United States;
investments described in Section 16(a) of the Bank Act, which include, among others, securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and
other securities that are assigned a rating or assessment by an NRSRO that is equivalent to or higher than the rating or assessment assigned by that NRSRO to the Consolidated Obligations. Rating modifiers are ignored when determining the applicable rating level.
| |
• | mortgages, which have any guaranty, insurance, or commitment from the United States or any agency of the United States; |
| |
• | investments described in Section 16(a) of the Bank Act, which include, among others, securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLB is located; and |
| |
• | other securities that are assigned a rating or assessment by an NRSRO that is equivalent to or higher than the rating or assessment assigned by that NRSRO to the Consolidated Obligations. |
The following table ($ amounts in millions) shows a comparison of the aggregate amount of the above-noted asset types to the total amount of outstanding Consolidated Obligations issued on our behalf and verifies that we maintain assets in excess of our required amounts.behalf. We were in compliance with this requirement at both December 31, 20102011, and 20092010. | | | | | December 31, | | December 31, |
| | | 2010 | | 2009 | | 2011 | | 2010 |
| Aggregate qualifying assets | | $ | 44,863 | | | $ | 46,542 | | | $ | 40,318 |
| | $ | 44,863 |
|
| Total Consolidated Obligations | | 40,800 | | | 42,158 | | | 36,894 |
| | 40,800 |
|
| Aggregate qualifying assets in excess of Consolidated Obligations | | $ | 4,063 | | | $ | 4,384 | | | $ | 3,424 |
| | $ | 4,063 |
|
| | | | | | | | | |
| Ratio of aggregate qualifying assets to Consolidated Obligations | | 1.10 | | | 1.10 | | | 1.09 |
| | 1.10 |
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Office of Finance
Finance. The issuance of the Consolidated Obligations is facilitated and executed by the Office of Finance. The Office of Finance, which also services all outstanding debt, provides information on capital market developments, and manages our relationship with the NRSROs with respect to Consolidated Obligations, and administers REFCORP and the Financing Corporation. These two corporations were established by Congress in the 1980s to help recapitalize the savings and loan industry's deposit insurance fund and resolve insolvent savings institutions.Obligations. The Office of Finance serves asalso prepares and publishes the FHLBs'Combined Financial Report of the FHLBanks.
As the FHLBanks' fiscal agent for debt issuance, andthe Office of Finance can control the timing and amount of each issuance. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments" for information on the restructuring of the Office of Finance board of directors.
The U.S.United States Treasury can affect debt issuance for the FHLBsFHLBanks through its oversight of the U.S.United States financial markets. See "SupervisionSupervision and Regulation - Government Corporations Control Act"Act herein for additional information.
Financing Corporation. The Financing Corporation is a corporation established by Congress in the Competitive Equality Banking Act of 1987 and was originally intended to finance a rebuilding of the Federal Savings and Loan Insurance Corporation (“FSLIC”). All of the FHLBanks provided initial funding for the Financing Corporation, which served as a financing vehicle for the FSLIC Resolution Fund, the entity that assumed the assets and liabilities of FSLIC following its insolvency. Since the early 1990s, the Financing Corporation's sole purpose has been to manage the outstanding debt obligations that it issued. Two FHLBank Presidents serve on a rotating basis, along with the President of the Office of Finance, as the directors of the Financing Corporation. Our President - CEO currently serves as chair of the Financing Corporation's directorate. The FHLBanks have no continuing responsibilities to the Financing Corporation other than to direct the Office of Finance to manage its activities.
Consolidated Obligation Bonds
Bonds. CO Bonds satisfy term funding requirements and are issued with a variety of maturities and terms under various programs. The maturities of these securities typically range from six months to 30 years, but the maturities are not subject to any statutory or regulatory limit. The CO Bonds can be fixed or adjustable rate and callable or non-callable. They are issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members.
We request funds primarily through automated systems developed by the Office of Finance. Our request may include parameters such as program type, issuance size, pricing and coupon levels, maturity, and option characteristics. We receive 100% of the proceeds of a bond issued via direct negotiation with underwriters of FHLB System debt when we are the only FHLB involved in the negotiation; consequently, we are the primary obligor on that CO Bond. When, along with one or more of the other FHLBs, we negotiate the issuance of a CO Bond directly with underwriters, we receive a portion of the proceeds of the CO Bond agreed upon with the other FHLBs; in those cases, we are the primary obligor for a pro-rata portion of the CO Bond based on the amount of proceeds we receive. Many of our CO Bond issuances, including both those that do and do not involve participation by other FHLBs, are conducted via direct negotiation with underwriters of FHLB System CO Bonds.
We may also request specific amounts of particular CO Bonds to be offered for sale via competitive auction conducted with underwriters in a bond selling group. One or more other FHLBs may also request that amounts of those same CO Bonds be offered for sale for their benefit via the same auction. We may receive from 0% to 100% of the proceeds of the CO Bonds issued via competitive auction depending on: (i) the amounts of, and costs for, the CO Bonds bid by the underwriters; (ii) the maximum costs we, and any other FHLB(s) participating in the same issue, are willing to pay for the CO Bonds; and (iii) the guidelines for allocation of CO Bond proceeds among multiple participating FHLBs as administered by the Office of Finance.
We also issue global CO Bonds. Effective in January 2009, the FHLBs and the Office of Financeimplemented a debt issuance process to provide a scheduled monthly date available for issuance of global bullet CO Bonds. Once a decision has been made to issue, our management determines and communicates a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on our behalf. If the orders from us and the other FHLBs do not meet the minimum debt issue size, we receive an allocation of proceeds equal to the larger of our commitment or the ratio of our capital to total capital of all of the FHLBs. If the FHLBs' commitments exceed the minimum debt issue size, then the proceeds are allocated based on relative capital of the FHLBs with the allocation limited to the lesser of the allocation amount or actual commitment amount. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of our debt through the Office of Finance. We can, however, pass on any scheduled calendar slot and decline to issue any global bullet CO Bonds upon agreement of 8 of the 12 FHLBs.
Consolidated Obligation Discount Notes
Notes. We also issue Discount Notes to provide short-term funds for Advances to members, liquidity, and for other investments. These securities can have maturities that range from one day to one year and are offered daily through a Discount Note selling group and through other authorized securities dealers. Discount Notes are sold at a discount and mature at par.
On a daily basis, we may request specific amounts of Discount Notes with specific maturity dates to be offered at a specific cost for sale to underwriters in the Discount Note selling group. One or more other FHLBs may also request that Discount Notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue Discount Notes on behalf of the participating FHLB(s) when underwriters in the selling group submit orders for the specific Discount Notes offered for sale. We may receive from 0% to 100% of the proceeds of the Discount Notes issued via this sales process depending on: (i) the maximum costs we or the other FHLBs participating in the same Discount Notes, if any, are willing to pay for the Discount Notes; (ii) the amounts of, and costs for, orders for the Discount Notes submitted by underwriters; and (iii) the guidelines for allocation of Discount Note proceeds among participating FHLBs as administered by the Office of Finance.
We may also request that specific amounts of Discount Notes with fixed maturity dates ranging from 4 weeks to 26 weeks be offered for sale via competitive auction conducted with underwriters in the Discount Note selling group. One or more other FHLBs may also request amounts of those same Discount Notes be offered for sale for their benefit via the same auction. The Discount Notes offered for sale via competitive auction are not subject to a limit on the maximum costs the FHLBs are willing to pay. We may receive from 0% to 100% of the proceeds of the Discount Notes issued via competitive auction depending on: (i) the amounts of, and costs for, the Discount Notes bid by underwriters; and (ii) guidelines for allocation of Discount Note proceeds among multiple participating FHLBs as administered by the Office of Finance.
Other Indebtedness
Although the majority of our total indebtedness consists of CO Bonds and Discount Notes outstanding, and deposits from our members, we are also obligated to pay other amounts owed in the form of:
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• | amounts owed under the AHP; |
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• | amounts owed to REFCORP; |
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• | amounts owed on capital stock that can be mandatorily redeemed; |
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• | amounts owed to counterparties on derivative contracts; and |
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• | other miscellaneous liabilities including benefits payable for employee pension and other benefit plan obligations, accrued salary and benefits, amounts payable related to the LRA and SMI on MPP loans, and amounts payable related to bank and correspondent service operations. |
Community Investment and Affordable Housing and Community Investment Programs
Each FHLB is required to set aside 10% of its annual net earnings before Interest Expense on MRCS and after the REFCORP assessment to fund its AHP (subject to an annual FHLB System-wide minimum of $100 million). Through our AHP, we provide cash grants or interest subsidies on Advances to our members, which are, in turn, provided to qualified individuals to finance the purchase, construction, or rehabilitation of very low- to moderate-income owner-occupied or rental housing. Our AHP includes the following programs:
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• | Competitive Program, which is the primary grant program to finance the purchase, construction or rehabilitation of housing for individuals with income at or below 80% of the median income for the area, and to finance the purchase, construction, or rehabilitation of rental housing, with at least 20% of the units occupied by, and affordable for, very low-income households.
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• | Homeownership Opportunities Program, which provides assistance with down payments and closing costs to first-time homebuyers.
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• | Neighborhood Impact Program, which provides rehabilitation assistance to homeowners to help improve neighborhoods.
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• | Neighborhood Stabilization Assistance, which provides assistance with down payments and closing costs to purchase a home assisted by funds from the U.S. Department of Housing and Urban Development ("HUD") Neighborhood Stabilization Program.
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In addition to AHP, we alsoWe offer a variety of specialized Advance programs to support housing and community development needs. Through our CIP,Community Investment Program, we offer Advances to our members involved in community economic development activities benefiting low- or moderate-income families or neighborhoods. These Advances have maturities ranging from 30 days to 20 years and are priced at our cost of funds plus reasonable administrative expenses. These funds can be used for the development of housing, infrastructure improvements, or assistance to small businesses or businesses that are creating or retaining jobs in the member's community for low- and moderate-income families. Advances made under our CIPCommunity Investment Programs comprised 3.4%3.2% and 3.2%3.4% of our total Advances outstanding, at par, at December 31, 20102011, and 2009,2010, respectively.
In addition to our Community Investment Programs, each FHLBank is required to set aside 10% of its annual net earnings before Interest Expense on MRCS to fund its AHP, subject to an annual FHLBank System-wide minimum of $100 million. Through our AHP, we provide cash grants or interest subsidies on Advances to our members, which are, in turn, provided to awarded projects or qualified individuals to finance the purchase, construction, or rehabilitation of very low- to moderate-income owner-occupied or rental housing. Our 2011 Community Lending Plan describes our plan to addressAHP includes the credit needs and market opportunities in our district states of Indiana and Michigan. It is available on our website at following:
www.fhlbi.comCompetitive Program, by clicking on "Community Investment" and then selecting "Publications, Bulletins and Presentations" fromwhich is the drop-down menu. Interested persons may also request a copy by contacting us, Attention: Corporate Secretary, FHLBprimary grant program to finance the purchase, construction or rehabilitation of Indianapolis, 8250 Woodfield Crossing Boulevard, Indianapolis, IN 46240.
We are providing our website address solelyhousing for individuals with income at or below 80% of the median income for the reader's information. Information appearing on our website is not incorporated into this Annual Report on Form 10-K.
REFCORP
REFCORP was establishedarea, and to provide funds tofinance the Resolution Trust Corporation to resolve troubled savings and loan institutions in receivership during the 1980s and early 1990s. REFCORP has no employees but instead uses the officers, employees, and agentspurchase, construction, or rehabilitation of the FHLBs. It is subject to such regulations, orders and directions as the Finance Agency prescribes. REFCORP was authorized by Congress in 1989 to issue bonds, notes, debentures, and similar obligations in an aggregate amount not to exceed $30 billion. REFCORP obligations are not obligations of, or guaranteed as to principal by, the FHLB System, the FHLBs, or the U.S. government. However, the U.S. government pays interest on such obligations as required, and, by statute,rental housing, with at least 20% of the net earnings afterunits occupied by, and affordable for, very low-income households. Each year, 65% of our annual available AHP expensefunds are granted through this program.
Set-Aside Programs, which include 35% of each FHLB is used to fundour annual available AHP funds administered through the interest payments on these obligations.following:
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| ◦ | Homeownership Opportunities Program, which provides assistance with down payments and closing costs to first-time homebuyers. |
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| ◦ | Neighborhood Impact Program, which provides rehabilitation assistance to homeowners to help improve neighborhoods. |
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| ◦ | Neighborhood Stabilization Assistance Program, which provides assistance with down payments and closing costs to purchase a home assisted by funds from the HUD Neighborhood Stabilization Program. |
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| ◦ | Disaster Relief Program, which may be reactivated in our discretion, in cases of federal or state disaster declarations for rehabilitation or down payment assistance targeted to low- or moderate-income homeowner disaster victims. |
In 1989, Congress established the amount of the total interest payments to be paid by the FHLBs at $300 million per year, or $75 million per quarter. In 1999, the GLB Act changed the annual assessment to a flat rate of 20% of net earnings after AHP expense for each FHLB. Because this amount cannot be changed without further legislation, the expiration of the obligation is shortened as payments in excess of $75 million per quarter are accrued by the FHLBs. As specified in the Finance Agency regulation that implemented Section 607 of the GLB Act, the payment amount in excess of the $75 million required quarterly payment is used to simulate the purchase of zero-coupon Treasury bonds to defease all or a portion of the most distant remaining $75 million quarterly payment. The Finance Agency, in consultation with the Secretary of the Treasury, selects the appropriate zero-coupon yields used in this calculation.
The FHLBs will continue to be obligated to pay these amounts until the aggregate amounts actually paid by all 12 FHLBs are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) with a final maturity date of April 15, 2030, at which point the required payment of each FHLB to REFCORP will be fully satisfied.
However, the FHLBs' aggregate payments through 2010 have exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening the remaining term as of December 31, 2010, to October 15, 2011. This date assumes that the FHLBs will pay exactly $75 million for each of the first two quarters of 2011 and $10 million on October 15, 2011. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Joint Capital Enhancement Agreement" for information about the Joint Capital Enhancement Agreement that the FHLBs entered into effective February 28, 2011, which will become operational once our REFCORP obligation has been satisfied.
Use of Derivatives
Derivatives are an integral part of our financial management strategies to manage identified risks inherent in our lending, investing and funding activities and to achieve our risk management objectives. Finance Agency regulations and our Risk Management Policy ("RMP") establish guidelines for the use of derivatives. The goal of our interest rate risk management strategy is not to eliminate interest-rate risk but to manage it within appropriate limits. Permissible derivatives include interest-rate swaps, swaptions, interest-rate cap and floor agreements, calls, puts, futures, and forward contracts executed as part of our market risk management philosophy.contracts. We are permitted to execute derivative transactions to only to manage interest-rate risk exposure inherent in otherwise unhedged asset or liability positions, hedge embedded options in assets and liabilities including mortgage prepayment risk positions, hedge any foreign currency positions, and act as an intermediary between our members and interest-rate swap counterparties. All derivatives are accounted for at their fair values. We are prohibited from trading in or the speculative use of these instruments, and we have limits for counterparty credit risk arising from these instruments.
We engage in derivative transactions to hedge market risk exposures of certain Advances, primarily fixed-rate bullet and putable Advances, and mortgage assets. Market risk includes the risks related to:
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• | movements in interest rates and mortgage prepayment speeds over time; |
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• | the change in the relationship between short-term and long-term interest rates (i.e., the slope of the Consolidated Obligation and LIBOR yield curves); |
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• | the change in the relationship of FHLB System debt spreads to other indices, primarily LIBOR and U.S. Treasury yields and the change in the relationship of FHLB System debt spreads to mortgage yields (commonly referred to as "basis" risk); and |
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• | the change in the relationship between fixed rates and variable rates. |
Our use of derivatives is the primary way we reconcilealign the preferences of investors for the kindstypes of debt securities that they want to purchase and the preferences of member institutions for the kindstypes of Advances they want to hold and the kindstypes of mortgage loans they want to sell. The most common reasons we use derivatives are to:See Notes to Financial Statements - Note 11 - Derivatives and Hedging Activities and Item 7A. Quantitative and Qualitative Disclosures About Market Risk for more information.
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• | preserve a favorable interest-rate spread between the yield of an asset and the cost of the supporting Consolidated Obligations. Without the use of derivatives, this interest-rate spread could be reduced or eliminated if the structures of the asset and Consolidated Obligations do not have similar characteristics including maturity and the level and characteristics of the interest rates (e.g., fixed/variable terms); |
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• | reduce funding costs by executing a derivative concurrently with the issuance of Consolidated Obligations; |
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• | fund and hedge Advances for which our members have sold us options embedded within the Advances; |
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• | increase flexibility of Advances by transforming borrowers' cash flow to one favored by investors; |
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• | mitigate the adverse earnings effects from the shortening or extension of the cash flows from mortgage assets with embedded prepayment options; |
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• | hedge embedded caps in floating-rate MBS; |
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• | hedge the market risk associated with timing differences in the settlement of commitments in the MPP and Consolidated Obligations; |
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• | protect the fair value of existing asset or liability positions; and |
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• | hedge market risk on a macro, or whole balance sheet, level. |
Supervision and Regulation
The Bank Act
Act. We are supervised and regulated by the Finance Agency, an independent agency in the executive branch of the U.S.United States government, established by HERA. Our former regulator, the Finance Board, was abolished on July 30, 2009. Finance Board regulations, policies and directives have been transferred to the Finance Agency.
Under the Bank Act, the Finance Agency's responsibility is to ensure that, pursuant to regulations promulgated by the Finance Agency, each FHLB:FHLBank:
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• | carries out its housing finance mission; |
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• | remains adequately capitalized and able to raise funds in the capital markets; and |
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• | operates in a safe and sound manner. |
carries out its housing finance mission;
remains adequately capitalized and able to raise funds in the capital markets; and
operates in a safe and sound manner.
The Finance Agency is headed by a Director, who is appointed to a five-year term by the President of the United States, with the advice and consent of the Senate. The Director appoints a Deputy Director for the Division of Enterprise Regulation, a Deputy Director for the Division of FHLBFHLBank Regulation, and a Deputy Director for Housing Mission and Goals, who oversees the housing mission and goals of Fannie Mae and Freddie Mac, as well as the housing finance and community and economic development mission of the FHLBs.FHLBanks. HERA also established the Federal Housing Finance Oversight Board, comprised of the Secretaries of the Treasury and HUD, the Chairman of the Securities and Exchange Commission ("SEC,"), and the Director. The Oversight Board functions as an advisory body to the Director. The Finance Agency's operating expenses are funded by assessments on the FHLBs,FHLBanks, Fannie Mae and Freddie Mac. As such, no tax dollars or other appropriations support the operations of the Finance Agency or the FHLBs.FHLBanks. In addition to reviewing our submissions to the Finance Agency of monthly and quarterly financial information on our financial condition and results of operations, the Finance Agency conducts annual on-site examinations and performs periodic on- and off-site reviews in order to assess our safety and soundness and also performs periodic on- and off-site reviews.soundness. For additional information, see "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments."
The Bank Act gives the Secretary of the Treasury the discretion to purchase Consolidated Obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977.
The U.S.United States Treasury receives a copy of the Finance Agency's annual report to the Congress, monthly reports reflecting the FHLBFHLBank System's securities transactions, and other reports reflecting the FHLBFHLBank System's operations. Our annual financial statements are audited by an independent registered public accounting firm in accordance with standards issued by the Public Company Accounting Oversight Board as well as the government auditing standards issued by the U.S.United States Comptroller General. The Comptroller General has authority under the Bank Act to audit or examine the Finance Agency and the FHLBFHLBank System and to decide the extent to which they fairly and effectively fulfill the purposes of the Bank Act. The Finance Agency's Office of Inspector General also has investigation authority over the Finance Agency and the FHLBank System.
GLB Act Amendments to the Bank Act
Act. Prior to the enactment of the GLB Act in 1999, the Bank Act provided for a "subscription" capital structure for the FHLBs.FHLBanks. Under that structure, a single class of capital stock was issued to members by their respective FHLBFHLBank pursuant to a statutory formula that required each member to purchase stock in an aggregate amount equal to the greatest of the following (i) $500; (ii) 1% of the member's total mortgage assets; or (iii) 5% of the Advances outstanding to the member. The stock was redeemable by a member that sought to withdraw from its FHLBFHLBank membership upon six months' prior written notice to that FHLB.FHLBank. Upon redemption, a member would receive the par value of its stock.
The GLB Act amended the Bank Act to provide a more flexible and permanent capital structure for the FHLBsFHLBanks by requiring that each FHLBFHLBank develop and implement a capital plan ("Capital Plan") that, among other things, would replace the previous single-class FHLBFHLBank capital stock with a new capital structure comprised of Class A Stock, Class B Stock, or both. Class A Stock is redeemable by a member upon six months' prior written notice to its FHLB.FHLBank. Class B Stock is redeemable by a member upon five years' prior written notice to its FHLB.FHLBank. Class B Stock also has a higher weighting than Class A Stock for purposes of calculating the minimum leverage requirement applicable to each FHLB.FHLBank.
The GLB Act amendments require that each FHLBFHLBank maintain permanent capital and total capital, as defined below, in sufficient amounts to comply with specified, minimum risk-based capital and leverage capital requirements.
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• | Permanent capital is defined as the amount we receive for our Class B Stock (including MRCS) plus our Retained Earnings. We are required to maintain permanent capital at all times in amount equal to our risk-based capital requirement, which includes the following components:
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Permanent capital is defined as the amount of our Class B Stock (including MRCS) plus our Retained Earnings. We are required to maintain permanent capital at all times in an amount equal to our risk-based capital requirement, which includes the following components:
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| ◦ | Credit risk capital requirement, which represents the sum of our credit risk charges for all assets, off-balance sheet items and derivative contracts, calculated using the methodologies and risk weights assigned to each classification in the regulations; |
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| ◦ | Market risk capital requirement, which represents the sum of the market value of our portfolio at risk from movements in interest rates, foreign exchange rates, commodity prices, and equity prices that could occur during periods of market stress, and the amount by which the market value of total capital is less than 85% of the book value of total capital; and |
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| ◦ | Operations risk capital requirement, which represents 30% of the sum of our credit risk and market risk capital requirements. |
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• | Total capital is defined as permanent capital plus a general allowance for losses plus any other amounts determined by the Finance Agency to be available to absorb losses. Total capital must equal at least 4% of Total Assets.
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Total capital is defined as permanent capital plus a general allowance for losses plus any other amounts determined by the Finance Agency to be available to absorb losses. Total capital must equal at least 4% of Total Assets.
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• | Leverage capital is defined as 150% of permanent capital. Leverage capital must equal at least 5% of Total Assets.
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Leverage capital is defined as 150% of permanent capital. Leverage capital must equal at least 5% of Total Assets.
From time to time, for reasons of safety and soundness, the Finance Agency may require one or more individual FHLBsFHLBanks to maintain more permanent capital or total capital than is required by the regulations. Failure to comply with these requirements or the minimum capital requirements could result in the imposition of operating agreements, cease and desist orders, civil money penalties, and other regulatory action, including involuntary merger, liquidation, or reorganization as authorized by the Bank Act.
In addition to changes in capital structure, the GLB Act also transferred more of the governance and management of each FHLBFHLBank to its board of directors and officers and away from the Finance Agency. This included the right of the directors to elect the chair and vice chair of the board of directors. The Finance Agency has issued guidance to the FHLBsFHLBanks on various topicsmatters that are now controlledgoverned by their boards but are of concern to the Finance Agency.
HERA Amendments to the Bank Act
Act. HERA eliminated the Finance Agency's authority to appoint directors to our board, and theboard. The appointed directors are now independent directors and are elected by the entire membership to four-year terms, subject to transitional staggerstaggered terms, which may be shorter. The member directors are also elected by each state to four-year terms (subject to staggering). HERA also eliminated the Finance Agency's authority to cap director fees but placed additional controls over executive compensation.
Government Corporations Control Act
Act. We are subject to the Government Corporations Control Act, which provides that, before we can issue and offer Consolidated Obligations to the public, the Secretary of the United States Treasury must prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price.
Furthermore, this Act provides that the United States Comptroller General may review any audit of the financial statements of an FHLBFHLBank conducted by an independent registered public accounting firm. If the Comptroller General undertakes such a review, the results and any recommendations must be reported to the Congress, the Office of Management and Budget, and the FHLBFHLBank in question. The Comptroller General may also conduct a separate audit of any of our financial statements.
Federal Securities Laws
Laws. Our shares of Class B Stock are registered with the SEC under the Exchange Act and we are subject to the information, disclosure, insider trading restrictions, and other requirements under the Exchange Act. We are not subject to the provisions of the Securities Act of 1933 as amended. We have been, and continue to be, subject to all relevant liability provisions of the Exchange Act.
Federal and State Banking Laws
Laws. We are not generally subject to the state and federal banking laws affecting U.S.United States retail depository financial institutions. However, as we do provide our members with certain correspondent services, such as wire transfer services, our activities are subject to certain requirements of the Bank Secrecy Act, as amended by the USA Patriot Act.Act, that are applicable to these services. We are, therefore, required to report suspicious activityactivities in limited circumstances, such as those involving the movement of large amounts of cash or the attempted wire transfer of funds to persons or countries that are on the U.S.United States government's restricted list. Further, we may become subjectThe Bank Act, as amended by HERA, requires the FHLBanks to additional requirements ifsubmit reports to the U.S. Treasury issues regulations governing ourFinance Agency concerning transactions involving financial instruments and loans that involve fraud or possible fraud. The Financial Crimes Enforcement Network has also issued a proposed rule that would require the FHLBanks to establish anti-money laundering programs and report suspicious activities in this area.to them pursuant to the Bank Secrecy Act and the USA Patriot Act, and otherwise to comply with such acts.
As a wholesale secured lender and a secondary market purchaser of mortgage loans, we are not, in general, directly subject to the various federal and state laws regarding consumer credit protection, such as anti-predatory lending laws. However, as non-compliance with these laws could affect the value of these loans as collateral or acquired assets, we require our members to warrant that all of the loans pledged or sold to us are in compliance with all applicable laws. On May 20, 2009, theThe Helping Families Save Their Homes Act of 2009 was signed into federal law. Among other things, this legislation requires that, when a mortgage loan (defined to include any consumer credit transaction secured by the principal dwelling of the consumer) is sold or transferred, the new creditor shall, within 30 days of the sale or transfer, notify the borrower of the following: the identity, address and telephone number of the new creditor; the date of transfer; how to reach an agent or party with the authority to act on behalf of the new creditor; the location of the place where the transfer is recorded; and any other relevant information regarding the new creditor. In accordance with this statute, we began providingprovide the appropriate notice to borrowers whose mortgage loans we purchase under our MPP and have established procedures to ensure compliance with this new notice requirement.
Regulatory Enforcement Actions
Actions. While examination reports are confidential between the Finance Agency and an FHLB,FHLBank, the Finance Agency may publicly disclose supervisory actions or agreements that the Finance Agency has entered into with an FHLB.FHLBank. We are not subject to any such Finance Agency actions, and we do not believe any current Finance Agency actions with respect to other FHLBsFHLBanks will have a material adverse effect on our cost of funds.
Membership Trends and Geographic Distribution
Our membership territory is comprised of the states of Indiana and Michigan. At IDecember 31, 2010n 2011, we gained , we had 410 members, compared to 417 members at December 31, 2009. While we experienced a loss of thirteen members in 2010, it was partially offset by six15 new members comprisedand lost nine members, for a net gain of two credit unions and four insurance companies.six members. Historically, few of our members have chosen to withdraw from membership other than in connection with mergers and consolidations. However, during 2010,During 2011, we lost threefour members as a result of regulatory resolution actions due to their distressed financial condition.
The following table presents the composition of our members by type of financial institution: | | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Commercial banks | | 221 | | | 230 | | | 218 |
| | 221 |
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| Thrifts | | 47 | | | 48 | | | 46 |
| | 47 |
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| Credit unions | | 100 | | | 101 | | | 105 |
| | 100 |
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| Insurance companies | | 42 | | | 38 | | | 47 |
| | 42 |
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| Total member institutions | | 410 | | | 417 | | | 416 |
| | 410 |
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Competition
We operate in a highly competitive environment. Demand by members for Advances is affected by, among other factors, the cost and availability of other sources of funds, including deposits. We compete with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include the U.S.United States government, deposit insurers, the Federal Reserve Banks, investment banking concerns, commercial banks, and in certain circumstances, other FHLBs.FHLBanks. An example of these circumstances occurs when a financial holding company has subsidiary banks that are members of different FHLBs,FHLBanks, and can, therefore, choose to take Advances from the FHLBFHLBank with the best terms. Larger institutions may have access to all of these alternatives as well as independent access to the national and global credit markets. The availability of alternative funding sources can be affected by a variety of factors, including market conditions, members' creditworthiness and regulatory restrictions, liquidity access from other government sources (such as the FDIC, a Federal Reserve Bank or the U.S. Treasury) and availability of collateral and its valuation. During 2010, our members' demand for Advances was influenced by several factors, including high deposit levels and low lending activity.
Likewise, MPP is subject to significant competition. The most direct competition for mortgage purchases comes from other buyers of government-guaranteed or conventional, conforming fixed-rate mortgage loans such as Ginnie Mae, Fannie Mae and Freddie Mac.
We also compete with Fannie Mae, Freddie Mac and other GSEs as well as corporate, sovereign, and supranational entities for funds raised through the issuance of CO Bonds, Discount Notes, and other debt instruments. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued on our behalf at the same cost than otherwise would be the case. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Financial Trends in theThe Capital Markets"Markets for additional information.
Employees
As of December 31, 20102011, we had 170174 full-time employees and five part-time employees, compared to 159170 full-time employees and five part-time employees at December 31, 20092010. A collective bargaining unit does not represent the employees.
Available Information
Our Annual and Quarterly Reports on Forms 10-K and 10-Q, together with our Current Reports on Form 8-K, are filed with the SEC through the EDGAR filing system. You mayA link to EDGAR is available through our public website at www.fhlbi.com by selecting "Investor Relations/Financial Publications."
We have a Code of Conduct that is applicable to all directors, officers, and employees and the members of our Affordable Housing Advisory Council. The Code of Conduct is available on our website at www.fhlbi.com by clicking onselecting "About" and then selecting "Code of Conduct" from the drop-down menu.
Our 2012 Community Lending Plan describes our plan to address the credit needs and market opportunities in our district states of Indiana and Michigan. It is available on our website at www.fhlbi.com by selecting "Community Investment" and then selecting "Publications, Bulletins and Presentations" from the drop-down menu.
We are providing our website address and the SEC's website address solely for the reader's information. Information appearing on our website is not incorporated into this Annual Report on Form 10-K. Except where expressly stated, information appearing on the SEC's website is not incorporated into this Annual Report on Form 10-K.
You may also request a copy of any of our public financial reports, or our Code of Conduct or our 2012 Community Lending Plan through our Corporate Secretary at FHLBFHLBank of Indianapolis, 8250 Woodfield Crossing Boulevard, Indianapolis, IN 46240, (317) 465-0200.
ItemITEM 1A. RISK FACTORS
We use certain acronyms and terms throughout this section of the Form 10-K which are defined in the Glossary of Terms located in Item 15. Exhibits and Financial Statement Schedules.
We have identified the following risk factors that could have a material adverse effect on our business, financial condition and/or results of operations.
Economic Conditions Particularly in our District, Could Have an Adverse Effect on Our Business, Financial Condition, and Results of Operations.
Our business, financial condition, and results of operations are sensitive to general domesticinternational and internationaldomestic business and economic conditions, such as changes in short-term and long-term interest rates and the money supply, inflation, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we conduct business.
Our business and results of operations are significantly affected by the fiscal and monetary policies of the United States government and its agencies, including the Federal Reserve Board through its regulation of the supply of money and credit in the United States. The Federal Reserve Board's policies either directly or indirectly influence the yield on our interest-earning assets, the cost of our interest-bearing liabilities and the demand for our Consolidated Obligations. The Federal Reserve Board has taken several measures intended to depress short-term and longer-term interest rates. These measures as well as other systemic events, such as the European sovereign debt crisis, could adversely affect our results of operations in many ways, such as through lower market yields on our investments and faster prepayment speeds on our investments with associated reinvestment risk. Also, changes in investors' perceptions in either the strength of the United States economy or availability of investment in overseas capital markets could lead to changes in foreign investors' interest in our Consolidated Obligations.
Our district is comprised of the states of Indiana and Michigan. Economic data for our district have generally been unfavorable compared to national data, with unemployment and foreclosure rates higher than national rates. The slow recovery from the financial crisis, unfavorable economic conditions and effects on the competitiveness of our business model from current or future federal government actions to improve economic conditions could result in additional unfavorable consequences for our business, including further reductions in our statutory mission activities and lower profitability.
Inability to Access Capital Markets Could Adversely Affect Our Liquidity, Our Operations, Our Financial Condition and Results of Operations and the Value of Membership in Our Bank.
Unfavorable conditions in the U.S. economyglobal and domestic economies could significantly increase our liquidity risk. Our primary source of funds is the sale of Consolidated Obligations in the capital markets. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, such as investor demand and liquidity in the financial markets. Severe financial and economic disruptions, and the U.S.United States government's measures to mitigate their effects, cancould change the traditional bases on which market participants value GSE debt securities and consequently could affect our funding costs and practices, which could make it more difficult and more expensive to issue longer-term debt. This would necessitatecould result in focusing our efforts on short-term debt funding with maturities of six months or less. Any significant disruption of the short-term debt market could have a serious impact on our Bank and the FHLBFHLBank System.
If we are unable to access funding when needed on acceptable terms, our ability to support and continue our operations could be adversely affected, which could negatively affect our financial condition and results of operations and the value of membership in our Bank.
Adverse Our Credit Rating, the Credit Rating of One or More of the Other FHLBanks, or the Credit Rating of the Consolidated Obligations Could be Lowered, Which Could Adversely Impact Our Cost of Funds, Our Ability to Access the Capital Markets, and/or Our Ability to Enter Into Derivative Instrument Transactions on Acceptable Terms.
In August 2011, S&P and Moody's each took various negative actions regarding credit ratings on the FHLBanks and the FHLBank System's Consolidated Obligations, based on the implied linkage between the FHLBanks and the FHLBank System's Consolidated Obligations, and the United States government. Each of the 12 FHLBanks and the Consolidated Obligations are currently rated AA+ with a negative outlook by S&P and Aaa with a rating outlook of negative by Moody's. S&P's and Moody's rating outlooks assess the potential direction of a long-term credit rating over the medium term (usually six months to two years) depending on their assessment of the general economic and/or business conditions.
Although these recent rating actions have not had an impact on our funding costs, uncertainty still remains regarding possible longer-term effects resulting from these rating actions. Our cost of issuing debt could be adversely affected if the credit ratings of one or more other FHLBanks are lowered. Any future downgrades in our credit ratings and outlook could result in higher funding costs or disruptions in our access to capital markets, including additional collateral posting requirements under certain derivative instrument agreements. Furthermore, member demand for certain of our products could possibly weaken. To the extent that we cannot access funding when needed on acceptable terms to effectively manage our cost of funds, our financial condition and results of operations and the value of membership in our Bank may be negatively affected.
Changes in Interest Rates Could Have a Material Adverse Effect on Earnings, Including Potential Loss.Earnings.
An adverseA change in interest rates or a change in the level or shape of the yield curve could result in reduced earnings. We purchase mortgage loans, MBS, and ABS at both premiums and discounts. Any growth in these portfolios could increase our interest rate risk. A decrease in the size of these portfolios could have an adverse effect on our earnings. A number of measures are used to monitor and manage interest rate risk. We make certain key assumptions, including prepayment speeds on mortgage-related assets, cash flows, loan volumes, and pricing. These assumptions are inherently uncertain and, as a result, it is impossible to accurately predict the impact of higher or lower interest rates on our earnings.
In addition, conditions in the housing and mortgage markets have resulted in an environment that mademakes it difficult to refinance mortgages or sell homes. These conditions occurred concurrently with a large drop in market interest rates which allowed us to exercise calls of our debt and reissue it at a lower cost. As a result, mortgage spreads are currentlyhave been much wider than historic norms. As the existing portfolio is paid down, the overall portfolio spread willmay continue to decline.
Our Exposure to Credit Risk Could Adversely Affect Our Financial Condition and Results of Operations.
We are exposed to credit risk from member products, investment securities and unsecured counterparties. The continuing deterioration of real estate property values could further affect the mortgages pledged as collateral for Advances, loans purchased through our MPP, and MBS.
During 2010,2011, the financial services industry continued to experience an increase in both financial institution failures and acquisitions to resolve distressed institutions. If a member fails and the FDIC or the member (or another applicable entity) does not either (i) promptly repay all of the failed institution's obligations to our Bank or (ii) assume the outstanding Advances, we may be required to liquidate the collateral pledged by the failed institution. The proceeds realized from the liquidation may not
be sufficient to fully satisfy the amount of the failed institution's obligations plus the operational cost of liquidation, particularly when the volatility of market prices and interest rates adversely affect the value of the collateral. Price volatility could also adversely impact our determination of collateral weightings, which could ultimately cause a collateral deficiency in a liquidation action. In some cases, we may not be able to liquidate the collateral in a timely manner.
As noted above, mortgage collateral pledged by our members may have decreased in value. In order to remain fully collateralized, we may require members to pledge additional collateral, when deemed necessary. This requirement may adversely affect members that lack additional assets to pledge as collateral. If members are unable to collateralize their obligations with us, our Advances could decrease further, negatively affecting our results of operations.
Since the inception of the MPP, we have acquired only traditional fixed-rate loans with fixed terms of up to 30 years. Delinquencies in prime fixed-rate mortgages have increased, and residential property values in many states have declined. If delinquency rates and loss severity on mortgage loans continue to increase, we could experience further reduced yields or losses on our MPP portfolio, exceeding the protection provided by the LRA and SMI credit enhancement.
The MBS market continues to face uncertainty over the effect of further home price deterioration and of existing, new or proposed governmental actions (including mortgage loan modification programs), as well as ongoing private-label MBS litigation and the reduction or elimination of Federal Reserve holdings of MBS.
During 2009 and 2010,the past few years, the NRSROs downgraded a significant number of private-label MBS, including severalmany in our portfolio. These and other factors have led to the deterioration of the fair value of our private-label MBS, as well as other-than-temporary impairmentOTTI charges for many of our private-label MBS.
Further declines in the housing price forecast assumptions, as well as other assumptions, such as increased loan default rates and loss severities and decreased prepayment speeds, may result in additional material other-than-temporary impairment charges or unrealized losses on private-label MBS in future periods, which could materially adversely affect our financial condition and operating results.
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• | money market counterparties; |
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• | derivative counterparties; |
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• | third-party providers of credit enhancements on the MBS investments that we hold in our investment portfolios, including mortgage insurers, bond insurers and financial guarantors; |
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• | third-party providers of PMI and SMI for mortgage loans purchased under our MPP; |
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• | servicers for mortgage loans we hold as collateral on Advances; and |
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• | servicers for mortgage loans purchased under our MPP. |
We assume unsecured credit risk when entering into money market transactions and financial derivatives transactions with domestic and foreign counterparties. A counterparty default could result in losses if our credit exposure to that counterparty were not collateralized or if our credit obligations associated with derivative positions were over-collateralized. The insolvency or other inability of a significant counterparty to perform its obligations under such transactions or other agreements could have an adverse effect on our financial condition and results of operations.
The European debt crisis, which has resulted in deteriorating economic conditions in Europe and ratings agency downgrades of the sovereign debt ratings of several European countries, has increased foreign credit risk. Continued European economic difficulties could indirectly have a material adverse effect on our credit performance and results of operations and financial condition to the extent it negatively affects the U.S. economy.
Our ability to engage in routine derivatives, funding and other transactions could be adversely affected by the soundness of financial institutions that transact business with our counterparties. Financial serviceservices institutions are interrelated as a result of trading, clearing, counterparty and/or other relationships. As a result,Consequently, financial difficulties experienced by one or more financial services institutions could lead to market-wide disruptions that may impair our ability to find counterparties for routine business transactions. For information on legislation regarding derivatives clearinghouses and related matters, please refer to "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments"Developments.
Other exposures to institutional counterparty risk are with:
third-party providers of credit enhancements on the MBS investments that we hold in our investment portfolios, including mortgage insurers, bond insurers and financial guarantors;
third-party providers of PMI and SMI for mortgage loans purchased under our MPP;
servicers for mortgage loans we hold as collateral on Advances; and
servicers for mortgage loans purchased under our MPP.
Changes in the Legal and Regulatory Environment May Adversely Affect Our Business, Demand for Advances, the Cost of Debt Issuance, and the Value of FHLBFHLBank Membership.
We could be materially adversely affected by the adoption of new or revised laws, policies, regulations or accounting pronouncements or changes in existing laws, policies or regulations;guidance; new or revised interpretations or applications of laws, policies, or regulations by the Finance Agency, its Office of Inspector General, the SEC, the Commodity Futures Trading Commission,CFTC, the Consumer Financial Protection Bureau, the Financial Stability Oversight Council, the Comptroller General, FASB or other federal or state regulatory bodies; judicial decisions that modify the
present regulatory environment; and the failure of certain regulatory rules or policies to change in the manner we anticipated at the time we established our own rules and policies.
Changes that restrict the growth of our current business or prohibit the creation of new products or services could negatively impact our earnings. Further, the regulatory environment affecting members could be changed in a manner that would negatively impact their ability to take full advantage of our products and services, our ability to rely on their pledged collateral, or their desire to maintain membership in our Bank.
In September 2008, the Finance Agency placed Fannie Mae and Freddie Mac into conservatorship, and the U.S.United States Treasury put in place a set of financing agreements to help those GSEs continue to meet their debt service obligations. The future role of the housing GSEs has been a national topic of discussion since Fannie Mae and Freddie Mac were placed into conservatorship. While these discussions have focused on Fannie Mae and Freddie Mac, the FHLBFHLBank System's role in the U.S.United States housing market and the FHLBFHLBank System's status as a GSE are also part of the discussions. On February 11, 2011, the U.S.United States Departments of the Treasury and Housing and Urban Development issued a joint report mandated by the Dodd-Frank Act, outlining a plan to wind down Fannie Mae and Freddie Mac as well as significantly reduce the U.S.United States government’s role in housing finance. This plan proposes key reforms to address several areas in the current U.S.United States mortgage market with the aim to improve consumer protection, transparency to investors, underwriting standards and other critical measures. These proposed reforms include:include winding down Fannie Mae and Freddie Mac while helping bring private capital to the mortgage market; fixing the fundamental flaws in the mortgage market; reevaluating the United States government’s support for affordable housing; and restructuring the United States government’s future role in the housing market.
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• | winding down Fannie Mae and Freddie Mac while helping bring private capital to the mortgage market; |
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• | fixing the fundamental flaws in the mortgage market; |
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• | reevaluating the U.S. government’s support for affordable housing; and |
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• | structuring the U.S. government’s future role in the housing market. |
Although the FHLBsFHLBanks are not the primary focus, the report identifies possible reforms for the FHLBFHLBank System, which would:
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• | focus the FHLBs on small- and medium-sized financial institutions; |
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• | restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLB; |
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• | limit the level of outstanding advances to individual members, affecting the large financial institutions; and |
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• | reduce the FHLBs’ investment portfolios and their composition, focusing the FHLBs on providing liquidity for insured depository institutions. |
focus the FHLBanks on small- and medium-sized financial institutions;
limit a holding company and its subsidiaries to membership in a single FHLBank when the subsidiaries are located in different FHLBank districts and would otherwise be eligible to join different FHLBanks;
limit the level of outstanding advances to individual members, thereby affecting the large financial institutions; and
reduce the FHLBanks’ investment portfolios and their composition, focusing the FHLBanks on providing liquidity for insured depository institutions.
The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market. A developed covered bond market could compete with FHLBour Advances. If housing GSE reform legislation is enacted incorporating these requirements, the FHLBswe could be significantly limited in theirour ability to make Advances to theirour members and subject to additional limitations on theirour investment authority.
Given the current uncertainty surrounding the timing and pace of the above reforms, the FHLBs’our funding costs and access to funds may be adversely affected by changes in investors’ perceptions of the risks associated with the housing GSEs. Additionally, investor concerns about U.S.United States agency debt and the U.S.United States agency debt market may also adversely affect the FHLBs’our competitive position and result in higher funding costs, which could negatively affect the FHLBs’our earnings. A reduction in our investment portfolio or a change in its composition could adversely impact our earnings and dividends. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments"Developments for more information regarding this report or other recent and pending legislative and regulatory developments.
On July 21, 2010, the U.S.United States government enacted the Dodd-Frank Act. The Dodd-Frank Act made significant changes to the overall regulatory framework of the U.S.United States financial system. Several provisions in the Dodd-Frank Act could affect us and our members, depending on how the various regulators decide to implement this federal law through the issuance of regulations and their enforcement activities. For example, if the Financial Stability Oversight Council established by the Dodd-Frank Act decidedwere to decide that we are a non-bank financial company, then we would be subject to the supervision of the Federal Reserve Board. Other provisions may not directly affect us but could affect our members. For example, this law establishes a solvency framework to address the failure of a financial institution, which could include one or more of our members. Because the Dodd-Frank Act requires several regulatory bodies to carry out its provisions, the full effect of this law remains uncertain until after the required regulations and reports to Congress are issued and implemented. For additional information concerning this legislation, please refer to "Item Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments."
A SignificantFailure or Prolonged DelayInterruption in the InitiationOur Information Systems or Completion of Foreclosure Proceedings on Mortgage Loans May Have a Materially Adverse Effect onCybersecurity Event Could Adversely Affect Our Business, Member Relations, Risk Management, Financial Condition, and Results of Operations.Operations, and Reputation.
ThereWe have recently been widely publicized allegationsnot experienced a failure or disruption in our information systems or a cybersecurity event that employeeshas had a material adverse impact on our business. However, we rely heavily on our information systems and other technology to conduct and manage our business. If we experience a failure or interruption in any of certain financial institutions have approved thousandsthese systems or a cybersecurity event, we may be unable to conduct and manage our business effectively, including, without limitation, our Advances and hedging activities.
Our operations rely on the secure processing, storage and transmission of foreclosures attestingconfidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could jeopardize the accuracy of the documents without having personal knowledge of the contentsconfidentiality or integrity of such documents. As a result, there have been regulatory initiatives proposed by federal and state agencies to delay the initiationinformation, or completion of foreclosure proceedings on specified types of mortgage loans. In addition, certain mortgage lenders voluntarily suspended foreclosures while they reviewed their foreclosure documentation and procedures. A significantotherwise cause interruptions or prolonged delay of mortgage foreclosure proceedings may have a materially adverse effect on the market value of the underlying collateralmalfunctions in our mortgage investments,operations, which wouldcould result in significant losses, damage to our reputation, litigation, regulatory fines or penalties, or adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.
During 2011, we began an enterprise-wide initiative to replace our core banking system. This implementation, which is expected to take several years, along with several other key initiatives simultaneously undertaken, could subject us to a higher risk of failure or interruption. Any failure or interruption could adversely affect our Advances business, member relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.
A Failure to Meet Minimum Regulatory Capital Requirements Could Affect Our Ability to Pay Dividends, Redeem or Repurchase Capital Stock, and Attract New Members.
We are required to maintain sufficient capital to meet specific minimum requirements, as defined by the Finance Agency. Historically, our capital has exceeded all capital requirements, and we have maintained adequate capital and leverage ratios. However, if we violate any of these requirements or if our board or the Finance Agency determine that we have incurred, or are likely to incur, losses resulting, or losses that are expected to result, in a charge against capital, we would not be able to redeem or repurchase any capital stock while such charges are continuing or expected to continue. Violations could also result in restrictions pertaining to dividend payments, lending, investment, MPP activities, or other business activities. Additionally, the Finance Agency could require that we call upon our members to purchase additional capital stock to meet our minimum regulatory capital requirements. Members may be unable or unwilling to satisfy such calls for additional capital, thereby affecting their desire to continue doing business with our Bank.
Continued declines in market conditions could result in performance that causes our capital ratio to fall below a required level. The formula for calculating risk-based capital includes factors that are dependent on interest rates and other market metrics outside our control and could cause the minimum requirement to increase to a point exceeding our capital level. Further, if our Retained Earnings were to become negative, the Finance Agency could initiate restrictions consistent with those associated with failure of a minimum capital requirement.
The stability of our capital is also important in maintaining the value of membership in our Bank. FailureBusiness and Financial Models Used to meet minimum capital requirements, the inabilityPrepare Our Financial Statements and Evaluate Various Financial Risks Could Fail to pay dividendsProduce Reliable Projections or repurchase stock at par, or a request for capital contributions to restore capital could make it more difficult for us to attract new members or retain existing members.
Our Credit Rating or the Credit Rating of One or More of the Other FHLBs Could be Lowered,Valuations, Which Could Adversely ImpactAffect Our CostBusiness, Financial Condition, Results of Funds or Ability to Enter Into Derivative Instrument Transactions on Acceptable Terms.Operations and Risk Management.
We currently have counterparty ratings of AAA/A-1+ and Aaa/P-1, with a stable outlook from S&P and Moody's, respectively. Adverse circumstances could cause either rating to be lowered at some point in the future, which would adversely affect our costs of doing business, including the cost of issuing debt.
Our financial strategies are highly dependent on our ability to enter into derivative transactions on acceptable terms to reduce interest-rate risk and funding costs. Rating agencies could lower our credit rating or issue negative reports, which may adversely affect our ability to enter into derivative transactions with acceptable parties on satisfactory terms in the quantities necessary to manage our interest-rate risk and funding costs on Consolidated Obligations.
Our cost of issuing debt could be adversely affected if the credit ratings of one or more other FHLBs are lowered. The following table shows the S&P and Moody's long-term credit ratings for each of the FHLBs as of March 11, 2011:
S&P/Moody's
Federal Home Loan Banks Rating and Outlook | | | | | | | | |
| | S&P | | Moody's |
Federal Home Loan Banks | | Rating | | Outlook | | Rating | | Outlook |
Atlanta | | AAA | | Stable | | Aaa | | Stable |
Boston | | AAA | | Stable | | Aaa | | Stable |
Chicago | | AA+ | | Stable | | Aaa | | Stable |
Cincinnati | | AAA | | Stable | | Aaa | | Stable |
Dallas | | AAA | | Stable | | Aaa | | Stable |
Des Moines | | AAA | | Stable | | Aaa | | Stable |
Indianapolis | | AAA | | Stable | | Aaa | | Stable |
New York | | AAA | | Stable | | Aaa | | Stable |
Pittsburgh | | AAA | | Stable | | Aaa | | Stable |
San Francisco | | AAA | | Stable | | Aaa | | Stable |
Seattle | | AA+ | | Negative | | Aaa | | Stable |
Topeka | | AAA | | Stable | | Aaa | | Stable |
Competition Could Negatively Impact Our Access to Funding, Our Earnings, Advances and Investments, and the Supply of Mortgage Loans for MPP.
We operate in a highly competitive environment. Demand for Advances is affected by, among other factors, the cost and availability of other sources of liquidity for our members, including deposits. We compete with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include the U.S. government, deposit insurers, the Federal Reserve Banks, investment banking concerns, commercial banks and, in certain circumstances, other FHLBs. Large institutions may also have independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for Advances and can vary as a result of a variety of factors, including market conditions, members' creditworthiness, and availability of collateral. Lower demand for Advances could negatively impact our earnings by reducing interest income.
Likewise, the MPP is subject to significant competition. The most direct competition for purchases of mortgages comes from other buyers of conventional, conforming, fixed-rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in smaller market share of the mortgages available for purchase and, therefore, lower income from these investments.
We also compete with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of CO Bonds, Discount Notes, and other debt instruments. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of Consolidated Obligations has kept pace with our funding needs, there can be no assurance that this will continue at the level required for our operational needs.
Loss of One or More Large Customers Could Adversely Impact Our Profitability, Our Ability to Achieve Business Objectives, and Our Risk Concentration.
The loss of a large customer could result from a variety of factors, including acquisition, consolidation of charters within a bank holding company, or resolution of a financially distressed member. As of December 31, 2010, our top two Advances customers accounted for 31% of total Advances, at par. The loss of any large customer could adversely impact our profitability and our ability to achieve business objectives.
At December 31, 2010, our top two MPP customers accounted for 53% of outstanding MPP assets, at par. These customers are no longer our members because they no longer have charters within our district. Although the mortgage loans purchased through our MPP remain outstanding until prepayment or maturity, we are no longer able to purchase mortgage loans from these customers. We currently purchase mortgage loans from smaller PFIs that predominantly originate mortgage loans in Indiana and Michigan. Over time, we expect our concentration of MPP loans from Indiana and Michigan to increase.
Providing Financial Support to Other FHLBs Could Negatively Impact Our Members.
We are jointly and severally liable with the other FHLBs for the Consolidated Obligations issued on behalf of the FHLBs through the Office of Finance. We may not pay any dividends to members or redeem or repurchase any shares of our capital stock if the principal and interest due on all Consolidated Obligations have not been paid in full when due. If another FHLB were to default on its obligation to pay principal or interest on any Consolidated Obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBs on a pro-rata basis or on any other basis the Finance Agency may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBs. Although no FHLB has ever defaulted on its debt obligations since the FHLB System was established in 1932, the economic crisis has adversely impacted the capital adequacy and financial results of some FHLBs. In addition to servicing debt under our joint and several liability, we may voluntarily or involuntarily provide financial assistance to another FHLB in order to resolve a condition of financial distress.
Operations Risk Could Cause Unexpected Losses.
Operations risk is the risk of unexpected losses attributable to human error, systems failures, fraud, unenforceability of contracts, or inadequate internal controls and procedures.
We make significant use of sophisticated financial models when preparing financial statements and evaluating various financial risks. Our business could be adversely affected if those models fail to produce reliable projections or valuations. These models, which rely on various inputs and require management to make critical judgments about the appropriate assumptions that are used in the calculations, may overstate or understate the value of certain financial instruments, future performance expectations, and our level of risk exposure. Our models could produce unreliable results for a number of reasons, including, but not limited to, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products or events outside the model's intended use. In particular, models are less dependable when the economic environment is outside of historical experience, as has been the case in recent years. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates"Estimates for more information.
A Significant or Prolonged Delay in the Initiation or Completion of Foreclosure Proceedings on Mortgage Loans May Have a Materially Adverse Effect on Our Business, Financial Condition and Results of Operations.
During 2010, there were widely publicized allegations that employees of certain financial institutions had approved thousands of foreclosures attesting to the accuracy of the documents without having personal knowledge of the contents of such documents. As a result, regulatory initiatives were proposed by federal and state agencies to delay the initiation or completion of foreclosure proceedings on specified types of mortgage loans. In October 2010, a number of single-family mortgage servicers temporarily halted some or all of the foreclosures they were processing after discovering deficiencies in their own and their service providers’ foreclosure processes. The servicer foreclosure process deficiencies have generated significant concern and have been reviewed by various government agencies and the various state attorneys general. On February 9, 2012, a settlement was announced among five of the nation’s largest mortgage servicers (Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC)) and the federal government and 49 state attorneys general. The announced settlement, among other things, will require implementation by those mortgage servicers of certain new servicing and foreclosure practices. Although servicers have generally ended their outright foreclosure halts, the processing of foreclosures continues to be slow in many states due to continuing issues in the servicer foreclosure process, including efforts by servicers to comply with regulatory consent orders and requirements, recent changes in state foreclosure laws, court rules and proceedings, and the pipeline of foreclosures resulting from these delays as well as the elevated level of foreclosures caused by the housing market downturn. In addition, inadequate court budgets in certain states could further delay the processing of foreclosures.
A significant or prolonged delay of mortgage foreclosure proceedings may have a materially adverse effect on the market value of the underlying collateral in our mortgage investments, which could adversely affect our business, financial condition and results of operations.
A Failure to Meet Minimum Regulatory Capital Requirements Could Affect Our Ability to Pay Dividends, Redeem or Repurchase Capital Stock, and Attract New Members.
We are required to maintain sufficient capital to meet specific minimum requirements, as defined by the Finance Agency. Historically, our capital has exceeded all capital requirements, and we have maintained adequate capital and leverage ratios. However, if we violate any of these requirements or if our board or the Finance Agency determines that we have incurred, or are likely to incur, losses resulting, or losses that are expected to result, in a charge against capital, we would not be able to redeem or repurchase any capital stock while such charges are continuing or expected to continue. Violations could also result in restrictions pertaining to dividend payments, lending, investment, MPP activities, or other business activities. Additionally, the Finance Agency could require that we call upon our members to purchase additional capital stock to meet our minimum regulatory capital requirements. Members may be unable or unwilling to satisfy such calls for additional capital, thereby affecting their desire to continue doing business with our Bank.
The formula for calculating risk-based capital includes factors that are dependent on interest rates and other market metrics outside our control and could cause the minimum requirement to increase to a point exceeding our capital level. Further, if our Retained Earnings were to become inadequate or negative, the Finance Agency could initiate restrictions consistent with those associated with failure of a minimum capital requirement.
The stability of our capital is also important in maintaining the value of membership in our Bank. Failure to meet minimum capital requirements, the inability to pay dividends or repurchase stock at par, or a request for capital contributions to restore capital could make it more difficult for us to attract new members or retain existing members.
Competition Could Negatively Impact Our Access to Funding, Our Earnings, Advances and Investments, and the Supply of Mortgage Loans for MPP.
We operate in a highly competitive environment. Demand for Advances is affected by, among other factors, the cost and availability of other sources of liquidity for our members, including deposits. We compete with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include the United States government, deposit insurers, the Federal Reserve Banks, investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Large institutions may also have independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for Advances and can vary as a result of a variety of factors, including market conditions, members' creditworthiness, and availability of collateral. Lower demand for Advances could negatively impact our earnings.
Likewise, the MPP is subject to significant competition. The most direct competition for purchases of mortgages comes from other buyers of conventional, conforming, fixed-rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in smaller market share of the mortgages available for purchase and, therefore, lower earnings.
We also compete with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of CO Bonds, Discount Notes, and other debt instruments. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of Consolidated Obligations has kept pace with our funding needs, there can be no assurance that this will continue at the level required for our future operational needs.
Loss of One or More Large Customers Could Adversely Impact Our Profitability, Our Ability to Achieve Business Objectives, and Our Risk Concentration.
The loss of a large customer could result from a variety of factors, including acquisition, consolidation of charters within a bank holding company, or resolution of a financially distressed member. As of December 31, 2011, our top two borrowers, Flagstar Bank, FSB and Jackson National Life Insurance Company, held $4.0 billion and $1.9 billion, respectively, or a total of 33%, of total Advances outstanding, at par. The loss of any large customer could adversely impact our profitability and our ability to achieve business objectives.
At December 31, 2011, our top two MPP customers accounted for 47% of outstanding MPP assets, at par. These customers are no longer our members because they no longer have charters within our district. Although the mortgage loans purchased through our MPP remain outstanding until prepayment or maturity, we are no longer able to purchase mortgage loans from these customers. We currently purchase mortgage loans from smaller PFIs that predominantly originate mortgage loans in Indiana and Michigan. Over time, we expect our concentration of MPP loans originating in Indiana and Michigan to increase.
Providing Financial Support to Other FHLBanks Could Negatively Impact Our Members.
We are jointly and severally liable with the other FHLBanks for the Consolidated Obligations issued on behalf of the FHLBanks through the Office of Finance. We may not pay any dividends to members or redeem or repurchase any shares of our capital stock if the principal and interest due on all Consolidated Obligations have not been paid in full when due. If another FHLBank were to default on its obligation to pay principal or interest on any Consolidated Obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro-rata basis or on any other basis the Finance Agency may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks. Although no FHLBank has ever defaulted on its debt obligations since the FHLBank System was established in 1932, the economic crisis has adversely impacted the capital adequacy and financial results of some FHLBanks. In addition to servicing debt under our joint and several liability, we may voluntarily or involuntarily provide financial assistance to another FHLBank in order to resolve a condition of financial distress.
Damage Caused by Natural Disasters, Acts of War, or Acts of Terrorism Could Adversely Affect Our Financial Condition and Results of Operations.
Damage caused by natural disasters, acts of war, or acts of terrorism could adversely affect us or our members, leading to impairment of assets and/or potential loss exposure. Real property that could be damaged in these events may serve as collateral for Advances, or security for the mortgage loans we purchase from our members or the non-agency MBS securities we hold as investments. If this real property is not sufficiently insured to cover the damages that may occur, the member may have insufficient other collateral to fully secure its Advances, or the mortgage loan sold to us may be severely impaired in value.
ITEM 2. PROPERTIES
We own an office building containing approximately 117,000 square feet of office and storage space at 8250 Woodfield Crossing Boulevard, Indianapolis, IN, of which we use approximately 65,000 square feet. We lease or hold for lease to various tenants the remaining 52,000 square feet .feet. We also maintain a leased off-site backup facility of approximately 6,800 square feet, which is on a separate electrical distribution grid. See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Operations Risk Management"Management for additional information.
In the opinion of management, our physical properties are suitable and adequate. All of our properties are insured to nearly replacement cost. In the event we were to need more space, our lease terms with tenants generally provide the ability to move tenants to comparable space at other locations at our cost for moving and outfitting any replacement space to meet our tenants' needs.
ItemITEM 3. LEGAL PROCEEDINGS
We are unaware of any potential claims against us that could be material.
Lehman Brothers Bankruptcy
On September 15, 2008, Lehman Brothers Holdings Inc. ("LBHI"), the guarantor for one of our former derivatives counterparties, Lehman Brothers Special Financing ("Lehman"), filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Due to LBHI's bankruptcy, we delivered a notice to Lehman on September 22, 2008 declaring an event of default under the International Swaps and Derivatives Association Master Agreement between us and Lehman ("ISDA Agreement") and terminated the transactions and designated September 25, 2008 as the "Early Termination Date" under the ISDA Agreement. On the Early Termination Date, we had approximately $5.3 billion notional amount of derivatives transactions outstanding with Lehman and no collateral posted to Lehman. After valuing the terminated transactions as of the Early Termination Date, we remitted approximately $95.6 million to Lehman on such date. Lehman's bankruptcy remains pending in the Bankruptcy Court as Chapter 11 Case No. 08-13555(JMP).
On May 9, 2011, we received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate, making a demand as of the date of the notice of approximately $2.1 million allegedly owed by us to Lehman. Subsequently, in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court, dated September 17, 2009 ("Order"), we responded to Lehman, denying Lehman's demand. Lehman served us a reply on June 23, 2011, effectively reiterating its position. The mediation conducted pursuant to the Order commenced on December 15, 2011 and concluded with a settlement on December 28, 2011. The amount we paid to Lehman under the settlement is immaterial.
Private-Label Mortgage-Backed Securities Litigation
On October 15, 2010, the Bankwe filed a complaint in the Superior Court of Marion County, Indiana, relating to 3230 private-label MBSmortgage-backed securities we purchased by the Bank in the aggregate original principal amount of approximately $2.96$2.7 billion. The Bank's complaint, which has been amended, is an action for rescission and damages and asserts claims for negligent misrepresentation and violations of state and federal securities lawslaw occurring in connection with the sale of these private-label MBS.mortgage-backed securities.
The table below provides additional information concerning the private-label residential MBS at issue in the amended complaint, including the original principal amount of each security, the defendants named in the complaint,defendants and their alleged respective capacities with respect to each security.
| | | Number | Number | Original Face Amount | Defendants | Capacities | Number | Original Face Amount | Defendants | Capacities |
| 1 | | $ | 70,000,000 | | Banc of America Mortgage Securities, Inc. | Depositor |
| $ | 70,000,000 |
| Banc of America Mortgage Securities, Inc. | Depositor |
| | | | Bank of America Securities LLC | Underwriter / Seller | | | Bank of America Securities LLC | Underwriter / Seller |
| | | | Bank of America Corporation | Controlling Person | | | Bank of America Corporation | Controlling Person |
| 2 | | 96,221,210 | | Bank of America Securities LLC | Seller |
| 96,221,210 |
| Banc of America Securities LLC | Seller |
| | | | Bank of America Corporation | Controlling Person | | | Bank of America Corporation | Controlling Person |
| | | | Structured Asset Mortgage Investments II Inc. | Depositor | | | Structured Asset Mortgage Investments II Inc. | Depositor |
| | | | The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person | | | The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person |
| | | | Bear, Stearns & Co. Inc. | Underwriter | | | Bear, Stearns & Co. Inc. | Underwriter |
| 3 | | 100,306,000 | | Countrywide Financial Corporation | Controlling Person |
| 100,306,000 |
| Countrywide Financial Corporation | Controlling Person |
| | | | CWMBS, Inc. | Depositor | | | CWMBS, Inc. | Depositor |
| | | | Credit Suisse (USA), Inc. | Controlling Person | | | Credit Suisse (USA), Inc. | Controlling Person |
| | | | Credit Suisse First Boston LLC | Underwriter / Seller | | | Credit Suisse First Boston LLC | Underwriter / Seller |
| | | | Credit Suisse Holdings (USA), Inc. | Controlling Person | | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| 4 | | 100,000,000 | | Countrywide Financial Corporation | Controlling Person |
| 100,000,000 |
| CWMBS, Inc. | Depositor |
| | | | CWMBS, Inc. | Depositor | | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | | Goldman, Sachs & Co. | Underwriter / Seller | | | The Goldman Sachs Group Inc. | Controlling Person |
| | | The Goldman Sachs Group Inc. | Controlling Person | |
| 5 | | 42,330,700 | | Chase Mortgage Finance Corporation | Depositor |
| 42,330,700 |
| Chase Mortgage Finance Corporation | Depositor |
| | | | J.P. Morgan Securities Inc. | Underwriter / Seller | | | J.P. Morgan Securities Inc. | Underwriter / Seller |
| | | | JPMorgan Chase & Co. | Controlling Person | | | JPMorgan Chase & Co. | Controlling Person |
| | | | JPMorgan Securities Holdings LLC | Controlling Person | | | JPMorgan Securities Holdings LLC | Controlling Person |
| 6 | | 54,755,000 | | Bear, Stearns & Co. Inc. | Underwriter / Seller |
| 54,755,000 |
| Bear, Stearns & Co. Inc. | Underwriter / Seller |
| | | | Countrywide Financial Corporation | Controlling Person | | | Countrywide Financial Corporation | Controlling Person |
| | | | CWMBS, Inc. | Depositor | | | CWMBS, Inc. | Depositor |
| | | | The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person | | | The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person |
| 7 | | 64,454,000 | | Credit Suisse (USA), Inc. | Controlling Person |
| 64,454,000 |
| Credit Suisse (USA), Inc. | Controlling Person |
| | | | Credit Suisse First Boston LLC | Underwriter / Seller | | | Credit Suisse First Boston LLC | Underwriter / Seller |
| | | | Credit Suisse First Boston Mortgage Securities Corp. | Depositor | | | Credit Suisse First Boston Mortgage Securities Corp. | Depositor |
| | | | Credit Suisse Holdings (USA), Inc. | Controlling Person | | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| 8 | | 90,961,270 | | Citigroup Global Markets Inc. | Underwriter | |
| 9 | |
| 86,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | | | GS Mortgage Securities Corp. | Depositor |
| | | | | Goldman, Sachs & Co. | Underwriter / Seller |
| 10 | |
| 56,658,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | | | GS Mortgage Securities Corp. | Depositor |
| | | | | Goldman, Sachs & Co. | Underwriter / Seller |
| 11 | |
| 100,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | | First Horizon Asset Securities, Inc. | Depositor | | | GS Mortgage Securities Corp. | Depositor |
| | | | First Tennessee Bank National Association | Controlling Person | | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | | UBS Securities LLC | Seller | | | |
| | | | | |
|
| | | | | | |
| Number | Original Face Amount | Defendants | Capacities |
| 12 |
| 105,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| 13 |
| 53,899,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| 14 |
| 143,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| 15 |
| 105,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| 16 |
| 103,000,000 |
| The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| 17 |
| 82,019,000 |
| IndyMac MBS, Inc. | Depositor |
| | | UBS Securities LLC | Underwriter / Seller |
| 18 |
| 54,125,700 |
| J.P. Morgan Acceptance Corporation I | Depositor |
| | | J.P. Morgan Securities Inc. | Underwriter / Seller |
| | | JPMorgan Chase & Co. | Controlling Person |
| | | JPMorgan Securities Holdings LLC | Controlling Person |
| 19 |
| 90,360,000 |
| Greenwich Capital Markets, Inc. | Underwriter / Seller |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| 20 |
| 99,160,206 |
| Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse First Boston LLC | Seller |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| | | Residential Funding Securities, LLC | Underwriter |
| 21 |
| 94,464,000 |
| Greenwich Capital Markets, Inc. | Underwriter / Seller |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| 22 |
| 95,418,000 |
| GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| 23 |
| 143,860,000 |
| WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 24 |
| 93,831,000 |
| J.P. Morgan Securities Inc. | Underwriter / Seller |
| | | JPMorgan Chase & Co. | Controlling Person |
| | | JPMorgan Securities Holdings LLC | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 25 |
| 106,000,000 |
| Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 26 |
| 59,874,246 |
| Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| | | Credit Suisse First Boston LLC | Seller |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 27 |
| 112,889,185 |
| Banc of America Securities LLC | Seller |
| | | Bank of America Corporation | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 28 |
| 100,000,000 |
| UBS Securities LLC | Underwriter / Seller |
| | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | | |
| | | | |
| | | | | |
| Number | Original Face Amount | Defendants | Capacities |
| 9 | | 86,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 10 | | 56,658,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 11 | | 100,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 12 | | 105,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 13 | | 53,899,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 14 | | 143,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 15 | | 105,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 16 | | 103,000,000 | | The Goldman Sachs Group Inc. | Controlling Person |
| | | GS Mortgage Securities Corp. | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | Goldman Sachs Mortgage Company | Controlling Person |
| 17 | | 82,019,000 | | IndyMac MBS, Inc. | Depositor |
| | | UBS Securities LLC | Underwriter / Seller |
| 18 | | 54,125,700 | | J.P. Morgan Acceptance Corporation I | Depositor |
| | | J.P. Morgan Securities Inc. | Underwriter / Seller |
| | | JPMorgan Chase & Co. | Controlling Person |
| | | JPMorgan Securities Holdings LLC | Controlling Person |
| 19 | | 90,360,000 | | GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person |
| | | GMAC Mortgage Group, Inc. | Controlling Person |
| | | Greenwich Capital Markets, Inc. | Underwriter / Seller |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| 20 | | 99,160,206 | | Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse First Boston LLC | Seller |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| | | GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person |
| | | GMAC Mortgage Group, Inc. | Controlling Person |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| | | Residential Funding Securities, LLC | Underwriter |
|
| | | | | | |
| Number | Original Face Amount | Defendants | Capacities |
| 30 |
| 165,000,000 |
| Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Credit Suisse First Boston LLC | Underwriter / Seller |
| | | Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| 31 |
| 59,618,990 |
| Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Greenwich Capital Markets, Inc. | Underwriter / Seller |
| 32 |
| 100,000,000 |
| Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| Total | $ | 2,737,244,237 |
| | |
| | | | | | |
| Number | Original Face Amount | Defendants | Capacities |
| 21 | | 94,464,000 | | GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person |
| | | GMAC Mortgage Group, Inc. | Controlling Person |
| | | Greenwich Capital Markets, Inc. | Underwriter / Seller |
| | | Residential Funding Mortgage Securities I, Inc. | Depositor |
| 22 | | 95,418,000 | | First Savings Mortgage Corporation | Depositor |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| 23 | | 143,860,000 | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 24 | | 93,831,000 | | J.P. Morgan Securities Inc. | Underwriter / Seller |
| | | JPMorgan Chase & Co. | Controlling Person |
| | | JPMorgan Securities Holdings LLC | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 25 | | 106,000,000 | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 26 | | 59,874,246 | | Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| | | Credit Suisse First Boston LLC | Seller |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 27 | | 112,889,185 | | Banc of America Securities LLC | Seller |
| | | Bank of America Corporation | Controlling Person |
| | | WaMu Asset Acceptance Corp. | Depositor |
| | | WaMu Capital Corp. | Underwritter |
| 28 | | 100,000,000 | | UBS Securities LLC | Underwriter / Seller |
| | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| 29 | | 127,000,000 | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| 30 | | 165,000,000 | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Credit Suisse First Boston LLC | Underwriter / Seller |
| | | Credit Suisse (USA), Inc. | Controlling Person |
| | | Credit Suisse Holdings (USA), Inc. | Controlling Person |
| 31 | | 59,618,990 | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Greenwich Capital Markets, Inc. | Underwriter / Seller |
| 32 | | 100,000,000 | | Wells Fargo & Company | Controlling Person |
| | | Wells Fargo Asset Securities Corporation | Depositor |
| | | Wells Fargo Bank, National Association | Controlling Person |
| | | Goldman, Sachs & Co. | Underwriter / Seller |
| | | The Goldman Sachs Group Inc. | Controlling Person |
| Total | | $ | 2,955,205,507 | | | |
We have no other material pending legal proceedings, and we are unaware of any potential claims that are material.
ITEM 4. REMOVED AND RESERVEDMINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
No Trading Market
Our Class B Stock is not publicly traded, and there is no established market for such stock. Members may be required to purchase additional shares of Class B Stock from time to time in order to meet minimum stock purchase requirements under our Capital Plan, which was implemented on January 2, 2003, in accordance with the provisions of the GLBGramm-Leach-Bliley Act of 1999 amendments to the Federal Home Loan Bank Act of 1932, as amended, and Federal Housing Finance Agency ("Finance Agency") regulations. Our Class B Stock may be redeemed, at par value of $100 per share, up to five years after we receive a written redemption request by a member, subject to regulatory limits and to the satisfaction of any ongoing stock purchase requirements applicable to the member. We may repurchase shares held by members in excess of their required holdings at our discretion at any time.
None of our capital stock is registered under the Securities Act of 1933, as amended, and purchases and sales of stock by our members are not subject to registration under the Securities Act of 1933, as amended.
Number of Shareholders
As of February 28, 201129, 2012, we had 432434 shareholders and $2.32.0 billion par value of regulatory capital stock, which includes Capital Stock and Mandatorily Redeemable Capital Stock ("MRCS") issued and outstanding.
Dividends
Dividends may, but are not required to, be paid on our Class B Stock. Our board of directors may declare and pay dividends in either cash or capital stock or a combination thereof, subject to Finance Agency regulations. Our Capital Plan provides for two sub-series of Class B Stock: Class B-1 and Class B-2. Class B-2 is required stock that is subject to a redemption request. Class B-1 shareholders receive a higher dividend than Class B-2 shareholders. The Class B-2 dividend is presently calculated at 80% of the amount of the Class B-1 dividend, and can only be changed by an amendment to our Capital Plan with approval of the Finance Agency. The amount of the dividend to be paid is based on the average number of shares of each sub-series held by the member during the dividend payment period. For more information, see "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Resources"Resources andNotes to Financial Statements - Note 16 - Capital in our Notes to Financial Statements..
We are exempt from federal, state, and local taxation, except for real estate taxes. Despite our tax-exempt status, any cash dividends issuedpaid by us to members are taxable dividends to the members, and members do not benefit from the exclusion for corporate dividends received. The preceding information is for general information only. It is not tax advice. Members should consult their own tax advisors regarding particular federal, state, and local tax consequences for purchasing, holding, and disposing of our Class B Stock, including the consequences of any proposed change in applicable law.
We paid quarterly cash dividends as set forth in the following table ($ amounts in millions)thousands). | | | | | B-1 Cash | | B-2 Cash | | Class B-1 | | Class B-2 |
| By Quarter | | Dividend Amount (2) | | Annualized Rate (3) | | Dividend Amount (2) | | Annualized Rate (3) | | Annualized Rate (2) | | Dividend on Capital Stock | | Interest Expense on MRCS | | Total | | Annualized Rate (2) | | Dividend on Capital Stock | | Interest Expense on MRCS | | Total |
| 2012: | | | | | | | | | | | | | | | | | |
Quarter 1 (1) | | | 3.0 | % | | $ | 11,698 |
| | $ | 3,203 |
| | $ | 14,901 |
| | 2.4 | % | | $ | 62 |
| | $ | 221 |
| | $ | 283 |
|
| | | | | | | | | | | | | | | | | | |
| 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter 1 (1) | | $ | 11 | | | 2.50 | % | | $ | — | | | 2.00 | % | |
| Quarter 4 | | | 2.5 | % | | $ | 9,599 |
| | $ | 2,839 |
| | $ | 12,438 |
| | 2.0 | % | | $ | 16 |
| | $ | 229 |
| | $ | 245 |
|
| Quarter 3 | | | 2.5 | % | | 9,838 |
| | 3,350 |
| | 13,188 |
| | 2.0 | % | | — |
| | 388 |
| | 388 |
|
| Quarter 2 | | | 2.5 | % | | 9,917 |
| | 3,450 |
| | 13,367 |
| | 2.0 | % | | 12 |
| | 487 |
| | 499 |
|
| Quarter 1 | | | 2.5 | % | | 10,546 |
| | 3,930 |
| | 14,476 |
| | 2.0 | % | | 12 |
| | 508 |
| | 520 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2010: | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter 4 | | $ | 9 | | | 2.00 | % | | $ | — | | | 1.60 | % | | 2.0 | % | | $ | 8,710 |
| | $ | 3,387 |
| | $ | 12,097 |
| | 1.6 | % | | $ | 15 |
| | $ | 444 |
| | $ | 459 |
|
| Quarter 3 | | 6 | | | 1.50 | % | | — | | | 1.20 | % | | 1.5 | % | | 6,432 |
| | 2,434 |
| | 8,866 |
| | 1.2 | % | | 11 |
| | 392 |
| | 403 |
|
| Quarter 2 | | 8 | | | 2.00 | % | | — | | | 1.60 | % | | 2.0 | % | | 8,516 |
| | 2,995 |
| | 11,511 |
| | 1.6 | % | | — |
| | 583 |
| | 583 |
|
| Quarter 1 | | 9 | | | 2.00 | % | | — | | | 1.60 | % | | 2.0 | % | | 8,691 |
| | 3,054 |
| | 11,745 |
| | 1.6 | % | | — |
| | 604 |
| | 604 |
|
| | | | | | | | | | |
| 2009: | | | | | | | | | |
| Quarter 4 | | $ | 9 | | | 2.00 | % | | $ | — | | | 1.60 | % | |
| Quarter 3 | | 16 | | | 3.25 | % | | — | | | 2.60 | % | |
| Quarter 2 | | 10 | | | 2.25 | % | | — | | | 1.80 | % | |
| Quarter 1 | | 19 | | | 4.00 | % | | — | | | 3.20 | % | |
| | |
| (1) | This dividend was paid on February 23, 2011.2012. |
| |
| (2) | Amounts exclude dividends paid on MRCS of $4.4 million for Quarter 1, 2011, $3.8 million, $2.8 million, $3.6 million, and $3.7 million for Quarter 4, Quarter 3, Quarter 2, and Quarter 1, 2010, respectively, and $2.9 million, $4.2 million, $2.8 million, and $5.0 million for Quarter 4, Quarter 3, Quarter 2, and Quarter 1, 2009, respectively. For financial reporting purposes, these dividends were classified as interest expense. |
| (3)
| Reflects the annualized rate on all of the Bank'sour average capital stock outstanding regardless of its classification for financial reporting purposes as either Capital Stock or MRCS. The Class B-2 dividend is paid at 80% of the amount of the Class B-1 dividend. |
ItemITEM 6. SELECTED FINANCIAL DATA
We use certain acronyms and terms in this Item 6 that are defined in the Glossary of Terms located in Item 15. Exhibits and Financial Statement Schedules. The following table should be read in conjunction with the financial statements and related notes and the discussion set forth in "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K. The resultstable presents a summary of operations for the years presented are not necessarily indicative of the results to be expected for any subsequent period or entire year. The results of operations data for the three years ended December 31, 2010, 2009, and 2008, and thecertain financial position data as of December 31, 2010, and 2009, areinformation derived from the audited financial statements included in this Annual Report on Form 10-K. The resultsas of operations dataand for the years ended December 31, 2007, and 2006, and the financial position data as of December 31, 2008, 2007, and 2006 are derived from the audited financial statements for such years, which are not included within this Annual Report on Form 10-Kperiods indicated ($ amounts in millions).:
| | | | Financial Highlights | | | | | | | | | | | |
| | | As of and for the Years Ended December 31, | | As of and for the Years Ended December 31, |
| | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 |
Statement of Condition: | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 44,930 | | | $ | 46,599 | | | $ | 56,860 | | | $ | 56,055 | | | $ | 46,809 | | | $ | 40,375 |
| | $ | 44,930 |
| | $ | 46,599 |
| | $ | 56,860 |
| | $ | 56,055 |
|
| Advances | | 18,275 | | | 22,443 | | | 31,249 | | | 26,770 | | | 22,282 | | | 18,568 |
| | 18,275 |
| | 22,443 |
| | 31,249 |
| | 26,770 |
|
Investments (1) | | 19,785 | | | 14,994 | | | 15,758 | | | 19,636 | | | 14,262 | | | 15,203 |
| | 19,785 |
| | 14,994 |
| | 15,758 |
| | 19,636 |
|
| Mortgage Loans Held for Portfolio | | 6,703 | | | 7,272 | | | 8,780 | | | 9,397 | | | 10,021 | | | 5,958 |
| | 6,703 |
| | 7,272 |
| | 8,780 |
| | 9,397 |
|
| Allowance for Loan Losses | | (1 | ) | | — | | | — | | | — | | | — | | |
| Allowance for loan losses | | | (3 | ) | | (1 | ) | | — |
| | — |
| | — |
|
| Discount Notes | | 8,925 | | | 6,250 | | | 23,466 | | | 22,171 | | | 10,471 | | | 6,536 |
| | 8,925 |
| | 6,250 |
| | 23,466 |
| | 22,171 |
|
| CO Bonds | | 31,875 | | | 35,908 | | | 28,697 | | | 30,254 | | | 32,844 | | | 30,358 |
| | 31,875 |
| | 35,908 |
| | 28,697 |
| | 30,254 |
|
| Total Consolidated Obligations | | 40,800 | | | 42,158 | | | 52,163 | | | 52,425 | | | 43,315 | | | 36,894 |
| | 40,800 |
| | 42,158 |
| | 52,163 |
| | 52,425 |
|
| MRCS | | 658 | | | 756 | | | 539 | | | 163 | | | 151 | | | 454 |
| | 658 |
| | 756 |
| | 539 |
| | 163 |
|
| Capital Stock, Class B Putable | | 1,610 | | | 1,726 | | | 1,879 | | | 2,003 | | | 1,793 | | | 1,563 |
| | 1,610 |
| | 1,726 |
| | 1,879 |
| | 2,003 |
|
| Retained Earnings | | 427 | | | 349 | | | 283 | | | 202 | | | 167 | | | 498 |
| | 427 |
| | 349 |
| | 283 |
| | 202 |
|
| Accumulated Other Comprehensive Income (Loss) | | (90 | ) | | (329 | ) | | (71 | ) | | (6 | ) | | (5 | ) | |
| AOCI | | | (114 | ) | | (90 | ) | | (329 | ) | | (71 | ) | | (6 | ) |
| Total Capital | | 1,947 | | | 1,746 | | | 2,091 | | | 2,199 | | | 1,955 | | | 1,947 |
| | 1,947 |
| | 1,746 |
| | 2,091 |
| | 2,199 |
|
| | | | | | | | | | | | | | | | | | | | | |
Statement of Income: | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income | | 267 | | | 272 | | | 278 | | | 207 | | | 205 | | | 231 |
| | 267 |
| | 272 |
| | 278 |
| | 207 |
|
| Provision for Credit Losses | | 1 | | | — | | | — | | | — | | | — | | | 5 |
| | 1 |
| | — |
| | — |
| | — |
|
| Net Other-Than-Temporary Impariment Credit Losses | | (70 | ) | | (60 | ) | | — | | | — | | | — | | |
| Other Income (Loss), excluding Net Other-Than-Temporary Impairment Credit Losses | | 11 | | | 2 | | | 15 | | | 2 | | | (2 | ) | |
| Net OTTI losses | | | (27 | ) | | (70 | ) | | (60 | ) | | — |
| | — |
|
| Other Income (Loss), excluding net OTTI losses | | | (6 | ) | | 11 |
| | 2 |
| | 15 |
| | 2 |
|
| Other Expenses | | 55 | | | 49 | | | 41 | | | 42 | | | 43 | | | 58 |
| | 55 |
| | 49 |
| | 41 |
| | 42 |
|
| Total Assessments | | 41 | | | 45 | | | 68 | | | 45 | | | 43 | | | 25 |
| | 41 |
| | 45 |
| | 68 |
| | 45 |
|
| Net Income | | 111 | | | 120 | | | 184 | | | 122 | | | 117 | | | 110 |
| | 111 |
| | 120 |
| | 184 |
| | 122 |
|
| | | | | | | | | | | | | | | | | | | | | |
Selected Financial Ratios: | | | | | | | | | | | | | | | | | | | |
| | |
|
Return on average equity (2) | | 6.13 | % | | 5.94 | % | | 8.14 | % | | 5.87 | % | | 5.39 | % | | 5.63 | % | | 6.13 | % | | 5.94 | % | | 8.14 | % | | 5.87 | % |
| Return on average assets | | 0.24 | % | | 0.23 | % | | 0.32 | % | | 0.24 | % | | 0.25 | % | | 0.26 | % | | 0.24 | % | | 0.23 | % | | 0.32 | % | | 0.24 | % |
Dividend payout ratio (3) | | 29.18 | % | | 44.72 | % | | 53.63 | % | | 70.87 | % | | 84.05 | % | | 36.29 | % | | 29.18 | % | | 44.72 | % | | 53.63 | % | | 70.87 | % |
Net interest margin (4) | | 0.58 | % | | 0.52 | % | | 0.48 | % | | 0.41 | % | | 0.43 | % | | 0.55 | % | | 0.57 | % | | 0.52 | % | | 0.48 | % | | 0.41 | % |
Total Capital ratio (at year end) (5) | | 4.33 | % | | 3.75 | % | | 3.68 | % | | 3.92 | % | | 4.17 | % | |
Total regulatory capital ratio (at year end) (6) | | 6.00 | % | | 6.07 | % | | 4.75 | % | | 4.23 | % | | 4.51 | % | |
| Average Equity to Average Assets | | 3.90 | % | | 3.87 | % | | 3.88 | % | | 4.10 | % | | 4.59 | % | |
Total capital ratio (5) | | | 4.82 | % | | 4.33 | % | | 3.75 | % | | 3.68 | % | | 3.92 | % |
Total regulatory capital ratio (6) | | | 6.23 | % | | 6.00 | % | | 6.07 | % | | 4.75 | % | | 4.23 | % |
| Average equity to average assets | | | 4.60 | % | | 3.90 | % | | 3.87 | % | | 3.88 | % | | 4.10 | % |
Weighted average dividend rate, Class B stock (7) | | 1.87 | % | | 2.83 | % | | 5.01 | % | | 4.62 | % | | 4.75 | % | | 2.50 | % | | 1.87 | % | | 2.83 | % | | 5.01 | % | | 4.62 | % |
| | |
| (1) | Investments consist of HTM securities, AFS securities, Trading Securities, Interest-Bearing Deposits, Federal Funds Sold, and Securities Purchased Under Agreements to Resell.Resell, Federal Funds Sold, AFS securities, HTM securities, and loans to other FHLBanks. |
| |
| (2) | Return on average equity is Net Income expressed as a percentage of average Total Capital.total capital. |
| |
| (3) | The dividend payout ratio is calculated by dividing dividends paid in cash during the period by Net Income for the year.period. |
| |
| (4) | Net interest margin is Net Interest Income expressed as a percentage of average earninginterest-earning assets. |
| |
(5) | Total Capitalcapital ratio is Capital Stock plus Retained Earnings and Accumulated Other Comprehensive Income (Loss), allAOCI expressed as a percentage of Total Assets. |
| |
(6) | Total regulatory capital ratio is Capital Stock plus Retained Earnings and MRCS allexpressed as a percentage of Total Assets. |
| |
(7) | WeightedThe weighted average dividend rates arerate is calculated by dividing dividends paid in cash during the period divided by the average of Capital Stock eligible for dividends (i.e., excludes MRCS). |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and related footnotes contained in this Form 10-K.
As used in this Form 10-K,Item 7, unless the context otherwise requires, the terms "we," "us," and "our," "FHLBI," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis. We use certain acronyms and terms throughout this Item 7 that are defined in the Glossary of Terms located in Item 15. Exhibits and Financial Statement Schedules.
Unless otherwise stated, amounts disclosed in this Form 10-K represent valuesItem 7 are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected in this Form 10-KItem 7 and, due to rounding, may not appear to agree to the Statement of Income dueamounts presented in thousands in the Financial Statements and Notes to rounding in previous quarters.Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
Special Note Regarding Forward-lookingForward-Looking Statements
Statements in this Annual Report on Form 10-K, including statements describing our objectives, projections, estimates or predictions, of the future, may be "forward-looking statements." These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "expects," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including,include, but are not limited to, the following:
| |
• | economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants; |
| |
• | volatility of market prices, rates, and indices that could affect the value of collateral we hold as security for the obligations of our members and counterparties; |
| |
• | economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants; volatility of market prices, rates, and indices that could affect the value of collateral we hold as security for the obligations of our members and counterparties; demand for our Advances and purchases of mortgage loans resulting from: |
| |
| ◦ | changes in our members' deposit flows and credit demands; |
| |
| ◦ | membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters; |
| |
| ◦ | changes in the general level of housing activity in the United States, the level of refinancing activity and consumer product preferences; and |
| |
| ◦ | competitive forces, including, without limitation, other sources of funding available to our members; |
our ability to introduce new products and services and successfully manage the risks associated with our products and services, including new types of collateral securing Advances;
| |
• | our ability to introduce new products and services and successfully manage the risks associated with our products and services, including new types of collateral securing Advances; |
| |
• | changes in mortgage asset prepayment patterns, delinquency rates and housing values; |
| |
• | political events, including legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members, counterparties, one or more of the FHLBs and/or investors in the Consolidated Obligations of the FHLBs; |
| |
• | changes in our ability to raise funds in the capital markets, including changes in credit ratings and the level of government guarantees provided to other United States and international financial institutions; and competition from other entities borrowing funds in the capital markets; |
| |
• | negative adjustments in the FHLBs' credit ratings that could adversely impact the marketability of our Consolidated Obligations, products, or services; |
| |
• | risk of loss should one or more of the FHLBs be unable to repay its participation in the Consolidated Obligations, or otherwise be unable to meet its financial obligations; |
| |
• | ability to attract and retain skilled individuals in order to fulfill an anticipated increase in staffing needs due to the evolving regulatory environment; |
| |
• | ability to develop and support technology and information systems sufficient to effectively manage the risks of our business; |
| |
• | changes in terms of interest-rate exchange agreements and similar agreements; |
| |
• | risk of loss arising from natural disasters, acts of war or acts of terrorism; and |
| |
• | changes in or differing interpretations of accounting guidance.
|
changes in mortgage asset prepayment patterns, delinquency rates and housing values;
political events, including legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members, counterparties, one or more of the FHLBanks and/or investors in the Consolidated Obligations of the 12 FHLBanks;
changes in our ability to raise capital market funding, including changes in credit ratings and the level of government guarantees provided to other United States and international financial institutions; and competition from other entities borrowing funds in the capital markets;
negative adjustments in the FHLBanks' credit ratings that could adversely impact the pricing and marketability of our Consolidated Obligations, products, or services;
risk of loss should one or more of the FHLBanks be unable to repay its participation in the Consolidated Obligations, or otherwise be unable to meet its financial obligations;
ability to attract and retain skilled individuals in order to fulfill a potential increase in staffing needs;
ability to develop and support technology and information systems sufficient to effectively manage the risks of our business;
changes in terms of interest-rate exchange agreements and similar agreements;
risk of loss arising from natural disasters, acts of war or acts of terrorism; and
changes in or differing interpretations of accounting guidance.
Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through reports filed with the SEC in the future, including Annual Reports onour Form 10-K, Quarterly Reports on10-K's, Form 10-Q10-Q's and Current Reports on Form 8-K should be consulted.8-K's.
Executive Summary
Overview
Overview. We are a regional wholesale bank that makes Advances, purchases mortgages and other investments, and provides other financial services to our member financial institutions. These member financial institutions can consist of federally-insured depository institutions (including commercial banks, thrifts, and credit unions), CDFIs and insurance companies. All member financial institutions are required to purchase shares of our Class B Capital Stock as a condition of membership. Our public policy mission is to facilitate and expand the availability of financing for housing and community development. We seek to achieve thisour mission by providing products and services to our members in a safe, sound, and profitable manner, and by generating a competitive return on their capital investment. See Item 1. Business - Background Information for more information.
We group our products and services within two business segments:
| |
• | Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), and deposits; and |
| |
• | MPP, which consists of mortgage loans purchased from our members. |
Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), correspondent services and deposits; and
MPP, which consists of mortgage loans initially purchased from our members.
Our principal source of funding is the proceeds from the sale to the public of FHLBFHLBank debt instruments, calledknown as Consolidated Obligations, which are the joint and several obligation of all 12 FHLBs.FHLBanks. We obtain additional funds from deposits, other borrowings, and the sale of capital stock to our members.
Our primary source of revenue is interest earned on Advances, long- and short-term investments, and mortgage loans purchased from our members.
Our Net Interest Income is primarily determined by the interest-rate spread between the interest rate earned on our assets and the interest rate paid on our share of the Consolidated Obligations. We use funding and hedging strategies to mitigate the related interest-rate risk.
The Economy and the Financial Services Industry
Economic Conditions. Our financial condition and results of operations are influenced by the general state of the global and national economies,economies; the conditions in the financial, credit and mortgage markets; the prevailing level of interest rates; and the local economies in our district states of Indiana and Michigan and their impact on our member financial institutions; the conditions in the financial, credit and mortgage markets; and the prevailing level of interest rates. institutions.
The U.S.United States economy entered a recession in December 2007, which ended in June 2009. ManyHowever, many of the effects of thisthe recession and the world-wide financial crisis continued during 2010,in the United States throughout 2011, including high levels of mortgage delinquencies and foreclosures, depressed housing prices, serious pressures on earnings and capital at many financial institutions, and high unemployment rates.
Accordingrates, high levels of mortgage delinquencies and foreclosures, and a depressed housing market. Delays in processing problem loans have contributed to a press releasebacklog of distressed properties, putting ongoing downward pressure on home prices.
Many of the effects of the world-wide financial crisis have also continued to affect the global economy throughout 2011. In late 2011 and early 2012, all three of the major NRSROs announced ratings downgrades on Eurozone countries, or have placed them on review for possible downgrade, citing concerns about tightening credit conditions, rising yields on bonds issued by top-rated sovereigns, the Federal Open Market Committee ("FOMC")ongoing political deadlock over how to deal with the crisis, high levels of the Federal Reserve Board (the "Federal Reserve") on March 15, 2011, there are signs that the economic recovery is on a firmer footing,government and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak,household debt and the housing sector continues to be depressed.increasing risk of a European recession in 2012. There are also continued concerns that a possible European recession could impact other economies.
During the year ended December 31, 2011, short-term interest rates remained at historic lows while intermediate- and long-term rates showed a generally modest upward trend during the first quarter of 2011 and a downward trend during the remainder of 2011. The FOMC indicated that it will maintain the target range for the federal funds rate at 0.00-0.25%, as it continues to anticipate that economic conditions, including low rates of resource utilization and subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.at least through late 2014. Although not possible to predict, the continued abnormally low rates in the near-term may cause more interest rate volatility and ultimately higher rates in the future than would normally be anticipated.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the FOMC decided to continue to expand its holdings of securities by reinvesting principal payments from its securities holdings. In addition, the FOMC intends to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The FOMC will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
Economic data for Indiana and Michigan continue to generally compare unfavorably to national data. The Bureau of Labor Statistics reported that Michigan's preliminary unemployment rate declined to 11.7%equaled 9.3% for December 2010,2011, while Indiana's preliminary rate decreasedwas 9.0%, compared to 9.5%, slightly exceeding the U.S.United States rate of 9.4%8.5%. Michigan reported the largest year-over-year unemployment rate decrease in the nation, while non-farm payrollsAccording to information provided by LPS Applied Analytics for Indiana were fairly stable year-over-year. Lender Processing Services reported thatNovember 2011, Indiana had a non-current mortgage rate (loans past due 30 days or more) of 14.6%14.4%, and Michigan had a non-current mortgage rate of 13.8% for December 2010, placing both states above11.8%, compared to the national rate of 13.0%12.3%. We believe
In its most recent forecast, the Center for Econometric Research at Indiana University stated that its current forecast for the Indiana economy has turned slightly more pessimistic for both employment and the growth rate of personal income. The most recent forecast published by the Research Seminar in Quantitative Economics at the University of Michigan states that the Michigan economy is continuing its recovery from its low point in late 2009, driven mainly by job growth in manufacturing, business and professional services and health services. University of Michigan economists expect a moderate rate of state job growth of about 0.8% for 2012. Although the overall economic outlook for our district is showing some signs of improvement, butwe believe it will continue to trail the overall U.S.United States economy.
Financial Trends in theThe Capital Markets
Markets. The Office of Finance, our fiscal agent, issues debt in the global capital markets on behalf of the 12 FHLBsFHLBanks in the form of Consolidated Obligations, which include CO Bonds and Discount Notes. Our funding operations dependare dependent on debt issued by the Office of Finance, and the issuance of our debt is affected by events in the capital markets.
The par amount ofOverall, the Consolidated Obligations for which we arecapital markets experienced significant volatility in 2011, mainly driven by concerns about the primary obligor decreased by 3%Eurozone countries. Other concerns included higher gas prices due to $40.7 billion at December 31, 2010, compared to $42.0 billion at December 31, 2009. The outstanding balance of CO Bonds, at par, was 78% of total Consolidated Obligations, compared to 85% at December 31, 2009. CO Bonds as a percentage of total Consolidated Obligations fell as Discount Notes were used to fund short-term investments, floating-rate securitiesglobal unrest in our HTM portfolio,Northern Africa and a portion of our swapped Advances. Although our swapped funding levels declinedthe Middle East during the first quarter of 2010,2011 and continued high unemployment and falling housing prices in the United States. In mid-July, the debate over raising the United States debt ceiling limit contributed to the volatility in the capital markets. Late in the fourth quarter of 2011, economic data, including a lower unemployment rate, indicated that the United States economy was beginning to improve. However, this news was offset by continued concerns about European sovereigns and the impact of a possible European recession on other world economies. During 2011, the combination of market demand for high-quality securities, shrinking supply and the financial problems in Europe resulted in improved funding costs.
On August 2, 2011, Moody's confirmed the Aaa rating on the FHLBank System's Consolidated Obligations and changed the rating outlook to negative at the same time that Moody's confirmed the Aaa bond rating of the United States government and changed the rating outlook to negative. On August 5, 2011, S&P lowered its long-term sovereign rating on the United States government to AA+ from AAA and affirmed its A-1+ short-term credit rating on the United States government. S&P removed both ratings from CreditWatch, where they improvedwere placed on July 15, 2011, with negative implications. Due to our status as a GSE and the application of S&P's government-related entity criteria, our issuer rating is constrained by the long-term sovereign credit rating of the United States government. On August 8, 2011, S&P announced that it had lowered the issuer credit ratings of 10 of 12 FHLBanks (including us) and the rating on the FHLBank System's Consolidated Obligations to AA+ from AAA.Each of the 12 FHLBanks is currently rated AA+ with outlook negative. S&P affirmed the FHLBanks' short-term issuer ratings at A-1+ and removed all of the ratings from CreditWatch. These changes have not had an adverse impact on our funding costs.
The FOMC decided to continue its program to extend the average maturity of its holdings of securities as announced in September. To help support conditions in the mortgage markets, the FOMC will maintain its existing policy of reinvesting principal payments from its holdings of agency MBS and agency debt in agency MBS. In addition, the FOMC will maintain its existing policy of replacing maturing United States Treasury securities at auction. The FOMC will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to promote a stronger economic recovery in a context of price stability.
The persistence of low interest rates and concerns around the debt ceiling discussions played a role in the sustained decrease in money market funds through early August. Taxable money market funds, which purchase a significant portion of the Discount Notes and short maturity CO Bonds issued by the FHLBanks, had a decline in assets through early August 2011, but recovered somewhat during the remainder of 2010.
During 2010, financial markets continued their recovery from the recent financial crisis. There was significant focus on government actions to support financial markets as well as financial reform legislation.
On February 1, 2010, several lending programs administered by the Federal Reserve Bankthird and fourth quarters of New York reached their scheduled expiration dates. These programs included the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. On February 10, 2010, Fannie Mae and Freddie Mac announced plans to purchase mortgage loans that are 120 days or more delinquent out of mortgage-backed securities. The initial purchases occurred through May 2010, with additional delinquency purchases as needed thereafter. The expiration of these programs and the delinquency purchases did not appear to have a significant effect on the agency debt markets. In addition, the Federal Reserve Bank of New York's purchases of our Consolidated Obligations, along with debt issued by Fannie Mae and Freddie Mac, ended during the first quarter of 2010.
On March 4, 2010, the SEC published in the Federal Register its final rule on money market fund reform, which included amendments to SEC Rule 2a-7. The rule became effective on May 5, 2010, with certain aspects of the rule phased in over the remainder of 2010. In its final rule, the SEC included our Discount Notes with remaining maturities of 60 days or less in its definition of weekly liquid assets, which should help maintain investor demand for shorter-term Discount Notes. However, this new rule, combined with shrinking yields in the money market sector, has driven investors to seek riskier investment categories that offer a higher rate of return. Taxable money market fund assets declined over $400 billion during 2010.2011. As a subset of those assets, taxable money market fund investments allocated to the "U.S. Other Agency" category have also declined duringwere generally unchanged at December 31, 2011 compared to December 31, 2010.
Summary ofImpact on Operating Results
Results. Our overall results are dependent on the market environment as well asand, in particular, our members' demand for wholesale funding and their sales of mortgage loans.loans to us. As part of their overall business strategy, our depository members typically use wholesale funding, in the form of Advances, along with other sources of funding, such as retail deposits, as a source of liquidity and excess liquidity. In addition, certain members may also sellto fund residential mortgage loans to us.
in their portfolio. Periods of economic growth have led to significant use of wholesale funds by our depository members because businessesthey typically fund expansion by using either wholesale or retail borrowing. Conversely, slow economic growth has tended to decrease our depository members' wholesale borrowing activity.
Our insurance company members have different business models and are subject to different regulations; therefore, their demand for Advances is not always correlated with that of our depository members. Our insurance company members tend to use Advances as a source of liquidity, for asset/liability management or other business purposes.
Member demand for Advances and the MPP is also influenced by the steepness of the yield curve, as well as the availability and cost of other sources of wholesale or government funding. Advances declinedto insurance company members, an increasing part of our membership and focus of our business, increased during 20102011. However, Advances to depository members were lower due to repayments and decreased demand related to various economic factors such as growth in our members' deposits and low loan demand at our members' institutions. Mortgage Loans Held for Portfolio also decreased as purchases of mortgage loans were not large enough to fully offset the reduction due to repayments.
Changes in short-term interest rates affect our interest income and interest expense because a considerable portion of our assets and liabilities are either directly or indirectly tied to short-term interest rates such as the federal funds or three-month LIBOR rates. Short-term interest rates also directly affect our earnings on invested capital. The level of market interest rates influences the yield on our earning assets, our cost of funds, and mortgage prepayment speeds. These factors drive our spreads, interest margins, and earnings. Since our assets and liabilities do not reprice immediately, there tends to be a lag between changes in market rates and changes to our spreads and margins. Market interest rates reflect a wide variety of influences, such as inflation expectations, money supply, and the attractiveness of investment alternatives. Other factors that may influence our margins or earnings include demand for our products, fee income, operating expenses and valuation of investment securities. See "ResultsResults of Operations and Changes in Financial Condition herein for a detailed discussion of these factors.
Results of Operations and Changes in Financial Condition
Net Income for the Years Ended December 31, 2011 and 2010. Net Income for the year ended December 31, 2011 was $110.1 million. The decrease of $0.9 million or 1% compared to the same period in 2010 was primarily due to lower net interest income and net losses on derivatives and hedging activities, substantially offset by lower OTTI credit losses on our private-label MBS and a decrease in Total Assessments resulting from the satisfaction of our obligation to REFCORP as of June 30, 2011. Net Interest Income After Provision for Credit Losses decreased by $39.9 million or 15% in 2011, compared to 2010, primarily due to contracting spreads on mortgage-related assets and a reduction in prepayment fees on Advances.
The following table presents the comparative highlights of our results of operations ($ amounts in millions):
|
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | | | $ | | % |
| Comparative Highlights | | 2011 | | 2010 | | Change | | Change |
| Net Interest Income After Provision for Credit Losses | | $ | 226 |
| | $ | 266 |
| | $ | (40 | ) | | (15 | %) |
| Other Income (Loss) | | (33 | ) | | (59 | ) | | 26 |
| | 44 | % |
| Other Expenses | | 58 |
| | 55 |
| | 3 |
| | 7 | % |
| Income Before Assessments | | 135 |
| | 152 |
| | (17 | ) | | (12 | %) |
| Total Assessments | | 25 |
| | 41 |
| | (16 | ) | | (41 | %) |
| Net Income | | $ | 110 |
| | $ | 111 |
| | $ | (1 | ) | | (1 | %) |
Net Income for the Years Ended December 31, 2010 and 2009. Net Income was $111.0 million for the year ended December 31, 2010. The decrease of $9.5 million or 8% compared to the same period in 2009 was primarily due to higher OTTI charges on our private-label MBS recognized in Other Income (Loss) that totaled $69.8 million for 2010, compared to $60.3 million for 2009. Net Interest Income decreased by $6.4 million, after provision for credit losses, primarily due to lower interest-earning assets, substantially offset by higher spreads on mortgage-related assets and 2008" herein for a detailed discussion of these factors.higher prepayment fees on Advances.
The following table presents information on market interest rates at December 31, 2010, and 2009, and average market interest rates for the years ended December 31, 2010, and 2009.comparative highlights of our results of operations ($ amounts in millions):
| | | | | | | | | | | | |
| | 2010 12-Month Average | 2009 12-Month Average | Average Rate 2010 vs. 2009 Variance | December 31, 2010 Ending Rate | December 31, 2009 Ending Rate | Ending Rate 2010 vs. 2009 Variance |
Federal Funds Target (1) | 0.25 | % | 0.25 | % | — | % | 0.25 | % | 0.25 | % | — | % |
| | | | | | | |
3-month LIBOR (1) | 0.34 | % | 0.69 | % | (0.35 | )% | 0.30 | % | 0.25 | % | 0.05 | % |
2-year LIBOR (1) | 0.93 | % | 1.41 | % | (0.48 | )% | 0.80 | % | 1.42 | % | (0.62 | )% |
5-year LIBOR (1) | 2.16 | % | 2.65 | % | (0.49 | )% | 2.17 | % | 2.98 | % | (0.81 | )% |
10-year LIBOR (1) | 3.25 | % | 3.44 | % | (0.19 | )% | 3.38 | % | 3.97 | % | (0.59 | )% |
| | | | | | | |
3-month U.S. Treasury (1) | 0.13 | % | 0.15 | % | (0.02 | )% | 0.13 | % | 0.05 | % | 0.08 | % |
2-year U.S. Treasury (1) | 0.69 | % | 0.94 | % | (0.25 | )% | 0.60 | % | 1.14 | % | (0.54 | )% |
5-year U.S. Treasury (1) | 1.92 | % | 2.18 | % | (0.26 | )% | 2.01 | % | 2.68 | % | (0.67 | )% |
10-year U.S. Treasury (1) | 3.20 | % | 3.24 | % | (0.04 | )% | 3.30 | % | 3.84 | % | (0.54 | )% |
| | | | | | | |
15-year residential mortgage note rate (2) | 4.13 | % | 4.59 | % | (0.46 | )% | 4.23 | % | 4.57 | % | (0.34 | )% |
30-year residential mortgage note rate (2) | 4.75 | % | 5.03 | % | (0.28 | )% | 4.82 | % | 5.08 | % | (0.26 | )% |
|
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | | | $ | | % |
| Comparative Highlights | | 2010 | | 2009 | | Change | | Change |
| Net Interest Income After Provision for Credit Losses | | $ | 266 |
| | $ | 272 |
| | $ | (6 | ) | | (2 | %) |
| Other Income (Loss) | | (59 | ) | | (58 | ) | | (1 | ) | | (1 | %) |
| Other Expenses | | 55 |
| | 49 |
| | 6 |
| | 12 | % |
| Income Before Assessments | | 152 |
| | 165 |
| | (13 | ) | | (8 | %) |
| Total Assessments | | 41 |
| | 45 |
| | (4 | ) | | (8 | %) |
| Net Income | | $ | 111 |
| | $ | 120 |
| | $ | (9 | ) | | (8 | %) |
Changes in Financial Condition for the Year Ended December 31, 2011. Total Assets at December 31, 2011 were $40.4 billion. The decrease of $4.6 billion or 10% compared to December 31, 2010 was primarily due to a decrease in short-term investments. Advances outstanding totaled $18.6 billion. The increase of 2% compared to December 31, 2010 was primarily due to higher Advances to our insurance company members. Mortgage Loans Held for Portfolio totaled $6.0 billion. The decrease of 11% compared to December 31, 2010 was primarily due to repayments exceeding the purchases of mortgage loans under our MPP. Investments, including HTM securities, AFS securities and short-term investments, totaled $15.2 billion. The decrease of 23% compared to December 31, 2010 was primarily due to a managed reduction in short-term investments. Consolidated Obligations totaled $36.9 billion at December 31, 2011. The decrease of 10% compared to December 31, 2010 was due to lower funding needs primarily resulting from the reduction in short-term investments.
Total Capital was $1.9 billion at December 31, 2011. The decrease of $0.2 million compared to December 31, 2010 was primarily due to a net decrease in Capital Stock of $47.0 million and a decrease in AOCI of $23.3 million, substantially offset by an increase in Retained Earnings of $70.1 million. During the second quarter of 2011, we repurchased $248.0 million of excess stock, consisting of Capital Stock of $125.9 million and MRCS of $122.1 million. The decrease in AOCI was primarily due to a decrease in the fair value of OTTI AFS securities of $60.5 million, partially offset by the reclassification of OTTI non-credit losses of $21.4 million from AOCI to Other Income (Loss) and the net change in unrealized gains (losses) on AFS securities of $19.7 million.
The following table presents the changes in financial condition ($ amounts in millions):
|
| | | | | | | | |
| Condensed Statements of Condition | | December 31, 2011 | | December 31, 2010 |
| Advances | | $ | 18,568 |
| | $ | 18,275 |
|
| Mortgage Loans Held for Portfolio, net | | 5,955 |
| | 6,702 |
|
Investments (1) | | 15,203 |
| | 19,785 |
|
| Other Assets | | 649 |
| | 168 |
|
| Total Assets | | $ | 40,375 |
| | $ | 44,930 |
|
| | | | | |
| Consolidated Obligations, net | | $ | 36,894 |
| | $ | 40,800 |
|
| Mandatorily Redeemable Capital Stock | | 454 |
| | 658 |
|
| Other Liabilities | | 1,080 |
| | 1,525 |
|
| Total Liabilities | | 38,428 |
| | 42,983 |
|
| Capital Stock, Class B Putable | | 1,563 |
| | 1,610 |
|
| Retained Earnings | | 498 |
| | 427 |
|
| Accumulated Other Comprehensive Income (Loss) | | (114 | ) | | (90 | ) |
| Total Capital (GAAP) | | 1,947 |
| | 1,947 |
|
| Total Liabilities and Capital | | $ | 40,375 |
| | $ | 44,930 |
|
| | | | | |
Total Regulatory Capital (2) | | $ | 2,515 |
| | $ | 2,695 |
|
| | |
| (1) | Source: Bloomberg.Includes HTM Securities, AFS Securities, Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold. |
| |
| (2) | Average rates calculated using Bloomberg. December 31, 2010, and December 31, 2009, ending rates are from the last week in December 2010, and December 2009, respectively.Total Regulatory Capital is Total Capital (GAAP) plus MRCS less AOCI. |
Outlook
We currently expect our financial performance for the near term to continue to generate attractive returns for member stockholdersshareholders across a wide range of business, financial, and economic environments. The market turmoilEvents in 2008the capital and 2009housing markets in the last several years have created opportunities to generate spreads well above historic levels on certain types of transactions. TheAlthough we expected the frequency and level of high-spreadhigher-spread investment opportunities diminished during 2010 asto continue to diminish in 2011, the current Eurozone crisis has led to very low costs for our Consolidated Obligations, causing spreads to be wider than expected across all asset classes. We expect Net Interest Income to continue to decline if the cost of our debt increases to historic levels and the spreads on our Advances and short-term investments began to normalize. We expect earnings to decline in 2011 if spreads on our mortgage-related assets revert to normal levels. However, these factorsspreads could be influenced by unexpected changes in the market environment.
Our Advances have been affected by increased deposits and low loan demand at our member banks, competitive pressures from alternative sources of wholesale funds available to the membership, and consolidation in the financial services industry. However, Advances declinedto our insurance company members increased during 2010, primarily due to repayments from former members and our members' reduced need2011, resulting in a net increase in Advances for additional liquidity in the current economic environment.2011. We do not expect a significant change in our total Advance balance during 2011. Although maturities2012, in spite of Advances to former membersthe FOMC's announcement that it will reduce outstanding Advances, wemaintain the target range for the federal funds rate at 0.00-0.25% through late 2014. We believe that Advances outstanding to our insurance company members, and the relative percentage of their Advances to the total, willcould continue to increase.
Although we purchased morePurchases of MPP loans in 2010 than in 2009, the increase was2011 were not large enough to fully offset maturities and principal repayments. We do not expectAlthough our intent is to stabilize the balancelevel of theour MPP portfolio, it could continue to change significantly during 2011.decline in 2012. We expect our future MPP balance and earnings from MPP to be negatively affected by the interest-rate environment and the limited number of large sellers in our district.
We actively monitor the credit quality of our investments; however, increased credit risk related to our Private-labelprivate-label MBS and ABS resulted in other-than-temporary impairment ("OTTI", which term may also refer to "other-than-temporarily impaired" as the context indicates) charges infor 2009, 2010 and 2010.2011. If delinquency and/or loss rates on mortgages and/or home equity loans increase at a greater rate than currently expected, and/or there is a larger than expected decline in residential real estate values, we could experience additional OTTI charges. Because of the uncertainty regarding regulatory changes and legal challenges in the housing market, as well as economic, financial market, and housing market conditions and the actual and projected performance of the loan collateral underlying our MBS, it is not possible to predict whether or to what extent we will have additional OTTI charges in the future. See "RiskRisk Management - Credit Risk Management - Investments - OTTI Evaluation Process"Process herein for more information.
The cost of our Consolidated Obligations in the future will depend on several factors, including the direction and level of market interest rates, competition from other issuers of agency debt, changes in the investment preferences of potential buyers of agency debt securities, global demand, pricing in the interest-rate swap market, and other technical market factors.
We do not currently anticipate any major changes in the composition of our Statement of Condition that would significantly increase earnings sensitivity to changes in the market environment. In addition to having embedded prepayment options and basis risk exposure, which increase both our market risk and earnings volatility, the amortization of purchased premiums and discounts on mortgage assets could also result in greater volatility.
In the future, we will continue to engage in various hedging strategies and use derivatives to assist in mitigating the volatility of earnings and equity market value due to the maturity structure of our financial assets and liabilities. While we would expect that hedging with derivatives would reduce market risk and earnings volatility, estimated fair value adjustments could increase earnings volatility.
We strive to keep our operating expense ratios relatively low while maintaining adequate systems, support, and staffing. Operating expenses are expected to increase in 2011, compared to 2010,2012 due to further operating systems enhancement, risk management and compliance-related expenses.
As a result of the satisfaction of our obligation to REFCORP, total assessments are expected to be lower in 2012. See Analysis of Results of Operations for the Years Ended December 31, 20102011, 20092010, and 2008
Comparative Highlights for the Years Ended December 31, 2010, and 2009
The following table presents the comparative highlights of our results of operations for the years ended December 31, 2010, and 2009 ($ amounts in millions):
| | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | | | | | $ | | % |
| Comparative Highlights | | 2010 | | 2009 | | change | | change |
| Net Interest Income After Provision for Credit Losses | | $ | 266 | | | $ | 272 | | | $ | (6 | ) | | (2 | )% |
| Other Income (Loss) | | (59 | ) | | (58 | ) | | (1 | ) | | (1 | )% |
| Other Expenses | | 55 | | | 49 | | | 6 | | | 12 | % |
| Income Before Assessments | | 152 | | | 165 | | | (13 | ) | | (8 | )% |
| Total Assessments | | 41 | | | 45 | | | (4 | ) | | (8 | )% |
| Net Income | | $ | 111 | | | $ | 120 | | | $ | (9 | ) | | (8 | )% |
Net Income
The following factors contributed to the decrease in Net Income for the year ended December 31, 2010.
| |
• | The decrease in Net Interest Income After Provision for Credit Losses was primarily due to a decrease in interest-earning assets, substantially offset by wider spreads on mortgage-related assets and higher prepayment fees on Advances. The factors impacting Net Interest Income After Provision for Credit Losses are further addressed below under "Net Interest Income After Provision for Credit Losses." |
| |
• | The decrease in Other Income (Loss) was primarily due to the higher OTTI credit losses on certain private-label residential MBS ("RMBS"), as discussed in more detail in "Other Income" herein.
|
| |
• | The increase in Other Expenses was primarily due to higher Compensation and Benefit expenses, as discussed in more detail in "Other Expenses" herein. |
The factors contributing to a decrease in Net Income were partially offset by a decrease in- Total Assessments which is directly attributable to the lower level of Income Before Assessments.- REFCORP and Liquidity and Capital Resources - Capital Resources - Joint Capital Enhancement Agreement herein for more information.
Comparative Highlights for the Years Ended December 31, 2009, and 2008
The following table presents the comparative highlights of our results of operations for the years ended December 31, 2009, and 2008 ($ amounts in millions):
| | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | | | | | $ | | % |
| Comparative Highlights | | 2009 | | 2008 | | change | | change |
| Net Interest Income After Provision for Credit Losses | | $ | 272 | | | $ | 278 | | | $ | (6 | ) | | (2 | )% |
| Other Income (Loss) | | (58 | ) | | 15 | | | (73 | ) | | (495 | )% |
| Other Expenses | | 49 | | | 41 | | | 8 | | | 21 | % |
| Income Before Assessments | | 165 | | | 252 | | | (87 | ) | | (34 | )% |
| Total Assessments | | 45 | | | 68 | | | (23 | ) | | (34 | )% |
| Net Income | | $ | 120 | | | $ | 184 | | | $ | (64 | ) | | (35 | )% |
Net Income
The following factors contributed to the decrease in Net Income for the year ended December 31, 2009.
| |
• | The decrease in Net Interest Income After Provision for Credit Losses was primarily due to a decrease in interest-earning assets. The factors impacting Net Interest Income are further addressed below under "Net Interest Income After Provision for Credit Losses." |
| |
• | The decrease in Other Income (Loss) was primarily due to OTTI credit losses on certain private-label RMBS and a decrease in Net Gain (Loss) on Derivatives and Hedging Activities as discussed in more detail in "Other Income" herein. |
| |
• | The increase in Other Expenses was primarily due to higher Compensation and Benefits expenses, as discussed in more detail in "Other Expenses" herein. |
The factors contributing to a decrease in Net Income were partially offset by a decrease in Total Assessments, which is directly attributable to the lower level of Income Before Assessments.
Analysis of Results of Operations for the Years Ended December 31, 2011, 2010 2009, and 20082009
Net Interest Income After Provision for Credit Losses. Net Interest Income is our primary source of earnings. We generate Net Interest Income from two components: (i) the net interest-rate spread, and (ii) the amount earned on the excess of interest-earning assets over interest-bearing liabilities. The sum of these two components, when expressed as a percentage of the average balance of interest-earning assets, equals the net interest margin.
See "Net Gains (Losses) on Derivatives and Hedging Activities" herein for information on the net effect of derivatives on our Net Interest Income.
ItemsFactors that decreased Net Interest Income After Provision for Credit Losses for the year ended December 31, 20102011, compared to the same period in 20092010, included:
| |
• | lower average balances of Advances and Mortgage Loans Held for Portfolio, as shown on the following tables; and |
| |
• | narrower spreads on Advances and short-term investments. |
39narrower spreads on Investment securities, Federal Funds Sold and Securities Purchased Under Agreements to Resell;
These decreases were partially offset by:lower prepayment fee income on Advances; and
| |
• | higher prepayment fee income on Advances; |
| |
• | higher average balances of HTM and AFS securities, as shown in "Average Balances, Interest Income and Expense, and Average Yields" below;
|
| |
• | wider spreads on mortgage-related assets, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment; and |
| |
• | lower amortization of purchased premiums due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience.
|
lower average balances of Federal Funds Sold and Securities Purchased Under Agreements to Resell, Advances and Mortgage Loans Held for Portfolio.
Items that decreased Net Interest Income for the year ended December 31, 2009, compared to the same period in 2008, included:
| |
• | lower average balances of interest-earning assets, and |
| |
• | a decline in interest rates between periods. The average yield on interest-bearing assets funded by interest-free capital and spreads on short-term investments were negatively affected by the lower interest rates. |
These decreases were partially offset by:
| |
• | wider spreads on our interest-earning assets (except for short-term investments) primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment; and |
| |
• | higher prepayment fee income on Advances. |
higher average balances of Investment securities;
lower average balances of Consolidated Obligations; and
wider spreads on Advances and Mortgage Loans Held for Portfolio, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment.
Factors that decreased Net Interest Income After Provision for Credit Losses for the year ended December 31, 2010, compared to the same period in 2009, included:
lower average balances of Advances and Mortgage Loans Held for Portfolio; and
narrower spreads on Advances and short-term investments.
These decreases were partially offset by:
higher prepayment fee income on Advances;
higher average balances of Investment securities;
wider spreads on mortgage-related assets, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment; and
lower amortization of purchased premiums due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience.
See Net Gains (Losses) on Derivatives and Hedging Activities herein for information on the net effect of derivatives on our Net Interest Income.
Average Balances, Interest Income and Expense, and Average Yields. The following table presents dailytables present average balances, interest income and expense, and average yields of our major categories of interest-earning assets and the sources funding those interest-earning assets ($ amounts in millions):
| | | | For the Years Ended December 31, | Years Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2011 | | 2010 | | 2009 |
| | Avg. Balance | | Interest Income/ Expense | | Avg. Yield | | Avg. Balance | | Interest Income/ Expense | | Avg. Yield | | Avg. Balance | | Interest Income/ Expense | | Avg. Yield | Average Balance | | Interest Income/ Expense | | Average Yield | | Average Balance | | Interest Income/ Expense | | Average Yield | | Average Balance | | Interest Income/ Expense | | Average Yield |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Funds Sold and Securities Purchased Under Agreements to Resell | $ | 8,198 | | | $ | 17 | | | 0.21 | % | | $ | 8,270 | | | $ | 25 | | | 0.29 | % | | $ | 10,683 | | | $ | 270 | | | 2.53 | % | $ | 5,710 |
| | $ | 7 |
| | 0.13 | % | | $ | 8,198 |
| | $ | 17 |
| | 0.21 | % | | $ | 8,270 |
| | $ | 25 |
| | 0.29 | % |
Investment Securities (1) (2) | 10,642 | | | 259 | | | 2.43 | % | | 9,187 | | | 290 | | | 3.16 | % | | 8,357 | | | 381 | | | 4.56 | % | |
Advances (1) | 20,432 | | | 214 | | | 1.05 | % | | 26,479 | | | 398 | | | 1.51 | % | | 29,945 | | | 998 | | | 3.33 | % | |
| Mortgage Loans Held for Portfolio | 6,821 | | | 349 | | | 5.11 | % | | 7,978 | | | 413 | | | 5.18 | % | | 9,075 | | | 468 | | | 5.15 | % | |
Investment securities (1) | | 11,828 |
| | 227 |
| | 1.92 | % | | 10,815 |
| | 259 |
| | 2.39 | % | | 9,330 |
| | 290 |
| | 3.11 | % |
Advances (2) | | 18,069 |
| | 169 |
| | 0.93 | % | | 20,432 |
| | 214 |
| | 1.05 | % | | 26,479 |
| | 398 |
| | 1.51 | % |
Mortgage Loans Held for Portfolio (2) | | 6,304 |
| | 300 |
| | 4.75 | % | | 6,821 |
| | 349 |
| | 5.11 | % | | 7,978 |
| | 413 |
| | 5.18 | % |
Other Assets (interest-earning) (3) | 149 | | | 1 | | | 0.89 | % | | 173 | | | — | | | 0.16 | % | | 36 | | | — | | | 0.80 | % | 343 |
| | — |
| | 0.11 | % | | 149 |
| | 1 |
| | 0.89 | % | | 173 |
| | — |
| | 0.16 | % |
| Total interest-earning assets | 46,242 | | | 840 | | | 1.82 | % | | 52,087 | | | 1,126 | | | 2.16 | % | | 58,096 | | | 2,117 | | | 3.64 | % | 42,254 |
| | 703 |
| | 1.66 | % | | 46,415 |
| | 840 |
| | 1.81 | % | | 52,230 |
| | 1,126 |
| | 2.16 | % |
Other Assets (4) | 160 | | | | | | | 329 | | | | | | | 330 | | | | | | 313 |
| | | | | | (13 | ) | | | | | | 186 |
| | | | |
| Total Assets | $ | 46,402 | | | | | | | $ | 52,416 | | | | | | | $ | 58,426 | | | | | | $ | 42,567 |
| | | | | | $ | 46,402 |
| | | | | | $ | 52,416 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Capital: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Deposits | $ | 735 | | | $ | — | | | 0.04 | % | | $ | 1,023 | | | $ | 1 | | | 0.08 | % | | $ | 904 | | | $ | 15 | | | 1.70 | % | $ | 1,032 |
| | — |
| | 0.02 | % | | $ | 735 |
| | — |
| | 0.04 | % | | $ | 1,023 |
| | 1 |
| | 0.08 | % |
| Discount Notes | 9,296 | | | 15 | | | 0.16 | % | | 14,756 | | | 85 | | | 0.58 | % | | 20,390 | | | 498 | | | 2.44 | % | 7,980 |
| | 8 |
| | 0.10 | % | | 9,296 |
| | 15 |
| | 0.16 | % | | 14,756 |
| | 85 |
| | 0.58 | % |
CO Bonds (1) | 32,263 | | | 544 | | | 1.68 | % | | 32,424 | | | 755 | | | 2.33 | % | | 33,465 | | | 1,314 | | | 3.93 | % | |
CO Bonds (2) | | 29,917 |
| | 449 |
| | 1.50 | % | | 32,263 |
| | 544 |
| | 1.68 | % | | 32,424 |
| | 755 |
| | 2.33 | % |
| MRCS | 758 | | | 14 | | | 1.81 | % | | 603 | | | 13 | | | 2.20 | % | | 269 | | | 12 | | | 4.34 | % | 556 |
| | 15 |
| | 2.60 | % | | 758 |
| | 14 |
| | 1.81 | % | | 603 |
| | 13 |
| | 2.20 | % |
| Other Borrowings | — | | | — | | | — | % | | 1 | | | — | | | 0.24 | % | | — | | | — | | | 2.30 | % | |
| Other borrowings | | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | | 1 |
| | — |
| | 0.24 | % |
| Total interest-bearing liabilities | 43,052 | | | 573 | | | 1.33 | % | | 48,807 | | | 854 | | | 1.75 | % | | 55,028 | | | 1,839 | | | 3.34 | % | 39,485 |
| | 472 |
| | 1.19 | % | | 43,052 |
| | 573 |
| | 1.33 | % | | 48,807 |
| | 854 |
| | 1.75 | % |
| Other Liabilities | 1,539 | | | | | | | 1,579 | | | | | | | 1,131 | | | | | | 1,126 |
| | | | | | 1,539 |
| | | | | | 1,579 |
| | | | |
| Total Capital | 1,811 | | | | | | | 2,030 | | | | | | | 2,267 | | | | | | 1,956 |
| | | | | | 1,811 |
| | | | | | 2,030 |
| | | | |
| Total Liabilities and Capital | $ | 46,402 | | | | | | | $ | 52,416 | | | | | | | $ | 58,426 | | | | | | $ | 42,567 |
| | | | | | $ | 46,402 |
| | | | | | $ | 52,416 |
| | | | |
| | | | | | | | | | | | | | | | | | | |
| Net Interest Income and net spread on interest-earning assets less interest-bearing liabilities | | | $ | 267 | | | 0.49 | % | | | | $ | 272 | | | 0.41 | % | | | | $ | 278 | | | 0.30 | % | | | $ | 231 |
| | 0.47 | % | | | | $ | 267 |
| | 0.48 | % | | | | $ | 272 |
| | 0.41 | % |
| Net interest margin | 0.58 | % | | | | | | 0.52 | % | | | | | | 0.48 | % | | | | | 0.55 | % | | | | | | 0.57 | % | | | | | | 0.52 | % | | | | |
| Average interest-earning assets to interest-bearing liabilities | 1.07 | | | | | | | 1.07 | | | | | | | 1.06 | | | | | | 1.07 |
| | | | | | 1.08 |
| | | | | | 1.07 |
| | | | |
| | |
| (1) | Interest income/expense and average rates include the effect of associated interest-rate exchange agreements to the extent such agreements qualify as fair value hedges. |
| (2)
| The average balances of investment securities are reflected at amortized cost; therefore, the resulting yields do not reflect changes in estimated fair value if applicable.that are recorded as a component of AOCI, nor do they include the effect of OTTI-related non-credit losses. Interest income/expense includes the effect of associated interest-rate exchange agreements. |
| |
(2) | Interest income/expense and average yield include all other components of interest, including the impact of net interest payments or receipts on derivatives, hedge accounting amortization, and Advance prepayment fees. |
| |
(3) | Other Assets (interest-earning) consistconsists of Interest-Bearing Deposits, Loansloans to Other FHLBs,other FHLBanks, and for 2010, Rabbi Trust assets.grantor trust assets, which are carried at estimated fair value. |
| |
| (4) | Includes changes in estimated fair value and the noncredit portioneffect of OTTIOTTI-related non-credit losses on AFS and HTM securities for purposes of the average balance sheet presentation.table. |
The following table summarizespresents changes in Interest Income and Interest Expense ($ amounts in millions):
| | | | For the Years Ended December 31, | | Years Ended December 31, |
| | 2010 over 2009 | | 2009 over 2008 | | 2011 vs. 2010 | | 2010 vs. 2009 |
| | Volume | | Rate | | Total | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Increase (Decrease) in Interest Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Funds Sold and Securities Purchased Under Agreements to Resell | $ | (1 | ) | | $ | (7 | ) | | $ | (8 | ) | | $ | (50 | ) | | $ | (195 | ) | | $ | (245 | ) | | $ | (5 | ) | | $ | (5 | ) | | $ | (10 | ) | | $ | (1 | ) | | $ | (7 | ) | | $ | (8 | ) |
| Investment Securities | 42 | | | (73 | ) | | (31 | ) | | 35 | | | (126 | ) | | (91 | ) | |
| Investment securities | | | 23 |
| | (55 | ) | | (32 | ) | | 42 |
| | (73 | ) | | (31 | ) |
| Advances | (79 | ) | | (105 | ) | | (184 | ) | | (105 | ) | | (495 | ) | | (600 | ) | | (23 | ) | | (22 | ) | | (45 | ) | | (79 | ) | | (105 | ) | | (184 | ) |
| Mortgage Loans Held for Portfolio | (59 | ) | | (5 | ) | | (64 | ) | | (58 | ) | | 3 | | | (55 | ) | | (26 | ) | | (23 | ) | | (49 | ) | | (59 | ) | | (5 | ) | | (64 | ) |
| Other Assets, net | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 |
| | (2 | ) | | (1 | ) | | — |
| | 1 |
| | 1 |
|
| Total | (97 | ) | | (189 | ) | | (286 | ) | | (178 | ) | | (813 | ) | | (991 | ) | | (30 | ) | | (107 | ) | | (137 | ) | | (97 | ) | | (189 | ) | | (286 | ) |
| Increase (Decrease) in Interest Expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Deposits | — | | | (1 | ) | | (1 | ) | | 2 | | | (16 | ) | | (14 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Discount Notes | (24 | ) | | (46 | ) | | (70 | ) | | (110 | ) | | (303 | ) | | (413 | ) | | (2 | ) | | (5 | ) | | (7 | ) | | (24 | ) | | (46 | ) | | (70 | ) |
| CO Bonds | (4 | ) | | (207 | ) | | (211 | ) | | (40 | ) | | (519 | ) | | (559 | ) | | (38 | ) | | (57 | ) | | (95 | ) | | (4 | ) | | (207 | ) | | (211 | ) |
| MRCS | 3 | | | (2 | ) | | 1 | | | 9 | | | (8 | ) | | 1 | | | (4 | ) | | 5 |
| | 1 |
| | 3 |
| | (2 | ) | | 1 |
|
| Other Borrowings | — | | | — | | | — | | | — | | | — | | | — | | |
| Other borrowings | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | (25 | ) | | (256 | ) | | (281 | ) | | (139 | ) | | (846 | ) | | (985 | ) | | (44 | ) | | (57 | ) | | (101 | ) | | (25 | ) | | (256 | ) | | (281 | ) |
| Increase (Decrease) in Net Interest Income before Provision for Credit Losses | $ | (72 | ) | | $ | 67 | | | $ | (5 | ) | | $ | (39 | ) | | $ | 33 | | | $ | (6 | ) | |
| Increase (Decrease) in Net Interest Income Before Provision for Credit Losses | | | $ | 14 |
| | $ | (50 | ) | | $ | (36 | ) | | $ | (72 | ) | | $ | 67 |
| | $ | (5 | ) |
Changes in both volume orand interest rates causeinfluence changes in Net Interest Income and net interest margin. Changes in Interest Income and Interest Expense that are not identifiable as either volume-related or rate-related, but are attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the volume and rate changes.
Other Income.Income (Loss). The following table presents a breakdownthe components of Other Income (Loss) for the years ended December 31, 2010, 2009, and 2008 ($ amounts in millions):
| | | | For the Years Ended December 31, | | | | | | | |
| Components of Other Income (Loss) | | 2010 | | 2009 | | 2008 | |
| Total OTTI Losses | | $ | (24 | ) | | $ | (412 | ) | | $ | — | | |
| | | | Years Ended December 31, |
| Components | | | 2011 | | 2010 | | 2009 |
| Total OTTI losses | | | $ | (6 | ) | | $ | (24 | ) | | $ | (412 | ) |
| Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss) | | (46 | ) | | 352 | | | — | | | (21 | ) | | (46 | ) | | 352 |
|
| Net OTTI Losses | | (70 | ) | | (60 | ) | | — | | |
| Net OTTI losses, credit portion | | | (27 | ) | | (70 | ) | | (60 | ) |
| Net Realized Gains from Sale of Available-for-Sale Securities | | 2 | | | — | | | — | | | 4 |
| | 2 |
| | — |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | | 7 | | | (1 | ) | | 12 | | | (13 | ) | | 7 |
| | (1 | ) |
| Service Fees | | 1 | | | 1 | | | 1 | | | 1 |
| | 1 |
| | 1 |
|
| Standby Letters of Credit Fees | | 2 | | | 1 | | | 1 | | | 2 |
| | 2 |
| | 1 |
|
| Loss on Extinguishment of Debt | | (2 | ) | | — | | | — | | | — |
| | (2 | ) | | — |
|
| Other, net | | 1 | | | 1 | | | 1 | | | — |
| | 1 |
| | 1 |
|
| Total Other Income (Loss) | | $ | (59 | ) | | $ | (58 | ) | | $ | 15 | | | $ | (33 | ) | | $ | (59 | ) | | $ | (58 | ) |
The unfavorablefavorable change in Other Income (Loss) for the year ended December 31, 20102011, compared to the same period in 20092010, was primarily due to higherthe lower OTTI credit losses on certain private-label RMBS. Certain estimates were refined and certain assumptions were adjusted each quarter throughout 2010, particularly related to prime loans. These changes resulted in higher projected principal losses and credit losses compared to 2009 due to our investment concentration in prime collateral. See "Results of OTTI Evaluation Process" below for more information. The higher credit losses wereRMBS, partially offset by a favorable changenet losses on derivatives and hedging activities for the year ended December 31, 2011 compared to net gains on derivatives and hedging activities for the same period in Net Gains (Losses) on Derivatives and Hedging Activities, as shown on "Net Gains (Losses) on Derivatives and Hedging Activities" below.
2010. The unfavorable change in Other Income (Loss) for the year ended December 31, 2009,2010 compared to the same period in 2008,2009, was primarily due to the following factors:higher OTTI credit losses on certain private-label RMBS.
| |
• | the credit loss portion of the OTTI charge on certain private-label RMBS as shown in "Results of OTTI Evaluation Process" below, and |
| |
• | an unfavorable change in Net Gains (Losses) on Derivatives and Hedging Activities as shown in "Net Gains (Losses) on Derivatives and Hedging Activities" below. |
Results of OTTI Evaluation Process.As a result of our evaluations, during the years ended December 31, 2010,2011 and 2009,2010, we recognized OTTI losses on23 and 21 private-label RMBS respectively. These securities had an aggregate unpaid principal balance of $1.2 billion and $1.3 billion as of December 31, 2010, and 2009, respectively. We determined that we would not recover the entire amortized cost of these securities, and we recognized OTTI losses as shown in the table below ($ amounts in millions):
| | | | | | Impairment | | | | | | | | | |
| | | Impairment Related to | | Related to All Other | | Total | | Total OTTI | | Portion Reclassified | | OTTI Credit |
| December 31, 2010 | | Credit Loss | | Factors | | Impairment | |
| Year Ended December 31, 2011 | | | Losses | | to (from) OCI | | Losses |
| Impairment on securities for which OTTI was not previously recognized | | $ | 4 | | | $ | 17 | | | $ | 21 | | | $ | — |
| | $ | — |
| | $ | — |
|
| Additional impairment on securities for which OTTI was previously recognized | | 66 | | | (63 | ) | | 3 | | | (6 | ) | | (21 | ) | | (27 | ) |
| Total | | $ | 70 | | | $ | (46 | ) | | $ | 24 | | | $ | (6 | ) | | $ | (21 | ) | | $ | (27 | ) |
| | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | |
| Impairment on securities for which OTTI was not previously recognized | | $ | 60 | | | $ | 352 | | | $ | 412 | | | $ | (21 | ) | | $ | 17 |
| | $ | (4 | ) |
| Additional impairment on securities for which OTTI was previously recognized | | — | | | — | | | — | | | (3 | ) | | (63 | ) | | (66 | ) |
| Total | | $ | 60 | | | $ | 352 | | | $ | 412 | | | $ | (24 | ) | | $ | (46 | ) | | $ | (70 | ) |
| | | | | | | | |
| Year Ended December 31, 2009 | | | | | | | |
| Impairment on securities for which OTTI was not previously recognized | | | $ | (412 | ) | | $ | 352 |
| | $ | (60 | ) |
| Additional impairment on securities for which OTTI was previously recognized | | | — |
| | — |
| | — |
|
| Total | | | $ | (412 | ) | | $ | 352 |
| | $ | (60 | ) |
For the years endedAs described in detail in December 31, 2010Notes to Financial Statements - Note 7 - Other-Than-Temporary Impairment Analysis, OTTI losses recorded on private-label RMBS are derived from projections of the future cash flows of the individual securities. These projections are based on a number of assumptions and expectations, which are updated on a quarterly basis. In 2009, we accreted $54.8 million and $28.4 million, respectively,2010, the assumptions and the resulting credit-related OTTI losses reflected the significant deterioration in the credit quality of previous non-credit impairment lossesthe securities due to economic, financial and housing market conditions. In particular, in 2010, ongoing pressure on housing prices from Accumulated Other Comprehensive Income (Loss) ("AOCI")large inventories of unsold or foreclosed properties and the then current and forecasted borrower defaults and foreclosures continued to negatively affect the projected performance of the underlying loan collateral, which contributed to the carrying valuerecognition of HTM securities. Foradditional credit losses in 2010. In first quarter 2011, the assumptions included higher projected loss severities and expected increases in foreclosure and liquidation costs, resulting in additional credit losses being recognized. However, the credit losses for the entire year were lower compared to the prior years ended December 31, 2010, and 2009, we accreted $4.5 million and $1.5 million, respectively, of credit impairment includeddue to the relative stabilization in the amortized costprojected performance of private-label RMBS to Net Interest Income.the underlying collateral during the remainder of 2011.
Net Gains (Losses) on Derivatives and Hedging Activities. All derivatives are recorded in the Statement of Condition at their estimated fair values. Changes in the fair values of our derivatives are recorded each period in earnings. If a hedge qualifies for fair value hedge accounting, changes in the fair value of the hedged item are also recorded in earnings. The net effect is that only the "ineffective" portion of a qualifying hedge has an impact on earnings.
Derivatives introduce periodic earnings volatility. Two types of hedging contribute significantly to volatility in our earnings.
The first type involves transactions in which we enter into interest-rate swaps with coupon cash flows identical or nearly identical to the cash flows of the hedged item, such as an Advance or investment security. In some cases involving hedges, of this type, an assumption of "no ineffectiveness" can be made, and the changes in the fair values of the hedge and the hedged item are considered identical and offsetting (referred to as the "short-cut method""short-cut method"). Effective April 1, 2008, weWe no longer apply the short-cut method to any new hedging relationships. AllHowever, we continue to use the short-cut method to account for all existing hedging relationships entered into prior to April 1, 2008, that were accounted for under the short-cut method, continue to be, provided they still meet the assumption of "effectiveness."no ineffectiveness."
If a hedge qualifies for fair value hedge accounting, but the assumption of "no ineffectiveness" cannot be made, the hedge and the hedged item must be marked to estimated fair value independently (referred to as the "long-haul method""long-haul method"). Under the long-haul method, the two components of the hedging relationship are marked to estimated fair value using discount rates appropriate for the nature of the instrument being marked to estimated fair value, and the resulting changes in fair value will generally be slightly different. Even though these differences are generally relatively small when expressed as prices, their impact can become more significant when multiplied by the principal amount of the transaction and then evaluated in the context of our Net Income. Nonetheless, the impact ofearnings volatility resulting from these types of ineffectiveness-related adjustments on earningsineffectiveness is transitory, as the net earnings impact will be zero over the life of the hedging relationship if the derivative and hedged item are held to maturity or their call dates, which is generally the case for us.
The second type of hedging relationship that creates earnings volatility involves transactions in which we enter into interest rate exchange agreements to economically hedge identifiable portfolio risks that do not qualify for hedge accounting (referred to as an "economic""economic" hedge). These economic hedges are recorded on the Statement of Condition at estimated fair value with the unrealized gains or losses recognized in earnings without any offsetting unrealized gains or losses from the associated asset or liability.
As shown in the following table, our Net Interest Income is affected by the inclusion or exclusion of the net interest income and/or expense associated with derivatives. For example, if a derivative qualifies for fair-value hedge accounting, the net interest income/expense associated with the derivative is included in Net Interest Income. If an interest-rate exchange agreement does not qualify for fair-value hedge accounting (economic hedges) or if we have not designated it in such a qualifying hedge relationship, the net interest income/expense associated with the derivative is excluded from Net Interest Income and is recorded in Net Gains (Losses) in Derivatives and Hedging Activities in Other Income (Loss).
Due tovolatility in the overall interest rate environment, our Net Gains (Losses) on Derivatives and Hedging Activities fluctuate as we hedge our asset or liability risk exposures. The change for 2011 was primarily due to unrealized losses on fair value hedges resulting from mark-to-market adjustments due to changes in benchmark rates. In general, we hold derivatives and associated hedged instruments, and certain assets and liabilities that are carried at estimated fair value, to the maturity, call, or put date. Therefore, due to timing, nearly all of the cumulative net gains and losses for these financial instruments will generally reverse over the remaining contractual terms of the hedged financial instruments.
The tabletables below presentspresent the net effect of derivatives on Net Interest Income and on Other Income (Loss), within the line Net Gains (Losses) on Derivatives and Hedging Activities, by type of hedge and hedged item ($ amounts in millions).:
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2010 | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Discount Notes | | Total |
| Net Interest Income: | | | | | | | | | | | | |
Amortization/accretion of hedging activities in net interest income (1) | | $ | — | | | $ | 11 | | | $ | (1 | ) | | $ | 4 | | | $ | — | | | $ | 14 | |
Net interest settlements included in net interest income (2) | | (464 | ) | | (78 | ) | | — | | | 182 | | | — | | | (360 | ) |
| Total Net Interest Income | | (464 | ) | | (67 | ) | | (1 | ) | | 186 | | | — | | | (346 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair value hedges | | 10 | | | (1 | ) | | — | | | — | | | — | | | 9 | |
| Gains (losses) on derivatives not receiving hedge accounting | | (1 | ) | | 1 | | | (3 | ) | | 1 | | | — | | | (2 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities | | 9 | | | — | | | (3 | ) | | 1 | | | — | | | 7 | |
| Total net effect of derivatives and hedging activities | | $ | (455 | ) | | $ | (67 | ) | | $ | (4 | ) | | $ | 187 | | | $ | — | | | $ | (339 | ) |
| December 31, 2009 | | | | | | | | | | | | |
| Net Interest Income: | | | | | | | | | | | | |
Amortization/accretion of hedging activities in net interest income (1) | | $ | — | | | $ | 9 | | | $ | 2 | | | $ | 4 | | | $ | — | | | $ | 15 | |
Net interest settlements included in net interest income (2) | | (556 | ) | | (66 | ) | | — | | | 183 | | | — | | | (439 | ) |
| Total Net Interest Income | | (556 | ) | | (57 | ) | | 2 | | | 187 | | | — | | | (424 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair value hedges | | (21 | ) | | (2 | ) | | — | | | 18 | | | — | | | (5 | ) |
| Gains (losses) on derivatives not receiving hedge accounting | | — | | | — | | | (2 | ) | | — | | | 6 | | | 4 | |
| Net Gains (Losses) on Derivatives and Hedging Activities | | (21 | ) | | (2 | ) | | (2 | ) | | 18 | | | 6 | | | (1 | ) |
| Total net effect of derivatives and hedging activities | | $ | (577 | ) | | $ | (59 | ) | | $ | — | | | $ | 205 | | | $ | 6 | | | $ | (425 | ) |
| December 31, 2008 | | | | | | | | | | | | |
| Net Interest Income: | | | | | | | | | | | | |
Amortization/accretion of hedging activities in net interest income (1) | | $ | (1 | ) | | $ | 6 | | | $ | (8 | ) | | $ | 6 | | | $ | — | | | $ | 3 | |
Net interest settlements included in net interest income (2) | | (209 | ) | | (20 | ) | | — | | | 91 | | | — | | | (138 | ) |
| Total Net Interest Income | | (210 | ) | | (14 | ) | | (8 | ) | | 97 | | | — | | | (135 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair value hedges | | 23 | | | 3 | | | — | | | (18 | ) | | — | | | 8 | |
| Gains (losses) on derivatives not receiving hedge accounting | | — | | | — | | | (2 | ) | | 1 | | | 5 | | | 4 | |
| Net Gains (Losses) on Derivatives and Hedging Activities | | 23 | | | 3 | | | (2 | ) | | (17 | ) | | 5 | | | 12 | |
| Total net effect of derivatives and hedging activities | | $ | (187 | ) | | $ | (11 | ) | | $ | (10 | ) | | $ | 80 | | | $ | 5 | | | $ | (123 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2011 | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Discount Notes | | Total |
| Net Interest Income: | | | | | | | | | | | | |
(Amortization) accretion of hedging activities in net interest income (1) | | $ | — |
| | $ | 13 |
| | $ | (4 | ) | | $ | 3 |
| | $ | — |
| | $ | 12 |
|
Net interest settlements included in net interest income (2) | | (302 | ) | | (84 | ) | | — |
| | 108 |
| | — |
| | (278 | ) |
| Total Net Interest Income | | (302 | ) | | (71 | ) | | (4 | ) | | 111 |
| | — |
| | (266 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair-value hedges | | (7 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (8 | ) |
| Gains (losses) on derivatives not qualifying for hedge accounting | | — |
| | (3 | ) | | (2 | ) | | — |
| | — |
| | (5 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities | | (7 | ) | | (3 | ) | | (2 | ) | | (1 | ) | | — |
| | (13 | ) |
| Total net effect of derivatives and hedging activities | | $ | (309 | ) | | $ | (74 | ) | | $ | (6 | ) | | $ | 110 |
| | $ | — |
| | $ | (279 | ) |
| | | | | | | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | | | | | | |
| Net Interest Income: | | | | | | | | | | | | |
(Amortization) accretion of hedging activities in net interest income (1) | | $ | — |
| | $ | 11 |
| | $ | (1 | ) | | $ | 4 |
| | $ | — |
| | $ | 14 |
|
Net interest settlements included in net interest income (2) | | (464 | ) | | (78 | ) | | — |
| | 182 |
| | — |
| | (360 | ) |
| Total Net Interest Income | | (464 | ) | | (67 | ) | | (1 | ) | | 186 |
| | — |
| | (346 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair-value hedges | | 10 |
| | (1 | ) | | — |
| | — |
| | — |
| | 9 |
|
| Gains (losses) on derivatives not qualifying for hedge accounting | | (1 | ) | | 1 |
| | (3 | ) | | 1 |
| | — |
| | (2 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities | | 9 |
| | — |
| | (3 | ) | | 1 |
| | — |
| | 7 |
|
| Total net effect of derivatives and hedging activities | | $ | (455 | ) | | $ | (67 | ) | | $ | (4 | ) | | $ | 187 |
| | $ | — |
| | $ | (339 | ) |
| | | | | | | | | | | | | |
| Year Ended December 31, 2009 | | | | | | | | | | | | |
| Net Interest Income: | | | | | | | | | | | | |
(Amortization) accretion of hedging activities in net interest income (1) | | $ | — |
| | $ | 9 |
| | $ | 2 |
| | $ | 4 |
| | $ | — |
| | $ | 15 |
|
Net interest settlements included in net interest income (2) | | (556 | ) | | (66 | ) | | — |
| | 183 |
| | — |
| | (439 | ) |
| Total Net Interest Income | | (556 | ) | | (57 | ) | | 2 |
| | 187 |
| | — |
| | (424 | ) |
| Net Gains (Losses) on Derivatives and Hedging Activities: | | | | | | | | | | | | |
| Gains (losses) on fair-value hedges | | (21 | ) | | (2 | ) | | — |
| | 18 |
| | — |
| | (5 | ) |
| Gains (losses) on derivatives not qualifying for hedge accounting | | — |
| | — |
| | (2 | ) | | — |
| | 6 |
| | 4 |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | | (21 | ) | | (2 | ) | | (2 | ) | | 18 |
| | 6 |
| | (1 | ) |
| Total net effect of derivatives and hedging activities | | $ | (577 | ) | | $ | (59 | ) | | $ | — |
| | $ | 205 |
| | $ | 6 |
| | $ | (425 | ) |
| | |
| (1) | Represents the amortization/accretion (amortization) of hedging estimated fair value adjustments for both open and closed hedge positions. |
| |
(2) | Represents interest income/expense on derivatives included in net interest income.Net Interest Income. |
Other ExpensesExpenses.. The following table presents a breakdownthe components of Other Expenses ($ amounts in millions):
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| Components | | 2011 | | 2010 | | 2009 |
| Compensation and Benefits | | $ | 36 |
| | $ | 36 |
| | $ | 32 |
|
| Other Operating Expenses | | 15 |
| | 13 |
| | 12 |
|
| Finance Agency and Office of Finance Expenses | | 6 |
| | 5 |
| | 4 |
|
| Other | | 1 |
| | 1 |
| | 1 |
|
| Total Other Expenses | | $ | 58 |
| | $ | 55 |
| | $ | 49 |
|
The increase in Total Other Expenses for the yearsyear ended December 31, 2011 compared to the same period in 2010, 2009,was primarily due to higher Other Operating Expenses, which were mainly attributable to increased depreciation resulting from the renovation of our office building, and 2008 ($ amountsincreases in millions): legal and other professional fees resulting primarily from legislative and regulatory developments.
| | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2010 | | 2009 | | 2008 |
| Compensation and Benefits | | $ | 36 | | | $ | 32 | | | $ | 26 | |
| Other Operating Expenses | | 13 | | | 12 | | | 10 | |
| Finance Agency and Office of Finance Expenses | | 5 | | | 4 | | | 4 | |
| Other | | 1 | | | 1 | | | 1 | |
| Total Other Expenses | | $ | 55 | | | $ | 49 | | | $ | 41 | |
The increase in Total Other Expenses for the year ended December 31, 2010 compared to the year ended December 31,same period in 2009, was primarily due to higher Compensation and Benefits, which were mainly attributable to higher incentive compensation achievements and an increase in headcount, and, to a lesser extent, an increase in pension costs resulting from an increase in plan liabilities. The increase in plan liabilities was due to an increase in total compensation and a decrease in the discount rate used to calculate plan liabilities.
The increase in Total Other Expenses for the year ended December 31, 2009, compared to the year ended December 31, 2008, was primarily due to an increase in Compensation and Benefits, which was primarily attributable to higher pension costs, resulting from amortization of the related prepaid asset and cash contributions to increase the funded status of our employee qualified defined benefit plan, which was necessitated by actuarial losses and a decline in the value of plan assets during the plan year, partially offset by unrealized gains on assets supporting our Supplemental Executive Retirement Plan.
Office of Finance Expenses. The FHLBsFHLBanks fund the costs of the Office of Finance as a joint office that facilitates issuing and servicing Consolidated Obligations, preparation of the FHLBs'FHLBanks' combined quarterly and annual financial reports, and certain other functions. For the years ended December 31, 2011, 2010 2009, and 2008,2009, our assessments to fund the Office of Finance were $2.12.7 million, $1.72.1 million and $1.7 million, respectively.
Finance Agency Expenses. The FHLBsFHLBanks are assessed the operating costs of theirour regulator, the Finance Agency. We have no direct control over these costs. For the years ended December 31, 2011, 2010 2009, and 2008,2009, our Finance Agency assessments were $2.63.7 million, $1.92.6 million and $1.71.9 million, respectively.
AHP and REFCORP Assessments.
AHPTotal Assessments.
AHP.. The FHLBsFHLBanks are required to set aside annually, in the aggregate, the greater of $100 million or 10% of their net earnings before Interest Expense on MRCS and after the REFCORP assessments, to fund the AHP. For purposes of the AHP calculation, net earnings is defined as net income before assessments, plus interest expense related to MRCS, less the assessment for REFCORP, if applicable. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. For the years ended December 31, 2011, 2010, 2009, and 2008,2009, our AHP expense was $13.913.8 million, $14.913.9 million and $21.814.9 million, respectively. Our AHP expense fluctuates in accordance with our Income Before Assessments.
If we experienced a net loss during a quarter, but still had net earnings for the year, our obligation to the AHP would be calculated based on our year-to-date net earnings. If we experienced a net loss for a full year, we would have no obligation to the AHP for the year, since our required annual contribution is limited to annual net earnings.
If the aggregate 10% calculation described above was less than $100 million for all 12 FHLBanks, each FHLBank would be required to assure that the aggregate contributions of the FHLBanks equal $100 million. The proration would be made on the basis of net earnings of each FHLBank in relation to the net earnings of all FHLBanks for the previous year, subject to the annual earnings limitation discussed above. There was no shortfall in 2011, 2010, or 2009.
If we determine that our required AHP contributions are contributing to financial instability, we may apply to the Finance Agency for a temporary suspension of our contributions. We did not make such an application in 2011, 2010, or 2009.
REFCORP. Each FHLB isPrior to June 30, 2011, each FHLBank was required to pay to REFCORP 20% of net income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. REFCORP has been designated as the calculation agent for the AHP and REFCORP assessments. Each FHLB provides its net income before AHP and REFCORP assessments to REFCORP, which then performs the calculations for each quarter end. If we experience a net loss during a quarter, but still had net income for the year-to-date, our obligation to REFCORP would be calculated based on our year-to-date GAAP net income. If we experience a net loss for a full year, we would have no obligation to REFCORP for the year.
The FHLBs will continue to beFHLBanks were obligated to pay the REFCORP assessment until the aggregate amounts actually paid by all 12 FHLBs areFHLBanks were equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) with a final maturity date of April 15, 2030, at which point the required payment of each FHLBFHLBank to REFCORP willwould be fully satisfied. The Finance Agency, in consultation with the U.S. Secretary
However, the FHLBs aggregate payments through 2010 havemade by the FHLBanks exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening the remaining term as of December 31, 2010, to October 15,June 30, 2011. This date assumesOn August 5, 2011, the Finance Agency certified that the FHLBs will pay exactly $75 million for each of the first two quarters of 2011 and $10 million on October 15, 2011.FHLBanks have fully satisfied their REFCORP obligation. See "LiquidityLiquidity and Capital Resources - Joint Capital Enhancement Agreement" hereinAgreement for information about the Joint Capital Enhancementamended JCE Agreement that will be in effect oncebecame operational when our REFCORP obligation has beenwas satisfied.
ForOur REFCORP expense for the year ended December 31, 2011 was $10.9 million, compared to $27.7 million and $30.1 million for the years ended December 31, 2010 and 2009, and 2008,respectively. The decrease in REFCORP expense for the year ended December 31, 2011 compared to the same period in 2010 was primarily due to the satisfaction of our REFCORP obligation as of June 30, 2011. The decrease in REFCORP expense for the year ended December 31, 2010 compared to the same period in 2009 was $27.7 million, $30.1 million and $46.1 million, respectively.due to lower Income Before Assessments.
Business Segments
Our products and services are grouped within two business segments: Traditional and MPP.
The Traditional business segment includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreement to Resell, AFS securities, and HTM securities), correspondent services, and deposits.
The following table sets forthpresents our financial resultsperformance for this operatingbusiness segment ($ amounts in millions):
| | | | | For the Years Ended December 31, | | Years Ended December 31, |
| Traditional Segment | | 2010 | | 2009 | | 2008 | | 2011 | | 2010 | | 2009 |
| Net Interest Income After Provision for Credit Losses | | $ | 173 | | | $ | 166 | | | $ | 215 | | |
| Net Interest Income | | | $ | 140 |
| | $ | 173 |
| | $ | 166 |
|
| Provision for Credit Losses | | | — |
| | — |
| | — |
|
| Other Income (Loss) | | (56 | ) | | (56 | ) | | 17 | | | (30 | ) | | (56 | ) | | (56 | ) |
| Other Expenses | | 53 | | | 47 | | | 39 | | | 56 |
| | 53 |
| | 47 |
|
| Income Before Assessments | | 64 | | | 63 | | | 193 | | | 54 |
| | 64 |
| | 63 |
|
| Total Assessments | | 18 | | | 18 | | | 52 | | | 9 |
| | 18 |
| | 18 |
|
| Net Income | | $ | 46 | | | $ | 45 | | | $ | 141 | | | $ | 45 |
| | $ | 46 |
| | $ | 45 |
|
The decrease in Net Income for the Traditional segment for the year ended December 31, 2011, compared to the same period in 2010, was primarily due to a decrease in Net Interest Income primarily resulting from contracting spreads on MBS and a reduction in prepayment fees on Advances. These decreases were partially offset by a favorable change in Other Income (Loss) that substantially resulted from lower OTTI credit losses on certain private-label RMBS and lower Total Assessments, which were directly attributable to the satisfaction of our obligation to REFCORP and the lower Income Before Assessments.
The increase in Net Income for the Traditional segment for the year ended December 31, 2010, compared to the same period in 2009, was primarily due to an increase in Net Interest Income After Provision for Credit Losses, that mainly resulted from wider spreads on MBS and higher average balances of MBS, andbut was partially offset by lower average balances of Advances and narrower spreads on our Advances and short-term investments. This increase was partially offset by an increase in Other Expenses resulting from higher incentive compensation achievements, and an increase in headcount, and, to a lesser extent, an increase in pension costs resulting from an increase in plan liabilities. The increase in plan liabilities was due to an increase in total compensation and a decrease in the discount rate used to calculate plan liabilities.
45
The decrease in Net Income for the Traditional segment for the year ended December 31, 2009, compared to the same period in 2008, was primarily due to the following factors:
| |
• | a decrease in Other Income (Loss) mainly due to the credit loss portion of the OTTI write-down of certain private-label RMBS that is described in more detail in "Results of Operations for the Years Ended December 31, 2010, 2009, and 2008 - Other Income - Results of OTTI Evaluation Process" herein; and |
| |
• | a decrease in Net Interest Income After Provision for Credit Losses primarily resulting from lower average balances of interest-earning assets and narrower spreads on our short-term investments. |
The MPP business segment consists of mortgage loans initially purchased from our members. The following table sets forthpresents our financial resultsperformance for this operatingbusiness segment ($ amounts in millions):
| | | | | For the Years Ended December 31, | | Years Ended December 31, |
| MPP Segment | | 2010 | | 2009 | | 2008 | | 2011 | | 2010 | | 2009 |
| Net Interest Income After Provision for Credit Losses | | $ | 93 | | | $ | 106 | | | $ | 63 | | |
| Net Interest Income | | | $ | 91 |
| | $ | 94 |
| | $ | 106 |
|
| Provision for Credit Losses | | | 5 |
| | 1 |
| | — |
|
| Other Income (Loss) | | (3 | ) | | (2 | ) | | (2 | ) | | (3 | ) | | (3 | ) | | (2 | ) |
| Other Expenses | | 2 | | | 2 | | | 2 | | | 2 |
| | 2 |
| | 2 |
|
| Income Before Assessments | | 88 | | | 102 | | | 59 | | | 81 |
| | 88 |
| | 102 |
|
| Total Assessments | | 23 | | | 27 | | | 16 | | | 16 |
| | 23 |
| | 27 |
|
| Net Income | | $ | 65 | | | $ | 75 | | | $ | 43 | | | $ | 65 |
| | $ | 65 |
| | $ | 75 |
|
The decrease in Net Income for the MPP segment for the year ended December 31, 20102011, compared to the same period in 20092010, was primarily due to a decrease in Net Interest Income resulting from the lower average balance of MPP loans, partially offset by higher spreads attributable to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest rate environment, and an increase in the Provision for Credit Losses. See Critical Accounting Policies and Estimates - Provision for Credit Losses - Mortgage Loans Acquired Under the MPP herein for more detail. The decrease in Income Before Assessments was offset by lower Total Assessments, which were directly attributable to the satisfaction of our obligation to REFCORP.
The decrease in Net Income for the MPP segment for the year ended December 31, 2010, compared to the same period in 2009, was primarily due to lower Net Interest Income After Provision for Credit Losses resulting from the lower average balance of MPP loans, partially offset by wider spreads, due to the replacement of higher-costing debt with lower-costing debt reflecting the current interest rate environment, and a decrease in amortization of purchased premiums due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience. The lower Net Interest Income After Provision for Credit Losses was partially offset by a decrease in Total Assessments, directly attributable to the lower Income Before Assessments.
The increase in Net Income After Provision for Credit Losses for the MPP segment for the year ended December 31, 2009, compared to 2008, was primarily due to an increase in Net Interest Income After Provision for Credit Losses due to continuing declines in market interest rates that resulted in wider spreads as we were able to replace higher-costing debt with lower-costing debt. This increase was partially offset by an increase in Total Assessments, directly attributable to the higher level of Income Before Assessments.
Analysis of Financial Condition
Total Assets. Total Assets were $44.9$40.4 billion as of December 31, 20102011, a decrease of 4%10% compared to December 31, 2009.2010. This $1.7decrease of $4.6 billion decrease was primarily due to net decreases of $4.2 billion in Advancescash and $0.6short-term investments and $0.7 billion in Mortgage Loans Held for Portfolio, partially offset by increasesan increase in Advances of $0.8 billion in cash and short-term investments, $1.5 billion in AFS securities and $0.8 billion in HTM securities.$0.3 billion.
Total Liabilities were $43.0Advances.Advances totaled $18.6 billion at December 31, 2011, an increase of 2% compared to December 31, 2010 a decrease of 4% compared to December 31, 2009.. This $1.9 billion decreaseincrease was primarily due to a decrease39% increase in the par value of $1.4 billion in Consolidated Obligations,Advances to insurance company members, which typically fluctuate in relation to our Total Assets.
Advances
Advances were $18.3totaled $7.2 billion at December 31, 2010,2011, partially offset by a decrease6% reduction in the par value of 19% comparedAdvances to December 31, 2009. This decrease was primarily due todepository members resulting from repayments from former members and our members' reduced need for liquidity in the current economic environment. In general, Advances fluctuate in accordance with our members' funding needs related to their deposit levels, mortgage pipelines, investment opportunities, available collateral, other balance sheet strategies, and the cost of alternative funding opportunities. See Risk Management - Credit Risk Management - Advances for information on the concentration of our Advances and our collateral policies.
The table below presents Advances by type of financial institution ($ amounts in millions).
|
| | | | | | | | | | | | | | |
| | | December 31, 2011 | | December 31, 2010 |
| | | | | % of | | | | % of |
| Type of Financial Institution | | Par Value | | Total | | Par Value | | Total |
| Commercial banks | | $ | 4,077 |
| | 23 | % | | $ | 4,738 |
| | 27 | % |
| Thrifts | | 4,803 |
| | 27 | % | | 4,721 |
| | 27 | % |
| Insurance Companies | | 7,230 |
| | 40 | % | | 5,217 |
| | 29 | % |
| Credit Unions | | 1,036 |
| | 6 | % | | 1,106 |
| | 6 | % |
| CDFI's | | — |
| | — | % | | — |
| | — | % |
| Total Member Advances | | 17,146 |
| | 96 | % | | 15,782 |
| | 89 | % |
| Non-member borrowers | | 622 |
| | 4 | % | | 1,856 |
| | 11 | % |
| Housing Associates | | — |
| | — | % | | — |
| | — | % |
| Total Par Value | | $ | 17,768 |
| | 100 | % | | $ | 17,638 |
| | 100 | % |
A breakdown of Advances by primary product line is providedpresented below ($ amounts in millions):
| | | | December 31, 2010 | | December 31, 2009 | | | | | | | | | |
| | | | | % of | | | | % of | | December 31, 2011 | | December 31, 2010 |
| Advances by Primary Product Line | | Amount | | Total | | Amount | | Total | |
| | | | | | % of | | | | % of |
| By Primary Product Line | | | Amount | | Total | | Amount | | Total |
| Fixed-rate | | | | | | | | | | | | | | | | |
Fixed rate (1) | | $ | 11,959 | | | 68 | % | | $ | 15,389 | | | 71 | % | |
Fixed-rate (1) | | | $ | 11,800 |
| | 67 | % | | $ | 11,959 |
| | 68 | % |
Amortizing/mortgage matched (2) | | 1,789 | | | 10 | % | | 2,545 | | | 12 | % | | 1,806 |
| | 10 | % | | 1,789 |
| | 10 | % |
| Other | | 15 | | | — | % | | 40 | | | — | % | | 570 |
| | 3 | % | | 15 |
| | — | % |
| Total fixed-rate | | 13,763 | | | 78 | % | | 17,974 | | | 83 | % | | 14,176 |
| | 80 | % | | 13,763 |
| | 78 | % |
Adjustable/variable rate indexed (3) | | 3,875 | | | 22 | % | | 3,736 | | | 17 | % | |
Adjustable/variable-rate indexed | | | 3,592 |
| | 20 | % | | 3,875 |
| | 22 | % |
| Total Advances, par value | | 17,638 | | | 100 | % | | 21,710 | | | 100 | % | | 17,768 |
| | 100 | % | | 17,638 |
| | 100 | % |
| Total Adjustments (unamortized discounts, hedging and other) | | 637 | | | | | 733 | | | | |
| Total adjustments (unamortized discounts, hedging and other) | | | 800 |
| | | | 637 |
| | |
| Total Advances | | $ | 18,275 | | | | | $ | 22,443 | | | | | $ | 18,568 |
| | | | $ | 18,275 |
| | |
| | |
| (1) | Includes fixed-rate bullet and putable Advances |
| |
(2) | Includes fixed-rate amortizing Advances |
| (3)
| Includes adjustable-rate and variable-rate Advances |
Mortgage Loans Held for Portfolio.We purchase mortgage loans from our members through our MPP. On November 29, 2010, we began offering MPP Advantage for new MPP loans. MPP Advantage utilizes an enhanced fixed LRA account for additional credit enhancement consistent with Finance Agency regulations, instead of utilizing coverage from SMI providers. The only substantive difference between our original MPP and MPP Advantage is the credit enhancement structure. Upon implementation of MPP Advantage, the original MPP was phased out and is no longer being used for acquisitions of new loans. There were 149 loans purchased under MCCs that remained open for the contractual fill-up period at the November 30, 2010, transition date. The final settlements under these MCCs occurred on March 4, 2011. Under MPP Advantage, we have purchased 3,259 mortgage loans for $477.3 million through December 31, 2011, which includes 52 loans purchased for $5.9 million through December 31, 2010. See Risk Management - Credit Risk Management - MPP for more detailed information about the credit enhancement structures for our original MPP and MPP Advantage.
At December 31, 2011, we held $6.0 billion of loans purchased through our original MPP and MPP Advantage, a decrease of 11% compared to December 31, 2010. The decrease was primarily due to repayments of outstanding mortgage loans that exceeded the purchases of new loans. In general, the volume of mortgage loans purchased through the MPP is affected by several factors, including the general level of housing activity in the United States, the level of member mortgage originations, the level of refinancing activity, consumer product preferences and competition from other purchasers of mortgage loans.
In accordance with our MPP policy for conventional loans, we purchase conforming, fixed-rate, fixed-term mortgage loans. For the year ended December 31, 2011, we purchased $0.6 billion in principal amount of new loans, including $0.1 billion of FHA loans, while total principal repayments were $1.3 billion. For the year ended December 31, 2010, we purchased $1.1 billion in principal amount of new loans, including $0.6 billion of FHA loans, while total principal repayments during the year were $1.7 billion.
We have established and maintain an allowance for MPP loan losses based on our best estimate of probable losses over the loss emergence period, which we have estimated to be 12 months. At December 31, 2011, our estimate of MPP losses remaining after borrower's equity was $49.3 million. After consideration of the portion recoverable under the associated credit enhancements, the allowance for loan losses was $3.3 million. At December 31, 2010, our estimate of MPP losses remaining after borrower's equity was $43.0 million. After consideration of the portion recoverable under the associated credit enhancements, the allowance for loan losses was $0.5 million. See Notes to Financial Statements - Note 10 - Allowance for Credit Losses and Risk Management - Credit Risk Management - MPP for more information.
Cash and Investments
Investments.The following table provides balances, at carrying value, forpresents the components of our cash and investments at carrying value ($ amounts in millions):
| | | | | | | | | | | | |
| | | December 31, |
| Components of Cash and Investments | | 2010 | | 2009 | | 2008 |
| Cash | | $ | 12 | | | $ | 1,722 | | | $ | 871 | |
| Interest-Bearing Deposits | | — | | | — | | | — | |
| Securities Purchased Under Agreements to Resell | | 750 | | | — | | | — | |
| Federal Funds Sold | | 7,325 | | | 5,532 | | | 7,223 | |
| Total Cash and Short-term Investments | | 8,087 | | | 7,254 | | | 8,094 | |
| AFS Securities: | | | | | | |
| GSE debentures | | 1,930 | | | 1,761 | | | 1,842 | |
TLGP debentures (1) | | 325 | | | — | | | — | |
| Private-label MBS | | 983 | | | — | | | — | |
| Total AFS Securities | | 3,238 | | | 1,761 | | | 1,842 | |
| HTM Securities: | | | | | | |
| GSE debentures | | 294 | | | 126 | | | — | |
| State or local housing finance agency obligations | | — | | | — | | | 1 | |
TLGP debentures (1) | | 2,066 | | | 2,067 | | | — | |
| Other U.S. Obligations - guaranteed RMBS | | 2,327 | | | 865 | | | 11 | |
| GSE RMBS | | 3,044 | | | 2,137 | | | 2,148 | |
| Private-label MBS | | 719 | | | 2,481 | | | 4,505 | |
| Private-label ABS | | 22 | | | 25 | | | 28 | |
| Total HTM Securities | | 8,472 | | | 7,701 | | | 6,693 | |
| Total Investment Securities | | 11,710 | | | 9,462 | | | 8,535 | |
| Total Cash and Investments, carrying value | | $ | 19,797 | | | $ | 16,716 | | | $ | 16,629 | |
|
| | | | | | | | | | | | |
| | | December 31, |
| Components of Cash and Investments | | 2011 | | 2010 | | 2009 |
| Cash and short-term investments: | | | | | | |
| Cash and Due from Banks | | $ | 513 |
| | $ | 12 |
| | $ | 1,722 |
|
| Interest-Bearing Deposits | | — |
| | — |
| | — |
|
| Securities Purchased Under Agreements to Resell | | — |
| | 750 |
| | — |
|
| Federal Funds Sold | | 3,422 |
| | 7,325 |
| | 5,532 |
|
| Total cash and short-term investments | | 3,935 |
| | 8,087 |
| | 7,254 |
|
| Investment securities: | | | | | | |
| AFS securities: | | | | | | |
| GSE debentures | | 2,026 |
| | 1,930 |
| | 1,761 |
|
| TLGP debentures | | 322 |
| | 325 |
| | — |
|
| Private-label MBS | | 601 |
| | 983 |
| | — |
|
| Total AFS securities | | 2,949 |
| | 3,238 |
| | 1,761 |
|
| HTM securities: | | |
| | |
| | |
| GSE debentures | | 269 |
| | 294 |
| | 126 |
|
| TLGP debentures | | 1,883 |
| | 2,066 |
| | 2,067 |
|
| Other U.S. obligations - guaranteed RMBS | | 2,747 |
| | 2,327 |
| | 865 |
|
| GSE RMBS | | 3,512 |
| | 3,044 |
| | 2,137 |
|
| Private-label MBS | | 402 |
| | 719 |
| | 2,481 |
|
| Manufactured housing loan ABS | | 17 |
| | 19 |
| | 21 |
|
| Home equity loan ABS | | 2 |
| | 3 |
| | 4 |
|
| Total HTM securities | | 8,832 |
| | 8,472 |
| | 7,701 |
|
| Total investment securities | | 11,781 |
| | 11,710 |
| | 9,462 |
|
| Total Cash and Investments, carrying value | | $ | 15,716 |
| | $ | 19,797 |
| | $ | 16,716 |
|
| | |
| (1)
| Corporate debentures guaranteed by the FDIC and backed by the full faith and credit of the U.S. government under the Temporary Liquidity Guarantee Program ("TLGP").
|
Cash and Short-Term Investments
Investments.Cash and short-term investments totaled $8.1$3.9 billion at December 31, 2010, an increase2011, a decrease of 12%51% compared to December 31, 20092010. This increaseThe decrease was primarily due to increasesdecreases of $1.8$3.9 billion in Federal Funds Sold and $0.8 billion in Securities Purchased Under Agreements to Resell partially offsetresulting from a managed reduction in short-term investments. We remain in compliance with all liquidity requirements. The composition of our short-term investment portfolio is influenced by our liquidity needs and the availability of short-term investments at attractive interest rates, relative to our cost of funds. See Liquidity and Capital Resources herein for more information.
Available-for-Sale Securities.AFS securities totaled $2.9 billion at December 31, 2011, a decrease of $1.7 billion in Cash that resulted from holding a higher balance at December 31, 2009, due to a relative lack of attractive investment opportunities at that time. Cash and short-term investments totaled $7.3 billion at December 31, 2009, a decrease of 10%9% compared to December 31, 2008. This2010. The decrease was primarily due to paydowns and the sale of six private-label MBS. As a decreaseresult of $1.7 billion in Federal Funds Sold, partially offset by an increase of $0.9 billion in Cash. Generally, we invest in short-term investments to provide cash flows to support our ongoing liquidity needs.
Available-for-Sale Securities
AFS securities totaled $3.2 billion at December 31, 2010, an increase of 84% compared to December 31, 2009. During 2010, we purchased agency debentures and corporate debentures issued under the TLGP and guaranteed by the FDIC. During the fourth quarter of 2010, we transferred 23 OTTI private-label RMBS from HTM to AFS. At the time of the transfer, these securities had an unpaid principal balance of $1.2 billion and a net book value of $881.0 million. One of these securities, for which we had previously recognizedrecognizing OTTI credit losses of $18.4totaling $29.8 million was sold prior to year end aton those securities, we realized a net gain on the sales of $2.4$4.2 million. Even though the remaining securities are now AFS, asAs of December 31, 2010,2011, we had no intention to sell any of the remaining OTTI AFS securities, nor did we consider it more likely than not that we will be required to sell any of these securities nor are we under any requirement to do so.before our anticipated recovery of each security's remaining amortized cost basis. However, in the future we may decide to sell these securities if conditions, strategies, risk tolerances or other factors change. See Note 5 - Available-for-Sale Securities
For the year ended December 31, 2011, we transferred one private-label RMBS to AFS from HTM due to a significant deterioration in the creditworthiness of the issuer and Note 7 - Other-Than-Temporary Impairment Analysisother factors. Such deterioration was evidenced by an OTTI credit loss for this security in our Notes to Financial Statements for more information.the three months ended September 30, 2011. At the time of transfer, this security had an amortized cost of $18.1 million and an estimated fair value of $17.2 million.
Held-to-Maturity Securities
Securities.HTM securities totaled $8.5$8.8 billion at December 31, 20102011, an increase of 10% compared to December 31, 2009. HTM securities totaled $7.7 billion at December 31, 2009, an increase of 15%4% compared to December 31, 2008. These increases were2010, primarily due to purchases of agency MBS and corporate debentures guaranteed by the FDIC and carrying the full faith and creditMBS.
Issuer Concentration
Concentration.As of December 31, 2010,2011, we held securities classified as AFS and HTM and AFS (excluding U.S.United States Government Agencies and corporate debentures guaranteed by the FDIC and carrying the full faith and credit of the U.S.United States government under the TLGP) from the following issuers with a carrying value greater than 10% of our Total Capital. The MBS issuers listed below include one or more trusts established as separate legal entities by the issuer. Therefore, the associated carrying and estimated fair values are not necessarily indicative of our exposure to that issuer ($ amounts in millions):
| | | | | December 31, 2010 | | December 31, 2011 |
| Name of Issuer | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Non-MBS: | | | | | | | | |
| Freddie Mac | | $ | 1,186 | | | $ | 1,186 | | | $ | 1,136 |
| | $ | 1,136 |
|
| Fannie Mae | | 740 | | | 740 | | | 776 |
| | 776 |
|
| Federal Farm Credit | | 273 | | | 272 | | | 383 |
| | 384 |
|
| MBS: | | | | | | | | |
| Fannie Mae | | 1,950 | | | 1,976 | | | 2,484 |
| | 2,549 |
|
| Freddie Mac | | 1,094 | | | 1,096 | | | 1,028 |
| | 1,079 |
|
| Ginnie Mae | | 2,327 | | | 2,351 | | | 2,747 |
| | 2,782 |
|
| GSR Mortgage Loan Trust | | 403 | | | 396 | | | 262 |
| | 259 |
|
| Washington Mutual Mortgage Pass-through Certificates | | 458 | | | 457 | | | 372 |
| | 368 |
|
| Total | | 8,431 | | | 8,474 | | | 9,188 |
| | 9,333 |
|
| All other issuers | | 3,279 | | | 3,277 | | | 2,593 |
| | 2,589 |
|
| Total Investment Securities | | $ | 11,710 | | | $ | 11,751 | | |
| Total investment securities | | | $ | 11,781 |
| | $ | 11,922 |
|
Investments by Year of Redemption
Redemption.The following table provides, by year of redemption, carrying values for Short-Term Investments as well as carrying values and yields for AFS and HTM Securities ($ amounts in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | | Due after | | Due after | | | | |
| | | Due in | | one year | | five years | | Due after | | |
| | | one year | | through | | through | | ten | | |
| Investments | | or less | | five years | | ten years | | years | | Total |
| AFS Securities: | | | | | | | | | | |
| GSE debentures | | $ | — | | | $ | — | | | $ | 1,930 | | | $ | — | | | $ | 1,930 | |
| TLGP debentures | | — | | | 325 | | | — | | | — | | | 325 | |
Private-label MBS (1) | | — | | | — | | | — | | | 983 | | | 983 | |
| Total AFS Securities | | $ | — | | | $ | 325 | | | $ | 1,930 | | | $ | 983 | | | $ | 3,238 | |
| Yield on AFS Securities | | — | % | | 0.78 | % | | 3.84 | % | | 5.36 | % | | |
| HTM Securities: | | | | | | | | | | |
| GSE debentures | | $ | 125 | | | $ | 169 | | | $ | — | | | $ | — | | | $ | 294 | |
| TLGP debentures | | 182 | | | 1,884 | | | — | | | — | | | 2,066 | |
Other U.S. Obligations - guaranteed RMBS (1) | | — | | | — | | | — | | | 2,327 | | | 2,327 | |
GSE RMBS (1) | | — | | | 261 | | | 1,425 | | | 1,358 | | | 3,044 | |
Private-label MBS (1) | | — | | | — | | | 95 | | | 624 | | | 719 | |
Private-label ABS (1) | | — | | | — | | | — | | | 22 | | | 22 | |
| Total HTM Securities | | $ | 307 | | | $ | 2,314 | | | $ | 1,520 | | | $ | 4,331 | | | $ | 8,472 | |
| Yield on HTM Securities | | 0.51 | % | | 0.71 | % | | 3.53 | % | | 3.13 | % | | |
| | | | | | | | | | | |
| Total Investment Securities | | $ | 307 | | | $ | 2,639 | | | $ | 3,450 | | | $ | 5,314 | | | $ | 11,710 | |
| Yield on Total Investment Securities | | 0.51 | % | | 0.72 | % | | 3.70 | % | | 3.54 | % | | |
| | | | | | | | | | | |
| Short-Term Investments: | | | | | | | | | | |
| Interest-Bearing deposits | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities Purchased Under Agreements to Resell | | 750 | | | — | | | — | | | — | | | 750 | |
| Federal Funds Sold | | 7,325 | | | — | | | — | | | — | | | 7,325 | |
| Total Short-Term Investments | | 8,075 | | | — | | | — | | | — | | | 8,075 | |
| Total Investments, carrying value | | $ | 8,382 | | | $ | 2,639 | | | $ | 3,450 | | | $ | 5,314 | | | $ | 19,785 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Due after | | Due after | | | | |
| | | Due in | | one year | | five years | | Due after | | |
| | | one year | | through | | through | | ten | | |
| Investments | | or less | | five years | | ten years | | years | | Total |
| AFS securities: | | | | | | | | | | |
| GSE debentures | | $ | — |
| | $ | 950 |
| | $ | 1,076 |
| | $ | — |
| | $ | 2,026 |
|
| TLGP debentures | | 322 |
| | — |
| | — |
| | — |
| | 322 |
|
Private-label MBS (1) | | — |
| | — |
| | — |
| | 601 |
| | 601 |
|
| Total AFS securities | | $ | 322 |
| | $ | 950 |
| | $ | 1,076 |
| | $ | 601 |
| | $ | 2,949 |
|
| Yield on AFS securities | | 0.79 | % | | 3.51 | % | | 3.79 | % | | 5.27 | % | | |
| HTM securities: | | | | | | | | | | |
| GSE debentures | | $ | — |
| | $ | 269 |
| | $ | — |
| | $ | — |
| | $ | 269 |
|
| TLGP debentures | | 1,883 |
| | — |
| | — |
| | — |
| | 1,883 |
|
Other U.S. obligations - guaranteed RMBS (1) | | — |
| | — |
| | — |
| | 2,747 |
| | 2,747 |
|
GSE RMBS (1) | | — |
| | 350 |
| | 1,602 |
| | 1,560 |
| | 3,512 |
|
Private-label MBS (1) | | — |
| | — |
| | 51 |
| | 351 |
| | 402 |
|
Manufactured housing loan ABS (1) | | — |
| | — |
| | — |
| | 17 |
| | 17 |
|
Home equity loan ABS (1) | | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Total HTM securities | | $ | 1,883 |
| | $ | 619 |
| | $ | 1,653 |
| | $ | 4,677 |
| | $ | 8,832 |
|
| Yield on HTM securities | | 0.66 | % | | 1.84 | % | | 3.09 | % | | 2.49 | % | | |
| | | | | | | | | | | |
| Total investment securities | | $ | 2,205 |
| | $ | 1,569 |
| | $ | 2,729 |
| | $ | 5,278 |
| | $ | 11,781 |
|
| Yield on total investment securities | | 0.68 | % | | 2.85 | % | | 3.36 | % | | 2.81 | % | | |
| | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | |
| Interest-Bearing Deposits | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Securities Purchased Under Agreements to Resell | | — |
| | — |
| | — |
| | — |
| | — |
|
| Federal Funds Sold | | 3,422 |
| | — |
| | — |
| | — |
| | 3,422 |
|
| Total short-term investments | | 3,422 |
| | — |
| | — |
| | — |
| | 3,422 |
|
| Total Investments, carrying value | | $ | 5,627 |
| | $ | 1,569 |
| | $ | 2,729 |
| | $ | 5,278 |
| | $ | 15,203 |
|
| | |
| (1) | Year of redemption on our MBS and ABS securities is determined based on contractual maturity. |
Mortgage Loans Held for Portfolio
We purchase mortgage loans fromSee Risk Management - Credit Risk Management - Investments for more information on the credit quality and OTTI on our members through our MPP. Atinvestments.
Total Liabilities. Total Liabilities were $38.4 billion at December 31, 2011, a decrease of 11% compared to December 31, 2010, we held $6.7. This decrease of $4.6 billion of MPP loans,was primarily due to a decrease of $3.9 billion in Consolidated Obligations.
Deposits (Liabilities).Total Deposits were $0.6 billion at December 31, 2011, an increase of 8%, compared to December 31, 2009. The decrease was primarily due to repayments of outstanding mortgage loans exceeding the purchases of new loans. In general, the volume of mortgage loans purchased through the MPP is affected by several factors, including the general level of housing activity in the U.S., the level of refinancing activity, and consumer product preferences.
In accordance with our MPP policy for conventional loans, we purchase conforming, fixed-rate, fixed-term mortgage loans. For the year ended December 31, 2010 we purchased $1.1 billion in principal amount of new loans, including $0.6 billion of FHA loans. Total principal repayments during the year were $1.7 billion. For the year ended December 31, 2009, we purchased $0.6 billion in principal amount of new loans, while total principal repayments were $2.1 billion.
Deposits (Liabilities)
Total Deposits were $0.6 billion at December 31, 2010, a decrease of 29% compared to December 31, 2009. These deposits represent a relatively small portion of our funding, and they vary depending upon market factors, such as the attractiveness of our deposit pricing relative to the rates available on alternative money market instruments, members' investment preferences with respect to the maturity of their investments, and member liquidity.
The following table presents time deposits issued in amounts of $100 thousand or more ($ amount in millions): | | | | | | | | |
| | | December 31, 2010 | | | December 31, 2009 | |
| 3 months or less | | $ | 15 | | | $ | — | |
| Over 3 months through 6 months | | — | | | 15 | |
| Over 6 months through 12 months | | — | | | — | |
| Over 12 months | | — | | | — | |
| Total | | $ | 15 | | | $ | 15 | |
Consolidated Obligations
Obligations. At December 31, 20102011, the carrying values of our Discount Notes and CO Bonds totaled $8.9$6.5 billion and $31.9$30.4 billion, respectively, compared to $6.38.9 billion and $35.931.9 billion, respectively, at December 31, 20092010. The overall balance of our Consolidated Obligations fluctuates in relation to our Total Assets. See "Executive Summary - Financial TrendsThe carrying value of our Discount Notes was 18% of total Consolidated Obligations at December 31, 2011, compared to 22% at December 31, 2010. Discount Notes are issued primarily to provide short-term funds while CO Bonds are issued to provide longer-term funding. The composition of our Consolidated Obligations can fluctuate significantly based on comparative changes in the Capital Markets" herein for more information on the issuancetheir cost levels, supply and demand conditions, Advance demand, money market investment balances, and our balance sheet management strategy.
Consistent with our risk management philosophy, we use interest rate-exchange agreements (also referred to as interest-rate swaps) to effectively convert many of our fixed-rate Consolidated Obligations to floating rate instruments that periodically reset to an index such as three-month LIBOR. During 20102011 and 2009,2010, we swapped both fixed-rate bullet bonds and callable bonds. A callable bond provides us with the right to redeem the instrument on predetermined call dates in the future. When we swap a callable Consolidated Obligation to LIBOR, we sell an option to the interest-rate swap counterparty that mirrors the option we own to call the bond. If market interest rates decline, the swap counterparty will generally cancel the interest-rate swap, and we will then typically call the CO Bond. Conversely, if market interest rates increase, the swap counterparty generally elects to keep the interest-rate swap outstanding, and we will typically elect not to call the CO Bond. With the generally low level of market interest rates in 20092011 and 2010, we called a number of our callable bonds and replaced a portion of them with new callable bonds.
In the future, the cost of debt will depend on several factors, including the direction and level of market interest rates, competition from other issuers of agency debt, changes in the investment preferences of potential buyers of agency debt securities, pricing in the interest-rate swap market, and other technical market factors.
Derivatives
Derivatives. As of December 31, 20102011, and December 31, 20092010, we had Derivative Assets, net of collateral held or postedand including accrued interest, with marketestimated fair values of $6.20.5 million and $1.76.2 million, respectively,respectively. The decrease of $5.7 million was primarily due to having fewer net asset positions with counterparties at December 31, 2011.
Asof December 31, 2011, and2010, we had Derivative Liabilities, net of collateral held or postedand including accrued interest, with marketestimated fair values of $657.0174.6 million and $712.7657.0 million, respectively. These market values reflectThe decrease of $482.5 million was primarily due to an increase in collateral posted at December 31, 2011 that was netted against Derivative Liabilities, partially offset by an increase in the impactestimated fair value of interest-rate changes. See Note 11 - Derivative and Hedging ActivitiesLiabilities due to changes in our Notes to Financial Statements and "Risk Management - Credit Risk Management - Derivatives" herein for more information.the derivative's underlying interest rate index.
The principal derivative instruments we use are interest-rate swaps and to-be-announced ("exchange agreements (or swaps). We also use TBA") MBS. We classify interest-rate swaps as derivative assets or liabilities according to the net estimated fair value of the interest-rate swaps with each counterparty. Because these swaps are covered by a master netting agreement, (a) if the net estimated fair value of the interest-rate swaps with a counterparty is positive, the swaps are classified as an asset and (b) if the net estimated fair value of the interest-rate swaps with a counterparty is negative, the swaps are classified as a liability. TBAs, which are not covered by a master netting agreement, are recorded as a derivative asset or liability based upon estimated fair value. Increases and decreases in the estimated fair value of each of these instruments are primarily caused by market changes in the derivative'sderivatives' underlying interest rate indexindexes.
Capital
Total Capital. Total Capital was $1.9 billion at December 31, 20102011, an increase. The decrease of 12%$0.2 million compared to December 31, 2009. This increase2010, was primarily due to an increaserepurchases and redemptions of $238.4 million in AOCI (i.e., a decrease in accumulated other comprehensive losses) and a net increase of $78.5 million in Retained Earnings, partially offset by a decrease of $115.9 million in Capital Stock.
Capital Stock.Capital Stock decreased by $115.9 million during the year ended December 31, 2010, due to the repurchase of $126.3 million of excess capital stock, and the net reclassification of $29.7 million of Capital Stock to MRCS, partially offset by proceeds of $40.0 million from the sale of capital stock and transfers to MRCS, of $47.0 million and a decrease in AOCI of $23.3 million, substantially offset by an increase in Retained Earnings of $70.1 million. During the second quarter of 2011, we repurchased $248.0 million of excess stock, consisting of Capital Stock. Stock of $125.9 million and MRCS of $122.1 million. The decrease in AOCI was primarily due to a decrease in the fair value of OTTI AFS securities of $60.5 million, partially offset by the reclassification of OTTI non-credit losses of $21.4 million from AOCI to Other Income (Loss) and the net change in unrealized gains (losses) on AFS securities of $19.7 million.
See "LiquidityLiquidity and Capital Resources - Capital Resources - Excess Stock"Joint Capital Enhancement Agreement herein for more information about the repurchase of excess stockJCE Agreement that occurredbecame effective on November 18, 2010.February 28, 2011.
Retained Earnings. Retained Earnings increased by $78.5 million during the year ended December 31, 2010, due to Net Income of $111.0 million, partially offset by dividends paid of $32.4 million.
Accumulated Other Comprehensive Income (Loss).AOCI increased (i.e., accumulated other comprehensive losses decreased) by $238.4 million for the year ended December 31, 2010, due to Total Comprehensive Income, which included unrealized gains (i.e., recoveries of previous non-credit OTTI losses) on HTM securities of $135.0 million resulting from the transfer of substantially all OTTI securities from HTM securities to AFS securities, reclassification of net non-credit OTTI losses of $45.9 million on HTM securities to Other Income and the accretion of $54.8 million on the net non-credit OTTI losses on HTM securities.
Liquidity and Capital Resources
Liquidity.We manage our liquidity in order to be able to satisfy our members' needs for short- and long-term funds, repay maturing Consolidated Obligations, redeem or repurchase excess stock and meet other financial obligations. We are required to maintain liquidity in accordance with the Bank Act, certain Finance Agency regulations and policies established by our management and board of directors.
Our primary sources of liquidity are the issuance of Consolidated Obligations and holdings of cash and short-term investments. Our cash and short-term investments portfolio which includes Federal Funds Sold and Securities Purchased Under Agreements to Resell, totaled $8.1 billion at December 31, 2010, compared to $7.33.9 billion at December 31, 20092011. Our short-term investments consist of high-quality, short- and intermediate-term financial instruments. We manage our short-term investment portfolio in response to economic conditions and market events and uncertainties. As a result, the overall level of our short-term investment portfolio may fluctuate accordingly. The maturities of the short-term investments provide sufficient cash flows to support our ongoing liquidity needs.
In addition, by statute, the issuance of Consolidated Obligations in the form of CO Bonds and Discount Notes. The Consolidated Obligations are rated Aaa/P-1 by Moody's and AAA/A-1+ by S&P. Our GSE-issuer status and these ratings have historically provided excellent access to the capital markets for the FHLBs. See "Item 1A. Risk Factors - Our Credit Rating or the Credit Rating of One or MoreUnited States Secretary of the Other FHLBs Could be Lowered, Which Could Adversely Impact Our Cost of Funds or Ability to Enter Into Derivative Instrument Transactions on Acceptable Terms" for a discussion of events that could have a negative impact on the rating of these Consolidated Obligations. In addition, under certain circumstances, the U.S. Treasury may acquire up to $4 billion of our Consolidated Obligations. The authority provided by this regulation may be exercised only if alternative means cannot be effectively employed to permit us to continue to supply reasonable amounts of funds to the FHLBs'mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. Any funds borrowed shall be repaid at the earliest practicable date.
Historically, our status as a GSE and favorable credit ratings have provided us with excellent access to capital markets. Our Consolidated Obligations which would offerare not obligations of, and they are not guaranteed by, the United States government although they have historically received the same credit rating as the United States government bond credit rating. The ratings also reflect our status as a GSE and have not been affected by rating actions taken with respect to individual FHLBanks.
On August 8, 2011, S&P lowered our issuer credit rating and the rating on the FHLBank System's Consolidated Obligations from AAA to AA+. As a result, we were subject to lower collateral thresholds and were required to deliver additional liquiditycollateral (at estimated fair value) to certain of our derivative counterparties. As of December 31, 2011, we had posted $719.3 million of collateral to 11 counterparties, compared to $42.1 million of collateral to two counterparties at June 30, 2011 prior to the FHLBs, if needed. downgrade. If our credit rating had been lowered by a major credit rating agency (from AA+ to AA), we could have been required to deliver up to an additional $29.8 million of collateral (at estimated fair value) to our derivative counterparties at December 31, 2011. However, our liquidity position could have satisfied that additional funding requirement with no material impact to our financial position. No other significant contract or covenant for any credit facility or other agreement is expected to be materially impacted by a downgrade to the next credit rating level.
We have not identified any other known trends, demands, commitments, events or uncertainties that are likely to materially increase or decrease our liquidity.
We maintain a contingency liquidity plan designed to enable us to meet our obligations and the liquidity needs of our members in the event of operational disruptions at the FHLBsFHLBanks or the Office of Finance, or short-term capital market disruptions. Our regulatory liquidity requirement is to maintain at least five business days of liquidity without access to the capital markets. In addition, to protect the FHLBsFHLBanks against temporary disruptions in access to the debt markets, effective March 6, 2009, the Finance Agency issued additional liquidity guidelines to address the stress and instability in domestic and international credit markets. The positive cash balances under the revised standards are impacted by the treatment of maturing Advances. Within specified ranges, the Finance Agency may increase or lower the daily liquidity target as circumstances dictate for us or the FHLBFHLBank System as a whole. Pursuant to the Finance Agency's March 6, 2009, guidance, we are required to submit weekly reports to the Finance Agency, demonstrating our compliance with the liquidity guidelines. We remain in compliance with those guidelines.
Changes in Cash Flow
Flow.Net cash provided by operating activities was $112.6$207.7 million for the year ended December 31, 2011, compared to $90.4 million for the year ended December 31, 2010, compared to $225.7and $225.5 million for the year ended December 31, 2009. This decrease2009. Net cash provided by operating activities was primarilyrelatively low for the year ended December 31, 2010, due to swap termination fees paid in 2010 which were deferred and will beare being amortized over the life of the related modified Advances. Net cash provided by operating activities was $225.7 million for the year ended December 31, 2009 compared to $118.7 million for the year ended December 31, 2008. This increase was primarily related to the termination of derivative positions with Lehman Brothers Special Financing in 2008.
Capital ResourcesResources.
Total Regulatory Capital.Capital. Our total regulatory capital consists of Retained Earnings and total regulatory capital stock, which includes Class B Capital Stock and MRCS. MRCS is classified as a liability on our Statement of Condition.
Our outstanding Class B Capital Stock, categorized by type of institution, and MRCS are provided in the following table ($ amounts in millions):
| | | Institution Type | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Commercial Banks | | $ | 634 | | | $ | 721 | | | $ | 552 |
| | $ | 634 |
|
| Thrifts | | 472 | | | 524 | | | 417 |
| | 472 |
|
| Credit Unions | | 161 | | | 153 | | | 164 |
| | 161 |
|
| Insurance Companies | | 343 | | | 328 | | | 430 |
| | 343 |
|
| Total GAAP Capital Stock | | 1,610 | | | 1,726 | | | 1,563 |
| | 1,610 |
|
| MRCS | | 658 | | | 756 | | | 454 |
| | 658 |
|
| Total Regulatory Capital Stock | | $ | 2,268 | | | $ | 2,482 | | | $ | 2,017 |
| | $ | 2,268 |
|
Mandatorily Redeemable Capital Adequacy. Stock.We are required by Finance Agency regulations to maintain sufficient permanent capital (defined as Class B Stock, MRCS, and Retained Earnings) to meet the combined credit risk, market risk and operational risk components of the risk-based capital requirement. The Finance Agency may mandate us to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. As of December 31, 2010, our risk-based capital requirement was $0.9 billion, compared to permanent capital of $2.7 billion. As of December 31, 2009, our risk-based capital requirement was $0.9 billion, compared to permanent capital of $2.8 billion.
In addition, the GLB Act and Finance Agency regulations require us to maintain at all times a regulatory capital ratio of at least 4.00% and a leverage ratio of at least 5.00%. At December 31, 20102011, our regulatorywe had $453.9 million in non-member capital ratiostock subject to mandatory redemption, compared to $658.4 million at December 31, 2010. This decrease was primarily due to the repurchase of $122.1 million of excess MRCS and the redemption of $96.5 million of MRCS, partially offset by the reclassification of $14.1 million from Capital Stock. See 6.00%Notes to Financial Statements, and our leverage ratio was - 9.00%.
Sections 1141 and 1142 of HERA authorize the Finance Agency to establish by regulation, which was published on August 4, 2009, the critical capital level for the FHLBs and require the Finance Agency to establish criteria for each of four capital classifications: adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized.
We hold sufficient capital to meet both our minimum capital and risk-based capital requirements. See Note 16 - Capital for additional information.
Excess Stock. Excess stock is capital stock that is not required as a condition of membership or to support services to members or former members. In general, the level of excess stock fluctuates with our members' demand for Advances. Finance Agency regulations prohibit an FHLBank from issuing new excess stock if the amount of excess stock outstanding exceeds 1% of our Total Assets. At December 31, 2011, our outstanding excess stock of $0.9 billion was equal to 2% of our Total Assets. Therefore, we are currently not permitted to issue new excess stock or distribute stock dividends.
We generally will not redeem or repurchase member capital stock based on an individual member's request until five years after either the membership is terminated or we receive a notice of withdrawal from membership. If we receive a request to redeem excess stock, we are not required to redeem or repurchase such excess stock until the expiration of the five-year redemption period. However, we reserve the right to repurchase, and have repurchased from time to time, excess stock from a member, without a member request and at our discretion, upon 15 days' notice to the member.
During the second quarter of 2011, we repurchased $248.0 million of excess stock, consisting of $125.9 million of Capital Stock and $122.1 million of MRCS, on a pro rata basis from all shareholders with excess stock in accordance with our Notescapital plan dated September 19, 2002 (as amended).
The following table presents the composition of our excess stock ($ amounts in millions):
|
| | | | | | | | |
| Excess Stock | | December 31,
2011 | | December 31,
2010 |
| Member capital stock not subject to redemption requests | | $ | 339 |
| | $ | 449 |
|
Member capital stock subject to redemption requests (1) | | 100 |
| | 130 |
|
MRCS subject to redemption (1) | | 418 |
| | 559 |
|
| Total excess capital stock | | $ | 857 |
| | $ | 1,138 |
|
| |
(1) | This amount does not include capital stock or MRCS that is still supporting outstanding credit products. |
Statutory and Regulatory Restrictions on Capital Stock Redemption. In accordance with the Bank Act, each class of FHLBank stock is considered putable by the member. However, there are significant statutory and regulatory restrictions on our obligation, or right, to Financial Statementsredeem the outstanding stock, including the following:
We may not redeem any capital stock if, following such redemption, we would fail to satisfy any of our minimum capital requirements. By law, no FHLBank stock may be redeemed at any time at which we are undercapitalized.
We may not redeem any capital stock without approval of the Finance Agency if either our board of directors, or the Finance Agency, determines that we have incurred, or are likely to incur, losses resulting, or expected to result, in a charge against capital while such charges are continuing or expected to continue.
Additionally, we may not redeem or repurchase shares of capital stock from any member if (i) the principal or interest due on any Consolidated Obligation has not been paid in full when due; (ii) we fail to certify in writing to the Finance Agency that we will remain in compliance with our liquidity requirements and will remain capable of making full and timely payment of all of our current obligations; (iii) we notify the Finance Agency that we cannot provide the foregoing certification, project we will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of our obligations; or (iv) we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or enter or negotiate to enter into an agreement with one or more FHLBanks to obtain financial assistance to meet our current obligations.
If we were to be liquidated, after payment in full to our creditors, our shareholders would be entitled to receive the par value of their capital stock at the time of liquidation as well as retained earnings, if any, in an amount proportional to the shareholder's share of the total shares of capital stock. In the event of a merger or consolidation, the board of directors shall determine the rights and preferences of the shareholders, subject to any terms and conditions imposed by the Finance Agency.
In addition to possessing the authority to prohibit stock redemptions, our board of directors has the right to call for our members, as a condition of membership, to make additional capital stock purchases as needed to satisfy statutory and regulatory capital requirements under the GLB Act.
Our board of directors has a statutory obligation to review and adjust member capital stock requirements in order to comply with our minimum capital requirements, and each member must comply promptly with any such requirement. However, a member could reduce its outstanding business with us as an alternative to purchasing stock.
If, during the period between receipt of a stock redemption notification from a member and the actual redemption (which may last indefinitely if an FHLBank is undercapitalized, is under-secured relative to its members' or former members' obligations, does not have the required credit rating, etc.), an FHLBank is liquidated, merged involuntarily, or is required to merge upon board of director's approval or consent, with one or more information.FHLBank(s), the consideration for the stock or the redemption value of the stock will be established after the settlement of all senior claims. Generally, no claims would be subordinated to the rights of FHLBank shareholders.
The GLB Act states that an FHLBank may repurchase, in its sole discretion, any member's stock that exceeds the required minimum amount.
Capital Distributions. We may, but are not required to, pay dividends on our capital stock. Dividends are non-cumulative and may be paid in cash or Class B Capital Stock out of current and previous Retained Earnings,net earnings or from unrestricted retained earnings, as authorized by our board of directors and subject to Finance Agency regulations. No dividend may be declared or paid if we are or would be, as a result of such payment, in violation of our minimum capital requirements. Moreover, we may not pay dividends if any principal or interest due on any Consolidated Obligations issued on behalf of any of the FHLBsFHLBanks has not been paid in full, or under certain circumstances, if we fail to satisfy liquidity requirements under applicable Finance Agency regulations.
Our Capital Plancapital plan divides our Class B stock into two sub-series: Class B-1 and Class B-2. The difference between the two sub-series is that Class B-2 is required stock that awaitsis subject to a redemption request and pays a lower dividend. The Class B-2 stock dividend is presently calculated at 80% of the amount of the Class B-1 dividend and can only be changed by amendment of our Capital Plancapital plan by our board of directors with approval of the Finance Agency.
On February 17, 2011,21, 2012, our board of directors declared a cash dividend of 2.50%3.0% (annualized) on our Capital Stock Putable-Class B-1 and of 2.00% (annualized) on our Capital Stock Putable-Class B-2. On February 22, 2010, our board of directors declared a cash dividend of 2.00% (annualized) on our Capital Stock Putable-Class B-1 and of 1.60%2.4% (annualized) on our Capital Stock Putable-Class B-2.
Joint Capital Enhancement Agreement.In 1989, Congress established REFCORP as a vehicle to assist in the recapitalization of the FDIC deposit insurance fund and provide funding for the Resolution Trust Corporation to finance its efforts to resolve the savings and loan crisis. REFCORP issued approximately $30 billion of long-term bonds. The interest due on the REFCORP bonds was paid from several sources, including contributions from the FHLBanks. Starting in 2000, the FHLBanks contributed 20% of their annual net earnings toward the REFCORP interest payments. The FHLBanks' payment obligation was to continue until the value of all payments made by the FHLBanks to REFCORP equaled the value of a benchmark annuity of $300 million per year that commenced on the date that the REFCORP bonds had been issued and ended on the last maturity date for the REFCORP bonds, which was April 15, 2030. In a Federal Register Notice dated August 5, 2011, the Finance Agency announced that the payment made by the FHLBanks on July 15, 2011 fully satisfied all their obligations to contribute toward the interest payments owed on bonds issued by REFCORP.
Effective February 28, 2011, wethe 12 FHLBanks entered into a Joint Capital EnhancementJCE Agreement (the "JCEAgreement") withintended to enhance the other 11 FHLBs. capital position of each FHLBank. The purpose of the JCE Agreement is to allocate that portion of each FHLBank's earnings historically paid to satisfy its REFCORP obligation to a separate restricted retained earnings account at that FHLBank.
The JCE Agreement provides that, upon full satisfaction of the FHLBs' obligations to REFCORP obligation, each FHLBFHLBank will on a quarterly basis, allocate at least 20% of its Net Income each quarter to a Separate Restricted Retained Earnings Account ("RRE Account"). Currently,restricted retained earnings account until the REFCORP obligations are expected to be fully satisfied during the 2011 calendar year. Under the JCE Agreement, each FHLB will be required to build its RRE Account tobalance of that account equals at least 1% of its totalthat FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings will not be available from which for this purpose is based onto pay dividends except to the most recent quarter'sextent the restricted retained earnings balance exceeds 1.5% of an FHLBank's average carrying valuebalance of alloutstanding Consolidated Obligations for which an FHLB is the primary obligor, excluding fair value option and hedging adjustments ("Total Consolidated Obligations").previous quarter. We do not expect that level to be reached for several years.
The JCE Agreement further requires each FHLB to submit an application toOn August 5, 2011, the Finance Agency for approvalapproved the FHLBanks' capital plan amendments to amend its Capital Plan or Capital Plan submission, as applicable, consistent withimplement the termsprovisions of the JCE Agreement. UnderThe amended capital plans of the FHLBanks, including our amended capital plan, became effective on September 5, 2011. The JCE Agreement was amended effective September 5, 2011 to conform it to the amendments to the FHLBanks' capital plans approved by the Finance Agency. In accordance with the JCE Agreement, even ifwe had allocated $13.2 million to restricted retained earnings as of December 31, 2011.
Adequacy of Retained Earnings. Regulatory guidance requires each FHLBank to assess, at least once a year, the FHLBs' REFCORP obligation terminates beforeadequacy of its retained earnings under various future financial and economic scenarios, including:
parallel and non-parallel interest-rate shifts;
changes in the basis relationship between different yield curves; and
changes in the credit quality of the FHLBank's assets.
Our Board of Directors assesses the adequacy of our Retained Earnings using various measures and metrics at least once a year in accordance with Finance Agency has approved all proposed Capital Plan amendments, each FHLB shall commence theregulations.
Adequacy of Capital. We are required allocation to its RRE Account beginning as of the end of the calendar quarter in which the final REFCORP payments are made by the FHLBs.
The JCE Agreement provides that any quarterly net losses of an FHLB may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. In the event an FHLB incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account as of the beginning of that calendar year, such FHLB's quarterly allocation requirement will thereafter increase to 50% of quarterly net income until the cumulative difference between the allocations made at the 50% rate and the allocations that would have been made at the regular 20% rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year. Any year-to-date or annual losses must first be allocated to retained earnings that are not restricted in the FHLB's RRE Account until such retained earnings are reduced to a zero balance. Thereafter, any remaining losses may be applied to reduce the balance of the FHLB's RRE Account, but not below a zero balance.
The JCE Agreement also provides that if an FHLB's RRE Account exceeds 1.5% of its Total Consolidated Obligations, such FHLB may transfer amounts from its RRE Account to the non-restricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5% of the FHLB's Total Consolidated Obligations immediately following such transfer.
Finally, the JCE Agreement provides that during periods in which an FHLB's RRE Account is less than 1% of its Total Consolidated Obligations, such FHLB may pay dividends only from retained earnings that are not restricted in its RRE Account or from the portion of quarterly net income that exceeds the amount required to be allocated to its RRE Account.
The JCE Agreement can be voluntarily terminated by an affirmative vote of two-thirds of the boards of directors of the FHLBs, or automatically, if a change in the Bank Act, Finance Agency regulations or other applicable law hasto maintain sufficient "permanent capital" (defined as the effect of: (i) creating any new or higher assessment or taxation on the net income or capitalsum of any FHLB, or requiring the FHLBs to retain a higher levelClass B Stock, MRCS, and Retained Earnings). The GLB Act of restricted retained earnings than the amount that is required under the JCE Agreement; or (ii) establishing general restrictions applicable to the payment of dividends by FHLBs that satisfy all relevant capital standards by either (a) requiring a new or higher mandatory allocation of an FHLB's net income to any retained earnings account other than the amount specified in the JCE Agreement, or (b) prohibiting dividend payments from any portion of an FHLB's retained earnings that are not held in its RRE Account.
Upon the voluntarily termination of the JCE Agreement, the requirement to allocate earnings to the RRE Account would cease (with1999 and Finance Agency consent for those FHLBs for whichregulations require us to maintain at all times a Capital Plan amendment has been approved), butregulatory capital-to-assets ratio of at least 4.00% and a leverage capital-to-assets ratio of at least 5.00%. Leverage capital is defined as the restrictions on the usesum of restricted retained earnings will continue until an event that triggers automatic termination occurs or until the FHLBs unanimously agree to remove such restriction (and the Finance Agency approves the termination, for those FHLBs for which(i) permanent capital weighted 1.5 times and (ii) all other capital without a Capital Plan amendment has been approved). If the JCE Agreement is automatically terminated, each FHLB's obligation to make allocations to its RRE Account will terminate and any restrictions on the use of amounts in its RRE Account will be eliminated. For more information, see our Current Report on Form 8-K filed on March 1, 2011.
Mandatorily Redeemable Capital Stock.weighting factor. At December 31, 20102011, our regulatory capital ratio was 6.23%, and our leverage ratio was 9.34%.
In addition, we had $658.4 millionmust maintain sufficient permanent capital to meet the combined credit risk, market risk and operational risk components of the risk-based capital requirement. As presented in the following table, we were in compliance with the risk-based capital stock subject to mandatory redemption,requirement at December 31, 2011 and 2010 ($ amounts in millions).
|
| | | | | | | | |
| Risk-Based Capital Components | | December 31, 2011 | | December 31, 2010 |
| Credit risk | | $ | 344 |
| | $ | 428 |
|
| Market risk | | 136 |
| | 286 |
|
| Operations risk | | 144 |
| | 214 |
|
| Total risk-based capital requirement | | $ | 624 |
| | $ | 928 |
|
| | | | | |
| Permanent capital | | $ | 2,515 |
| | $ | 2,695 |
|
The decrease in our risk-based capital requirement was primarily caused by a decrease in the market risk capital component, which decreased due to the change in composition of 13% compared to December 31, 2009. This decrease wasour Total Assets, as well as the overall decline in Total Assets. Our MBS portfolio increased during 2011, primarily due to purchases of variable-rate MBS, while our MPP portfolio, which includes fixed-rate mortgage loans, decreased during 2011. Variable-rate mortgage assets generally have lower market risk than fixed-rate mortgage assets. Other factors that decreased the market risk capital component included lower interest rates and negative duration of equity at December 31, 2011, compared to a repurchasepositive duration of $123.1 millionequity at December 31, 2010. The operations risk capital component is calculated as 30% of excessthe credit and market risk capital stockcomponents.
The Finance Agency may mandate us, by regulation, to maintain a greater amount of permanent capital than is generally required by the risk-based capital requirements as defined, in order to promote safe and sound operations. In addition, on March 3, 2011, the Finance Agency issued a final rule, effective April 4, 2011, authorizing the Director of the Finance Agency to issue an order temporarily increasing the minimum capital level for an FHLBank if the Director determines that the current level is insufficient to address such FHLBank's risks. The rule sets forth certain factors that the Director may consider in making this determination. See $2.2 millionRecent Accounting and Regulatory Developments - Legislative and Regulatory Developments - Significant Finance Agency Regulatory Actions - Final Rule on Temporary Increases in Minimum Capital Levels herein for more information.
The Finance Agency has established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, and implemented the prompt corrective action provisions of HERA that was reclassifiedapply to Capital Stock whenFHLBanks that are not deemed to be adequately capitalized. The Finance Agency determines our capital classification on at least a non-member stockholder that had acquired stockquarterly basis. If we are determined to be other than adequately capitalized, we would become subject to additional supervisory authority by purchasing one of our members became a member of our Bank, partially offset bythe Finance Agency. Before implementing a reclassification, the Director of the Finance Agency would be required to provide us with written notice of the proposed action and an opportunity to respond. We hold sufficient capital to be adequately capitalized and meet both our minimum capital and risk-based capital requirements. See $31.9 million from Capital Stock because of membership changes. See Note 16 - Capital in our Notes to Financial Statements - Note 16 - Capitalfor additional information on the redemption requests for member capital stock.more information.
Excess Stock. Excess stock is capital stock that is not required as a condition of membership or to support services to members or former members. In general, the level of excess stock fluctuates with our members' demand for Advances. Finance Agency regulations prohibit an FHLB from issuing new excess stock if the amount of excess stock outstanding exceeds 1% of the Bank's Total Assets. At December 31, 2010, our outstanding excess stock of $1.1 billion was equal to 3% of our Total Assets. Therefore, we are currently not permitted to issue new excess stock, including the payment of stock dividends.
We generally will not redeem or repurchase member capital stock until five years after either the membership is terminated or we receive a notice of withdrawal from membership. If we receive a request to redeem excess stock, we are not required to redeem or repurchase such excess stock until the expiration of the five-year redemption period. However, we reserve the right to repurchase, and have repurchased, excess stock from a member, without a member request and at our discretion, upon 15 days' notice to the member.
On November 18, 2010, we repurchased $249.4 million of excess stock, consisting of $126.3 million of Capital Stock and $123.1 million of MRCS, on a pro rata basis from all but one shareholder with excess stock, in accordance with our Capital Plan dated September 19, 2002 (as amended).
The following table presents the composition of our excess stock ($ amounts in millions):
| | | | | | | | |
| Excess Stock | | December 31,
2010 | | December 31,
2009 |
| Member capital stock not subject to redemption requests | | $ | 449 | | | $ | 465 | |
Member capital stock subject to redemption requests (1) | | 130 | | | 131 | |
MRCS subject to redemption (1) | | 559 | | | 608 | |
| Total excess capital stock | | $ | 1,138 | | | $ | 1,204 | |
| | |
| (1)
| This amount does not include capital stock or MRCS that is still supporting outstanding credit products. |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance-sheet arrangements ($(notional $ amounts in millions):
| | | | | | | | |
| Notional amount | | December 31, 2010 | | December 31, 2009 |
Standby letters of credit outstanding (1) | | $ | 527 | | | $ | 590 | |
| Unused lines of credit | | 762 | | | 171 | |
| Commitments to fund additional Advances | | 16 | | | 38 | |
| Commitments to fund or purchase mortgage loans | | 57 | | | 38 | |
Unsettled CO Bonds, at par (2) | | 412 | | | 1,995 | |
| Unsettled Discount Notes, at par | | — | | | — | |
|
| | | | | | | | |
| Types | | December 31, 2011 | | December 31, 2010 |
Standby letters of credit outstanding (1) | | $ | 512 |
| | $ | 527 |
|
| Unused lines of credit | | 780 |
| | 762 |
|
| Commitments to fund additional Advances | | 12 |
| | 16 |
|
| Commitments to fund or purchase mortgage loans | | 68 |
| | 57 |
|
Unsettled CO Bonds, at par (2) | | 275 |
| | 412 |
|
| | |
| (1) | We had no outstanding commitments to issue standby letters of credit at December 31, 2011, or 2010 and 2009.. |
| |
| (2) | Unsettled CO Bonds of $250.0 million$250,000 at December 31, 2011, and $1.7 billion2010, respectively, were hedged with associated interest-rate swaps at December 31, 2010, and 2009, respectively.swaps. |
A standby letter of credit is a financing arrangement between us and one of our members that is executed for a fee. If we are required to make payment on a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. The original terms of these standby letters of credit, including related commitments, range from less than three6 months to 20 years, including a final expiration in 2,0292029.
Lines of credit allow members to fund short-term cash needs (up to six months) without submitting a new application for each request for funds. The increase in unused linesmaximum line of credit amount is primarily due$50.0 million.
At December 31, 2011 and 2010, there was approximately $20.9 million and $21.0 million, respectively, of principal on delinquent MPP loans that has been paid in full by the servicers but is subject to modifications that we made toclaim against us for any losses. After foreclosure and liquidation in the fees and terms of our Overdraft Line of Credit product in order to make it more attractive to all of our members.
We only record a liability for Consolidated Obligations on our Statements of Condition for the proceeds we receive from the issuance of those Consolidated Obligations. In addition, each FHLB is jointly and severally liable for the payment of all Consolidated Obligations of allname of the FHLBs. Accordingly, should any FHLB be unable to repay its participation inservicer of these mortgage loans, the Consolidated Obligations, each ofservicer files a claim against the other FHLBs could be called upon to repay all or part of such obligations,various credit enhancements for reimbursement for losses incurred which is then reviewed and paid as determined or approved by the Finance Agency. No FHLB has had to assume or pay the Consolidated Obligations of another FHLB.
The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBs. The FHLBs have no control over the amount of the guaranty or the determination of how each FHLB would performappropriate under the jointvarious credit enhancement policies or guidelines. Subsequently, the servicers may submit claims to us for any remaining losses.
See Notes to Financial Statements - Note 21 - Commitments and several liability. Because the FHLBs are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the jointContingencies for information on additional commitments and several liability for each of the FHLBs Consolidated Obligations, our jointcontingencies.
and several obligations are excluded from the initial recognition and measurement provisions of the Guarantees topic of the FASB Codification. Accordingly, we do not recognize a liability for our joint and several obligations related to Consolidated Obligations issued for the benefit of other FHLBs. The par amounts of the FHLBs outstanding Consolidated Obligations, including Consolidated Obligations held by other FHLBs, were approximately $796.4 billion and $930.6 billion at December 31, 2010, and 2009, respectively.
Contractual Obligations
Consolidated Obligations are the joint and several debt obligations of the 12 FHLBsFHLBanks and consist of CO Bonds and Discount Notes. Consolidated Obligations represent the primary source of liabilities used to fund Advances, MPP and investments. As noted under "Risk Management," we use debt with a variety of maturities and option characteristics to manage our duration of equity. We make extensive use of interest-rate swap transactions, executed in conjunction with specific Consolidated Obligation debt issues, to synthetically reconfigure funding terms and costs.
The following table presents the payments due or expiration terms by specified contractual obligation type. Long-term debt is reported at par and based on contractual maturities and excludes Discount Notes due to their short-term nature ($ amounts in millions). See "LiquidityLiquidity and Capital Resources - Capital Resources"Resources herein for more information on MRCS.
| | December 31, 2010 | | < 1 year | | 1 to 3 years | | 3 to 5 years | | > 5 years | | Total | |
| | December 31, 2011 | | | < 1 year | | 1 to 3 years | | 3 to 5 years | | > 5 years | | Total |
| Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 15,976 | | | $ | 5,488 | | | $ | 3,358 | | | $ | 6,957 | | | $ | 31,779 | | | $ | 17,071 |
| | $ | 4,795 |
| | $ | 1,587 |
| | $ | 6,839 |
| | $ | 30,292 |
|
| Operating leases | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Commitments to fund or purchase mortgage loans | | 57 | | | — | | | — | | | — | | | 57 | | |
Benefit payments (1) | | 2 | | | 1 | | | 1 | | | 4 | | | 8 | | | 1 |
| | 1 |
| | 1 |
| | 4 |
| | 7 |
|
| MRCS | | 115 | | | 335 | | | 208 | | | — | | | 658 | | | 7 |
| | 413 |
| | 34 |
| | — |
| | 454 |
|
| Total | | $ | 16,150 | | | $ | 5,824 | | | $ | 3,567 | | | $ | 6,961 | | | $ | 32,502 | | | $ | 17,079 |
| | $ | 5,209 |
| | $ | 1,622 |
| | $ | 6,843 |
| | $ | 30,753 |
|
| | |
| (1) | Amounts represent estimated future benefit payments due in accordance with the Bank's Supplemental Executive Retirement Plan.our SERP. See Notes to Financial Statements -Note 1718 - Employee and Director Retirement and Deferred Compensation Plans in our Notes to Financial Statements for more information. |
In connection with our enterprise-wide initiative to replace our core banking system, we are contractually obligated to make a remaining immaterial payment for software. Consulting contracts related to the implementation of this initiative may be terminated with 30 days notice.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reporting period. We review these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors that we believe to be reasonable under the circumstances. Changes in estimates and assumptions have the potential to significantly affect our financial position and results of operations. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our financial statements.
We have identified five accounting policies that we believe are critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These accounting policies are:relate to:
| |
• | Provision for Credit Losses; |
| |
• | Accounting for Derivatives and Hedging Activities; |
| |
• | Fair Value Estimates; and |
| |
• | Accounting for Premiums and Discounts and Other Costs Associated with Originating or Acquiring Mortgage Loans, MBS, and ABS. |
OTTI analysis (see Notes to Financial Statements - Note 7 - Other-Than-Temporary Impairment Analysis for more detail);
Allowance for credit losses (see Notes to Financial Statements - Note 10 - Allowance for Credit Losses for more detail);
Derivatives and hedging activities (see Notes to Financial Statements - Note 11 - Derivatives and Hedging Activities for more detail);
Fair value estimates (see Notes to Financial Statements - Note 20 - Estimated Fair Values for more detail); and
Premiums and discounts and other costs associated with originating or acquiring mortgage loans, MBS, and ABS (see Notes to Financial Statements - Note 1 - Summary of Significant Accounting Policies for more detail).
We believe the application of our accounting policies on a consistent basis enables us to provide financial statement users with useful, reliable and timely information about our earnings results of operations, financial position and cash flows.
Other-Than-Temporary Impairment Analysis
The continued broad-based deterioration of credit performance related to residential mortgage loans and the accompanying decline in U.S. residential real estate values as well as increased delinquency rates have increased the level of credit risk to which we are exposed in our investments in mortgage-related securities, primarily Private-label MBS and ABS. Our investments in mortgage-related securities are directly or indirectly supported by underlying mortgage loans. Analysis. We closely monitor the performance of our investment securities classified as AFS or HTM on a quarterly basis to evaluate our exposure to the risk of loss on these investments in order to determine whether an impairment is other-than-temporary, consistent with the accounting guidance for recognition and presentation of OTTI. Our investments in mortgage-related securities are directly or indirectly supported by underlying mortgage loans. The continued broad-based deterioration of credit performance related to residential mortgage loans and the accompanying decline in United States residential real estate values as well as increased delinquency rates have increased the level of credit risk to which we are exposed in our investments in mortgage-related securities, primarily private-label MBS and ABS.
To ensure consistency in theEach FHLBank is responsible for its determination of OTTI for Private-label MBSimpairment and ABS (including manufactured housing and home equity ABS) among all FHLBs, the FHLBs enhancedreasonableness of assumptions that are approved by the overall OTTI process in 2009 by implementing a system-wide governance committee ("FHLB OTTI Governance Committee") and establishing a formal process to determine the key OTTI modeling assumptions used for purposes of our cash flow analyses for substantially all of these securities. The FHLBFHLBank OTTI Governance Committee, charter provides a formal process by which the FHLBs can provide input oninputs and approvemethodologies used, and the assumptions. The methodsrequired present value calculations using appropriate historical cost bases and assumptions evaluated and approved by the FHLB OTTI Governance Committee were based on recommendations developed primarily by the FHLB of San Francisco for prime and Alt-A MBS and by the FHLB of Chicago for subprime MBS.yields.
We selectevaluate all of our Private-label MBSprivate-label RMBS and ABS investments to be evaluated using the FHLBs'FHLBanks' common framework and approved assumptions.assumptions for purposes of OTTI cash flow analysis. For certain Private-label MBS andone immaterial manufactured housing loan ABS investments wherefor which underlying collateral data is not readily available, alternative procedures, as determined by each FHLBFHLBank, are used to assess these securitiesevaluate this security for OTTI (one manufactured housing investment, representing an unpaid principal balance of $19.0 million at December 31, 2010, for us).OTTI.
Our evaluation includes estimatinga projection of the cash flows that we are likely to collect based on an assessment of the structure of each security and certain assumptions, some of which are determined based upon other assumptions, such as:
| |
• | the remaining payment terms for the security; |
| |
• | prepayment speeds and 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-rate assumptions. |
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.
Our cash-flowcash flow analysis uses two third-party models.models to assess whether the entire amortized cost basis of our private-label RMBS will be recovered. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying our securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. described above.
A significant modeling assumption in the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas ("CBSA"),CBSAs, which are based upon an assessment of the individual housing markets. 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 with a population of 10,000 or more people. Our housing price forecast assumes future CBSA level current-to-trough home price declines ranging from 1%0% (for those housing markets that are believed to 10%have reached their trough) to 8%. For those markets where further home price declines are anticipated, the declines were projected to occur over the 3- to 9-month period beginning October 1, 2010. Thereafter,2011. From the trough, home prices are projected to recover using one of five different recovery paths that vary by housing market. Under those
The following table presents projected home price recovery paths, home prices are projected to increase within a range of 0% to 2.8% in the firstby year 0% to 3.0% in the second year, 1.5% to 4.0% in the third year, 2.0% to 5.0% in the fourth year, 2.0% to 6.0% in each of the fifth and sixth years, and 2.3% to 5.6% in each subsequent year.at December 31, 2011.
|
| | | | |
| Time Period | | Recovery Range % |
| Year 1 | | 0.0% | – | 2.8% |
| Year 2 | | 0.0% | – | 3.0% |
| Year 3 | | 1.5% | – | 4.0% |
| Year 4 | | 2.0% | – | 5.0% |
| Years 5 and 6 | | 2.0% | – | 6.0% |
| Thereafter | | 2.3% | – | 5.6% |
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 third-party model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
The projected cash flows are based on a number of assumptions and expectations, and therefore the results of these models can vary significantly with changes in assumptions and expectations. The projected cash flows based on the model approach described above reflect the most reasonable estimate and include a base case current-to-trough housing price forecast and a base case housing price recovery path.
Each FHLB is responsible for making its own determination of impairment and the reasonableness of assumptions that are determined by the FHLB OTTI Governance Committee, inputs and methodologies used, and for performing the required present value calculations using appropriate historical cost bases and yields.
In addition to evaluating our Private-labelprivate-label MBS and ABS under a base case (or best estimate) scenario, we also performed a cash-flow analysis for each of these securities under a more adverse housing price scenario.
This more stressful scenario was based on a housing price forecast that was 5 percentage points lower at the trough than the base case scenario, followed by a flatter recovery path. Under this scenario, current-to-trough home price declines were projected to range from 6%5% to 15%13% over the 3- to 9-month period beginning October 1, 2010. Thereafter,2011. From the trough, home prices were projected to increase within a rangerecover using one of 0% to 1.9% in the first year, 0% to 2.0% in the second year, 1.0% to 2.7% in the third year, 1.3% to 3.4% in the fourth year, 1.3% to 4.0% in each of the fifth and sixth years, and 1.5% to 3.8% in each subsequent year.five different recovery paths that vary by housing market.
The following table showspresents projected home price recovery by year at December 31, 2011 under the more adverse scenario.
|
| | | | |
| Time Period | | Recovery Range % |
| Year 1 | | 0.0% | – | 1.9% |
| Year 2 | | 0.0% | – | 2.0% |
| Year 3 | | 1.0% | – | 2.7% |
| Year 4 | | 1.3% | – | 3.4% |
| Years 5 and 6 | | 1.3% | – | 4.0% |
| Thereafter | | 1.5% | – | 3.8% |
The following table presents the results of the base case scenario and what the impact on OTTI would have been under the more adverse home price scenario for the quarter ended December 31, 2010 ($ amounts in millions):. The classification (prime, Alt-A and subprime) is based on the model used to estimate the cash flows for the security, and may not be the same as the classification at the time of origination. | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarter Ended December 31, 2010 |
| | | | | | | | | | Number of | | | | |
| | | | | | | Impairment | | | Securities | | | | Estimated |
| | | | | | | Related to | | | Impaired | | | | Credit Loss |
| | | | | | | Credit Loss | | | Using | | | | Using |
| | | Number of | | Unpaid | | Included in | | | Adverse | | Unpaid | �� | Adverse |
| | | Securities | | Principal | | Statement | | | Housing Price | | Principal | | Housing Price |
NRSRO Classification (1) | | Impaired | | Balance | | of Income | | | Scenario | | Balance | | Scenario |
| Prime | | 4 | | | $ | 159 | | | $ | 2 | | | | 12 | | | $ | 725 | | | $ | 12 | |
| Alt-A | | 2 | | | 53 | | | — | | | | 2 | | | 53 | | | 2 | |
| Total | | 6 | | | $ | 212 | | | $ | 2 | | | | 14 | | | $ | 778 | | | $ | 14 | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Quarter Ended December 31, 2011 | | | | As Reported | | Using Adverse Housing Price Scenario | | | | Number of | | | | Impairment | | Number of | | | | Impairment | | | | Securities | | | | Related to | | Securities | | | | Related to | | Classification | | Impaired | | UPB | | Credit Loss | | Impaired | | UPB | | Credit Loss | | Prime | | 1 |
| | $ | 39 |
| | $ | (1 | ) | | 9 |
| | $ | 502 |
| | $ | (7 | ) | | Alt-A | | 1 |
| | 36 |
| | — |
| | 1 |
| | 36 |
| | (1 | ) | | Subprime | | 1 |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | Total | | 3 |
| | $ | 76 |
| | $ | (1 | ) | | 11 |
| | $ | 539 |
| | $ | (8 | ) |
The adverse scenario and associated results do not represent our current expectations, and therefore should not be construed as a prediction of our future results, market conditions or the performance of these securities. Rather, the results from this hypothetical stress test scenario provide a measure of the credit losses that we might incur if home price declines (and subsequent recoveries) are more adverse than those projected in our OTTI evaluation.
(1)
| While there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, MBS and ABS are classified as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance. |
Additional information aboutregarding OTTI of our Private-labelprivate-label MBS and ABS is provided in "RiskRisk Management - Credit Risk Management - Investments" herein, and in Note 7 - Other-than-Temporary Impairment Analysis in our Notes to Financial Statements.Investments herein.
Provision for Credit LossesLosses.
Credit ServicesProducts.We are required by Finance Agency regulation to obtain sufficient collateral on credit services to protect against losses and to accept only certain collateral, such as residential mortgage loans, U.S. government or government agency securities, ORERC, and deposits. At December 31, 2010, and 2009, we had rights to collateral, either loans or securities, on a member-by-member basis, with an estimated fair value in excess of outstanding credit services. Based2011, based on the collateral held as security our credit extension and collateral policies,for Advances, management's credit analysisanalyses and theour prior repayment history, on credit services, no allowance for losses on credit servicesAdvances is deemed necessary by management nor was a liability recorded to reflect an allowance for credit losses for off-balance sheet credit exposures.necessary.
Mortgage Loans Acquired under the MPP. We acquire both FHA and conventional fixed-rate mortgage loans under the MPP. FHA loans are government-guaranteed and, consequently, we have determined that no allowance for losses is deemed necessary for such loans. Conventional loans, in addition to having the related real estate as collateral, are also credit-enhanced by PMI (if applicable), the member's LRA, and SMI (if applicable) before we would have a credit loss obligation. Our pool aggregation program has the effect of creating a larger population of loans over which the risk of loss can be spread.
Our loan loss reserve policy requires management to determine if it is probable that impairment has occurred in the mortgage loan portfolio as of the StatementsStatement of Condition datesdate and if the amount of loss can be reasonably estimated. Losses shall not be recognized before it is probable that they have been incurred, even though it may be probable based on past experience that losses will be incurred in the future. Probable impairment is defined as the point at which we determine,occurs when management determines, using current and historical information and events, that wethe Bank will likely be unable to collect all principal and interest contractually due under each loan agreement. We have developedThe MPP portfolio's delinquency migration is used to determine whether a loss event is probable. Once a loss event is deemed to be probable, a systematic approach for reviewing the adequacy ofmethodology that incorporates all credit enhancements and servicer advances is used to establish the allowance for creditinherent loan losses.
Using this methodology, we perform a review designed to identify probable impairment as well as compute a reasonable estimate of loss, if any. This quarterly review is designed to ensure the adequacy of the allowance and includes:
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• | consideringsegregating specific delinquent conventional loans, which are collectively evaluated for impairment within each homogeneous pool; |
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• | reviewing the estimated liquidation value of real estate collateral held and the amount of other credit enhancements, including PMI, LRA, and SMI in each pool; |
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• | reviewing the total exposure associated with each pool, including the unpaid principal balance remaining, interest owed on the delinquent loans to date, and other estimated costs associated with maintaining and disposing the collateral; |
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• | reviewing any limitations associated with stop-loss SMI coverage on each pool, where applicable; |
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• | reviewing current economic trends and conditions, comparing delinquency trends to industry reported data, and reviewing historical default experience; and |
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• | evaluating the pools based on current and historical information and events and determining the necessary allowance for loans deemed to have a probable impairment after taking into consideration the estimated liquidation value of the real estate collateral held and the amount of the other credit enhancements, including the PMI, LRA, and SMI. |
During 2010, we had netapplying the estimated liquidation value of real estate collateral held and the amount of other credit enhancements, including PMI (if applicable), LRA, and SMI (if applicable) in each pool or aggregated pool;
calculating the total exposure associated with each pool, including the UPB remaining, interest owed on the delinquent loans to date, and other estimated costs associated with maintaining and disposing the collateral;
reducing for any limitations associated with stop-loss SMI coverage on each pool, where applicable;
reviewing current economic trends and conditions, comparing delinquency trends to industry reported data, and reviewing historical default experience;
evaluating the pools based on current and historical information and events and determining the necessary allowance for loans deemed to have a probable impairment after taking into consideration the estimated liquidation value of the real estate collateral held and the amount of the other credit enhancements, including the applicable PMI, LRA, and SMI (any incurred losses of $0.4 million in excess ofthat would be recovered from the credit enhancements onare not reserved as part of our allowance for loan losses);
reviewing any remaining exposure to loans paid in full by the MPPservicers; and
reviewing any remaining exposure inherent in the current (0 - 180 days delinquent) portfolio. Based on our analysis, using an
To calculate the estimated liquidation value, we obtain actual selling prices on all properties in our MPP portfolio for which a claim was initiated with our SMI providers from the HUD statement. The total of the property selling prices is divided by the total of the original appraisal values to determine a weighted-average "collateral recovery rate" expressed as a percentage. Such rate is then applied at December 31, 2010,the pool level and 2009,is further reduced for estimated liquidation costs to determine the estimated liquidation value for collective evaluation of impairment. We use the most recent 12 months weighted-average collateral recovery rate to allow us to estimate losses based upon our historical experience and to reflect current trends in the market.
Our allowance for loan losses incorporates our analysis of delinquent conventional MPP loans, using the weighted-average collateral recovery rate for the previous 12 months of approximately 54% and 55%, respectively,52% of the original appraised value, further reduced by estimated liquidation costs.
Certain conventional loans that are impaired, primarily troubled debt restructurings, are specifically identified for purposes of calculating the allowance for loan losses. The measurement of the allowance for loans individually evaluated for loan loss considers loan-specific attribute data similar to loans evaluated on a collective basis. The resulting incurred loss, if any, is equal to the estimated cost associated with maintaining and disposing of the property (which includes UPB, interest owed on the delinquent loan to date, and estimated costs associated with disposing the collateral) less the estimated fair value of the collateral (net of estimated selling costs) and after considerationthe amount of other credit enhancements including the PMI (if applicable), LRA and SMI we recorded $0.5(if applicable).
Our allowance for loan losses also includes potential claims by servicers for any losses on approximately $20.9 million of allowanceprincipal that has been paid in full by the servicers. We review the properties included in this balance and obtain HUD statements, sales listings or other evidence of current expected liquidation amounts. If a specific amount is not available, we use the weighted-average collateral recovery rate of approximately 52% to determine our exposure.
Our analysis also incorporates the use of a recognized third-party credit and prepayment model to estimate potential ranges of credit loss exposure for the current loans in the MPP. The loss projection is based upon distinct underlying loan characteristics including stage of delinquency, loan vintage (year of origination), geographic location, credit support features and other factors.
As a result of our analysis, we increased our estimated losses on our conventional mortgage loans, before any credit enhancements, to $49.3 million at December 31, 2011.
However, our allowance for loan losses considers the credit enhancements associated with conventional mortgage loans under the MPP. To determine a potential loss, the credit enhancements are applied to the estimated losses in the following order: any remaining borrower's equity, any applicable PMI up to coverage limits, any available funds remaining in the LRA, and any SMI coverage up to the policy limits. Any remaining loss would be borne by the Bank and included in our allowance for loan losses. After consideration of the credit enhancements associated with conventional mortgage loans under the MPP, we estimate that, of the $49.3 million in estimated losses, we will recover $6.6 million from PMI, $11.6 million from LRA, and $27.8 million from SMI, resulting in our allowance for loan losses of $3.3 million at December 31, 2010. We recorded no allowance2011.
The third-party credit and prepayment model also currently serves as a secondary review of the systematic approach performed for the delinquent portfolio and loans paid in full by the servicers. The projected losses from the model are within our estimate of loan losses at December 31, 2009. 2011.
We have also performed our loan loss allowancereserve analysis under multiple scenariosan adverse scenario whereby we changed various assumptions and have concluded that a worsening of those assumptions downlowered the collateral recovery rate to a 50% estimated liquidation value45% which, all else being equal, would have increased our allowance toby approximately $3.0$6.9 million at December 31, 2010.2011. We consider a collateral recovery rate of 45% to be the lowest rate that is reasonably possible to occur over the loss emergence period, which we have estimated to be 12 months. We continue to monitor the appropriateness of this adverse scenario based on the actual collateral recovery rate. Annually, we also consider other adverse scenarios that include loans in earlier stages of delinquency (90 days), counterparty losses on claims to our SMI providers, and higher costs to liquidate collateral.
We evaluated the adverse scenario and determined that the likelihood of incurring losses resulting from this scenario during the next 12 months was not probable. Therefore, the allowance for loan losses is based upon our best estimate of the losses incurred over the next 12 months that would not be recovered from the credit enhancements.
These estimates require significant judgments, especially considering the prolonged deterioration in the national housing market, the inability to readily determine the fair value of all underlying properties and the uncertainty in other macroeconomic factors that make estimating defaults and severity increasingly imprecise.
Accounting for Derivatives and Hedging Activities
Activities. All derivatives are recorded in the StatementsStatement of Condition at their estimated fair values. Changes in the estimated fair value of our derivatives are recorded in current period earnings regardless of how estimated fair value changes in the assets or liabilities being hedged may be treated. Therefore, even though derivatives are used to mitigate market risk, derivatives introduce the potential for earnings volatility. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and income effects of derivative instruments positioned to mitigate market risk associated with those assets or liabilities. Therefore, during periods of significant changes in interest rates and due to other market factors, our earnings may experience greater volatility.
Generally, we strive to use derivatives that effectively hedge specific assets or liabilities and qualify for fair-value hedge accounting. Fair-value hedge accounting allows for offsetting changes in estimated fair value attributable to the hedged risk in the hedged item to also be recorded in the current period through either of two generally acceptable accounting methods:
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• | Short-cut method. Certain highly effective hedges that use interest-rate swaps as the hedging instrument and that meet certain criteria can qualify for short-cut fair-value hedge accounting. Short-cut accounting allows for the assumption of no ineffectiveness, which means the fair value change in the hedged item can be assumed to be equal and offsetting to the fair value change in the derivative. Effective April 1, 2008, we no longer apply the short-cut method to any new hedging relationships. All hedging relationships entered into prior to April 1, 2008, that were accounted for under the short-cut method remain, provided they continue to meet the assumption of effectiveness. |
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• | Long-haul method. For all hedges entered into after March 31, 2008, and earlier hedges that did not qualify for short-cut treatment, the fair value change in the hedged item must be measured separately from the derivative, and effectiveness testing must be performed. The results of this effectiveness testing must be within established tolerances to qualify for the long-haul method. The effectiveness test is performed both at the hedge's inception and on a quarterly basis thereafter, using regression or statistical analyses. We intentionally match the terms between the derivative and the hedged item. Should effectiveness testing fail and the hedge no longer qualify for hedge accounting, the derivative would be adjusted to fair value through current earnings without any offset related to the hedged item. |
Short-cut method. Certain highly effective hedges that use interest-rate swaps as the hedging instrument and that meet certain criteria can qualify for short-cut fair-value hedge accounting. Short-cut accounting allows for the assumption of no ineffectiveness, which means the estimated fair value change in the hedged item can be assumed to be equal and offsetting to the estimated fair value change in the derivative. Effective April 1, 2008, we no longer apply the short-cut method to any new hedging relationships. All hedging relationships entered into prior to April 1, 2008 that were accounted for under the short-cut method remain, provided they continue to meet the assumption of effectiveness.
Long-haul method. For all hedges entered into after March 31, 2008, and earlier hedges that did not qualify for short-cut treatment, the estimated fair value change in the hedged item must be measured separately from the derivative, and effectiveness testing must be performed. The results of this effectiveness testing must be within established tolerances to qualify for the long-haul method. The effectiveness test is performed both at the hedge's inception and on a quarterly basis thereafter, using regression or statistical analyses. We intentionally match the terms between the derivative and the hedged item. Should effectiveness testing fail and the hedge no longer qualify for hedge accounting, the derivative would be adjusted to estimated fair value through current earnings without any offset related to the hedged item.
Although the majority of our derivatives qualify for fair-value hedge accounting, we carry certain derivatives that do not qualify for fair-value hedge accounting or other economic hedges for asset/liability management purposes. The changes in the estimated fair value of these derivatives designated as economic hedges are recorded in current period earnings with no offset for the change in estimated fair value of the hedged item.
In accordance with Finance Agency regulations and policies, we have executed all derivatives to reduce market risk exposure, not for speculation or solely for earnings enhancement. All outstanding derivatives hedge specific assets, liabilities, or mandatory delivery contracts under the MPP, or are stand-alone derivatives used for asset/liability management purposes.
The use of estimates based on market prices to determine the derivative's estimated fair value can have a significant impact on current period earnings for all hedges, both those in fair-value hedging relationships and those in economic hedging relationships. Although this estimation and valuation process can cause earnings volatility during the periods the derivative instruments are held, the estimation and valuation process for hedges that qualify for fair-value hedge accounting does not have any net long-term economic effect or result in cash flows if the derivative and the hedged item are held to maturity. Since these estimated fair values fluctuate throughout the hedge period and eventually return to zero (or par value) on the maturity date, the effect of such adjustmentsfluctuations throughout the hedge period is normally only a timing issue.
Fair Value Estimates
Estimates. We carry certain assets and liabilities on the Statement of Condition at estimated fair value, including investments classified as AFS and certain HTM (on a non-recurring basis), Rabbi Trustgrantor trust assets, and all derivatives. We define "fair value" 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 or(i.e., an exit price.price). We are required to consider factors specific to the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom we would transact in that market. In general, the transaction price will equal the exit price and, therefore, represents the fair value of the asset or liability at initial recognition.
Fair values play an important role in the valuation of certain of our assets, liabilities and hedging transactions. FairEstimated fair values are based on quoted market prices or market-based prices, if such prices are available. If quoted market prices or market-based prices are not available, estimated fair values are determined based on valuation models that use either:
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• | discounted cash flows, using market estimates of interest rates and volatility; or |
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• | dealer prices and prices of similar instruments. |
Pricingdealer prices on similar instruments.
For external pricing models, we review the vendors' pricing processes, methodologies, and theircontrol procedures for reasonableness. For internal pricing models, the underlying assumptions are based on management's best estimates for:
discount rates;
prepayments;
market volatility; and
other factors.
The assumptions used in both external and internal pricing models could have a significant effect on the reported fair values of assets and liabilities, including the related income and expense. The use of different assumptions, as well as changes in market conditions, could result in materially different values.
We continue to refine our valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. Effective December 31, 2011 we refined our method for estimating the fair values of MBS, consistent with the methodology changes approved by the FHLBank System MBS Pricing Governance Committee as of this date. Our revised valuation technique first requires the establishment of a "median" price for each security based on prices received from four pricing services. All prices that are within a specified tolerance threshold of the median price are included in the "cluster" of prices that are averaged to compute a "default" price. Prices that are outside the threshold ("outliers") are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier is in fact not representative of estimated fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the estimated fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
The four pricing vendors use various proprietary models to price MBS. Since many MBS do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the pricing for individual securities. Each pricing vendor has an established challenge process, which facilitates resolution of potentially erroneous prices identified by the Bank. We had a minimal number of prices that required a challenge, and such challenges had an insignificant impact on fair value, as we used the average cluster prices in almost all instances. As an additional step, we reviewed the final fair value estimates of management with respect to:our private-label RMBS holdings as of December 31, 2011 for reasonableness using an implied yield test, which resulted in no adjustments to fair value. For all of our MBS holdings, the final price was determined by using the valuation technique described above. The revision to the valuation technique did not have a significant impact on the estimated fair values of our MBS holdings as of December 31, 2011.
We categorize our financial instruments carried at estimated fair value into a three-level hierarchy. The valuation hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank'sour market assumptions. Level 1 instruments are those for which inputs to the valuation methodology are observable inputs that are derived from quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 instruments are those for which inputs are observable inputs, either directly or indirectly, that include quoted prices for similar assets and liabilities. Finally, Level 3 instruments are those for which inputs are unobservable or are unable to be corroborated by external market data.
We utilize valuation techniques that, to the extent possible, use observable inputs in our valuation models. Described belowHowever, as markets continue to remain illiquid, we may utilize more unobservable inputs if they better reflect market values. With respect to our private-label MBS, we concluded that, overall, the inputs used to determine fair value are unobservable (i.e., Level 3). We have sufficient information to conclude that Level 3 is appropriate based on our knowledge of the dislocation of the private-label MBS market and the distribution of prices received from the four third-party pricing services, which is generally wider than would be expected if observable inputs were used.
See Notes to Financial Statements - Note 20 - Estimated Fair Values for further information regarding the estimated fair value measurement methodologies and levelguidance, including the classification forwithin the fair value hierarchy of all our assets and liabilities carried at estimated fair value on the Statementsas of Condition:December 31, 2011.
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• | AFS — The fair values of our non-MBS assets fall within the Level 2 hierarchy as they are based on executable prices for identical assets. We consider the assets to trade in markets where there is not enough volume or depth to be considered active. The fair values of our MBS assets fall within the Level 3 hierarchy based on the current lack of significant market activity for private-label RMBS. |
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• | Rabbi Trust assets — The estimated fair values of our Rabbi Trust assets (included in Other Assets) fall within the Level 1 hierarchy and are based on quoted market prices for identical assets in an active market. |
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• | Derivative Assets and Derivative Liabilities — The estimated fair values of our derivative assets and liabilities fall within the Level 2 hierarchy and are based on widely accepted valuation models that utilize market observable valuation inputs such as the U.S. dollar swap curve and U.S. dollar swaption values with the valuation inputs and |
techniques remaining consistent with those used in previous periods. We use the mid-point in the bid/ask range as a practical expedient. Additionally, derivative market values are corroborated through quotes provided by the derivative counterparties and significant differences are investigated.
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• | We measure certain HTM at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (e.g., when there is evidence of OTTI). |
Accounting for Premiums and Discounts and Other Costs Associated with Originating or Acquiring Mortgage Loans, MBS, and ABS
ABS. When we purchase mortgage loans under our MPP or purchase MBS or ABS, we may not pay the seller the exact amount of the unpaid principal balance.UPB. If we pay more than the unpaid principal balance,UPB, and purchase the mortgage assets at a premium, the premium reduces the yield we recognize on the assets below the coupon amount. Conversely, if we pay less than the unpaid principal balance,UPB, and purchase the mortgage assets at a discount, the discount increases the yield above the coupon amount.
Similarly, gains and losses associated with terminated fair-value hedges are included in the carrying value of the mortgage loan and amortized accordingly. Losses are accreted along with discounts, while gains are amortized along with premiums, to increase or decrease the coupon yield on the mortgage loan.
The amortization/accretion associated with MPP mortgage loans, MBS, and ABS is recognized in current period earnings as a decrease/increase to Interest Income. An offsetting adjustment is made to the asset's net carrying value.amortized cost.
We defer and amortize/accrete premiums/discounts and gains/losses into Interest Income over the estimated life of the assets using the level-yield method. To arrive at this recognition:
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• | individual mortgage assets are purchased with a premium or discount under the MPP according to the executed mandatory delivery contract. These individual mortgage assets are then aggregated into multiple portfolios, called pools, according to common characteristics such as coupon interest rate, final original maturity (typically 15 or 30 years), calendar quarter and year purchased, and the type of mortgage (i.e., conventional or FHA); gains/losses associated with terminated fair value hedges are aggregated similarly to the MPP mortgages; |
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• | premiums and discounts paid on each MBS or ABS are analyzed as a separate pool; |
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• | the projected prepayment speeds of each pool of mortgage assets (both MPP and MBS or ABS) are used to estimate all cash flows, including interest and return of principal; |
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• | the internal rate of return (level-yield) is calculated, after factoring in actual and estimated future prepayments, and applied to the amount of original premium/discount at acquisition date; and |
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• | a cumulative current period adjustment is made to adjust retrospectively the accumulated premium/discount for the pool to the amount required as if the new projected prepayments had been known since the original acquisition date of the mortgage assets. |
individual mortgage loans are purchased with a premium or discount under the MPP according to the executed mandatory delivery contract. These individual mortgage loans are then aggregated into multiple portfolios, called pools, according to common characteristics such as coupon interest rate, final original maturity (typically 15 or 30 years), calendar quarter and year purchased, and the type of mortgage (i.e., conventional or FHA); gains/losses associated with terminated fair value hedges are aggregated similarly to the MPP mortgages;
premiums and discounts paid on each MBS or ABS are analyzed as a separate pool;
the projected prepayment speeds of each pool of mortgage assets (both MPP and MBS or ABS) are used to estimate all cash flows, including interest and return of principal;
the internal rate of return (level-yield) is calculated, after factoring in actual and estimated future prepayments, and applied to the amount of original premium/discount at acquisition date; and
a cumulative current period adjustment is made to adjust retrospectively the accumulated premium/discount for the pool to the amount required as if the new projected prepayments had been known since the original acquisition date of the mortgage assets.
The projected prepayments, therefore, may have a material impact on the calculation of the amortizationamortization/accretion of certain premiums and discounts. The periodic retrospective adjustments, in an uncertain interest rate market, can be the source of income volatility in the MPP and MBS/ABS portfolios.
Projected prepayment speeds for mortgage assets are based on monthly implied forward interest rates. We use implied forward interest rates because they are the market's consensus of future interest rates; they are the default set of interest rates used to price and value financial instruments; and they are the interest rates that can be hedged with various instruments. We use a nationally-recognized prepayment model to project prepayment speeds.
The following table shows the estimated impact to Interest Income for the three months ended December 31, 2010,2011, for both MPP and MBS/ABS assuming a 25% and 50% increase in projected prepayment speeds and a 25% and 50% decrease in projected prepayment speeds ($ amounts in millions):
| | | | 25% | | 50% | | 25% | | 50% | | 25% | | 25% |
| Portfolio | Increase | | Increase | | Decrease | | Decrease | | Increase | | Decrease |
| MPP | $ | (2 | ) | | $ | (3 | ) | | $ | 2 | | | $ | 5 | | | $ | (2 | ) | | $ | 3 |
|
| MBS/ABS | — | | | (1 | ) | | — | | | — | | | (1 | ) | | 1 |
|
Recent Accounting and Regulatory Developments
Accounting Developments
Developments. SeeNotes to Financial Statements - Note 2 - Recently Adopted and Issued Accounting Guidance in our Notes to Financial Statements for a description of how recent accounting developments may impact our results of operations or financial condition.
Legislative and Regulatory Developments
Developments. The legislative and regulatory environment for the FHLBsFHLBanks and the Office of Finance has been one of profound change duringchanged profoundly over the period covered by this report, the most notable of which was the enactment of the Dodd-Frank Act on July 21, 2010. Further, the issuance of several proposedpast few years, with HERA in 2008 and final regulations from the Finance Agency as well as from other financial regulators, such as the FDIC, added to the climate of rapid regulatory change. The FHLBs expect 2011 to involve additional, significant legislative and regulatory changescontinuing, as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Act enacted in July 2010 and proposals forCongress considers housing finance and GSE housing reform are introduced.
Dodd-Frank Act. reform. The Dodd-Frank Act, among other things: (i) creates an interagency Oversight Council that is charged with identifying and regulating systemically important financial institutions; (ii) regulates the over-the-counter derivatives market; (iii) imposes new executive compensation proxy and disclosure requirements; (iv) establishes new requirements for MBS, including a risk-retention requirement; (v) reforms the NRSROs; (vi) makes a number of changes to the federal deposit insurance system, including making permanent the temporary increase in the standard maximum deposit insurance amount of $250,000; and (vii) creates the Consumer Financial Protection Bureau ("CFPB"). Although the FHLBs were exempted from several notable provisions of the Dodd-Frank Act, the FHLBs'FHLBanks' business operations, funding costs, rights, obligations, and/or the environment in which the FHLBsFHLBanks carry out their housing finance mission are likely to be materially affected by the Dodd-Frank Act. Certain regulatory actions resulting from the Dodd-Frank Act that may have an important effect on the FHLBs are summarized below, althoughAct; however, the full effect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized. Significant regulatory actions and developments for the period covered by this Form 10-K are summarized below.
Dodd-Frank Act.
New Requirements for the FHLBs' Derivatives Transactions.Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those used by the FHLBsthat we utilize to hedge theirour interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. These
Mandatory Clearing of Derivatives Transactions. The CFTC has issued a final rule regarding the process to determine which types of swaps will be subject to mandatory clearing, but has not yet made any such determinations. The CFTC has also issued a proposal setting forth an implementation schedule for effectiveness of its mandatory clearing determinations. Pursuant to this proposal, regardless of when the CFTC determines that a type of swap is required to be cleared, trades aresuch mandatory clearing would not take effect until certain rules being issued by the CFTC and the SEC under the Dodd-Frank Act have been finalized. In addition, the proposal provides that each time the CFTC determines that a type of swap is required to be cleared, the CFTC would have the option to implement such requirement in three phases. Under the proposal, our Bank would be a "category 2 entity" and would therefore have to comply with mandatory clearing requirements for a particular swap during phase 2 (within 180 days of the CFTC's issuance of such requirements). Based on the CFTC's proposed implementation schedule and the time periods set forth in the rule for CFTC determinations regarding mandatory clearing, it is not expected that any of our swaps will be required to be cleared until the fourth quarter of 2012, at the earliest.
Collateral Requirements for Cleared Swaps. Cleared swaps will be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared tradesswaps have the potential of making derivative transactions more costly and less attractive as risk management tools for the FHLBs.
The Dodd-Frank Actcostly. In addition, mandatory swap clearing will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements ("uncleared trades"). While the FHLBs expect to continuerequire us to enter into uncleared tradesnew relationships and accompanying documentation with clearing members (which we are currently negotiating) and additional documentation with our swap counterparties.
The CFTC has issued a final rule requiring that collateral posted by swap customers to a clearinghouse in connection with cleared swaps be legally segregated on a bilateralcustomer-by-customer basis, those trades are expectedknown as the LSOC Model. Pursuant to the LSOC Model, customer collateral must be subjectsegregated by customer on the books of a futures commission merchant and derivatives clearing organization but may be commingled with the collateral of other customers of the same futures commission merchant in one physical account. The LSOC Model affords greater protection to new regulatory requirements, including new mandatory reporting requirementscollateral posted for cleared swaps than is currently afforded to collateral posted for futures contracts. However, because of operational and new minimum margininvestment risks inherent in the LSOC Model and capital requirements imposed by bank and other federal regulators. Any of these margin and capital requirements could adversely affect the liquidity and pricingbecause of certain uncleared derivative transactions entered into byprovisions applicable to futures commission merchant insolvencies under the FHLBs, making uncleared trades more costly and less attractive asUnited States Bankruptcy Code, the LSOC Model does not afford complete protection to cleared swaps customer collateral. To the extent the CFTC's final rule places our posted collateral at greater risk management tools forof loss in the FHLBs.clearing structure than under the current over-the-counter market structure, we may be adversely impacted.
Definitions of Certain Terms under New Derivatives Requirements. The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as "swap dealers" or "major swap participants"participants," as the case may be, with the Commodity Futures Trading Commission ("CFTC") and/or the SEC. Based on the definitiondefinitions in the proposed rules jointly issued by the CFTC and SEC, it seems unlikelydoes not appear likely that the FHLBswe will be required to register as a major"major swap participant," although registration still remains a possibility. It also seems unlikelyAlso, based on the definitions in the proposed rules, it does not appear likely that the FHLBswe will be required to register as a swap dealer"swap dealer" for the derivative transactions that each of themwe enter into with dealer counterparties for the purpose of hedging and managing its interest-rate risk, which constitute the great majority of the FHLBs' derivative transactions. However,our interest rate risk; however, based on the proposed rules, it is possible that an FHLBwe could be required to register with the CFTC as a swap dealer based on theif we enter into intermediated "swaps" that it enters intoswaps with its members.our members beyond a very narrow proposed exemption.
It is also unclear how the final rule will treat the embedded derivativescall and put optionality in Advancescertain advances to FHLB members, such as capsmembers. The CFTC and floors. The scope ofSEC have issued joint proposed rules further defining the term "swap" inunder the Dodd-Frank Act hasAct. These proposed rules and accompanying interpretive guidance attempt to clarify what products will and will not yet been addressed in proposed rules. Accordingly,be regulated as "swaps." While it is not known at this time whether certainunlikely that Advance transactions between any of the FHLBsus and its membersour member customers will be treated as "swaps."swaps," the proposed rules and accompanying interpretive guidance are not entirely clear on this issue.
Depending on how the terms "swap" and "swap dealer" are finally defined in the rules, the FHLBsfinal regulations, we may be faced with the business decision of whether to continue to offer "swaps"certain types of Advance products to membersmember customers if those transactions would require that FHLBus to
register as a swap dealer. Although our policies permit us currently to enter into intermediated swaps with our members, we have no such swaps outstanding as of March 18, 2011.
Designation as a swap dealer would subject that FHLBus to significant additional regulation and cost,costs including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements, and additional swap-based capital and margin requirements. Even if an FHLB iswe are designated as a swap dealer as a result of our Advances activities, the proposed ruleregulations would permit that FHLBus to apply to the CFTC to limit such designation to those specified activities as tofor which that FHLB iswe are acting as a swap dealer. Thus, theIf such limited designation is granted, our hedging activities of an FHLB maywould not be subject to the full requirements that arewill generally be imposed on traditional swap dealers.
Uncleared Derivatives Transactions. The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While we expect to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new regulatory requirements, including mandatory reporting, documentation, and minimum margin and capital requirements. Under the CFTC's proposed margin rules, we will have to post both initial margin and variation margin to our swap dealer counterparties, but may be eligible in both instances for modest unsecured thresholds as "low-risk financial end users." Moreover, pursuant to additional Finance Agency provisions, we will be required to collect both initial margin and variation margin from our swap dealer counterparties, without any unsecured thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions that we enter into, making such trades more costly.
The FHLBsCFTC has issued a proposal setting forth an implementation schedule for the effectiveness of the new margin and documentation requirements for uncleared swaps. Pursuant to the proposal, regardless of when the final rules regarding these requirements are issued, such rules would not take effect until (1) certain other rules being issued under the Dodd-Frank Act take effect and (2) a certain additional time period has elapsed. The length of this additional time period depends on the type of entity entering into the uncleared swaps. Our Bank would be a "category 2 entity" and would therefore have to comply with the new requirements during phase 2 (within 180 days of the effectiveness of the final applicable rulemaking). Accordingly, it is not likely that we would have to comply with such requirements until the fourth quarter of 2012, at the earliest.
Temporary Exemption from Certain Provisions. While certain provisions of the Dodd-Frank Act took effect on July 16, 2011, the CFTC has issued an order (and an amendment to that order) temporarily exempting persons or entities with respect to provisions of Title VII of the Dodd-Frank Act that reference "swap dealer," "major swap participant," "eligible contract participant," and "swap." These exemptions will expire upon the earlier of: (i) the effective date of the applicable final rule further defining the relevant terms; or (ii) July 16, 2012. In addition, the provisions of the Dodd-Frank Act that will have the most effect on us did not take effect on July 16, 2011, but will take effect no sooner than 60 days after the CFTC publishes final regulations implementing such provisions. The CFTC is expected to publish such final regulations during the first half of 2012, but it is not expected that such final regulations will become effective until later in 2012, and delays beyond that time are possible. Moreover, as discussed above, mandatory clearing requirements and new margin and documentation requirements for uncleared swaps may be subject to additional implementation schedules, further delaying the effectiveness of such requirements.
Our Bank, together with the other FHLBanks, is actively participating in the development of the regulations underregulatory process regarding the Dodd-Frank Act by formally commenting to the regulators regarding a variety of the rulemakings that could affectimpact the FHLBs. It is not expected that final rules implementingFHLBanks. We are also working with the other FHLBanks to implement the processes and documentation necessary to comply with the Dodd-Frank Act will become effective until the latter half of 2011, and delays beyond that time are possible.Act's new requirements for derivatives.
Regulation of Certain Non-bankSystemically Important Nonbank Financial Companies.
Federal Reserve Board Proposed Rule on Regulatory Oversight of Non-bank Financial Companies.Definitions. On February 11, 2011, the Federal Reserve Board issued a proposed rule that would define certain key terms usedrelevant to determine which non-bank"nonbank financial companies will be subject tocompanies" under the Federal Reserve's regulatory oversight.Dodd-Frank Act, including the interagency Oversight Council's authorities described below. The proposed rule provides that a company is "predominantly engaged in financial activities"activities," and thus a nonbank financial company, if:
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• | the annual gross financial revenue of the company represents 85 percentthe annual gross consolidated financial revenue of the company represents 85% or more of the company's gross revenue in either of its two most recent completed fiscal years; or the company's consolidated total financial assets represent 85% or more of the company's gross revenue in either of its two most recent completed fiscal years; or |
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• | the company's total financial assets represent 85 percent or more of the company's total assets as of the end of either of its two most recently completed fiscal years. |
Comments on this proposed rule are due by March 30, 2011.
Our Bank would be predominantly engaged in financial activities under either prong of the proposed test. In pertinent part to the FHLBs, the proposed rule also defines "significant non-bank financial company" to mean a non-bank financial company that had $50 billion or more in total assets as of the end of either of its two most recently completed fiscal year. If an individual FHLB is determinedyears.
We would be deemed to be predominantly engaged in financial activities, and thus a non-banknonbank financial company, subject tounder the Federal Reserve's regulatory oversight, then that FHLB's operations and business may be adversely affected by such oversight.proposed rule.
Oversight Council Notice of Proposed Rulemaking on Authority to Supervise and Regulate Certain Non-bank Financial Companies. Rule. On January 26,October 18, 2011, the Oversight Council issued a second notice of proposed rulemaking to provide guidance regarding the standards and procedures it will consider in designating nonbank financial companies whose financial activities or financial condition may pose a threat to the overall financial stability of the United States, and to subject those companies to Federal Reserve Board supervision and certain prudential standards. This proposed rule supersedes a prior proposal on these designations. Under the proposed designation process, in non-emergency situations the Oversight Council will first identify those United States nonbank financial companies that have $50 billion or more of total consolidated assets and exceed any of five other quantitative threshold indicators of interconnectedness or susceptibility to material financial distress. As of December 31, 2011, we did not meet any of these quantitative thresholds. Significantly for our Bank, in addition to the asset size criterion, one of the other thresholds is whether a nonbank financial company has $20 billion or more of borrowing outstanding, including bonds (in our case, Consolidated Obligations) issued. As of December 31, 2011, we had $40.4 billion in total assets and $36.9 in total outstanding Consolidated Obligations. If a nonbank financial company meets any of these quantitative thresholds, the Oversight Council will then analyze the potential threat that the nonbank financial company may pose to the United States' financial stability, based in part on information from the company's primary financial regulator and nonpublic information collected directly from the company. Comments on this proposed rule were due by December 19, 2011.
Federal Reserve Board Proposed Prudential Standards. On January 5, 2012, the Federal Reserve Board issued a proposed rule that would implement the Oversight Council's authority to subject non-bankenhanced prudential standards and early remediation standards required by the Dodd-Frank Act for nonbank financial companies identified by the Oversight Council as posing a threat to the supervision ofUnited States' financial stability. Such proposed prudential standards include: risk-based capital and leverage requirements, liquidity standards, requirements for overall risk management, single-counterparty credit limits, stress test requirements, and a debt-to-equity limit. The capital and liquidity requirements would be implemented in phases and would be based on or exceed the Basel international capital and liquidity framework (as discussed in further detail below under Additional Developments). Comments on the proposed rule are due by March 31, 2012.
When finalized, the Federal Reserve Board and Oversight Council proposed rules may include our Bank as a nonbank financial company and may subject us to Federal Reserve Board oversight and prudential standards. If we are designated by the Oversight Council for supervision and oversight by the Federal Reserve Board, then our operations and business could be adversely impacted by additional costs and business activities' restrictions resulting from such oversight.
Significant Finance Agency Regulatory Actions.
Advance Notice of Proposed Rulemaking on Use of NRSRO Credit Ratings. On January 31, 2011, the Finance Agency issued an advance notice of proposed rulemaking that would implement a provision in the Dodd-Frank Act requiring all federal agencies to remove regulations that mandate use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific Finance Agency regulations applicable to FHLBanks, including risk-based capital requirements, prudential requirements, investments, and Consolidated Obligations. Comments on this advance notice of rulemaking were due on March 17, 2011.
Final Rule on Private Transfer Fee Covenants. On March 15, 2012, the Finance Agency announced that it had finalized a rule that will restrict the FHLBanks from purchasing, investing in, accepting as collateral or otherwise dealing in any mortgages on properties encumbered by private transfer fee covenants, securities backed by such mortgages, and securities backed by the income stream from such covenants, with certain excepted transfer fee covenants. Excepted transfer fee covenants are covenants to pay private transfer fees to covered associations (including, among others, organizations comprising owners of homes, condominiums, cooperatives, and manufactured homes, and certain other tax-exempt organizations) that use the private transfer fees exclusively for the direct benefit of the property. The foregoing restrictions will apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, to securities backed by such mortgages, and to securities issued after February 8, 2011 and backed by revenue from private transfer fees regardless of when the covenants were created. The Bank is starting to implement new policies and procedures to comply with the new rule. The Bank has not yet completed its assessment of the new rule, but, to the extent this rule limits our investments, the type of collateral we accept for advances, and the type of loans eligible for purchase under our MPP Advantage program, our business could be impacted. The rule will become effective July 16, 2012.
Final Rule on Temporary Increases in Minimum Capital Levels. On March 3, 2011, the Finance Agency issued a final rule, effective April 4, 2011, authorizing the Director of the Finance Agency to increase the minimum capital level for an FHLBank if the Director determines that the current level is insufficient to address such FHLBank's risks. The rule sets forth certain factors that the Director may consider in making this determination (including current or anticipated declines in the value of assets held by the FHLBank and current or projected declines in its capital), and gives the Director discretion to consider other conditions as appropriate. The rule provides that the Director shall consider the need to maintain, modify or rescind any such increase no less than every 12 months. If we were required to increase our minimum capital level, we may need to lower or suspend dividend payments to increase retained earnings to satisfy such increase. Alternatively, we could satisfy an increased capital requirement by disposing of assets to decrease the size of our balance sheet relative to total outstanding stock, which may adversely impact our results of operations and financial condition and ability to satisfy our mission.
Proposed Rule on Prudential Management and Operations Standards. On June 20, 2011, the Finance Agency issued a proposed rule to establish prudential standards.standards with respect to ten categories of operation and management of the FHLBanks and the other housing finance GSEs, including internal controls, interest rate risk exposure and market risk. The Finance Agency proposes to adopt the standards as guidelines set out in an appendix to the rule, which generally provide principles and leave to the regulated entities the obligation to organize and manage their operations in a way that ensures the standards are met, subject to the oversight of the Finance Agency. The proposed rule defines "non-bank financial company" broadly enoughalso provides potential consequences for failing to likely covermeet the FHLBs. Also, understandards, such as requirements regarding submission of a corrective action plan and the proposed rule, the Oversight Council will consider certain factors in determining whether to subject a non-bank financial company to supervision and prudential standards. Some factors identified include the availability of substitutes for the financial services and products the entity provides as well as the entity's size, interconnectedness with other financial firms, leverage, liquidity risk, maturity mismatch and existing regulatory scrutiny. If one or moreauthority of the FHLBs are determinedDirector to be non-bank financial companies subjectimpose other sanctions, such as limits on asset growth or increases in capital that the Director believes appropriate, until the regulated entity returns to compliance with the Oversight Council's regulatory requirements, then the FHLBs' operations and business are likely to be affected.prudential standards. Comments on this proposed rule were due by February 25,August 19, 2011.
Oversight Council Recommendations on Implementing the Volcker Rule.In January 2011, the Oversight Council issued recommendations for implementing certain prohibitions on proprietary trading, commonly referred to as the Volcker Rule. Institutions subject to the Volcker Rule may be subject to various limits with regard to their proprietary trading and various regulatory requirements to ensure compliance with the Volcker Rule. If the FHLBs are subject to the Volcker Rule, then each FHLB may be subject to additional limitations on the composition of its investment portfolio beyond Finance Agency regulations. These limitations may potentially result in less profitable investment alternatives. Further, complying with related regulatory requirements would likely increase the FHLBs' regulatory burden and incremental costs. The FHLB System's Consolidated Obligations generally are exempt from the operation of this rule, subject to certain limitations, including the absence of conflicts of interest and certain financial risks.
FDIC Regulatory Actions
FDIC Final Rule on Assessment System.Voluntary Mergers. On February 25,November 28, 2011, the FDICFinance Agency issued a final rule that establishes the conditions and procedures for the consideration and approval of voluntary mergers between FHLBanks. Under the rule, two or more FHLBanks may merge provided:
the FHLBanks have agreed upon the terms of the proposed merger and the board of directors of each such FHLBank has authorized the execution of the merger agreement;
the FHLBanks have jointly filed a merger application with the Finance Agency to obtain the approval of the Director;
the Director has granted approval of the merger, subject to any closing conditions as the Director may determine must be met before the merger is consummated;
the members of each such FHLBank ratify the merger agreement;
the Director has received evidence that the closing conditions have been met; and
the Director has accepted the organization certificate of the continuing FHLBank.
Final Rule on Conservatorship and Receivership. On June 20, 2011, the Finance Agency issued a final rule to reviseestablish a framework for conservatorship and receivership operations for the assessment system applicable to FDIC-insured financial institutions.FHLBanks. The final rule addresses the nature of a conservatorship or receivership and provides greater specificity on the FHLBanks' operations, in line with procedures set forth in similar regulatory frameworks such as the FDIC's receivership authority. The rule clarifies the relationship among various classes of creditors and equity holders under a conservatorship or receivership and the priorities for contract parties and other things, implementsclaimants in receivership. This rule became effective on July 20, 2011.
Regulatory Waiver of SMI Rating Requirement for MPP Purchases. The Finance Agency's AMA regulations require FHLBank members that sell loans to FHLBanks through an AMA program (such as our MPP) to provide credit enhancements to the pools sold. One method allowed is to be legally obligated at all times to maintain SMI with an insurer rated not lower than the second highest rating category when SMI is used as a provisionform of credit enhancement in the Dodd-Frank ActAMA program. With prolonged deteriorations in the mortgage markets, it has remained difficult for us to redefinemeet this requirement because no mortgage insurers are currently rated in the assessment base usedsecond highest rating category or better by any NRSRO. On August 6, 2009, the Director of the Finance Agency granted a temporary waiver of this NRSRO rating requirement for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic depositsSMI providers, subject to average consolidated total assets minus average tangible equity. Once this rule takes effect oncertain limitations and conditions.
On April 1, 2011, FHLB Advances will be included8, 2010, in their members' assessment base. The rule also eliminates an adjustmentaccordance with its temporary waiver, we submitted to the base assessment rate paidFinance Agency a written analysis of credit enhancement alternatives that would no longer rely on SMI for secured liabilities, including FHLB Advances, in excessour existing pools of 25% of an institution's domestic deposits because these are now partloans. On July 29, 2010, the Acting Director of the assessment base. This rule may negatively affect demandFinance Agency issued an order extending the waiver relating to our existing MPP pools that utilize SMI until such time as the Finance Agency amends the subject AMA regulation, or for FHLB Advancesan additional year, whichever comes sooner. On August 5, 2011, the Finance Agency extended this waiver until the subject regulation is amended. Under this extended waiver, we are required to continue evaluating the extent that these assessments increaseclaims-paying ability of SMI providers, whether to hold additional retained earnings, and any other steps necessary to mitigate any attendant risk associated with using an SMI provider having a rating below the cost of advances for some members.standard established by the AMA regulation.
Other Significant Regulatory Actions.
FDIC Interim Final Rule on Dodd-Frank Act Orderly Liquidation Resolution Authority.Authority. On January 25, 2011, the FDIC issued an interim final rule on how the FDIC would treat certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company, not including FDIC-insured depository institutions, in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States. The interim final rule provides, among other things:
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• | a valuation standard for collateral on secured claims; |
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• | that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral; |
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• | a clarification of the treatment for contingent claims; and |
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• | that secured obligations collateralized with U.S. government obligations will be valued at fair market value. |
a valuation standard for collateral on secured claims;
that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral;
a clarification of the treatment for contingent claims; and
that secured obligations collateralized with U.S. government obligations will be valued at fair market value.
Comments on this interim final rule arewere due by March 28, 2011. Valuing most collateral at fair value, rather than par, could adversely impact the value of our investments in the event of the issuer's insolvency.
FDIC Final Rule on Unlimited Deposit Insurance for Non-Interest-Bearing Transaction Accounts.Assessment System. On November 15, 2010,February 25, 2011, the FDIC issued a final rule providingto revise the assessment system applicable to FDIC-insured financial institutions. The rule, among other things, implements a provision in the Dodd-Frank Act to redefine the assessment base used for unlimitedcalculating deposit insurance assessments. Specifically, the rulechanges the assessment base for non-interest-bearing transaction accountsmost institutions from December 31, 2010 until Januaryadjusted domestic deposits to average consolidated total assets minus average tangible equity. This rule became effective on April 1, 2013. Deposits2011, so Advances are now included in our members' assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank Advances, in excess of 25% of an institution's domestic deposits since these are now part of the assessment base. To the extent that increased assessments increase the cost of Advances for some members, the rule may negatively impact their demand for our Advances.
Joint Proposed Rule on Credit Risk Retention for Asset-Backed Securities. On April 29, 2011, the federal banking agencies, the Finance Agency, HUD and the SEC jointly issued a sourceproposed rule, which would require sponsors of liquidityABS to retain a minimum of a five-percent economic interest in a portion of the credit risk of the assets collateralizing ABS, unless all of the securitized assets satisfy specified qualifications.
The proposed rule specifies criteria for FHLB members,qualified residential mortgage, commercial real estate, auto and a risecommercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages are described in deposits,the proposed rulemaking as those underwriting and product features which, may occurbased on historical data, are associated with low risk even in periods of decline of housing prices and high unemployment.
Key issues in the proposed rule include: (i) the appropriate terms for treatment as a resultqualified residential mortgage; (ii) the extent to which Fannie Mae- and Freddie Mac-related securitizations will be exempt from the risk retention rules; and (iii) the possibility of creating a category of high quality non-qualified residential mortgage loans that would have less than a 5% risk retention requirement.
If adopted as proposed, the FDIC's unlimited supportrule could reduce the number of non-interest-bearing transaction accounts, tends to weakenloans originated by our members, which could negatively impact member demand for FHLB Advances.our products. Comments on this proposed rule were due on June 10, 2011.
Payment of Interest on Demand Deposit Accounts. The Dodd-Frank Act repealed the statutory prohibition against the payment of interest on demand deposits, effective July 21, 2011. To conform their regulations to this provision, the FDIC and the Federal Reserve Board issued separate final rules in July 2011 to rescind their regulations that prohibit paying interest on demand deposits. FHLBank members' ability to pay interest on their customers' demand deposit accounts may increase their ability to attract or retain customer deposits, which could reduce their funding needs from the FHLBanks. Each of these final rules became effective on July 21, 2011.
National Credit Union Administration Proposal on Emergency Liquidity. On December 22, 2011, the National Credit Union Administration issued an advance notice of proposed rulemaking that would require federally-insured credit unions to have access to backup federal liquidity sources for use in times of financial emergency and distressed economic circumstances and their contingency funding plans through one of four ways:
becoming a member in good standing of the National Credit Union Association's Central Liquidity Facility directly;
becoming a member in good standing of the National Credit Union Administration's Central Liquidity Facility indirectly through a corporate credit union;
obtaining and maintaining demonstrated access to the Federal Reserve Discount Window; or
maintaining a certain percentage of assets in highly liquid Treasury securities.
The rule would apply to both federal and state-chartered credit unions. If enacted, the proposed rule may encourage credit unions to favor these federal sources of liquidity over FHLBank membership and advances, which could negatively impact our results of operations. Comments on the advance notice of proposed rulemaking were due by February 21, 2012.
Additional Developments.
Home Affordable Refinance Program and Other Foreclosure Prevention Efforts. During the third quarter of 2011, the Finance Agency along with Fannie Mae and Freddie Mac (together, the "Enterprises"), announced a series of changes to the Home Affordable Refinance Program that are intended to assist more eligible borrowers who can benefit from refinancing their home mortgage. The changes include lowering or eliminating certain risk-based fees, removing the current 125% LTV ceiling on fixed-rate mortgages that are purchased by the Enterprises, waiving certain representations and warranties, eliminating the need for a new property appraisal where there is a reliable automated valuation model estimate provided by the Enterprises, and extending the end date for the program until December 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009. Other federal agencies have implemented other programs during the past few years to reduce the frequency of foreclosure (including the Home Affordable Modification Program and the Principal Reduction Alternative). These programs focus on lowering a homeowner's monthly payments through mortgage modifications or refinancings, providing temporary reductions or suspensions of mortgage payments, and helping homeowners transition to more affordable housing. Other proposals, such as expansive principal writedowns or principal forgiveness, or converting delinquent borrowers into renters and conveying the properties to investors, have recently been made, and a settlement was recently announced among 49 states' attorneys general, the federal government and five larger servicers. It is unclear at this time whether additional foreclosure prevention efforts will be implemented during 2012. If new programs or settlementsinclude expansive mandatory principal writedowns or forgiveness with respect to securitized loans, they could have a material negative impact on our MBS and MPP portfolios.
Housing Finance and GSE Housing Reform. Reform. On February 11, 2011, the U.S DepartmentsDepartment of the Treasury and HUD issued jointly a report to Congress on entitled Reforming America's Housing Finance Market.Market. The report's primary focus is on providingreport provided options for Congressional consideration regarding the long-term structure of housing finance. In response, several bills were introduced in Congress during 2011, and Congress continues to consider various proposals to reform the United States housing finance involvingsystem, including specific reforms to Fannie Mae and Freddie Mac. In addition, the Administration noted it would work, in consultation with the Finance Agency and Congress, to restrict the areas of mortgage finance in which Fannie Mae, Freddie Mac and the FHLBs operate so that overall government support of the mortgage market will be substantially reduced over time.
Although the FHLBsFHLBanks are not the primary focus of this report,these housing finance reforms, they arehave been recognized as playing a vital role in helping smaller financial institutions access liquidity and capital to compete in an increasingly competitive marketplace. The report sets forth
Housing finance and GSE reform is not expected to progress significantly prior to the following possible limitations for2012 presidential election, but it is expected that GSE legislative activity will continue. While none of the FHLB System, which would:
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• | focus the FHLBs on small- and medium-sized financial institutions; |
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• | restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLB; |
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• | limit the level of outstanding Advances to individual members; and |
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• | reduce FHLB investment portfolios and alter their composition, to better serve the FHLBs' mission of providing liquidity and access to capital for insured depository institutions. |
If housing legislation is enacted incorporating these requirements,introduced thus far proposes specific changes to the FHLBsFHLBanks, we could be significantly limited in their ability to make Advances to their members and subject to additional limitations on their investment authority.
The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market. Covered bonds are debt instruments issued by banks and collateralized by specific pools of asset (home mortgages or, in the U.S., AAA-rated MBS). A developed covered bond market could compete with FHLB Advances.
Additionally, the report sets forth various reforms for Fannie Mae and Freddie Mac, each of which would ultimately wind
down those entities. The FHLBs have traditionally allocated a significant portion of their investment portfolio to investments in Fannie Mae and Freddie Mac debt securities. Accordingly, FHLB investment strategies would likelynonetheless be affected in numerous ways by a winding down of those entities. To the extent that Fannie Mae and Freddie Mac wind down or limit the amount of mortgages they purchase, FHLB members may determine to increase their mortgage loans held for portfolio which could potentially increase demand for FHLB Advances. Alternatively, members may determine to increase their sales of conforming mortgages using our MPP. The potential effect of GSE reform on the government agency debt market is unknown at this time. In any case, the effect of housing GSE reform on the FHLBs will depend on the content of legislation that is enacted to implement housing GSE reform.
Finance Agency Regulatory Actions
Final Rules
Office of the Ombudsman. On February 10, 2011, the Finance Agency issued a final rule concerning the establishment of the Office of the Ombudsman. This office is responsible for considering complaints and appeals from Fannie Mae, Freddie Mac, the FHLBs (collectively, the "regulated entities"), the Office of Finance, and any person that has a business relationship with a regulated entity or the Office of Finance, regarding any matter relatingchanges to the Finance Agency's regulationUnited States housing finance structure and supervision of the regulated entities or the Office of Finance. This final rule became effective on March 14, 2011.
Office of Minority and Women Inclusion.On December 28, 2010, the Finance Agency issued a final rule requiring each of the FHLBs and Office of Finance to promote diversity and the inclusion of women, minorities and individuals with disabilities in all activities. The rule requires each FHLB to either establish an Office of Minority and Women Inclusion or designate an office to be responsible for carrying out this rule's requirements at every level of the organization including management, employment and contracting. Additionally, the rule requires each of the FHLBs and Office of Finance to make certain periodic reports on its compliance to the Director of the Finance Agency. We expect that complying with the rule will increase our regulatory burden and incremental costs. This rule became effective on January 27, 2011.
Finance Agency Final Rule on FHLB Housing Goals. On December 27, 2010, the Finance Agency issued a final rule on the FHLB housing goals. The final rule establishes three single-family owner-occupied purchase money mortgage goals and one single-family refinancing mortgage goal applicable to the FHLBs' purchases of single-family owner-occupied mortgages, if any, under their Acquired Member Asset ("AMA") programs, consistent with the single-family housing goals for Fannie Mae and Freddie Mac. An FHLBThe ultimate effects of housing finance and GSE reform or any other legislation, including legislation to address the debt limit or federal deficit, on the FHLBanks are unknown at this time and will be subject todepend on the housing goalslegislation, if its AMA-approved mortgage purchases in a given year exceed a volume threshold of $2.5 billion. In 2010, our AMA-approved mortgage purchases under our MPP totaled $1.1 billion, so it is unlikely that we will be subject to these housing goals for 2011.
An FHLBany, that is subject to the housing goals will be in compliance with a housing goal if its performance under the housing goal meets or exceeds the share of the market that qualifies for the housing goal, as established annually by the Finance Agency for each FHLB district, based on certain criteria. In addition, the FHLB shall be subject to goals for low-income families, low-income areas, and very low-income families housing based on the percentage share of such Bank's total purchases of purchase money AMA-approved mortgages on owner-occupied single-family housing that consists of mortgages for such families and areas. This requirement also extends to purchases of refinancing AMA-approved mortgages for low-income families. The Finance Agency has outlined requirements for measuring and receiving credit toward achievement of these goals. Each FHLB is required to assist the Finance Agency in monitoring its housing goal activities by compiling loan-level data on each AMA-approved mortgage purchase. If the Director determines that an FHLB has failed to meet any housing goal and that achievement of the goal was feasible, the Director may require the FHLB to submit a housing plan for approval.finally enacted.
Use of Community Development Loans by CFIs to Secure Advances and Secured Lending to FHLB Members and Their Affiliates.On December 9, 2010, the Finance Agency issued a final rule that, among other things:
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• | provides the FHLBs with regulatory authority to accept community development loans as collateral for Advances from CFIs that are members, subject to other regulatory requirements; and |
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• | codifies the Finance Agency's position that secured lending to a member by an FHLB in any form is an "Advance" and is therefore subject to all requirements applicable to an Advance, including FHLB stock investment requirements. |
However, the final rule (i) clarified that it was not intended to prohibit an FHLB's derivatives activities with members or other obligations that may create a credit exposure to an FHLB but that do not arise from that FHLB's lending of cash funds, and (ii) does not include a prohibition on secured transactions with members' affiliates, as was initially proposed. This latter prohibition would have prohibited the FHLBs from entering into many of the repurchase transactions that we currently enter into for liquidity and investment purposes. This rule became effective on January 10, 2011.
Restructuring the Office of Finance. On May 3, 2010, the Finance Agency issued a final regulation restructuring the Office of Finance's board of directors. Among other things, the regulation:
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• | increased the size of the board, such that it is now comprised of the twelve FHLB presidents and five independent directors; |
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• | restructured the audit committee; |
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• | provided for the creation of other committees; |
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• | established a method for electing independent directors, along with setting qualifications for these directors; and |
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• | provided that the method of funding the Office of Finance and allocating its expenses among the FHLBs shall be as determined by policies adopted by the board of directors. |
The audit committee may only be comprised of the five independent directors and has been charged with the oversight of the preparation and distribution of the combined financial reports for the FHLBs, ensuring that the scope, form and content of the disclosures are consistent with SEC requirements. Additionally, the audit committee has responsibility to ensure that the FHLBs adopt consistent accounting policies and procedures to the extent necessary for information submitted by the FHLBs to the Office of Finance to be combined to create accurate and meaningful combined financial reports. The rule generally became effective on June 2, 2010.
FHLB Directors' Eligibility, Elections, Compensation and Expenses.On April 5, 2010, the Finance Agency issued a final rule on FHLB director elections, compensation, and expenses. Regarding elections, the final regulation changes the process by which FHLB directors are chosen after a directorship is re-designated prior to the end of the term as a result of the annual designation of FHLB directorships. Specifically, the re-designation causes the original directorship to terminate at the end of the calendar year and creates a new directorship that will be filled by an election of the members. Regarding compensation, the final rule, among other things: allows FHLBs to pay directors reasonable compensation and reimburse necessary expenses; requires each FHLB to adopt a written compensation policy relating to such compensation and reimbursement of expenses; prescribes certain related reporting requirements; and prohibits payments to FHLB directors who regularly fail to attend board or committee meetings. This rule became effective on May 5, 2010.
Reporting Fraudulent Financial Instruments and Loans.On January 27, 2010, the Finance Agency issued a final regulation, requiring each FHLB to report to the Finance Agency its purchase or sale of fraudulent financial instruments or loans, or financial instruments or loans it suspects are possibly fraudulent. The regulation imposes requirements on the timeframe, format, document retention, and nondisclosure obligations for reporting fraud or possible fraud to the Finance Agency. Each FHLB is also required to establish and maintain adequate internal controls, policies, procedures, and an operational training program to discover and report fraud or possible fraud. The adopting release provides that the regulation will apply to all of the FHLBs' programs and products. Given this scope, this regulation potentially creates significant investigatory and reporting obligations for the FHLBs if they discover or suspect fraudulent financial instruments or loans. The adopting release for the regulation provides that the Finance Agency will issue certain guidance specifying the investigatory and reporting obligations under the regulation. However, this guidance has not yet been issued. The FHLBs will be in a position to assess their obligations after the Finance Agency has issued the guidance. This rule became effective on February 26, 2010.
Finance Agency Rule on Temporary Increases in Minimum Capital Levels.On March 3, 2011, the Finance Agency issued a final rule effective April 4, 2011, authorizing the Director of the Finance Agency to increase the minimum capital level for an FHLB if the Director determines that the current level is insufficient to address such FHLB's risks. The rule provides the factors that the Director may consider in making this determination, including:
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• | current or anticipated declines in the value of the FHLB's assets; |
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• | the FHLB's ability to access liquidity and funding; |
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• | the FHLB's credit, market, operational and other risks; |
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• | current or projected declines in the FHLB's capital; |
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• | the FHLB's material non-compliance with regulations, written orders, or agreements; |
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• | housing finance market conditions; |
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• | levels of the FHLB's retained earnings; |
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• | initiatives, operations, products or practices of the FHLB that entail heightened risk; |
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• | the FHLB's ratio of market value of equity to the par value of capital stock; and/or |
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• | other conditions as notified by the Director. |
The rule provides that the Director shall consider the need to maintain, modify or rescind any such increase no less than every 12 months. Should an FHLB be required to increase its minimum capital level, such FHLB could need to require additional stock purchases from its members and/or lower or suspend dividend payments to increase retained earnings to satisfy such increase. Alternatively, the FHLB could try to satisfy the increased requirement by disposing of assets to lower the size of its balance sheet relative to its total outstanding stock; such disposal may adversely impact the FHLB's results of operations and ability to fulfill its mission.
Proposed Rules
Private Transfer Fee Covenants.On February 8, 2011, the Finance Agency issued a proposed rule that would restrict the FHLBs from acquiring, or taking security interests in, mortgages on properties encumbered by certain private transfer fee covenants and related securities. The proposed rule prohibits the FHLBs from purchasing or investing in any mortgages on properties encumbered by private transfer fee covenants, securities backed by such mortgages or securities backed by the income stream from such covenants, unless such covenants are excepted transfer fee covenants. Excepted transfer fee covenants are covenants to pay a private transfer fee to a homeowner association, condominium, cooperative or certain other tax-exempt organizations that use the private transfer fees for the direct benefit of the property. The proposed rule also prohibits the FHLBs from accepting such mortgages or securities as collateral for advances unless such covenants are excepted transfer fee covenants. Pursuant to the proposed rule, the foregoing restrictions would apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, and to securities backed by such mortgages, and to securities issued after that date and backed by revenue from private transfer fees regardless of when the covenants were created. The FHLBs would be required to comply with the regulation within 120 days of the publication of the final rule. Comments on the proposed rule are due by April 11, 2011.
Voluntary FHLB Mergers.On November 26, 2010, the Finance Agency issued a proposed rule that would establish the conditions and procedures for the consideration and approval of voluntary mergers between FHLBs. Based on the proposed rule, two or more FHLBs may merge provided:
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• | the FHLBs have agreed upon the terms of the proposed merger and the board of directors of each such FHLB has authorized the execution of the merger agreement; |
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• | the FHLBs have jointly filed a merger application with the Finance Agency to obtain the approval of the Director; |
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• | the Director has granted preliminary approval of the merger; |
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• | the members of each such FHLB ratify the merger agreement; and |
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• | the Director has granted final approval of the merger agreement. |
Comments on this proposed rule were due by January 25, 2011.
FHLB Liabilities. On November 8, 2010, the Finance Agency issued a proposed rule that would, among other things:
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• | reorganize and re-adopt Finance Board regulations dealing with Consolidated Obligations, as well as related regulations addressing other authorized FHLB liabilities and book entry procedures for Consolidated Obligations; |
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• | implement recent statutory amendments that removed authority from the Finance Agency to issue Consolidated Obligations; |
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• | specify that the FHLBs issue Consolidated Obligations that are the joint and several obligations of the FHLBs as provided for in the statute rather than as joint and several obligations of the FHLBs as provided for in the current regulation; and |
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• | provide that Consolidated Obligations are issued under Section 11(c) of the Bank Act rather than under Section 11(a) of the Bank Act. |
The adoption of the proposed rule would not have any adverse effect on the FHLBs' joint and several liability for the principal and interest payments on Consolidated Obligations. Comments on this proposed rule were due by January 7, 2011.
Rules of Practice and Procedure for Enforcement Proceedings.On August 12, 2010, the Finance Agency issued a proposed rule that would amend existing regulations implementing stronger Finance Agency enforcement powers and procedures if adopted as proposed. Comments on this proposed rule were due by October 12, 2010.
Conservatorship and Receivership. On July 9, 2010, the Finance Agency issued a proposed rule that would set forth the basic authorities of the Finance Agency when acting as conservator or receiver for any of the entities it regulates, including the FHLBs. The basic authorities set forth in the proposed rule include the authority to enforce and repudiate contracts, establish procedures for conservators and receivers and priorities of claims for contract parties and other claimants, and address whether and to what extent claims by current and former holders of equity interests in the regulated entities will be paid. Comments on this proposed rule were due by September 7, 2010.
FHLB Investments.On May 4, 2010, the Finance Agency issued a proposed regulation that, among other things, requested comment on whether additional limitations on an FHLB's MBS investments, including its private-label MBS investments, should be adopted as part of a final regulation and whether, for private-label MBS investments, such limitations should be based on an FHLB's level of Retained Earnings. Comments on this proposed rule were due by July 6, 2010.
Temporary Increases in Minimum Capital Levels.On February 8, 2010, the Finance Agency issued a proposed regulation that sets forth certain standards and procedures that the Director of the Finance Agency would employ in determining whether to require or rescind a temporary increase in the minimum capital levels for any of the FHLBs. To the extent that the final rule results in an increase in an FHLB's capital requirements, that FHLB's ability to pay dividends and repurchase or redeem capital stock may be adversely impacted. Comments on this proposed rule were due by April 9, 2010.
Advance Notices of Proposed Rulemaking
Use of NRSRO Credit Ratings. On January 31, 2011, the Finance Agency issued an advance notice of proposed rule that would implement a provision in the Dodd-Frank Act that requires all federal agencies to remove regulations that require use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific Finance Agency regulations applicable to FHLBs, including risk-based capital requirements, prudential requirements, investments and Consolidated Obligations. Comments on this advance notice of rulemaking were due on March 17, 2011.
FHLB Members.On December 27, 2010, the Finance Agency issued an advance notice of proposed rulemaking to address its regulations on FHLB membership to ensure such regulations are consistent with maintaining a nexus between FHLB membership and the housing and community development mission of the FHLBs. The notice lists certain alternative approaches relating to that nexus including, among other things:
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• | requiring compliance with membership standards on a continuous basis rather than only at the time of admission to membership; and |
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• | creating additional quantifiable standards for membership. |
The FHLBs' results of operations may be adversely affected, due to the reduced business opportunities that would result, if the Finance Agency ultimately issues a regulation that prospectively excludes institutions from becoming FHLB members or precludes existing members from continuing as FHLB members. A number of insurance companies in our district are members of our Bank, and several others are prospective members; thus, we are concerned about any possible adverse effects that any future membership rules may have on our current or prospective insurance company members. Comments on this advance notice of proposed rulemaking are due on March 28, 2011.
Additional Developments
Finance Agency Approval of New Credit Enhancement Structure for MPP - MPP Advantage.The Finance Agency's AMA regulation generally requires us to (i) obtain NRSRO confirmation that we determine for each loan pool the required credit enhancement using a methodology comparable to one used by an NRSRO in similar circumstances, and (ii) establish a level of credit enhancement sufficient to enhance the asset or pool of assets to a credit quality equivalent to that of an instrument having at least the fourth highest credit rating from an NRSRO (collectively, “NRSRO confirmations”). While we continue to determine required credit enhancements in accordance with the AMA regulation, given housing and financial market conditions over the past several quarters and their impact on credit ratings and the mortgage insurance market, we are currently unable to obtain the NRSRO confirmations.
On April 6, 2010, we filed a notice of new business activity ("NBA") with the Finance Agency relating to new MPP business. This NBA plan utilizes a supplemental fixed LRA account for additional credit enhancement for new MPP business consistent with Finance Agency regulations, in lieu of utilizing coverage from an SMI provider. On June 4, 2010, the Finance Agency granted initial approval of our NBA filing, subject to certain conditions that require us to:
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• | monitor and report to the Finance Agency losses offset by the LRA on pools acquired through the NBA and remaining LRA balances for such pools; |
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• | obtain a third-party vendor's comprehensive validation of our use of an NRSRO Model (a credit risk model we use to estimate the level of credit enhancement necessary for an implied credit rating), under the standards set forth in Finance Agency Advisory Bulletin 2009-AB-03, the scope and results of such validation to be to the satisfaction of the Finance Agency; |
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• | obtain a letter from our independent accountants on the appropriate application of generally accepted accounting principles to the elements of the NBA; and |
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• | after one year, assess the relative credit risk of the loans structured under the NBA approach (compared to the prior approach), and assess the opportunity to restore an overall pool rating of AA using either approach. |
The Finance Agency has waived the NRSRO confirmations requirements of the AMA regulation with respect to our new MPP business, subject to our use of a third-party vendor's validation model in the manner described above. On September 14, 2010, we submitted to the Finance Agency the third-party vendor's comprehensive validation of our use of the NRSRO Model. On November 18, 2010, the Finance Agency concluded that our third-party model validation satisfied the model-validation condition. In addition, the Finance Agency granted final approval of our NBA, subject to certain additional conditions:
• prior to commencing the new activity, submit written confirmation to the Finance Agency that we have fully addressed the model validation report's recommendations for improving our documentation with respect to our use of the third-party vendor's model; and
• confirm with the Finance Agency that we have obtained a signed letter from our independent accountants on the appropriate application of GAAP to the elements of the NBA.
We have met these additional conditions, and we continue to fulfill the remaining Finance Agency conditions, described above, for implementing our NBA. Our new MPP program, named "MPP Advantage," became effective on November 30, 2010.
Government Claims Against Mortgage Servicers.On March 3, 2011, a group of federal regulators (including the U.S. Department of Justice, the CFPB, the Federal Trade Commission and the HUD) and the states' attorneys general presented a settlement offer term sheet to some of the nation's largest mortgage servicers concerning foreclosure proceedings, home valuations and loan modifications. Although we cannot predict the outcome of these proceedings, legal or regulatory actions that effectively force mortgage servicers to reduce the outstanding principal balance of, or otherwise restructure, mortgages we have acquired through MPP could reduce the value of those assets. Similarly, such actions could reduce the value of, or increase our losses in, our private label MBS portfolio.
Expiration of Authority to Issue Tax-Exempt Letters of Credit.The FHLBs' authority to issue letters of credit to support non-housing-related tax-exempt state and local bond issuances on behalf of members generally expired on December 31, 2010 in accordance with HERA, although an FHLB may renew a letter of credit issued between the date of enactment of HERA and December 31, 2010.
Basel Committee on Banking Supervision Capital Framework. Framework. In September 2010, the Basel Committee on Banking Supervision (the "Basel Committee")(Basel Committee) approved a new capital framework for internationally active banks. Banks subject to the new regimeframework will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses. The Basel Committee also proposed a liquidity coverage ratio for short-term liquidity needs that would be phased in by 2015, as well as a net stable funding ratio for longer-term liquidity needs that would be phased in by 2018.
On January 5, 2012, the Federal Reserve Board announced its proposed rule on enhanced prudential standards and early remediation requirements, as required by the Dodd-Frank Act, for nonbank financial companies designated as systemically important by the Oversight Council. The proposed rule declines to finalize certain standards such as liquidity requirements until the Basel Committee framework gains greater international consensus, but the Federal Reserve Board proposes a liquidity buffer requirement that would be in addition to the final Basel Committee framework requirements. The size of the buffer would be determined through liquidity stress tests, taking into account a financial institution's structure and risk factors.
While it is still uncertain how the new capital regime or otherand liquidity standards being developed by the Basel Committee such as liquidity standards,ultimately will be implemented by the U.S.United States regulatory authorities, the new regimeframework and the Federal Reserve Board's proposed plan could require some of our members to divest assets in order to comply with the more stringent capital and liquidity requirements, thereby tending to decrease their need for Advances. Likewise, anyAdvances; on the other hand, the new liquidityframework may incent our members to take our term Advances to create balance sheet liquidity. The requirements may also adversely affect member demand for Advances and/or investor demand for Consolidated Obligations to the extent that impacted institutions divest or limit their investment in Consolidated Obligations.
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SEC Final Rule on Money Market Reform. On March 4, 2010, the SEC issued a final rule, amending the rules governing money market funds under the Investment Company Act. These amendments have resulted in tightening certain liquidity requirements on such funds, including: maintaining certain financial instruments for short-term liquidity; reducing the maximum weighted-average maturity of portfolio holdings; and improving the quality of portfolio holdings. The final rule includes overnight FHLB Discount Notes in the definition of "daily liquid assets" and "weekly liquid assets" and will encompass FHLB Discount Notes with remaining maturities of up to 60 days in the definition of "weekly liquid assets." The final rule's requirements became effective on May 5, 2010 unless another compliance date is specified (e.g., daily and weekly liquidity requirements became effective on May 28, 2010).
Risk Management
We have exposure to a number of risks in pursuing our business objectives. These risks may be broadly classified as market, credit, liquidity, operations, and business risks.business. Market risk is not discussed in this section because it is discussed in detail in "ItemItem 7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk."Risk.
Active risk management is an integral part of our operations. Our goal is not to eliminate risk, which isoperations because these risks are an inherent part of our business activities, but toactivities. We manage riskthese risks by, among other actions, setting and enforcing appropriate limits and developing and maintaining internal policies and processes to ensure an appropriate risk profile. In the fourth quarter of 2009, we realignedorder to enhance our ability to manage Bank-wide risk, our risk management function has been aligned to further segregate risk measurement, monitoring, and evaluation from our business units where risk-taking occurs through financial transactions. We believe this structure enhances our ability to manage Bank-wide risk.
The Finance Agency establishes certain risk-related compliance requirements. In addition, our board of directors establishes compliancerisk-related requirements that are documented in our RMP, which serves as the key policy to address our exposures to credit, market, liquidity, operations, and business risks.
Effective risk management programs not only include conformance to specific risk management practices through RMP requirements but also the active involvement of our board of directors. Our board of directors has established a Finance Committee that provides focus and direction for our risk management process. Further, pursuant to the RMP, we have established the following internal management committees to focus on risk management, among other duties:
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• | Financial Policy Committee |
Financial Policy Committee
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• | consists of senior managers; |
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• | monitors financial activities and risks; |
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• | guides strategic direction and tactical initiatives with focus on risk/return tradeoff; |
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• | reviews proposed financial policy amendments prior to submission to our board of directors; and |
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• | monitors the activities of the Market Risk Committee and Credit Committee. |
consists of senior managers;
monitors financial activities and risks;
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• | monitors market risk exposure and compliance with policy guidelines; |
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• | evaluates strategies to manage market risk; and |
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• | recommends policy enhancements to the Financial Policy Committee. |
guides strategic direction and tactical initiatives with focus on risk/return tradeoff;
reviews proposed financial policy amendments prior to submission to our board of directors; and
monitors the activities of the Market Risk Committee and Credit Committee.
Market Risk Committee
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monitors market risk exposure and compliance with policy guidelines;
evaluates strategies to manage market risk; and
recommends policy enhancements to the Financial Policy Committee.
Credit Committee
monitors credit exposure from member products, investments, and derivatives;
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• | monitors credit exposure from member products, investments, and derivatives; |
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• | reviews compliance with all credit policies; |
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• | through member and non-member subcommittees, focuses on applicable risks; and |
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• | recommends policy enhancements to the Financial Policy Committee. |
reviews compliance with all credit policies;
focuses on applicable risks through member and non-member subcommittees; and
recommends policy enhancements to the Financial Policy Committee.
We have a formal process for the assessment of Bank-wide risk and risk-related issues. Our risk assessment process is designed to identify and evaluate all material risks, including both quantitative and qualitative aspects, which could adversely affect our achievement of our financial performance objectives and compliance with applicable requirements. Business unit managers play a significant role in this process, as they are best positioned to understand and identify the risks inherent in their respective operations. Assessments evaluate the inherent risks within each of the key processes and the controls and strategies in place to manage those risks, identify theany primary weaknesses, and recommend actions that should be undertaken to address the identified weaknesses. The results of these assessments are summarized in an annual risk assessment report, which is reviewed by senior management and our board of directors.
Credit Risk Management
Management. Credit risk is the risk that our members or other counterparties may be unable to meet their contractual obligations to us, or that the values of those obligations will decline as a result of deterioration in ourthe members' or other counterparties' creditworthiness. Credit risk arises when our funds are extended, committed, invested or otherwise exposed through actual or implied contractual agreements. We face credit risk on Advances and other credit products, investments, mortgage loans, derivative financial instruments, and AHP grants.
The most important step in the management of credit risk is the initial decision to extend credit. We also manage credit risk by following established policies, evaluating the creditworthiness of our members and counterparties, and utilizing collateral agreements and settlement netting. Periodic monitoring of members and other counterparties is performed for all areas wherewhenever we are exposed to credit risk.
Advances.We manage our exposure to credit risk on Advances through a combination of our security interest in assets pledged by the borrowing member and ongoing reviews of our borrowers' financial condition. Section 10(a) of the Bank Act prohibits us from making Advances without sufficient collateral to secure the Advance. Although we have never experienced a credit loss on an Advance to a member in over 75 years of existence, unfavorable economic conditions have increased our credit risk and led us to enhance our collateral review and monitoring.
ProtectionSecurity is provided via thorough underwriting and establishing a perfected position in eligible assets pledged by the borrower as collateral before Advances are issued. Although we have never experienced a credit loss on an Advance to a member in nearly 80 years of existence, unfavorable economic conditions have increased our credit risk and led us to enhance our collateral review and monitoring.
Each member's collateral reporting and control status reflects its financial condition, type of institution, and our review of conflicting liens, with our level of control increasing when a borrower's financial performance deteriorates. We continue to evaluate the quality and value of collateral pledged to support Advances and have been workingwork with members to obtain additional loan level detail to achieve betterimprove the accuracy of valuations. Credit analyses are performed on existing borrowers, with the frequency and scope determined by the financial condition of the borrower and/or the amount of our credit products outstanding.
We maintain a credit products borrowing limit of 50% of a member's adjusted assets, defined as total assets less borrowings from all sources. This limit may be waived by the approval of two appropriate officers. Credit underwriting will make a recommendation based upon such factors as the member's credit rating, collateral quality, and earnings stability. Members whose total credit products exceed 50% of adjusted assets are monitored closely and are reported to senior management on a regular basis. This limit may be waived by our Bank as provided for in our credit policy. Credit underwriting will make a recommendation based upon such factors as the member's credit rating, collateral quality, and earnings stability. As of December 31, 2010, none2011, we had Advances outstanding, at par, of $0.6 billion from two of our members whose total credit products had Advances outstanding that exceeded 50% of their adjusted assets.
Concentration.Concentration. Our credit risk is magnified due to the concentration of Advances in a few borrowers. As of December 31, 20102011, our top threetwo borrowers,Flagstar Bank, FSB and Jackson National Life Insurance Company, held 36%$4.0 billion and $1.9 billion, respectively, or a total of 33%, of total Advances outstanding, at par. Because of this concentration in Advances, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we analyze the implications to our financial management and profitability if we were to lose the business of one or more of these borrowers.
Overview of Collateral Requirements.Requirements. We generally require all borrowers to execute a security agreement that grants us a blanket lien on substantially all assets of the member. Our agreements with our borrowers require each borrowing entity to pledge sufficient eligible collateral to us to fully secure all outstanding extensions of credit at all times, including Advances,
accrued interest receivable, standby letters of credit, correspondent services, AHP transactions, and all indebtedness, liabilities or obligations arising or incurred as a result of a member transacting business with our Bank. We may also require a member to pledge additional collateral to cover exposure resulting from any applicable prepayment fees on Advances, AHP, the Bank. MPP, and other products or services we provide.
The assets that constitute eligible collateral to secure extensions of credit are set forth in Section 10(a) of the Bank Act. In accordance with the Bank Act, we accept the following assets as collateral:
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• | fully disbursed, whole first mortgages on improved residential property (not more than 60 days delinquent), or securities representing a whole interest in such mortgages; |
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• | securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including, without limitation, MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae); |
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• | cash or deposits in an FHLB; and |
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• | ORERC acceptable to us if such collateral has a readily ascertainable value and we can perfect our interest in the collateral. |
fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages;
securities issued, insured, or guaranteed by the United States government or any agency thereof (including, without limitation, MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae);
cash or deposits in an FHLBank; and
ORERC acceptable to us if such collateral has a readily ascertainable value and we can perfect our interest in the collateral.
Additionally, for any CFI, as defined in accordance with the Bank Act and HERA, we may also accept secured loans for small business and agricultural real estate.
We protect our security interest in these assets by filing UCC financing statements in the appropriate jurisdictions. Our agreements with borrowers allow us, in our sole discretion, to refuse to make extensions of credit against any collateral, require substitution of collateral, or adjust the discounts applied to collateral at any time. We also may require members to pledge additional collateral regardless of whether the collateral would be eligible to originate a new extension of credit. Our agreements with our borrowers also afford us the right, in our sole discretion, to declare any borrower to be in default if we deem our Bank to be inadequately secured.
In addition to our internal credit risk management policies and procedures, Section 10(e) of the Bank Act affords any security interest granted to us, by a member or such member's affiliate, priority over the claims or rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, except for claims held by bona fide purchasers for value or by parties that are secured by prior perfected security interests, provided that such claims would otherwise be entitled to priority under applicable law. Moreover, with respect to federally insured depository institution members, our claims are given certain preferences pursuant to the receivership provisions of the Federal Deposit Insurance Act. With respect to insurance company members, however, Congress provided in the McCarran-Ferguson Act of 1945 that state law generally governs the regulation of insurance and shall not be invalidated by federal law unless the federal law expressly regulates the business of insurance. Thus, if a court were to determine that the priority provision of Section 10(e) of the Bank Act conflicts with state insurance law applicable to our insurance company members, the court might then determine that the priority of our security interest would be governed by state law, not Section 10(e). Under these circumstances the "super lien" priority protection afforded to our security interest under Section 10(e) may not fully apply when we lend to such insurance company members.
Collateral Status.Status. We assign members to a collateral status upon joining our Bank after the initial underwriting review. The assignment of a member to a collateral status category reflects, in part, our philosophy of increasing our level of control over the collateral pledged by the member based on our underwriting conclusions and review of conflicting liens. Some members pledge and report collateral under a blanket lien established through the security agreement, while others are placed on specific listings or physical possession status or a combination of the three via a hybrid status. Members may elect a more restrictive collateral status to receive a higher lendable value for their collateral. In addition, we take possession of collateral posted by insurance companies to further ensure our position as a first-priority secured creditor.
The primary features of these three collateral status categories are:
Blanket:
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• | only certain financially sound depository institutions are eligible; |
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• | institutions that have granted a blanket lien to another creditor are ineligible; |
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• | review and approval by credit services management is required; |
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• | member retains possession of eligible whole loan collateral pledged to us; |
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• | member executes a written security agreement and agrees to hold such collateral for our benefit; and |
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• | member provides quarterly reports of all eligible collateral. |
only certain financially sound depository institutions are eligible;
institutions that have granted a blanket lien to another creditor are ineligible;
review and approval by credit services management is required;
member retains possession of eligible whole loan collateral pledged to us;
member executes a written security agreement and agrees to hold such collateral for our benefit; and
member provides periodic reports of all eligible collateral.
Specific Listings:
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• | applicable to depository institutions that demonstrate potential weakness in their financial condition or wish to have lower over-collateralization requirements; |
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• | may be available to institutions that have granted a blanket lien to another creditor if an inter-creditor or subordination agreement is executed; |
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• | member retains possession of eligible whole loan collateral pledged to us; |
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• | member executes a written security agreement and agrees to hold such collateral for our benefit; and |
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• | member provides loan level detail on the pledged collateral on at least a monthly basis. |
Physical applicable to depository institutions that demonstrate potential weakness in their financial condition or wish to have lower over-collateralization requirements;
may be available to institutions that have granted a blanket lien to another creditor if an inter-creditor or subordination agreement is executed;
member retains possession of eligible whole loan collateral pledged to us;
member executes a written security agreement and agrees to hold such collateral for our benefit; and
member provides loan level detail on the pledged collateral on at least a monthly basis.
Possession:
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• | applicable to depository institutions demonstrating less financial strength than those approved for specific listings; |
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• | required for all de novo institutions, insurance companies, and institutions that have granted a blanket lien to another creditor but have not executed an inter-creditor or subordination agreement; |
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• | safekeeping for securities pledged as collateral can be with us or a third-party custodian that we have pre-approved; and |
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• | member provides loan level detail on the pledged collateral on at least a monthly basis. |
applicable to all insurance companies and those depository institutions demonstrating less financial strength than those approved for specific listings;
required for all de novo institutions and institutions that have granted a blanket lien to another creditor but have not executed an inter-creditor or subordination agreement;
safekeeping for securities pledged as collateral can be with us or a third-party custodian that we have pre-approved; and
member provides loan level detail on the pledged collateral on at least a monthly basis.
Credit Services management continually monitors members' collateral reporting status and may require a member to change collateral status based upon deteriorating financial performance, results of on-site collateral reviews, or a high level of borrowings as a percentage of their assets. The blanket lien created by the security agreement remains in place regardless of a member's collateral status.
Collateral Requirements.Requirements. In order to mitigate the credit risk, market risk, liquidity risk, operational risk and business risk associated with collateral, we apply a discountour over-collateralization requirement to the book value or market value of pledged collateral to establish theits lending value of the collateral.value. Collateral that we have determined to contain a low level of risk, such as U.S.United States government obligations, is discountedover-collateralized at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. The discountover-collateralization requirement applied to asset classes may vary depending on collateral status, assince lower discountsrequirements are applied as our levels of information and control over the assets increase. The following table shows our collateral requirements for members on Blanket, Specific Listings and Physical Possession.
| | | | | December 31, 2010 | | December 31, 2011 |
| | | Lendable Values | | Average | | Lendable Values | | Average |
| | | Applied to | | Effective | | Applied to | | Effective |
| Type of Collateral | | Collateral (1) | | Lendable Value (1) | | Collateral (1) | | Lendable Value (1) |
| Blanket: | | | | |
| Single-family mortgage loans | | 57%-80% | | 69 | % | | 52% - 81% | | 67 | % |
| Multi-family mortgage loans | | 33%-57% | | 53 | % | | 33% - 57% | | 54 | % |
| ORERC - Home equity loans/lines of credit | | 15%-47% | | 37 | % | |
| ORERC - home equity loans/lines of credit | | | 16% - 43% | | 38 | % |
| CFI collateral | | 30%-50% | | 40 | % | | 22% - 50% | | 45 | % |
| ORERC - Commercial real estate | | 15%-50% | | 42 | % | |
| ORERC - commercial real estate | | | 16% - 50% | | 44 | % |
| | | | | |
| Specific Listings: | | | | |
| Single-family mortgage loans | | 49%-79% | | 71 | % | | 48% - 80% | | 71 | % |
| FHA/VA loans | | 74%-80% | | 75 | % | | 74% - 79% | | 76 | % |
| Multi-family mortgage loans | | 43%-64% | | 57 | % | | 49% - 62% | | 58 | % |
| ORERC - Home equity loans/lines of credit | | 32%-43% | | 39 | % | |
| ORERC - home equity loans/lines of credit | | | 13% - 52% | | 29 | % |
| CFI collateral | | 29%-47% | | 39 | % | | 31% - 44% | | 40 | % |
| ORERC - Commercial real estate | | 35%-56% | | 52 | % | |
| ORERC - commercial real estate | | | 26% - 56% | | 42 | % |
| | | | | |
| Physical Possession (Delivered Collateral): | | | |
| Cash, U.S. Government/U.S. Treasury securities | | 91%-100% | | 96 | % | |
| Possession (Delivered Collateral): | | | |
| Cash, United States Government/United States Treasury securities | | | 91% - 100% | | 95 | % |
| U.S. agency securities | | 85%-95% | | 94 | % | | 85% - 95% | | 94 | % |
| U.S. agency MBS/CMOs | | 89%-95% | | 94 | % | | 87% - 95% | | 95 | % |
| Private-label MBS and CMOs | | 74%-91% | | 87 | % | | 55% - 91% | | 79 | % |
| ORERC - CMBS | | 74%-87% | | 81 | % | | 53% - 87% | | 80 | % |
| Single-family mortgage loans | | 34%-79% | | 67 | % | | 46% - 79% | | 64 | % |
| FHA/VA loans | | 73%-79% | | 77 | % | | 74% - 79% | | 79 | % |
| Multi-family mortgage loans | | 32%-64% | | 60 | % | | 20% - 62% | | 54 | % |
| Other government-guaranteed mortgage loans | | 74% | | 74 | % | | 76% | | 76 | % |
| ORERC - Home equity loans/lines of credit | | 28%-40% | | 36 | % | |
| ORERC - home equity loans/lines of credit | | | 8% - 47% | | 23 | % |
| CFI collateral | | 0.01%-50% | | 25 | % | | 24% - 46% | | 25 | % |
| ORERC - Commercial real estate | | 37%-56% | | 52 | % | |
| ORERC - Other | | 74%-77% | | 76 | % | |
| ORERC - commercial real estate | | | 2% - 56% | | 28 | % |
| ORERC - other | | | 74% | | 74 | % |
| | |
| (1) | Represents the total lendable value divided by eligible collateral defined as unpaid principal balanceUPB of loan collateral and market value of securities collateral. |
Based on overall declines in the valuation of mortgage collateral, we have increased our collateral ratio requirements for certain types of collateral. We have made changes to, and continue to update, our internal valuation model to gain greater consistency between model-generated valuations and observed market prices. These changes have loweredadjusted the lendable values on certain types of whole loan collateral. We routinely engage outside pricing vendors to benchmark our modeled pricing on residential and commercial real estate collateral, and we modify valuations where appropriate.
The following table provides information regarding credit products outstanding with members and non-member borrowers based on reporting status at December 31, 2010,2011, along with their corresponding collateral balances. The table only lists collateral that was identified and pledged by members and non-members with outstanding credit products at December 31, 2010,2011, and does not include all assets thatagainst which we have liens against via our security agreementagreements and UCC filings ($ amounts in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | # of Borrowers | | Lendable Value (1) | | Credit Outstanding (2) | | 1st lien Residential | | ORERC/CFI | | Securities/Delivery | | Total Collateral | | Average Collateral Ratios (3) |
| Blanket | | 77 | | | $ | 4,706 | | | $ | 2,076 | | | $ | 6,207 | | | $ | 1,071 | | | $ | 2 | | | $ | 7,280 | | | 350.7 | % |
| Hybrid | | 46 | | | 4,550 | | | 1,911 | | | 4,070 | | | 2,285 | | | 893 | | | 7,248 | | | 379.4 | % |
| Listings | | 88 | | | 5,970 | | | 3,170 | | | 6,641 | | | 963 | | | 865 | | | 8,469 | | | 267.1 | % |
| Physical/Delivery | | 51 | | | 15,212 | | | 11,006 | | | 8,875 | | | 4,750 | | | 7,380 | | | 21,005 | | | 190.8 | % |
| Total | | 262 | | | $ | 30,438 | | | $ | 18,163 | | | $ | 25,793 | | | $ | 9,069 | | | $ | 9,140 | | | $ | 44,002 | | | 242.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | # of Borrowers | | Lendable Value (1) | | Credit Outstanding (2) | | 1st lien Residential | | ORERC/CFI | | Securities/Delivery | | Total Collateral | | Average Collateral Ratios (3) |
| Blanket | | 73 |
| | $ | 3,761 |
| | $ | 1,282 |
| | $ | 5,030 |
| | $ | 976 |
| | $ | 2 |
| | $ | 6,008 |
| | 468.5 | % |
| Hybrid | | 46 |
| | 4,682 |
| | 1,792 |
| | 4,491 |
| | 2,293 |
| | 779 |
| | 7,563 |
| | 422.1 | % |
| Listings | | 79 |
| | 5,353 |
| | 2,241 |
| | 4,825 |
| | 1,007 |
| | 1,588 |
| | 7,420 |
| | 331.2 | % |
| Delivery | | 53 |
| | 15,802 |
| | 12,966 |
| | 8,356 |
| | 7,251 |
| | 8,732 |
| | 24,339 |
| | 187.7 | % |
| Total | | 251 |
| | $ | 29,598 |
| | $ | 18,281 |
| | $ | 22,702 |
| | $ | 11,527 |
| | $ | 11,101 |
| | $ | 45,330 |
| | 248.0 | % |
| | |
| (1) | Lendable Value is the member's borrowing capacity, based upon collateral pledged after a market value has been estimated (excluding blanket-pledged collateral), and a collateral ratio adjustmentan over-collateralization requirement has been applied. |
| |
(2) | Credit outstanding includes Advances (at par value), outstanding lines of credit, and outstanding letters of credit. |
| |
(3) | Ratios are averages of total collateral to credit outstanding for all of our members and non-members; individual members may have collateral ratios that are higher or lower than these percentages. |
Credit Review and Monitoring. We closely monitor the financial condition of all member and non-member borrowers by reviewing certain available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, SEC filings, and rating agency reports to ensure that potentially troubled institutions are identified as soon as possible. In addition, we have access to most members' regulatory examination reports and, when appropriate, contact members' management teams to discuss performance and business strategies. We analyze this information on a regular basis. This analysis is utilized by Credit Services management to determine the appropriate collateral status for a member or non-member borrower.
We use a credit scoring model to assign a quarterly financial performance measure for all member and non-member depository institutions. In general, the frequency and depth of underwriting analysis for these institutions are driven by their quarterly scores.
Collateral Review and Monitoring.Monitoring. Our employees conduct regular on-site reviews of collateral pledged by members to confirm the existence of the pledged collateral, to confirm that the collateral conforms to our eligibility requirements, and to score the collateral for concentration and credit risk. Based on the results of such on-site reviews, a member may have its over-collateralization requirements adjusted, limitations may be placed on the amount of certain asset types accepted as collateral, or, in some cases, the member may be changed to a more stringent collateral reporting status. We may conduct a review of any borrower's collateral at any time.
Credit Review and Monitoring. We closely monitor the financial condition of all member and non-member borrowers by reviewing certain available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, SEC filings, and rating agency reports to ensure that potentially troubled institutions are identified as soon as possible. In addition, we have access to most members' regulatory examination reports and, when appropriate, may contact members' management teams to discuss performance and business strategies. We analyze this information on a regular basis and use it to determine the appropriate collateral status for a member or non-member borrower.
We use a credit scoring model to assign a quarterly financial performance measure for all member and non-member depository institutions and our life and property and casualty insurance members. In general, the frequency and depth of underwriting analysis for these institutions are driven by their individual quarterly scores.
Investments.We are also exposed to credit risk through our investment portfolios. The RMP approved by our board of directors restricts the acquisition of investments to high-quality, short-term money market instruments and highly-rated long-term securities. We are prohibited by Finance Agency regulation from investing in financial instruments of non-United States entities other than those issued by United States branches of foreign commercial banks. Therefore, we do not own any sovereign European financial instruments.
Short-Term Investments. We place funds with large, high-quality financial institutions with investment-grade long-term credit ratings on an unsecured basis for terms of up to 275 days; most such placements typically mature within 90 days. At December 31, 20102011, our unsecured credit exposure, including accrued interest related to short-term investment securities and money-market instruments, was $7.33.4 billion to 179 counterparties and issuers, of which $4.33.2 billion was for Federal Funds Sold that mature overnight.
We actively monitor counterparty creditworthiness, ratings, performance, and capital adequacy in an effort to mitigate unsecured credit risk on theour short-term investments, with an emphasis on the potential impacts from global economic conditions. Unsecured transactions can only be conducted with counterparties that are domiciled in countries that maintain a long-term sovereign rating from S&P of AA or higher. As of December 31, 2011, our total unsecured credit was concentrated in counterparties domiciled in the following countries: United States (36%, none of which was to United States GSEs/Agencies), Canada (26%), Sweden (19%), and Finland (19%). We do not believe that any of these countries are experiencing significant economic, fiscal and/or political strains such that the likelihood of default would be higher than would be anticipated when such factors do not exist.
Long-Term Investments. Our long-term investments include RMBS guaranteed by the housing GSEs (Fannie Mae and Freddie Mac), other U.S. obligations - guaranteed RMBS (Ginnie Mae), corporate debentures guaranteed by the FDIC and backed by the full faith and credit of the U.S.United States government under the TLGP, and corporate debentures issued by the GSEs, RMBS guaranteed by the housing GSEs (Fannie Mae and Freddie Mac), and other U.S. obligations - guaranteed RMBS (Ginnie Mae).GSEs.
The GSEs guarantee that the holders of their MBS will receive all payments of interest and principal. Securities guaranteed by either of these two GSEs, although not formally rated, are regarded as having a credit rating equivalent to AAA. In September 2008, the Finance Agency placed both Fannie Mae and Freddie Mac into conservatorship. See Item 1A. Risk Factors - Changes in the Legal and Regulatory Environment May Adversely Affect Our Business, Demand for Advances, the Cost of Debt Issuance and the Value of FHLB Membership for more information on the status of Fannie Mae and Freddie Mac.
Delegated underwriting and servicing (DUS) bonds issued by Fannie Mae and multi-family securities issued by Freddie Mac represented approximately 20% of the unpaid principal balance of our total MBS portfolio as of December 31, 2010. These bonds provide lockouts with prepayment or defeasance provisions that reduce the inherent convexity of traditional mortgage securities. These securities carry the same guarantees as traditional GSE RMBS.
Ginnie Mae guarantees the timely payment of principal and interest on all of its MBS, and its guarantee is backed by the full faith and credit of the U.S. government. Included are bonds with underlying pools of traditional 1 - 4 family and multi-family mortgages and reverse mortgages on single family units, i.e., Home Equity Conversion Mortgages (HECM). The underlying mortgages for these bonds are FHA-insured reverse mortgages. These mortgages allow persons over 62 years of age to utilize the equity in their homes to supplement retirement income without having to make monthly cash payments or sell their homes. These loans are originated with both fixed- and floating-rate options. The structure of these loans limits the motivation to refinance as market interest rates move and therefore these securities exhibit much less convexity than traditional MBS. As of December 31, 2010, approximately 29% of the unpaid principal balance of our total MBS portfolio was comprised of these securities.
Our long-term investments also include Private-labelprivate-label MBS and ABS.
We are subject to secured credit risk related to Private-labelon private-label MBS and ABS, thatwhich are directly or indirectly supportedsecured by underlying mortgage loans. Investments in private-label MBS and ABS may be purchased as long as the investments are rated AAA atAAA. Each of the timePrivate-label MBS and ABS securities contains one or more of purchase.the following forms of credit protection:
Subordination - Represents the structure of classes of the security, where subordinated classes absorb any credit losses before senior classes.
Excess spread - The average coupon rate of the underlying mortgage loans in the pool is higher than the coupon rate on the MBS note. The spread differential may be used to offset any losses that may be realized.
Over-collateralization - The total outstanding balance of the underlying mortgage loans in the pool is greater than the outstanding MBS note balance. The excess collateral is available to offset any losses that may be realized.
Insurance wrap - A third-party bond insurance company guarantees timely payment of principal and interest to certain classes of the security.
A Finance Agency policyregulation provides that the total book value of our investments in MBS and ABS, calculated using amortized historical cost, must not exceed 300% of our total regulatory capital, consisting of Retained Earnings, Class B Capital Stock, and MRCS, as of the previous month end on the day we purchase the securities.securities, based on the capital amount most recently reported to the Finance Agency. These investments, as a percentage of total regulatory capital, were 263%294% at December 31, 2010, and 195% at December 31, 20092011. Generally, our goal is to maintain these investments near the 300% limit. The percentage of investments to total regulatory capital increased at December 31, 2010, compared to December 31, 2009, as there were more favorable opportunities to purchase MBS and ABS during 2010.
Each of the Private-label MBS and ABS securities contains one or more of the following forms of credit protection:
| |
• | Subordination - Represents the structure of classes of the security, where subordinated classes absorb any credit losses before senior classes. |
| |
• | Excess spread - The average coupon rate of the underlying mortgage loans in the pool is higher than the coupon rate on the MBS note. The spread differential may be used to offset any losses that may be realized. |
| |
• | Over collateralization - The total outstanding balance of the underlying mortgage loans in the pool is greater than the outstanding MBS note balance. The excess collateral is available to offset any losses that may be realized. |
| |
• | Insurance wrap - A third-party bond insurance company guarantees timely payment of principal and interest to certain classes of the security. |
Our Private-label MBS and ABS are backed by collateral primarily in the state of California (51%). The next four largest states include New York (7%), Florida (5%), Virginia (3%), and New Jersey (3%).
Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's and Fitch. Rating modifiers and watch status are ignored when determining the applicable rating level for a given counterparty.counterparty or investment.
The following tables present the carrying value by credit ratings of our investments, grouped by category ($ amounts in millions):
| | | | | | | | | | | | Below | | | | | | | | | | | | | | | |
| | | | | | | | | | | Investment | | | | | | | | | | | | Below | | |
| December 31, 2010 | | AAA | | AA | | A | | BBB | | Grade | | Total | |
| | | | | | | | | | | | Investment | | |
| December 31, 2011 | | | AAA | | AA | | A | | BBB | | Grade | | Total |
| Short-term investments: | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Interest-Bearing Deposits | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Securities Purchased Under Agreements to Resell | | 750 | | | — | | | — | | | — | | | — | | | 750 | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Federal Funds Sold | | — | | | 5,343 | | | 1,982 | | | — | | | — | | | 7,325 | | | — |
| | 2,095 |
| | 1,327 |
| | — |
| | — |
| | 3,422 |
|
| Total Short-term investments | | 750 | | | 5,343 | | | 1,982 | | | — | | | — | | | 8,075 | | |
| AFS securities: | | | | | | | | | | | | | |
| GSE debentures | | 1,930 | | | — | | | — | | | — | | | — | | | 1,930 | | |
| TLGP debentures | | 325 | | | — | | | — | | | — | | | — | | | 325 | | |
Private-label MBS (1) | | — | | | — | | | — | | | — | | | 983 | | | 983 | | |
| Total AFS securities | | 2,255 | | | — | | | — | | | — | | | 983 | | | 3,238 | | |
| HTM securities: | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | 269 | | | 25 | | | — | | | — | | | — | | | 294 | | |
| State or local housing finance agency obligations | | — | | | — | | | — | | | — | | | — | | | — | | |
| TLGP debentures | | 2,066 | | | — | | | — | | | — | | | — | | | 2,066 | | |
| Other U.S. Obligations - guaranteed RMBS | | 2,327 | | | — | | | — | | | — | | | — | | | 2,327 | | |
| GSE RMBS | | 3,044 | | | — | | | — | | | — | | | — | | | 3,044 | | |
| Private-label MBS | | 479 | | | 82 | | | 35 | | | 16 | | | 107 | | | 719 | | |
| Private-label ABS | | — | | | 19 | | | — | | | — | | | 3 | | | 22 | | |
| Total HTM securities | | 8,185 | | | 126 | | | 35 | | | 16 | | | 110 | | | 8,472 | | |
| Total investments, carrying value | | $ | 11,190 | | | $ | 5,469 | | | $ | 2,017 | | | $ | 16 | | | $ | 1,093 | | | $ | 19,785 | | |
| Percentage of total | | 57 | % | | 28 | % | | 10 | % | | 0 | % | | 5 | % | | 100 | % | |
| | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | | | |
| Interest-Bearing Deposits | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
| Securities Purchased Under Agreements to Resell | | — | | | — | | | — | | | — | | | — | | | — | | |
| Federal Funds Sold | | — | | | 4,226 | | | 1,306 | | | — | | | �� | | | 5,532 | | |
| Total Short-term investments | | — | | | 4,226 | | | 1,306 | | | — | | | — | | | 5,532 | | |
| Total short-term investments | | | — |
| | 2,095 |
| | 1,327 |
| | — |
| | — |
| | 3,422 |
|
| AFS securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | 1,761 | | | — | | | — | | | — | | | — | | | 1,761 | | | — |
| | 2,026 |
| | — |
| | — |
| | — |
| | 2,026 |
|
| TLGP debentures | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | 322 |
| | — |
| | — |
| | — |
| | 322 |
|
| Private-label MBS | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | 601 |
| | 601 |
|
| Total AFS securities | | 1,761 | | | — | | | — | | | — | | | — | | | 1,761 | | | — |
| | 2,348 |
| | — |
| | — |
| | 601 |
| | 2,949 |
|
| HTM securities: | | | | | | | | | | | | | | | | | | | | | | | | |
|
| GSE debentures | | 100 | | | 26 | | | — | | | — | | | — | | | 126 | | | — |
| | 269 |
| | — |
| | — |
| | — |
| | 269 |
|
| State or local housing finance agency obligations | | — | | | — | | | — | | | — | | | — | | | — | | |
| TLGP debentures | | 2,067 | | | — | | | — | | | — | | | — | | | 2,067 | | | — |
| | 1,883 |
| | — |
| | — |
| | — |
| | 1,883 |
|
| Other U.S. Obligations - guaranteed RMBS | | 865 | | | — | | | — | | | — | | | — | | | 865 | | |
| Other U.S. obligations - guaranteed RMBS | | | — |
| | 2,747 |
| | — |
| | — |
| | — |
| | 2,747 |
|
| GSE RMBS | | 2,137 | | | — | | | — | | | — | | | — | | | 2,137 | | | — |
| | 3,512 |
| | — |
| | — |
| | — |
| | 3,512 |
|
| Private-label MBS | | 841 | | | 153 | | | 107 | | | 274 | | | 1,106 | | | 2,481 | | | 187 |
| | 13 |
| | 9 |
| | 76 |
| | 117 |
| | 402 |
|
| Private-label ABS | | — | | | 21 | | | — | | | — | | | 4 | | | 25 | | | — |
| | 17 |
| | — |
| | — |
| | 2 |
| | 19 |
|
| Total HTM securities | | 6,010 | | | 200 | | | 107 | | | 274 | | | 1,110 | | | 7,701 | | | 187 |
| | 8,441 |
| | 9 |
| | 76 |
| | 119 |
| | 8,832 |
|
| Total investments, carrying value | | $ | 7,771 | | | $ | 4,426 | | | $ | 1,413 | | | $ | 274 | | | $ | 1,110 | | | $ | 14,994 | | | $ | 187 |
| | $ | 12,884 |
| | $ | 1,336 |
| | $ | 76 |
| | $ | 720 |
| | $ | 15,203 |
|
| | | | | | | | | | | | | | |
| Percentage of total | | 52 | % | | 30 | % | | 9 | % | | 2 | % | | 7 | % | | 100 | % | | 1 | % | | 85 | % | | 9 | % | | — | % | | 5 | % | | 100 | % |
| | | | | | | | | | | | | | |
| December 31, 2010 | | | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | | | |
| Interest-Bearing Deposits | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Securities Purchased Under Agreements to Resell | | | 750 |
| | — |
| | — |
| | — |
| | — |
| | 750 |
|
| Federal Funds Sold | | | — |
| | 5,343 |
| | 1,982 |
| | — |
| | — |
| | 7,325 |
|
| Total short-term investments | | | 750 |
| | 5,343 |
| | 1,982 |
| | — |
| | — |
| | 8,075 |
|
| AFS securities: | | | | | | | | | | | | | |
| GSE debentures | | | 1,930 |
| | — |
| | — |
| | — |
| | — |
| | 1,930 |
|
| TLGP debentures | | | 325 |
| | — |
| | — |
| | — |
| | — |
| | 325 |
|
| Private-label MBS | | | — |
| | — |
| | — |
| | — |
| | 983 |
| | 983 |
|
| Total AFS securities | | | 2,255 |
| | — |
| | — |
| | — |
| | 983 |
| | 3,238 |
|
| HTM securities: | | | | | | | | | | | | | |
|
| GSE debentures | | | 269 |
| | 25 |
| | — |
| | — |
| | — |
| | 294 |
|
| TLGP debentures | | | 2,066 |
| | — |
| | — |
| | — |
| | — |
| | 2,066 |
|
| Other U.S. obligations - guaranteed RMBS | | | 2,327 |
| | — |
| | — |
| | — |
| | — |
| | 2,327 |
|
| GSE RMBS | | | 3,044 |
| | — |
| | — |
| | — |
| | — |
| | 3,044 |
|
| Private-label MBS | | | 479 |
| | 82 |
| | 35 |
| | 16 |
| | 107 |
| | 719 |
|
| Private-label ABS | | | — |
| | 19 |
| | — |
| | — |
| | 3 |
| | 22 |
|
| Total HTM securities | | | 8,185 |
| | 126 |
| | 35 |
| | 16 |
| | 110 |
| | 8,472 |
|
| Total investments, carrying value | | | $ | 11,190 |
| | $ | 5,469 |
| | $ | 2,017 |
| | $ | 16 |
| | $ | 1,093 |
| | $ | 19,785 |
|
| | | | | | | | | | | | | | |
| Percentage of total | | | 57 | % | | 28 | % | | 10 | % | | — | % | | 5 | % | | 100 | % |
| | |
| (1)
| Represents the outstanding carrying value related to the OTTI securities that were transferred from HTM to AFS. |
On August 5, 2011, S&P lowered its long-term United States sovereign credit rating from AAA to AA+ with a negative outlook. On August 8, 2011, S&P lowered the long-term credit ratings and related issue ratings of the GSEs from AAA to AA+ with a negative outlook. In S&P's application of its government-related entities criteria, the ratings of the GSEs, including Fannie Mae, Freddie Mac, and Federal Farm Credit, are constrained by the long-term sovereign credit rating of the United States. The TLGP debentures are guaranteed by the FDIC and backed by the full faith and credit of the United States government. Ginnie Mae guarantees the timely payment of principal and interest on all of its RMBS, which are included in the above table in other U.S. obligations - guaranteed RMBS, and its guarantee is backed by the full faith and credit of the United States government. Our Securities Purchased Under Agreements to Resell are collateralized by AA-rated United States Treasuries. Although none of these individual securities are rated, we consider these investments to have been downgraded based on S&P's action. We currently expect to recover all contractual cash flows on these securities because we determined that the strength of the issuers' guarantees and the direct or indirect support from the United States government are sufficient to protect us from losses.
In addition, following the downgrades of the GSEs, we reevaluated our internal credit limits on our holdings of the GSEs' senior unsecured debt based on the nature of the downgrades, our assessment of the GSEs' creditworthiness, and regulatory interpretive guidance received from the Finance Agency. Following the completion of our assessment, we determined that we do not need to liquidate any existing holdings of GSE senior unsecured debt, or to impose lower credit limits for GSE senior unsecured debt. We will continue to monitor the GSEs' credit ratings, creditworthiness, and regulatory guidance and may revise credit limits for GSE senior unsecured debt in the future.
From January 1, 20112012 to March 11, 2011, there15, 2012 two private-label RMBS were no downgrades of unsecured counterparties. However, two Federal Funds Sold counterparties rated AA were placed on negative watch.downgraded from AAA to AA. At December 31, 2010,2011 the carrying value of these Federal Funds Soldtwo securities was $967.0 million.
From January 1, 2011 to March 11, 2011, one private-label MBS security$36.1 million and the estimated fair value was downgraded from AAA to BB. At December 31, 2010, the carrying value of this security was $0.2$35.1 million. There were no changes in watch status on ourother downgrades of MBS and ABS or unsecured counterparties during this period.
Two private-label MBS sinceor ABS securities were on negative watch as of March 15, 2012. At December 31, 2010.2011, the carrying value and estimated fair value of these securities were both $3.8 million.
Private-labelPrivate-Label MBS and ABS. ABSWhile there is no universally accepted definition of prime, Alt-A or subprime underwriting standards,. MBS and ABS are classified as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance. Because there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, such classifications are subjective. We do not hold any collateralized debt obligations. All MBS and ABS were rated AAA at the date of purchase.
Our private-label MBS and ABS are backed by collateral located in the United States. The top five states, by percentage of collateral located in those states as of December 31, 2011, were California (56%), New York (6%), Florida (6%), Virginia (3%), and New Jersey (3%).
Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes that we hold are affected (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities that we hold would be affected, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes that we hold could have losses in scenarios in which the cumulative loan losses do not exceed the current credit enhancement percentage.
The tables below present for our prime, Alt-A and subprime securities the unpaid principal balance, amortized cost, fair value, and other collateral informationUPB by credit ratings, as of December 31, 2010, based on the lowest of Moody's, S&P, or comparable Fitch ratings, as well as amortized cost, estimated fair value, year-to-date OTTI, and other collateral information by year of securitization as of December 31, 2011($ amounts in millions):.
| | | | 2004 | | | | | | | | | | | | | | | | | | | |
| | | and | | | | | | | | | | 2004 | | | | | | | | |
| By Year of Securitization - Prime | | prior | | 2005 | | 2006 | | 2007 | | Total | |
| | | | and | | | | | | | | |
| Prime | | | prior | | 2005 | | 2006 | | 2007 | | Total |
| Private-label RMBS: | | | | | | | | | | | | | | | | | | | | |
| Unpaid Principal Balance by credit rating: | | | | | | | | | | | |
| AAA-rated | | $ | 418 | | | $ | 30 | | | $ | — | | | $ | — | | | $ | 448 | | | $ | 177 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 177 |
|
| AA-rated | | 5 | | | 66 | | | — | | | — | | | 71 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| A-rated | | 27 | | | — | | | — | | | — | | | 27 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| BBB-rated | | — | | | 16 | | | — | | | — | | | 16 | | | 53 |
| | 23 |
| | — |
| | — |
| | 76 |
|
| Below investment grade: | | | | | | | | | | | | | | | | | | | | | |
|
| BB-rated | | — | | | 14 | | | — | | | — | | | 14 | | | 39 |
| | 26 |
| | — |
| | — |
| | 65 |
|
| B-rated | | — | | | 243 | | | 118 | | | — | | | 361 | | | — |
| | 47 |
| | 3 |
| | — |
| | 50 |
|
| CCC-rated | | — | | | 200 | | | 65 | | | 116 | | | 381 | | | — |
| | 198 |
| | — |
| | — |
| | 198 |
|
| CC-rated | | — | | | 42 | | | 44 | | | 130 | | | 216 | | | — |
| | 200 |
| | — |
| | 51 |
| | 251 |
|
| C-rated | | — | | | — | | | — | | | 251 | | | 251 | | | — |
| | 39 |
| | 129 |
| | 177 |
| | 345 |
|
| Total Unpaid Principal Balance | | $ | 450 | | | $ | 611 | | | $ | 227 | | | $ | 497 | | | $ | 1,785 | | |
| Total below investment grade | | | 39 |
| | 510 |
| | 132 |
| | 228 |
| | 909 |
|
| Total UPB | | | $ | 269 |
| | $ | 533 |
| | $ | 132 |
| | $ | 228 |
| | $ | 1,162 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 449 | | | $ | 582 | | | $ | 219 | | | $ | 416 | | | $ | 1,666 | | | $ | 269 |
| | $ | 489 |
| | $ | 125 |
| | $ | 171 |
| | $ | 1,054 |
|
Gross unrealized losses (1) | | $ | (12 | ) | | $ | (52 | ) | | $ | (12 | ) | | $ | (11 | ) | | $ | (87 | ) | |
| Fair Value | | $ | 438 | | | $ | 530 | | | $ | 207 | | | $ | 412 | | | $ | 1,587 | | |
Unrealized losses (1) | | | (9 | ) | | (77 | ) | | (13 | ) | | (22 | ) | | (121 | ) |
| Estimated fair value | | | 260 |
| | 412 |
| | 112 |
| | 149 |
| | 933 |
|
| | | | | | | | | | | | | | | | | | | | | |
| OTTI: | | | | | | | | | | | | |
| Credit-related OTTI charge recorded | | $ | — | | | $ | 19 | | | $ | 4 | | | $ | 45 | | | $ | 68 | | |
| Non-credit-related OTTI charge recorded | | — | | | (8 | ) | | 4 | | | (42 | ) | | (46 | ) | |
| Total OTTI charge recorded | | $ | — | | | $ | 11 | | | $ | 8 | | | $ | 3 | | | $ | 22 | | |
OTTI (year-to-date) (2): | | | | | | | | | | | |
|
| Total OTTI losses | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Portion reclassified to (from) OCI | | | — |
| | (15 | ) | | (1 | ) | | (5 | ) | | (21 | ) |
| OTTI credit losses | | | $ | — |
| | $ | (15 | ) | | $ | (1 | ) | | $ | (5 | ) | | $ | (21 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average percentage of Fair Value to Unpaid Principal Balance | | 97.4 | % | | 86.8 | % | | 91.1 | % | | 82.8 | % | | 88.9 | % | |
| Weighted average percentage of estimated fair value to UPB | | | 97 | % | | 77 | % | | 85 | % | | 65 | % | | 80 | % |
| Original weighted average credit support | | 2.7 | % | | 6.8 | % | | 4.9 | % | | 7.1 | % | | 5.6 | % | | 3 | % | | 7 | % | | 6 | % | | 10 | % | | 7 | % |
| Weighted average credit support | | 9.0 | % | | 8.4 | % | | 4.8 | % | | 5.6 | % | | 7.3 | % | |
Weighted average collateral delinquency (2) | | 4.5 | % | | 14.8 | % | | 14.7 | % | | 19.3 | % | | 13.4 | % | |
| Current weighted average credit support | | | 11 | % | | 7 | % | | 3 | % | | 4 | % | | 7 | % |
Weighted average collateral delinquency (3) | | | 7 | % | | 14 | % | | 17 | % | | 24 | % | | 14 | % |
| | |
| (1) | Gross unrealizedUnrealized losses represent the difference between estimated fair value and amortized cost where estimated fair value is less than amortized cost. These amounts exclude gross unrealized gains. |
| |
(2) | Amounts only include OTTI losses for securities held at December 31, 2011 and, therefore, will not agree to OTTI losses reported on the Statement of Income due to sales of OTTI securities during 2010 and 2011. |
| |
(3) | Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balancethe UPB of the individual securities in the category based on loan groups for certain bonds.their respective collateral delinquency. |
| | | | 2004 | | | | | | | | | | | | | | | | | | | |
| | | and | | | | | | | | | | 2004 | | | | | | | | |
| By Year of Securitization - Alt-A | | prior | | 2005 | | 2006 | | 2007 | | Total | |
| | | | and | | | | | | | | |
| Alt-A | | | prior | | 2005 | | 2006 | | 2007 | | Total |
| Private-label RMBS: | | | | | | | | | | | | | | | | | | | | |
| Unpaid Principal Balance by credit rating: | | | | | | | | | | | |
| AAA-rated | | $ | 32 | | | $ | — | | | $ | — | | | $ | — | | | $ | 32 | | | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10 |
|
| AA-rated | | 11 | | | — | | | — | | | — | | | 11 | | | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| A-rated | | 8 | | | — | | | — | | | — | | | 8 | | | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
| BBB-rated | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Below investment grade: | | | | | | | | | | | | | | | | | | | | | |
|
| BB-rated | | — | | | 14 | | | — | | | — | | | 14 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| B-rated | | — | | | — | | | — | | | — | | | — | | | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| CCC-rated | | — | | | 53 | | | — | | | — | | | 53 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| CC-rated | | — | | | — | | | — | | | — | | | — | | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| C-rated | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Unpaid Principal Balance | | $ | 51 | | | $ | 67 | | | $ | — | | | $ | — | | | $ | 118 | | |
| D-rated | | | — |
| | 36 |
| | — |
| | — |
| | 36 |
|
| Total below investment grade: | | | 4 |
| | 42 |
| | — |
| | — |
| | 46 |
|
| Total UPB | | | $ | 36 |
| | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | 78 |
|
| | | | | | | | | | | | |
|
| |
|
| |
|
| |
|
| | |
| Amortized cost | | $ | 51 | | | $ | 61 | | | $ | — | | | $ | — | | | $ | 112 | | | $ | 35 |
| | $ | 34 |
| | $ | — |
| | $ | — |
| | $ | 69 |
|
Gross unrealized losses (1) | | $ | (2 | ) | | $ | (8 | ) | | $ | — | | | $ | — | | | $ | (10 | ) | |
| Fair Value | | $ | 49 | | | $ | 53 | | | $ | — | | | $ | — | | | $ | 102 | | |
Unrealized losses (1) | | | (1 | ) | | (10 | ) | | — |
| | — |
| | (11 | ) |
| Estimated fair value | | | 34 |
| | 24 |
| | — |
| | — |
| | 58 |
|
| | | | | | | | | | | | | | | | | | | | | |
| OTTI: | | | | | | | | | | | | | |
| Credit-related OTTI charge recorded | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | |
| Non-credit-related OTTI charge recorded | | — | | | — | | | — | | | — | | | — | | |
| Total OTTI charge recorded | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | |
OTTI (year-to-date) (2): | | | | | | | | | | | |
| Total OTTI losses | | | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | (5 | ) |
| Portion reclassified to (from) OCI | | | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| OTTI credit losses | | | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average percentage of Fair Value to Unpaid Principal Balance | | 94.9 | % | | 79.4 | % | | — | % | | — | % | | 86.2 | % | |
| Weighted average percentage of estimated fair value to UPB | | | 95 | % | | 58 | % | | — | % | | — | % | | 75 | % |
| Original weighted average credit support | | 3.2 | % | | 5.8 | % | | — | % | | — | % | | 4.6 | % | | 3 | % | | 7 | % | | — | % | | — | % | | 5 | % |
| Weighted average credit support | | 9.3 | % | | 4.4 | % | | — | % | | — | % | | 6.5 | % | |
Weighted average collateral delinquency (2) | | 6.2 | % | | 16.3 | % | | — | % | | — | % | | 11.9 | % | |
| Current weighted average credit support | | | 11 | % | | — | % | | — | % | | — | % | | 5 | % |
Weighted average collateral delinquency (3) | | | 7 | % | | 19 | % | | — | % | | — | % | | 13 | % |
| | |
| (1) | Gross unrealizedUnrealized losses represent the difference between estimated fair value and amortized cost where estimated fair value is less than amortized cost. These amounts exclude gross unrealized gains. |
| |
(2) | Amounts only include OTTI losses for securities held at December 31, 2011 and, therefore, will not agree to OTTI losses reported on the Statement of Income due to sales of OTTI securities during 2010 and 2011. |
| |
(3) | Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balancethe UPB of the individual securities in the category based on loan groups for certain bonds.their respective collateral delinquency. |
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | | | | | | |
| | | and | | | | | | | | |
| By Year of Securitization - Subprime | | prior | | 2005 | | 2006 | | 2007 | | Total |
| Home equity loan investments: | | | | | | | | | | |
| Unpaid Principal Balance by credit rating: | | | | | | | | | | |
| Below investment grade: | | | | | | | | | | |
| B-rated | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | |
| Total Unpaid Principal Balance | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | |
| | | | | | | | | | | |
| Amortized cost | | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | |
Gross unrealized losses (1) | | $ | (1 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (1 | ) |
| Fair Value | | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | | | | | |
| OTTI: | | | | | | | | | | |
| Credit-related OTTI charge recorded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Non-credit-related OTTI charge recorded | | — | | | — | | | — | | | — | | | — | |
| Total OTTI charge recorded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Weighted average percentage of Fair Value to Unpaid Principal Balance | | 56.2 | % | | — | % | | — | % | | — | % | | 56.2 | % |
| Original weighted average credit support | | 100.0 | % | | — | % | | — | % | | — | % | | 100.0 | % |
| Weighted average credit support | | 100.0 | % | | — | % | | — | % | | — | % | | 100.0 | % |
Weighted average collateral delinquency (2) | | 37.8 | % | | — | % | | — | % | | — | % | | 37.8 | % |
| | | | | | | | | | | |
| Manufactured housing loan investments: | | | | | | | | | | |
| Unpaid Principal Balance by credit rating: | | | | | | | | | | |
| AA-rated | | $ | 19 | | | $ | — | | | $ | — | | | $ | — | | | $ | 19 | |
| Total Unpaid Principal Balance | | $ | 19 | | | $ | — | | | $ | — | | | $ | — | | | $ | 19 | |
| | | | | | | | | | | |
| Amortized cost | | $ | 19 | | | $ | — | | | $ | — | | | $ | — | | | $ | 19 | |
Gross unrealized losses (1) | | $ | (1 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (1 | ) |
| Fair Value | | $ | 18 | | | $ | — | | | $ | — | | | $ | — | | | $ | 18 | |
| | | | | | | | | | | |
| OTTI: | | | | | | | | | | |
| Credit-related OTTI charge recorded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Non-credit-related OTTI charge recorded | | — | | | — | | | — | | | — | | | — | |
| Total OTTI charge recorded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Weighted average percentage of Fair Value to Unpaid Principal Balance | | 94.0 | % | | — | % | | — | % | | — | % | | 94.0 | % |
| Original weighted average credit support | | 27.7 | % | | — | % | | — | % | | — | % | | 27.7 | % |
| Weighted average credit support | | 28.2 | % | | — | % | | — | % | | — | % | | 28.2 | % |
Weighted average collateral delinquency (2) | | 2.4 | % | | — | % | | — | % | | — | % | | 2.4 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | | | | | | |
| | | and | | | | | | | | |
| Subprime | | prior | | 2005 | | 2006 | | 2007 | | Total |
| Private-label ABS - home equity loans: | | | | | | | | | | |
| Below investment grade: | | | | | | | | | | |
| B-rated | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Total UPB | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| | | | | | | | | | | |
| Amortized cost | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
Unrealized losses (1) | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Estimated fair value | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| | | | | | | | | | | |
OTTI (year-to-date) (2): | | | | | | | | | | |
| Total OTTI losses | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Portion reclassified to (from) OCI | | — |
| | — |
| | — |
| | — |
| | — |
|
| OTTI credit losses | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | |
| Weighted average percentage of estimated fair value to UPB | | 67 | % | | — | % | | — | % | | — | % | | 67 | % |
Original weighted average credit support (3) | | 100 | % | | — | % | | — | % | | — | % | | 100 | % |
Current weighted average credit support (3) | | 100 | % | | — | % | | — | % | | — | % | | 100 | % |
Weighted average collateral delinquency (4) | | 27 | % | | — | % | | — | % | | — | % | | 27 | % |
| | | | | | | | | | | |
| Private-label ABS - manufactured housing loans: | | | | | | | | | | |
| AA-rated | | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17 |
|
| Total UPB | | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17 |
|
| | | | | | | | | | | |
| Amortized cost | | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17 |
|
Unrealized losses (1) | | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| Estimated fair value | | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| | | | | | | | | | | |
OTTI (year-to-date) (2): | | | | | | | | | | |
| Total OTTI losses | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Portion reclassified to (from) OCI | | — |
| | — |
| | — |
| | — |
| | — |
|
| OTTI credit losses | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | |
| Weighted average percentage of estimated fair value to UPB | | 79 | % | | — | % | | — | % | | — | % | | 79 | % |
| Original weighted average credit support | | 28 | % | | — | % | | — | % | | — | % | | 28 | % |
| Current weighted average credit support | | 29 | % | | — | % | | — | % | | — | % | | 29 | % |
Weighted average collateral delinquency (4) | | 2 | % | | — | % | | — | % | | — | % | | 2 | % |
| | |
| (1) | Gross unrealizedUnrealized losses represent the difference between estimated fair value and amortized cost where estimated fair value is less than amortized cost. These amounts exclude gross unrealized gains. |
| |
(2) | Amounts only include OTTI losses for securities held at December 31, 2011 and, therefore, will not agree to OTTI losses reported on the Statement of Income due to sales of OTTI securities during 2010 and 2011. |
| |
(3) | The credit support for the home equity loans is provided by MBIA Insurance Corporation. |
| |
(4) | Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balancethe UPB of the individual securities in the category based on loan groups for certain bonds.their respective collateral delinquency. |
The following table presents the unpaid principal balance of the underlying collateralUPB of our Private-labelprivate-label MBS and ABS by type of collateral typeand interest rate ($ amounts in millions):
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| | | Fixed | | Variable | | | | Fixed | | Variable | | | | Fixed | | Variable | | | | Fixed | | Variable | | |
| Collateral Type | | Rate | | Rate (1) (2) | | Total | | Rate | | Rate (1) (2) | | Total | | Rate | | Rate (1) (2) | | Total | | Rate | | Rate (1) (2) | | Total |
| RMBS: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prime loans | | $ | 985 | | | $ | 800 | | | $ | 1,785 | | | $ | 1,650 | | | $ | 1,060 | | | $ | 2,710 | | | $ | 405 |
| | $ | 757 |
| | $ | 1,162 |
| | $ | 985 |
| | $ | 800 |
| | $ | 1,785 |
|
| Alt-A loans | | 118 | | | — | | | 118 | | | 170 | | | — | | | 170 | | | 78 |
| | — |
| | 78 |
| | 118 |
| | — |
| | 118 |
|
| Total RMBS | | | 483 |
| | 757 |
| | 1,240 |
| | 1,103 |
| | 800 |
| | 1,903 |
|
| ABS - home equity loans: | | | |
| | |
| | |
| | |
| | |
| | |
|
| Subprime loans | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
| | 3 |
|
| Total RMBS | | 1,103 | | | 800 | | | 1,903 | | | 1,820 | | | 1,060 | | | 2,880 | | |
| Home Equity Loans ABS: | | | | | | | | | | | | | | | | | | | |
| Total ABS - home equity loans | | | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
| | 3 |
|
| ABS - manufactured housing loans: | | | |
| | |
| | |
| | |
| | |
| | |
|
| Subprime loans | | — | | | 3 | | | 3 | | | — | | | 4 | | | 4 | | | 17 |
| | — |
| | 17 |
| | 19 |
| | — |
| | 19 |
|
| Total Home Equity Loans ABS | | — | | | 3 | | | 3 | | | — | | | 4 | | | 4 | | |
| Manufactured Housing ABS: | | | | | | | | | | | | | | | | | | | |
| Subprime Loans | | 19 | | | — | | | 19 | | | 21 | | | — | | | 21 | | |
| Total Manufactured Housing ABS | | 19 | | | — | | | 19 | | | 21 | | | — | | | 21 | | |
| Total Private-label MBS and ABS, at unpaid principal balance | | $ | 1,122 | | | $ | 803 | | | $ | 1,925 | | | $ | 1,841 | | | $ | 1,064 | | | $ | 2,905 | | |
| Total ABS - manufactured housing loans | | | 17 |
| | — |
| | 17 |
| | 19 |
| | — |
| | 19 |
|
| Total private-label MBS and ABS, at UPB | | | $ | 500 |
| | $ | 760 |
| | $ | 1,260 |
| | $ | 1,122 |
| | $ | 803 |
| | $ | 1,925 |
|
| | |
| (1) | Variable-rate Private-labelprivate-label MBS and ABS include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change. |
| |
(2) | All variable-rate RMBS prime loans are Hybrid Adjustable-Rate Mortgagehybrid adjustable-rate mortgage securities. |
The table below summarizespresents, by loan type, certain characteristics of private-label RMBS, manufactured housing loansMBS and home equity loansABS in a gross unrealized loss position at December 31, 2010.2011. The lowest ratings available for each security are reported as of March 11, 201115, 2012, based on the security's unpaid principal balanceUPB at December 31, 20102011 ($ amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | March 11, 2011 Ratings Based on |
| | | | | | | | | | | | | December 31, 2010 |
| | | December 31, 2010 | | Unpaid Principal Balance (3) (4) |
| | | | | | | | | Weighted | | | | | | | | | | |
| | | | | | | | | Average | | | | | | | | Below | | |
| Private-Label MBS | | Unpaid | | | | Gross | | Collateral | | | | | | Investment | | Investment | | |
| and ABS in a Loss | | Principal | | Amortized | | Unrealized | | Delinquency | | AAA | | AAA | | Grade | | Grade | | Watchlist |
Position (1) | | Balance | | Cost | | Losses | | Rate (2) | | % | | % | | % | | % | | % |
| Private-label RMBS backed by: | | | | | | | | | | | | | | | | | | |
| Prime - 1st lien | | 1,460 | | | $ | 1,364 | | | $ | (87 | ) | | 14 | % | | 25 | % | | 25 | % | | 32 | % | | 68 | % | | 10 | % |
| Alt-A other - 1st lien | | 114 | | | 108 | | | (10 | ) | | 12 | % | | 25 | % | | 25 | % | | 41 | % | | 59 | % | | 10 | % |
| Total private-label RMBS | | 1,574 | | | 1,472 | | | (97 | ) | | 14 | % | | 25 | % | | 25 | % | | 33 | % | | 67 | % | | 10 | % |
| Subprime Manufactured housing ABS loans backed by: | | | | | | | | | | | | | | | | | | |
| 1st lien | | 19 | | | 19 | | | (1 | ) | | 2 | % | | — | % | | — | % | | 100 | % | | — | % | | — | % |
| Total Subprime Manufactured housing loans | | 19 | | | 19 | | | (1 | ) | | 2 | % | | — | % | | — | % | | 100 | % | | — | % | | — | % |
Subprime Home Equity ABS loans backed by: (5) | | | | | | | | | | | | | | | | | | | | | | | |
| 2nd lien | | 3 | | | 3 | | | (1 | ) | | 38 | % | | — | % | | — | % | | — | % | | 100 | % | | — | % |
| Total Subprime Home Equity ABS loans | | 3 | | | 3 | | | (1 | ) | | 38 | % | | — | % | | — | % | | — | % | | 100 | % | | — | % |
| Total Private-label MBS and ABS | | $ | 1,596 | | | $ | 1,494 | | | $ | (99 | ) | | 14 | % | | 24 | % | | 25 | % | | 34 | % | | 66 | % | | 10 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | March 15, 2012 Ratings Based on |
| | | December 31, 2011 | | | December 31, 2011 UPB (3) (4) |
| | | | | | | Gross | | Collateral | | | | | | | Other | | Below | | |
| | | | | Amortized | | Unrealized | | Delinquency | | | | | | | Investment | | Investment | | |
By Loan Type (1) | | UPB | | Cost | | Losses | | Rate (2) | | AAA (3) | | | AAA | | Grade | | Grade | | Watchlist |
| Private-label RMBS backed by: | | | | | | | | | | | | | | | | | | | |
| Prime - 1st lien | | $ | 1,111 |
| | $ | 1,004 |
| | $ | (121 | ) | | 15 | % | | 13 | % | | | 11 | % | | 9 | % | | 80 | % | | — | % |
| Alt-A other - 1st lien | | 75 |
| | 67 |
| | (11 | ) | | 14 | % | | 14 | % | | | — | % | | 38 | % | | 62 | % | | — | % |
| Total private-label RMBS | | 1,186 |
| | 1,071 |
| | (132 | ) | | 15 | % | | 13 | % | | | 10 | % | | 11 | % | | 79 | % | | — | % |
Subprime ABS - home equity loans backed by: (5) | | |
| | |
| | |
| | |
| | |
| | | | | | | | | |
| 2nd lien | | 3 |
| | 3 |
| | (1 | ) | | 27 | % | | — | % | | | — | % | | — | % | | 100 | % | | 37 | % |
| Total subprime ABS - home equity loans | | 3 |
| | 3 |
| | (1 | ) | | 27 | % | | — | % | | | — | % | | — | % | | 100 | % | | 37 | % |
| Subprime ABS - manufactured housing loans backed by: | | | | | | | | | | | | | | | | | | | |
| 1st lien | | 17 |
| | 17 |
| | (4 | ) | | 2 | % | | — | % | | | — | % | | 100 | % | | — | % | | — | % |
| Total subprime ABS - manufactured housing loans | | 17 |
| | 17 |
| | (4 | ) | | 2 | % | | — | % | | | — | % | | 100 | % | | — | % | | — | % |
| Total private-label MBS and ABS | | $ | 1,206 |
| | $ | 1,091 |
| | $ | (137 | ) | | 15 | % | | 13 | % | | | 10 | % | | 12 | % | | 78 | % | | — | % |
| | |
| (1) | We classify our private-label RMBS manufactured housing loans and home equity loan investmentsABS as prime, Alt-A and subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS.issuance. |
| |
| (2) | Includes delinquencies of 60 days or more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balancethe UPB of the individual securities in the category based on loan groups for certain bonds.their respective collateral delinquency. |
| |
| (3) | Excludes paydowns in full subsequent to December 31, 2010. |
| (4)
| Represents the lowest ratings available for each security based on the lowest of Moody's, S&P or comparable Fitch ratings. |
| |
(4) | Excludes paydowns in full subsequent to December 31, 2011. |
| |
(5) | The credit support for the home equity loans is provided by MBIA Insurance Corporation ("MBIA").Corporation. This insurance company had a credit rating of B as of March 11, 2011,15, 2012, based on the lower of Moody's and S&P ratings. |
OTTI Evaluation Process.Process. 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 described in Notes to Financial Statements - Note 7 - Other-Than-Temporary Impairment Analysis in our Notes to Financial Statements.
As of December 31, 2010, our investments in MBS and ABS classified as HTM had gross unrealized losses totaling $55.9 million, of which $23.2 million were related to Private-label MBS and ABS. These gross unrealized losses were primarily due to significant uncertainty about the future condition of the mortgage market and the economy, and the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their acquisition cost. As of December 31, 2010, our investments in private-label RMBS classified as AFS had gross unrealized losses recognized in AOCI of $75.8 million.
We have performed our OTTI analysis using key modeling assumptions approved by the FHLBFHLBanks' OTTI Governance Committee for 7354 of our 7758 private-label MBS and ABS. For the quarter ended December 31, 2010,2011, we contracted with the FHLBFHLBank of Chicago to perform cash-flow analysis for two of our subprime home equity loans with a total unpaid principal balanceUPB of $3.32.8 million. We also contracted with the FHLBFHLBank of San Francisco to perform cash-flow analysis for one security held in common with another FHLBFHLBank with an unpaid principal balanceUPB of $4.73.8 million.
For one manufactured housing investment for which underlying collateral data are not readily available, we used alternative procedures, as determined by our Bank,us, to evaluate for OTTI. This security, representing an unpaid principal balanceUPB of $19.016.8 million as of December 31, 2010,2011, was outside the scope of the FHLBFHLBank OTTI Governance Committee's analyses. However, we were able to perform the necessary cash-flow analysis using a different third-party model and determined that this security was not OTTI at December 31, 2010.2011.
Our investments secured by home equity loans are insured by MBIA.MBIA Insurance Corporation, a monoline bond insurer. The bond insurance on these investments guarantees timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. We performed an analysisanalyses to assess the financial strength of MBIA andthese monoline bond insurers to establish an expected case regarding the time horizon of itsthe monoline bond insurers' ability to fulfill itstheir financial obligations and provide credit support. The projected time horizon of credit protection provided by an insurer is a function of claims paying resources and anticipated claims in the future. Based on our analysis, our home equity loan securities were not consideredThis assumption is referred to as the "burn-out period" and is expressed in months. We own one security insured by MBIA Insurance Corporation (UPB of less than $1 million) that was OTTI at December 31, 2010.2011, for which we assumed a burn-out period of three months.
OTTI calculations are performed on an individual security basis where the projected losses of each security vary according to the changes in assumptions. Certain estimates were refined and certain assumptions were adjusted each quarter throughout 2010, particularly related to prime loans. These changes were based on current and forecasted economic trends affecting the underlying loans. Such trends include continued high unemployment, ongoing downward pressure on housing prices, and limited refinancing opportunities for many borrowers whose houses are now worth less than the balance of their mortgages.
The following table presentstables present the significant modeling assumptions used to determine if anwhether a security was OTTI is considered to have occurred during the fourth quarter of 2010,2011, as well as the related current credit enhancement, for all private-label RMBS (i.e., excludes ABS) outstanding as of December 31, 2010.2011. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. A zero or negative credit enhancement percentage reflects securities that have no remaining credit support from subordinated tranches and are likely to have experienced an actual principal loss. The calculated averages represent the dollar-weighted averages of all of the private-label RMBS and ABS in each category shown. The classification (primeMBS and ABS are classified as prime, Alt-A or Alt-A) issubprime based on the model used to estimate the cash flows for the security, which may not be the same as theoriginator's classification at the time of origination.origination or based on classification by an NRSRO upon issuance. Because there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, such classifications are subjective.
| | | | | Significant Modeling Assumptions for all Private-label RMBS | | Current Credit | | Significant Modeling Assumptions for all Private-label RMBS | | Current Credit |
| | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement |
| | | Weighted | | | Weighted | | | Weighted | | | Weighted | | | | Weighted | | | Weighted | | | Weighted | | | Weighted | | |
| | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range |
| Year of Securitization | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % |
| Prime: | | | | | | | | | | | | | | | | | | |
| 2007 | | 8.2 | | | 7.1 - 9.6 | | 38.8 | | | 24.7 - 53.7 | | 41.7 | | | 38.2 - 45.9 | | 5.6 | | | 1.3 - 11.6 | | 6.8 |
| | 6.5 - 7.2 | | 39.5 |
| | 30.7 - 47.9 | | 50.1 |
| | 45.8 - 53.3 | | 4.6 |
| | 2.7 - 8.6 |
| 2006 | | 8.9 | | | 7.2 - 11.5 | | 17.6 | | | 0.4 - 23.3 | | 38.5 | | | 19.4 - 48.5 | | 4.9 | | | 3.5 - 7.7 | | 7.8 |
| | 7.0 - 8.2 | | 18.7 |
| | 12.9 - 21.2 | | 46.6 |
| | 42.8 - 60.1 | | 3.4 |
| | 1.2 - 4.9 |
| 2005 | | 10.7 | | | 7.4 - 22.5 | | 24.8 | | | 0.7 - 42.4 | | 33.7 | | | 20.0 - 42.6 | | 8.4 | | | 3.9 - 10.5 | | 8.8 |
| | 7.0 - 17.0 | | 26.9 |
| | 0.5 - 33.2 | | 41.0 |
| | 21.2 - 50.7 | | 7.4 |
| | 1.8 - 11.6 |
| 2004 and prior | | 17.8 | | | 4.7 - 40.0 | | 3.8 | | | 0.0 - 17.4 | | 24.9 | | | 0.0 - 88.5 | | 9.1 | | | 2.2 - 52.1 | | 18.1 |
| | 3.0 - 42.8 | | 8.3 |
| | 0.0 - 20.3 | | 29.8 |
| | 0.0 - 86.4 | | 11.1 |
| | 3.0 - 60.8 |
| Total Prime | | 11.6 | | | 4.7 - 40.0 | | 22.5 | | | 0.0 - 53.7 | | 34.3 | | | 0.0 - 88.5 | | 7.4 | | | 1.3 - 52.1 | | 10.5 |
| | 3.0 - 42.8 | | 24.2 |
| | 0.0 - 47.9 | | 40.7 |
| | 0.0 - 86.4 | | 7.3 |
| | 1.2 - 60.8 |
| Alt-A: | | | | | | | | | | | | | | | | | | |
| 2006 | | 16.2 | | | 16.2 - 16.2 | | 24.9 | | | 24.9 - 24.9 | | 41.9 | | | 41.9 - 41.9 | | 4.4 | | | 4.4 - 4.4 | | 8.1 |
| | 8.1 - 8.1 | | 29.7 |
| | 29.7 - 29.7 | | 48.4 |
| | 48.4 - 48.4 | | 3.7 |
| | 3.7 - 3.7 |
| 2005 | | 10.8 | | | 8.9 - 16.2 | | 40.4 | | | 28.5 - 44.6 | | 40.2 | | | 35.9 - 41.8 | | 4.3 | | | 4.2 - 4.3 | | 6.9 |
| | 6.6 - 8.6 | | 34.3 |
| | 27.9 - 35.5 | | 46.4 |
| | 31.9 - 49.1 | | 0.2 |
| | (0.1) - 1.9 |
| 2004 and prior | | 17.8 | | | 13.1 - 19.4 | | 5.5 | | | 1.5 - 9.3 | | 24.0 | | | 19.3 - 38.8 | | 9.3 | | | 4.2 - 15.8 | | 13.1 |
| | 12.3 - 16.3 | | 4.7 |
| | 0.8 - 9.6 | | 26.2 |
| | 18.1 - 38.1 | | 10.6 |
| | 4.5 - 15.6 |
| Total Alt-A | | 14.7 | | | 8.9 - 19.4 | | 23.6 | | | 1.5 - 44.6 | | 34.4 | | | 19.3 - 41.9 | | 6.2 | | | 4.2 - 15.8 | | 9.5 |
| | 6.6 - 16.3 | | 22.4 |
| | 0.8 - 35.5 | | 39.3 |
| | 18.1 - 49.1 | | 4.8 |
| | (0.1) - 15.6 |
| Total private-label RMBS | | 11.8 | | | 4.7 - 40.0 | | 22.6 | | | 0.0 - 53.7 | | 34.3 | | | 0.0 - 88.5 | | 7.3 | | | 1.3 - 52.1 | | 10.4 |
| | 3.0 - 42.8 | | 24.0 |
| | 0.0 - 47.9 | | 40.6 |
| | 0.0 - 86.4 | | 7.1 |
| | (0.1) - 60.8 |
The following table presents the significant modeling assumptions used for all non-agency home equity loans as of December 31, 2010. Disclosures on current credit enhancements are not considered meaningful for home equity loans as these investments are third-party insured. The calculated averages represent the dollar-weighted averages in each category shown. The classification (prime or Alt-A) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.
| | | | | Significant Modeling Assumptions for all Home Equity Loans | | Significant Modeling Assumptions for all ABS - Home Equity Loans | | Current Credit |
| | | Prepayment Rates | | Default Rates | | Loss Severities | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement |
| | | Weighted | | | Weighted | | | Weighted | | | | Weighted | | | Weighted | | | Weighted | | | Weighted | | |
| | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range |
| Year of Securitization | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % | | % |
| Subprime 2004 and prior | | 16.8 | | 15.8 - 17.3 | | 15.3 | | 11.8 - 17.1 | | 59.5 | | 45.8 - 66.6 | | 11.5 | | 11.1 - 11.7 | | 20.9 | | 20.8 - 21.0 | | 51.1 | | 31.2 - 62.8 | | 100.0 | | 100.0 - 100.0 |
| Total home equity loans | | 16.8 | | 15.8 - 17.3 | | 15.3 | | 11.8 - 17.1 | | 59.5 | | 45.8 - 66.6 | |
| Total ABS - home equity loans | | | 11.5 | | 11.1 - 11.7 | | 20.9 | | 20.8 - 21.0 | | 51.1 | | 31.2 - 62.8 | | 100.0 | | 100.0 - 100.0 |
We continue to actively monitor the credit quality of our Private-labelprivate-label MBS and ABS, which depends on the actual performance of the underlying loan collateral as well as our future modeling assumptions. Many factors could influence our future modeling assumptions including economic, financial market and housing market conditions.collateral. If performance of the underlying loan collateral deteriorates and/or our modeling assumptions become more pessimistic as a result of deterioration in economic, financial market or housing conditions, we could record additional losses on our portfolio.
For our Private-label MBS and ABS that were not OTTI as of December 31, 2010, we do not intend to sell these securities; it is not more likely than not (i.e., not likely) that we will be required to sell these securities before our anticipated recovery of the remaining amortized cost basis; and we expect to recover the remaining amortized cost basis of these securities. As a result, we have determined that, as of December 31, 2010, the unrealized losses on the remaining Private-label MBS and ABS are temporary.
For other U.S. obligations, non-MBS and MBS GSEs, and TLGP securities, we determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect us from losses based on current expectations. As a result, we have determined that, as of December 31, 2010, any gross unrealized losses on these securities were temporary.
MPP.We are exposed to credit risk on loans purchased from members through the MPP. Each loan we purchase must meet guidelines for our MPP guidelines or be specifically approved as an exception based on compensating factors. For example, the maximum LTVloan-to-value for any conventional mortgage loan purchased is 95%, and the borrowers must meet certain minimum credit scores depending upon the type of underlying loanproperty or property.loan.
MPP Advantage.On November 29, 2010, we began offering MPP Advantage. The only substantive difference between MPP Advantage and our original MPP is the credit enhancement structure. MPP Advantage utilizes an enhanced fixed LRA account for additional credit enhancement for new MPP business instead of utilizing coverage from an SMI provider. Thus, MPP Advantage presents no risk from the financial condition of the SMI providers. For both the original MPP and MPP Advantage, the funds in the LRA are used to pay losses for a particular pool of loans. Under MPP Advantage, the LRA is funded up front instead of over time. Our original MPP relied on credit enhancement from LRA and SMI to achieve an implied credit rating, based on an NRSRO model, of at least AA, in compliance with Finance Agency regulations. MPP Advantage relies on credit enhancement from LRA only, resulting in an implied credit rating of at least BBB, which is also in compliance with Finance Agency regulations. Although the implied credit rating on MPP Advantage is lower than the implied credit rating for our original MPP, we believe that the changes in the credit enhancement structure result in substantially the same level of risk for our Bank.
Credit Enhancements. FHA loans comprise 15%17% of our outstanding MPP loans.loans, at par. These loans are backed by insurance provided by the FHA; therefore, we do not require either LRA or SMI coverage for these loans.
Credit enhancements for conventional loans include (in order of priority):
| |
• | PMI (when applicable for the purchase of mortgages with an initial LTV ratio of over 80% at the time of purchase); |
| |
• | SMI (if applicable) purchased by the seller from a third-party provider naming us as the beneficiary. |
Any losses that exceedPMI (when applicable for the funds availablepurchase of mortgages with an initial loan-to-value ratio of over 80% at the time of purchase);
LRA; and
SMI (as applicable) purchased by the seller from a third-party provider naming us as the above sources would be absorbed by us.beneficiary.
Primary Mortgage Insurance. As of December 31, 2011, we were the beneficiary of PMI coverage on $626.8 million or 13% of our conventional mortgage loans. For a conventional loan, PMI, if applicable, covers losses or exposure down to approximately an LTVa loan-to-value ratio of between 65% and 80% based upon the original appraisal, original LTV ratio, term, and amount of PMI coverage, and characteristics of the loan.coverage. We are exposed to credit risk ifin that a PMI provider failsmay fail to fulfill its claims payment obligations to us. As of December 31, 2010, we were the beneficiary of PMI coverage on $0.7 billion or 12.1% of conventional mortgage loans. We have analyzed our potential loss exposure to all of our mortgage insurancethe PMI providers and, despite the low credit ratings and negative outlooks, do not expect any incremental losses due to their lower credit ratings.material losses. This expectation is based on the credit-enhancement features of our master commitments (exclusive of primary mortgage insurance)PMI), the underwriting characteristics of the loans that back our master commitments, the seasoning of the loans, that back these master commitments, and the performance of the loans to date. We closely monitor the financial conditions of each of our mortgage insurancePMI providers.
The following table showspresents the mortgage insurance companiesPMI providers and related PMI coverage amount on seriously delinquent loans held in our portfolio as of December 31, 20102011, and the mortgage insurance company credit ratings of the PMI providers as of March 11, 201115, 2012
($ ($ amounts in millions):
| | | | Seriously Delinquent Loans with Primary Mortgage Insurance (2) | | | | | | | | | |
| | | | | Credit | | Unpaid | | PMI | | Seriously Delinquent Loans with Primary Mortgage Insurance (2) |
| | | Credit | | Rating | | Principal | | Coverage | | | | Credit | |
| Mortgage Insurance Company | | Rating (1) | | Outlook (1) | | Balance | | Outstanding | |
| | | | Credit | | Rating | | | | PMI Coverage |
| PMI Provider | | | Rating (1) | | Outlook (1) | | UPB | | Outstanding |
| Mortgage Guaranty Insurance Corporation | | B | | Negative | | $ | 8 | | | $ | 2 | | | B | | Negative | | $ | 7 |
| | $ | 2 |
|
| Republic Mortgage Insurance Corporation | | BB | | Negative | | 7 | | | 2 | | |
Republic Mortgage Insurance Company (3) (5) | | | R | | N/A | | 6 |
| | 2 |
|
| Radian Guaranty, Inc. | | B | | Negative | | 5 | | | 1 | | | B | | Negative | | 6 |
| | 1 |
|
| Genworth Mortgage Insurance Corporation Corporation | | | B | | Negative | | 4 |
| | 1 |
|
| United Guaranty Residential Insurance Corporation | | BBB | | Stable | | 3 | | | 1 | | | BBB | | Stable | | 3 |
| | 1 |
|
| Genworth Mortgage Insurance Corporation | | BB | | Negative | | 2 | | | 1 | | |
| All Others | | NR, BBB, B | | N/A | | 3 | | | 1 | | |
All Others (4) (5) | | | R,NR,BBB | | N/A | | 2 |
| | 1 |
|
| Total | | $ | 28 | | | $ | 8 | | | $ | 28 |
| | $ | 8 |
|
| | |
| (1) | Represents the lowest credit rating and outlook of S&P, Moody's or Fitch stated in terms of the S&P equivalent as of March 11, 2011.15, 2012. |
| |
| (2) | Seriously delinquent loans includesinclude loans that are 90 days or more past due or in the process of foreclosure. |
| |
(3) | On August 3, 2011, we announced that we would no longer accept Republic Mortgage Insurance Company as a provider of PMI, effective with mandatory delivery contracts committed on or after August 1, 2011. On January 20, 2012, the North Carolina Department of Insurance took possession and control of Republic Mortgage Insurance Company, a subsidiary of Old Republic International Corporation, and, beginning January 19, 2012, Republic Mortgage Insurance Company will pay only 50% of its claim amounts with the remaining amount to be paid at a future date when funds become available. Based upon the PMI coverage outstanding, we do not expect a material impact on our allowance for credit losses on mortgage loans in future periods. |
| |
(4) | On October 20, 2011, the Arizona Department of Insurance took possession and control of PMI Mortgage Insurance Co., and, beginning October 24, 2011, PMI Mortgage Insurance Co. will pay only 50% of its claim amountswith the remaining amount deferred until the company is liquidated. Such action has not had a material impact on the allowance for credit losses on mortgage loans as PMI Mortgage Insurance Co. was a small provider of mortgage insurance on our underlying mortgage loan portfolio. |
| |
(5) | R signifies regulatory supervision while NR indicates the insurer is unrated. |
Lender Risk Account. We use either a "spread LRA" or a "fixed LRA" for credit enhancement. The spread LRA was used in combination with SMI for credit enhancement of conventional mortgage loans purchased under our original MPP, and the fixed LRA is being used for all acquisitions of new conventional mortgage loans purchased under MPP Advantage. The only substantive difference between our original MPP and MPP Advantage is the credit enhancement structure.
For each pool of conventional loans acquired prior to December 2010,under the original MPP, we established a spread LRA in combination with SMI. The spread LRA is funded through a reduction to our net yield earned on the loans, and the corresponding purchase price paid to the PFI reflects the reduced net yield to us. The fixed LRA for each pool of loans is funded throughmonthly, at an adjustmentannual rate ranging from seven to ten basis points depending on the corresponding price paid to the PFI. As these funds are collected, eitherMCC terms, from the remittances or a reduction in purchase price, they are held by usinterest spread received on outstanding loans and is used to reimburse losses incurred by uspay loan loss claims or is held until the SMI provider, if applicable, within each pool.LRA accumulates to a required "release point." The release point is 30 to 50 basis points of the then outstanding principal balances of the loans in that pool, depending on the terms of the original contract. If the LRA exceeds the required release point, the excess amount is eligible for return to the member(s) that sold us the loans in that pool, subject to a minimum 5-year lock-out period and, in some instances, completion of the releases by the 11th year after loan acquisition. SMI provides an additional layer of credit enhancement beyond the LRA. Losses that exceed LRA funds are covered by SMI up to a severity of approximately 50% of the original property value of the loan, depending on the SMI contract terms. We would absorb any losses in excess of LRA funds and SMI.
The LRA for MPP Advantage differs from our original MPP in that the funding of the LRA occurs at the time the loan is acquired and consists of a portion of the purchase proceeds. The LRA funding amount is currently 120 basis points of the principal balance of the loans in the pool. There is no SMI credit enhancement for MPP Advantage. Funds in the LRA not used to coverpay loan losses may be returned to the remainingseller subject to a release schedule detailed in each pool's contract based on the original LRA amount. No LRA funds in the LRA are returned to the member in accordance withfor the Master Commitment Contracts.
The LRA is recorded in Other Liabilities in the Statements of Condition and totaled $21.1 million and $23.8 million at December 31, 2010, and 2009, respectively. These amounts are aggregated from 579 and 504 Master Commitment Contracts at December 31, 2010, and 2009, respectively. The LRA for each Master Commitment Contract is segregated. These fundsfirst 5 years after acquisition but such returns are available to coverbe completed by the 26th year after loan acquisition. We absorb any losses in excess of the borrower's equity and PMI, if any, within each pool.
Generally, after five years, if the balance of the funds in the LRA exceeds the required balance, the excess amounts are distributed to the seller based on a pre-determined schedule set forth in the Master Commitment Contract that establishes the LRA. We use an NRSRO credit risk model to assign the LRA percentage to each Master Commitment Contract and to manage the credit risk of committed and purchased conventional loans. This model evaluates the characteristics of the loans our sellers commit to deliver and the loans actually delivered to us for the likelihood of timely payment of principal and interest. The NRSRO model results are based on numerous standard borrower and loan attributes, such as the LTV ratio, loan purpose (purchase of home, refinance, or cash-out refinance), type of documentation, income and debt expense ratios, and credit scores.
If a credit loss occurs on an MPP pool, the accumulated LRA for that pool is used to cover the credit loss in excess of the borrower's equity and PMI until the LRA is exhausted. SMI, if applicable, provides additional coverage over and above losses covered by the LRA.funds.
Supplemental Mortgage Insurance.For pools of loans acquired prior to December 2010,under our original MPP, we have credit protection from loss on each loan, where eligible, through SMI, which provides sufficient insurance to cover credit losses to approximately 50% of the property's original value, subject, in certain cases, to an aggregate stop-loss provision in the SMI policy. TheMCCs that equal or exceed $35 million of total initial principal to be sold on a best effort basis include an aggregate loss/benefit limit or "stop-loss" is only on Master Commitment Contracts that equal or exceed $35 million. The stop-loss is equal to the total initial principal balance of loans under the Master Commitment ContractMCC multiplied by the stop-loss percentage, as is then in effect, and represents the maximum aggregate amount payable by the SMI provider under the SMI policy for that pool. We do not have SMI coverage on loans purchased after December 2010.under MPP Advantage.
Even with the stop-loss provision, the aggregate of the LRA and the amount payable by the SMI provider under an SMI stop-loss contract will be equal to or greater than the amount of credit enhancement required for the pool to have an implied credit rating of at least AA at the time of purchase.
Non-credit losses, such as uninsured property damage losses whichthat are not covered by the SMI, can be recovered from the LRA to the extent that there has been no credit loss claim on those LRA funds.are available funds prior to a disbursement to the PFI. We will absorb any non-credit losses beyond that level.greater than the available LRA.
Credit Risk Exposure to Supplemental Mortgage Insurance Providers. Providers.As of December 31, 20102011, we were the beneficiary of SMI coverage on mortgage pools with a total unpaid principal balanceUPB of $5.64.4 billion. Two mortgage insurance companies provide all of the coverage under these policies. SMI coverage. The following table presents the estimated SMI exposure ($ amounts in millions):
|
| | | | | | | | |
Mortgage Insurance Company | | December 31,
2011 | | December 31,
2010 |
| Mortgage Guaranty Insurance Corporation | | $ | 36 |
| | $ | 22 |
|
| Genworth Mortgage Insurance Corporation | | 21 |
| | 17 |
|
| Total | | $ | 57 |
| | $ | 39 |
|
Finance Agency credit-risk-sharing regulations that authorize the use of SMI require us to use SMIthat the providers that arebe rated at least AA- at the time the loans are purchased. The loans purchased are credit-enhancedWith the deterioration in the mortgage markets, we have been unable to achieve an implied rating at an investment grade level based upon an NRSRO model approved bymeet the Finance Agency. If there is evidence of a decline in the credit quality of a mortgage pool, the regulations require us to re-evaluate the mortgage pool for deterioration in credit quality and to allocate risk-based capital to cover any potential credit quality issues. We are holding the required amount of risk-based capital allocated to the MPP.
BecauseAgency regulation's rating requirement because no mortgage insurers thatare currently underwrite SMI are rated in the second highest rating category or better by any NRSRO, we began offering MPP AdvantageNRSRO. In fact, none of the mortgage insurance companies currently providing SMI coverage to our membersus were rated higher than B as of March 15, 2012. Additional information concerning the SMI provider ratings is provided in November 2010. MPP Advantage uses an enhanced fixed LRA account for additional credit enhancement instead of using coverage from an SMI provider. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments - Additional Developments - Finance Agency Approval of New Credit Enhancement Structure for MPP - MPP Advantage" herein for more information on MPP credit enhancement and related Finance Agency regulations.Regulatory Actions.
Loan Characteristics. Two indicators of credit quality are LTV ratios and credit scores provided by FICO®FICO®. FICO®FICO® provides a commonly used measure to assess a borrower’s credit quality, with scores ranging from a low of 300 to a high of 850. In today’s market, the mortgage industry generally considersThe combination of a FICO®lower FICO® score of over 660, and ana higher LTV ratio of 80% or lower, as benchmarks indicating an increased probability of collection/payment. High LTV ratios, especially those above 90%is a key driver in which homeowners have little or no equity at stake, are key drivers inanticipation of potential mortgage delinquencies and defaults. The following tables present these two characteristics of our conventional loan portfolio as a percentage of the unpaid principal balanceUPB outstanding:
| | FICO® SCORE (1) | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| < 620 | | — | % | | — | % | | — | % | | — | % |
| 620 to < 660 | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| 660 to < 700 | | 16 | % | | 16 | % | | 15 | % | | 16 | % |
| 700 to < 740 | | 22 | % | | 23 | % | | 22 | % | | 22 | % |
| > = 740 | | 56 | % | | 55 | % | | 57 | % | | 56 | % |
| Total | | | 100 | % | | 100 | % |
| | | | | | | | | |
| Weighted Average | | 740 | | | 739 | | |
Weighted Average FICO® Score | | | 749 |
| | 740 |
|
| | Loan-to-Value Ratio (2) | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| < = 60% | | 18 | % | | 19 | % | | 17 | % | | 18 | % |
| > 60% to 70% | | 15 | % | | 15 | % | | 15 | % | | 15 | % |
| > 70% to 80% | | 55 | % | | 54 | % | | 55 | % | | 55 | % |
> 80% to 90% (3) | | 6 | % | | 6 | % | | 7 | % | | 6 | % |
> 90% (3) | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | | | 100 | % | | 100 | % |
| | | | | | | | | |
| Weighted Average | | 72 | % | | 72 | % | |
| Weighted Average LTV | | | 72 | % | | 72 | % |
| | |
| (1) | Represents the FICO®FICO® score at origination of the lowest scoring borrower for the related loan. |
| |
| (2) | Represents the LTV ratio atAt origination. |
| |
(3) | These conventional loans were required to have primary mortgage insurancePMI at origination. |
As of December 31, 2010,2011, 94% of the borrowers in our conventional loan portfolio had FICO®FICO® scores greater than 660 at origination and 88%87% had an LTV ratio of 80% or lower. We believe these measures are an indication that the MPP loans have a decreasedlow risk of default. Based on the available data, we believe we have very little exposure to loans in the MPP that are considered to have characteristics of subprime or Alt-A loans. Further, we do not knowingly purchase any loan that violates the terms of our Anti-Predatory Lending Policy.
The concentration of conventional MPP loans by state was as follows:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Indiana | | 19 | % | | 17 | % | | 22 | % | | 19 | % |
| Michigan | | 18 | % | | 14 | % | | 21 | % | | 18 | % |
| California | | 8 | % | | 9 | % | | 7 | % | | 8 | % |
| Florida | | 5 | % | | 5 | % | | 5 | % | | 5 | % |
| Texas | | 5 | % | | 5 | % | | 4 | % | | 5 | % |
| All others | | 45 | % | | 50 | % | |
| Illinois | | | 4 | % | | 4 | % |
All others (1) | | | 37 | % | | 41 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| |
(1) | No state exceeded 3% at December 31, 2011 or 2010. |
The MPP mortgage loans held for portfoliopurchased through the MPP are currently dispersed across 50 states and the District of Columbia. No single zip code represented more than 1% of MPP loans outstanding at December 31, 2011 or 2010, or 2009.. It is likely that the concentration of MPP loans in our district states of Indiana and Michigan will increase in the future, due to the loss of ourthe three largest sellers in 2006 - 2007 that were also our largestprimary sources of nationwide mortgages. The median outstanding balance of our MPP loans was approximately $134132 thousand and $135$134 thousand at December 31, 2011 and 2010, and 2009, respectively.
Credit Performance. The unpaid principal balanceUPB of our conventional and FHA loans 90 days or more past due and accruing interest, non-accrual loans and troubled debt restructurings, as well as anyalong with the allowance for creditloan losses, are presented in the table below ($ amounts in millions):
| | | | As of and for the Years Ended December 31, | | | | | | | | | | | |
| | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | Year Ended December 31, |
| | | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 |
| Past Due, Non-Accrual and Restructured Loans | | | | | | | | | | | |
| Real estate mortgages past due 90 days or more and still accruing interest | | $ | 127 | | | $ | 183 | | | $ | 104 | | | $ | 81 | | | $ | 49 | | | $ | 128 |
| | $ | 127 |
| | $ | 183 |
| | $ | 104 |
| | $ | 81 |
|
| Non-accrual loan participations | | — | | | — | | | — | | | — | | | — | | |
Non-accrual loans (1) | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Troubled debt restructurings | | — | | | — | | | — | | | — | | | — | | | 2 |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for credit losses | | 1 | | | — | | | — | | | — | | | — | | |
| | | | | | | | | | | | |
| Allowance for Credit Losses on Mortgage Loans | | | | | | | | | | | |
| Allowance for loan losses, beginning of the year | | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Charge-offs | | | (2 | ) | | — |
| | — |
| | — |
| | — |
|
| Provision (reversal) for loan losses | | | 4 |
| | 1 |
| | — |
| | — |
| | — |
|
Allowance for loan losses, end of the year (2) | | | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
(1) | The interest income shortfall on non-accrual loans was less than $1.0 million for the year ended December 31, 2011 and was zero for each of the years ended December 31, 2010, 2009, 2008 and 2007. |
| |
(2) | Our allowance for loan losses also includes potential claims by servicers for any losses on approximately $20.9 million and $21.0 million of principal that has been paid in full by the servicers at December 31, 2011 and 2010, respectively. |
Troubled debt restructurings related to mortgage loans are considered to have occurred when a concession is granted to the debtor related to the debtor's financial difficulties that would not otherwise be considered for economic or legal reasons. We do not participate in government-sponsored loan modification programs. There were 16 mortgage loans modified that were considered troubled debt restructurings during the year ended December 31, 2011 and none for the year ended December 31, 2010.
Although we establish credit enhancements in each mortgage pool at the time of the pool's origination that are sufficient to absorb loan losses up to approximately 50% of original principal balance, we realize any additional loan losses in that pool when a mortgage pool's credit enhancements are exhausted. The magnitude of the declines in home prices, rise in unemployment rates, and increase in delinquencies in some areas since 2006 have resulted in losses in some of the mortgage pools that have exhausted credit enhancements. Some of our mortgage pools have loans originated in states and localities (e.g., California, Arizona, Florida, Michigan, and Nevada) that have had the most severe declines in home prices. We purchased most of these loan pools from former members that are no longer members of our Bank and thus have stopped selling mortgage loans to us.
The serious delinquency rate for our FHA mortgages was 0.61% at December 31, 2011, compared to 0.09% at December 31, 2010.2010. We rely on insurance provided by the FHA, which generally provides coverage for 100% of the principal balance of the underlying mortgage loan and defaulted interest at the debenture rate. However, we would receive defaulted interest at the contractual rate from the servicer.
The serious delinquency rate for conventional mortgages was 2.49% at December 31, 2011, compared to 2.24% at December 31, 2010 which is. Both rates were below the national serious delinquency rate. See Notes to Financial Statements - Note 10 - Allowance for Credit Losses in our Notes to Financial Statements for more information.
Derivatives.Derivatives. A primary credit risk posed by derivative transactions is the risk that a counterparty will fail to meet its related contractual obligations, on a transaction, forcing us to replace the derivativederivatives at market prices. The notional amount of interest-rate exchange agreements does not measurerepresent our true credit risk exposure. Rather, when theexposure; however, it serves as a factor in determining periodic interest payments or cash flows received and paid. Our net credit exposure is measured at estimated fair value of our interest-rate exchange agreements with a counterparty is positive, this generally indicates that the counterparty owes us. When the net fair value of the interest-rate exchange agreements is negative, we owe the counterparty.value. If a counterparty fails to perform, our credit risk is approximately equal to the aggregate fair value gain, if any, on the interest-rate exchange agreements. If our credit rating had been lowered from its current rating to the next lower rating, we could have been required to deliver up to an additional $527.9 million
We maintain a policy requiring that interest rate exchange agreements be governed by an ISDA Master Agreement. Our current counterparties governed by these agreements include large banks and other financial institutions with a significant presence in the derivatives market that are rated A- or better by S&P and A3 or better by Moody's. These agreements provide for netting of amounts due to us and amounts due to counterparties, thereby reducing credit exposure. When the net estimated fair value of our interest-rate exchange agreements with a counterparty is positive, the counterparty generally owes us. When the net estimated fair value of the interest-rate exchange agreements is negative, we generally owe the counterparty. Other counterparties include broker dealers used to transact forward contracts relating to TBA mortgage hedges. All counterparties are subject to credit review procedures in accordance with our RMP. We review our counterparties' exposure to European sovereign debt as part of our credit risk review procedures.
We manage this risk by executing derivative transactions with experienced counterparties of high credit quality, diversifying our derivatives across many counterparties, and executing transactions under master agreements that require counterparties to post collateral if we are exposed to a potential credit loss on the related derivatives exceeding an agreed-upon threshold. Our board of directors, through the RMP, establishes maximum net unsecured credit exposure amounts per ISDA counterparty. However, most counterparty agreements are executed with lower thresholds than required under the RMP. These thresholds are based upon the counterparty's current credit rating, with more stringent requirements applied to lower-rated entities. If the counterparty exceeds the maximum amount, the counterparty must provide collateral equal to the excess of the exposure over
the unsecured credit exposure threshold amount. Eligible types of collateral are determined in each counterparty agreement. Acceptable collateral types include cash and liquid instruments, such as Treasury securities, and certain agency securities. We have never experienced a loss on a derivative due to credit default by a counterparty.
We regularly monitor the exposure of our derivative transactions by determining the marketestimated fair value of positions using internal pricing models. The marketestimated fair values generated by a pricing model are compared to dealer model results on a monthly basis to ensure that our pricing model is calibrated to actual market pricing methodologies used by the dealers. Collateral transfers required due to changes in marketfair values are executed on at least a monthlyregular basis.
The following tables summarizetable presents key information on derivative counterparties on a settlement date basis using credit ratings based on the lower of S&P or Moody's ($ amounts in millions). | | | | | | | | | | | | | | | | |
| | | | | Credit Exposure | | Other | | |
| | | Total | | Net of Cash | | Collateral | | Net Credit |
| December 31, 2010 | | Notional | | Collateral | | Held | | Exposure |
| AAA | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| AA | | 14,691 | | | 6 | | | — | | | 6 | |
| A | | 18,549 | | | — | | | — | | | — | |
| Unrated | | 126 | | | — | | | — | | | — | |
| Subtotal | | 33,366 | | | 6 | | | — | | | 6 | |
Member institutions (1) | | 57 | | | — | | | — | | | — | |
| Total | | $ | 33,423 | | | $ | 6 | | | $ | — | | | $ | 6 | |
| | | | | | | | | |
| December 31, 2009 | | | | | | | | |
| AAA | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| AA | | 15,981 | | | 1 | | | — | | | 1 | |
| A | | 20,373 | | | — | | | — | | | — | |
| Unrated | | 41 | | | 1 | | | — | | | 1 | |
| Subtotal | | 36,395 | | | 2 | | | — | | | 2 | |
Member institutions (1) | | 38 | | | — | | | — | | | — | |
| Total | | $ | 36,433 | | | $ | 2 | | | $ | — | | | $ | 2 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Credit Exposure | | Other | | |
| | | Total | | Net of Cash | | Collateral | | Net Credit |
| December 31, 2011 | | Notional | | Collateral | | Held | | Exposure |
| AA | | $ | 13,359 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| A | | 21,561 |
| | — |
| | — |
| | — |
|
| Unrated | | 70 |
| | — |
| | — |
| | — |
|
| Subtotal | | 34,990 |
| | — |
| | — |
| | — |
|
Member institutions (1) | | 68 |
| | — |
| | — |
| | — |
|
| Total | | $ | 35,058 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| December 31, 2010 | | | | | | | | |
| AA | | $ | 14,691 |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
|
| A | | 18,549 |
| | — |
| | — |
| | — |
|
| Unrated | | 126 |
| | — |
| | — |
| | — |
|
| Subtotal | | 33,366 |
| | 6 |
| | — |
| | 6 |
|
Member institutions (1) | | 57 |
| | — |
| | — |
| | — |
|
| Total | | $ | 33,423 |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
|
| | |
| (1) | Member institutions includeIncludes mortgage delivery commitments and derivatives with members where we are acting as an intermediary. Collateral held with respect to derivatives with member institutions represents the minimum amount of eligible collateral physically held by or on behalf of the Bank or eligible collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.commitments. |
See "Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments - New Requirements for the FHLBs' Derivatives Transactions" herein for more information.
AHP. Our AHP requires members and project sponsors to make commitments with respect to the usage of the AHP grants to assist very low-, low-, and moderate-income families, as defined by regulation. If these commitments are not met, we may have an obligation to recapture these funds from the member or project sponsor to replenish the AHP fund. This credit exposure is addressed in part by evaluatingour evaluation of project feasibility at the time of an award and the member'smember’s ongoing monitoring of AHP projects.
Liquidity Risk Management
Management. The primary objectives of liquidity risk management are to maintain the ability to meet obligations as they come due and to meet the credit needs of our member borrowers in a timely and cost-efficient manner. We routinely monitor the sources of cash available to meet liquidity needs and use various tests and guidelines to manage our liquidity risk.
Daily projections of liquidity requirements are prepared to help us maintain adequate funding for our operations. Operational liquidity levels are determined assuming sources of cash from both the FHLBFHLBank System's ongoing access to the capital markets and our holding of liquid assets to meet operational requirements in the normal course of business. Contingent liquidity levels are determined based upon the assumption of an inability to readily access the capital markets for a period of five business days. These analyses include projections of cash flows and funding needs, targeted funding terms, and various funding alternatives for achieving those terms. A contingency plan allows us to maintain sufficient liquidity in the event of operational disruptions at our Bank, at the Office of Finance, or in the capital markets.
Operations Risk Management
Management. Operations risk is the risk of unexpected losses attributable to human error, system failures, fraud, unenforceability of contracts, or inadequate internal controls and procedures. Our management has established policies and procedures to mitigate operations risk. Our corporate risk management department conducts a comprehensive annual risk and control assessment that is designed to identify operational risks and evaluate the adequacy of the control structure. In addition, our internal audit department independently reviews certain functions within the Bank.our operational activities. The Director of Internal Audit reports directly to the Audit Committee of our board of directors.
We use various financial models and model output to quantify financial risks and analyze potential strategies. Management mitigatesWe maintain a model validation program that is intended to mitigate the risk of incorrect model output, leadingwhich could potentially lead to inappropriate business decisionsor operational decisions.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that potentially could jeopardize the confidentiality of such information or otherwise cause interruptions or malfunctions in our operations. We seek to mitigate this risk by benchmarking model resultsestablishing and administering system access limitations, establishing and monitoring controls for sensitive data, and actively monitoring system access.
We rely heavily on our information systems and other technology to independent sourcesconduct and having third parties periodically validate critical models.manage our business. During 2011, we began an enterprise-wide initiative to replace our core banking system. This implementation, which is expected to take several years, along with several other key initiatives simultaneously undertaken, could subject us to a higher risk of failure or interruption. We believe we have the appropriate controls and processes in place to manage this risk. We have enhanced our focus on project management and quality assurance as part of this implementation.
In order to ensure our ability to provide liquidity and service to our members, we have business continuity plans designed to restore critical business processes and systems in the event of a business interruption. We operate a back-up facility at a separate location, with the objective of being able to fully recover all critical activities intra-day. This off-site recovery center is subject to periodic testing.
DespiteWe have not experienced a failure or disruption in our information systems or a cybersecurity event that has had a material adverse impact on our business. However, despite these policies and procedures, some operational risks are beyond our control, and the failure of other parties to adequately address their operational risks could adversely affect us.
Business Risk Management
Management. Business risk is the risk of an adverse impact on profitability resulting from external factors that may occur in both the short and long-term. Business risk includes political, strategic, reputation and/or regulatory events that are beyond our control. Our board of directors and management seek to mitigate these risks by, among other actions, maintaining an open and constructive dialogue with regulators, providing input on potential legislation, long-term strategic planning, continually monitoring general economic conditions and the external environment, and fulfilling our mission of supporting member institutions with liquidity and supporting community development.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use certain acronyms and terms throughout this Item 7A which are defined in the Glossary of Terms located in Item 15. Exhibits and Financial Statement Schedules.
Market risk is the risk that the market value or estimated fair value of our overall portfolio of assets and liabilities, and including
derivatives, or our net earnings will decline as a result of changes in interest rates or financial market volatility, or that net earnings will be significantly reduced by interest-rate changes. volatility. Market risk includes the risks related to:
movements in interest rates over time;
movements in prepayment speeds over time;
the change in the relationship between short-term and long-term interest rates (i.e., the slope of the Consolidated Obligation and LIBOR yield curves);
the change in the relationship of FHLBank System debt spreads to other indices, primarily LIBOR (commonly referred to as "basis" risk); and
the change in the relationship between fixed rates and variable rates.
The goal of market risk management is to preserve our financial strength at all times, and mitigate any adverse effect on our net earnings, including during periods of significant market volatility and across a wide range of possible interest-rate changes. We regularly assess our exposure to changes in interest rates using a diverse set of analyses and measures. As appropriate, we may rebalance our portfolio to help attain our risk management objectives.
Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets and liabilities that, together with their associated hedges, limit our expected interest rate sensitivity to within our specified tolerances. Derivative financial instruments, primarily interest rate exchange agreements, are frequently employed to hedge the interest rate risk and embedded option risk on Advances, structured debt, and structured agency bonds held as investments.
We have significant investments in MPP loans MBS, and ABS.MBS. The prepayment options embedded in mortgages can result in extensions or contractions in the expected weighted average life of these investments, depending on changes in interest rates. We primarily manage the interest rate and prepayment risk associated with mortgages through debt issuance, which includes both callable and non-callable debt, to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans. Due to the use of call options and lockouts, and by selecting appropriate maturity sectors, callable debt provides an element of protection for the prepayment risk in the mortgage portfolios. The duration of callable debt, like that of a mortgage, shortens when interest rates decrease and lengthens when interest rates increase.
The prepayment option on an Advance can create interest-rate risk. If a member prepays an Advance, we could suffer lower future income if the principal portion of the prepaid Advance was reinvested in lower yielding assets that continue to be funded by higher cost debt. To protect against this risk, we charge a prepayment fee, is charged that makes us financially indifferent to a borrower's decision to prepay an Advance, thereby creating minimal market risk. See Notes to Financial Statements - Note 8 - Advances in our Notes to Financial Statements for more information on prepayment fees and their impact on our financial results.
Significant resources, including analytical computer models and an experienced professional staff, are devoted to assuring that the level of interest-rate risk in the balance sheet is accurately measured, thus allowing us to monitor the risk against policy and regulatory limits. We use an asset and liability system to calculate market values under alternative interest rate scenarios. The system analyzes our financial instruments, including derivatives, using broadly accepted algorithms with consistent and appropriate behavioral assumptions, market prices, and current position data. On at least an annual basis, we review the major assumptions and methodologies used in the model, including discounting curves, spreads for discounting, and prepayment assumptions.
Measuring Market Risks
We utilize multiple risk measurements, including duration, duration gaps, convexity, value at risk, market risk metric (one-month VaR), earnings at risk, and changes in market value of equity, to calculate potential market exposure. Periodically, stress tests are conducted to measure and analyze the effects that extreme movements in the level of interest rates and the shape of the yield curve would have on our risk position.
Types of Key Market Risks
Market risk can occur due to various factors, such as:
| |
• | Interest Rates- Parallel and non-parallel interest rate yield curve fluctuations; Basis Risk - Changes in spreads or valuations between financial assets and the instruments funding the assets caused by asymmetric interest rate movements in different interest rate curves that are linked to the financial assets and the funding instruments. For example, our mortgage assets are sensitive to the LIBOR curve, while our mortgage liabilities, primarily CO Bonds, are sensitive to the Consolidated Obligations curve; Volatility - Varying values of assets or liabilities with embedded options, such as mortgages and callable bonds, created by the changing expectations of the magnitude or frequency of interest rate fluctuations. Increasing levels of volatility increase the value of embedded options owned; Option-Adjusted Spread - Changes to the value of assets with embedded options, particularly mortgages and MBS, reflecting fluctuations of the value attributed to the embedded options rather than yield curve movements. The option-adjusted spread for mortgage-related assets tends to reflect supply and demand for such assets. Widening of option-adjusted spread reduces the market value of an existing mortgage, while tightening of option-adjusted spread tends to increase this market value; and Prepayment Speeds- Variations from expected levels of principal payments on mortgage loans in a portfolio or supporting an MBS alter their cash flows, yields, and values, particularly in cases where the loans or MBS are acquired at a premium or discount.
Interest Rates- Parallel and non-parallel interest rate yield curve fluctuations;
|
| |
• | Basis Risk - Changes in spreads or valuations between financial assets and the instruments funding the assets caused by asymmetric interest rate movements in different interest rate curves that are linked to the financial assets and the funding instruments. For example, our mortgage assets are sensitive to the LIBOR curve and our mortgage liabilities, primarily CO Bonds, are sensitive to the Consolidated Obligations curve;
|
| |
• | Volatility - Varying values of assets or liabilities with embedded options, such as mortgages and callable bonds, created by the changing expectations of the magnitude or frequency of interest rate fluctuations. Increasing levels of volatility increase the value of embedded options owned;
|
| |
• | Option-Adjusted Spread - Changes to the value of assets with embedded options, particularly mortgages and MBS, reflecting fluctuations of the value attributed to the embedded options rather than yield curve movements. The option-adjusted spread for mortgage-related assets tends to reflect supply and demand for such assets. Widening of option-adjusted spread reduces the market value of existing mortgages, while tightening of option-adjusted spread tends to increase this market value; and
|
| |
• | Prepayment Speeds- Variations from expected levels of principal payments on mortgage loans in a portfolio or supporting an MBS alter their cash flows, yields, and values, particularly in cases where the loans or MBS are acquired at a premium or discount.
|
Duration of Equity
Equity. Duration of equity is a measure of interest-rate risk and a primary metric used to manage our market risk exposure. It is an estimate of the percentage change (expressed in years) in our market value of equity that could be caused by a 100 basis point ("bp") parallel upward or downward shift in the interest-rate curves. We value our portfolios using two main interest-rate curves, the LIBOR curve and the Consolidated ObligationsCO curve. The market value and interest-rate sensitivity of each asset, liability, and off balance sheet position is computed to determine our duration of equity. We calculate duration of equity using the interest-rate curves as of the date of calculation and for scenarios where interest-rate curves are 200 bpsbasis points higher or lower than the initial level. Our board of directors determines acceptable ranges for duration of equity. A negative duration of equity suggests adverse exposure to falling rates and a favorable response to rising rates, while a positive duration suggests adverse exposure to rising rates and a favorable response to falling rates.
The following table summarizespresents the effective duration of equity levels for our total position which are subject to internal policy guidelines:
|
| | | | | | |
| | | -200 bps*basis points* | | 0 bpsbasis points | | +200 bpsbasis points |
| December 31, 2011 | | (6.9) years | | (1.5) years | | 2.4 years |
| December 31, 2010 | | (1.0) years | | 0.6 years | | 2.9 years |
| |
| * | Our internal policy guidelines provide for the calculation of the duration of equity, in a low-rate environment, to be based on the Finance Agency Advisory Bulletin 03-09, as modified September 3, 2008. Under these guidelines, our duration of equity was (1.5) years at December 31, 2009 | | (4.1)2011, and 0.6 years | | (1.2) years | | 0.8 years at December 31, 2010. |
* Our internal policy guidelines provide for the calculation of the duration of equity in a low-rate environment to be based on the Finance Agency Advisory Bulletin 03-09, as modified September 3, 2008. Under these guidelines, our duration of equity was 0.6 years at December 31, 2010, and (1.2) years at December 31, 2009.
We were in compliance with the duration of equity limits established at both dates.
Duration Gap
Gap. The duration gap is the difference between the effective duration of total assets and the effective duration of total liabilities, adjusted for the effect of derivatives. A positive duration gap signals an exposure to rising interest rates because it indicates that the duration of assets exceeds the duration of liabilities. A negative duration gap signals an exposure to declining interest rates because the duration of assets is less than the duration of liabilities. The duration gap was (2.1) months at December 31, 2011, compared to (0.6) months at December 31, 2010, compared to (1.8) months at December 31, 2009.
Convexity
Convexity. Convexity measures how fast duration changes as a function of interest-rate changes. Measurement of convexity is important because of the optionality embedded in the mortgage and callable debt portfolios. The mortgage portfolios exhibit negative convexity due to the embedded prepayment options. Management routinely reviews convexity and considers it when developing funding and hedging strategies for the acquisition of mortgage-based assets. The issuance of callable debt is aA primary strategy for managing convexity risk arising from our mortgage portfolio. At December 31, 2010,portfolio is the issuance of callable debt funding mortgage assets as a percentage of the net mortgage portfolio equaled 34%, compared to 45% at the end of 2009.debt. The negative convexity onof the mortgage assets is mitigatedpartially offset by the negativepositive convexity of underlying callable debt.
Market Risk-Based Capital Requirement
Requirement. We are subject to the Finance Agency's risk-based capital regulations. This regulatory framework requires the maintenance of sufficient permanent capital to meet the combined credit risk, market risk, and operations risk components. Our permanent capital is defined by the Finance Agency as Class B Stock (including MRCS) and Retained Earnings. The market risk-based capital component is the sum of two factors. The first factor is the market value of the portfolio at risk from movements in
interest rates that could occur during times of market stress. This estimation is accomplished through an internal VaR-based modeling approach that was approved by the Federal Housing Finance Board (predecessor to the Finance Agency) before the implementation of our Capital Plan.capital plan. The second factor is the amount, if any, by which the current market value of total regulatory capital is less than 85% of the book value of total regulatory capital. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Resources - Adequacy of Capital for more information about our risk-based capital requirement.
The VaR approach used for calculating the first factor is primarily based upon historical simulation methodology. The estimation incorporates scenarios that reflect interest-rate shifts, interest-rate volatility, and changes in the shape of the yield curve. These observations are based on historical information from 1978 to the present. When calculating the risk-based capital requirement, the VaR comprising the first factor of the market risk component is defined as the potential dollar loss from adverse market movements, for a holding period of 120 business days, with a 99% confidence interval, based on these historical prices and market rates. Market risk-based capital estimates for the years ended December 31, 2010, and 2009are presented below ($ amounts in million)millions):
| | | | | As of the | | For the Years Ended | | As of the | | Years Ended |
| VaR | | Years Ended | | High | | Low | | Average | | Years Ended | | High | | Low | | Average |
| December 31, 2011 | | | $ | 136 |
| | $ | 305 |
| | $ | 131 |
| | $ | 221 |
|
| December 31, 2010 | | 286 | | | 286 | | | 155 | | | 216 | | | 286 |
| | 286 |
| | 155 |
| | 216 |
|
| December 31, 2009 | | 283 | | | 333 | | | 103 | | | 185 | | |
Changes in the Ratio of Market Value to Book Value of Equity between Base Rates and Shift Scenarios
Scenarios. We measure potential changes in the market value to book value of equity based on the current month-end level of rates versus the ratio of market value to book value of equity under large parallel rate shifts. This measurement provides information related to the sensitivity of our interest-rate position.
The table below providespresents changes in the ratio of market value to book value of equity from the base rates:
| | | -200 bps | | +200 bps | | | | |
| | | -200 basis points | | +200 basis points |
| December 31, 2011 | | (3.0 | )% | | 0.4 | % |
| December 31, 2010 | 0.1 | % | | (4.0 | )% | 0.1 | % | | (4.0 | )% |
| December 31, 2009 | (5.0 | )% | | — | % | |
Use of Derivative Hedges
We use derivatives to hedge our market risk exposures. The primary types of derivatives used are interest-rate exchange agreements or swaps and caps. Interest-rate swaps and caps increase the flexibility of our funding alternatives by providing specific cash flows or characteristics that might not be as readily available or cost effective if obtained in the cash debt market. We also use TBAs to temporarily hedge mortgage positions. We do not speculate using derivatives and do not engage in derivatives trading.
Hedging Debt Issuance
Issuance. When CO Bonds are issued, we often use the derivatives market to create funding that is more attractively priced than the funding available in the Consolidated Obligations market. To reduce funding costs, we may enter into interest rate exchange agreements concurrently with the issuance of Consolidated Obligations. A typical hedge of this type occurs when a CO Bond is issued, while we simultaneously execute a matching interest rate exchange agreement. The counterparty pays a rate on the swap to us, which is designed to mirror the interest rate we pay on the CO Bond. In this transaction we typically pay a variable interest rate, generally LIBOR, which closely matches the interest payments we receive on short-term or variable-rate Advances or investments. This intermediation between the capital and swap markets permits the acquisition of funds by us at lower all-in costs than would otherwise be available through the issuance of simple fixed- or floating-rate Consolidated Obligations in the capital markets. Occasionally, interest rate exchange agreements are executed to hedge Discount Notes.
Hedging Advances
Advances. Interest-rate swaps are also used to increase the flexibility of Advance offerings by effectively converting the specific cash flows or characteristics that the borrower prefers into cash flows or characteristics that may be more readily or cost effectively funded in the debt markets.
Hedging Investments
Investments. Some interest rate exchange agreements are executed to hedge investments. In addition, interest-rate caps are purchased to reduce the risk inherent in floating-rate instruments that include caps as part of the structure.
Other Hedges
Hedges. On an infrequent basis, we may act as an intermediary between certain smaller member institutions and the capital markets by executing interest rate exchange agreements with members. We occasionally use derivatives, such as swaptions, to maintain our risk profile within the approved risk limits set forth in our RMP.
The volume of derivative hedges is often expressed in terms of notional amount, which is the amount upon which interest payments are calculated. The following table highlights the notional amounts by type of hedged item, hedging instrument, and hedging objective ($ amounts in millions):
| | Hedged Item / Hedging Instrument | Hedging Objective | Hedge Accounting Designation | | December 31,
2010 | | December 31,
2009 | Hedging Objective | Hedge Accounting Designation | | December 31,
2011 | | December 31,
2010 |
| Advances: | | | | | | | | |
| Pay fixed, receive floating interest-rate swap (without options) | Converts the Advance’s fixed rate to a variable rate index. | Fair-value | | $ | 8,694 | | | $ | 8,450 | | Converts the Advance’s fixed rate to a variable rate index. | Fair-value | | $ | 10,009 |
| | $ | 8,694 |
|
| Pay fixed, receive floating interest-rate swap (with options) | Converts the Advance’s fixed rate to a variable rate index and offsets option risk in the Advance. | Fair-value | | 2,132 | | | 5,271 | | Converts the Advance’s fixed rate to a variable rate index and offsets option risk in the Advance. | Fair-value | | 1,561 |
| | 2,132 |
|
| Economic | | 20 | | | 10 | | Economic | | 15 |
| | 20 |
|
| Pay floating with embedded features, receive floating interest-rate swap (non-callable) | Reduces interest rate sensitivity and repricing gaps by converting the Advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the Advance. | Fair-value | | 10 | | | — | | Reduces interest rate sensitivity and repricing gaps by converting the Advance’s variable rate to a different variable rate index and/or offsets embedded option risk in the Advance. | Fair-value | | 10 |
| | 10 |
|
| Investments: | | | | | | | | |
| | |
|
| Pay fixed, receive floating interest-rate swap | Converts the investment’s fixed rate to a variable rate index. | Fair Value | | 2,025 | | | 1,600 | | Converts the investment’s fixed rate to a variable rate index. | Fair-value | | 2,025 |
| | 2,025 |
|
| Economic | | 1 | | | 1 | | Economic | | — |
| | 1 |
|
| Interest-rate cap | Offsets the interest-rate cap embedded in a variable rate investment. | Economic | | 75 | | | — | | Offsets the interest-rate cap embedded in a variable rate investment. | Economic | | 305 |
| | 75 |
|
| Mortgage Loans: | | | | | | | | |
| Forward settlement agreement | Protects against changes in market value of fixed rate mortgage delivery commitments resulting from changes in interest rates. | Economic | | 126 | | | 41 | | Protects against changes in market value of fixed rate mortgage delivery commitments resulting from changes in interest rates. | Economic | | 70 |
| | 126 |
|
| CO Bonds: | | | | | | | | |
| Receive fixed, pay floating interest-rate swap (without options) | Converts the bond’s fixed rate to a variable rate index. | Fair Value | | 16,222 | | | 14,502 | | Converts the bond’s fixed rate to a variable rate index. | Fair-value | | 15,114 |
| | 16,222 |
|
| Economic | | — | | | 10 | | | | | | |
| Receive fixed, pay floating interest-rate swap (with options) | Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond. | Fair Value | | 3,375 | | | 6,385 | | Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond. | Fair-value | | 4,797 |
| | 3,375 |
|
| Economic | | — | | | 15 | | | | | | |
| Receive floating with embedded features, pay floating interest-rate swap (callable) | Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond. | Fair Value | | 210 | | | 110 | | Reduces interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or offsets embedded option risk in the bond. | Fair-value | | 220 |
| | 210 |
|
| Receive-float with embedded features, pay floating interest rate swap (non-callable) | | Reduces interest rate sensitivity and repricing gaps by converting the bond's variable rate to a different variable rate index and/or offsets embedded option risk in the bond. | Fair-value | | 115 |
| | — |
|
| Discount Notes: | | | | | | | | |
| Receive fixed, pay floating interest-rate swap | Converts the discount note’s fixed rate to a variable rate index. | Economic | | 476 | | | — | | Converts the Discount Note’s fixed rate to a variable rate index. | Economic | | 749 |
| | 476 |
|
| Stand-Alone Derivatives: | | | | | | | | |
| Mortgage delivery commitments | Protects against fair value risk associated with fixed rate mortgage purchase commitments. | Economic | | 57 | | | 38 | | Protects against fair value risk associated with fixed rate mortgage purchase commitments. | Economic | | 68 |
| | 57 |
|
| Total | | $ | 33,423 | | | $ | 36,433 | | | $ | 35,058 |
| | $ | 33,423 |
|
The above table includes interest-rate swaps and caps, TBA MPP hedges, and mandatory delivery commitments. Complex swaps include, but are not limited to, step-up and range bonds. The level of different types of derivatives is contingent upon and tends to vary with our balance sheet size, Advances demand, MPP purchase activity, and Consolidated Obligation issuance levels.
Interest-Rate Swaps. The following table presents the amount swapped by interest-rate payment terms for AFS securities, Advances, CO Bonds, and Discount Notes:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2011 | | December 31, 2010 |
Interest-Rate Payment Terms | | Total Outstanding | | Amount Swapped | | % Swapped | | Total Outstanding | | Amount Swapped | | % Swapped |
| AFS securities: | | | | | | | | | | | | |
| Total fixed-rate | | $ | 2,435 |
| | $ | 2,333 |
| | 96 | % | | $ | 2,642 |
| | $ | 2,260 |
| | 86 | % |
| Total variable-rate | | 618 |
| | — |
| | — | % | | 669 |
| | — |
| | — | % |
| Total AFS securities, amortized cost | | $ | 3,053 |
| | $ | 2,333 |
| | 76 | % | | $ | 3,311 |
| | $ | 2,260 |
| | 68 | % |
| | | | | | | | | | | | | |
| Advances: | | | | | | | | | | | | |
| Total fixed-rate | | $ | 14,176 |
| | $ | 11,585 |
| | 82 | % | | $ | 13,763 |
| | $ | 10,846 |
| | 79 | % |
| Total variable-rate | | 3,592 |
| | 10 |
| | — | % | | 3,874 |
| | 10 |
| | — | % |
| Total Advances, par value | | $ | 17,768 |
| | $ | 11,595 |
| | 65 | % | | $ | 17,637 |
| | $ | 10,856 |
| | 62 | % |
| | | | | | | | | | | | | |
| CO Bonds: | | | | | | | | | | | | |
| Total fixed-rate | | $ | 29,957 |
| | $ | 19,660 |
| | 66 | % | | $ | 31,570 |
| | $ | 19,597 |
| | 62 | % |
| Total variable-rate | | 335 |
| | 335 |
| | 100 | % | | 210 |
| | 210 |
| | 100 | % |
| Total CO Bonds, par value | | $ | 30,292 |
| | $ | 19,995 |
| | 66 | % | | $ | 31,780 |
| | $ | 19,807 |
| | 62 | % |
| | | | | | | | | | | | | |
| Discount Notes: | | | | | | | | | | | | |
| Total fixed-rate | | $ | 6,536 |
| | $ | 750 |
| | 11 | % | | $ | 8,926 |
| | $ | 477 |
| | 5 | % |
| Total variable-rate | | — |
| | — |
| | — | % | | — |
| | — |
| | — | % |
| Total Discount Notes, par value | | $ | 6,536 |
| | $ | 750 |
| | 11 | % | | $ | 8,926 |
| | $ | 477 |
| | 5 | % |
See "ItemItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Derivatives"Credit Risk Management - Derivatives for information on credit risk related to derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be included in this Annual Report on Form 10-K begin on page F-1.
Quarterly Results
Supplementary unaudited financial data for each full quarter within the two years ended December 31, 20102011, and 20092010, are included in the tables below ($ amounts in millions).
| | For the Year Ended December 31, 2010 | | 1st Quarter 2010 | | 2nd Quarter 2010 | | 3rd Quarter 2010 | | 4th Quarter 2010 | | Total | |
| | Year Ended December 31, 2011 | | | 1st Quarter 2011 | | 2nd Quarter 2011 | | 3rd Quarter 2011 | | 4th Quarter 2011 | | Total |
| Total Interest Income | | | $ | 187 |
| | $ | 177 |
| | $ | 170 |
| | $ | 169 |
| | $ | 703 |
|
| Total Interest Expense | | | 127 |
| | 121 |
| | 114 |
| | 110 |
| | 472 |
|
| Net Interest Income | | | 60 |
| | 56 |
| | 56 |
| | 59 |
| | 231 |
|
| Provision for Credit Losses | | | 1 |
| | 1 |
| | 2 |
| | 1 |
| | 5 |
|
| Net Interest Income After Provision for Credit Losses | | | 59 |
| | 55 |
| | 54 |
| | 58 |
| | 226 |
|
| Net Other-Than-Temporary Impairment Losses Recognized on Held-to-Maturity Securities | | | (18 | ) | | (3 | ) | | (5 | ) | | (1 | ) | | (27 | ) |
| Net Realized Gains (Losses) from Sale of Available-for-Sale Securities | | | — |
| | (2 | ) | | 6 |
| | — |
| | 4 |
|
| Net Gains (Losses) on Derivative and Hedging Activities | | | — |
| | (4 | ) | | (7 | ) | | (2 | ) | | (13 | ) |
| Loss on Extinguishment of Debt | | | — |
| | — |
| | — |
| | — |
| | — |
|
| All Other Income | | | — |
| | 1 |
| | 1 |
| | 1 |
| | 3 |
|
| Total Other Income (Loss) | | | (18 | ) | | (8 | ) | | (5 | ) | | (2 | ) | | (33 | ) |
| Total Other Expenses | | | 13 |
| | 14 |
| | 16 |
| | 15 |
| | 58 |
|
| Income Before Assessments | | | 28 |
| | 33 |
| | 33 |
| | 41 |
| | 135 |
|
| Assessments | | | 8 |
| | 9 |
| | 3 |
| | 5 |
| | 25 |
|
| Net Income | | | $ | 20 |
| | $ | 24 |
| | $ | 30 |
| | $ | 36 |
| | $ | 110 |
|
| | | | | | | | | | | | |
| Year Ended December 31, 2010 | | | 1st Quarter 2010 | | 2nd Quarter 2010 | | 3rd Quarter 2010 | | 4th Quarter 2010 | | Total |
| Total Interest Income | | $ | 210 | | | $ | 205 | | | $ | 226 | | | $ | 199 | | | $ | 840 | | | $ | 210 |
| | $ | 205 |
| | $ | 226 |
| | $ | 199 |
| | $ | 840 |
|
| Total Interest Expense | | 148 | | | 149 | | | 144 | | | 132 | | | 573 | | | 148 |
| | 149 |
| | 144 |
| | 132 |
| | 573 |
|
| Net Interest Income | | 62 | | | 56 | | | 82 | | | 67 | | | 267 | | | 62 |
| | 56 |
| | 82 |
| | 67 |
| | 267 |
|
| Provision for Credit Losses | | — | | | — | | | — | | | 1 | | | 1 | | | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Net Interest Income After Provision for Credit Losses | | 62 | | | 56 | | | 82 | | | 66 | | | 266 | | | 62 |
| | 56 |
| | 82 |
| | 66 |
| | 266 |
|
| Net Other-Than-Temporary Impairment Losses Recognized on Held-to-Maturity Securities | | (6 | ) | | (62 | ) | | — | | | (2 | ) | | (70 | ) | | (6 | ) | | (62 | ) | | — |
| | (2 | ) | | (70 | ) |
| Net Realized Gains from Sale of Available-for-Sale Securities | | — | | | — | | | — | | | 2 | | | 2 | | | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Net Gains (Losses) on Derivative and Hedging Activities | | (1 | ) | | (1 | ) | | 2 | | | 7 | | | 7 | | | (1 | ) | | (1 | ) | | 2 |
| | 7 |
| | 7 |
|
| Loss on Extinguishment of Debt | | — | | | — | | | (1 | ) | | (1 | ) | | (2 | ) | | — |
| | — |
| | (1 | ) | | (1 | ) | | (2 | ) |
| All Other Income | | — | | | 1 | | | — | | | 3 | | | 4 | | | — |
| | 1 |
| | — |
| | 3 |
| | 4 |
|
| Total Other Income (Loss) | | (7 | ) | | (62 | ) | | 1 | | | 9 | | | (59 | ) | | (7 | ) | | (62 | ) | | 1 |
| | 9 |
| | (59 | ) |
| Total Other Expenses | | 11 | | | 11 | | | 14 | | | 19 | | | 55 | | | 11 |
| | 11 |
| | 14 |
| | 19 |
| | 55 |
|
| Income (Loss) Before Assessments | | 44 | | | (17 | ) | | 69 | | | 56 | | | 152 | | | 44 |
| | (17 | ) | | 69 |
| | 56 |
| | 152 |
|
| Assessments | | 12 | | | (4 | ) | | 18 | | | 15 | | | 41 | | |
| Assessments, net | | | 12 |
| | (4 | ) | | 18 |
| | 15 |
| | 41 |
|
| Net Income (Loss) | | $ | 32 | | | $ | (13 | ) | | $ | 51 | | | $ | 41 | | | $ | 111 | | | $ | 32 |
| | $ | (13 | ) | | $ | 51 |
| | $ | 41 |
| | $ | 111 |
|
| | | | | | | | | | | | |
| For the Year Ended December 31, 2009 | | 1st Quarter 2009 | | 2nd Quarter 2009 | | 3rd Quarter 2009 | | 4th Quarter 2009 | | Total | |
| Total Interest Income | | $ | 360 | | | $ | 300 | | | $ | 245 | | | $ | 221 | | | $ | 1,126 | | |
| Total Interest Expense | | 299 | | | 220 | | | 179 | | | 156 | | | 854 | | |
| Net Interest Income | | 61 | | | 80 | | | 66 | | | 65 | | | 272 | | |
| Provision for Credit Losses | | — | | | — | | | — | | | — | | | — | | |
| Net Interest Income After Provision for Credit Losses | | 61 | | | 80 | | | 66 | | | 65 | | | 272 | | |
| Net Other-Than-Temporary Impairment Losses Recognized on Held-to-Maturity Securities | | (19 | ) | | (2 | ) | | (24 | ) | | (15 | ) | | (60 | ) | |
| Net Realized Gains from Sale of Available-for-Sale Securities | | — | | | — | | | — | | | — | | | — | | |
| Net Gains (Losses) on Derivative and Hedging Activities | | (1 | ) | | 4 | | | (2 | ) | | (2 | ) | | (1 | ) | |
| Loss on Extinguishment of Debt | | — | | | — | | | — | | | — | | | — | | |
| All Other Income | | 1 | | | — | | | 1 | | | 1 | | | 3 | | |
| Total Other Income (Loss) | | (19 | ) | | 2 | | | (25 | ) | | (16 | ) | | (58 | ) | |
| Total Other Expenses | | 12 | | | 9 | | | 11 | | | 17 | | | 49 | | |
| Income Before Assessments | | 30 | | | 73 | | | 30 | | | 32 | | | 165 | | |
| Assessments | | 8 | | | 20 | | | 8 | | | 9 | | | 45 | | |
| Net Income | | $ | 22 | | | $ | 53 | | | $ | 22 | | | $ | 23 | | | $ | 120 | | |
Deposits
A summary of the average rates we paid on Interest-Bearing depositsDeposits greater than 10% of average total deposits is presented in the following table ($ amounts in millions):
| | | | | For the Years Ended December 31, | | Years Ended December 31, |
| | | 2010 | | 2009 | | 2008 | | 2011 | | 2010 | | 2009 |
| Interest-Bearing Overnight Deposits: | | | | | | | | | | | | |
| Average balance | | $ | 541 | | | $ | 847 | | | $ | 753 | | | $ | 733 |
| | $ | 541 |
| | $ | 847 |
|
| Average rate paid | | 0.04 | % | | 0.05 | % | | 1.77 | % | | 0.02 | % | | 0.04 | % | | 0.05 | % |
| Interest-Bearing Demand Deposits: | | | | | | | | | | | | |
| Average balance | | $ | 175 | | | $ | 129 | | | $ | 107 | | | $ | 289 |
| | $ | 175 |
| | $ | 129 |
|
| Average rate paid | | 0.02 | % | | 0.02 | % | | 0.91 | % | | 0.01 | % | | 0.02 | % | | 0.02 | % |
The aggregate amount of time deposits with a denomination of $100 thousand or more was $0, $15.0 million $15.2 million and $46.5$15.2 million as of December 31, 2011, 2010, and 2009, respectively. The time deposits outstanding at December 31, 2010 had a remaining maturity of less than three months. The time deposits outstanding at December 31, 2009 had a remaining maturity of between three and 2008, respectively.six months.
Short-term Borrowings
A summary of our short-term borrowings for which the average balance outstanding exceeded 30% of capital is presented in the table below ($ amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Discount Notes | | CO Bonds With Original Maturities of One Year or Less |
| | | December 31, | | December 31, |
| Short-term Borrowings | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 |
| Outstanding at period end | | $ | 8,925 | | | $ | 6,250 | | | $ | 23,466 | | | $ | 11,430 | | | $ | 12,284 | | | $ | 6,417 | |
| Weighted average rate at period end | | 0.15 | % | | 0.12 | % | | 1.40 | % | | 0.34 | % | | 0.69 | % | | 2.48 | % |
| Daily average outstanding for the period | | $ | 9,296 | | | $ | 14,756 | | | $ | 20,390 | | | $ | 8,438 | | | $ | 11,129 | | | $ | 7,075 | |
| Weighted average rate for the period | | 0.16 | % | | 0.58 | % | | 2.44 | % | | 0.48 | % | | 1.00 | % | | 2.77 | % |
| Highest outstanding at any month end | | $ | 13,827 | | | $ | 24,539 | | | $ | 22,160 | | | $ | 11,430 | | | $ | 12,809 | | | $ | 9,362 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Discount Notes | | CO Bonds With Original Maturities of One Year or Less |
| Short-term Borrowings | | 2011 | | 2010 | | 2009 | | 2011 | | 2010 | | 2009 |
| Outstanding at year end | | $ | 6,536 |
| | $ | 8,925 |
| | $ | 6,250 |
| | $ | 5,995 |
| | $ | 11,430 |
| | $ | 12,284 |
|
| Weighted average rate at year end | | 0.07 | % | | 0.15 | % | | 0.12 | % | | 0.15 | % | | 0.34 | % | | 0.69 | % |
| Daily average outstanding for the year | | $ | 7,980 |
| | $ | 9,296 |
| | $ | 14,756 |
| | $ | 8,257 |
| | $ | 8,438 |
| | $ | 11,129 |
|
| Weighted average rate for the year | | 0.10 | % | | 0.16 | % | | 0.58 | % | | 0.27 | % | | 0.48 | % | | 1.00 | % |
| Highest outstanding at any month end | | $ | 9,993 |
| | $ | 13,827 |
| | $ | 24,539 |
| | $ | 11,430 |
| | $ | 11,430 |
| | $ | 12,809 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures ("DCP") that are designed to ensure that information required to be disclosed by us in theour reports filed by us under the Securities Exchange Act of 1934 ("Exchange Act"), as amended is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC'sSecurities and Exchange Commission's rules and forms; and (b) accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, to allow timely decisions regarding required disclosures. In designing and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives, and that our management's duties require it to make its best judgment regarding the design of our DCP. As of December 31, 20102011, we conducted an evaluation, under the supervision, (andand with the participation)participation, of our management, including our Chief Executive Officer (the principal executive officer), Chief Operating Officer-ChiefOfficer - Chief Financial Officer (the principal financial officer) and Chief Accounting Officer (the principal accounting officer), of the effectiveness of the design and operation of our DCPdisclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Operating Officer-ChiefOfficer - Chief Financial Officer and Chief Accounting Officer concluded that our DCPdisclosure controls and procedures were effective as of December 31, 20102011.
Internal Control Over Financial Reporting
Management's Report on Internal Control over Financial Reporting
Reporting. Our management's report on internal control over financial reporting appears on page F-2 of this Annual Report and is incorporated herein by reference.
The effectiveness of our internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, ("ICFR") as of December 31, 20102011, has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in its report dated March 18, 201120, 2012, which appears on page F-3 of this Annual Report and is incorporated herein by reference.
Changes in Internal Control overOver Financial Reporting
Reporting. There were no changes in our ICFRinternal control over financial reporting, as defined in rules 13a-15(f) and 15(d)-15(f) of the Exchange Act, that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our ICFR.internal control over financial reporting.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures and other internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Additionally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
HERA, which became effective on July 30, 2008, significantly restructured the manner in which the FHLBs' directors are elected. HERAThe Federal Home Loan Bank Act of 1932, as amended ("Bank Act") divides the directorships of FHLBsthe 12 Federal Home Loan Banks ("FHLBanks") into two categories, "member" directorships and "independent" directorships. Both types of directorships are filled by a vote of the members. No member of an FHLB'sFHLBank's management may serve as a director of that FHLB.FHLBank. Elections for member directors are held on a state-by-state basis. Independent directors are elected at-large by all the members in the FHLBFHLBank district without regard to the state. Prior to enactment of HERA, our board of directors was comprised of a combination of directors elected by
Under the members and public interest directors appointed by our former regulator, the Finance Board.
Under HERA,Bank Act, member directorships must always make up a majority of the board of directors' seats, and the independent directorships must comprise at least 40% of the entire board.board of directors. A Federal Housing Finance Agency ("Finance Agency") Order issued June 21, 2010,3, 2011 provides that we have eighteen seats on our board of directors for 2011,2012, consisting of five Indiana member directors, five Michigan member directors, and eight independent directors. The term of office for directors elected after July 30, 2008 is four years, unless otherwise adjusted by the Director of the Finance Agency in order to achieve an appropriate staggering of terms (with approximately one-fourth of the directors' terms expiring each year). Directors may not serve more than three consecutive full terms.
Finance Agency regulations permit, but do not require, the board of directors to conduct an annual assessment of the skills and experience possessed by the board of directors as a whole and to determine whether the capabilities of the board of directors would be enhanced through the addition of individuals with particular skills and experience. We may identify those qualifications and so inform the voting members as part of our nomination and balloting process; however, by regulation as described below, we may not exclude a member director nominee from the election ballot on the basis of those qualifications so identified. For the 2011 director elections, our board of directors listed in its request for nominations certain desirable candidate financial and industry experiences, but no particular qualifications were required as part of its nomination, balloting and election process.
Nomination of Member Directors
Directors. Member directors are required by statute and regulation to meet certain specific criteria in order to be eligible to be elected and serve as directors. To be eligible, an individual must: (i) be an officer or director of a member institution located in the state in which there is an open member director position; (ii) represent a member institution that is in compliance with the minimum capital requirements established by its regulator; and (iii) be a U.S.United States citizen. These criteria are the only permissible eligibility criteria that member directors must be required to meet, and the FHLBsFHLBanks are not permitted to establish additional eligibility or qualifications criteria for member directors or nominees.
Each eligible institution may nominate representatives from member institutions in its respective state to serve terms on the board of directors as member directors. As a matter of statute and regulation, only FHLBFHLBank shareholders may nominate and elect member directors. Specifically, member institutions that hold stock in the FHLBFHLBank as of the record date (i.e., December 31 of the year prior to the year in which the election is held) are entitled to participate in the election process. FHLB boards ofIndividual FHLBank directors are not permitted to nominate or elect member directors, (exceptexcept to fill a vacancy for the remainder of an unexpired term).term. With respect to member directors, under Finance Agency regulations, no director, officer, employee, attorney or agent of an FHLBFHLBank (except in his or her personal capacity) may, directly or indirectly, support the nomination or election of a particular individual for a member directorship. As a result of this structure for FHLBFHLBank member director nominations and elections, we do not know
what specific experience, qualifications, attributes or skills (other than satisfying the regulatory criteria described above) led our member institutions to conclude that the member director nominees should serve as a director of the FHLB.our Bank.
Nomination of Independent Directors
Directors. Independent director nominees also must meet certain statutory and regulatory eligibility criteria. Each independent director must be a United States citizen and a bona fide resident of Michigan or Indiana. Before nominating any individual for an independent directorship, other than for a public interest directorship, our Bank's board of directors must determine that the nominee's knowledge or experience is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to that of our Bank.
Under HERA,the Bank Act, there are two types of independent directors:
| |
• | Public interest directors. We are required to have at least two public interest directors. Public interest directors must have more than four years of experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections. Before names are placed on the ballot, nominee eligibility will be verified through application and eligibility certification forms prescribed by the Finance Agency. Public interest directors. We are required to have at least two public interest directors. Public interest directors must have more than four years of experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections. Before names are placed on the ballot, nominee eligibility will be verified through application and eligibility certification forms prescribed by the Finance Agency. Other independent directors. Independent directors must have demonstrated knowledge or experience in auditing or accounting, derivatives, financial management, organizational management, project development or risk management practices, or other expertise established by Finance Agency regulations.
The Finance Agency deemed existing public interest directors who qualified and were designated under previous Bank Act provisions to be public interest directors for the remainder of their current terms. |
| |
• | Other independent directors. Independent directors must have demonstrated knowledge or experience in auditing or accounting, derivatives, financial management, organizational management, project development or risk management practices, or other expertise established by Finance Agency regulations. |
HERA prohibits an independent director from serving as an officer of any FHLBFHLBank and from serving as a director, officer, or employee of any member of the FHLBFHLBank on whose board the director sits, or of any recipient of any Advances from that FHLB.FHLBank.
Pursuant to HERAthe Bank Act and Finance Agency regulations, the Executive/Governance Committee of the board of directors, after consultation with our Affordable Housing Advisory Council regarding all independent director nominees, nominates candidates for the independent director positions on our board.board of directors. Individuals interested in serving as independent directors may submit an application for consideration.consideration by the Executive/Governance Committee. The application form is available on our website at www.fhlbi.com. Member institutions may also nominate independent director candidates for the Executive/Governance Committee to consider. The conclusion that the independent directors and independent director nominees should serve as directors of the FHLBFHLBank is based upon the satisfaction, by such persons, of the regulatoryregulatorily prescribed eligibility criteria describedlisted above. Under these regulations, the board of directors then submits the slated independent director candidates to the Finance Agency for its review and possible comment. Once the Finance Agency has accepted candidates for the independent director positions, we hold a district-wide election for those positions.
In order for an independent director candidate to be elected,Under the Finance Agency regulations, if the board of directors nominates just one independent director candidate per open seat, each candidate must receive at least 20% of the votes that are eligible to be cast.cast in order for that individual to be elected. If there is more than one candidate for each open independent director seat, then the requirement that the elected candidate must receive at least 20% of the votes eligible to be cast does not apply.
20102011 Member and Independent Director ElectionsElections.
Voting rights and processes with regard to the election of member directors and independent directors are set forth in the Bank Act and Finance Agency regulations. For the election of both member directors and independent directors, each eligible institution is entitled to cast one vote for each share of stock that it was required to hold as of the record date; however, the number of votes that a member institution may cast for each directorship cannot exceed the average number of shares of stock that were required to be held by all member institutions located in that state on the record date.
The only matter submitted to a vote of our shareholders in 20102011 was the election of certain member directors and independent directors, which occurred in the fourth quarter. In 2010,2011 nomination and election of member directors and independent directors were conducted by mail. No meeting of the members was held with regard to either election. The board of directors does not solicit proxies, nor are eligible institutions permitted to solicit or use proxies to cast their votes in an election for directors. The election was conducted in accordance with the Bank Act and Finance Agency regulations. See our Current Report on Form 8-K filed on December 17, 2010,November 4, 2011 for more information regarding our election of directors.
Our directors are listed in the table below. The information below includes all directors that served in 20102011 and current directors as of March 18, 201120, 2012.
|
| | | | | | | | |
| Name | | Age | | Director Since | | Term Expiration | | Independent (elected by District) or Member (elected by State) |
Paul D. BorjaJonathan P. Bradford (3) | | 5062 | | | 1/1/2008 | | 12/31/2010 | | Member (MI) |
Jonathan P. Bradford | | 61 | | | 5/17/4/24/2007 | | 12/31/2012 | | Independent |
IndependentPaul C. Clabuesch (1)
|
Paul C. Clabuesch | | 62 | 63 | | 1/1/2003 | | 12/31/20112015 | | Member (MI) |
Christine A. Coady | | 47 | | | 1/1/2008 | | 12/31/2011 | | Independent |
Charles L. Crow | | 67 | | | 1/1/2002 | | 12/31/2010 | | Member (IN) |
| Matthew P. Forrester | | 54 | 55 | | 1/1/2010 | | 12/31/2013 | | Member (IN) |
| Timothy P. Gaylord | | 56 | 57 | | 1/1/2005 | | 12/31/20112015 | | Member (MI) |
| Michael J. Hannigan, Jr. | | 6667 | | | 5/17/4/24/2007 | | 12/31/2013 | | Independent |
| Carl E. Liedholm | | 70 | 71 | | 1/6/1/2009 | | 12/31/2012 | | Independent |
| James L. Logue, III | | 5859 | | | 1/1/4/24/2007 | | 12/31/2013 | | Independent |
| Robert D. Long | | 5657 | | | 5/17/4/24/2007 | | 12/31/20112015 | | Independent |
| James D. MacPhee | | 63 | 64 | | 1/1/2008 | | 12/31/2014 | | Member (MI) |
| Dan L. Moore | | 60 | 61 | | 1/1/2011 | | 12/31/2014 | | Member (IN) |
| Christine Coady Narayanan | | 48 | | 1/1/2008 | | 12/31/2015 | | Independent |
Jeffrey A. Poxon(2) | | 64 | 65 | | 6/15/2006 | | 12/31/2013 | | Member (IN) |
| John L. Skibski | | 46 | 47 | | 1/1/2008 | | 12/31/20112015 | | Member (MI) |
Elliot A. Spoon(3) | | 6061 | | | 2/29/1/1/2008 | | 12/31/2014 | | Independent(1) |
| Thomas R. Sullivan | | 60 | 61 | | 1/1/2011 | | 12/31/2014 | | Member (MI) |
| Larry A. Swank | | 68 | 69 | | 1/6/1/2009 | | 12/31/2014 | | Independent |
| Maurice F. Winkler, III | | 55 | 56 | | 1/1/2009 | | 12/31/2012 | | Member (IN) |
| Christopher A. Wolking | | 51 | 52 | | 1/1/2009 | | 12/31/2012 | | Member (IN) |
| | |
| (1) | In 2008, prior to the effective dateOn November 17, 2011 our board of HERA,directors elected Mr. Bradford was designated by the Finance BoardClabuesch as Chair for a public interest director. In the 2008 independent director election, Mr. Bradford was elected as a public interest director. In the 2010 independent director election, Mr. Spoon was elected as a public interest director.two-year term expiring December |
31, 2013.
| |
(2) | On November 17, 2011 our board of directors elected Mr. Poxon as Vice-Chair for a two-year term expiring December 31, 2013. |
| |
(3) | Public Interest Director designation. |
The following is a summary of the background and business experience of each of our directors. Except as otherwise indicated, for at least the last five years, each director has been engaged in his or her principal occupation as described below:below.
Paul D. Borja is the Executive Vice President and Chief Financial Officer of Flagstar Bank in Troy, Michigan, and has held that position since 2005. From 1997 to 2005, Mr. Borja was a partner in the law firm Kutak Rock LLP in Washington, D.C. and was partner in other law firms from 1990 to 1999. Mr. Borja's legal experience included matters relating to federal bankruptcy law and securities law, as well as corporate law and accounting matters. Before practicing law, Mr. Borja practiced as a CPA with KPMG and other accounting firms since 1982.
Jonathan P. Bradford is the President and Chief Executive Officer of Inner City Christian Federation ("ICCF),Foundation, in Grand Rapids, Michigan, and has held that position since 1981. ICCFInner City Christian Foundation is involved in the development of affordable housing, as well as housing education and counseling. As President and Chief Executive Officer of ICCF,Inner City Christian Foundation, Mr. Bradford has developed the organization's real estate development financing system and has guided the development of over 500 housing units.units and approximately 70,000 square feet of commercial space. Mr. Bradford also serves as the Vice President of the Board of the Michigan Non-Profit Housing Corporation and is a board member of the Genesis Non-Profit Housing Corporation in Grand Rapids, Michigan. Mr. Bradford holds a Master's Degree in Social Work from the University of Michigan with a concentration in housing and community development policy and planning. He is also licensed in the State of Michigan as a residential building contractor. Mr. Bradford currently serves as Vice Chair of the Affordable Housing Committee, and also serves on our Executive/Governance and Finance Committees.
Paul C. Clabuesch serves as the Chair of our board of directors. He is the past Chairman, President, and Chief Executive Officer of Thumb Bancorp, Inc., a bank holding company, and Thumb National Bank and Trust, in Pigeon, Michigan, a position in which he served from 1985 through 2009, when he was named Chairman Emeritus of Thumb National Bank and Trust. Mr. Clabuesch's career with that bank began in 1973. Mr. Clabuesch also serves as a member of the board of directors of two bank holding companies, Rogers Bancshares, Inc. and Citizens Bancshares, Inc. During his career, Mr. Clabuesch has held numerous leadership positions with the Michigan Bankers Association, including service as Chairman of its board, Treasurer, and membership on its Executive Council. Mr. Clabuesch was also named the Michigan Bankers Association's Banker of the Year in 2008. Mr. Clabuesch has served as a member of the Board of Trustees of Scheurer Hospital, Pigeon, Michigan, since 1975.from 1975 to 2010. In addition to serving as the Chair of our board of directors, Mr. Clabuesch serves as Chair of the Executive/Governance Committee and is an ex-officio member of all board of directors' committees.
Christine A. Coady is the President and Chief Executive Officer of Opportunity Resource Fund ("ORF"), formerly known as Michigan Interfaith Trust Fund in Lansing, Michigan, having served in that position since October 2004. ORF is a non-profit community development financial institution engaged in lending for affordable housing and community development purposes. Ms. Coady has held various positions with the ORF and its predecessor organization since 1989, and served as its Executive Director from 1997 to 2004. Ms. Coady currently serves as Chair of our Human Resources Committee, and also serves on our Affordable Housing and Budget/IT Committees.
Charles L. Crow is the Chairman and Chief Executive Officer of Community Bank in Noblesville, Indiana, and Chairman of Community Bancshares, Inc., a bank holding company in Noblesville, Indiana. Mr. Crow has served in those capacities since 1991, and also served as that company's President from 1991 through 2009. Mr. Crow has over forty years' experience in commercial and retail banking. During 2010, Mr. Crow served as Vice Chair of the Human Resources Committee and Secretary of the Executive/Governance Committee, and from 2004 to 2009 served as the Vice Chair of our board of directors.
Matthew P. Forrester is the President and Chief Executive Officer of River Valley Financial Bank in Madison, Indiana, and River Valley Bancorp, a thrift holding company in Madison, Indiana. Mr. Forrester has held those positions since 1999. Prior to that, Mr. Forrester was Chief Financial Officer of Home Loan Bank in Fort Wayne, Indiana, and Senior Vice President and Treasurer for its holding company, Home Bancorp. Mr. Forrester held those positions for 14 years. Before joining Home Loan Bank, Mr. Forrester served as an examiner for the Indiana Department of Financial Institutions.Institutions for three years. Mr. Forrester holds a bachelor's degree from Wabash College and a master of business administration degree from St. Francis College. Mr. Forrester currently serves on our Audit Committee.and Budget/Information Technology Committees.
Timothy P. Gaylord is the President and Chief Executive Officer of Capital Directions, Inc., a bank holding company in Mason, Michigan, and Mason State Bank, its banking subsidiary, and has held those positions since 1995. Mr. Gaylord is a graduate of Central Michigan University, and has completed additional course work in management, strategic planning and finance from several graduate management and banking schools. Mr. Gaylord currently serves as Chair of our Finance Committee and Vice Chair of our Audit Committee. In addition, Mr. Gaylord serves on our Executive/Governance Committee.
Michael J. Hannigan, Jr., Jr. has been involved in mortgage banking and related businesses for more than 25 years. Currently, he is the President of The Hannigan Company, LLC, a real estate development company in Carmel, Indiana, and has held that position since 2006 when he formed the company. From 1986 to 2006, Mr. Hannigan was the Executive Vice President and a director of The Precedent Companies, LLC. Mr. Hannigan previously served as a Senior Vice President and director of Union Federal Savings Bank. During his career, Mr. Hannigan has been involved as a director and founding partner of several companies involved in residential development, home building, private water utility service, industrial development, and private capital acquisition. Since 2009, Mr. Hannigan has served as Program Manager for the Indiana Builders Association, a trade association. Mr. Hannigan currently serves as Chair of our Affordable Housing Committee, as Vice Chair of our Budget/Information Technology Committee, as Vice Chair of our Human Resources Committee, and as Secretary of our Executive/Governance Committee. He has previously served as Vice Chair of our Board of Directors and Vice Chair of the Council of FHLBanks.
Carl E. Liedholm, PhD, is a Professor of Economics at Michigan State University in East Lansing, Michigan, and has held that position since 1965. He has taught graduate and post-graduate courses and presented seminars on international finance, banking and housing matters. Mr. Liedholm has over four decades of experience in generating and analyzing financial and other performance data from enterprises in over two dozen countries. Mr. Liedholm earned his bachelor's degree from Pomona College and his doctoral degree from the University of Michigan. He has published numerous books and monographs on economics and related matters. Mr. Liedholm currently serves on our Affordable Housing and Finance Committees.
James L. Logue, III is the Senior Vice President and Chief Operating Officer of Great Lakes Capital Fund, a housing finance and development company in Lansing, Michigan, and has held that position since September 2003. Prior to that time, Mr. Logue served as the Executive Director of the Michigan State Housing Development Authority since 1991. Mr. Logue has over 30 years' experience in affordable housing and finance matters. He served as Deputy Assistant Secretary for Multifamily Housing Programs at the United States Department of Housing and Urban Development in 1988 - 1989,and has been involved in various capacities with the issuance of housing bonds and the management of multi-billion dollar housing portfolios. Mr. Logue serves as a board member of the National Housing Trust, Washington, D.C., and the Corporation for Supportive Housing, New York, New York. Mr. Logue currently serves as Chair of our Budget/Information Technology Committee, and also serves on our Executive/Governance and Affordable Housing Committees.
Robert D. Longretired from KPMG, LLP on December 31, 2006, where he was the Office Managing Partner in the Indianapolis, Indiana office since 1999, and had served as an Audit Partner for KPMG since 1988. As an audit partner, Mr. Long served a number of companies with public, private and cooperative ownership structures, in a variety of industries, including banking, finance and insurance. Mr. Long served as Board Chairman for Kenra, Ltd., a provider of hair care products, until the company was sold in December 2010. Mr. Long is also a member of the board of directors and Chair of the Audit Committee for Schulman Associates Institutional Review Board, Inc., a company providing independent review services to pharmaceutical and clinical research companies. Since August 2010, Mr. Long has been a member of the board of directors and Chair of the Audit Committee of Beefeaters Holding Company, Inc., a pet food company. Mr. Long currently serves as Chair of our Audit Committee, and also serves on our Finance and Human Resources Committees.
James D. MacPhee is the Chief Executive Officer and a director of Kalamazoo County State Bank in Schoolcraft, Michigan, and has served in that position since 1990.1991. Mr. MacPhee also serves as a director of First State Bank in Decatur, Michigan. Mr. MacPhee has worked in the financial services industry since 1968. During his career, Mr. MacPhee has held leadership positions with the Community Bankers of Michigan (formerly the Michigan Association of Community Bankers) and the Independent Community Bankers of America, ("ICBA"), and currently serves asis immediate past chair of the ICBA's Chair.latter organization. He holds an undergraduate degree in business and finance from Kalamazoo Valley Community College and an executive master of business administration degree in bank management from the University of Michigan. Mr. MacPhee currently serves on our Budget/ITInformation Technology and Human Resources Committees.
Dan L. Mooreis the President and Chief Executive Officer of Home Bank SB in Martinsville, Indiana, and has served in that position since 2006. Prior to that time, Mr. Moore served as that bank's Executive Vice President and Chief Operating Officer. Mr. Moore has also served as a director of Home Bank SB since 2000. He has been employed by Home Bank SB since 1977.1978. Mr. Moore is a graduate of Indiana State University and holds a Master of Science degree in management from Indiana Wesleyan University. Mr. Moore currently serves on our Human Resources Committee.and Audit Committees.
Christine Coady Narayanan is the President and Chief Executive Officer of Opportunity Resource Fund, formerly known as Michigan Interfaith Trust Fund in Lansing, Michigan, having served in that position since October 2004. Opportunity Resource Fund is a non-profit community development financial institution engaged in lending for affordable housing and community development purposes. Ms. Narayanan has held various positions with the Opportunity Resource Fund and its predecessor organization since 1989, and served as its Executive Director from 1997 to 2004. Ms. Narayanan currently serves as Chair of our Human Resources Committee, and also serves on our Affordable Housing and Budget/Information Technology Committees.
Jeffrey A. Poxonserves as Vice Chair of our board of directors. He is the Vice President —- Investment Research of The Lafayette Life Insurance Company in Lafayette, Indiana,Cincinnati, Ohio, a member of the Western & Southern Financial Group, having previously served as its Chief Investment Officer. Mr. Poxon has been with that companyLafayette Life since 1979, was appointed Chief Investment Officer in 1987, and was promoted to Senior Vice President in 1995. He is also a director of LSB Financial Corporation, Lafayette, Indiana and a director of its banking subsidiary, Lafayette Savings Bank, FSB in Lafayette, Indiana, having served in those capacities since 1992. Lafayette Savings Bank, FSB is a member of our Bank. In addition to serving as Vice Chair of our board of directors, Mr. Poxon currently serves as Vice Chair of our Executive/Governance Committee. Mr. Poxon also serves on our Audit and Finance Committees.
John L. Skibski is the Executive Vice President and Chief Financial Officer of MBT Financial Corp., a bank holding company located in Monroe, Michigan, and Monroe Bank and Trust, its banking subsidiary. Mr. Skibski has held those positions since 2004, and has been a director of both companies since 2008. Mr. Skibski has over 20 years' experience in banking.banking in various financial controls capacities. He holds a bachelor's degree and a master of business administration degree from the University of Toledo. Mr. Skibski currently serves on our Executive/Governance, Audit and Budget/ITInformation Technology Committees.
Elliot A. Spoonis an Assistant Dean and a Professor of Law in Residence at Michigan State University College of Law in East Lansing, Michigan, and has held that position since 2001. Before beginning his teaching career, Mr. Spoon practiced law for 26 years. Mr. Spoon currently teaches in the areas of securities regulation, mortgage banking, corporate finance and accounting for lawyers, and practiced in these areas when he was in private practice. In 2009, the State of Michigan Office of Financial and Insurance Regulation appointed Mr. Spoon to the SAFE Mortgage Test National Review Committee. He served on that committee through 2011. Mr. Spoon has served as co-chair of the Midwest Securities Law Institute since 2004. Mr. Spoon currently serves on our Affordable Housing, Audit, and Finance Committees.
Thomas R. Sullivanis the President, Chief Executive Officer, and a director of Firstbank Corporation, aan SEC-registrant, multi-bank holding company in Alma, Michigan, and has held those positions since 2000. Mr. Sullivan was President and Chief Executive Officer of Firstbank (Mt. Pleasant), a state bank subsidiary of Firstbank Corporation in Mt. Pleasant, Michigan, from 1991 through January 2007. Mr. Sullivan has over 35 years of banking experience. He has previously served on the Community Bankers Council of the American Bankers Association, as a director of the Michigan Bankers Association, and as a member of the Regulation Review Committee of the Independent Community Bankers of America. Mr. Sullivan received a bachelor's degree from Wayne State University, and has attended several banking schools during his career. Mr. Sullivan currently serves on our Finance Committee.and Human Resources Committees.
Larry A. Swank is President and Chief Executive Officer of Sterling Group, Inc. and affiliated companies in Mishawaka, Indiana. Mr. Swank has served as President and Chief Executive Officer of Sterling Group, Inc. since 1979. The principal business of that company and its affiliates involves the acquisition, development, construction and management of multi-family housing. Mr. Swank's company manages over 50 properties in 12 states. Mr. Swank has served as a director of the National Association of Home Builders since 1995 and as a member of its Executive Board since 1997. He has served as Chair of that association's housing finance committee on three separate occasions. Mr. Swank currently serves on our Affordable Housing and Budget/ITInformation Technology Committees.
Maurice F. Winkler, III is President and Chief Executive Officer of Peoples Federal Savings Bank of DeKalb County in Auburn, Indiana. He is also President and Chief Executive Officer of Peoples Bancorp (previously an SEC registrant), the holding company of Peoples Federal Savings Bank of DeKalb County. Mr. Winkler has held those positions since 1996 and served as Chief Financial Officer of the bank and the holding company from 1987 to 1996. He has also been a director of Peoples Bancorp since 1993. Mr. Winkler has over 30 years' experience in banking. He previously served on the board of directors of the Indiana Bankers Association. Mr. Winkler received a bachelor's degree from Purdue University. He currently serves on our Budget/ITInformation Technology and Human Resources Committees.
Christopher A. Wolking is the Senior Executive Vice President and Chief Financial Officer of Old National Bancorp in Evansville, Indiana, and has held those positions since January 2005. Prior to that time, he served as Senior Vice President and Treasurer of Old National Bancorp since February 1999. Mr. Wolking has over 25 years' experience in commercial banking, primarily in treasury and finance roles. Mr. Wolking is a graduate of the University of Tulsa with degrees in finance and economics, and obtained his master of business administration degree from Western Michigan University. Mr. Wolking currently serves as Vice Chair of our Finance Committee, and also serves on our Audit Committee.
Nominating Committee. Our board of directors does not have a nominating committee with respect to member director positions because, as explained above, member directors are nominated by our members. As noted, the Executive/Governance Committee, after consultation with our Affordable Housing Advisory Council, nominates candidates for independent director positions.
Our board of directors, with input from the Executive/Governance Committee, elects a Chair and a Vice Chair to two-year terms.
Audit Committee and Audit Committee Financial Expert. Our board of directors has an Audit Committee that was comprised of the following members as of December 31, 2011:
Robert D. Long, Audit Committee Chair
Timothy P. Gaylord, Audit Committee Vice Chair
Matthew P. Forrester
Jeffrey A. Poxon
John L. Skibski
Elliot A. Spoon
Christopher A. Wolking
Paul C. Clabuesch, Ex-Officio Voting Member
The 2012 Audit Committee is made up of the following members as of March 20, 2012:
Robert D. Long, Audit Committee Chair
Timothy P. Gaylord, Audit Committee Vice Chair
Matthew P. Forrester
Dan L. Moore
Jeffrey A. Poxon
John L. Skibski
Elliot A. Spoon
Christopher A. Wolking
Paul C. Clabuesch, Ex-Officio Voting Member
Our board of directors has determined that Mr. Long is the Audit Committee Financial Expert due to his previous experience as an audit partner at a major public accounting firm. As discussed more fully in Item 13. Certain Relationships and Related Transactions and Director Independence, all Audit Committee members meet the tests for independence under the regulations of the Finance Agency. Our board of directors has determined that no member director may qualify as "independent" under the New York Stock Exchange rules definition due to the cooperative nature of the FHLBank with its members.
The Bank Act requires the FHLBanks to comply with the substantive audit committee director independence rules applicable to issuers of securities under the rules adopted pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"). Those rules provide that, to be considered an independent member of an audit committee, a director may not be an affiliated person of the registrant. The term "affiliated person" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the registrant. The rule provides a "safe harbor," whereby a person will not be deemed an affiliated person if the person is not the beneficial owner, directly or indirectly, of more than 10% of any class of voting securities of the registrant. All of our Audit Committee member directors' institutions presently meet this safe harbor.
Executive Officers
Our Executive Officers, as determined under SECSecurities and Exchange Commission ("SEC") rules ("Executive Officers"Officers"), are listed in the table below. Each officer serves a term of office of one calendar year or until the election and qualification of his or her successor;successor, provided, however, that pursuant to the Bank Act, our board of directors may dismiss any officer at any time. Except as indicated below, each officer has been employed in the principal occupation listed below for at least five years.
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| | | | |
| Name | | Age | | Position |
Milton J. Miller, II (1) | | 5556 | | President —- Chief Executive Officer (Principal Executive Officer) |
Cindy L. Konich (2) | | 5455 | | Executive Vice President —- Chief Operating Officer —- Chief Financial Officer (Principal Financial Officer) |
Jonathan R. West (3) | | 5455 | | Executive Vice President —- Chief Operating Officer —- Business Operations |
Sunil U. Mohandas (4) | | 5152 | | Senior Vice President —- Chief Risk Officer |
K. Lowell Short, Jr. (5) | | 5455 | | Senior Vice President —- Chief Accounting Officer (Principal Accounting Officer) |
Gregory L. Teare (6) | | 5758 | | Senior Vice President —- Chief Banking Officer |
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| (1) | Mr. Miller was selected by our board of directors to serve as President —- Chief Executive Officer effective July 16, 2007. Previously, Mr. Miller was the Senior Vice President —- Chief Financial Officer prior to his retirement from the Bank effective December 29, 2006. Mr. Miller currently serves on the board of directors of the Office of Finance.Finance and is the Chairman of the Board of the Financing Corporation. In 2008, Mr. Miller was appointed to the board of directors of Pentegra Defined Benefit Plan for Financial Institutions, which is part of Pentegra Retirement Services. Pentegra Retirement Services is a not-for-profit cooperative that provides full-service community bank retirement programs nationwide, including those provided to our employees. |
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(2) | Ms. Konich was promoted to Executive Vice President - Chief Operating Officer—Officer - Chief Financial Officer on July 30, 2010, after having served as Senior Vice President —- Chief Financial Officer, since September 17, 2007. Effective December 30, 2006, Ms. Konich was appointed by our board of directors as First Vice President —- Acting Chief Capital Markets Officer after having served as the First Vice President —Treasurer.- Treasurer. |
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| (3) | Mr. West was promoted to Executive Vice President - Chief Operating Officer —- Business Operations on July 30, 2010, after having having been appointed by our board of directors to serve as Senior Vice President —- Administration, General Counsel and Corporate Secretary (Ethics Officer) on September 17, 2007. Prior to his 2007 appointment, Mr. West was the Senior Vice President —- General Counsel and Corporate Secretary. |
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(4) | Mr. Mohandas was promoted to Senior Vice President —- Chief Risk Officer, effective January 1, 2011, after having been appointed by our board of directors as First Vice President —- Corporate Risk Manager, effective September 19, 2008. Prior to his 2008 appointment, Mr. Mohandas was the First Vice President —- Treasury Risk Manager. |
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(5) | Mr. Short was appointed by our board of directors as Senior Vice President —- Chief Accounting Officer on August 17, 2009, after being hired on August 10, 2009. Mr. Short was a member of the board of directors of One America Funds, Inc. in Indianapolis, Indiana, from 2007 to 2009, and was a member of that board's Audit Committee. From 2006 to 2007, Mr. Short served as Executive Vice President —- Chief Financial Officer of Forethought Financial Group in Indianapolis and Batesville, Indiana. Mr. Short served as Senior Vice President — Finance with various responsibilities, including, among others, accounting, financial reporting, and rating agency/regulatory/investor relations, at Conseco Companies in Carmel, Indiana from 1990 to 2006. |
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| (6) | Mr. Teare was appointed by our board of directors as Senior Vice President —- Chief Banking Officer on September 19, 2008, after being hired on September 15, 2008. He served as Risk Management Senior Manager for PricewaterhouseCoopers in Seattle, Washington, from 2006 to 2008, where he led projects providing advisory services to major financial institutions on regulatory compliance and operational reviews. |
Code of Conduct
We have a Code of Conduct that is applicable to all directors, officers and employees of theour Bank, including our principal executive officer, our principal financial officer, and our principal accounting officer, and the members of our Affordable Housing Advisory Council. The Code of Conduct is available on our website at www.fhlbi.com by clicking on "About" and then selecting "Code of Conduct" from the drop downdrop-down menu. Interested persons may also request a copy by contacting us, Attention: Corporate Secretary, FHLBFHLBank of Indianapolis, 8250 Woodfield Crossing Boulevard, Indianapolis, IN 46240.
Nominating Committee
Our board of directors does not have a nominating committee with respect to member director positions because, as explained above, member directors are nominated by our members. As noted, the Executive/Governance Committee, after consultation with our Advisory Council, nominates candidates for independent director positions.
The board of directors, with input from the Executive/Governance Committee, elects a Chair and a Vice Chair to two-year terms.
Audit Committee and Audit Committee Financial Expert
Our board of directors has an Audit Committee that was comprised of the following members as of December 31, 2010:
Robert D. Long, Audit Committee Chair
Timothy P. Gaylord, Audit Committee Vice Chair
Matthew P. Forrester
Jeffrey A. Poxon
John L. Skibski
Elliot A. Spoon
Christopher A. Wolking
Paul C. Clabuesch, Ex-Officio Voting Member
The 2011 Audit Committee is made up of the following members as of March 18, 2011:
Robert D. Long, Audit Committee Chair
Timothy P. Gaylord, Audit Committee Vice Chair
Matthew P. Forrester
Jeffrey A. Poxon
John L. Skibski
Elliot A. Spoon
Christopher A. Wolking
Paul C. Clabuesch, Ex-Officio Voting Member
Our board of directors has determined that Mr. Long is the Audit Committee Financial Expert due to his previous experience as an audit partner at a major public accounting firm. As discussed more fully in "Item 13. Certain Relationships and Related Transactions and Director Independence," all Audit Committee members meet the tests for independence under the regulations of the Finance Agency. Our board of directors has determined that no member director may qualify as "independent" under the NYSE rules definition due to the cooperative nature of the FHLB with its members.
Section 1112 of HERA requires the FHLBs to comply with the substantive audit committee director independence rules applicable to issuers of securities under the rules adopted pursuant to the Exchange Act. Those rules provide that, to be considered an independent member of an audit committee, a director may not be an affiliated person of the registrant. The term "affiliated person" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the registrant. The rule provides a "safe harbor," whereby a person will not be deemed an affiliated person if the person is not the beneficial owner, directly or indirectly, of more than 10% of any class of voting securities of the registrant. All of our Audit Committee member directors' institutions presently meet this safe harbor.
Section 16(a) Beneficial Ownership Reporting Compliance
Not Applicable.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Interlocks and Insider Participation
The Human Resources Committee ("HR Committee"Committee") serves as the Compensation Committee of the board of directors and is made up solely of directors. No officers or employees of theour Bank serve on the HR Committee. Further, no director serving on the HR Committee has ever been an officer of theour Bank or had any other relationship which would be disclosable under Item 404 of Regulation S-K.
Compensation Committee Report
The HR Committee has reviewed and discussed with Bank management the "Compensation Discussion and Analysis" that follows and, based on such review and discussions, has recommended to our board of directors that the Compensation Discussion and Analysis be included in the Bank'sour Annual Report on Form 10-K for fiscal year 20102011. As of December 31, 20102011, the HR Committee was comprised of the following members:
Christine A. Coady HR Committee Chair
Charles L. Crow, HR Committee Vice Chair
Michael J. Hannigan, Jr.
Robert D. Long
James D. MacPhee
Maurice F. Winkler, III
Paul C. Clabuesch, Ex-Officio Voting Member
The HR Committee is comprised of the following members as of March 18, 2011:
Christine A. Coady,Narayanan, HR Committee Chair
Michael J. Hannigan, Jr., HR Committee Vice Chair
Robert D. Long
James D. MacPhee
Dan L. Moore
Maurice F. Winkler, III
Paul C. Clabuesch, Ex-Officio Voting Member
The HR Committee is comprised of the following members as of March 20, 2012:
Christine Coady Narayanan, HR Committee Chair
Michael J. Hannigan, Jr., HR Committee Vice Chair
Robert D. Long
James D. MacPhee
Dan L. Moore
Thomas R. Sullivan
Maurice F. Winkler, III
Paul C. Clabuesch, Ex-Officio Voting Member
Compensation Discussion and Analysis
Overview
Overview. To provide perspective on our compensation programs and practices for our Named Executive Officers ("NEOs"NEOs"), we have included certain information in the Compensation Discussion and Analysis relating to Executive Officers and employees other than the NEOs. Our NEOs for the last completed fiscal year were (i) our principal executive officer ("PEO"PEO"), (ii) our principal financial officer ("PFO"PFO"), and (iii) the three most highly compensated officers (other than the PEO and the PFO) who were serving as Executive Officers (as defined in SEC rules) at the end of the last completed fiscal year. The following persons were our NEOs for the period covered by this Compensation Discussion and Analysis:
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| | |
| NEO | | Title |
| Milton J. Miller, II | | President —- Chief Executive Officer (PEO) |
| Cindy L. Konich | | Executive Vice President —- Chief Operating Officer —- Chief Financial Officer (PFO) |
| Jonathan R. West | | Executive Vice President —- Chief Operating Officer —- Business Operations |
Sunil U. MohandasK. Lowell Short, Jr. | | Senior Vice President —- Chief RiskAccounting Officer |
| Gregory L. Teare | | Senior Vice President —- Chief Banking Officer |
Our executive compensation program is overseen by the Executive/Governance Committee (in the case of the President-ChiefPresident - Chief Executive Officer's ("CEO"CEO") compensation) and the HR Committee (in the case of the other NEOs' compensation), and ultimately by the entire board of directors. The HR Committee meets at scheduled times throughout the year (five(seven times in 2010)2011) and reports regularly to the board of directors on its recommendations. In carrying out its responsibilities and duties, the HR Committee has the authority to obtain advice and assistance from outside legal counsel, compensation consultants, and other advisors as the HR Committee deems necessary, with all fees and expenses paid by theour Bank. The Executive/Governance Committee assists the board of directors in the governance of theour Bank, including nominations of the Chair and Vice Chair of the board of directors and its committees, and in overseeing the affairs of theour Bank during intervals between regularly scheduled board of directors' meetings, as provided for in the Bank'sour bylaws. The Executive/Governance Committee also reviews the President-CEO'sPresident - CEO's performance and compensation. The Executive/Governance Committee meets as needed throughout the year (four times in 2010)2011) and reports to the board of directors on its recommendations.
As a GSE,Government-sponsored enterprise ("GSE"), all aspects of our business and operations, including our executive compensation programs, are subject to regulation by the Finance Agency. Section 1113 of HERAThe Bank Act gives the Director of the Finance Agency authority to prevent the FHLBsFHLBanks from paying compensation to their executive officers that is not reasonable and comparable with compensation for employment in other similar businesses (including other publicly-held financial institutions or major financial services companies) involving similar duties and responsibilities. Pursuant to this authority, the Finance Agency has directed the FHLBsFHLBanks to provide information to the Finance Agency concerning all compensation actions relating to the respective FHLBs' five most highly compensated officers.FHLBanks' NEOs. This information, which includes studies of comparable compensation, must be provided to the Finance Agency at least four weeks in advance of any planned board of directors' action with respect to the compensation of the specified officers. Under the supervision of the board of directors, we provide this information to the Finance Agency on an ongoing basis as required.
On October 27, 2009, the Finance Agency issued Advisory Bulletin 2009-AB-02. This Advisory Bulletin2009-AB-02, issued in October 2009, sets forth certain principles for executive compensation practices to which the FHLBsFHLBanks and the Office of Finance should adhere in setting executive compensation. These principles consist of the following:
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• | executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions; |
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• | executive incentive compensation should be consistent with sound risk management and preservation of the par value of the FHLB's capital stock; |
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• | a significant percentage of an executive's incentive-based compensation should be tied to longer-term performance and outcome-indicators; |
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• | a significant percentage of an executive's incentive-based compensation should be deferred and made contingent upon performance over several years; and |
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• | the FHLB's board of directors should promote accountability and transparency in the process of setting compensation. |
executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions;
executive incentive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank's capital stock;
a significant percentage of an executive's incentive-based compensation should be tied to longer-term performance and outcome indicators;
a significant percentage of an executive's incentive-based compensation should be deferred and made contingent upon performance over several years; and
the FHLBank's board of directors should promote accountability and transparency in the process of setting compensation.
In evaluating compensation at the FHLBs,FHLBanks, the Director of the Finance Agency will consider the extent to which an executive's compensation is consistent with the above-listed principles. As described below, we incorporated these principles into our development, implementation, and review of compensation policies and practices for executives for 20102011 and 2011.2012.
Additionally, in April 2011, seven federal financial regulators, including the Finance Agency, published a proposed rule that would prohibit "covered financial institutions" from entering into incentive-based compensation arrangements that encourage inappropriate risks. This rule would be applicable to the FHLBanks and would:
prohibit excessive compensation;
prohibit incentive compensation that could lead to material financial loss;
require an annual report;
require policies and procedures; and
require mandatory deferrals of 50% of incentive compensation over three years for certain executive officers.
Covered persons under the rule would include senior management responsible for the oversight of firm-wide activities or material business lines and non-executive employees or groups of those employees whose activities may expose the institution to a material loss. Under the proposed rule, covered financial institutions would be required to comply with three key risk management principles related to the design and governance of incentive-based compensation: balanced design, independent risk management controls and strong governance. In addition, the proposed rule identifies four methods to balance compensation design and make it more sensitive to risk: risk adjustment of awards, deferral of payment, longer performance periods and reduced sensitivity to short-term performance. We would also be subject to a mandatory 50% deferral of incentive-based compensation for certain executive officers and board oversight of incentive-based compensation for certain risk-taking employees who are not executive officers. As described below, we have incorporated these concepts into our development, implementation and review of compensation policies and practices for 2012.
Compensation Philosophy and Objectives
TheObjectives. On November 17, 2011 our board of directors adopted a resolution updating our statement of compensation program forphilosophy. Pursuant to the resolution, our NEOscompensation philosophy is designed to provide a market-competitive compensation and benefits package that will enable us to attract,effectively recruit, promote, retain and motivate highly qualified employees and retain talented individuals. We strive to provide an aggregate compensation opportunity that is generally competitive with prevailing practices, alignsmanagement talent for the interest of the NEOs with thosebenefit of our Bank, its members, reflects total compensation that is consistent with performance and business resultsother stakeholders. We desire to be competitive and complies with the requirements of the Finance Agency. In determining or reviewingforward-thinking while maintaining a prudent risk management culture. Thus, the compensation ofprogram should encourage responsible growth and prudent risk-taking while delivering a competitive pay package.
Specifically, our NEOs, the Executive/Governance and HR Committees are guided by the principle that there should be a strong link between individual and Bank performance and executive pay. On January 21, 2011, the board of directors, after consultation with the HR Committee, re-affirmed this overall compensation philosophy and structure, first put in place in 2008, as discussed in this compensation discussion and analysis.
The compensation program is designed to reward:
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• | the attainment of the Bank's performance goals; |
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• | the implementation of short and long-term business strategies; |
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• | the accomplishment of our public policy mission; |
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• | the effective and appropriate management of financial, operational, reputational, regulatory, and human resources risks; |
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• | the growth and enhancement of senior management leadership and functional competencies; and |
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• | the accomplishment of goals to maintain an efficient cooperative system. |
the attainment of performance goals;
the implementation of short and long-term business strategies;
the accomplishment of our public policy mission;
the effective and appropriate management of financial, operational, reputational, regulatory, and human resources risks;
the growth and enhancement of senior management leadership and functional competencies; and
the accomplishment of goals to maintain an efficient cooperative system.
The board of directors continues to review these goals and the compensation alternatives available and may make changes in the program from time to time to better achieve these goals or to comply with the directives of the Finance Agency. We are not able to offer market-based equity compensation because we are a cooperative, and only member institutions (or their legal successors) may own our stock. Without equity incentives to attract, reward and rewardretain NEOs, we provide alternative compensation and benefits such as cash incentive opportunities, and pension (with respect to our current NEOs) and other retirement benefits.benefits (as to all NEOs). This approach will generally lead to a mix of compensation for NEOs that emphasizes base salary, provides meaningful incentive opportunities, and creates a competitive total compensation opportunity relative to the market.
Role of the Executive/Governance and HR Committees in Setting Executive Compensation
Compensation. The Executive/Governance and HR Committees intend that the executive compensation program be aligned with our short-term and long-term business objectives and focus executives' efforts on fulfilling these Bank-wide objectives. As discussed below, the Executive/Governance Committee reviews the President-CEO'sPresident - CEO's performance and researches and recommends the President-CEO'sPresident - CEO's salary to the board of directors, and the President-CEOPresident - CEO determines the salaries of the other NEOs, after consulting with the HR Committee. The percentage of salary increases that will apply to merit and promotional equity increases for each year's budget is recommended by the HR Committee to the Budget/Information Technology Committee for approval by the board of directors. The benefit plans that will be offered, and any material changes to those plans from year to year, are approved by the board of directors after review and recommendation by the HR Committee. The HR Committee also recommends the goals, payouts and qualifications for both the annual short-term incentive plans and the long-term incentive plan for board of directors' review and approval.
Role of the Named Executive Officers in the Compensation Process
Process. The NEOs assist the HR Committee and the board of directors by providing support to any compensation consultants engaged by the board of directors or HR Committee. The Director of Human Resources & Administration assists by gathering research on the Bank's hiring and turnover statistics, compensation trends, peer groups, cost of living, and other market data requested by the President-CEO,President - CEO, the HR Committee, the Audit Committee, the Executive/Governance Committee, or the board of directors. Additionally, the Director of Human Resources & Administration makes recommendations regarding officer appointments and salary levels for all Bank employees, which are evaluated by senior management or one of the board committees, depending on the position. Further, senior management prepares the strategic plan financial forecasts for the board of directors and the Budget/Information Technology Committee, which are then used to establishconsidered when establishing the goals and anticipated payout terms for the incentive compensation plans.
Role of Compensation Consultants in Setting Executive Compensation
Compensation. The salary and benefit benchmarks we use to establish reasonable and competitive compensation for our employees are the competitor groups establishedidentified by McLagan Partners, an Aon Hewitt Consulting and its affiliate, McLagan Partners.Company. The primary peercompetitor group is comprised of a number of large regional/commercial banks and other companies as listed below ("Primary Peer Group"Competitor Group")., considering the divisional heads of such companies. The other eleven FHLBsFHLBanks and regional/commercial banks with assets of $5 billion to $20 billion are the secondary peercompetitor group ("Secondary Peer Group"Competitor Group"), including a sub-set of 'non-metro' FHLBs, which excludes the FHLBs of Atlanta, Chicago, New Yorkconsidering both functional responsibilities and San Francisco.top-five-paid analyses to capture unique positions that may otherwise not be reported in salary surveys. The Primary and Secondary PeerCompetitor Groups are collectively referred to as "Peer Groups.""Competitor Groups" and are listed below. For certain positions, with input from Aon Consulting and McLagan Partners, we use job specific benchmarks for similar jobs that may or may not reflect actual job responsibilities, but are determined by the consultant to be market comparable and represent realistic employment opportunities. For example, the compensation of the President-CEO of our Bank would not necessarilyPresident - CEO will be compared to that of the President-CEOPresident - CEO of a Primary PeerCompetitor Group company; rather, his compensation may be compared tocompany, as well as that of the President-CEOPresident - CEO of a division or subsidiary company of that Primary PeerCompetitor Group. We will establish threshold, target and maximum base and anticipated incentive pay levels based on this competitor group analysis, while actual pay levels will be based on our financial performance, stability, prudent risk-taking and conservative operating philosophies, and our compensation philosophy (as discussed above).
The institutions in the Primary Peer Group,Competitor Groups, as determined in 2010,2011, are:
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| ABN AMRO Securities (USA) LLC | | HSBC |
| AIB Capital Markets | | ING |
| Ally Financial Inc. | | JP Morgan |
| Amegy Bank | | KBC Bank |
| Australia & New Zealand Banking Group | | KeyCorp |
| Banco Bilbao Vizcaya Argentaria | | Landesbank Baden-Wuerttemberg |
| Banco Santander | | Lloyds Banking Group |
AIB Capital MarketsBanco Hapoalim | | M&T Bank Corporation |
Ally Financial Inc.Bank of America | | Macquarie Bank |
Associated BancBank of China | | Marshall & Ilsley CorporationMercantile Commercebank, N.A. |
Australia & New Zealand Banking GroupBank of the West | | MetLife Bank |
| Bank of Tokyo- Mitsubishi UFJ | | Mitsubishi Securities |
| Bayerische Landesbank | | Mitsubishi UFJ Trust & Banking Corporation (USA) |
Banco Bilbao Vizcaya ArgentariaBBVA Compass | | Mizuho Capital Markets |
| BMO Financial Group | | Mizuho Corporate Bank, Ltd. |
Banco ITAU Investment BankBNP Paribas | | National Australia Bank |
Banco SantanderBOK Financial Corporation | | Natixis |
Banco HapoalimBranch Banking & Trust Co. | | Nord/LB |
California Bank of America Merrill Lynch | | Nordea Bank |
Bank of China | | Piper Jaffray |
Bank of the West& Trust | | PNC Bank |
Bank of Tokyo- Mitsubishi UFJCapital One | | Rabobank Nederland |
Bayerische LandesbankChina Construction Bank | | RBS GBM |
BBVA CompassChina Merchants Bank | | RBS/Citizens Bank |
BMO Financial GroupCIBC World Markets | | Regions Financial Corporation |
BNP ParibasCitigroup | | Royal Bank of Canada |
BOK Financial CorporationCity National Bank | | Royal Bank of ScotlandSallie Mae |
Branch Banking & Trust Co.Comerica | | Skandinaviska Enskilda Banken AB(Publ), NY Branch |
Brown Brothers Harriman & Co.Commerzbank | | Societe Generale |
Capital OneCredit Agricole CIB | | Standard Bank |
CargillCredit Industriel et Commercial | | Standard Chartered Bank |
China Merchants BankDexia | | Sumitomo Mitsui Banking Corporation |
CIBC WorldDnB NOR Markets, Inc. | | Sun National Bank |
| DVB Bank | | SunTrust Banks |
Citi Global Consumer Group | | Susquehanna International Group |
CitigroupEspirito Santo Investment | | SVB Financial Group |
ComericaFannie Mae | | SynovusSwedbank First Securities |
Credit Agricole CIBFederal Home Loan Bank of Atlanta | | TD Ameritrade |
| Federal Home Loan Bank of Boston | | TD Securities |
Credit Industriel et Commercial | | TheFederal Home Loan Bank of New York Mellon |
DexiaChicago | | The Bank of Nova Scotia |
DnB NOR Markets, Inc.Federal Home Loan Bank of Cincinnati | | The CIT Group |
DVBFederal Home Loan Bank of Dallas | | The NorinchukinBank, New York Branch |
DZFederal Home Loan Bank | | The Northern Trust Corporation |
Espirito Santo Investment of Des Moines | | The Private Bank |
Fannie MaeFederal Home Loan Bank of New York | | The Sumitomo Trust & Banking Co. (U.S.A.) |
Frost NationalFederal Home Loan Bank of Pittsburgh | | U.S. BancorpThe Sumitomo Trust & Banking Co., Ltd. |
GE Commercial FinanceFederal Home Loan Bank of San Francisco | | UniCredit |
HSBCFederal Home Loan Bank of Seattle | | Union Bank, N.A. |
INGFederal Home Loan Bank of Topeka | | United Bank for Africa Plc |
JP Morgan ChaseFifth Third Bank | | Webster Bank |
| First Midwest Bank | | Wells Fargo Bank |
KBC BankFirst Tennessee Bank/First Horizon | | WestLB |
KeyCorpFreddie Mac | | Westpac Banking Corporation |
Landesbank Baden-WuerttembergGE Capital | | Wilmington Trust CompanyZions Bancorporation |
The Executive/Governance and HR Committees target the median market level (within ± 5%) of the salary and benefits benchmarks, considering our culture of expecting above-peer financial performance, stability, prudent risk taking and conservative operating philosophies. Also, individual employee differences, including job performance results, responsibilities, experience and tenure, are considered when establishing individual base salaries of the NEOs. The Bank recruits and desires to retain senior management from national markets. Consequently, cost of living in Indiana is not a direct factor in determining compensation.
During 2008 the board of directors engaged Aon Consulting and McLagan Partners to complete a comprehensive compensation review, including salary and benefits with an emphasis on the retirement plans. Their engagement was limited to thisa comprehensive review with respect toof our compensation, benefits, and director fees, and did not include consultation concerning hiring or staffing matters. This review resulted in modifications to our compensation philosophy and structure for NEOs as described in the following sections. These modifications also affected compensation provided to other officers and employees of our Bank. In 2011 McLagan Partners, working with the Bank.HR Committee, evaluated and updated our salary benchmarks.
Elements of Compensation Used to Achieve Compensation Philosophy and Objectives
Objectives. The total compensation mix for NEOs in 20102011 consisted of:
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| (2) | annual short-term incentive opportunities; |
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| (3) | long-term incentive opportunities; |
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| (4) | retirement benefits; and |
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| (5) | perquisites and other benefits. |
Base Salaries.Unless otherwise described, the term "base salary" as used herein refers to an individual's annual salary, before considering incentive compensation, deferred compensation, perquisites, taxes, or any other adjustments that may be elected or required. We recruit and desire to retain senior management from national markets. Consequently, cost of living in Indiana is not a direct factor in determining base salary. The base salary for the President-CEOPresident - CEO is established annually by the full board of directors after review and recommendation by the Executive/Governance Committee. The base salaries for our other NEOs are set annually by the President-CEO,President - CEO, generally after an advisory consultation with the HR Committee. We have concluded that this different treatment, and the additional level of scrutiny to which the base salary determination for the President-CEOPresident - CEO is subjected, is appropriate in light of the nature of the position of President-CEOPresident - CEO and the extent to which the President-CEOPresident - CEO is responsible for the overall performance of theour Bank. Merit increases to base salaries are used, in part, to keep our NEO salary levels competitive with the market.
In setting the base salary for the President-CEO,President - CEO, the Executive/Governance Committee and board of directors have discretion to consider a wide range of factors, including the President-CEO'sPresident - CEO's individual performance, the performance of theour Bank overall, the President-CEO'sPresident - CEO's tenure, and the amount of the President-CEO'sPresident - CEO's base salary relative to the base salaries paid to executives in similar positions in the 50th and 75th percentile of executive salariescompanies in our PeerCompetitor Groups. Though a policy or a specific formula has not been developed for such purpose, the Executive/Governance Committee and board of directors also consider the amount and relative percentage of the President-CEO'sPresident - CEO's total compensation that is derived from his base salary. In light of the wide variety of factors that are considered, the Executive/Governance Committee and board of directors have not attempted to rank or otherwise assign relative weights to the factors they consider. The Executive/Governance Committee and board of directors consider all the factors as a whole in reaching a determination with respect to the President-CEO'sPresident - CEO's base salary. Based upon the foregoing, at year-end 2009,2010, the Executive/Governance Committee and board of directors approved a merit increase for Mr. Miller of 3.0% for 2010, resulting in an annual base salary of $534,066.
When setting the base salaries for our other NEOs, the President-CEO has discretion to consider a wide range of factors including each NEO's qualifications, responsibilities, assessed performance contribution, tenure, position held, amount of base salary relative to similarly-positioned executives in our Peer Groups, input from the HR Committee, and the Bank's overall salary budget. Though a policy or a specific formula has not been developed for such purpose, the President-CEO also considers the amount and relative percentage of total compensation that are derived by the NEOs from their base salaries. Based upon his subjective evaluation and weighting of the various factors, the President-CEO provided the following adjustments to the base salaries of the NEOs for 2010:
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| NEO | | Merit Increase % for 2010 | | Base Salary for 2010 |
Cindy L. Konich (1) | | 3.0 | | | $ | 320,450 | |
Jonathan R. West (2) | | 3.0 | | | 294,476 | |
| Sunil U. Mohandas | | 3.0 | | | 254,176 | |
Gregory L. Teare (3) | | 5.0 | | | 234,130 | |
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| (1)
| In July 2010, Ms. Konich was promoted to Executive Vice President, Chief Operating Officer — Chief Financial Officer from Senior Vice President — Chief Financial Officer. Her base salary was adjusted prospectively to $360,022. |
| (2)
| In July 2010, Mr. West was promoted to Executive Vice President, Chief Operating Officer — Business Operations from Senior Vice President — Administration, General Counsel and Corporate Secretary. His base salary was adjusted prospectively to $325,000. |
| (3)
| The merit increase percentage for Mr. Teare for 2010 was larger than the merit increase percentages for the other NEOs due to a re-assessment of similarly-positioned executives in our Peer Groups. |
These salary adjustments for 2010 were within the range of merit and market-based increases recommended by the HR Committee and the Budget/Information Technology Committee, and approved by the board of directors on October 15, 2009, for all employees of the Bank.
On October 21, 2010, the HR Committee recommended, and the board of directors approved, 2011 merit and market-based increases totaling 2.5% of annual base salaries. An additional 1.1% was approved for promotional and equity adjustments. These approved amounts were used in adjusting the base salaries of Bank employees for 2011. These amounts were then incorporated into our 2011 operating budget as recommended by our Budget/Information Technology Committee and approved by our board of directors on November 18, 2010. Within this budget, the President-CEO, after discussion with the HR Committee, provided the following adjustments to the other NEOs for their base salaries for 2011:
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| NEO | | Merit Increase % for 2011 | | Base Salary for 2011 |
| Cindy L. Konich | | 2.5 | | | $ | 369,018 | |
| Jonathan R. West | | 2.5 | | | 333,138 | |
| Sunil U. Mohandas | | 4.0 | | | 264,342 | |
| Gregory L. Teare | | 3.0 | | | 241,150 | |
The Executive/Governance Committee recommended and the board of directors approved a merit increase for Mr. Miller of 4.0% for 2011, resulting in an annual base salary of $555,438.
When setting the base salaries for our other NEOs, the President - CEO has discretion to consider a wide range of factors including each NEO's qualifications, responsibilities, assessed performance contribution, tenure, position held, amount of base salary relative to similarly-positioned executives in our Competitor Groups, input from the HR Committee, and our overall salary budget. Though a policy or a specific formula has not been developed for such purpose, the President - CEO also considers the amount and relative percentage of total compensation that are derived by the NEOs from their base salaries.
Based upon his subjective evaluation and weighting of the various factors, the President - CEO provided the following adjustments to the base salaries of the NEOs for 2011:
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| NEO | | Merit Increase % for 2011 | | Base Salary for 2011 |
| Cindy L. Konich | | 2.5 | | $ | 369,018 |
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| Jonathan R. West | | 2.5 | | 333,138 |
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| K. Lowell Short, Jr. | | 3.0 | | 244,010 |
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| Gregory L. Teare | | 3.0 | | 241,150 |
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These salary adjustments for 2011 were within the range of merit and market-based increases recommended by the HR Committee and the Budget/Information Technology Committee, and approved by the board of directors on October 21, 2010, for all employees of our Bank.
On November 17, 2011 the HR Committee recommended, and the board of directors approved, 2012 merit and market-based increases totaling 3.0% of annual base salaries. An additional 1.0% was approved for promotional and equity adjustments. These approved amounts were used in adjusting the base salaries of Bank employees for 2012. These amounts were then incorporated into our 2012 operating budget as recommended by our Budget/Information Technology Committee and approved by our board of directors on November 17, 2011. As described below under Incentive Opportunities - 2012, for 2012 and subsequent years a greater percentage of an NEO's incentive compensation is expected to be deferred and thereby would be disregarded for purposes of calculating an NEO's benefits under the Pentegra Defined Benefit Plan for Financial Institutions or the 2005 Supplemental Executive Retirement Plan. Consequently, the Executive/Governance Committee recommended and the board of directors approved an increase for the President - CEO's base salary of 9.0%, consisting of a 3.0% merit increase and a 6.0% additional adjustment primarily due to reductions in the President - CEO's short-term incentive compensation opportunity and total incentive compensation opportunity, as described below, resulting in a 2012 base salary of $605,436.
In addition, the President - CEO, after discussion with the HR Committee, provided the following adjustments to the other NEOs for their base salaries for 2012.
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| NEO | | Merit Increase % for 2012 | | Additional Adjustment % for 2012 | | Base Salary for 2012 |
| Cindy L. Konich | | 3.0 | | 1.0 | | $ | 383,786 |
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| Jonathan R. West | | 3.0 | | 1.0 | | 346,476 |
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| K. Lowell Short, Jr. | | 3.0 | | 2.0 | | 256,230 |
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| Gregory L. Teare | | 3.0 | | 2.0 | | 253,214 |
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Incentive Opportunities.Generally, as an executive's level of responsibility increases, a greater percentage of total compensation is based on our overall performance. Our incentive plans have a measurement framework that rewards both profits and member product usage, consistent with our mission.
As discussed in more detail below, the Bank'sour incentive plans are performance-based and represent a reasonable risk-return balance between product usage by our cooperative members and modest profit targets expected by our shareholder investors. The Bank hasWe have used a similar structure for annual incentive goals for itsour senior officers since 1989.
TheIncentive Opportunities - 2011 and Prior Years. For 2011 and prior years, the pay-outs of the Short-Term Incentive ("STI"STI") Plan (annually) and Long-Term Incentive ("LTI"LTI") Plan (over three years) arewere generally calculated as follows:
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| Performance result for each mission goal in the plan | | x | | Interpolation factor between threshold, target and maximum award levels | | x | | Weighted value for each goal | | x | | % of base salary incentive opportunity based on job position | | = | | Sum of all target awards | | x | | Participant's annual base salary | | = | | Incentive award |
Annual Short-Term Incentive Opportunities. Opportunities.Under the 20102011 STI Plan there were fivesix mission goals, and sixthirteen components within these goals, for all participants, including the NEOs, but excluding those in the Internal Audit Department, whose annual incentive compensation was not based upon our performance. These goals were tied to potential dividend, Advances, MPPMortgage Purchase Program ("MPP") volume, the total amount of CIPCommunity Investment Program ("CIP") Advances originated, Information Technology, and proficiency and efficiency of Corporate Risk Management ("CRM"CRM") reporting. The goals were weighted based upon the consideration of the impact on our overall mission, and differed between the CRM department and all other Bank employees.employees so that the CRM department's incentive weighting focuses more on risk monitoring as opposed to Bank transactions. The plan established threshold, target, and maximum performance levels for each goal.
These incentive goals were derived from, and each is specifically aligned to, our strategic plan and financial forecast that were prepared by management and approved by the board of directors. The HR Committee and Budget/Information Technology Committee each reviewed the STI Plan before recommending the 20102011 STI Plan to the full board of directors, which approved the plan on January 21, 2010.20, 2011.
Under the terms of the 20102011 STI Plan, the board of directors had discretion to reduce or eliminate any payouts that were otherwise earned under the plan, if the board of directors found that a serious, material safety or soundness problem or a serious, material risk management deficiency existed at theour Bank. The board of directors made no such finding, and thus did not reduce or eliminate payouts otherwise earned under the 20102011 STI Plan.
Although the CRM goals are identical with respect to performance goals for other STI Plan participants, excluding those in Internal Audit, the weighted value for each goal differs. The weights, specific goals, and our actual result for each 20102011 mission goal are presented below ($ amounts in millions):
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| Mission Goals | | Weighted Value | | Weighted Value (CRM) | | Threshold | | Target | | Maximum | | Actual | | Attainment Percentage (Interpolated) | | Weighted Average | | Weighted Average (CRM) |
| Profitability | | | | | | | | | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 50 | % | | 35 | % | | 50 bps | | | 100 bps | | | 250 bps | | | > maximum | | | 100 | % | | 50 | % | | 35 | % |
| Advances | | | | | | | | | | | | | | | | | | |
Member Participation (2) | | 15 | % | | 11 | % | | 65 | % | | 67 | % | | 70 | % | | 66 | % | | 44 | % | | 6 | % | | 5 | % |
New, Reactivated or Cross-Sold Members (3) | | 10 | % | | 5 | % | | 8 points | | | 14 points | | | 20 points | | | > maximum | | | 100 | % | | 10 | % | | 5 | % |
| Mortgage Purchase Program | | | | | | | | | | | | | | | | | | |
MPP production (4) | | 10 | % | | 7 | % | | $ | 238 | | | $ | 325 | | | $ | 750 | | | > maximum | | | 100 | % | | 10 | % | | 7 | % |
| Community Investment | | | | | | | | | | | | | | | | | | |
CIP Advances Originated (5) | | 10 | % | | 7 | % | | $ | 25 | | | $ | 50 | | | $ | 100 | | | > maximum | | | 100 | % | | 10 | % | | 7 | % |
CRM Reporting (6) | | 5 | % | | 35 | % | | Met expectation for CRM Reporting/Monitoring | | Fully Proficient | | Fully Proficient and Efficient | | > target | | | 98 | % | | 5 | % | | 34 | % |
| Total Achievement | | | | | | | | | | | | | | | | 91 | % | | 93 | % |
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| 2011 STI Plan Performance Goals |
| Mission Goals | | Weighted Value (14) | | Weighted Value (CRM) | | Threshold | | Target | | Maximum | | Actual Result | | Attainment Percentage (Interpolated) | | Weighted Average Payout (14) | | Weighted Average Payout (CRM) |
| Profitability: | | | | | | | | | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 35 | % | | 15 | % | | 50 bps | | 100 bps | | 250 bps | | > maximum | | 100 | % | | 35 | % | | 15 | % |
| Advances: | |
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Member Advance Growth (2) | | 10 | % | | 5 | % | | 0% | | 2.8% | | 4.0% | | 3.5% | | 89 | % | | 9 | % | | 4 | % |
New Member Recruitment (3) | | 5 | % | | 5 | % | | 6 members | | 8 members | | 16 members | | 15 members | | 97 | % | | 5 | % | | 5 | % |
Public Unit Deposit Letters of Credit - Members Using (4) | | 5 | % | | 5 | % | | $100.0 | | $250.0 | | $950.0 | | $302.4 | | 77 | % | | 4 | % | | 4 | % |
| MPP: | |
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MPP production (5) | | 5 | % | | 2.5 | % | | $238 | | $325 | | $750 | | $617 | | 92 | % | | 4 | % | | 2 | % |
MPP Balance (6) | | 5 | % | | 2.5 | % | | $6,700 | | $7,000 | | $7,400 | | $5,900 | | — | % | | — | % | | — | % |
New or Reactivated Traders (7) | | 5 | % | | 5 | % | | 5 members | | 7 members | | 10 members | | > maximum | | 100 | % | | 5 | % | | 5 | % |
Community Investments: CIP Advances and Letters of Credit Originated (8) | | 10 | % | | 5 | % | | $25 | | $50 | | $75 | | > maximum | | 100 | % | | 10 | % | | 5 | % |
Information Technology (9) | | 5 | % | | 5 | % | | 2 goals | | 3 goals | | 4 goals | | 3 goals | | 75 | % | | 4 | % | | 4 | % |
| CRM: | |
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Economic "Value Added Percentage" for Bank Stock (10) | | 5 | % | | 5 | % | | — | | Average >0 and not all quarters positive | | Average >0 and all quarters positive | | Average >0 and not all quarters positive | | 75 | % | | 4 | % | | 4 | % |
CRM Memo and Annual Risk Assessment (11) | | 1 | % | | 10 | % | | 2 memos plus 1 Risk Assessment | | 4 memos plus 1 Risk Assessment | | 5 memos plus 1 Risk Assessment | | maximum | | 100 | % | | 1 | % | | 10 | % |
CRM Reports, Operational Risk Management ("ORM") Reports and Information Security ("IS") Reports (11) | | 1 | % | | 10 | % | | 8 CRM reports, 2 ORM reports and 1 IS report | | 10 CRM reports, 3 ORM reports and 2 IS reports | | 12 CRM reports, 4 ORM reports and 3 IS reports | | maximum | | 100 | % | | 1 | % | | 10 | % |
Special Risk Assessments, Risk Analysis or Risk Process Improvements (12) | | 3 | % | | 15 | % | | 2 | | 3 | | 4 | | maximum | | 100 | % | | 3 | % | | 15 | % |
CRM Reporting (13) | | 5 | % | | 10 | % | | Met expectation for CRM Reporting/Monitoring | | Fully Proficient | | Fully Proficient and Efficient | | > target | | 95 | % | | 4 | % | | 9 | % |
| Total Achievement | | | | | | | | | | | | | | | | 89 | % | | 92 | % |
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| (1) | This amount is measured in basis points ("bps"bps") and is defined as adjusted net income as a percentage of average total capital stock. Adjusted netNet income is adjusted (a) for the effects of current and prior period prepayments and debt extinguishments, (b) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, and (c) to exclude the effects from interest expense on MRCS.Mandatorily Redeemable Capital Stock ("MRCS"). This definition assumes no material change in investment authority under theour Bank's financial management policy, regulation, policy or law. |
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| (2) | The member participation rate representsMember Advances growth is measured by the number of qualifying members participating in advances, letters of credit, or lines of credit as a percentage of total membersgrowth in the qualifying group.average daily balance of Advances outstanding to members. |
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| (3) | This is measured by qualifyingNew members activatingare institutions that have a new product category that was not being utilized by the qualified member asminimum of $50 million in assets (as of December 31, 2009. One point is accumulated each time2011), were not a member activates a new product category duringof the month. Once a product point is earned from a memberBank on December 31, 2010, and in any month for a product category, it shall not be earned again during2011 join the calendar year. TheBank and buy the required amount of capital stock. |
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(4) | Three quarter average of total numberoutstanding Public Unit Deposit Letters of product usage points earned each month will be added together and comparedCredit issued to the 2010 goal.Indiana Board for Depositories to support public unit deposits, beginning with June 30, 2011. |
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| (4)(5)
| MPP production is the amount of all master delivery commitments traded in 2010.2011. This goal assumes that the member will not have to purchase capital stock in the Bank for its MPP sales. This definition also assumes no material change in MPP authority under the Bank'sFinance Agency's financial management policy, regulation, policy or law. When calculating achievement between the minimum threshold and performance maximum, performance, no single member can account for more than 25% of production. Federal Housing Administration ("FHA") loans will not be counted in the numerator when calculating. |
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(6) | Represents the unpaid principal balance ("UPB") of MPP loans as of December 31, 2011. |
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(5)(7)
| Members that have never traded or have not traded with MPP within the previous 12 months of their 2011 trade would qualify. |
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(8) | Newly originated Community Investment Cash Advances, including Community Investment Program,CIP, HomeRetain and other qualifying Advances and qualified letters of credit (excluding Public Unit Deposit Letters of Credit), provided in support of targeted projects as defined in 12 CFR Part 952 and the Bank Act. |
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(6)(9)
| There are four qualifying information technology goals related to our core banking system to complete in 2011, including completion of the business process map work stream, completion of the down stream data requirements work stream, implementation of the automated regression testing tools, and completion of the requirements and design documentation for the initial phase. |
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(10) | Represents the value added percentage for our stock. The amount is calculated as the average of four quarters. |
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(11) | Requires providing the board of directors the CRM memo and presentation of the Annual Risk Assessment Report. |
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(12) | These goals are proposed by the Chief Risk Officer; the President - CEO evaluates whether to categorize these as special and whether the work product was acceptable to count toward this goal. |
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(13) | This goal is evaluated by the President - CEO and is based upon an evaluation of efficiency of CRM reporting and assessment services provided to theour Bank. Efficiency is broader than meeting budget expectations for CRM division and entails exhibition of executive vision and creation/maintenance of a high level of cooperation and professionalism with all operating areas of theour Bank, while providing beneficial insight into material risks. The board of directors determines the goal achievement of the President - CEO for the CRM mission goal. |
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(14) | For all Bank employees, including NEOs but excluding those in CRM and Internal Audit. |
The percent of base salary that an NEO may have earned for certain target achievement levels and the actual percent of base salary payout achieved are presented below:
2010
2011 STI Plan
% of Base Salary By
Target Achievement Level
Payable in 20112012
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| NEO | | Threshold | | Target | | Maximum | | % of Base Salary | | Amount (2) | | Threshold | | Target | | Maximum | | % of Base Salary | | Amount (1) |
| Milton J. Miller, II | | 30 | % | | 50 | % | | 70 | % | | 65.0 | % | | $ | 347,276 | | | 30% | | 50% | | 70% | | 62.1 | % | | $ | 344,850 |
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| Cindy L. Konich | | 20 | % | | 30 | % | | 40 | % | | 37.5 | % | | 135,053 | | | 20% | | 30% | | 40% | | 35.8 | % | | 132,083 |
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| Jonathan R. West | | 20 | % | | 30 | % | | 40 | % | | 37.5 | % | | 121,916 | | | 20% | | 30% | | 40% | | 35.8 | % | | 119,240 |
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Sunil U. Mohandas (1) | | 20 | % | | 30 | % | | 40 | % | | 37.9 | % | | 96,237 | | |
| K. Lowell Short, Jr. | | | 20% | | 30% | | 40% | | 35.8 | % | | 87,339 |
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| Gregory L. Teare | | 20 | % | | 30 | % | | 40 | % | | 37.5 | % | | 87,828 | | | 20% | | 30% | | 40% | | 35.8 | % | | 86,315 |
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| (1) | Mr. Mohandas earned incentive awards under the 2010 STI Plan based upon the Senior Vice President level. |
| (2)
| These amounts were paid on February 25, 2011.March 9, 2012. |
Long-Term Incentive Opportunities.Opportunities. To remain market-competitive at the median level of the benchmarks, to promote stability in earnings, and to facilitate our long-term safe and sound operation, the board of directors established an LTI Plan, commencing January 1, 2008, an LTI Plan.2008. The purpose of the LTI Plan is to better enable theour Bank to attract, retain and motivate certain key employees, including NEOs, and to focus their efforts on continued improvementprudent, stable on-going Bank profitability. Under the LTI Plan, a Level I Participant is the President - CEO, a Level II Participant is an Executive Vice President or Senior Vice President, and a Level III Participant is any employee (excluding those in the profitability of the Bank.Internal Audit Department) who is not a Level I or Level II Participant. The LTI Plan is based on rolling three-year performance periods. For example,periods, subject to certain modifications for 2012 and future years as described below. LTI Plan payments earned for the 2008-2010 performance period were paid on February 25, 2011, payments earned for the 2009-2011 performance period will bewere paid in 2012, and payments earned for the 2010-2012 performance period will be paid in 2013. Anyon March 9, 2012. No payments under the LTI Plan will not be included in a participant's compensation for purposes of calculating a benefit under the Pentegra Defined Benefit Plan for Financial Institutions or the 2005 Supplemental Executive Retirement Plan. In general, an award based on performance under the LTI for 2011 and prior years will be earned, and therefore vested, if the applicable performance goals for the three-year performance period are satisfied and the participant is employed on the last day of the performance period. An LTI Plan award based on performance for 2011 and prior years is forfeited if a participant terminates service prior to vesting of the award, unless the termination is due to death, disability, scheduled retirement, resignation for good reason (such as reorganization of
the our Bank and a material change in the participant's job status, position, or title not representing a promotion), or merger or liquidation. A participant whose employment terminates during a performance period for one of these reasons is eligible for a pro-rated payout based on the amount of time served during the period, provided the performance goals for the period are satisfied.
The LTI Plan for the 2009-2011 performance period contains a discretionary award pool for Level II and Level III participants (defined as any individual who is not a Level I or II participant) to be determined by the board of directors in its discretion, after receiving a recommendation from the President-CEO.President - CEO. The amount of the discretionary incentive pool may not exceed 20% of the aggregate awards earned by the Level I and Level II participants over that three-year performance period. The President-CEOPresident - CEO may recommend, in writing, to the board of directors that an additional discretionary award be made to a Level II or Level III Participant to address external market considerations, including for recruiting purposes. The President-CEOPresident - CEO did not recommend any additional discretionary awards for the 2008-20102009-2011 performance period and the board of directors did not make any awards from the discretionary pool.
All LTI Plan participants, as a condition of participation in the LTI Plan, must sign a non-solicitation and non-disclosure agreement. Under this agreement, the participant agrees not to (i) disclose the Bank'sour confidential information or use such information for personal benefit or to compete against theour Bank at any time, or (ii) solicit or hire any Bank employee during the participant's employment at theour Bank and for 12 months following the participant's termination of service from theour Bank.
Under the terms of the LTI Plan, the board of directors may, in its discretion, reduce or eliminate an LTI Plan award that was otherwise earned if the board of directors finds that a serious, material safety or soundness problem or a serious, material risk management deficiency exists at theour Bank. The board of directors made no such finding for the 2008-20102009-2011 performance period and thus did not reduce or eliminate awards otherwise earned under the LTI Plan.
The 2008-20102009-2011 performance goals in the LTI Plan were the same as those for the 2008-20102009-2011 STI Plans, and were tied to potential dividend, Advances, MPP volume, the total amount of CIP Advances originated, Information Technology (for 2011), and forCRM reporting (for 2010 CRM reporting.and 2011). The goals were weighted based upon overallanticipated impact on our financial performance, and the plan set threshold, target and maximum performance goals. The percent of base salary that an NEO may have earned for certain target achievement levels and the actual percent of base salary payout achieved are presented below for the 2008-20102009-2011 performance period:
LTI Plan
2008-20102009-2011 Performance Period
% of Base Salary
By Achievement Level
Payable in 20112012
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| Eligible Participants | | Threshold (60%) (1) | | Target (80%) (1) | | Maximum (100%) (1) | | % of Base Salary | | Amount (3) | | | Threshold (60%) (1) | | Target (80%) | | Maximum (100%) | | % of Base Salary | | Amount (2) |
| Level I Participant: | | | | | | | | | | | | | |
| Milton J. Miller, II | | 15 | % | | 30 | % | | 45 | % | | 33 | % | | $ | 165,002 | | | | 15% | | 30% | | 45% | | 31% | | $ | 159,444 |
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| Level II Participants: | | | | | | | | | | | | | |
| Cindy L. Konich | | 10 | % | | 20 | % | | 30 | % | | 22 | % | | 66,003 | | | | 10% | | 20% | | 30% | | 21% | | 63,779 |
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| Jonathan R. West | | 10 | % | | 20 | % | | 30 | % | | 22 | % | | 59,900 | | | | 10% | | 20% | | 30% | | 21% | | 58,609 |
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| Sunil U. Mohandas | | (2) | | | (2) | | | (2) | | | (2) | | | (2) | | | |
K. Lowell Short, Jr. (3) | | | 10% | | 20% | | 30% | | 21% | | 37,784 |
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| Gregory L. Teare | | 10 | % | | 20 | % | | 30 | % | | 22 | % | | 35,782 | | (4) | | 10% | | 20% | | 30% | | 21% | | 45,710 |
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(1) | So that the three-year LTI Plan would provide for more stretch performance than the one-year STI Plan, a percentage achievement of less than 60% averaged over the three-year LTI Plan would have resulted in no payout. |
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(2) | The LTI Plan award for the 2009-2011 performance period was paid on March 9, 2012. |
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(3) | Mr. Short's payout has been prorated for his partial year of employment with the Bank in 2009. |
The 2011 performance goals for the 2010-2012 performance period of the LTI Plan were the same as those for the 2011 STI Plan, and were tied to potential dividend, Advances, MPP volume, the total amount of CIP Advances originated, Information Technology and CRM reporting. The 2012 performance goals are described below. The 2011 performance goals were weighted based upon anticipated impact on our performance, and the plan set threshold, target and maximum performance goals. The percent of base salary that an eligible participant may earn for certain target achievement levels are presented below for the 2010-2012 performance period:
LTI Plan
2010-2012 Performance Period
% of Base Salary
By Achievement Level
Payable in 2013
|
| | | | | | | | |
| Eligible Participants | | Threshold (60%) (1) | | Target (80%) | | Maximum (100%) | | Payout (2) |
| Level I Participant: | | | | | | | | |
| Milton J. Miller, II | | 15% | | 30% | | 45% | | ---- |
| | | | | | | | | |
| Level II Participants: | | | | | | | | |
| Cindy L. Konich | | 10% | | 20% | | 30% | | ---- |
| Jonathan R. West | | 10% | | 20% | | 30% | | ---- |
| K. Lowell Short, Jr. | | 10% | | 20% | | 30% | | ---- |
| Gregory L. Teare | | 10% | | 20% | | 30% | | ---- |
| | | | | | | | | |
| Senior Vice Presidents | | 10% | | 20% | | 30% | | ---- |
| |
(1) | So that the three-year LTI Plan provides for more stretch performance than the one-year STI Plan, a percentage achievement of less than 60% averaged over the three-year LTI Plan will receiveresult in no payout. |
| (2)
| Mr. Mohandas was not a participant in the LTI Plan for the 2008-2010 performance period. |
| (3)
| The LTI Plan award for the 2008-2010 performance period was paid on February 25, 2011. |
| (4)
| Mr. Teare's payout has been prorated for his partial year of employment with the Bank in 2008. |
The 2010 and 2011 performance goals for the 2010-2012 performance period of the LTI Plan are the same as those for the 2010 and 2011 STI Plans, respectively, and are tied to potential dividend, Advances, MPP volume, the total amount of CIP Advances originated, and CRM reporting. The goals are weighted based upon overall impact on our financial performance, and the plan set threshold, target and maximum performance goals. The percent of base salary that an eligible participant may earn for certain target achievement levels are presented below for the 2010-2012 performance period:
LTI Plan
2010-2012 Performance Period
% of Base Salary
By Achievement Level
Payable in 2013
| | | | | | | | | | | |
| Eligible Participants | | Threshold (60%) (1) | | Target (80%) (1) | | Maximum (100%) (1) | | Payout |
| Level I Participant: | | | | | | | | |
| Milton J. Miller, II | | 15 | % | | 30 | % | | 45 | % | | (3) |
| | | | | | | | | |
| Level II Participants: | | | | | | | | |
| Cindy L. Konich | | 10 | % | | 20 | % | | 30 | % | | (3) |
| Jonathan R. West | | 10 | % | | 20 | % | | 30 | % | | (3) |
Sunil U. Mohandas (2) | | 10 | % | | 20 | % | | 30 | % | | (3) |
| Gregory L. Teare | | 10 | % | | 20 | % | | 30 | % | | (3) |
| | | | | | | | | |
| Senior Vice Presidents and Others - Board Designated | | 10 | % | | 20 | % | | 30 | % | | (3) |
| | |
| (1)
| So that the three-year LTI Plan provides for more stretch performance than the one-year STI Plan, a percentage achievement of less than 60% averaged over the three-year LTI Plan will receive no payout. |
| (2) | Mr. Mohandas is considered an eligible Level II participant at the Senior Vice President level in the LTI Plan for the 2010-2012 performance period. |
| (3)
| The LTI Plan award for the 2010-2012 performance period cannot yet be calculated as of December 31, 2010,2011, and will be paid, if applicable, in 2013. |
Incentive Opportunities - 2012. On December 1, 2011, the board of directors completed its adoption of an Incentive Plan ("Incentive Plan") that took effect on January 1, 2012 by approving certain performance goals for eligible participants. The Incentive Plan has been submitted to the Finance Agency for review. The Incentive Plan is a cash-based incentive plan that provides award opportunities based on achievement of performance goals. The purpose of the Incentive Plan is to attract, retain and motivate our employees and to focus their efforts on continued improvement in our profitability while maintaining safety and soundness. Under the Incentive Plan, the HR Committee determines appropriate performance goals and the relative weight to be accorded to each goal. In making these determinations, the HR Committee, in accordance with the Incentive Plan, must:
balance risk and financial results in a manner that does not encourage participants to expose our Bank to imprudent risks;
endeavor to ensure that participants' overall compensation is balanced and not excessive in amount, and that Annual Awards, Deferred Awards and Gap Year Awards (each as defined below) are consistent with our policies and procedures regarding such compensation arrangement; and
monitor the success of the performance goals and the weightings established in prior years, alone and in combination with other incentive compensation awarded to the same participants, and make appropriate adjustments in future calendar years as needed so that payments appropriately incentivize participants and appropriately reflect risk.
The Incentive Plan effectively combines our STI and LTI plans into one incentive plan for all employees, except for Internal Audit. The migration to one plan will occur from 2012 through 2015 as described below.
Any employee hired before October 1 of a calendar year will become a "Participant" in the Incentive Plan for that calendar year, unless the employee is classified as a "temporary," an "intern," a "contract" or a "temporary agency" employee, or participates in our Internal Audit Incentive Plan. Under the Incentive Plan, a "Level I Participant" is the Bank's President - CEO, an Executive Vice President or a Senior Vice President, while a "Level II Participant" is any other participating employee. All NEOs identified as of December 31, 2011 are included among the eligible Level I Participants and must execute an agreement with our Bank containing non-solicitation and non-disclosure provisions. Under this agreement, the Participant agrees not to (i) disclose our Bank's confidential information or use such information for personal benefit or to compete against our Bank at any time, or (ii) solicit or hire any Bank employee during the Participant's employment at our Bank and for 12 months following the Participant's termination of service from our Bank.
In accordance with Incentive Plan guidelines, the board of directors will establish performance goals, which are the performance factors for each one-calendar-year period ("Performance Period") and three-calendar-year period ("Deferral Performance Period") that are taken into consideration in determining the value of an Annual Award, Deferred Award or Gap Year Award. The board of directors will define "Threshold," "Target" and "Maximum" achievement levels for each performance goal to determine how much of an award is earned. The board of directors may adjust the performance goals to ensure the purposes of the Plan are served.
Under the Incentive Plan, the board of directors will establish a maximum award for eligible Participants at the beginning of each Performance Period. Each award will equal a percentage of the Participant's annual compensation (generally defined as the Participant's annual earned base salary or wages for hours worked). For Level I Participants, awards may be Annual Awards, Deferred Awards or Gap Year Awards.
With respect to Annual Awards and Deferred Awards for the NEOs, the Incentive Plan provides that fifty percent (50%) of an Award to a Level I Participant will become earned and vested on the last day of the Performance Period, subject to the achievement of specified Bank performance goals over such period, the attainment of at least a "Satisfactory" individual performance rating over the Performance Period, and (subject to certain limited exceptions) active employment on the last day of such period. The remaining fifty percent (50%) of an award to a Level I Participant will become earned and vested on the last day of the Deferral Performance Period, subject to the same conditions for such period, and further subject to the achievement of additional performance goals relating to our profitability, retained earnings and prudential management objectives for each year of the Deferral Performance Period. The level of achievement of those additional goals could cause an increase or decrease to the Deferred Award.
For the 2012 Performance Period, the percentage of base salary incentive opportunity for Level I Participants in the Incentive Plan will be as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | 50% of Total Incentive Earned and Vested at Year-End | | 50% of Total Incentive Deferred for 3 Years |
| | | Total Incentive as % of Compensation | | Year-End Incentive as % of Compensation | | Deferred Incentive as % of Compensation (1) |
| Position | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum |
| CEO | | 50.0% | | 75.0% | | 100.0% | | 25.0% | | 37.5% | | 50.0% | | 25.0% | | 37.5% | | 50.0% |
EVP/SVP (2) | | 30.0% | | 50.0% | | 70.0% | | 15.0% | | 25.0% | | 35.0% | | 15.0% | | 25.0% | | 35.0% |
| |
(1) | Deferred Awards are subject to additional performance goals during the Deferral Performance Period. Depending on our performance during the Deferral Performance Period, the Final Award will be worth 75% at Threshold, 100% at Target or 125% at Maximum of the original amount of the Deferred Award. |
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(2) | Executive Vice President/Senior Vice President |
Pursuant to the Incentive Plan, the board of directors has established the following Annual Award Performance Period Goals for 2012 for Level I Participants relating to specific mission goals for our profitability, Advances, MPP, Community Investment, Information Technology and CRM performance ($ amounts in millions).
|
| | | | | | | | | | |
| 2012 Mission Goals | | Weighted Value (11) | | Weighted Value (CRM) | | Threshold | | Target | | Maximum |
| Profitability: | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 30% | | 10% | | 50 bps | | 266 bps | | 300 bps |
| Advances: | | | | | | | | | | |
Member Advance Growth (2) | | 10% | | 5% | | 0% | | 3% | | 5% |
Community Bank Financial Institutions ("CFI")/Credit Union Outreach (3) | | 10% | | 5% | | 75% | | 80% | | 95% |
| MPP: | | | | | | | | | | |
MPP Production (4) | | 10% | | 3% | | $360 | | $480 | | $750 |
New or Reactivated Traders (5) | | 5% | | 2% | | 5 members | | 7 members | | 10 members |
Community Investment (6) | | 5% | | 5% | | 50 meetings | | 100 meetings | | 210 meetings |
Information Technology (7) | | 10% | | 5% | | 3 projects completed | | 4 projects completed | | 5 projects completed |
| CRM: | | | | | | | | | | |
Retained Earnings (8) | | 10% | | 10% | | 3.50% | | 3.75% | | 3.90% |
CRM Memo and Annual Risk Assessment (9) | | 4% | | 20% | | 2 memos + 1 Risk Assessment | | 4 memos + 1 Risk Assessment | | 5 memos + 1 Risk Assessment |
| CRM Reports, ORM Reports and IS Reports | | 1% | | 15% | | 8 CRM reports, 2 ORM reports, and 1 IS report | | 10 CRM reports, 3 ORM reports, and 2 IS reports | | 12 CRM reports, 4 ORM reports, and 3 IS reports |
Special Risk Assessments, Risk Analysis or Risk Process Improvements (10) | | 5% | | 20% | | 2 | | 3 | | 4 |
| |
(1) | Potential Dividend over our Cost of Funds is defined as adjusted net income as a percentage of average total capital stock. Net income is adjusted (i) for the effects of current and prior period prepayments and debt extinguishments, (ii) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, (iii) and to exclude the effects from interest expense on MRCS. Assumes no material change in investment authority under the Finance Agency's regulation, policy or law. |
| |
(2) | Member Advances are calculated as the growth in the average daily balance of Advances outstanding to members at par. Average daily balances are used instead of point-in-time balances to eliminate point-in-time activity that may occur and to reward for the benefit of the income earned on Advances balances while outstanding. The target percentage growth will be calculated to achieve the board-approved base strategic plan forecast for 2012, based upon year end 2011 total outstanding member Advances, and assumes that Advances grow steadily beginning January 1, 2012. Members that become non-members during 2012 will be excluded from the calculation. |
| |
(3) | Participation in targeted, Bank-sponsored events by members that are either CFIs or credit unions. Such events would include Bank-sponsored workshops; CFI collateral outreach and educational meetings; regional member meetings; collateral pledge training meetings; business development calls related to advances, MPP, Affordable Housing Program ("AHP") or CIP; participation in webinars; and member recruitment calls. In calculating the participation rate, we will identify CFIs based upon the CFI asset cap for 2012, credit union members as of January 1, 2012, plus any CFIs or credit unions that are approved for membership or targeted for a recruitment call during 2012. |
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(4) | MPP production, including FHA, will be the amount of all conventional master delivery contracts traded in 2012. Assumes no capital requirement for MPP. It also assumes no material change in MPP authority under the Finance Agency's regulation, policy, or law. When calculating achievement between the minimum threshold and the performance maximum, no single member can account for more than 25% of conventional production. |
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(5) | Members that have never traded or have not traded with MPP within the previous 12 months of their 2012 trade would qualify to count toward the goal. |
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(6) | The number of meetings and presentations made to members on the availability and benefits of using CIP Advances, determined as the total number of actual meetings, times a multiplier. Such events would include workshops, regional member meetings, targeted calls, recruitment calls, business development in-person calls, participation in webinars, etc., when CIP is presented. Each member may only count toward one meeting. There is no method to evaluate the historical presentations on CIP as all past goals have been based upon dollar amount of CIP advances taken and/or letters of credit issued. A multiplier will be calculated to apply to the number of total meetings for this goal related to CIP. The multiplier is based on one-on-one meetings with "Qualifying Members," which are active members that have received an AHP award over the last three years, and as to which the debt constituting such award is being provided by the sponsoring member in addition to the AHP award. The multiplier equals one plus the product determined as the number of meetings with Qualifying Members, divided by the total number of Qualifying Members. For example, if there are 30 members sponsoring AHP projects that involve sponsor-provided debt and we have a one-on-one meeting with 20 of those members, and have meetings with an additional 15 members, the number of all member meetings would be multiplied by 1.67, and would equal 1.67 times 35 (total number of meetings), or 58.45 meetings (instead of 35). |
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(7) | There are five qualifying Information Technology goals to complete in 2012, including (a) the security roadmap 2012 security project list completion, (b) applications 99.0% availability for the service catalog as measured by information technology success factors, (c) complete 47 future state business processes for the Core Banking System Phase 1 Derivatives, (d) mortgage-backed securities ("MBS") available in the data warehouse, and (e) capital stock re-write business requirement design testing and implementation. Status and reporting on these technology projects to be provided in writing by the Chief Information Officer and confirmed by the Executive Vice President - Chief Financial Officer. |
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(8) | Total Retained Earnings divided by mortgage assets, measured at the end of each month. Calculated each month as Total Retained Earnings divided by the sum of the carrying value of the MBS and MPP portfolios. The year-end calculation will be the simple average of 12 month-end calculations. |
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(9) | As per the board of directors meeting schedule, provide the board of directors the CRM memo and present the Annual Risk Assessment Report. |
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(10) | Chief Risk Officer will propose and President - CEO will evaluate whether to categorize these as special and whether work product was acceptable to count toward this goal. |
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(11) | For Level I Participants other than those in CRM and Internal Audit. |
In addition, as noted above, the board of directors has established Deferred Award Performance Goals for Level I Participants in the Incentive Plan for the three-year period covering calendar years 2013 through 2015, relating to our profitability, retained earnings and prudential management objectives for each year of the period. Those goals are as follows:
|
| | | | | | | | | | |
| 2013-2015 Incentive Mission Goals | | Weighted Value (3) | | Weighted Value (CRM) | | Threshold (4) | | Target (4) | | Maximum (4) |
| Profitability: | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 35% | | 35% | | 25 bps | | 50 bps | | 150 bps |
Retained Earnings (2) | | 35% | | 35% | | 3.5% | | 3.9% | | 4.3% |
| Prudential | | 30% | | 30% | | Achieve 2 Prudential Standards | | Achieve 2 Prudential Standards | | Achieve 3 Prudential Standards |
| Maintain a regulatory capital-to-assets ratio of at least 4.16% as measured on each quarter-end for calendar years 2013 through 2015 | | | | | | | | | | |
| Without Board pre-approval, do not purchase more than $2.5 billion of conventional MPP assets per plan year | | | | | | | | | | |
| Award to Bank members the annual AHP funding requirement in each plan year | | | | | | | | | | |
| |
(1) | Potential Dividend over our Cost of Funds is defined as adjusted net income as a percentage of average total capital stock. Net income is adjusted (i) for the effects of current and prior period prepayments and debt extinguishments, (ii) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, (iii) and to exclude the effects from interest expense on MRCS. Assumes no material change in investment authority under the Finance Agency's regulation, policy or law. The Potential Dividend will be computed using a simple annual average over the three-year period. |
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(2) | Total Retained Earnings divided by mortgage assets, measured at the end of each month. Calculated each month as Total Retained Earnings divided by the sum of the carrying value of the MBS and MPP portfolios. The calculation will be the simple average of 36 month-end calculations. |
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(3) | For Level I Participants other than those in CRM and Internal Audit. |
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(4) | Deferred Awards are subject to additional performance goals for the Deferral Performance Period. Depending on our performance during the Deferral Performance Period, the Final Award will be worth 75% at Threshold, 100% at Target or 125% at Maximum of the original amount. |
The Incentive Plan also establishes transitional performance goals for calendar year 2012 for the 2010 LTI and 2011 LTI, and for calendar year 2013 for the 2011 LTI. For purposes of calculating the final awards for the 2010 LTI and 2011 LTI (payable in 2013 and 2014, respectively) with respect to the performance period measured as to calendar year 2012, the following table will be used to determine the annual achievement average, which in turn will be multiplied by the participant's 2010 base salary for the 2010 LTI benefit calculation, and by the participant's 2011 base salary for the 2011 LTI benefit calculation.
|
| | | | | | | | | | |
| 2012 Mission Goals | | Weighted Value (3) | | Weighted Value (CRM) | | Threshold (60%) | | Target (80%) | | Maximum (100%) |
| Profitability: | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 50% | | 50% | | 100 bps | | 266 bps | | 300 bps |
Retained Earnings (2) | | 50% | | 50% | | 3.50% | | 3.75% | | 3.90% |
| |
(1) | Potential Dividend over our Bank's Cost of Funds is defined as adjusted net income as a percentage of average total capital stock. Net income is adjusted (i) for the effects of current and prior period prepayments and debt extinguishments, (ii) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, (iii) and to exclude the effects from interest expense on MRCS. Assumes no material change in investment authority under the Finance Agency's regulation, policy or law. |
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(2) | Total Retained Earnings divided by mortgage assets. Calculated each month as Total Retained Earnings divided by the sum of the carrying value of the MBS and MPP portfolios. The year-end calculation will be the simple average of 12 month-end calculations. |
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(3) | For Level I Participants other than those in CRM and Internal Audit. |
For purposes of calculating final awards for the 2011 LTI with respect to the performance period measured as to calendar year 2013, the following table will be used to determine the annual achievement average, which in turn will be multiplied by the participant's 2011 base salary for the 2011 LTI benefit calculation.
|
| | | | | | | | | | |
| 2013 Mission Goals | | Weighted Value (3) | | Weighted Value (CRM) | | Threshold (60%) | | Target (80%) | | Maximum (100%) |
| Profitability: | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 50% | | 50% | | 100 bps | | 266 bps | | 300 bps |
Retained Earnings (2) | | 50% | | 50% | | 3.50% | | 3.75% | | 3.90% |
| |
(1) | Potential Dividend over our Bank's Cost of Funds is defined as adjusted net income as a percentage of average total capital stock. Net income is adjusted (i) for the effects of current and prior period prepayments and debt extinguishments, (ii) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, (iii) and to exclude the effects from interest expense on MRCS. Assumes no material change in investment authority under the Finance Agency's regulation, policy or law. |
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(2) | Total Retained Earnings divided by mortgage assets. Calculated each month as Total Retained Earnings divided by the sum of the carrying value of the MBS and MPP portfolios. The year-end calculation will be the simple average of the 12 month-end calculations. |
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(3) | For Level I Participants other than those in CRM and Internal Audit. |
Under the Incentive Plan, a Gap Year Award is a special award made by the board of directors to Level I Participants solely for calendar year 2012 to address a gap in payment of incentive compensation during calendar year 2015 that arises as a result of the implementation of the Incentive Plan and the planned discontinuation of the 2011 LTI. The Gap Year Award will become earned and vested over a three-year period that began on January 1, 2012 and ends on December 31, 2014, subject to the achievement of specified Bank performance goals over such period, the attainment of at least a "Satisfactory" individual performance rating over such period, and (subject to certain limited exceptions) active employment on the last day of such period. For the President - CEO, the Gap Year Award equals 60% of his actual 2011 STI payment or $206,910. For the other NEOs, the Gap Year Award equals 67% of the NEO's actual 2011 STI payment, as follows:
|
| | | | | | | | |
| NEO | | 2011 STI Payment | | Original Gap Year Award |
| Cindy L. Konich | | $ | 132,083 |
| | $ | 88,496 |
|
| Jonathan R. West | | 119,240 |
| | 79,891 |
|
| K. Lowell Short, Jr. | | 87,339 |
| | 58,517 |
|
| Gregory L. Teare | | 86,315 |
| | 57,831 |
|
The performance goals for the Gap Year Award relate to our profitability, retained earnings and prudential management objectives for each year of the three-year period, and consist of the following:
|
| | | | | | | | | | |
| Gap Year - 2012-2014 Mission Goals | | Weighted Value (3) | | Weighted Value (CRM) | | Threshold (4) | | Target (4) | | Maximum (4) |
| Profitability: | | | | | | | | | | |
Potential Dividend over our Cost of Funds (1) | | 35% | | 35% | | 25 bps | | 50 bps | | 150 bps |
Retained Earnings (2) | | 35% | | 35% | | 3.5% | | 3.9% | | 4.3% |
| Prudential | | 30% | | 30% | | Achieve 2 Prudential Standards | | Achieve 2 Prudential Standards | | Achieve 3 Prudential Standards |
| Maintain a regulatory capital-to-assets ratio of at least 4.16% as measured on each quarter-end for calendar years 2012 through 2014 | | | | | | | | | | |
| Without Board pre-approval, do not purchase more than $2.5 billion of conventional MPP assets per plan year | | | | | | | | | | |
| Award to Bank members the annual AHP funding requirement in each plan year | | | | | | | | | | |
| |
(1) | Potential Dividend over our Cost of Funds is defined as adjusted net income as a percentage of average total capital stock. Net income is adjusted (i) for the effects of current and prior period prepayments and debt extinguishments, (ii) to exclude mark-to-market adjustments and other effects from derivatives and hedging activities, (iii) and to exclude the effects from interest expense on MRCS. Assumes no material change in investment authority under the Finance Agency's regulation, policy or law. The Potential Dividend will be computed using a simple annual average over the three-year period. |
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(2) | Total Retained Earnings divided by mortgage assets. Calculated each month as Total Retained Earnings divided by the sum of the carrying value of the MBS and MPP portfolios. The calculation will be the simple average of 36 month-end calculations. |
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(3) | For Level I Participants other than those in CRM and Internal Audit. |
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(4) | Gap Year Awards are subject to additional Performance Goals for the Gap Year Performance Period. Depending on the Bank's performance during the Gap Year Performance Period, the Final Award will be worth 75% at Threshold, 100% at Target or 125% at Maximum of the original Gap Year Award. |
The Incentive Plan provides that a termination of service of a Level I Participant during a Performance Period may result in the forfeiture of the Participant's award. The Incentive Plan recognizes certain exceptions to this general rule, if the termination of service is: due to the Level I Participant's death, "Disability," or "Retirement"; for "Good Reason"; or without "Cause" due to a "Reduction in Force" (in each case as defined in the Incentive Plan). If one of these exceptions applies, a Level I Participant's Annual Award, Deferred Awards or Gap Year Award generally will be treated as earned and vested, based on certain assumptions with respect to our achievement of applicable performance goals for the applicable Performance Period.
The Incentive Plan further provides that, if a "Reorganization" of our Bank occurs (as defined in the Incentive Plan), any portion of a Level I Participant's Annual Award or Deferred Award which has not otherwise become earned and vested as of the date of the Reorganization will be treated as 100% earned and vested effective as of the date of the Reorganization, based on the assumption that we would have achieved the performance goals at the Target achievement level for the Performance Period and/or the Deferral Performance Period.
The Incentive Plan also amends our 2009, 2010 and 2011 LTIs by revising the definition of "Retirement," as used in those prior plans, to conform to the Incentive Plan's definition of that term, for purposes of determining if an employee has retired beginning on or after January 1, 2012. Each of those prior plans, as amended, survives the adoption of the Incentive Plan.
The Incentive Plan provides that awards may be reduced or forfeited in certain circumstances. If, during the Deferral Performance Period, we realize actual losses or other measures or aspects of performance related to the Performance Period or Deferral Performance Period which would have caused a reduction in the final award for the Performance Period or Deferral Performance Period, then the remaining amount of the final award to be paid at the end of the Deferral Performance Period will be reduced to reflect this additional information. In addition, if a Participant violates the non-solicitation agreement with our Bank, the Participant's entire unpaid vested and unvested awards will be forfeited effective as of the date the board of directors determines such violation occurred. Further, all or a portion of an award may be forfeited at the direction of the board of directors if we have failed to remediate to the satisfaction of the board of directors an unsafe or unsound practice or condition (as identified by the Finance Agency) that is material to our financial operation and within the Level I Participant's area(s) of responsibility. Under such circumstances, the board of directors may also direct the cessation of payments for a vested award. Moreover, the board of directors may reduce or eliminate an award that is otherwise earned but not yet paid, if the board of directors finds that a serious, material safety-soundness problem, or a serious, material risk-management deficiency exists at our Bank, or if (i) operational errors or omissions result in material revisions to (a) the financial results, (b) information submitted to the Finance Agency, or (c) data used to determine incentive payouts; (ii) submission of material information to the SEC, Office of Finance and/or Finance Agency is significantly past-due; or (iii) our Bank fails to make sufficient progress, as determined by the board of directors, in the timely remediation of significant examination, monitoring and other supervisory findings.
In accordance with Finance Agency directives, we have submitted the Incentive Plan (including the above-described performance goals established by the board of directors) to the Director of the Finance Agency for review.
Retirement Benefits.In order for our total compensation to be competitive with our Peer Groups, weWe have established and maintain a comprehensive retirement program for NEOs. During 20102011, we offeredprovided qualified and non-qualified defined benefit plans and a qualified and non-qualified defined contribution plans.plan. The benefits provided by these plans are components of the total compensation opportunity for NEOs. The board of directors believes that these plans serve as valuable retention tools and provide significant tax deferral opportunities and resources for the participants' long-range financial planning. Each of these fourThese plans isare discussed below.
Pension and Thrift Plans.The Bank'sOur retirement program is comprised of two qualified retirement plans: the Pentegra Defined Benefit Plan for Financial Institutions ("DB Plan"Plan") (for eligible employees hired before February 1, 2010) and the Pentegra Defined Contribution Plan for Financial Institutions ("DC Plan"Plan") (for all employees).
In response to federal legislation which imposes restrictions on the retirement benefits payable tootherwise earned by executives, in 1993 and 1994 we established two non-qualified benefit equalization plans: the Supplemental Executive Retirement Plan ("SERP"SERP") and the Supplemental Executive Thrift Plan ("SETP"). In order to grandfather the SERP and SETP under the laws in effect prior to the effective date of the Internal Revenue Code ("IRC") Section 409A regulations, both the SERP and SETP plans were frozen, effective December 31, 2004, and are now referred to as the "Frozen SERP""Frozen SERP" and "Frozen"Frozen SETP,," respectively. A separate SERP (as amended and restated effective January 1, 2008) ("2005 SERP"SERP") and a separate SETP (as amended and restated effective January 1, 2008) ("2005 SETP"SETP") were established effective January 1, 2005, to conform to the Section 409A regulations. The Frozen SERP and 2005 SERP are collectively referred to as the "SERPs""SERPs" and the Frozen SETP and the 2005 SETP are collectively referred to as the "SETPs."SETPs." In addition to the NEOs, certain other officers are eligible to participate in the 2005 SETP and 2005 SERP. The SETPs were terminated effective December 23, 2009, and all account balances under the SETPs were distributed to participants in lump-sum payments on or about December 24, 2010. We established rabbi trusts to fund the SETPs, and, to the extent funds in the trusts were insufficient, payments were made out of our general assets. Benefits received by the participants from these SETPs were recognized as ordinary income in the year in which they were distributed. The rabbi trusts for the SETPs remain in place (but unfunded), should the board of directors decide to reinstate the SETP in the future.
These retirement plans have all been amended and restated from time to time to comply with changes in laws and regulations of the Internal Revenue Service ("IRS"IRS") and to modify certain benefit features. As described in more detail in the next section, the DB Plan was frozen as of February 1, 2010, with the result that only employees hired before that date are eligible to participate in the DB plan.
On November 20, 2009, the board of directors adopted resolutions to terminate the SETPs due to increased concerns of possible restrictions on payments under the SETPs in cases where the Bank is not insolvent. The SETPs were terminated effective December 23, 2009, upon the Bank's receipt of acknowledgment from the Finance Agency that the board of directors had the authority to terminate the SETPs. All account balances under the SETPs were distributed to participants in lump-sum payments on or about December 24, 2010. Prior distribution elections by terminated participants under the SETPs were honored until mid-December 2010, in accordance with the terms of the plans and IRC Section 409A regulations. For additional information, please refer to our Current Report on Form 8-K filed on December 29, 2009.
The DB Plan and SERPs provide benefits based on a combination of a participant's length of service, age and annual compensation, except as described below for Mr. Miller. The DC Plan provides and the SETPs provided benefits based upon amounts deferred by the participant and employer matching contributions based upon length of service and the amount of the deferral and compensation.
DB Plan and SERP. SERP.All employees who met the eligibility requirements and were hired before February 1, 2010, including the NEOs, participate in the DB Plan, a tax-qualified, multi-employer defined benefit pension plan. The plan neither requires nor permits employee contributions. Participants' pension benefits vest upon completion of five years of service. Benefits are based upon compensation up to the annual compensation limit under the IRC, which was $$245,000 in 2010.2011. In addition, benefits payable to participants in the DB Plan may not exceed a maximum benefit limit under the IRC, which in 2011 was $2010 was $195,000, payable as a single life annuity at normal retirement age. The SERPs, as non-qualified retirement plans, restore retirement benefits that a participant would otherwise receive, absent these limitations imposed by the IRC. In this respect, the SERPs are an extension of our retirement commitment to our NEOs as highly-compensated employees because they preserve and restore the full pension benefits, which, due to IRC limitations, are not payable from the DB Plan.
In determining whether a participant is entitled to a restoration of retirement benefits, the SERPs utilize the identical benefit formula applicable to the DB Plan. In the event that the benefit payable from the DB Plan has been reduced or otherwise limited due to IRC limitations, the participant's lost benefits are payable under the terms of the SERPs.
In connection with an early retirement option offered in late 2006, Mr. Miller elected to retire effective December 29, 2006, and was granted an early retirement benefit. This early retirement benefit included an additional three years of service and three years of age ("3+3"3") for purposes of calculating his accrued benefit under the DB Plan and the SERPs. On July 16, 2007, Mr. Miller was re-hired as the Bank's President-CEO.our President - CEO. At that time, all scheduled future payments from the SERPs were suspended until Mr. Miller retires again. Mr. Miller is eligible to participate in and accrue additional benefits under the DB Plan and the 2005 SERP (but not the Frozen SERP, because accruals to it were frozen as of December 31, 2004). The DB Plan benefit to be paid to Mr. Miller upon his future retirement will include the value of the early retirement benefit (3+3) but will also automatically be reduced, under the terms of the DB Plan, by the lump sum benefit of $1,230,601 he received from the DB Plan when he retired in 2006. The Frozen SERP benefit to be paid to Mr. Miller upon his future retirement will include the value of the early retirement benefit but will also automatically be reduced, under the terms of the Frozen SERP, to both take into account the one installment payment of $308,231 that Mr. Miller has already received under the Frozen SERP, and to further reduce Mr. Miller's benefitwill be reduced by an additional $450,000 which represents the amount determined by the board of directors to approximate the after-tax value of the additional benefit Mr. Miller received under the early retirement option. The Frozen SERP benefit will be increased by interest earned at the annual rate of 4.86% from December 31, 2004 (the date on which the Frozen SERP was frozen) to the date of payment following Mr. Miller's future retirement. The 2005 SERP provides that Mr. Miller's benefit upon his future retirement will include the value of the early retirement benefit and will be reduced to take into account his receipt of a lump sum payout of $1,242,282 (for a total SERP payout of $1,550,513) from his 2006 retirement. The 2005 SERP benefit will be increased by interest earned at the annual rate of 4.69% from February 1, 2007 (the date of the above-referenced installment payment) to the date of payment following Mr. Miller's future retirement. In addition, if a payment were to become due to Mr. Miller under the terms of his Key Employee Severance Agreement, the portion of that payment attributable to his 2005 SERP benefits would be calculated as if he had three years added to his age and had an additional three years of benefit service. For more information concerning Mr. Miller's Key Employee Severance Agreement, please refer to "PotentialPotential Payments Upon Termination or Change in Control"Control herein.
When the Executive/Governance Committee established Mr. Miller's compensation package in June 2007, it considered his then-established DB Plan and SERP benefits, as well as the likelihood that he would later be awarded a Key Employee Severance Agreement. The committeeCommittee also considered other FHLBs'FHLBanks' CEO compensation and reviewed salary data supplied by McLagan and Towers Perrin. Using this data, the committee approved a motion to offer Mr. Miller base pay of $400,000 with a short-term incentive bonus not to exceed 50% of base pay. The committeeCommittee discussed the prior payment of the early retirement benefit, and this was taken into account in setting the newMr. Miller's compensation package.package when he returned to our Bank.
The DB Plan was amended, effective for all employees hired on or after July 1, 2008, to provide a reduced benefit. All eligible employees hired on or before June 30, 2008, were grandfathered under the benefit formula and the terms of the DB Plan in effect as of June 30, 2008 ("Grandfathered DB Plan"Plan") and are eligible to continue under the Grandfathered DB Plan, subject to future plan amendments made by the board of directors. All eligible employees hired on or after July 1, 2008, and before February 1, 2010, are enrolled in the amended DB Plan ("Amended DB Plan"Plan"). As of December 31, 2010,2011, all NEOs are enrolled in either the Grandfathered DB Plan or the Amended DB Plan, and are eligible to participate in the SERP. See below for a description of the differences in benefits included in these plans.
Grandfathered DB Plan. The following table shows estimated annual benefits payable upon retirement at age 65 by combining the Grandfathered DB Plan and the SERPs. The estimated annual benefits are calculated in accordance with the formula currently in effect for specified years of service and compensation for individuals participating in both plans, and hired prior to July 1, 2008:
| | | Sample High 3-Year Average Compensation | | Annual Benefits Payable at age 65 Based on Years of Benefit Service | | Annual Benefits Payable at age 65 Based on Years of Benefit Service |
| 15 | | 20 | | 25 | | 30 | | 35 | 15 | | 20 | | 25 | | 30 | | 35 |
| 200,000 | | $ | 75,000 | | | $ | 100,000 | | | $ | 125,000 | | | $ | 150,000 | | | $ | 175,000 | | |
| $200,000 | | | $ | 75,000 |
| | $ | 100,000 |
| | $ | 125,000 |
| | $ | 150,000 |
| | $ | 175,000 |
|
| 300,000 | | 112,500 | | | 150,000 | | | 187,500 | | | 225,000 | | | 262,500 | | | 112,500 |
| | 150,000 |
| | 187,500 |
| | 225,000 |
| | 262,500 |
|
| 400,000 | | 150,000 | | | 200,000 | | | 250,000 | | | 300,000 | | | 350,000 | | | 150,000 |
| | 200,000 |
| | 250,000 |
| | 300,000 |
| | 350,000 |
|
| 500,000 | | 187,500 | | | 250,000 | | | 312,500 | | | 375,000 | | | 437,500 | | | 187,500 |
| | 250,000 |
| | 312,500 |
| | 375,000 |
| | 437,500 |
|
| 600,000 | | 225,000 | | | 300,000 | | | 375,000 | | | 450,000 | | | 525,000 | | | 225,000 |
| | 300,000 |
| | 375,000 |
| | 450,000 |
| | 525,000 |
|
| 700,000 | | 262,500 | | | 350,000 | | | 437,500 | | | 525,000 | | | 612,500 | | | 262,500 |
| | 350,000 |
| | 437,500 |
| | 525,000 |
| | 612,500 |
|
| |
• | Formula: The combined Grandfathered DB Plan and SERP benefit equals 2.5% times years of benefit service times the high three-year average compensation. Benefit service begins one year after employment, and benefits are vested after five years. Benefit payments commencing before age 65 are reduced by applying an early retirement factor based on the participant's age when payments begin. The allowance payable at age 65 would be reduced by 3% for each year the employee is under age 65. If the sum of age and years of vesting service at termination of employment is at least 70 ("Rule of 70"), the retirement allowance would be reduced by 1.5% for each year the employee is under age 65. See above description that describes the calculation of benefits for Mr. Miller. Beginning at age 66, retirees are also provided an annual retiree cost of living adjustment of 3% per year, which is not reflected in the table above.
|
Formula: The combined Grandfathered DB Plan and SERP benefit equals 2.5% times years of benefit service times the high three-year average compensation. Benefit service begins one year after employment, and benefits are vested after five years. Benefit payments commencing before age 65 are reduced by applying an early retirement factor based on the participant's age when payments begin. The allowance payable at age 65 would be reduced by 3.0% for each year the employee is under age 65. If the sum of age and years of vesting service at termination of employment is at least 70 ("Rule of 70"), the retirement allowance would be reduced by 1.5% for each year the employee is under age 65. See above description that describes the calculation of benefits for Mr. Miller. Beginning at age 66, retirees are also provided an annual retiree cost of living adjustment of 3.0% per year, which is not reflected in the table above.
Amended DB Plan. The following table shows estimated annual benefits payable upon retirement at age 65 by combining the Amended DB Plan and the 2005 SERP. The estimated annual benefits are calculated in accordance with the formula currently in effect for specified years of service and compensation for individuals participating in both plans, hired on or after July 1, 2008 and before February 1, 2010:
| | Sample High 5-Year Average Compensation | | Annual Benefits Payable at age 65 Based on Years of Benefit Service | | Annual Benefits Payable at age 65 Based on Years of Benefit Service |
| 15 | | 20 | | 25 | | 30 | | 35 | 15 | | 20 | | 25 | | 30 | | 35 |
| 200,000 | | $ | 45,000 | | | $ | 60,000 | | | $ | 75,000 | | | $ | 90,000 | | | $ | 105,000 | | |
| $200,000 | | | $ | 45,000 |
| | $ | 60,000 |
| | $ | 75,000 |
| | $ | 90,000 |
| | $ | 105,000 |
|
| 300,000 | | 67,500 | | | 90,000 | | | 112,500 | | | 135,000 | | | 157,500 | | | 67,500 |
| | 90,000 |
| | 112,500 |
| | 135,000 |
| | 157,500 |
|
| 400,000 | | 90,000 | | | 120,000 | | | 150,000 | | | 180,000 | | | 210,000 | | | 90,000 |
| | 120,000 |
| | 150,000 |
| | 180,000 |
| | 210,000 |
|
| 500,000 | | 112,500 | | | 150,000 | | | 187,500 | | | 225,000 | | | 262,500 | | | 112,500 |
| | 150,000 |
| | 187,500 |
| | 225,000 |
| | 262,500 |
|
| 600,000 | | 135,000 | | | 180,000 | | | 225,000 | | | 270,000 | | | 315,000 | | | 135,000 |
| | 180,000 |
| | 225,000 |
| | 270,000 |
| | 315,000 |
|
| 700,000 | | 157,500 | | | 210,000 | | | 262,500 | | | 315,000 | | | 367,500 | | | 157,500 |
| | 210,000 |
| | 262,500 |
| | 315,000 |
| | 367,500 |
|
| |
• | Formula: The combined Amended DB Plan and 2005 SERP benefit equals 1.5% times years of benefit service times the high five-year average compensation. The benefit is not payable under the Frozen SERP because no participant in the Amended DB Plan is an eligible participant in the Frozen SERP. Benefit service begins one year after employment, and benefits are vested after five years. Benefit payments commencing before age 65 are reduced by applying an early retirement factor based on the participant's age when payments begin. The allowance payable at age 65 would be reduced according to the actuarial equivalent based on actual age when early retirement commences. If a participant satisfied the Rule of 70 at termination of employment, the retirement allowance would be reduced by 3.0% for each year the participant is under age 65. |
Formula: The combined Amended DB Plan and 2005 SERP benefit equals 1.5% times years of benefit service times the high five-year average compensation. The benefit is not payable under the Frozen SERP because no participant in the Amended DB Plan is an eligible participant in the Frozen SERP. Benefit service begins one year after employment, and benefits are vested after five years. Benefit payments commencing before age 65 are reduced by applying an early retirement factor based on the participant's age when payments begin. The allowance payable at age 65 would be reduced according to the actuarial equivalent based on actual age when early retirement commences. If a participant satisfied the Rule of 70 at termination of employment, the retirement allowance would be reduced by 3.0% for each year the participant is under age 65.
AThe following table sets forth a comparison of the Grandfathered DB Plan and the Amended DB Plan is included below:Plan:
| | | DB Plan Provisions | | Grandfathered DB Plan (All Employees Hired on or before June 30, 2008) | | Amended DB Plan (All Employees Hired between July 1, 2008 and January 31, 2010) | | Grandfathered DB Plan (All Employees Hired on or before June 30, 2008) | | Amended DB Plan (All Employees Hired between July 1, 2008 and January 31, 2010) |
| Benefit Increment | | 2.5% | | 1.5% | | 2.5% | | 1.5% |
| Cost of Living Adjustment | | 3.0% Per Year Cumulative, Commencing at Age 66 | | None | | 3.0% Per Year Cumulative, Commencing at Age 66 | | None |
| Normal Form of Payment | | Guaranteed 12 Year Payout | | Life Annuity | | Guaranteed 12 Year Payout | | Life Annuity |
| Early Retirement Reduction for less than Age 65: | | | | | | | | |
| a) Rule of 70 | | 1.5% Per Year | | 3.0% Per Year | |
| b) Rule of 70 Not Met | | 3.0% Per Year | | Actuarial Equivalent | |
| i) Rule of 70 | | | 1.5% Per Year | | 3.0% Per Year |
| ii) Rule of 70 Not Met | | | 3.0% Per Year | | Actuarial Equivalent |
With respect to all employees hired before February 1, 2010:
| |
• | Eligible compensation includes salary, STI, bonus, and any other compensation that is reflected on the IRS Form W-2 (but not including LTI or any compensation deferred from a prior year). |
| |
• | Retirement benefits from the Frozen SERP may be paid in the form of a lump sum payment or annual installments up to 20 years, or a combination of lump sum and annual payments. Retirement benefits from the 2005 SERP may be paid in the form of a lump sum payment, or annual installments up to 20 years, or a combination of lump sum and annual payments. The benefits due from the SERPs are paid out of a Rabbi Trust that we have established or out of the Bank's general assets. The assets of the Rabbi Trust are subject to the claims of the Bank's general creditors. |
| |
• | Retirement benefits from the DB Plan are paid in the form of a lump sum, annuity, or a combination of the two, at the election of the retiree at the time of retirement. Any payments involving a lump sum are subject to spousal consent. |
Eligible compensation includes salary, STI, bonus, and any other compensation that is reflected on the IRS Form W-2 (but not including LTI or any compensation deferred from a prior year).
Retirement benefits from the Frozen SERP may be paid in the form of a lump sum payment or annual installments up to 20 years, or a combination of lump sum and annual payments. Retirement benefits from the 2005 SERP may be paid in the form of a lump sum payment, or annual installments up to 20 years, or a combination of lump sum and annual payments. The benefits due from the SERPs are paid out of a grantor trust that we have established or out of our general assets. The assets of the grantor trust are subject to the claims of our general creditors.
Retirement benefits from the DB Plan are paid in the form of a lump sum, annuity, or a combination of the two, at the election of the retiree at the time of retirement. Any payments involving a lump sum are subject to spousal consent.
The 2005 SERP was amended in 2008 to clarify that, for employees hired on or after July 1, 2008 who have previously accrued Pentegra retirement benefits, the 2005 SERP will only restore benefits earned while at our Bank. The 2005 SERP was also amended in 2008 to reflect the conforming changes otherwise reflected in the July 1, 2008 board of directors' resolution, including the decision not to include LTI payments in compensation when calculating the benefit payable under the 2005 SERP.
During 2010 our board of directors froze ourdiscontinued participation in the Amended DB Plan.Plan for new employees. As a result, no employee hired on or after February 1, 2010 (including future NEOs) will be enrolled in that plan, and members of the Amended DB Plan as of January 31, 2010 (including NEOs) will continue to be eligible for the Amended DB Plan and accrue benefits thereunder until termination of employment.
DC Plan.All employees, including the NEOs, who have met the eligibility requirements may participate in the DC Plan, a retirement savings plan qualified under the IRC (Section 401(k)). Prior to January 1, 2011, we matched participant contributions based on the length of service and the amount of the participant's contribution.
Prior to October 1, 2010, we contributed a fully vested amount equal to the greater of (A) or (B):
(A)
| |
• | 50% of a participant's contribution during the 2nd and 3rd years of employment; |
| |
• | 75% of a participant's contribution during the 4th and 5th years of employment; and |
| |
• | 100% of a participant's contribution starting with the 6th year of employment. |
The above applicable Bank percentage contribution applied to the first 6% of base pay that the participant deferred.
OR
| |
(B) | The lesser of $75 per month or 2% of a participant's base pay. |
For a transition period from October 1, 2010 through December 31, 2010, as a result of a plan amendment adopted by the board of directors, we eliminated the 2% minimum Bank contribution described above, and therefore contributed a fully vested amount for that transition period equal to:
| |
• | 50% of a participant's contribution during the 2nd and 3rd years of employment; |
| |
• | 75% of a participant's contribution during the 4th and 5th years of employment; and |
| |
• | 100% of a participant's contribution starting with the 6th year of employment. |
The above-listed Bank percentage contribution applied during this transition period to the first 6% of base pay that the participant deferred.
The board of directors adopted aA safe-harbor plan amendment to the DC Plan, adopted effective January 1, 2011. This amendment2011, provides for an immediate fully vested (after the first month of hire) employer match of 100% on the first 6% of base pay that the participant defers. This amendment thereby eliminated the previous one-year waiting period before the employer match would begin, and eliminated the previous step-matchfive-year vesting schedule based on years of service. This action was taken primarily to facilitate the recruitment and retention of new hiresemployees after February 1, 2010 since they are not eligible to participate in the Grandfathered DB Plan or the Amended DB Plan.
Eligible compensation in the DC Plan is defined as base salary. A participant in the DC Plan may elect to contribute up to 50% of eligible compensation, under the DC Plan, subject to the following limits. Under IRS regulations, in 20102011 an employee could contribute up to $$16,500 of eligible compensation on a pre-tax basis, and employeesan employee age 50 or over could contribute up to an additional $$5,500 on a pre-tax basis. Participant contributions over that amount may be made on an after-tax basis. A total of $$49,000 per year may be contributed to a participant's account, including our matching contribution and the participant's pre-tax and after-tax contributions. In addition, no more than $$245,000 of annual compensation may be taken into account in computing eligible compensation. The amount deferred on a pre-tax basis will be taxed to the participant as ordinary income when distributed from the DC Plan. The plan permits participants to self-direct the investment of their DC Plan accounts into one or more investment funds. All returns are at the market rate of the related fund.
Effective October 1, 2010 an amendment to the DC Plan effective October 1, 2010, that permits a participant (in addition to making pre-tax elective deferrals) to fund a separate "Roth Elective Deferral Account" (also known as a "Roth"Roth 401(k)") with after-tax contributions. A participant may now make both pre-tax and Roth 401(k) contributions, subject to the limitations described in the previous paragraph. All Bank contributions will be allocated to the participant's safe-harbor account, subject to the maximum match amount described above. Under current IRS rules, withdrawals from a Roth 401(k) account (including investment gains) are tax-free after the participant reaches age 59 1/2 and if the withdrawal occurs at least five years after January 1 of the first year in which a contribution to the Roth 401(k) account occurs. Effective December 10, 2010 the Bank elected to allow in-plan Roth conversions. This allows participants to convert certain vested contributions into Roth contributions similar to a Roth IRA conversion.
Supplemental Executive Thrift Plans (SETPs). The SETPs, as non-qualified thrift plans, restored retirement benefits that an eligible participant would otherwise receive, absent the limitations imposed by the IRC on the contributions made on behalf of the eligible participant to our DC Plan. In determining whether an eligible participant was entitled to a restoration of retirement benefits, the SETPs utilized nearly identical benefit formulas as applicable to the DC Plan. In the event that the contributions made to the DC Plan on behalf of the eligible participant were reduced or otherwise limited, the participant's lost benefits were payable under the terms of the SETPs. Prior to the cessation of contributions to the 2005 SETP in late 2009 (as a result of the plan's termination as discussed above), participants in the 2005 SETP could have elected to defer up to 100% of their eligible compensation (base salary) and up to 100% of both their STI Plan payout and their LTI Plan payout. Amounts deferred under the SETPs were credited to the eligible participant's account on a tax-deferred basis. The Bank established Rabbi Trusts to fund the SETPs, and, to the extent funds in the trusts were insufficient, payments were made out of the Bank's general assets. Benefits received by the participants from these SETPs were recognized as ordinary income in the year in which they were distributed. As explained above, the board of directors terminated the SETPs, effective December 23, 2009, and all account balances were distributed to participants (including NEOs) in lump-sum payments on or about December 24, 2010. The Rabbi Trust for the SETPs remains in place, should the board of directors decide to reinstate the SETP in the future.
Executive Perquisites and Other Benefits.Perquisites and other benefits are provided to the NEOs as a matter of market competitiveness and are commensurate with their overall position, duties, and responsibilities.
We offer the following perquisites and other benefits to the NEOs:
| |
• | DB Plan and DC Plan (as discussed above); |
| |
• | participation in the 2005 SERP; |
| |
• | medical, dental, and vision insurance (subject to employee expense sharing); |
| |
• | vacation leave, which increases based upon officer title and years of service; |
| |
• | life and long-term disability insurance; |
| |
• | educational assistance; |
| |
• | reimbursement, limited to two hundred dollars annually, for health club membership or in-home health equipment; |
| |
• | employee relocation assistance, where appropriate, for new hires; |
| |
• | spousal travel to board and preapproved industry activities (limited to two events per year); and |
| |
• | annual physical examination. |
DB Plan and DC Plan (as discussed above);
participation in the 2005 SERP;
medical, dental, and vision insurance (subject to employee expense sharing);
vacation leave, which increases based upon officer title and years of service;
life and long-term disability insurance;
travel insurance;
educational assistance;
reimbursement, limited to two hundred dollars annually, for health club membership or in-home health equipment;
employee relocation assistance, where appropriate, for new hires;
spousal travel to board of directors and preapproved industry activities (limited to two events per year); and
annual physical examination.
The incremental cost of such perquisites to us is included in the Summary Compensation Table. Many of these benefits are also provided to other Bank employees.
Key Employee Severance Agreements.We have Key Employee Severance Agreements with certain officers, including the NEOs. Please refer to the "PotentialPotential Payments Upon Termination or Change in Control"Control herein for additional information concerning Key Employee Severance Agreements.
Tax Considerations. The board of directors has structured the compensation programs to comply with IRC Section 409A. If an executive is entitled to nonqualified deferred compensation benefits that are subject to IRC Section 409A, and such benefits do not comply with IRC Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the executive is subject to payment of regular federal income tax, interest and an additional federal income tax of 20% of the benefit includable in income.
Key Employee Severance Agreements with three of our NEOs contain provisions that "gross-up" certain benefits paid thereunder in the event the NEO should become liable for an excise tax on such benefits. Please refer to the "PotentialPotential Payments Upon Termination or Change in Control"Control herein for additional information concerning Key Employee Severance Agreements.
Summary Compensation Table for 2010
2011
| | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary (1) | | Non-Equity Incentive Plan Compensation (2) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings (3) | | All Other Compensation (4) | | Total |
| (a) | | (b) | | (c) | | (g) | | (h) | | (i) | | (j) |
| Milton J. Miller, II President — Chief Executive Officer (PEO) | | 2010 | | $ | 534,066 | | | $ | 512,278 | | | $ | 872,000 | | | $ | 14,914 | | | $ | 1,933,258 | |
| | 2009 | | 538,461 | | | 228,242 | | | 1,275,000 | | | 22,265 | | | 2,063,968 | |
| | 2008 | | 500,006 | | | 350,004 | | | 748,000 | | | 32,390 | | | 1,630,400 | |
| Cindy L. Konich Executive Vice President — Chief Operating Officer — Chief Financial Officer (PFO) | | 2010 | | 337,192 | | | 201,056 | | | 650,000 | | | 14,835 | | | 1,203,083 | |
| | 2009 | | 323,082 | | | 78,585 | | | 586,000 | | | 20,230 | | | 1,007,897 | |
| | 2008 | | 300,014 | | | 120,006 | | | 382,000 | | | 14,835 | | | 816,855 | |
| Jonathan R. West Executive Vice President — Chief Operating Officer —Business Operations | | 2010 | | 307,390 | | | 181,816 | | | 333,000 | | | 16,279 | | | 838,485 | |
| | 2009 | | 296,892 | | | 72,215 | | | 309,000 | | | 17,273 | | | 695,380 | |
| | 2008 | | 272,272 | | | 108,909 | | | 253,000 | | | 16,553 | | | 650,734 | |
| Sunil U. Mohandas Senior Vice President — Chief Risk Officer | | 2010 | | 254,176 | | | 96,237 | | | 122,000 | | | 14,802 | | | 487,215 | |
| | 2009 | | 256,257 | | | 47,205 | | | 95,000 | | | 15,478 | | | 413,940 | |
| Gregory L. Teare Senior Vice President — Chief Banking Officer | | 2010 | | 234,130 | | | 123,610 | | | 48,000 | | | 7,118 | | | 412,858 | |
| | 2009 | | 231,552 | | | 56,322 | | | 36,000 | | | 1,894 | | | 325,768 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary (1) | | Non-Equity Incentive Plan Compensation (2) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings (3) | | All Other Compensation (4) | | Total |
| (a) | | (b) | | (c) | | (g) | | (h) | | (i) | | (j) |
Milton J. Miller, II President - CEO (PEO) | | 2011 | | $ | 555,438 |
| | $ | 504,294 |
| | $ | 2,083,000 |
| | $ | 14,805 |
| | $ | 3,157,537 |
|
| | 2010 | | 534,066 |
| | 512,278 |
| | 872,000 |
| | 14,914 |
| | 1,933,258 |
|
| | 2009 | | 538,461 |
| | 228,242 |
| | 1,275,000 |
| | 22,265 |
| | 2,063,968 |
|
Cindy L. Konich Executive Vice President - COO - CFO (PFO) | | 2011 | | 369,018 |
| | 195,861 |
| | 1,264,000 |
| | 14,803 |
| | 1,843,682 |
|
| | 2010 | | 337,192 |
| | 201,056 |
| | 650,000 |
| | 14,835 |
| | 1,203,083 |
|
| | 2009 | | 323,082 |
| | 78,585 |
| | 586,000 |
| | 20,230 |
| | 1,007,897 |
|
Jonathan R. West Executive Vice President -COO - Business Operations | | 2011 | | 333,138 |
| | 177,849 |
| | 987,000 |
| | 14,793 |
| | 1,512,780 |
|
| | 2010 | | 307,390 |
| | 181,816 |
| | 333,000 |
| | 16,279 |
| | 838,485 |
|
| | 2009 | | 296,892 |
| | 72,215 |
| | 309,000 |
| | 17,273 |
| | 695,380 |
|
K. Lowell Short, Jr. Senior Vice President - Chief Accounting Officer | | 2011 | | 244,010 |
| | 125,123 |
| | 44,000 |
| | 14,709 |
| | 427,842 |
|
Gregory L. Teare Senior Vice President - Chief Banking Officer | | 2011 | | 241,150 |
| | 132,025 |
| | 86,000 |
| | 14,537 |
| | 473,712 |
|
| | 2010 | | 234,130 |
| | 123,610 |
| | 48,000 |
| | 7,118 |
| | 412,858 |
|
| | 2009 | | 231,552 |
| | 56,322 |
| | 36,000 |
| | 1,894 |
| | 325,768 |
|
| | |
| (1) | The 2009 amounts represent 27 pay periods whereas the 20082010 and 20102011 amounts represent 26 pay periods. |
| |
(2) | The Non-Equity Incentive Plan Compensation table below shows the components of the "Non-Equity Incentive Plan Compensation" column and the dates that these amounts were paid. |
| |
(3) | These amounts represent a change in pension values under the Grandfathered DB Plan, Amended DB Plan and the SERPs. No NEO received preferential or above-market earnings on deferred compensation. Pension values are determined by calculating the present values of pension benefits accrued through the plan valuation dates. The calculations incorporate various assumptions and changes in compensation, age and service, and utilize discount interest rates based on market interest rates. Those discount rates declined significantly in 2011, which resulted in a corresponding significant increase in pension values in 2011. The change in pension values for Mr. Miller includes an additional three years of service and an additional three years of age as part of the early retirement incentive package that he received from his retirement in December 2006. |
| |
(4) | The All Other Compensation table below shows the components of the "All Other Compensation" column. |
Non-Equity Incentive Plan Compensation — 2010- 2011
| | | | | STI | | LTI | | Total | | STI Plan | | LTI Plan | | Total |
| | | | | | | | | Non-Equity | | | | | | Non-Equity |
| Name | | Year | | Amounts Earned (1) | | Date Paid | | Amounts Earned | | Date Paid | | Incentive Compensation | | Year | | Amounts Earned | | Date Paid | | Amounts Earned | | Date Paid | | Incentive Compensation |
| Milton J. Miller, II | | 2010 | | $ | 347,276 | | | 02/25/2011 | | $ | 165,002 | | | 02/25/2011 | | | $ | 512,278 | | | 2011 | | $ | 344,850 |
| | 3/9/2012 | | $ | 159,444 |
| | 3/9/2012 | | $ | 504,294 |
|
| | | 2009 | | 228,242 | | | 02/26/2010 | | — | | | — | | | 228,242 | | | 2010 | | 347,276 |
| | 2/25/2011 | | 165,002 |
| | 2/25/2011 | | 512,278 |
|
| | | 2008 | | 350,004 | | | 02/27/2009 | | — | | | — | | | 350,004 | | | 2009 | | 228,242 |
| | 2/26/2010 | | — |
| | N/A | | 228,242 |
|
| Cindy L. Konich | | 2010 | | 135,053 | | | 02/25/2011 | | 66,003 | | | 02/25/2011 | | | 201,056 | | | 2011 | | 132,083 |
| | 3/9/2012 | | 63,778 |
| | 3/9/2012 | | 195,861 |
|
| | | 2009 | | 78,585 | | | 02/26/2010 | | — | | | — | | | 78,585 | | | 2010 | | 135,053 |
| | 2/25/2011 | | 66,003 |
| | 2/25/2011 | | 201,056 |
|
| | | 2008 | | 120,006 | | | 02/27/2009 | | — | | | — | | | 120,006 | | | 2009 | | 78,585 |
| | 2/26/2010 | | — |
| | N/A | | 78,585 |
|
| Jonathan R. West | | 2010 | | 121,916 | | | 02/25/2011 | | 59,900 | | | 02/25/2011 | | | 181,816 | | | 2011 | | 119,240 |
| | 3/9/2012 | | 58,609 |
| | 3/9/2012 | | 177,849 |
|
| | | 2009 | | 72,215 | | | 02/26/2010 | | — | | | — | | | 72,215 | | | 2010 | | 121,916 |
| | 2/25/2011 | | 59,900 |
| | 2/25/2011 | | 181,816 |
|
| | | 2008 | | 108,909 | | | 02/27/2009 | | — | | | — | | | 108,909 | | | 2009 | | 72,215 |
| | 2/26/2010 | | — |
| | N/A | | 72,215 |
|
| Sunil U. Mohandas | | 2010 | | 96,237 | | | 02/25/2011 | | �� (2) | | | — | | | 96,237 | | |
| | | 2009 | | 47,205 | | | 02/26/2010 | | — | | | — | | | 47,205 | | |
K. Lowell Short, Jr. (1) | | | 2011 | | 87,339 |
| | 3/9/2012 | | 37,784 |
| | 3/9/2012 | | 125,123 |
|
| Gregory L. Teare | | 2010 | | 87,828 | | | 02/25/2011 | | 35,782 | | | 02/25/2011 | | | 123,610 | | | 2011 | | 86,315 |
| | 3/9/2012 | | 45,710 |
| | 3/9/2012 | | 132,025 |
|
| | | 2009 | | 56,322 | | | 02/26/2010 | | — | | | — | | | 56,322 | | | 2010 | | 87,828 |
| | 2/25/2011 | | 35,782 |
| | 2/25/2011 | | 123,610 |
|
| | | | 2009 | | 56,322 |
| | 2/26/2010 | | — |
| | N/A | | 56,322 |
|
| | |
| (1) | CertainMr. Short's LTI payout for the 2009-2011 performance period has been prorated for his partial year of employment with the amountsBank in this column for 2008 ($175,002 for Mr. Miller and $21,782 for Mr. West) were deferred at the election of the NEO. No amounts were deferred for 2009 or 2010. |
| (2)
| Mr. Mohandas was not a participant in the 2008 - 2010 LTI.2009. |
All Other Compensation — - 20112010
| | | | | Bank Contribution | | Bank Contribution | | | | Total | | Bank Contribution | | Bank Contribution | | | | Total |
| | | to | | to | | | | All Other | | to | | to | | | | All Other |
| Name | | Year | | 2005 SETP | | DC Plan | | Other (1) | | Compensation | | Year | | 2005 SETP | | DC Plan | | Other (1) | | Compensation |
| Milton J. Miller, II | | 2010 | | $ | — | | | $ | 14,700 | | | $ | 214 | | | $ | 14,914 | | | 2011 | | $ | — |
| | $ | 14,700 |
| | $ | 105 |
| | $ | 14,805 |
|
| | | 2009 | | 7,350 | | | 14,700 | | | 215 | | | 22,265 | | | 2010 | | — |
| | 14,700 |
| | 214 |
| | 14,914 |
|
| | | 2008 | | 16,200 | | | 13,800 | | | 2,390 | | | 32,390 | | | 2009 | | 7,350 |
| | 14,700 |
| | 215 |
| | 22,265 |
|
| Cindy L. Konich | | 2010 | | — | | | 14,700 | | | 135 | | | 14,835 | | | 2011 | | — |
| | 14,700 |
| | 103 |
| | 14,803 |
|
| | | 2009 | | 4,957 | | | 13,710 | | | 1,563 | | | 20,230 | | | 2010 | | — |
| | 14,700 |
| | 135 |
| | 14,835 |
|
| | | 2008 | | 2,730 | | | 11,956 | | | 149 | | | 14,835 | | | 2009 | | 4,957 |
| | 13,710 |
| | 1,563 |
| | 20,230 |
|
| Jonathan R. West | | 2010 | | — | | | 14,700 | | | 1,579 | | | 16,279 | | | 2011 | | — |
| | 14,700 |
| | 93 |
| | 14,793 |
|
| | | 2009 | | 3,768 | | | 13,386 | | | 119 | | | 17,273 | | | 2010 | | — |
| | 14,700 |
| | 1,579 |
| | 16,279 |
|
| | | 2008 | | 2,808 | | | 13,636 | | | 109 | | | 16,553 | | | 2009 | | 3,768 |
| | 13,386 |
| | 119 |
| | 17,273 |
|
| Sunil U. Mohandas | | 2010 | | — | | | 14,700 | | | 102 | | | 14,802 | | |
| | | 2009 | | 5,616 | | | 9,759 | | | 103 | | | 15,478 | | |
| K. Lowell Short, Jr. | | | 2011 | | — |
| | 14,641 |
| | 68 |
| | 14,709 |
|
| Gregory L. Teare | | 2010 | | — | | | 7,024 | | | 94 | | | 7,118 | | | 2011 | | — |
| | 14,469 |
| | 68 |
| | 14,537 |
|
| | | 2009 | | — | | | 1,801 | | | 93 | | | 1,894 | | | 2010 | | — |
| | 7,024 |
| | 94 |
| | 7,118 |
|
| | | | 2009 | | — |
| | 1,801 |
| | 93 |
| | 1,894 |
|
| | |
| (1) | Other includes other de minimus perquisites that are individually and in the aggregate valued at less than $10,000. |
Annual Incentive Compensation
Grants of Plan-Based Awards Table for 20102011
| | | | | Estimated Future Payouts Under Non-Equity Incentive Plans | | Estimated Future Payouts Under Non-Equity Incentive Plans |
| Name | | Plan Name | | Threshold (1) (2) | | Target | | Maximum | | Plan Name | | Grant Date | | Threshold (1) (2) | | Target | | Maximum |
| (a) | | (b) | | (c) | | (d) | | (e) | | (b) | | (c) | | (d) | | (e) |
| Milton J. Miller, II | | STI | | $ | 8,011 | | | $ | 267,033 | | | $ | 373,846 | | | STI | | 1/20/2011 | | $ | 1,666 |
| | $ | 277,719 |
| | $ | 388,807 |
|
| | | LTI | | 80,110 | | | 160,220 | | | 240,330 | | | LTI | | 1/20/2011 | | 83,316 |
| | 166,631 |
| | 249,947 |
|
| Cindy L. Konich | | STI | | 3,600 | | | 108,007 | | | 144,009 | | | STI | | 1/20/2011 | | 738 |
| | 110,705 |
| | 147,607 |
|
| | | LTI | | 32,045 | | | 64,090 | | | 96,135 | | | LTI | | 1/20/2011 | | 36,902 |
| | 73,804 |
| | 110,705 |
|
| Jonathan R. West | | STI | | 3,250 | | | 97,500 | | | 130,000 | | | STI | | 1/20/2011 | | 666 |
| | 99,941 |
| | 133,255 |
|
| | | LTI | | 29,448 | | | 58,895 | | | 88,343 | | | LTI | | 1/20/2011 | | 33,314 |
| | 66,628 |
| | 99,941 |
|
| Sunil U. Mohandas | | STI | | 2,542 | | | 76,253 | | | 101,670 | | |
| K. Lowell Short, Jr. | | | STI | | 1/20/2011 | | 488 |
| | 73,203 |
| | 97,604 |
|
| | | LTI | | 25,418 | | | 50,835 | | | 76,253 | | | LTI | | 1/20/2011 | | 24,401 |
| | 48,802 |
| | 73,203 |
|
| Gregory L. Teare | | STI | | 2,341 | | | 70,239 | | | 93,652 | | | STI | | 1/20/2011 | | 482 |
| | 72,345 |
| | 96,460 |
|
| | | LTI | | 23,413 | | | 46,826 | | | 70,239 | | | LTI | | 1/20/2011 | | 24,115 |
| | 48,230 |
| | 72,345 |
|
| | |
| (1) | The STI threshold payout is the amount expected to be paid when meeting the minimum threshold for the smallest component of each of the six13 components of the STI Plan. If the minimum threshold for the lightest weighted of the six13 components was achieved, but we did not reach the minimum threshold for any of the other components, the payout would be 1.50%0.30% of the eligible payout for the CEO and 1.00%0.20% for the other NEOs (1.50%(0.30% x base pay for Mr. Miller and 1.00%0.20% x base pay for the other NEOs) resulting in a cash payout as noted above in column (c). There was no guaranteed payout under the 20102011 STI Plan. Therefore,Plan.Therefore, the minimum that could be paid out under this plan is $0 for each NEO. The Non-Equity Incentive Plan Compensation table above shows the amounts actually earned and paid under the 2011 STI Plan. |
| |
| (2) | The LTI threshold payout is based upon attaining the minimum threshold over the 3-year period of the plan. The threshold is the amount expected be paid when meeting the minimum threshold for achievement under the LTI plan over the 3-year period. Thereperiod.There is no guaranteed payout under the 2010-20122011-2013 LTI Plan. Therefore, the minimum that could be paid out under this plan is $0 for each NEO. |
Retirement Benefits
Pension Benefits Table for 20102011
| | | Name | | Plan Name | | Number of Years of Credited Service (1) (2) | | Present Value of Accumulated Benefits | | Payments During Last Fiscal Year | | Plan Name | | Number of Years of Credited Service (1) (2) | | Present Value of Accumulated Benefits | | Payments During Last Fiscal Year |
| (a) | | (b) | | (c) | | (d) | | (e) | | (b) | | (c) | | (d) | | (e) |
| Milton J. Miller, II | | DB Plan | | 33 | | | $ | 376,000 | | | $ | — | | | DB Plan | | 34 | | $ | 606,000 |
| | $ | — |
|
| | | SERP | | 33 | | | 3,048,000 | | | — | | | SERP | | 34 | | 4,901,000 |
| | — |
|
| Cindy L. Konich | | DB Plan | | 26 | | | 1,363,000 | | | — | | | DB Plan | | 27 | | 1,897,000 |
| | — |
|
| | | SERP | | 26 | | | 991,000 | | | — | | | SERP | | 27 | | 1,721,000 |
| | — |
|
| Jonathan R. West | | DB Plan | | 24 | | | 1,216,000 | | | — | | | DB Plan | | 25 | | 1,700,000 |
| | — |
|
| | | SERP | | 24 | | | 707,000 | | | — | | | SERP | | 25 | | 1,210,000 |
| | — |
|
| Sunil U. Mohandas | | DB Plan | | 7 | | | 258,000 | | | — | | |
| K. Lowell Short, Jr. | | | DB Plan | | 1 | | 41,000 |
| | — |
|
| | | SERP | | 7 | | | 116,000 | | | — | | | SERP | | 1 | | 11,000 |
| | — |
|
| Gregory L. Teare | | DB Plan | | 8 | | | 84,000 | | | — | | | DB Plan | | 9 | | 152,000 |
| | — |
|
| | | SERP | | 2 | | | 20,000 | | | — | | | SERP | | 3 | | 38,000 |
| | — |
|
| | |
| (1) | The years of credited service for Mr. Miller in the table above have been increased by three years as a result of the terms of his early retirement in 2006, as previously discussed. For each of the NEOs, the years of credited service have been rounded to the nearest whole year. |
| |
(2) | Mr. Teare's employment with theour Bank began on September 19, 2008. He was previously employed by the FHLBFHLBank of Seattle and is credited with six additional years of service for the DB Plan. |
Pension values are determined by calculating the present values of pension benefits accrued through the plan valuation dates. The calculations incorporate various assumptions and changes in compensation, age and service, and utilize discount interest rates based on market interest rates.
The present value of the accumulated benefits is based upon a retirement age of 65, using the RP 2000 mortality table projected five years, a discount rate of 5.54%4.4% for the DB Plan, and a discount rate of 5.50%4.3% for the SERPs for 2011.2010.
Non-Qualified Deferred Compensation (SETP) for 2010
| | | | | | | | | | | | | | | | | | | | |
| Name | | Executive Contributions in Last FY (2010) | | Bank Contributions in Last FY (2010) | | Aggregate Earnings in Last FY (2010) | | Aggregate Withdrawals/ Distributions | | Aggregate Balance at Last FYE (12/31/10) |
| (a) | | (b) | | (c) | | (d) | | (e) | | (f) |
| Milton J. Miller, II | | $ | — | | | $ | — | | | $ | 5,843 | | | $ | 661,772 | | | $ | — | |
| Cindy L. Konich | | — | | | — | | | 27,402 | | | 318,870 | | | — | |
| Jonathan R. West | | — | | | — | | | 66,368 | | | 579,118 | | | — | |
| Sunil U. Mohandas | | — | | | — | | | 34,446 | | | 698,989 | | | — | |
| Gregory L. Teare | | — | | | — | | | — | | | — | | | — | |
The SETPs are described in more detail herein "Elements of Compensation Used to Achieve Compensation Philosophy and Objectives - Retirement Benefits - Pension and Thrift Plans." As previously noted, the board of directors terminated the SETPs effective December 23, 2009.
Potential Payments Upon Termination or Change in ControlControl.
Severance Pay Plan.The board of directors has adopted a Severance Pay Plan that pays the NEOs, upon a qualifying termination as described below, up to a maximum 52 weeks of base pay computed at the rate of four weeks of severance pay for each year of service with a minimum of 8 weeks of base pay to be paid. In addition, the plan pays a lump sum paymentamount equal to the NEOs' cost to maintain health insurance coverage under COBRAthe Consolidated Omnibus Budget Reconciliation Act ("COBRA") for the time period applicable under the severance pay schedule. The Severance Pay Plan may be amended or eliminated by the board of directors at any time. This plan does not apply to NEOs who have a Key Employee Severance Agreement (discussed below) with the Bank, if a qualifying event has triggered payment under the terms of the Key Employee Severance Agreement. However, if an NEO's employment is terminated, but a qualifying event under a Key Employment Severance Agreement has not occurred (i.e., if the NEO's employment is terminated as part of a reduction in force that is not associated with a change in control), the provisions of the Severance Pay Plan apply. As of the date of this Report, all of our NEOs have a Key Employee Severance Agreement with theour Bank.
The following qualifying events will trigger an NEO's right to severance benefits under the Severance Pay Plan:
| |
• | the elimination of a job or position; |
| |
• | a substantial job modification, to the extent the incumbent NEO is no longer qualified for, or is unable to perform, the restructured job; or |
| |
• | the reassignment of staff requiring the relocation by more than 75 miles of the NEO's primary residence. |
the elimination of a job or position;
a reduction in force;
a substantial job modification, to the extent the incumbent NEO is no longer qualified for, or is unable to perform, the restructured job; or
the reassignment of staff requiring the relocation by more than 75 miles of the NEO's primary residence.
The following table includes the amounts to be paid to the NEOs under the Severance Pay Plan if triggered as of December 31, 2010,2011, absent a qualifying event that would result in payments under the respective Key Employee Severance Agreement:
| | | | | Months of | | Cost of | | Weeks of | | Cost of | | Total | | Months of | | Cost of | | Weeks of | | Cost of | | Total |
| NEO | | COBRA | | COBRA | | Salary | | Salary | | Severance | | COBRA | | COBRA | | Salary | | Salary | | Severance |
| Milton J. Miller, II | | 12 | | $ | 15,737 | | | 52 | | $ | 534,066 | | | $ | 549,803 | | | 12 | | $ | 16,912 |
| | 52 | | $ | 555,438 |
| | $ | 572,350 |
|
| Cindy L. Konich | | 12 | | 15,737 | | | 52 | | 360,022 | | | 375,759 | | | 12 | | 16,912 |
| | 52 | | 369,018 |
| | 385,930 |
|
| Jonathan R. West | | 12 | | 15,737 | | | 52 | | 325,000 | | | 340,737 | | | 12 | | 16,912 |
| | 52 | | 333,138 |
| | 350,050 |
|
| Sunil U. Mohandas | | 8 | | 10,491 | | | 32 | | 156,416 | | | 166,907 | | |
| K. Lowell Short, Jr. | | | 2 | | 2,819 |
| | 9 | | 42,232 |
| | 45,051 |
|
| Gregory L. Teare | | 2 | | 2,623 | | | 9 | | 40,522 | | | 43,145 | | | 3 | | 4,228 |
| | 13 | | 60,287 |
| | 64,515 |
|
The amounts discussed above do not include payments and benefits to the extent that they are provided on a nondiscriminatory basis to NEOs generally upon termination of employment. These include:
| |
• | accrued salary and vacation pay; |
| |
• | distribution of benefits under the DB Plan; and |
| |
• | distribution of plan balances under the DC Plan. |
accrued salary and vacation pay;
distribution of benefits under the DB Plan; and
distribution of plan balances under the DC Plan.
The amounts discussed above also do not include payments from the SETPs and SERPs. TheThose amounts may be found in the Deferred Compensation Table and Pension Benefits Table.
Key Employee Severance Agreements. We have a Key Employee Severance Agreement in place with each of our NEOs. These agreements are intended to promote retention of the NEOs in the event of discussions concerning a possible reorganization or change in control of the Bank, and to ensure that merger or reorganization opportunities are evaluated
objectively. As described in the following paragraphs, these agreements provide for payment and, in some cases, continued and/or increased benefits if the NEO's employment terminates under certain circumstances in connection with a reorganization, merger or other change in control of the Bank.
The Key Employee Severance Agreement with Mr. Miller was entered into in 2010 following a review by the Finance Agency, conducted pursuant to Section 1113 of HERAthe Bank Act and applicable Finance Agency directives, and ensuing discussions between the board of directors and the Finance Agency concerning several provisions.directives. Ms. Konich's agreement was entered into during 2007. Mr. West's agreement was first made in 2001, and was amended by the board of directors in 2005 and again in 2007.
The agreements with Mr. Miller, Ms. Konich, and Mr. West contain certain common features. The agreements provide each of them with coverage under our medical and dental insurance plans in effect at the time of termination for 36 months (subject to the NEO paying the employee portion of the cost of such coverage). We do not believe payments to these NEOs under the agreements are subject to the restriction on change-in-control payments under IRC Section 280G or the excise tax applicable to excess change-in-control payments because we are exempt from these requirements as a tax-exempt instrumentality of the United States government. If it is determined, however, that the NEO is liable for such excise tax payment, the agreement provides for a "gross-up" of the benefits to cover such excise tax payment. This gross-up is shown as a component of the value of the Key Employee Severance Agreement in the table below. Further, the agreements for these NEOs also provide that the NEO will be reimbursed for all reasonable accounting, legal, financial advisory and actuarial fees and expenses incurred by the NEO with respect to execution of the agreement or at the time of payment under the agreement. The agreements also provide that the NEO will be reimbursed for all reasonable legal fees and expenses incurred by the NEO if theour Bank contests the enforceability of the agreements or the calculation of the amounts payable under these agreements, so long as the NEO is wholly or partially successful on the merits or the parties agree to a settlement of the dispute.
Under the terms of their agreements, Mr. Miller, Ms. Konich, and Mr. West are each entitled to a lump sum payment equal to a multiplier of the NEO's three preceding calendar years':
| |
• | base salary (less salary deferrals), bonus, and other cash compensation; |
| |
• | salary deferrals and employer matching contributions to the DC Plan and 2005 SETP; and |
| |
• | taxable portion of automobile allowance, if any. |
base salary (less salary deferrals), bonus, and other cash compensation;
salary deferrals and employer matching contributions to the DC Plan and 2005 SETP; and
taxable portion of automobile allowance, if any.
Mr. Miller's multiplier is 2.0, whereas Ms. Konich and Mr. West are entitled to a multiplier of 2.99, if they terminate for "good reason" during a period beginning 12 months before and ending 24 months after a reorganization, or if any of these three NEOs is terminated without "cause" within 12 months before and 24 months after a reorganization.
Benefits for Mr. Miller under the 2005 SERP would be determined as if he had three years added to his age calculation and had an additional three years of benefit service. This benefit enhancement with respect to the 2005 SERP would be in addition to the early retirement benefit previously granted to Mr. Miller as part of aour Bank-wide early retirement program established in 2006. (For additional information concerning Mr. Miller's retirement benefits, see "DBDB Plan and SERP"SERP herein.) For Ms. Konich and Mr. West, benefits under the SERP would be calculated as if the NEO were three years older and had three more years of benefit service.
If the Bankwe were not in compliance with any applicable regulatory capital or regulatory leverage requirement at the time payment under the agreements becomes due, or if the payments would cause the Bankus to fall below applicable regulatory requirements, the payments for Mr. Miller, Ms. Konich and Mr. West would be deferred until such time as the Bank achieveswe achieve compliance with such requirements. For additional information concerning the Key Employee Severance Agreement with Mr. Miller, please refer to our Current Report on Form 8-K filed with the SEC on May 24, 2010.
In January 2011, we offered Key Employee Severance Agreements to Mr. MohandasShort and Mr. Teare following a review by the Finance Agency conducted pursuant to Section 1113 of HERAthe Bank Act and applicable Finance Agency directives. Under the terms of these agreements, if the NEO terminates for "good reason" within 24 months after a reorganization, or if the NEO is terminated without "cause" within 12 months before and 24 months after a reorganization, the NEO is entitled to a lump-sum payment equal to 1.0 times the average of his three preceding calendar years' base salary (inclusive of amounts deferred under a qualified or nonqualified plan), and bonus (inclusive of amounts deferred under a qualified or nonqualified plan), provided that, for any calendar year in which the NEO received base salary for less than the entire year, the gross amount shall be annualized as if such amount had been payable for the entire calendar year. In addition, theour Bank would pay the NEO a dollar amount equal to the cash equivalent of the Bank'sour contribution for medical and dental insurance premiums for the NEO (and his spouse and dependents if they were covered at the time of termination) for a 12-month period, which the NEO may use to pay for
continuation coverage under the Bank'sour medical and dental insurance policies in accordance with the requirements of the Consolidated Omnibus Budget Reconciliation Act ("COBRA").COBRA. If the Bankwe were not in compliance with any applicable regulatory capital or regulatory leverage requirement at the time payment under the agreement becomes due, or if the payment would cause theour Bank to fall below applicable regulatory requirements, the payment would be deferred until such time as the Bank achieveswe achieve compliance with such requirements. For additional information concerning these Key Employee Severance Agreements, please refer to our Current Report on Form 8-K filed with the SEC on February 4, 2011.
If a reorganization of theour Bank had triggered payments under any of the Key Employee Severance Agreements on December 31, 2010,2011, the value of the payments for the NEOs would have been approximately as follows:
| | Provision (1) | | Milton J. Miller, II | | Cindy L. Konich | | Jonathan R. West | | Sunil U. Mohandas | | Gregory L. Teare | | Milton J. Miller, II | | Cindy L. Konich | | Jonathan R. West | | K. Lowell Short, Jr. | | Gregory L. Teare |
| 1.0 times average of the 3 prior calendar years base salary and bonuses paid to the executive including salary and bonus accruals | | N/A | | | N/A | | | N/A | | | $ | 294,555 | | | $ | 298,066 | | | N/A |
| | N/A |
| | N/A |
| | $ | 310,515 |
| | $ | 324,257 |
|
| 2.0 times average of the 3 prior calendar years base salary, bonuses and other cash compensation paid to the executive except for salary deferrals which are included below | | 1,207,584 | | | N/A | | | N/A | | | N/A | | | N/A | | | $ | 1,656,465 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| 2.99 times average of the 3 prior calendar years base salary, bonuses and other cash compensation paid to the executive except for salary deferrals which are included below | | N/A | | | 1,050,104 | | | 937,571 | | | N/A | | | N/A | | | N/A |
| | $ | 1,363,682 |
| | $ | 1,167,792 |
| | N/A |
| | N/A |
|
| 2.0 times average of the executive's salary deferrals and employer matching contributions under the DC Plan and the SETP for the 3 prior calendar years | | 327,473 | | | N/A | | | N/A | | | (2) | | | (2) | | | 194,968 |
| | N/A |
| | N/A |
| |
(a) |
| |
(a) |
|
| 2.99 times average of the executive's salary deferrals and employer matching contributions under the DC Plan and the SETP for the 3 prior calendar years | | N/A | | | 218,967 | | | 239,066 | | | (2) | | | (2) | | | N/A |
| | 113,687 |
| | 177,940 |
| |
(a) |
| |
(a) |
|
| 2.0 times average of the 3 prior calendar years taxable portion of the executive's automobile allowance | | — | | | N/A | | | N/A | | | (3) | | | (3) | | | — |
| | N/A |
| | N/A |
| |
(b) |
| |
(b) |
|
| 2.99 times average of the 3 prior calendar years taxable portion of the executive's automobile allowance | | N/A | | | — | | | — | | | (3) | | | (3) | | | N/A |
| | — |
| | — |
| | (b) |
| | (b) |
|
| Additional amount under the SERP equal to the additional benefit calculated as if the executive were 3 years older and had 3 more years of credited service | | 1,087,604 | | | 602,387 | | | 545,646 | | | (3) | | | (3) | | | 1,271,050 |
| | 695,043 |
| | 619,306 |
| | (b) |
| | (b) |
|
Gross-up payment to cover any excise tax that is not ordinary federal income tax(4) | | — | | | 801,177 | | | 688,602 | | | (3) | | | (3) | | |
| Gross-up payment to cover any excise tax that is not ordinary federal income tax, if applicable | | | — |
| | 929,248 |
| | 804,439 |
| | (b) |
| | (b) |
|
| Medical and dental insurance coverage for 36 months | | 27,671 | | | 27,671 | | | 27,671 | | | N/A | | | N/A | | | 44,658 |
| | 44,658 |
| | 44,658 |
| | N/A |
| | N/A |
|
| Lump sum payment of cash equivalent of medical and dental insurance coverage for 12 months | | N/A | | | N/A | | | N/A | | | 8,405 | | | 8,405 | | | N/A |
| | N/A |
| | N/A |
| | 13,896 |
| | 13,896 |
|
Reimbursement of reasonable accounting, legal, financial advisory, and actuarial services (5) | | 10,000 | | | 10,000 | | | 10,000 | | | (3) | | | (3) | | |
Reimbursement of reasonable accounting, legal, financial advisory, and actuarial services (2) | | | 10,000 |
| | 10,000 |
| | 10,000 |
| | (b) |
| | (b) |
|
| Total value of contract | | $ | 2,660,332 | | | $ | 2,710,306 | | | $ | 2,448,556 | | | $ | 302,960 | | | $ | 306,471 | | | $ | 3,177,141 |
| | $ | 3,156,318 |
| | $ | 2,824,135 |
| | $ | 324,411 |
| | $ | 338,153 |
|
135
| | |
| (1) | Items marked as "N/A" indicate that the NEO has a similar provision but a different payout calculation. |
| |
(2) | The amount of $10,000 for reimbursement of reasonable accounting, legal, financial advisory, and actuarial services is an estimate. |
| |
(a) | The Key Employee Severance Agreements for Mr. MohandasShort and Mr. Teare specify a multiplier on the gross salary and gross bonus amounts paid. Any salary deferrals have already been included. |
| |
(3)(b)
| The Key Employee Severance Agreements for Mr. MohandasShort and Mr. Teare do not include a provision for this severance coverage. |
| (4)
|
We do not believe payments to NEOs under the Key Employee Severance Agreements are subject to the restrictions of Internal Revenue Code Section 280G, including the excise tax applicable to excess change of control payments, because we are exempt from the requirements due to the Bank's status as a tax-exempt instrumentality of the United States government. Therefore, the gross-up payment should not be triggered. | | (5)
| The amount of $10,000 for reimbursement of reasonable accounting, legal, financial advisory, and actuarial services is an estimate. |
Compensation Risk
The HR Committee and the Executive/Governance Committee undertook a review of the Bank'sour policies and practices of compensating itsour employees, including non-executive officers, and determined that none of such policies and practices result in risk which is reasonably likely to have a material adverse effect on theour Bank. Further, as a result of such review, the HR Committee and the Executive/Governance Committee believe that the Bank'sour plans and programs contain features which operate to mitigate risk and reduce the likelihood of employees engaging in excessing risk-taking behavior with respect to the compensation-related aspects of their jobs. In addition, the material plans and programs operate within a strong governance and review structure that serves and supports risk mitigation.
Director Compensation
Section 1202 of HERA amended the Bank Act by removing specific dollar limitations imposed by the Finance Agency on director fees. Accordingly, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. Under this policy, as in effect in 2010 and 2011, compensation is comprised of per-day in-person meeting fees and quarterly retainers, subject to the combined fee cap shown below. The fees compensate directors for:
| |
• | time spent reviewing materials sent to them on a periodic basis; |
| |
• | preparing for meetings; |
| |
• | actual time spent attending the meetings of our board or its committees; and |
| |
• | participating in any other activities, such as attending new director orientations and director meetings called by the Finance Agency or the Council of FHLBs. |
Additional compensation is paid for serving as chair or vice chair of the board of directors or as chair of a board committee. Member marketing meetings and customer appreciation events are not counted in calculating the in-person meeting fee. Because the Bank is a cooperative and only member institutions can own our stock, no director may receive equity-based compensation. Under the policy, director fees are paid at the end of each quarter.
The following table summarizes our 2010 director compensation policy, which was unchanged from 2009:
| | | | | | | | | | | | | | | | | |
| | | Per-day In-Person Fee | | Quarterly Retainer Fee | | Combined Annual In-Person and Quarterly Fee Cap | | Additional Committee Chair Fee (1) | |
| Chair | | $ | 2,500 | | | $ | 7,500 | | | $ | 60,000 | | | $ | — | | |
| Vice Chair | | 2,291 | | | 6,875 | | | 55,000 | | | — | | |
| Audit Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 10,000 | | |
| Finance Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 10,000 | | |
| HR Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 5,000 | | |
| Budget / Information Technology Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 5,000 | | |
| Affordable Housing Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 5,000 | | |
| Executive/Governance Committee Chair | | 1,875 | | | 5,625 | | | 45,000 | | | 5,000 | | (2) |
| All other directors | | 1,875 | | | 5,625 | | | 45,000 | | | — | | |
| | |
| (1)
| It has been the board of directors' practice to assign a director to only one Committee Chair. |
| (2)
| For 2010, the Chair of our board of directors also served as Chair of the Executive/Governance Committee. |
Director Compensation Table for 2010 | | | | | | | | |
| Name | | Fees Earned or Paid-in Cash | | Total |
| | | (b) | | (h) |
| Paul D. Borja | | $ | 43,250 | | | $ | 43,250 | |
| Jonathan P. Bradford | | 45,000 | | | 45,000 | |
| Paul C. Clabuesch | | 65,000 | | | 65,000 | |
| Christine A. Coady | | 50,000 | | | 50,000 | |
| Charles L. Crow | | 45,000 | | | 45,000 | |
| Matthew P. Forrester | | 45,000 | | | 45,000 | |
| Timothy P. Gaylord | | 55,000 | | | 55,000 | |
| Michael J. Hannigan, Jr. | | 50,000 | | | 50,000 | |
| Carl E. Liedholm | | 45,000 | | | 45,000 | |
| James L. Logue, III | | 50,000 | | | 50,000 | |
| Robert D. Long | | 55,000 | | | 55,000 | |
| James D. MacPhee | | 43,500 | | | 43,500 | |
| Jeffrey A. Poxon | | 55,000 | | | 55,000 | |
| John L. Skibski | | 45,000 | | | 45,000 | |
| Elliot A. Spoon | | 45,000 | | | 45,000 | |
| Larry A. Swank | | 45,000 | | | 45,000 | |
| Maurice F. Winkler, III | | 45,000 | | | 45,000 | |
| Christopher A. Wolking | | 45,000 | | | 45,000 | |
| Total | | $ | 871,750 | | | $ | 871,750 | |
During 2009 and prior years, directors were permitted to defer any or all of their director fees under a Director Deferred Compensation Plan ("DDCP"). Under this plan, a director could have deferred any or all of his or her director fees, provided that the director made a timely election to do so. Effective December 23, 2009, the board of directors terminated the DDCP (and a predecessor plan), but kept in place the DDCP's Rabbi Trust. Consequently, no deferrals were permitted under the DDCP during 2010. Pursuant to the plans' terminations, all account balances under the DDCP and its predecessor plan were distributed to participants in a lump-sum payment on or about December 24, 2010, unless they had elected an earlier payment under the DDCP. The amounts of these distributions to participants included non-preferential earnings on the deferred amounts. For the fiscal years 2006 (the first year for which we were subject to SEC reporting requirements) through 2009, the amounts deferred by participants under the DDCP were reported in our Annual Reports on Form 10-K as having been earned as fees during the year(s) in which the deferral(s) occurred.
We provide various travel and accident insurance coverages for all of our directors, officers, and employees. Our total annual premium for these coverages for all directors, officers and employees was $5,664 for 2010.
The Bank also reimburses directors or directly pays for reasonable travel and related expenses in accordance with the director compensation and travel reimbursement policy. Our policy is to reimburse directors for travel expenses of a spouse or guest accompanying the director to no more than two Bank-related travel events (including board meetings) each year. Total travel and related expenses reimbursed to or paid for directors were $353,668, $350,165, and $272,123 for the years ended December 31, 2010, 2009, and 2008, respectively.
None of our directors received more than $10,000 of other compensation or benefits during 2010.
On April 5, 2010 the Finance Agency published its adoption of a final rule relating to director eligibility, elections and compensation and expenses. With respect to director compensation and expenses, the final rule specifies that each FHLBFHLBank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, as determined by a compensation policy to be adopted annually by the FHLB'sFHLBank's board of directors. Payments under the compensation policy may be based on any factors that the board of directors determines reasonably to be appropriate, subject to the requirements of the final rule. The compensation policy is required to address the activities or functions for which director attendance or participation is necessary and which may be compensated, and shall explain and justify the methodology used to determine the amount of director compensation. The compensation paid by an FHLBFHLBank to a director is required to reflect the amount of time the director spent on official FHLBFHLBank business, subject to reduction as necessary to reflect lesser attendance or performance at board or committee meetings during a given year. Under the final rule, the Director of the Finance Agency
reviews the compensation and expenses of FHLBFHLBank directors and has the authority to determine that the compensation and/or expenses paid to directors are not reasonable. In such case, the Director could order the FHLBFHLBank to refrain from making any further payments; provided, however, that such order would only be applied prospectively and would not affect any compensation earned but unpaid or expenses incurred but not yet reimbursed.
Following the publication of the final rule, we retained McLagan Partners to provide market research data. On December 16, 2010 after consideration of the McLagan Partners data, a director fee comparison among the FHLBsFHLBanks, and our Bank's ability to recruit and retain highly-qualified directors, our board of directors adopted a revised director compensation and travel expense policy for 2011. On November 17, 2011 our board of directors re-adopted the policy without material changes for 2012.
Under this policy, as in effect in 2011 and 2012, compensation is comprised of per-day in-person meeting fees and quarterly retainers, subject to the combined fee cap shown below. The fees compensate directors for:
time spent reviewing materials sent to them on a periodic basis;
preparing for meetings;
actual time spent attending the meetings of our board of directors or its committees; and
participating in any other activities, such as attending new director orientations and director meetings called by the Finance Agency or the Council of FHLBanks.
Additional compensation is paid for serving as chair or vice chair of the board of directors or as chair of a board committee. Member marketing meetings and customer appreciation events are not counted in calculating the in-person meeting fee. Because we are a cooperative and only member institutions can own our stock, no director may receive equity-based compensation. Under the policy, director fees are paid at the end of each quarter.
The following table summarizes our 2011
policy onand 2012 director
compensation: | | | | | | | | | | | | | | | | | |
| | | Per-day In-Person Fee | | Quarterly Retainer Fee | | Combined Annual In-Person and Quarterly Fee Cap | | Additional Committee Chair Fee (1) | |
| Chair | | $ | 4,167 | | | $ | 12,500 | | | $ | 100,000 | | | $ | — | | |
| Vice Chair | | 3,542 | | | 10,625 | | | 85,000 | | | — | | |
| Audit Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | |
| Finance Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | |
| HR Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | |
| Budget / Information Technology Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | |
| Affordable Housing Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | |
| Executive/Governance Committee Chair | | 3,125 | | | 9,375 | | | 75,000 | | | 10,000 | | (2) |
| All other directors | | 3,125 | | | 9,375 | | | 75,000 | | | — | | |
|
| | | | | | | | | | | | | | | | | |
| Position | | Per-day In-Person Fee | | Quarterly Retainer Fee | | Combined Annual In-Person and Quarterly Fee Cap | | Additional Committee Chair Fee (1) | |
| Chair | | $ | 4,167 |
| | $ | 12,500 |
| | $ | 100,000 |
| | $ | — |
| |
| Vice Chair | | 3,542 |
| | 10,625 |
| | 85,000 |
| | — |
| |
| Audit Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| |
| Finance Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| |
| HR Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| |
| Budget / Information Technology Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| |
| Affordable Housing Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| |
| Executive/Governance Committee Chair | | 3,125 |
| | 9,375 |
| | 75,000 |
| | 10,000 |
| (a) |
| All other directors | | 3,125 |
| | 9,375 |
| | 75,000 |
| | — |
| |
| | |
| (1) | It has been the board of directors' practice to assign a director to only one Committee Chair. |
| |
(2)(a)
| For 2011, the Chair of our board of directors also servesserved as Chair of the Executive/Governance Committee.Committee and was eligible for an additional $10,000 in excess of the Combined Annual In-Person and Quarterly Fee Cap. |
Director Compensation Table for 2011 |
| | | | | | | | |
| | | Fees Earned or Paid-in Cash | | Total |
| Name | | (b) | | (h) |
| Jonathan P. Bradford | | $ | 75,000 |
| | $ | 75,000 |
|
| Paul C. Clabuesch | | 110,000 |
| | 110,000 |
|
| Matthew P. Forrester | | 75,000 |
| | 75,000 |
|
| Timothy P. Gaylord | | 85,000 |
| | 85,000 |
|
| Michael J. Hannigan, Jr. | | 85,000 |
| | 85,000 |
|
| Carl E. Liedholm | | 75,000 |
| | 75,000 |
|
| James L. Logue, III | | 85,000 |
| | 85,000 |
|
| Robert D. Long | | 85,000 |
| | 85,000 |
|
| James D. MacPhee | | 75,000 |
| | 75,000 |
|
| Dan L. Moore | | 75,000 |
| | 75,000 |
|
| Christine Coady Narayanan | | 85,000 |
| | 85,000 |
|
| Jeffrey A. Poxon | | 85,000 |
| | 85,000 |
|
| John L. Skibski | | 75,000 |
| | 75,000 |
|
| Elliot A. Spoon | | 75,000 |
| | 75,000 |
|
| Thomas R. Sullivan | | 75,000 |
| | 75,000 |
|
| Larry A. Swank | | 75,000 |
| | 75,000 |
|
| Maurice F. Winkler, III | | 75,000 |
| | 75,000 |
|
| Christopher A. Wolking | | 75,000 |
| | 75,000 |
|
| Total | | $ | 1,445,000 |
| | $ | 1,445,000 |
|
We provide various travel and accident insurance coverages for all of our directors, officers, and employees. Our total annual premium for these coverages for all directors, officers and employees was $5,668 for 2011.
We also reimburse directors or directly pay for reasonable travel and related expenses in accordance with the director compensation and travel reimbursement policy. Our policy is to reimburse directors for travel expenses of a spouse or guest accompanying the director to no more than two Bank-related travel events (including board of directors meetings) each year. Total travel and related expenses reimbursed to or paid for directors were $359,243, $353,668, and $350,165, for the years ended December 31, 2011, 2010, and 2009, respectively.
None of our directors received more than $10,000 of other compensation or benefits during 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of our regulatory capital stock as of February 28, 201129, 2012, by each shareholder that owns beneficially more than 5% of the outstanding shares of regulatory capital stock. Each shareholder named has sole voting and investment power over the shares that shareholder beneficially owns.
| | | | | | |
| Name and Location of Shareholder | | Number of Shares Owned | | % Outstanding Shares of Regulatory Capital Stock |
| Flagstar Bank, FSB - Troy, Michigan | | 3,371,901 | | | 14.86 | % |
| Bank of America N.A. - Charlotte, North Carolina | | 2,816,167 | | | 12.41 | % |
| Fifth Third Bank - Cincinnati, OH | | 1,232,614 | | | 5.43 | % |
| Total | | 7,420,682 | | | 32.70 | % |
|
| | | | | | |
| Name and Address of Shareholder | | Number of Shares Owned | | % Outstanding Shares of Regulatory Capital Stock |
| Flagstar Bank, FSB - 5151 Corporate Drive, Troy, MI | | 3,017,366 |
| | 15 | % |
| Bank of America N.A. - One NCNB Plaza, Charlotte, NC | | 2,249,214 |
| | 11 | % |
| Jackson National Life Insurance Company - 1 Corporate Way, Lansing, MI | | 1,068,947 |
| | 5 | % |
| Total | | 6,335,527 |
| | 31 | % |
The majority of our directors are officers and/or directors of our financial institution members. The following table sets forth the financial institution members that have one of its officers and/or directors serving on our board of directors as of February 28, 201129, 2012:
| | | Name of Member | | Director Name | | Number of Shares Owned by Member | | % of Outstanding Shares of Regulatory Capital Stock | | Director Name | | Number of Shares Owned by Member | | % of Outstanding Shares of Regulatory Capital Stock |
| Thumb National Bank & Trust | | Paul C. Clabuesch | | 11,065 | | | 0.05 | % | | Paul C. Clabuesch | | 9,644 |
| | 0.05 | % |
| River Valley Financial Bank | | Matthew P. Forrester | | 44,960 | | | 0.20 | % | | Matthew P. Forrester | | 42,260 |
| | 0.21 | % |
| Mason State Bank | | Timothy P. Gaylord | | 22,416 | | | 0.10 | % | | Timothy P. Gaylord | | 20,468 |
| | 0.10 | % |
| First State Bank | | James D. MacPhee | | 4,286 | | | 0.02 | % | | James D. MacPhee | | 3,879 |
| | 0.02 | % |
| Kalamazoo County State Bank | | James D. MacPhee | | 2,441 | | | 0.01 | % | | James D. MacPhee | | 2,268 |
| | 0.01 | % |
| Home Bank SB | | Dan L. Moore | | 29,966 | | | 0.13 | % | | Dan L. Moore | | 27,818 |
| | 0.14 | % |
| The Lafayette Life Insurance Company | | Jeffrey A. Poxon | | 87,923 | | | 0.39 | % | |
| Lafayette Savings Bank, FSB | | Jeffrey A. Poxon | | 35,830 | | | 0.16 | % | | Jeffrey A. Poxon | | 31,846 |
| | 0.16 | % |
| Monroe Bank & Trust | | John L. Skibski | | 118,311 | | | 0.52 | % | | John L. Skibski | | 106,054 |
| | 0.52 | % |
| Firstbank-West Branch | | Thomas R. Sullivan | | 21,660 | | | 0.09 | % | | Thomas R. Sullivan | | 18,632 |
| | 0.09 | % |
| Firstbank | | Thomas R. Sullivan | | 19,588 | | | 0.08 | % | | Thomas R. Sullivan | | 17,791 |
| | 0.09 | % |
| Firstbank - West Michigan | | Thomas R. Sullivan | | 14,541 | | | 0.06 | % | | Thomas R. Sullivan | | 12,678 |
| | 0.06 | % |
| Firstbank - Alma | | Thomas R. Sullivan | | 13,351 | | | 0.06 | % | | Thomas R. Sullivan | | 14,002 |
| | 0.07 | % |
| Keystone Community Bank | | Thomas R. Sullivan | | 11,093 | | | 0.05 | % | | Thomas R. Sullivan | | 9,556 |
| | 0.05 | % |
| Firstbank - St. Johns | | Thomas R. Sullivan | | 1,798 | | | 0.01 | % | |
| Peoples Federal Savings Bank | | Maurice F. Winkler III | | 42,581 | | | 0.19 | % | | Maurice F. Winkler III | | 41,277 |
| | 0.20 | % |
| Old National Bank | | Christopher A. Wolking | | 342,599 | | | 1.51 | % | | Christopher A. Wolking | | 308,346 |
| | 1.53 | % |
| Total | | 824,409 | | | 3.63 | % | | 666,519 |
| | 3.30 | % |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Parties
We are a cooperative institution and owning shares of our Class B Stock is generally a prerequisite to transacting business with us. As such, we are wholly-owned by financial institutions that are also our customers (with the exception of shares held by former members, or their legal successors, in the process of redemption). In addition, the majority of our directors are elected by our members, and we conduct our business almost exclusively with our members. Therefore, in the normal course of business, we extend credit to members with officers or directors who may serve as our directors on marketsubstantially the same terms, that are no more favorableincluding interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to them than comparable transactions withour Bank (i.e., other members,members), and that do not involve more than the normal risk of collectability or present other unfavorable terms.
We do not loan money to or conduct other business transactions with our Executive Officersexecutive officers or any of our other officers or employees. Executive Officersofficers may obtain loans under certain employee benefit plans but only on the same terms and conditions as are applicable to all employees who participate in such plans.
Related Transactions
We have a Code of Conduct that requires all directors, officers and employees to disclose any related party interests through ownership or family relationship. These disclosures are reviewed by our ethics officers and, where appropriate, our board of directors to determine the potential for a conflict of interest. In the event of a conflict, appropriate action is taken, which may include: recusal of a director from the discussion and vote on a transaction in which the director has a related interest; removal of an employee from a project with a related party vendor; disqualification of related vendors from transacting business with the Bank;us; or requiring directors, officers or employees to divest their ownership interest in a related party. The Corporate Secretary and ethics officers maintain records of all related party disclosures, and there have been no transactions involving our directors, officers or employees of the Bank that would be required to be disclosed herein.
Director Independence and Audit Committee
General
General. Our board of directors is required to evaluate and report on the independence of our directors under two distinct director independence standards. First, Federal Housing Finance Agency ("Finance Agency") regulations establish independence criteria for directors who serve as members of our Audit Committee. Second, SECSecurities and Exchange Commission ("SEC") rules require that our board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors. As of the date of this Report,Form 10-K, we have 18 directors: ten were elected as member directors by our member institutions; and eight were elected (Mr. Liedholm) or re-elected (Ms. CoadyNarayanan and Messrs. Bradford, Hannigan, Logue, Long, Spoon and Swank) as "independent directors" by our member institutions pursuant to the Bank Act following the enactment of HERA. None of our directors is an "inside" director. That is, none of our directors is a Bankan employee or officer.officer of our Bank. Further, our directors are prohibited from personally owning stock in theour Bank. Each of the ten member directors, however, is a senior officer or director of an institution that is aour member of the Bank thatand is encouraged to engage in transactions with us on a regular basis.
Finance Agency Regulations Regarding Independence
Independence. The Finance Agency director independence standards prohibit an individual from serving as a member of our Audit Committee if he or she has one or more disqualifying relationships with theour Bank or our management that would interfere with the exercise of his or her independent judgment. Relationships considered to be disqualifying by theour board of directors are: employment with the Bankus at any time during the last five years; acceptance of compensation from the Bankus other than for service as a director; being a consultant, advisor, promoter, underwriter or legal counsel for theour Bank at any time within the last five years; and serving asbeing an immediate family member of an individual who is or who has been a Bankan Executive Officer within the past five years. TheOur board of directors assesses the independence of each director under the Finance Agency's independence standards, regardless of whether he or she serves on the Audit Committee. As of the date of this Form 10-K, each of our directors is "independent" under these criteria relating to disqualifying relationships.
SEC Rules Regarding Independence
Independence. SEC rules require our board of directors to adopt a standard of independence with which to evaluate our directors. Pursuant thereto, theour board adopted the independence standards of the New York Stock Exchange ("NYSE"NYSE") to determine which of our directors are "independent," which members of its Audit Committee are not "independent," and whether our Audit Committee's financial expert is "independent." After applying the NYSE independence standards, theour board determined that, as of the date of this Form 10-K, our eight directors (Ms. CoadyNarayanan and Messrs. Bradford, Hannigan, Liedholm, Logue, Long, Spoon, and Swank) who are "independent" directors, as defined in and for purposes of the Federal Home Loan Bank Act (asof 1932 ("Bank Act"), as amended by HERA)the Housing and Economic Recovery Act of 2008 ("HERA") are also "independent" under the NYSE standards.
Based upon the fact that each member director is a senior officer or director of an institution that is a member of theour Bank (and thus the member is an equity holder in theour Bank), that each such institution routinely engages in transactions with the Bank,us, and that such transactions occur frequently and are encouraged, theour board of directors determined thatconcluded for the present time it would conclude that none of the member directors meetsmeet the independence criteria under the NYSE independence standards. It is possible that under a strict reading of the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with theour Bank by the director's institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director's institution may change frequently, and because we generally desire to increase the amount of business we conduct with each member institution, theour board of directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with theour Bank by any director's institution at a specific time.
TheOur board of directors has a standing Audit Committee comprised of eight directors, six of whom are member directors and two of whom are independent"independent" directors (according to Bank Act director classifications established by HERA). For the reasons noted above, theour board of directors determined that none of the current member directors on our Audit Committee isare "independent" under the NYSE standards for audit committee members. TheOur board of directors determined that Mr. Long and Mr. Spoon, the independent directors who serve on the Audit Committee, are "independent" under the NYSE independence standards for audit committee members. As stated above, theour board of directors also determined that each member of the Audit Committee is "independent" under the Finance Agency's standards applicable to our Audit Committee.
SEC Rule Regarding Audit Committee Independence
Independence. Section 1112 of HERA requires the FHLBsFHLBanks to comply with the substantive audit committee director independence rules applicable to issuers of securities pursuant to the rules of the Exchange Act. Those rules provide that, to be considered an independent member of an audit committee, the director may not be an affiliated person of the Exchange Act registrant. The term "affiliated person" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the registrant. The rule provides a "safe harbor," whereby a person will not be deemed an affiliated person if the person is not the beneficial owner, directly or indirectly, of more than 10% of any class of voting securities of the registrant. All of our Audit Committee member directors' institutions presently meet this safe harbor.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Bank for the years ended December 31, 20102011, and 20092010, by our independent registered public accounting firm, PricewaterhouseCoopers LLP ($ amounts in thousands):
| | | | | 2010 | | 2009 | | 2011 | | 2010 |
| Audit fees | | $ | 923 | | | $ | 1,024 | | | $ | 711 |
| | $ | 666 |
|
| Audit-related fees | | — | | | — | | | 47 |
| | 66 |
|
| Tax fees | | — | | | — | | | — |
| | — |
|
| All other fees | | — | | | — | | | — |
| | — |
|
| Total fees | | $ | 923 | | | $ | 1,024 | | | $ | 758 |
| | $ | 732 |
|
Audit fees were for professional services rendered for the audits of our financial statements. Audit-related fees were for assurance and related services primarily related to accounting consultations and control advisory services.
We are exempt from all federal, state, and local taxation, except real estate taxes. Therefore, no fees were paid for tax services during the years presented.
Our Audit Committee has adopted the Independent Accountant Pre-approval Policies and Procedures for the Audit Committee (the "Pre-approval Policy""Pre-approval Policy"). In accordance with the Pre-approval Policy and applicable law, our Audit Committee pre-approves audit services, audit-related services, tax services and non-audit services to be provided by our independent registered public accounting firm. The termPre-approvals are valid until the end of any pre-approval is 12 months from the date of pre-approvalnext calendar year, unless the Audit Committee specifically provides otherwise. On an annual basis, the Audit Committee reviews the list of specific services and projected fees for services to be provided for the next 12 months and pre-approves services as the Audit Committee deems necessary. Under the Pre-approval Policy, the Audit Committee may delegate pre-approval authority to one or more of its members. The Audit Committee has designated the Committee Chair as the member to whom such authority is delegated. Pre-approved actions by the Committee Chair as designee are reported to the Audit Committee for approval at its next scheduled meeting. New services that have not been pre-approved by the Audit Committee that are in excess of the pre-approval fee level established by the Audit Committee must be presented to the entire Audit Committee for pre-approval.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following financial statements of the Federal Home Loan Bank of Indianapolis set forth in Item 8. above are filed as a part of this report.
Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 2010, and 2009
Statements of Income for the Years Ended December 31, 2010, 2009, and 2008
Statements of Capital for the Years Ended December 31, 2010, 2009, and 2008
Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008
Notes to Financial Statements
(b) Exhibits
The exhibits to this annual report on Form 10-K are listed in the attached Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
| | |
| /s/ MILTON J. MILLER II | |
| Milton J. Miller II | |
| President — Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 18, 2011 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below:
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ MILTON J. MILLER II | | President — Chief Executive Officer | | March 18, 2011 |
Milton J. Miller II | | | | |
(Principal Executive Officer) | | | | |
| | | | |
/s/ CINDY L. KONICH | | Executive Vice President — Chief Operating Officer - Chief Financial Officer | | March 18, 2011 |
Cindy L. Konich | | | | |
(Principal Financial Officer) | | | | |
| | | | |
/s/ K. LOWELL SHORT, JR. | | Senior Vice President — Chief Accounting Officer | | March 18, 2011 |
K. Lowell Short, Jr. | | | | |
(Principal Accounting Officer) | | | | |
| | | | |
/s/ PAUL C. CLABUESCH | | Chair of the board of directors | | March 18, 2011 |
Paul C. Clabuesch | | | | |
| | | | |
/s/ JEFFREY A. POXON | | Vice Chair of the board of directors | | March 18, 2011 |
Jeffrey A. Poxon | | | | |
| | | | |
/s/ JONATHAN P. BRADFORD | | Director | | March 18, 2011 |
Jonathan P. Bradford | | | | |
| | | | |
/s/ CHRISTINE A. COADY | | Director | | March 18, 2011 |
Christine A. Coady | | | | |
| | | | |
/s/ MATTHEW P. FORRESTER | | Director | | March 18, 2011 |
Matthew P. Forrester | | | | |
| | | | |
/s/ TIMOTHY P. GAYLORD | | Director | | March 18, 2011 |
Timothy P. Gaylord | | | | |
| | | | |
Signature | | Title | | Date |
| | |
/s/ MICHAEL J. HANNIGAN, JR. | | Director | | March 18, 2011 |
Michael J. Hannigan, Jr. | | | | |
| | |
/s/ CARL E. LIEDHOLM | | Director | | March 18, 2011 |
Carl E. Liedholm | | | | |
| | |
/s/ JAMES L. LOGUE, III | | Director | | March 18, 2011 |
James L. Logue, III | | | | |
| | |
/s/ ROBERT D. LONG | | Director | | March 18, 2011 |
Robert D. Long | | | | |
| | |
/s/ JAMES D. MACPHEE | | Director | | March 18, 2011 |
James D. MacPhee | | | | |
| | |
/s/ DAN L. MOORE | | Director | | March 18, 2011 |
Dan L. Moore | | | | |
| | | | |
/s/ JOHN L. SKIBSKI | | Director | | March 18, 2011 |
John L. Skibski | | | | |
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/s/ ELLIOT A. SPOON | | Director | | March 18, 2011 |
Elliot A. Spoon | | | | |
| | |
/s/ THOMAS R. SULLIVAN | | Director | | March 18, 2011 |
Thomas R. Sullivan | | | | |
| | | | |
/s/ LARRY A. SWANK | | Director | | March 18, 2011 |
Larry A. Swank | | | | |
| | |
/s/ MAURICE F. WINKLER, III | | Director | | March 18, 2011 |
Maurice F. Winkler, III | | | | |
| | |
/s/ CHRISTOPHER A. WOLKING | | Director | | March 18, 2011 |
Christopher A. Wolking | | | | |
EXHIBIT INDEX
| | |
Exhibit Number | | Description |
| | |
3.1* | | Organization Certificateof the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 filed on February 14, 2006
|
| | |
3.2* | | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 21, 2010 |
| | |
4* | | Capital Plan of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on June 1, 2009 |
| | |
10.1*+ | | Federal Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 13, 2009 |
| | |
10.2*+ | | Federal Home Loan Bank of Indianapolis Supplemental Executive Thrift Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on September 29, 2006 |
| | |
10.3*+ | | Second Amendment of Federal Home Loan Bank of Indianapolis Supplemental Executive Thrift Plan (terminating such plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.3 of our Annual Report on Form 10-K filed on March 19, 2010 |
| | |
10.4*+ | | Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on November 13, 2007 |
| | |
10.5*+ | | First Amendment of Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan (as previously amended and restated) (terminating such amended and restated plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.5 of our Annual Report on Form 10-K filed on March 19, 2010 |
| | |
10.6*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to our Current Report on Form 8-K, filed on November 20, 2007 |
| | |
10.7*+ | | Federal Home Loan Bank of Indianapolis Directors' Deferred Compensation Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on September 29, 2006 |
| | |
10.8*+ | | Second Amendment of Federal Home Loan Bank of Indianapolis Directors' Deferred Compensation Plan (terminating such plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.8 of our Annual Report on Form 10-K filed on March 19, 2010 |
| | |
10.9*+ | | Federal Home Loan Bank of Indianapolis 2005 Directors' Deferred Compensation Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on November 13, 2007 |
| | |
10.10*+ | | First Amendment of Federal Home Loan Bank of Indianapolis 2005 Directors' Deferred Compensation Plan (as previously amended and restated) (terminating such amended and restated plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.10 of our Annual Report on form 10-K filed on March 19, 2010 |
| | |
10.11*+ | | Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2011, incorporated by reference to Exhibit 99.3 of our Current Report on Form 8-K filed on December 17, 2010 |
| | |
10.12+ | | Federal Home Loan Bank of Indianapolis 2011 Long Term Incentive Plan, effective January 1, 2011 |
| | |
10.13*+ | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 27, 2006 |
| | |
10.14*+ | | Federal Home Loan Bank of Indianapolis 2009 Long Term Incentive Plan, incorporated by reference to our Annual Report on Form 10-K filed on March 16, 2009 |
| | |
10.15+ | | Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011 |
| | |
10.16*+ | | Form of Key Employee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010 |
| | |
10.17*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011 |
| | |
10.18* | | Joint Capital Enhancement Agreement, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on March 1, 2011 |
| | |
12 | | Computation of Ratios of Earnings to Fixed Charges |
| | |
14.1* | | Code of Conduct for Directors, Officers, Employees and Advisory Council Members, effective March 18, 2010, incorporated by reference to our Annual Report on Form 10-K filed on March 19, 2010 |
| | |
31.1 | | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification of the Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.3 | | Certification of the Senior Vice President - Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
32 | | Certification of the President - Chief Executive Officer, Executive Vice President - Chief Operating Officer - Chief Financial Officer, and Senior Vice President - Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
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Table of Contents | | Page Number |
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Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act ("ICFR"). Our ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| |
• | pertain to the maintenance of our records that, in reasonable detail, accurately and fairly reflect our transactions and asset dispositions; |
| |
• | provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| |
• | provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Reasonable assurance, as defined in Section 13(b)(7) of the Exchange Act, is the level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs in devising and maintaining a system of internal accounting controls.
Due to its inherent limitations, ICFR may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, we assessed the effectiveness of our ICFR as of December 31, 2010. Our assessment included extensive documentation, evaluation, and testing of the design and operating effectiveness of our ICFR. In making this assessment, our management used the criteria for Internal Control — Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Based on our assessment using these criteria, our management concluded that we maintained effective ICFR as of December 31, 2010.
Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 2011, and 2010
Statements of Income for the Years Ended December 31, 2011, 2010, and 2009
Statements of Capital for the Years Ended December 31, 2011, 2010, and 2009
Statements of Cash Flows for the Years Ended December 31, 2011, 2010, and 2009
Notes to Financial Statements
(b) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the attached Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
|
| | |
| /s/ MILTON J. MILLER II | |
| Milton J. Miller II | |
| President - Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 20, 2012 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below:
|
| | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ MILTON J. MILLER II | | President - Chief Executive Officer | | March 20, 2012 |
| Milton J. Miller II | | | | |
| (Principal Executive Officer) | | | | |
| | | | |
| /s/ CINDY L. KONICH | | Executive Vice President - Chief Operating Officer - Chief Financial Officer | | March 20, 2012 |
| Cindy L. Konich | | | | |
| (Principal Financial Officer) | | | | |
| | | | |
| /s/ K. LOWELL SHORT, JR. | | Senior Vice President - Chief Accounting Officer | | March 20, 2012 |
| K. Lowell Short, Jr. | | | | |
| (Principal Accounting Officer) | | | | |
| | | | |
| /s/ PAUL C. CLABUESCH | | Chair of the board of directors | | March 20, 2012 |
| Paul C. Clabuesch | | | | |
| | | | |
| /s/ JEFFREY A. POXON | | Vice Chair of the board of directors | | March 20, 2012 |
| Jeffrey A. Poxon | | | | |
| | | | |
| /s/ JONATHAN P. BRADFORD | | Director | | March 20, 2012 |
| Jonathan P. Bradford | | | | |
| | | | |
| /s/ MATTHEW P. FORRESTER | | Director | | March 20, 2012 |
| Matthew P. Forrester | | | | |
| | | | |
| /s/ TIMOTHY P. GAYLORD | | Director | | March 20, 2012 |
| Timothy P. Gaylord | | | | |
|
| | | | |
| Signature | | Title | | Date |
| | |
| /s/ MICHAEL J. HANNIGAN, JR. | | Director | | March 20, 2012 |
| Michael J. Hannigan, Jr. | | | | |
| | |
| /s/ CARL E. LIEDHOLM | | Director | | March 20, 2012 |
| Carl E. Liedholm | | | | |
| | |
| /s/ JAMES L. LOGUE, III | | Director | | March 20, 2012 |
| James L. Logue, III | | | | |
| | |
| /s/ ROBERT D. LONG | | Director | | March 20, 2012 |
| Robert D. Long | | | | |
| | |
| /s/ JAMES D. MACPHEE | | Director | | March 20, 2012 |
| James D. MacPhee | | | | |
| | |
| /s/ DAN L. MOORE | | Director | | March 20, 2012 |
| Dan L. Moore | | | | |
| | | | |
| /s/ CHRISTINE COADY NARAYANAN | | Director | | March 20, 2012 |
| Christine Coady Narayanan | | | | |
| | | | |
| /s/ JOHN L. SKIBSKI | | Director | | March 20, 2012 |
| John L. Skibski | | | | |
| | |
| /s/ ELLIOT A. SPOON | | Director | | March 20, 2012 |
| Elliot A. Spoon | | | | |
| | |
| /s/ THOMAS R. SULLIVAN | | Director | | March 20, 2012 |
| Thomas R. Sullivan | | | | |
| | | | |
| /s/ LARRY A. SWANK | | Director | | March 20, 2012 |
| Larry A. Swank | | | | |
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| /s/ MAURICE F. WINKLER, III | | Director | | March 20, 2012 |
| Maurice F. Winkler, III | | | | |
| | |
| /s/ CHRISTOPHER A. WOLKING | | Director | | March 20, 2012 |
| Christopher A. Wolking | | | | |
EXHIBIT INDEX
|
| | |
| Exhibit Number | | Description |
| | |
| 3.1* | | Organization Certificateof the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 filed on February 14, 2006 |
| | |
| 3.2* | | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 21, 2010 |
| | |
| 4* | | Capital Plan of the Federal Home Loan Bank of Indianapolis, effective September 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
| | |
| 10.1*+ | | Federal Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 13, 2009 |
| | |
| 10.2*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to our Current Report on Form 8-K, filed on November 20, 2007 |
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| 10.3*+ | | Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2012, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 22, 2011 |
| | |
| 10.4*+ | | Federal Home Loan Bank of Indianapolis 2011 Long Term Incentive Plan, effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.5*+ | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 27, 2006 |
| | |
| 10.6*+ | | Federal Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to Exhibit 10.9 of our Annual Report on Form 10-K filed on March 16, 2009 |
| | |
| 10.7*+ | | Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.8*+ | | Form of Key Employee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010 |
| | |
| 10.9*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011 |
| | |
| 10.10* | | Joint Capital Enhancement Agreement dated August 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
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| 10.11+ | | Federal Home Loan Bank of Indianapolis Incentive Plan, effective January 1, 2012, with technical amendments made on March 19, 2012 |
| | |
| 12 | | Computation of Ratios of Earnings to Fixed Charges |
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| 14.1 | | Code of Conduct for Directors, Officers, Employees and Advisory Council Members, effective March 24, 2011 |
|
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| Exhibit Number | | Description |
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| | |
| 31.1 | | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | | Certification of the Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.3 | | Certification of the Senior Vice President - Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
| 32 | | Certification of the President - Chief Executive Officer, Executive Vice President - Chief Operating Officer - Chief Financial Officer, and Senior Vice President - Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
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Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting ("ICFR"), as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of our records that, in reasonable detail, accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Reasonable assurance, as defined in Section 13(b)(7) of the Exchange Act, is the level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs in devising and maintaining a system of internal accounting controls.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, we assessed the effectiveness of our ICFR as of December 31, 2011. Our assessment included extensive documentation, evaluation, and testing of the design and operating effectiveness of our ICFR. In making this assessment, our management used the criteria for Internal Control — Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Based on our assessment using these criteria, our management concluded that we maintained effective ICFR as of December 31, 2011.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Indianapolis:
In our opinion, the accompanying statements of condition and the related statements of income, of capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Indianapolis (the "Bank""Bank") at December 31, 20102011 and 20092010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20102011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 20102011, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Bank's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2, effective January 1, 2009, the Bank adopted guidance that revises the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as either available-for-sale or held-to-maturity.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
March 18, 201120, 2012
Indianapolis, Indiana
Federal Home Loan Bank of Indianapolis
Statements of Condition
($ amounts and shares in thousands, except par value)
| | | | | | | |
| | December 31,
2010 | | December 31,
2009 |
Assets: | | | |
| Cash and Due from Banks (Note 3) | $ | 11,676 | | | $ | 1,722,077 | |
| Interest-Bearing Deposits | 3 | | | 25 | |
| Securities Purchased Under Agreements to Resell (Note 4) | 750,000 | | | — | |
| Federal Funds Sold | 7,325,000 | | | 5,532,000 | |
Available-for-Sale Securities (a) (Note 5) | 3,237,916 | | | 1,760,714 | |
Held-to-Maturity Securities (b) (Note 6) | 8,471,827 | | | 7,701,151 | |
| Advances (Note 8) | 18,275,364 | | | 22,442,904 | |
| Mortgage Loans Held for Portfolio, net (Notes 9 and 10) | 6,702,576 | | | 7,271,895 | |
| Accrued Interest Receivable | 98,924 | | | 114,246 | |
| Premises, Software, and Equipment, net | 10,830 | | | 10,786 | |
| Derivative Assets, net (Note 11) | 6,173 | | | 1,714 | |
| Other Assets | 39,584 | | | 41,554 | |
| Total Assets | $ | 44,929,873 | | | $ | 46,599,066 | |
Liabilities: | | | | |
| Deposits (Note 12): | | | | |
| Interest-Bearing | $ | 574,894 | | | $ | 821,431 | |
| Non-Interest-Bearing | 10,034 | | | 3,420 | |
| Total Deposits | 584,928 | | | 824,851 | |
| Consolidated Obligations (Note 13): | | | | |
| Discount Notes | 8,924,687 | | | 6,250,093 | |
| Bonds | 31,875,237 | | | 35,907,789 | |
| Total Consolidated Obligations, net | 40,799,924 | | | 42,157,882 | |
| Accrued Interest Payable | 133,862 | | | 211,504 | |
| Affordable Housing Program Payable (Note 14) | 35,648 | | | 37,329 | |
| Payable to Resolution Funding Corporation (Note 15) | 10,325 | | | 6,533 | |
| Derivative Liabilities, net (Note 11) | 657,030 | | | 712,716 | |
| Mandatorily Redeemable Capital Stock (Note 16) | 658,363 | | | 755,660 | |
| Other Liabilities | 102,422 | | | 146,180 | |
| Total Liabilities | 42,982,502 | | | 44,852,655 | |
| Commitments and Contingencies (Note 20) | | | | |
Capital (Note 16): | | | | |
| Capital Stock Putable (at par value of $100 per share): | | | |
| Class B-1 issued and outstanding shares: 16,072 and 17,260, respectively | 1,607,116 | | | 1,726,000 | |
| Class B-2 issued and outstanding shares: 29 and 0, respectively | 2,944 | | | — | |
| Total Capital Stock Putable | 1,610,060 | | | 1,726,000 | |
| Retained Earnings | 427,557 | | | 349,013 | |
| Accumulated Other Comprehensive Income (Loss): | | | | |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 5) | (4,615 | ) | | 2,140 | |
| Net Non-Credit Portion of Other-Than-Temporary Impairment Losses on: | | | |
| Available-for-Sale Securities (Note 5) | (68,806 | ) | | — | |
| Held-to-Maturity Securities (Note 6) | (7,056 | ) | | (324,041 | ) |
| Pension and Postretirement Benefits (Note 17) | (9,769 | ) | | (6,701 | ) |
| Total Accumulated Other Comprehensive Income (Loss) | (90,246 | ) | | (328,602 | ) |
| Total Capital | 1,947,371 | | | 1,746,411 | |
| Total Liabilities and Capital | $ | 44,929,873 | | | $ | 46,599,066 | |
(a) Amortized cost: $3,146,617 and $1,672,918 at December 31, 2010, and 2009, respectively.
(b) Estimated fair values: $8,513,391 and $7,690,482 at December 31, 2010, and 2009, respectively. |
| | | | | | | |
| | December 31,
2011 | | December 31,
2010 |
Assets: | | | |
| Cash and Due from Banks (Note 3) | $ | 512,682 |
| | $ | 11,676 |
|
| Interest-Bearing Deposits | 15 |
| | 3 |
|
| Securities Purchased Under Agreements to Resell (Note 4) | — |
| | 750,000 |
|
| Federal Funds Sold | 3,422,000 |
| | 7,325,000 |
|
| Available-for-Sale Securities (Note 5) | 2,949,446 |
| | 3,237,916 |
|
Held-to-Maturity Securities (Estimated Fair Values of $8,972,081 and $8,513,391, respectively) (Note 6) | 8,832,178 |
| | 8,471,827 |
|
| Advances (Note 8) | 18,567,702 |
| | 18,275,364 |
|
| Mortgage Loans Held for Portfolio, net (Notes 9 and 10) | 5,955,142 |
| | 6,702,576 |
|
| Accrued Interest Receivable | 87,314 |
| | 98,924 |
|
| Premises, Software, and Equipment, net | 12,626 |
| | 10,830 |
|
| Derivative Assets, net (Note 11) | 493 |
| | 6,173 |
|
| Other Assets | 35,892 |
| | 39,584 |
|
| Total Assets | $ | 40,375,490 |
| | $ | 44,929,873 |
|
Liabilities: | |
| | |
| Deposits (Note 12): | |
| | |
| Interest-Bearing | $ | 620,702 |
| | $ | 574,894 |
|
| Non-Interest-Bearing | 8,764 |
| | 10,034 |
|
| Total Deposits | 629,466 |
| | 584,928 |
|
| Consolidated Obligations (Note 13): | |
| | |
| Discount Notes | 6,536,109 |
| | 8,924,687 |
|
| Bonds | 30,358,210 |
| | 31,875,237 |
|
| Total Consolidated Obligations, net | 36,894,319 |
| | 40,799,924 |
|
| Accrued Interest Payable | 102,060 |
| | 133,862 |
|
| Affordable Housing Program Payable (Note 14) | 32,845 |
| | 35,648 |
|
| Payable to Resolution Funding Corporation (Note 15) | — |
| | 10,325 |
|
| Derivative Liabilities, net (Note 11) | 174,573 |
| | 657,030 |
|
| Mandatorily Redeemable Capital Stock (Note 16) | 453,885 |
| | 658,363 |
|
| Other Liabilities | 141,154 |
| | 102,422 |
|
| Total Liabilities | 38,428,302 |
| | 42,982,502 |
|
| Commitments and Contingencies (Note 21) |
|
| |
|
|
Capital (Notes 16 and 17): | |
| | |
| Capital Stock Putable (at par value of $100 per share): | | | |
| Class B-1 issued and outstanding shares: 15,592 and 16,072, respectively | 1,559,196 |
| | 1,607,116 |
|
| Class B-2 issued and outstanding shares: 39 and 29, respectively | 3,860 |
| | 2,944 |
|
| Total Capital Stock Putable | 1,563,056 |
| | 1,610,060 |
|
| Retained Earnings: | | | |
| Unrestricted | 484,511 |
| | 427,557 |
|
| Restricted | 13,162 |
| | — |
|
| Total Retained Earnings | 497,673 |
| | 427,557 |
|
| Accumulated Other Comprehensive Income (Loss) (Note 17): | |
| | |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 5) | 15,080 |
| | (4,615 | ) |
| Net Non-Credit Portion of Other-Than-Temporary Impairment Losses: | | | |
| Available-for-Sale Securities (Note 5) | (119,274 | ) | | (68,806 | ) |
| Held-to-Maturity Securities (Note 6) | (392 | ) | | (7,056 | ) |
| Pension Benefits (Note 18) | (8,955 | ) | | (9,769 | ) |
| Total Accumulated Other Comprehensive Income (Loss) | (113,541 | ) | | (90,246 | ) |
| Total Capital | 1,947,188 |
| | 1,947,371 |
|
| Total Liabilities and Capital | $ | 40,375,490 |
| | $ | 44,929,873 |
|
The accompanying notes are an integral part of these financial statements.
F- 4
Federal Home Loan Bank of Indianapolis
Statements of Income
($ amounts in thousands)
| | | | | For the years ended December 31, | Years Ended December 31, |
| | | 2010 | | 2009 | | 2008 | 2011 | | 2010 | | 2009 |
| Interest Income: | | | | | | | | | | | |
| Advances | | $ | 196,959 | | | $ | 393,062 | | | $ | 997,727 | | $ | 161,914 |
| | $ | 196,959 |
| | $ | 393,062 |
|
| Prepayment Fees on Advances, net | | 16,937 | | | 5,525 | | | 486 | | 6,945 |
| | 16,937 |
| | 5,525 |
|
| Interest-Bearing Deposits | | 243 | | | 280 | | | 223 | | 271 |
| | 243 |
| | 280 |
|
| Securities Purchased Under Agreements to Resell | | 4,265 | | | 479 | | | — | | 1,230 |
| | 4,265 |
| | 479 |
|
| Federal Funds Sold | | 12,708 | | | 23,741 | | | 270,369 | | 6,302 |
| | 12,708 |
| | 23,741 |
|
| Available-for-Sale Securities | | 8,483 | | | 18,052 | | | 30,057 | | 48,620 |
| | 8,483 |
| | 18,052 |
|
| Held-to-Maturity Securities | | 250,401 | | | 272,165 | | | 350,892 | | 178,138 |
| | 250,401 |
| | 272,165 |
|
| Mortgage Loans Held for Portfolio, net | | 348,472 | | | 413,662 | | | 467,332 | | 299,666 |
| | 348,472 |
| | 413,662 |
|
| Other, net | | 1,082 | | | 1 | | | 64 | | 123 |
| | 1,082 |
| | 1 |
|
| Total Interest Income | | 839,550 | | | 1,126,967 | | | 2,117,150 | | 703,209 |
| | 839,550 |
| | 1,126,967 |
|
| Interest Expense: | | | | | | | | | | | |
| Consolidated Obligation Discount Notes | | 15,073 | | | 85,339 | | | 498,094 | | 8,210 |
| | 15,073 |
| | 85,339 |
|
| Consolidated Obligation Bonds | | 543,541 | | | 754,805 | | | 1,313,651 | | 448,930 |
| | 543,541 |
| | 754,805 |
|
| Deposits | | 315 | | | 780 | | | 15,337 | | 198 |
| | 315 |
| | 780 |
|
| Mandatorily Redeemable Capital Stock | | 13,743 | | | 13,263 | | | 11,677 | | 14,483 |
| | 13,743 |
| | 13,263 |
|
| Other Interest Expense | | — | | | 2 | | | 9 | | — |
| | — |
| | 2 |
|
| Total Interest Expense | | 572,672 | | | 854,189 | | | 1,838,768 | | 471,821 |
| | 572,672 |
| | 854,189 |
|
| Net Interest Income | | 266,878 | | | 272,778 | | | 278,382 | | 231,388 |
| | 266,878 |
| | 272,778 |
|
| Provision for Credit Losses | | 500 | | | — | | | — | | 4,900 |
| | 500 |
| | — |
|
| Net Interest Income After Provision for Credit Losses | | 266,378 | | | 272,778 | | | 278,382 | | 226,488 |
| | 266,378 |
| | 272,778 |
|
| Other Income (Loss): | | | | | | | | | | | |
| Total Other-Than-Temporary Impairment Losses | | (23,895 | ) | | (412,731 | ) | | — | | (5,450 | ) | | (23,895 | ) | | (412,731 | ) |
| Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss), net | | (45,906 | ) | | 352,440 | | | — | | (21,361 | ) | | (45,906 | ) | | 352,440 |
|
| Net Other-Than-Temporary Impairment Losses | | (69,801 | ) | | (60,291 | ) | | — | | |
| Net Other-Than-Temporary Impairment Losses, credit portion | | (26,811 | ) | | (69,801 | ) | | (60,291 | ) |
| Net Realized Gains from Sale of Available-for-Sale Securities | | 2,396 | | | — | | | — | | 4,244 |
| | 2,396 |
| | — |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | | 6,995 | | | (1,363 | ) | | 11,842 | | (13,358 | ) | | 6,995 |
| | (1,363 | ) |
| Service Fees | | 1,094 | | | 1,183 | | | 1,280 | | 1,055 |
| | 1,094 |
| | 1,183 |
|
| Standby Letters of Credit Fees | | 1,730 | | | 1,439 | | | 1,031 | | 1,737 |
| | 1,730 |
| | 1,439 |
|
| Loss on Extinguishment of Debt | | (1,979 | ) | | — | | | — | | (397 | ) | | (1,979 | ) | | — |
|
| Other, net | | 800 | | | 871 | | | 574 | | 479 |
| | 800 |
| | 871 |
|
| Total Other Income (Loss) | | (58,765 | ) | | (58,161 | ) | | 14,727 | | (33,051 | ) | | (58,765 | ) | | (58,161 | ) |
| Other Expenses: | | | | | | | | | | | |
| Compensation and Benefits | | 36,422 | | | 32,163 | | | 26,177 | | 35,813 |
| | 36,422 |
| | 32,163 |
|
| Other Operating Expenses | | 12,876 | | | 12,229 | | | 9,854 | | 15,421 |
| | 12,876 |
| | 12,229 |
|
| Federal Housing Finance Agency | | 2,583 | | | 1,872 | | | 1,709 | | 3,702 |
| | 2,583 |
| | 1,872 |
|
| Office of Finance | | 2,120 | | | 1,708 | | | 1,695 | | 2,700 |
| | 2,120 |
| | 1,708 |
|
| Other | | 1,053 | | | 1,187 | | | 1,267 | | 1,002 |
| | 1,053 |
| | 1,187 |
|
| Total Other Expenses | | 55,054 | | | 49,159 | | | 40,702 | | 58,638 |
| | 55,054 |
| | 49,159 |
|
| Income Before Assessments | | 152,559 | | | 165,458 | | | 252,407 | | 134,799 |
| | 152,559 |
| | 165,458 |
|
| Assessments: | | | | | | | | | | | |
| Affordable Housing Program | | 13,856 | | | 14,860 | | | 21,796 | | 13,825 |
| | 13,856 |
| | 14,860 |
|
| Resolution Funding Corporation | | 27,741 | | | 30,120 | | | 46,122 | | 10,907 |
| | 27,741 |
| | 30,120 |
|
| Total Assessments | | 41,597 | | | 44,980 | | | 67,918 | | 24,732 |
| | 41,597 |
| | 44,980 |
|
| Net Income | | $ | 110,962 | | | $ | 120,478 | | | $ | 184,489 | | $ | 110,067 |
| | $ | 110,962 |
| | $ | 120,478 |
|
The accompanying notes are an integral part of these financial statements.
F- 5
Federal Home Loan Bank of Indianapolis
Statements of Capital
Years Ended December 31, 2009 and 2010
($ 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 | | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| Balance, December 31, 2007 | | 20,029 | | | $ | 2,002,862 | | | — | | | $ | 1 | | | $ | 202,111 | | | $ | (6,042 | ) | | $ | 2,198,932 | | |
| | | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 2,561 | | | 256,066 | | | — | | | — | | | | | | | 256,066 | | |
| Repurchase/Redemption of Capital Stock | | — | | | — | | | — | | | — | | | | | | | — | | |
| Transfers of Capital Stock | | (2 | ) | | (195 | ) | | 2 | | | 195 | | | | | | | — | | |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (3,796 | ) | | (379,554 | ) | | — | | | — | | | | | | | (379,554 | ) | |
| | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | 184,489 | | | | | 184,489 | | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | |
| Net Unrealized Losses on Available-for-Sale Securities | | | | | | | | | | | | (66,766 | ) | | (66,766 | ) | |
| Pension and Postretirement Benefits | | | | | | | | | | | | 1,410 | | | 1,410 | | |
| Total Comprehensive Income (Loss) | | | | | | | | | | 184,489 | | | (65,356 | ) | | 119,133 | | |
| | | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | | | | | (4,927 | ) | | | | (4,927 | ) | |
| Cash Dividends on Capital Stock (5.01% annualized) | | | | | | | | | | (98,942 | ) | | | | (98,942 | ) | |
| | | | | | | | | | | | | | | | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| Balance, December 31, 2008 | | 18,792 | | | $ | 1,879,179 | | | 2 | | | $ | 196 | | | $ | 282,731 | | | $ | (71,398 | ) | | $ | 2,090,708 | | | 18,794 |
| | $ | 1,879,375 |
| | $ | 282,731 |
| | $ | — |
| | $ | 282,731 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 721 | | | 72,142 | | | — | | | — | | | | | | | 72,142 | | | 721 |
| | 72,142 |
| | | | | | | | | | 72,142 |
|
| Repurchase/Redemption of Capital Stock | | (51 | ) | | (5,128 | ) | | — | | | — | | | | | | | (5,128 | ) | | (51 | ) | | (5,128 | ) | | | | | | | | | | (5,128 | ) |
| Transfers of Capital Stock | | 2 | | | 196 | | | (2 | ) | | (196 | ) | | | | | | — | | |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (2,204 | ) | | (220,389 | ) | | — | | | — | | | | | | | (220,389 | ) | | (2,204 | ) | | (220,389 | ) | | | | | | | | | | (220,389 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | 120,478 | | | | | 120,478 | | | | | | | 120,478 |
| | — |
| | 120,478 |
| | | | 120,478 |
|
| Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | |
| Net Unrealized Gains on Available-for-Sale Securities | | | | | | | | | | | | 68,906 | | | 68,906 | | |
| Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | | | | | | | | | | | | (374,580 | ) | | (374,580 | ) | |
| Reclassification of Non-Credit Losses to Other Income (Loss) | | | | | | | | | | | | 22,140 | | | 22,140 | | |
| Net Non-Credit Portion Before Accretion | | | | | | | | | | | | (352,440 | ) | | (352,440 | ) | |
| Accretion of Non-Credit Portion | | | | | | | | | | | | 28,399 | | | 28,399 | | |
| Net Non-Credit Portion | | | | | | | | | | | | (324,041 | ) | | (324,041 | ) | |
| Pension and Postretirement Benefits | | | | | | | | | | | | (2,069 | ) | | (2,069 | ) | |
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
|
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | | 68,906 |
| | 68,906 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | | (324,041 | ) | | (324,041 | ) |
| Net Change in Pension Benefits | | | | | | | | | | | | | (2,069 | ) | | (2,069 | ) |
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | | (257,204 | ) | | (257,204 | ) |
| Total Comprehensive Income (Loss) | | | | | | | | | | 120,478 | | | (257,204 | ) | | (136,726 | ) | | | | | | 120,478 |
| | — |
| | 120,478 |
| | (257,204 | ) | | (136,726 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | | | | | (320 | ) | | | | (320 | ) | | | | | | (320 | ) | | — |
| | (320 | ) | | | | (320 | ) |
| Cash Dividends on Capital Stock (2.83% annualized) | | | | | | | | | | (53,876 | ) | | | | (53,876 | ) | | | | | | (53,876 | ) | | — |
| | (53,876 | ) | | | | (53,876 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | 17,260 | | | $ | 1,726,000 | | | — | | | $ | — | | | $ | 349,013 | | | $ | (328,602 | ) | | $ | 1,746,411 | | | 17,260 |
| | $ | 1,726,000 |
| | $ | 349,013 |
| | $ | — |
| | $ | 349,013 |
| | $ | (328,602 | ) | | $ | 1,746,411 |
|
| | | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | | 401 |
| | 40,076 |
| | | | | | | | | | 40,076 |
|
| Repurchase/Redemption of Capital Stock | | | (1,263 | ) | | (126,291 | ) | | | | | | | | | | (126,291 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | | (297 | ) | | (29,725 | ) | | | | | | | | | | (29,725 | ) |
| | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | |
| Net Income | | | | | | | 110,962 |
| | — |
| | 110,962 |
| | | | 110,962 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | | (6,755 | ) | | (6,755 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | | (68,806 | ) | | (68,806 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | | 316,985 |
| | 316,985 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | | (3,068 | ) | | (3,068 | ) |
| Total Other Comprehensive Income | | | | | | | | | | | | | 238,356 |
| | 238,356 |
|
| Total Comprehensive Income | | | | | | | 110,962 |
| | — |
| | 110,962 |
| | 238,356 |
| | 349,318 |
|
| | | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | | (43 | ) | | — |
| | (43 | ) | | | | (43 | ) |
Cash Dividends on Capital Stock (1.87% annualized) | | | | | | | (32,375 | ) | | — |
| | (32,375 | ) | | | | (32,375 | ) |
| | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
The accompanying notes are an integral part of these financial statements.
F- 6
Federal Home Loan Bank of Indianapolis
Statements of Capital, continued
Year Ended December 31, 2011
($ 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 | | 401 | | | 40,076 | | | — | | | — | | | | | | | 40,076 | |
| Repurchase/Redemption of Capital Stock | | (1,263 | ) | | (126,291 | ) | | — | | | — | | | | | | | (126,291 | ) |
| Transfers of Capital Stock | | (29 | ) | | (2,944 | ) | | 29 | | | 2,944 | | | | | | | — | |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (297 | ) | | (29,725 | ) | | — | | | — | | | | | | | (29,725 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | 110,962 | | | | | 110,962 | |
| Other Comprehensive Income (Loss): | | | | | | | | | | | | | | |
| Net Unrealized Losses on Available-for-Sale Securities | | | | | | | | | | | | (6,755 | ) | | (6,755 | ) |
| Non-Credit Portion of Other-Than-Temporary Impairment Losses on Available-for-Sale Securities | | | | | | | | | | | | (66,410 | ) | | (66,410 | ) |
| Reclassification of Net Realized Gains to Other Income (Loss) | | | | | | | | | | | | (2,396 | ) | | (2,396 | ) |
| Net Non-Credit Portion | | | | | | | | | | | | (68,806 | ) | | (68,806 | ) |
| Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | | | | | | | | | | | | (22,458 | ) | | (22,458 | ) |
| Reclassification of Non-Credit Losses to Other Income (Loss) | | | | | | | | | | | | 68,364 | | | 68,364 | |
| Net Non-Credit Portion Before Accretion | | | | | | | | | | | | 45,906 | | | 45,906 | |
| Accretion of Non-Credit Portion | | | | | | | | | | | | 54,820 | | | 54,820 | |
| Reclassification of Non-Credit Portion to Available-for-Sale Securities | | | | | | | | | | | | 216,259 | | | 216,259 | |
| Net Non-Credit Portion | | | | | | | | | | | | 316,985 | | | 316,985 | |
| Pension and Postretirement Benefits | | | | | | | | | | | | (3,068 | ) | | (3,068 | ) |
| Total Comprehensive Income | | | | | | | | | | 110,962 | | | 238,356 | | | 349,318 | |
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | | | | | (43 | ) | | | | (43 | ) |
| Cash Dividends on Capital Stock (1.87% annualized) | | | | | | | | | | (32,375 | ) | | | | (32,375 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | 16,072 | | | $ | 1,607,116 | | | 29 | | | $ | 2,944 | | | $ | 427,557 | | | $ | (90,246 | ) | | $ | 1,947,371 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | |
| Balance, December 31, 2010 | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 1,223 |
| | 122,312 |
| | | | | | | | | | 122,312 |
|
| Repurchase/Redemption of Capital Stock | | (1,552 | ) | | (155,194 | ) | | | | | | | | | | (155,194 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (141 | ) | | (14,122 | ) | | | | | | | | | | (14,122 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | | | 110,067 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | 19,695 |
| | 19,695 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | (50,468 | ) | | (50,468 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | 6,664 |
| | 6,664 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | 814 |
| | 814 |
|
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | (23,295 | ) | | (23,295 | ) |
| Total Comprehensive Income (Loss) | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | (23,295 | ) | | 86,772 |
|
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (11 | ) | | — |
| | (11 | ) | | | | (11 | ) |
Cash Dividends on Capital Stock (2.50% annualized) | | | | | | (39,940 | ) | | — |
| | (39,940 | ) | | | | (39,940 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | 15,631 |
| | $ | 1,563,056 |
| | $ | 484,511 |
| | $ | 13,162 |
| | $ | 497,673 |
| | $ | (113,541 | ) | | $ | 1,947,188 |
|
The accompanying notes are an integral part of these financial statements.
F- 7
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(b) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the attached Exhibit Index.
SIGNATURES
($ amounts in thousands)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
| | | | | | | | | | | |
| | For the years ended |
| | December 31, |
| | 2010 | | 2009 | | 2008 |
Operating Activities: | | | | | |
| Net Income | $ | 110,962 | | | $ | 120,478 | | | $ | 184,489 | |
| Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activities: | | | | | |
| Depreciation and Amortization | (166,800 | ) | | (111,759 | ) | | (20,514 | ) |
| Net Realized (Gain) Loss on Disposal of Premises, Software, and Equipment | — | | | 19 | | | (5 | ) |
| Net Other-Than-Temporary Impairment Losses | 69,801 | | | 60,291 | | | — | |
| Loss on Extinguishment of Debt | 1,979 | | | — | | | — | |
| Provision for Credit Losses | 500 | | | — | | | — | |
| (Gain) Loss on Sale of Available-for-Sale Securities | (2,396 | ) | | — | | | — | |
| (Gain) Loss on Derivative and Hedging Activities | (9,555 | ) | | 12,454 | | | (113,702 | ) |
| Net Change in: | | | | | |
| Accrued Interest Receivable | 15,326 | | | 38,281 | | | 41,013 | |
| Net Accrued Interest on Derivatives | 170,946 | | | 187,884 | | | 43,495 | |
| Other Assets | (253 | ) | | (2,856 | ) | | 2,482 | |
| Affordable Housing Program Payable, including Discount on Advances | (1,681 | ) | | 1,320 | | | 5,709 | |
| Accrued Interest Payable | (77,642 | ) | | (72,516 | ) | | (34,507 | ) |
| Payable to Resolution Funding Corporation | 3,792 | | | (10,630 | ) | | 7,700 | |
| Other Liabilities | (2,366 | ) | | 2,766 | | | 2,522 | |
| Total Adjustments, net | 1,651 | | | 105,254 | | | (65,807 | ) |
| Net Cash provided by (used in) Operating Activities | 112,613 | | | 225,732 | | | 118,682 | |
Investing Activities: | | | | | |
| Net Change in: | | | | | |
| Interest-Bearing Deposits | 49,279 | | | 216,513 | | | (296,996 | ) |
| Securities Purchased Under Agreements to Resell | (750,000 | ) | | — | | | — | |
| Federal Funds Sold | (1,793,000 | ) | | 1,691,000 | | | 4,038,000 | |
| Premises, Software, and Equipment | (1,464 | ) | | (2,137 | ) | | (1,342 | ) |
| Available-for-Sale Securities: | | | | | |
| Purchases of Available-for-Sale Securities | (425,350 | ) | | — | | | (1,680,398 | ) |
| Proceeds from Sales of Available-for-Sale Securities | 48,268 | | | — | | | — | |
| Held-to-Maturity Securities: | | | | | |
| Net (Increase) Decrease in Short-Term Held-to-Maturity Securities | — | | | — | | | 1,660,000 | |
| Proceeds from Maturities of Long-Term Held-to-Maturity Securities | 1,770,626 | | | 2,280,188 | | | 1,669,544 | |
| Purchases of Long-Term Held-to-Maturity Securities | (3,407,920 | ) | | (3,535,890 | ) | | (1,626,602 | ) |
| Advances: | | | | | |
| Principal Collected | 25,889,736 | | | 29,835,768 | | | 57,372,719 | |
| Made to Members | (21,817,661 | ) | | (21,570,539 | ) | | (60,947,068 | ) |
| Mortgage Loans Held for Portfolio: | | | | | |
| Principal Collected | 1,703,588 | | | 2,095,029 | | | 1,098,655 | |
| Purchases | (1,138,155 | ) | | (591,210 | ) | | (497,594 | ) |
| Payments (Proceeds) from Sales of Foreclosed Properties | (350 | ) | | (109 | ) | | (68 | ) |
| Other Federal Home Loan Banks: | | | | | |
| Principal Collected on Loans | 236,735 | | | 180,000 | | | 1,169,000 | |
| Loans Made | (236,735 | ) | | (180,000 | ) | | (1,169,000 | ) |
| Net Cash provided by (used in) Investing Activities | 127,597 | | | 10,418,613 | | | 788,850 | |
|
| | |
| /s/ MILTON J. MILLER II | |
| Milton J. Miller II | |
| President - Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 20, 2012 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below:
|
| | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ MILTON J. MILLER II | | President - Chief Executive Officer | | March 20, 2012 |
| Milton J. Miller II | | | | |
| (Principal Executive Officer) | | | | |
| | | | |
| /s/ CINDY L. KONICH | | Executive Vice President - Chief Operating Officer - Chief Financial Officer | | March 20, 2012 |
| Cindy L. Konich | | | | |
| (Principal Financial Officer) | | | | |
| | | | |
| /s/ K. LOWELL SHORT, JR. | | Senior Vice President - Chief Accounting Officer | | March 20, 2012 |
| K. Lowell Short, Jr. | | | | |
| (Principal Accounting Officer) | | | | |
| | | | |
| /s/ PAUL C. CLABUESCH | | Chair of the board of directors | | March 20, 2012 |
| Paul C. Clabuesch | | | | |
| | | | |
| /s/ JEFFREY A. POXON | | Vice Chair of the board of directors | | March 20, 2012 |
| Jeffrey A. Poxon | | | | |
| | | | |
| /s/ JONATHAN P. BRADFORD | | Director | | March 20, 2012 |
| Jonathan P. Bradford | | | | |
| | | | |
| /s/ MATTHEW P. FORRESTER | | Director | | March 20, 2012 |
| Matthew P. Forrester | | | | |
| | | | |
| /s/ TIMOTHY P. GAYLORD | | Director | | March 20, 2012 |
| Timothy P. Gaylord | | | | |
|
| | | | |
| Signature | | Title | | Date |
| | |
| /s/ MICHAEL J. HANNIGAN, JR. | | Director | | March 20, 2012 |
| Michael J. Hannigan, Jr. | | | | |
| | |
| /s/ CARL E. LIEDHOLM | | Director | | March 20, 2012 |
| Carl E. Liedholm | | | | |
| | |
| /s/ JAMES L. LOGUE, III | | Director | | March 20, 2012 |
| James L. Logue, III | | | | |
| | |
| /s/ ROBERT D. LONG | | Director | | March 20, 2012 |
| Robert D. Long | | | | |
| | |
| /s/ JAMES D. MACPHEE | | Director | | March 20, 2012 |
| James D. MacPhee | | | | |
| | |
| /s/ DAN L. MOORE | | Director | | March 20, 2012 |
| Dan L. Moore | | | | |
| | | | |
| /s/ CHRISTINE COADY NARAYANAN | | Director | | March 20, 2012 |
| Christine Coady Narayanan | | | | |
| | | | |
| /s/ JOHN L. SKIBSKI | | Director | | March 20, 2012 |
| John L. Skibski | | | | |
| | |
| /s/ ELLIOT A. SPOON | | Director | | March 20, 2012 |
| Elliot A. Spoon | | | | |
| | |
| /s/ THOMAS R. SULLIVAN | | Director | | March 20, 2012 |
| Thomas R. Sullivan | | | | |
| | | | |
| /s/ LARRY A. SWANK | | Director | | March 20, 2012 |
| Larry A. Swank | | | | |
| | |
| /s/ MAURICE F. WINKLER, III | | Director | | March 20, 2012 |
| Maurice F. Winkler, III | | | | |
| | |
| /s/ CHRISTOPHER A. WOLKING | | Director | | March 20, 2012 |
| Christopher A. Wolking | | | | |
EXHIBIT INDEX
|
| | |
| Exhibit Number | | Description |
| | |
| 3.1* | | Organization Certificateof the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 filed on February 14, 2006 |
| | |
| 3.2* | | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 21, 2010 |
| | |
| 4* | | Capital Plan of the Federal Home Loan Bank of Indianapolis, effective September 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
| | |
| 10.1*+ | | Federal Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 13, 2009 |
| | |
| 10.2*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to our Current Report on Form 8-K, filed on November 20, 2007 |
| | |
| 10.3*+ | | Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2012, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 22, 2011 |
| | |
| 10.4*+ | | Federal Home Loan Bank of Indianapolis 2011 Long Term Incentive Plan, effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.5*+ | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 27, 2006 |
| | |
| 10.6*+ | | Federal Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to Exhibit 10.9 of our Annual Report on Form 10-K filed on March 16, 2009 |
| | |
| 10.7*+ | | Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.8*+ | | Form of Key Employee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010 |
| | |
| 10.9*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011 |
| | |
| 10.10* | | Joint Capital Enhancement Agreement dated August 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
| | |
| 10.11+ | | Federal Home Loan Bank of Indianapolis Incentive Plan, effective January 1, 2012, with technical amendments made on March 19, 2012 |
| | |
| 12 | | Computation of Ratios of Earnings to Fixed Charges |
| | |
| 14.1 | | Code of Conduct for Directors, Officers, Employees and Advisory Council Members, effective March 24, 2011 |
|
| | |
| Exhibit Number | | Description |
| | |
| | |
| 31.1 | | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | | Certification of the Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.3 | | Certification of the Senior Vice President - Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
| 32 | | Certification of the President - Chief Executive Officer, Executive Vice President - Chief Operating Officer - Chief Financial Officer, and Senior Vice President - Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
|
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Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting ("ICFR"), as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of our records that, in reasonable detail, accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Reasonable assurance, as defined in Section 13(b)(7) of the Exchange Act, is the level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs in devising and maintaining a system of internal accounting controls.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, we assessed the effectiveness of our ICFR as of December 31, 2011. Our assessment included extensive documentation, evaluation, and testing of the design and operating effectiveness of our ICFR. In making this assessment, our management used the criteria for Internal Control — Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Based on our assessment using these criteria, our management concluded that we maintained effective ICFR as of December 31, 2011.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Indianapolis:
In our opinion, the accompanying statements of condition and the related statements of income, of capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Indianapolis (the "Bank") at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Bank's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
March 20, 2012
Indianapolis, Indiana
Federal Home Loan Bank of Indianapolis
Statements of Condition
($ amounts and shares in thousands, except par value) |
| | | | | | | |
| | December 31,
2011 | | December 31,
2010 |
Assets: | | | |
| Cash and Due from Banks (Note 3) | $ | 512,682 |
| | $ | 11,676 |
|
| Interest-Bearing Deposits | 15 |
| | 3 |
|
| Securities Purchased Under Agreements to Resell (Note 4) | — |
| | 750,000 |
|
| Federal Funds Sold | 3,422,000 |
| | 7,325,000 |
|
| Available-for-Sale Securities (Note 5) | 2,949,446 |
| | 3,237,916 |
|
Held-to-Maturity Securities (Estimated Fair Values of $8,972,081 and $8,513,391, respectively) (Note 6) | 8,832,178 |
| | 8,471,827 |
|
| Advances (Note 8) | 18,567,702 |
| | 18,275,364 |
|
| Mortgage Loans Held for Portfolio, net (Notes 9 and 10) | 5,955,142 |
| | 6,702,576 |
|
| Accrued Interest Receivable | 87,314 |
| | 98,924 |
|
| Premises, Software, and Equipment, net | 12,626 |
| | 10,830 |
|
| Derivative Assets, net (Note 11) | 493 |
| | 6,173 |
|
| Other Assets | 35,892 |
| | 39,584 |
|
| Total Assets | $ | 40,375,490 |
| | $ | 44,929,873 |
|
Liabilities: | |
| | |
| Deposits (Note 12): | |
| | |
| Interest-Bearing | $ | 620,702 |
| | $ | 574,894 |
|
| Non-Interest-Bearing | 8,764 |
| | 10,034 |
|
| Total Deposits | 629,466 |
| | 584,928 |
|
| Consolidated Obligations (Note 13): | |
| | |
| Discount Notes | 6,536,109 |
| | 8,924,687 |
|
| Bonds | 30,358,210 |
| | 31,875,237 |
|
| Total Consolidated Obligations, net | 36,894,319 |
| | 40,799,924 |
|
| Accrued Interest Payable | 102,060 |
| | 133,862 |
|
| Affordable Housing Program Payable (Note 14) | 32,845 |
| | 35,648 |
|
| Payable to Resolution Funding Corporation (Note 15) | — |
| | 10,325 |
|
| Derivative Liabilities, net (Note 11) | 174,573 |
| | 657,030 |
|
| Mandatorily Redeemable Capital Stock (Note 16) | 453,885 |
| | 658,363 |
|
| Other Liabilities | 141,154 |
| | 102,422 |
|
| Total Liabilities | 38,428,302 |
| | 42,982,502 |
|
| Commitments and Contingencies (Note 21) |
|
| |
|
|
Capital (Notes 16 and 17): | |
| | |
| Capital Stock Putable (at par value of $100 per share): | | | |
| Class B-1 issued and outstanding shares: 15,592 and 16,072, respectively | 1,559,196 |
| | 1,607,116 |
|
| Class B-2 issued and outstanding shares: 39 and 29, respectively | 3,860 |
| | 2,944 |
|
| Total Capital Stock Putable | 1,563,056 |
| | 1,610,060 |
|
| Retained Earnings: | | | |
| Unrestricted | 484,511 |
| | 427,557 |
|
| Restricted | 13,162 |
| | — |
|
| Total Retained Earnings | 497,673 |
| | 427,557 |
|
| Accumulated Other Comprehensive Income (Loss) (Note 17): | |
| | |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 5) | 15,080 |
| | (4,615 | ) |
| Net Non-Credit Portion of Other-Than-Temporary Impairment Losses: | | | |
| Available-for-Sale Securities (Note 5) | (119,274 | ) | | (68,806 | ) |
| Held-to-Maturity Securities (Note 6) | (392 | ) | | (7,056 | ) |
| Pension Benefits (Note 18) | (8,955 | ) | | (9,769 | ) |
| Total Accumulated Other Comprehensive Income (Loss) | (113,541 | ) | | (90,246 | ) |
| Total Capital | 1,947,188 |
| | 1,947,371 |
|
| Total Liabilities and Capital | $ | 40,375,490 |
| | $ | 44,929,873 |
|
The accompanying notes are an integral part of these financial statements.
F- 8
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continuedIncome
($ amounts in thousands)
| | | | | | | | | | | |
| | For the years ended |
| | December 31, |
| | 2010 | | 2009 | | 2008 |
Financing Activities: | | | | | |
| Net Change in Deposits | (234,095 | ) | | 203,360 | | | 54,423 | |
| Net Proceeds (Payments) on Derivative Contracts with Financing Elements | (143,225 | ) | | (153,435 | ) | | 168,112 | |
| Net Proceeds from Issuance of Consolidated Obligations: | | | | | |
| Discount Notes | 695,302,061 | | | 461,353,989 | | | 1,010,819,889 | |
| Bonds | 35,779,923 | | | 31,984,873 | | | 27,147,262 | |
| Bonds Transferred from Other Federal Home Loan Banks | — | | | — | | | 39,142 | |
| Payments for Maturing and Retiring Consolidated Obligations: | | | | | |
| Discount Notes | (692,627,766 | ) | | (478,494,043 | ) | | (1,009,503,570 | ) |
| Bonds | (39,781,854 | ) | | (24,696,800 | ) | | (28,917,520 | ) |
| Borrowings from Other Federal Home Loan Banks | 114,000 | | | 236,000 | | | 22,000 | |
| Payments for Maturities of Borrowings from Other Federal Home Loan Banks | (114,000 | ) | | (236,000 | ) | | (22,000 | ) |
| Proceeds from Sale of Capital Stock | 40,076 | | | 72,142 | | | 256,066 | |
| Payments for Redemption of Mandatorily Redeemable Capital Stock | (127,065 | ) | | (4,160 | ) | | (8,839 | ) |
| Payments for Repurchase/Redemption of Capital Stock | (126,291 | ) | | (5,128 | ) | | — | |
| Cash Dividends Paid | (32,375 | ) | | (53,876 | ) | | (98,942 | ) |
| Net Cash provided by (used in) Financing Activities | (1,950,611 | ) | | (9,793,078 | ) | | (43,977 | ) |
| | | | | | |
| Net Increase (Decrease) in Cash and Cash Equivalents | (1,710,401 | ) | | 851,267 | | | 863,555 | |
| Cash and Cash Equivalents, beginning of the year | 1,722,077 | | | 870,810 | | | 7,255 | |
| Cash and Cash Equivalents, end of the year | $ | 11,676 | | | $ | 1,722,077 | | | $ | 870,810 | |
| | | | | | |
Supplemental Disclosures: | | | | | |
| Interest Paid | $ | 656,466 | | | $ | 924,436 | | | $ | 1,364,204 | |
| Affordable Housing Program Payments, net | 15,537 | | | 13,540 | | | 16,087 | |
| Resolution Funding Corporation Assessments Paid | 23,949 | | | 40,750 | | | 38,422 | |
| Non-cash transfer of Held-to-Maturity Securities to Available-for-Sale Securities | 880,960 | | | — | | | — | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2011 | | 2010 | | 2009 |
| Interest Income: | | | | | |
| Advances | $ | 161,914 |
| | $ | 196,959 |
| | $ | 393,062 |
|
| Prepayment Fees on Advances, net | 6,945 |
| | 16,937 |
| | 5,525 |
|
| Interest-Bearing Deposits | 271 |
| | 243 |
| | 280 |
|
| Securities Purchased Under Agreements to Resell | 1,230 |
| | 4,265 |
| | 479 |
|
| Federal Funds Sold | 6,302 |
| | 12,708 |
| | 23,741 |
|
| Available-for-Sale Securities | 48,620 |
| | 8,483 |
| | 18,052 |
|
| Held-to-Maturity Securities | 178,138 |
| | 250,401 |
| | 272,165 |
|
| Mortgage Loans Held for Portfolio, net | 299,666 |
| | 348,472 |
| | 413,662 |
|
| Other, net | 123 |
| | 1,082 |
| | 1 |
|
| Total Interest Income | 703,209 |
| | 839,550 |
| | 1,126,967 |
|
| Interest Expense: | | | | | |
| Consolidated Obligation Discount Notes | 8,210 |
| | 15,073 |
| | 85,339 |
|
| Consolidated Obligation Bonds | 448,930 |
| | 543,541 |
| | 754,805 |
|
| Deposits | 198 |
| | 315 |
| | 780 |
|
| Mandatorily Redeemable Capital Stock | 14,483 |
| | 13,743 |
| | 13,263 |
|
| Other Interest Expense | — |
| | — |
| | 2 |
|
| Total Interest Expense | 471,821 |
| | 572,672 |
| | 854,189 |
|
| Net Interest Income | 231,388 |
| | 266,878 |
| | 272,778 |
|
| Provision for Credit Losses | 4,900 |
| | 500 |
| | — |
|
| Net Interest Income After Provision for Credit Losses | 226,488 |
| | 266,378 |
| | 272,778 |
|
| Other Income (Loss): | | | | | |
| Total Other-Than-Temporary Impairment Losses | (5,450 | ) | | (23,895 | ) | | (412,731 | ) |
| Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss), net | (21,361 | ) | | (45,906 | ) | | 352,440 |
|
| Net Other-Than-Temporary Impairment Losses, credit portion | (26,811 | ) | | (69,801 | ) | | (60,291 | ) |
| Net Realized Gains from Sale of Available-for-Sale Securities | 4,244 |
| | 2,396 |
| | — |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | (13,358 | ) | | 6,995 |
| | (1,363 | ) |
| Service Fees | 1,055 |
| | 1,094 |
| | 1,183 |
|
| Standby Letters of Credit Fees | 1,737 |
| | 1,730 |
| | 1,439 |
|
| Loss on Extinguishment of Debt | (397 | ) | | (1,979 | ) | | — |
|
| Other, net | 479 |
| | 800 |
| | 871 |
|
| Total Other Income (Loss) | (33,051 | ) | | (58,765 | ) | | (58,161 | ) |
| Other Expenses: | | | | | |
| Compensation and Benefits | 35,813 |
| | 36,422 |
| | 32,163 |
|
| Other Operating Expenses | 15,421 |
| | 12,876 |
| | 12,229 |
|
| Federal Housing Finance Agency | 3,702 |
| | 2,583 |
| | 1,872 |
|
| Office of Finance | 2,700 |
| | 2,120 |
| | 1,708 |
|
| Other | 1,002 |
| | 1,053 |
| | 1,187 |
|
| Total Other Expenses | 58,638 |
| | 55,054 |
| | 49,159 |
|
| Income Before Assessments | 134,799 |
| | 152,559 |
| | 165,458 |
|
| Assessments: | | | | | |
| Affordable Housing Program | 13,825 |
| | 13,856 |
| | 14,860 |
|
| Resolution Funding Corporation | 10,907 |
| | 27,741 |
| | 30,120 |
|
| Total Assessments | 24,732 |
| | 41,597 |
| | 44,980 |
|
| Net Income | $ | 110,067 |
| | $ | 110,962 |
| | $ | 120,478 |
|
The accompanying notes are an integral part of these financial statements.
F- 9
Federal Home Loan Bank of Indianapolis
Statements of Capital
Years Ended December 31, 2009 and 2010
($ amounts and shares in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | |
| Balance, December 31, 2008 | | 18,794 |
| | $ | 1,879,375 |
| | $ | 282,731 |
| | $ | — |
| | $ | 282,731 |
| | $ | (71,398 | ) | | $ | 2,090,708 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 721 |
| | 72,142 |
| | | | | | | | | | 72,142 |
|
| Repurchase/Redemption of Capital Stock | | (51 | ) | | (5,128 | ) | | | | | | | | | | (5,128 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (2,204 | ) | | (220,389 | ) | | | | | | | | | | (220,389 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 120,478 |
| | — |
| | 120,478 |
| | | | 120,478 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | |
|
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | 68,906 |
| | 68,906 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | (324,041 | ) | | (324,041 | ) |
| Net Change in Pension Benefits | | | | | | | | | | | | (2,069 | ) | | (2,069 | ) |
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | (257,204 | ) | | (257,204 | ) |
| Total Comprehensive Income (Loss) | | | | | | 120,478 |
| | — |
| | 120,478 |
| | (257,204 | ) | | (136,726 | ) |
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (320 | ) | | — |
| | (320 | ) | | | | (320 | ) |
Cash Dividends on Capital Stock (2.83% annualized) | | | | | | (53,876 | ) | | — |
| | (53,876 | ) | | | | (53,876 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | 17,260 |
| | $ | 1,726,000 |
| | $ | 349,013 |
| | $ | — |
| | $ | 349,013 |
| | $ | (328,602 | ) | | $ | 1,746,411 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 401 |
| | 40,076 |
| | | | | | | | | | 40,076 |
|
| Repurchase/Redemption of Capital Stock | | (1,263 | ) | | (126,291 | ) | | | | | | | | | | (126,291 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (297 | ) | | (29,725 | ) | | | | | | | | | | (29,725 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 110,962 |
| | — |
| | 110,962 |
| | | | 110,962 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | (6,755 | ) | | (6,755 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | (68,806 | ) | | (68,806 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | 316,985 |
| | 316,985 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | (3,068 | ) | | (3,068 | ) |
| Total Other Comprehensive Income | | | | | | | | | | | | 238,356 |
| | 238,356 |
|
| Total Comprehensive Income | | | | | | 110,962 |
| | — |
| | 110,962 |
| | 238,356 |
| | 349,318 |
|
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (43 | ) | | — |
| | (43 | ) | | | | (43 | ) |
Cash Dividends on Capital Stock (1.87% annualized) | | | | | | (32,375 | ) | | — |
| | (32,375 | ) | | | | (32,375 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
The accompanying notes are an integral part of these financial statements.
F-6
Federal Home Loan Bank of Indianapolis
Statements of Capital, continued
Year Ended December 31, 2011
($ amounts and shares in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | |
| Balance, December 31, 2010 | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 1,223 |
| | 122,312 |
| | | | | | | | | | 122,312 |
|
| Repurchase/Redemption of Capital Stock | | (1,552 | ) | | (155,194 | ) | | | | | | | | | | (155,194 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (141 | ) | | (14,122 | ) | | | | | | | | | | (14,122 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | | | 110,067 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | 19,695 |
| | 19,695 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | (50,468 | ) | | (50,468 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | 6,664 |
| | 6,664 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | 814 |
| | 814 |
|
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | (23,295 | ) | | (23,295 | ) |
| Total Comprehensive Income (Loss) | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | (23,295 | ) | | 86,772 |
|
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (11 | ) | | — |
| | (11 | ) | | | | (11 | ) |
Cash Dividends on Capital Stock (2.50% annualized) | | | | | | (39,940 | ) | | — |
| | (39,940 | ) | | | | (39,940 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | 15,631 |
| | $ | 1,563,056 |
| | $ | 484,511 |
| | $ | 13,162 |
| | $ | 497,673 |
| | $ | (113,541 | ) | | $ | 1,947,188 |
|
The accompanying notes are an integral part of these financial statements.
F-7
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(b) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the attached Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
|
| | |
| /s/ MILTON J. MILLER II | |
| Milton J. Miller II | |
| President - Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 20, 2012 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below:
|
| | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ MILTON J. MILLER II | | President - Chief Executive Officer | | March 20, 2012 |
| Milton J. Miller II | | | | |
| (Principal Executive Officer) | | | | |
| | | | |
| /s/ CINDY L. KONICH | | Executive Vice President - Chief Operating Officer - Chief Financial Officer | | March 20, 2012 |
| Cindy L. Konich | | | | |
| (Principal Financial Officer) | | | | |
| | | | |
| /s/ K. LOWELL SHORT, JR. | | Senior Vice President - Chief Accounting Officer | | March 20, 2012 |
| K. Lowell Short, Jr. | | | | |
| (Principal Accounting Officer) | | | | |
| | | | |
| /s/ PAUL C. CLABUESCH | | Chair of the board of directors | | March 20, 2012 |
| Paul C. Clabuesch | | | | |
| | | | |
| /s/ JEFFREY A. POXON | | Vice Chair of the board of directors | | March 20, 2012 |
| Jeffrey A. Poxon | | | | |
| | | | |
| /s/ JONATHAN P. BRADFORD | | Director | | March 20, 2012 |
| Jonathan P. Bradford | | | | |
| | | | |
| /s/ MATTHEW P. FORRESTER | | Director | | March 20, 2012 |
| Matthew P. Forrester | | | | |
| | | | |
| /s/ TIMOTHY P. GAYLORD | | Director | | March 20, 2012 |
| Timothy P. Gaylord | | | | |
|
| | | | |
| Signature | | Title | | Date |
| | |
| /s/ MICHAEL J. HANNIGAN, JR. | | Director | | March 20, 2012 |
| Michael J. Hannigan, Jr. | | | | |
| | |
| /s/ CARL E. LIEDHOLM | | Director | | March 20, 2012 |
| Carl E. Liedholm | | | | |
| | |
| /s/ JAMES L. LOGUE, III | | Director | | March 20, 2012 |
| James L. Logue, III | | | | |
| | |
| /s/ ROBERT D. LONG | | Director | | March 20, 2012 |
| Robert D. Long | | | | |
| | |
| /s/ JAMES D. MACPHEE | | Director | | March 20, 2012 |
| James D. MacPhee | | | | |
| | |
| /s/ DAN L. MOORE | | Director | | March 20, 2012 |
| Dan L. Moore | | | | |
| | | | |
| /s/ CHRISTINE COADY NARAYANAN | | Director | | March 20, 2012 |
| Christine Coady Narayanan | | | | |
| | | | |
| /s/ JOHN L. SKIBSKI | | Director | | March 20, 2012 |
| John L. Skibski | | | | |
| | |
| /s/ ELLIOT A. SPOON | | Director | | March 20, 2012 |
| Elliot A. Spoon | | | | |
| | |
| /s/ THOMAS R. SULLIVAN | | Director | | March 20, 2012 |
| Thomas R. Sullivan | | | | |
| | | | |
| /s/ LARRY A. SWANK | | Director | | March 20, 2012 |
| Larry A. Swank | | | | |
| | |
| /s/ MAURICE F. WINKLER, III | | Director | | March 20, 2012 |
| Maurice F. Winkler, III | | | | |
| | |
| /s/ CHRISTOPHER A. WOLKING | | Director | | March 20, 2012 |
| Christopher A. Wolking | | | | |
EXHIBIT INDEX
|
| | |
| Exhibit Number | | Description |
| | |
| 3.1* | | Organization Certificateof the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 filed on February 14, 2006 |
| | |
| 3.2* | | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 21, 2010 |
| | |
| 4* | | Capital Plan of the Federal Home Loan Bank of Indianapolis, effective September 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
| | |
| 10.1*+ | | Federal Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 13, 2009 |
| | |
| 10.2*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to our Current Report on Form 8-K, filed on November 20, 2007 |
| | |
| 10.3*+ | | Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2012, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on November 22, 2011 |
| | |
| 10.4*+ | | Federal Home Loan Bank of Indianapolis 2011 Long Term Incentive Plan, effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.5*+ | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 27, 2006 |
| | |
| 10.6*+ | | Federal Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to Exhibit 10.9 of our Annual Report on Form 10-K filed on March 16, 2009 |
| | |
| 10.7*+ | | Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 |
| | |
| 10.8*+ | | Form of Key Employee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010 |
| | |
| 10.9*+ | | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011 |
| | |
| 10.10* | | Joint Capital Enhancement Agreement dated August 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 |
| | |
| 10.11+ | | Federal Home Loan Bank of Indianapolis Incentive Plan, effective January 1, 2012, with technical amendments made on March 19, 2012 |
| | |
| 12 | | Computation of Ratios of Earnings to Fixed Charges |
| | |
| 14.1 | | Code of Conduct for Directors, Officers, Employees and Advisory Council Members, effective March 24, 2011 |
|
| | |
| Exhibit Number | | Description |
| | |
| | |
| 31.1 | | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | | Certification of the Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.3 | | Certification of the Senior Vice President - Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
| | |
| 32 | | Certification of the President - Chief Executive Officer, Executive Vice President - Chief Operating Officer - Chief Financial Officer, and Senior Vice President - Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
|
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Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting ("ICFR"), as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of our records that, in reasonable detail, accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Reasonable assurance, as defined in Section 13(b)(7) of the Exchange Act, is the level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs in devising and maintaining a system of internal accounting controls.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, we assessed the effectiveness of our ICFR as of December 31, 2011. Our assessment included extensive documentation, evaluation, and testing of the design and operating effectiveness of our ICFR. In making this assessment, our management used the criteria for Internal Control — Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Based on our assessment using these criteria, our management concluded that we maintained effective ICFR as of December 31, 2011.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Indianapolis:
In our opinion, the accompanying statements of condition and the related statements of income, of capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Indianapolis (the "Bank") at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Bank's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
March 20, 2012
Indianapolis, Indiana
Federal Home Loan Bank of Indianapolis
Statements of Condition
($ amounts and shares in thousands, except par value) |
| | | | | | | |
| | December 31,
2011 | | December 31,
2010 |
Assets: | | | |
| Cash and Due from Banks (Note 3) | $ | 512,682 |
| | $ | 11,676 |
|
| Interest-Bearing Deposits | 15 |
| | 3 |
|
| Securities Purchased Under Agreements to Resell (Note 4) | — |
| | 750,000 |
|
| Federal Funds Sold | 3,422,000 |
| | 7,325,000 |
|
| Available-for-Sale Securities (Note 5) | 2,949,446 |
| | 3,237,916 |
|
Held-to-Maturity Securities (Estimated Fair Values of $8,972,081 and $8,513,391, respectively) (Note 6) | 8,832,178 |
| | 8,471,827 |
|
| Advances (Note 8) | 18,567,702 |
| | 18,275,364 |
|
| Mortgage Loans Held for Portfolio, net (Notes 9 and 10) | 5,955,142 |
| | 6,702,576 |
|
| Accrued Interest Receivable | 87,314 |
| | 98,924 |
|
| Premises, Software, and Equipment, net | 12,626 |
| | 10,830 |
|
| Derivative Assets, net (Note 11) | 493 |
| | 6,173 |
|
| Other Assets | 35,892 |
| | 39,584 |
|
| Total Assets | $ | 40,375,490 |
| | $ | 44,929,873 |
|
Liabilities: | |
| | |
| Deposits (Note 12): | |
| | |
| Interest-Bearing | $ | 620,702 |
| | $ | 574,894 |
|
| Non-Interest-Bearing | 8,764 |
| | 10,034 |
|
| Total Deposits | 629,466 |
| | 584,928 |
|
| Consolidated Obligations (Note 13): | |
| | |
| Discount Notes | 6,536,109 |
| | 8,924,687 |
|
| Bonds | 30,358,210 |
| | 31,875,237 |
|
| Total Consolidated Obligations, net | 36,894,319 |
| | 40,799,924 |
|
| Accrued Interest Payable | 102,060 |
| | 133,862 |
|
| Affordable Housing Program Payable (Note 14) | 32,845 |
| | 35,648 |
|
| Payable to Resolution Funding Corporation (Note 15) | — |
| | 10,325 |
|
| Derivative Liabilities, net (Note 11) | 174,573 |
| | 657,030 |
|
| Mandatorily Redeemable Capital Stock (Note 16) | 453,885 |
| | 658,363 |
|
| Other Liabilities | 141,154 |
| | 102,422 |
|
| Total Liabilities | 38,428,302 |
| | 42,982,502 |
|
| Commitments and Contingencies (Note 21) |
|
| |
|
|
Capital (Notes 16 and 17): | |
| | |
| Capital Stock Putable (at par value of $100 per share): | | | |
| Class B-1 issued and outstanding shares: 15,592 and 16,072, respectively | 1,559,196 |
| | 1,607,116 |
|
| Class B-2 issued and outstanding shares: 39 and 29, respectively | 3,860 |
| | 2,944 |
|
| Total Capital Stock Putable | 1,563,056 |
| | 1,610,060 |
|
| Retained Earnings: | | | |
| Unrestricted | 484,511 |
| | 427,557 |
|
| Restricted | 13,162 |
| | — |
|
| Total Retained Earnings | 497,673 |
| | 427,557 |
|
| Accumulated Other Comprehensive Income (Loss) (Note 17): | |
| | |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 5) | 15,080 |
| | (4,615 | ) |
| Net Non-Credit Portion of Other-Than-Temporary Impairment Losses: | | | |
| Available-for-Sale Securities (Note 5) | (119,274 | ) | | (68,806 | ) |
| Held-to-Maturity Securities (Note 6) | (392 | ) | | (7,056 | ) |
| Pension Benefits (Note 18) | (8,955 | ) | | (9,769 | ) |
| Total Accumulated Other Comprehensive Income (Loss) | (113,541 | ) | | (90,246 | ) |
| Total Capital | 1,947,188 |
| | 1,947,371 |
|
| Total Liabilities and Capital | $ | 40,375,490 |
| | $ | 44,929,873 |
|
The accompanying notes are an integral part of these financial statements.
F-4
Federal Home Loan Bank of Indianapolis
Statements of Income
($ amounts in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2011 | | 2010 | | 2009 |
| Interest Income: | | | | | |
| Advances | $ | 161,914 |
| | $ | 196,959 |
| | $ | 393,062 |
|
| Prepayment Fees on Advances, net | 6,945 |
| | 16,937 |
| | 5,525 |
|
| Interest-Bearing Deposits | 271 |
| | 243 |
| | 280 |
|
| Securities Purchased Under Agreements to Resell | 1,230 |
| | 4,265 |
| | 479 |
|
| Federal Funds Sold | 6,302 |
| | 12,708 |
| | 23,741 |
|
| Available-for-Sale Securities | 48,620 |
| | 8,483 |
| | 18,052 |
|
| Held-to-Maturity Securities | 178,138 |
| | 250,401 |
| | 272,165 |
|
| Mortgage Loans Held for Portfolio, net | 299,666 |
| | 348,472 |
| | 413,662 |
|
| Other, net | 123 |
| | 1,082 |
| | 1 |
|
| Total Interest Income | 703,209 |
| | 839,550 |
| | 1,126,967 |
|
| Interest Expense: | | | | | |
| Consolidated Obligation Discount Notes | 8,210 |
| | 15,073 |
| | 85,339 |
|
| Consolidated Obligation Bonds | 448,930 |
| | 543,541 |
| | 754,805 |
|
| Deposits | 198 |
| | 315 |
| | 780 |
|
| Mandatorily Redeemable Capital Stock | 14,483 |
| | 13,743 |
| | 13,263 |
|
| Other Interest Expense | — |
| | — |
| | 2 |
|
| Total Interest Expense | 471,821 |
| | 572,672 |
| | 854,189 |
|
| Net Interest Income | 231,388 |
| | 266,878 |
| | 272,778 |
|
| Provision for Credit Losses | 4,900 |
| | 500 |
| | — |
|
| Net Interest Income After Provision for Credit Losses | 226,488 |
| | 266,378 |
| | 272,778 |
|
| Other Income (Loss): | | | | | |
| Total Other-Than-Temporary Impairment Losses | (5,450 | ) | | (23,895 | ) | | (412,731 | ) |
| Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss), net | (21,361 | ) | | (45,906 | ) | | 352,440 |
|
| Net Other-Than-Temporary Impairment Losses, credit portion | (26,811 | ) | | (69,801 | ) | | (60,291 | ) |
| Net Realized Gains from Sale of Available-for-Sale Securities | 4,244 |
| | 2,396 |
| | — |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | (13,358 | ) | | 6,995 |
| | (1,363 | ) |
| Service Fees | 1,055 |
| | 1,094 |
| | 1,183 |
|
| Standby Letters of Credit Fees | 1,737 |
| | 1,730 |
| | 1,439 |
|
| Loss on Extinguishment of Debt | (397 | ) | | (1,979 | ) | | — |
|
| Other, net | 479 |
| | 800 |
| | 871 |
|
| Total Other Income (Loss) | (33,051 | ) | | (58,765 | ) | | (58,161 | ) |
| Other Expenses: | | | | | |
| Compensation and Benefits | 35,813 |
| | 36,422 |
| | 32,163 |
|
| Other Operating Expenses | 15,421 |
| | 12,876 |
| | 12,229 |
|
| Federal Housing Finance Agency | 3,702 |
| | 2,583 |
| | 1,872 |
|
| Office of Finance | 2,700 |
| | 2,120 |
| | 1,708 |
|
| Other | 1,002 |
| | 1,053 |
| | 1,187 |
|
| Total Other Expenses | 58,638 |
| | 55,054 |
| | 49,159 |
|
| Income Before Assessments | 134,799 |
| | 152,559 |
| | 165,458 |
|
| Assessments: | | | | | |
| Affordable Housing Program | 13,825 |
| | 13,856 |
| | 14,860 |
|
| Resolution Funding Corporation | 10,907 |
| | 27,741 |
| | 30,120 |
|
| Total Assessments | 24,732 |
| | 41,597 |
| | 44,980 |
|
| Net Income | $ | 110,067 |
| | $ | 110,962 |
| | $ | 120,478 |
|
The accompanying notes are an integral part of these financial statements.
F-5
Federal Home Loan Bank of Indianapolis
Statements of Capital
Years Ended December 31, 2009 and 2010
($ amounts and shares in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | |
| Balance, December 31, 2008 | | 18,794 |
| | $ | 1,879,375 |
| | $ | 282,731 |
| | $ | — |
| | $ | 282,731 |
| | $ | (71,398 | ) | | $ | 2,090,708 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 721 |
| | 72,142 |
| | | | | | | | | | 72,142 |
|
| Repurchase/Redemption of Capital Stock | | (51 | ) | | (5,128 | ) | | | | | | | | | | (5,128 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (2,204 | ) | | (220,389 | ) | | | | | | | | | | (220,389 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 120,478 |
| | — |
| | 120,478 |
| | | | 120,478 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | |
|
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | 68,906 |
| | 68,906 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | (324,041 | ) | | (324,041 | ) |
| Net Change in Pension Benefits | | | | | | | | | | | | (2,069 | ) | | (2,069 | ) |
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | (257,204 | ) | | (257,204 | ) |
| Total Comprehensive Income (Loss) | | | | | | 120,478 |
| | — |
| | 120,478 |
| | (257,204 | ) | | (136,726 | ) |
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (320 | ) | | — |
| | (320 | ) | | | | (320 | ) |
Cash Dividends on Capital Stock (2.83% annualized) | | | | | | (53,876 | ) | | — |
| | (53,876 | ) | | | | (53,876 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | 17,260 |
| | $ | 1,726,000 |
| | $ | 349,013 |
| | $ | — |
| | $ | 349,013 |
| | $ | (328,602 | ) | | $ | 1,746,411 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 401 |
| | 40,076 |
| | | | | | | | | | 40,076 |
|
| Repurchase/Redemption of Capital Stock | | (1,263 | ) | | (126,291 | ) | | | | | | | | | | (126,291 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (297 | ) | | (29,725 | ) | | | | | | | | | | (29,725 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 110,962 |
| | — |
| | 110,962 |
| | | | 110,962 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | (6,755 | ) | | (6,755 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | (68,806 | ) | | (68,806 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | 316,985 |
| | 316,985 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | (3,068 | ) | | (3,068 | ) |
| Total Other Comprehensive Income | | | | | | | | | | | | 238,356 |
| | 238,356 |
|
| Total Comprehensive Income | | | | | | 110,962 |
| | — |
| | 110,962 |
| | 238,356 |
| | 349,318 |
|
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (43 | ) | | — |
| | (43 | ) | | | | (43 | ) |
Cash Dividends on Capital Stock (1.87% annualized) | | | | | | (32,375 | ) | | — |
| | (32,375 | ) | | | | (32,375 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
The accompanying notes are an integral part of these financial statements.
F-6
Federal Home Loan Bank of Indianapolis
Statements of Capital, continued
Year Ended December 31, 2011
($ amounts and shares in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock Class B Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Capital |
| | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | |
| Balance, December 31, 2010 | | 16,101 |
| | $ | 1,610,060 |
| | $ | 427,557 |
| | $ | — |
| | $ | 427,557 |
| | $ | (90,246 | ) | | $ | 1,947,371 |
|
| | | | | | | | | | | | | | | |
| Proceeds from Sale of Capital Stock | | 1,223 |
| | 122,312 |
| | | | | | | | | | 122,312 |
|
| Repurchase/Redemption of Capital Stock | | (1,552 | ) | | (155,194 | ) | | | | | | | | | | (155,194 | ) |
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | | (141 | ) | | (14,122 | ) | | | | | | | | | | (14,122 | ) |
| | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | |
| Net Income | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | | | 110,067 |
|
| Other Comprehensive Income (Note 17): | | | | | | | | | | | | | | |
| Net Change in Unrealized Gains (Losses) on Available-for-Sale Securities | | | | | | | | | | | | 19,695 |
| | 19,695 |
|
| Net Change in Non-Credit Other-Than-Temporary Impairment on Available-for-Sale Securities | | | | | | | | | | | | (50,468 | ) | | (50,468 | ) |
| Net Change in Non-Credit Other-Than-Temporary Impairment on Held-to-Maturity Securities | | | | | | | | | | | | 6,664 |
| | 6,664 |
|
| Net Change in Pension Benefits | | | | | | | | | | | | 814 |
| | 814 |
|
| Total Other Comprehensive Income (Loss) | | | | | | | | | | | | (23,295 | ) | | (23,295 | ) |
| Total Comprehensive Income (Loss) | | | | | | 96,905 |
| | 13,162 |
| | 110,067 |
| | (23,295 | ) | | 86,772 |
|
| | | | | | | | | | | | | | | |
| Distributions on Mandatorily Redeemable Capital Stock | | | | | | (11 | ) | | — |
| | (11 | ) | | | | (11 | ) |
Cash Dividends on Capital Stock (2.50% annualized) | | | | | | (39,940 | ) | | — |
| | (39,940 | ) | | | | (39,940 | ) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | 15,631 |
| | $ | 1,563,056 |
| | $ | 484,511 |
| | $ | 13,162 |
| | $ | 497,673 |
| | $ | (113,541 | ) | | $ | 1,947,188 |
|
The accompanying notes are an integral part of these financial statements.
F-7
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
($ amounts in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2011 | | 2010 (1) | | 2009 (1) |
Operating Activities: | | | | | |
| Net Income | $ | 110,067 |
| | $ | 110,962 |
| | $ | 120,478 |
|
| Adjustments to reconcile Net Income to Net Cash provided by Operating Activities: | | | | | |
| Depreciation and Amortization | (34,699 | ) | | (166,800 | ) | | (111,759 | ) |
| Net Realized (Gain) Loss on Disposal of Premises, Software, and Equipment | — |
| | — |
| | 19 |
|
| Change in Net Derivative and Hedging Activities | 111,517 |
| | 161,391 |
| | 200,338 |
|
| Net Other-Than-Temporary Impairment Losses, credit portion | 26,811 |
| | 69,801 |
| | 60,291 |
|
| Loss on Extinguishment of Debt | 397 |
| | 1,979 |
| | — |
|
| Provision for Credit Losses | 4,900 |
| | 500 |
| | — |
|
| Net Realized Gains from Sale of Available-for-Sale Securities | (4,244 | ) | | (2,396 | ) | | — |
|
| Net Change in: | | | | | |
| Accrued Interest Receivable (adjusted for capitalized interest) | 34,058 |
| | (6,932 | ) | | 38,052 |
|
| Other Assets | 446 |
| | (253 | ) | | (2,856 | ) |
| Accrued Interest Payable | (31,803 | ) | | (77,642 | ) | | (72,516 | ) |
| Other Liabilities | (9,769 | ) | | (255 | ) | | (6,544 | ) |
| Total Adjustments, net | 97,614 |
| | (20,607 | ) | | 105,025 |
|
| Net Cash provided by Operating Activities | 207,681 |
| | 90,355 |
| | 225,503 |
|
Investing Activities: | | | | | |
| Net Change in: | | | | | |
| Interest-Bearing Deposits | (688,103 | ) | | 49,279 |
| | 216,513 |
|
| Securities Purchased Under Agreements to Resell | 750,000 |
| | (750,000 | ) | | — |
|
| Federal Funds Sold | 3,903,000 |
| | (1,793,000 | ) | | 1,691,000 |
|
| Purchases of Premises, Software, and Equipment | (4,153 | ) | | (1,464 | ) | | (2,137 | ) |
| Available-for-Sale Securities: | | | | | |
| Proceeds from Maturities of Long-Term | 174,893 |
| | — |
| | — |
|
| Proceeds from Sales of Long-Term | 154,675 |
| | 48,268 |
| | — |
|
| Purchases of Long-Term | — |
| | (425,350 | ) | | — |
|
| Held-to-Maturity Securities: | | | | | |
| Proceeds from Maturities of Long-Term | 1,326,226 |
| | 1,792,884 |
| | 2,280,417 |
|
| Purchases of Long-Term | (1,693,973 | ) | | (3,407,920 | ) | | (3,535,890 | ) |
| Advances: | | | | | |
| Principal Collected | 24,987,879 |
| | 25,889,736 |
| | 29,835,768 |
|
| Made to Members | (25,118,356 | ) | | (21,817,661 | ) | | (21,570,539 | ) |
| Mortgage Loans Held for Portfolio: | | | | | |
| Principal Collected | 1,342,088 |
| | 1,703,238 |
| | 2,094,920 |
|
| Purchases | (607,989 | ) | | (1,138,155 | ) | | (591,210 | ) |
| Other Federal Home Loan Banks: | | | | | |
| Principal Collected on Loans | 50,000 |
| | 236,735 |
| | 180,000 |
|
| Loans Made | (50,000 | ) | | (236,735 | ) | | (180,000 | ) |
| Net Cash provided by Investing Activities | 4,526,187 |
| | 149,855 |
| | 10,418,842 |
|
| |
(1) | Certain amounts have been revised. See Note 1 - Summary of Significant Accounting Policies - Correction of an Error. |
The accompanying notes are an integral part of these financial statements.
F-8
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
($ amounts in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2011 | | 2010 | | 2009 |
Financing Activities: | | | | | |
| Net Change in Deposits | 38,709 |
| | (234,095 | ) | | 203,360 |
|
| Net Payments on Derivative Contracts with Financing Elements | (101,374 | ) | | (143,225 | ) | | (153,435 | ) |
| Net Proceeds from Issuance of Consolidated Obligations: | | | | | |
| Discount Notes | 289,603,069 |
| | 695,302,061 |
| | 461,353,989 |
|
| Bonds | 30,570,020 |
| | 35,779,923 |
| | 31,984,873 |
|
| Payments for Matured and Retired Consolidated Obligations: | | | | | |
| Discount Notes | (291,990,306 | ) | | (692,627,766 | ) | | (478,494,043 | ) |
| Bonds | (32,061,547 | ) | | (39,781,854 | ) | | (24,696,800 | ) |
| Other Federal Home Loan Banks: | | | | | |
| Borrowings | — |
| | 114,000 |
| | 236,000 |
|
| Payments for Maturities | — |
| | (114,000 | ) | | (236,000 | ) |
| Proceeds from Sale of Capital Stock | 122,312 |
| | 40,076 |
| | 72,142 |
|
| Payments for Redemption of Mandatorily Redeemable Capital Stock | (218,611 | ) | | (127,065 | ) | | (4,160 | ) |
| Payments for Repurchase/Redemption of Capital Stock | (155,194 | ) | | (126,291 | ) | | (5,128 | ) |
| Cash Dividends Paid on Capital Stock | (39,940 | ) | | (32,375 | ) | | (53,876 | ) |
| Net Cash used in Financing Activities | (4,232,862 | ) | | (1,950,611 | ) | | (9,793,078 | ) |
| | | | | | |
| Net Increase (Decrease) in Cash and Cash Equivalents | 501,006 |
| | (1,710,401 | ) | | 851,267 |
|
| Cash and Cash Equivalents at Beginning of the Year | 11,676 |
| | 1,722,077 |
| | 870,810 |
|
| Cash and Cash Equivalents at End of the Year | $ | 512,682 |
| | $ | 11,676 |
| | $ | 1,722,077 |
|
Supplemental Disclosures: | | | | | |
| Interest Paid | $ | 495,004 |
| | $ | 656,466 |
| | $ | 924,436 |
|
| Affordable Housing Program Payments | 16,628 |
| | 15,537 |
| | 13,540 |
|
| Resolution Funding Corporation Assessments Paid | 21,232 |
| | 23,949 |
| | 40,750 |
|
| Non-cash Transfer of Held-to-Maturity Securities to Available-for-Sale Securities | 13,822 |
| | 880,960 |
| | — |
|
| Capitalized Interest on Certain Held-to-Maturity Securities | 29,066 |
| | 37,422 |
| | 229 |
|
| Net Shares Reclassified to Mandatorily Redeemable Capital Stock | 14,122 |
| | 29,725 |
| | 220,389 |
|
The accompanying notes are an integral part of these financial statements.
F-9
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
($ amounts in thousands unless otherwise indicated)
These Notes to Financial Statements should be read in conjunction with the Statements of Condition as of December 31, 20102011, and 20092010, and the Statements of Income, Statements of Capital, and Statements of Cash Flows for the years ended December 31, 20102011, 20092010, and 20082009. All dollar amounts included in the Notes to Financial Statements are presented in thousands, unless otherwise indicated. We use certain acronyms and terms throughout these Notes to Financial Statements, which are defined in the Glossary of Terms located on page F-71. Unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis.
Background Information
The Federal Home Loan Bank of Indianapolis, a federally chartered corporation, is one of 12 district Federal Home Loan Banks (collectively,FHLBanks in the "FHLBs" or individually an "FHLB"). WeUnited States. Even though we are part of the FHLBank System, we operate as a separate entity with our own management, employees and board of directors. Through our members, we enhanceWe are a financial cooperative that enhances the availability of credit for residential mortgages and targeted community development. We are a financial cooperative that providesdevelopment by providing a readily available, competitively-priced source of funds to our member institutions. Regulated financial depositories and insurance companies engaged in residential housing finance that have a principal place of business located in Indiana or Michigan may applyare eligible for membership. Additionally, effective February 4, 2010, authorized community development financial institutions areCDFIs became eligible to be members. State and local housing authorities that meet certain statutory and regulatory criteria may also borrow from us. While eligible to borrow, housing authorities are not members and, as such, are not allowed to hold our capital stock. We do not have any special purpose entities or any other type of off-balance sheet conduits.
All members must purchase our capital stock based on the amount of their total mortgage assets. Each member may be required to purchase additional activity-based capital stock as it engages in certain business activities. Member institutions own nearly all of our capital stock. Former members (including certain non-members that own our capital stock as a result of merger or acquisition of an FHLBFHLBank member) own the remaining capital stock to support business transactions still carriedoutstanding on our Statement of Condition. All holders of our capital stock may, to the extent declared by our board of directors, receive dividends on their capital stock, subject to the applicable regulations as discussed in Note 16 – Capital.- Capital. See Note 21 –Transactions22 - Transactions with Related Parties and Other FHLBs for more information about transactions with shareholders.
The former Federal Housing Finance Board ("Finance Board") was an independent agency in the executive branch of the U.S. government that supervised and regulated the FHLBs and the FHLBs' Office of Finance through July 29, 2008. With the passage of the Housing and Economic Recovery Act of 2008 ("HERA"), the Federal Housing Finance Agency ("Finance Agency") was established and became the new independent Federal regulator of the FHLBs, Federal Home Loan Mortgage Corporation ("FHLBanks, Freddie Mac,") and Federal National Mortgage Association ("Fannie Mae,"), effective July 30, 2008. The Finance Board was merged into2008 with the Finance Agency aspassage of October 27, 2008.HERA. Pursuant to HERA, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Director of the Finance Agency, any court of competent jurisdiction, or operation of law. References throughout this document toTherefore, regulations of the Finance Agency also include the regulations of the Finance Board where they remain applicable. The Finance Agency's stated mission with respect to the FHLBsFHLBanks is to provide effective supervision, regulation and housing mission oversight of the FHLBsFHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market.
The Office of Finance is a joint office of the FHLBsFHLBanks established to facilitate the issuance and servicing of the debt instruments of the FHLBs,FHLBanks, known as Consolidated Obligations, consisting of Consolidated Obligation Bonds ("CO Bonds") and Discount Notes, ("Discount Notes"), and to combine the quarterly and annual financial reports of all 12 FHLBs.FHLBanks. As provided by the Federal Home Loan Bank Act of 1932, as amended ("Bank Act") and applicable regulations, Consolidated Obligations are backed only by the financial resources of all 12 FHLBs.FHLBanks.
Consolidated Obligations are the primary source of funds for the FHLBs.FHLBanks. Deposits, other borrowings and capital stock issued to members provide additional funds. We primarily use these funds to make secured loans to members and housing associates ("Advances,"), to acquire mortgage loans from Participating Financial Institutions ("PFI")PFI's through our Mortgage Purchase Program ("MPP,"), and to maintain liquidity. We also provide correspondent services, such as wire transfer, security safekeeping, and settlement services, to our member institutions.
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation. The accompanying financial statements of the Federal Home Loan Bank of Indianapolis have been prepared in accordance with GAAP and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the SEC.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 1 – SummaryThe financial statements contain all adjustments that are, in the opinion of Significant Accounting Policiesmanagement, necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented.
Basis of Presentation.
Our accounting and financial reporting policiesReclassifications. We have reclassified certain amounts from the prior periods to conform to accounting principles generally acceptedthe 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.
Estimated Fair Value. The estimated fair value amounts, recorded on the Statement of Condition and presented in the United Statesnote disclosures, have been determined using available market information and our best judgment of America ("appropriate valuation methods at GAAPDecember 31, 2011") and 2010. Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these estimated fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 20 - Estimated Fair Values for more information.
All dollar amounts included in the Notes are presented in thousands, unless otherwise indicated. As used in this Form 10-K, unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis.
Cash Flows. Within the Statement of Cash Flows, we consider Cash and Due from Banks on the Statement of Condition as Cash and Cash Equivalents because of their highly liquid nature. Federal Funds Sold and Interest-Bearing Deposits on the Statement of Condition are not treated as Cash and Cash Equivalents within the Statement of Cash Flows, but instead are treated as short-term investments and are reported in the Investing Activities section of the Statement of Cash Flows.
Reclassifications.Correction of an Error. Certain amountsDuring the preparation of the third quarter 2011 Form 10-Q, as previously disclosed in the 2009,third quarter 2011 Form 10-Q, we determined that in periods prior to September 30, 2011 we incorrectly included the effects of certain non-cash transactions related to capitalized interest on Other U.S. obligations - guaranteed RMBS in the Operating Activities and 2008 financial statementsInvesting Activities sections of the Statements of Cash Flows. Such non-cash transactions should have been reclassifiedhad no impact on those sections; however the effects of the error were fully offsetting in total. We have evaluated the effects of these errors and concluded that none of them are material to conformany of our previously issued quarterly or annual Financial Statements. Nevertheless, we have elected to revise our previously issued Statements of Cash Flows in this report and future filings to correct for the financial statement presentationeffect of these errors. The revision does not affect the net change in cash and cash equivalents for 2010. These reclassifications hadany of the periods, and has no effect on Netour Statements of Condition, Income or Total Capital.
Subsequent Events. We have evaluated events and transactions through the filingThe amounts on prior period Statements of our Annual Report on Form 10-K with the Securities and Exchange Commission and believe thereCash Flows that have been no material subsequent events requiring additional recognition or disclosure in the financial statements.revised are summarized below.
|
| | | | | | | | | | | | | | | | |
| | | Year Ended | | Year Ended |
| | | December 31, 2010 | | December 31, 2009 |
| | | As Previously Reported | | As Revised | | As Previously Reported | | As Revised |
| Operating Activities: | | | | | | | | |
| Net Change in: Accrued Interest Receivable | | $ | 15,326 |
| | $ | (6,932 | ) | | $ | 38,281 |
| | $ | 38,052 |
|
| Total adjustments, net | | 1,651 |
| | (20,607 | ) | | 105,254 |
| | 105,025 |
|
| Net Cash provided by Operating Activities | | 112,613 |
| | 90,355 |
| | 225,732 |
| | 225,503 |
|
| | | |
| | | | | | |
| Investing Activities: | | | | | | | | |
Held-to-maturity securities: Proceeds from Maturities of Long-Term | | 1,770,626 |
| | 1,792,884 |
| | 2,280,188 |
| | 2,280,417 |
|
| Net Cash provided by Investing Activities | | 127,597 |
| | 149,855 |
| | 10,418,613 |
| | 10,418,842 |
|
Use of Estimates.
The preparation of financial statements in accordance with GAAP requires usNotes 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.
Fair Value.The fair value amounts, recorded on the Statement of Condition and presented in the note disclosures, have been determined using available market information and our best judgment of appropriate valuation methods at December 31, 2010Financial Statements, and 2009. Although we use our best judgmentcontinued
($ amounts in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 19 – Estimated Fair Values for more information.thousands unless otherwise indicated)
|
| | | | | | | | | | | | | | | | |
| | | (Unaudited) | | (Unaudited) |
| | | Three Months Ended | | Three Months Ended |
| | | March 31, 2011 | | March 31, 2010 |
| | | As Previously Reported | | As Revised | | As Previously Reported | | As Revised |
| Operating Activities: | | | | | | | | |
| Net Change in: Accrued Interest Receivable | | $ | 1,040 |
| | $ | 6,484 |
| | $ | 4,025 |
| | $ | (4,887 | ) |
| Total adjustments, net | | 42,678 |
| | 48,122 |
| | 23,140 |
| | 14,228 |
|
| Net Cash provided by (used in) Operating Activities | | 62,548 |
| | 67,992 |
| | 55,429 |
| | 46,517 |
|
| | | | | | | | | |
| Investing Activities: | | | | | | | | |
Held-to-maturity securities: Proceeds from Maturities of Long-Term | | 515,645 |
| | 510,201 |
| | 491,928 |
| | 500,840 |
|
| Net Cash provided by (used in) Investing Activities | | 1,227,092 |
| | 1,221,648 |
| | (690,125 | ) | | (681,213 | ) |
|
| | | | | | | | | | | | | | | | |
| | | (Unaudited) | | (Unaudited) |
| | | Six Months Ended | | Six Months Ended |
| | | June 30, 2011 | | June 30, 2010 |
| | | As Previously Reported | | As Revised | | As Previously Reported | | As Revised |
| Operating Activities: | | | | | | | | |
| Net Change in: Accrued Interest Receivable | | $ | 9,051 |
| | $ | 19,925 |
| | $ | 9,139 |
| | $ | (6,305 | ) |
| Total adjustments, net | | 80,569 |
| | 91,443 |
| | 104,420 |
| | 88,976 |
|
| Net Cash provided by (used in) Operating Activities | | 124,824 |
| | 135,698 |
| | 123,767 |
| | 108,323 |
|
| | | | | | | | | |
| Investing Activities: | | | | | | | | |
Held-to-maturity securities: Proceeds from Maturities of Long-Term | | 764,381 |
| | 753,507 |
| | 958,802 |
| | 974,246 |
|
| Net Cash provided by (used in) Investing Activities | | 6,350,052 |
| | 6,339,178 |
| | (463,479 | ) | | (448,035 | ) |
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold.
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold provide short-term liquidity and are carried at cost. Interest-bearing deposits may include certificates of deposit ("CDs") and bank notes not meeting the definition of a security. We treat Securities Purchased under Agreements to Resell as collateralized financings.
Investment Securities.
We classify investments as trading, Held-to-Maturity ("HTM") and Available-for-Sale ("or AFS") at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Trading. Securities classified as trading are carried at fair value. We record changes in the fair value of these investments through Other Income (Loss) as Net Gain (Loss) on Trading Securities. However, we do not participate in speculative trading practices and limit credit risk arising from these instruments. We did not have any investments classified as trading during the years ended December 31, 20102011, 20092010, or 20082009.
Held-to-Maturity. Securities for which we have both the ability and intent to hold to maturity are classified as HTM, on the Statement of Condition, and are carried at amortized cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts, and, if applicable, other-than-temporary impairment ("OTTI", which term may also refer to "other-than-temporarily impaired" as the context indicates) recognized in Net Income and accreted from Accumulated Other Comprehensive Income (Loss) ("AOCI.AOCI").
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Certain changes in circumstances may cause us to change our intent to hold a certain security to maturity without calling into question our intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of an HTM security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness, or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, non-recurring, and unusual that could not have been reasonably anticipated may cause us to sell or transfer an HTM security without necessarily calling into question our intent to hold other debt securities to maturity.
In addition, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (i) the sale occurs near enough to its maturity date (or call date, if exercise of the call is probable) that interest-rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security's estimated fair value, or (ii) the sale of a security occurs after we have already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
Available-for-Sale. Securities that are not classified as HTM or trading are classified as AFS and are carried at estimated fair value. We record changes in the fair value of these securities in Other Comprehensive Income ("OCI") as Net Unrealized Gains (Losses) on Available-for-Sale Securities. For an AFS security that has been hedged and qualifies as a fair-value hedge, we record the portion of the change in value related to the risk being hedged in Other Income (Loss) as Net Gains (Losses) on Derivatives and Hedging Activities together with the related change in the fair value of the derivative, and record the remainder of the change in the fair value of the investment in OCI as Net Unrealized Gains (Losses) on Available-for-Sale Securities. For AFS securities that are OTTI, changes in fair value, net of the credit loss, are recorded in OCI as the Non-Credit Portion.
Premiums and Discounts. We amortize purchased premiums and accrete purchased discounts on mortgage-backed-securities ("MBS") and asset-backed securities ("ABS") at an individual instrumentsecurity level using the retrospective level-yield method(retrospective interest method) over the estimated remaining cash flows of the securities. This method requires that we estimate prepayments over the estimated remaining life of the securities and make a retrospective adjustment of the effective yield each time we change the estimated life as if the new estimate had been known since the acquisition date of the securities.
Gains and Losses on Sales. We compute gains and losses on sales of investment securities using the specific identification method and include these gains and losses in Other Income (Loss). as Net Realized Gains (Losses) from Sale of Available-for-Sale Securities.
Investment Securities —- Other-Than-Temporary Impairment.
We evaluate our individual impaired AFS and HTM securities that have been previously OTTI or are in an unrealized loss position for OTTI.OTTI on a quarterly basis. A security is considered impairedin an unrealized loss position (i.e., impaired) when its estimated fair value is less than its amortized cost basis (i.e., in an unrealized loss position).basis. We consider an impaired debt security to be OTTI under any of the following circumstances:
| |
• | if we have an intent to sell the debt security; |
| |
• | if, based on available evidence, we believe it is more likely than not (i.e., likely) that we will be required to sell the debt security before the recovery of its amortized cost basis; or |
| |
• | if we do not expect to recover the entire amortized cost of the debt security. |
if, based on available evidence, we believe it is more likely than not that we will be required to sell the debt security before the recovery of its amortized cost basis; or
if we do not expect to recover the entire amortized cost of the debt security.
Recognition of OTTI. If either of the first two conditions above is met, we recognize an OTTI charge in earningsloss equal to the entire difference between the debt security's amortized cost and its estimated fair value as of the Statement of Condition date.
Recognition of OTTI. For impairedthose securities that meet neither of the first twothese conditions, we perform an analysis that includes a cash flow test for private-label MBSanalysis to determine ifwhether we expect to recover the entire amortized cost basis of each of these securities. security.
The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected andis less than the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its estimated fair value. However, rather than recognizing the entire difference between the amortized cost basis and estimated fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) is recognized in OCI.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The total OTTI loss is presented in the Statement of Income with an offset for the portion of the total OTTI loss recognized in OCI. The remaining amount in the Statement of Income represents the credit loss for the period.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Subsequent Accounting for OTTI. For subsequent accounting of OTTI securities, if the present value of cash flows expected to be collected is less than the amortized cost basis, which reflects previous credit losses, we record an additional OTTI. The amount of OTTI prior to determination of additional OTTI, for an AFS or HTM security that was previously impaired, is calculated as the difference between its amortized cost less the amount of its non-credit OTTI remaining in AOCI and its estimated fair value. For certain AFS or HTM securities that were previously impaired and have subsequently incurred additional credit losses, an amount equal to the additional credit losses, up to the amount remaining in AOCI, areis reclassified out of non-credit losses in AOCI and into Other Income (Loss).
Subsequent increases and decreases (if not an additional OTTI) in the estimated fair value of OTTI AFS securities are netted against the non-credit component of OTTI recognized previously in AOCI for purposes of accretion. For debtHTM securities, classified as HTM, the OTTI in AOCI is accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimatedprojected cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected). For debt securities classified as AFS, we do not accrete the OTTI in AOCI to the carrying value because the subsequent measurement basis for these securities is estimated fair value.
Interest Income Recognition. As of the initial OTTI measurement date, a new accretable yield is calculated for the OTTI debt security. This yield is then used to calculate the amount of credit losses included in the amortized cost of the OTTI security to be recognized into Interest Income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected.
Upon subsequent evaluation of an OTTI security, if there is no additional OTTI, we adjust the accretable yield on a prospective basis if there is a significant increase in the security's expected cash flows. The estimated cash flows and accretable yield are re-evaluated on a quarterly basis.
Accounting priorVariable Interest Entities. We have investments in VIEs that include, but are not limited to, 2009. Prior to implementationsenior interests in private-label MBS and ABS. The carrying amounts of current accounting guidance for OTTIthe investments are included in HTM and AFS securities on investment securities, 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 Statement of Condition dateCondition. We have no liabilities related to these VIEs. The maximum loss exposure on 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 a quarterly basis we perform an evaluation to determine whether we are the primary beneficiary in any VIE. To perform this evaluation, we consider whether we possess both of the reporting period for which following characteristics:
the assessment was made. We would concludepower 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 impairment was other-than-temporary if it were probable that we would not receive allevaluation of the investment security's contractual cash flows. As part of this analysis,above characteristics, we had to assesshave determined that consolidation is not required for our intent and ability to hold a security until recovery of any unrealized losses. We implemented the current accounting guidance for OTTIinvestments in VIEs as of January 1, 2009, and didDecember 31, 2011. In addition, we have not recognizeprovided financial or other support (explicitly or implicitly) to any adjustmentsVIE during the year ended December 31, 2011. Furthermore, we were not previously contractually required to retained earnings asprovide, nor do we had no OTTI on that date.intend to provide, such support to any VIE in the future.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Advances.
We report Advances at amortized cost net of premiums, discounts, unearned commitment fees and hedging adjustments. We amortize/accrete premiums and discounts, and recognize unearned commitment fees and hedging adjustments on Advances to Interest Income using a level-yield methodology. We record interest on Advances to Interest Income as earned.
Advance Modifications. In cases in which we fund a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance, we evaluate whether the new Advance meets the accounting criteria to qualify as a modification of an existing Advance or whether it constitutes a new Advance. We compare the present value of cash flows on the new Advance to the present value of cash flows remaining on the existing Advance. If there is at least a 10% difference in the cash flows or if we conclude the difference between the Advances is more than minor based on a qualitative assessment of the modifications made to the Advance's original contractual terms, the Advance is accounted for as a new Advance. In all other instances, the new Advance is accounted for as a modification.
Prepayment Fees. We charge a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. We record prepayment fees net of basis adjustments related to hedging activities included in the book basis of the Advance as Prepayment Fees on Advances, net in Interest Income.
If a new Advance does not qualify as a modification of an existing Advance, the existing Advance is treated as an Advance termination and any prepayment fee, net of hedging adjustments, is recorded to Prepayment Fees on Advances in the Interest Income section of the Statement of Income.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
If a new Advance qualifies as a modification of an existing Advance, any prepayment fee, net of hedging adjustments, is deferred, recorded in the basis of the modified Advance, and amortized using a level-yield methodology over the life of the modified Advance. This amortization is included in Advances in Interest Income. If the modified Advance is hedged and meets hedge accounting requirements, the modified Advance is marked to the risk being hedged,estimated fair value and subsequent fair-valuefair value changes attributable to the hedged risk are recorded in Other Income (Loss) in the Statement of Income..
Mortgage Loans Held for Portfolio.
We classify mortgage loans for which we have the intent and ability to hold for the forseeableforeseeable future or until maturity or payoff as held for portfolio. Accordingly, these mortgagesmortgage loans are reported net of premiums, discounts, deferred loan fees or costs, hedging adjustments, and the allowance for credit losses.
We receive payments from servicers on a scheduled/scheduled basis, which means that scheduled monthly principal and interest from the servicer are received, regardless of whether the mortgagee is making payments to the servicer, or on an actual/actual basis, which means the servicers remit payments only as they are received from the borrowers.
Premiums and Discounts. We defer and amortize/accrete premiums paid and discounts received by a PFI, deferred loan fees or costs, and hedging basis adjustments to Interest Income using the retrospective interest method. In determining prepayment estimates for the retrospective interest method, mortgage loans are aggregated by similar characteristics (type, maturity, note rate and acquisition date).
Credit Enhancements. On November 29, 2010 we began offering MPP Advantage for new MPP loans, which utilizes an enhanced fixed LRA account for additional credit enhancement, instead of utilizing coverage from SMI providers.For conventional mortgage loans, under our original MPP program, credit enhancement is provided through either depositing a portion of the periodic interest payment on the loans orinto an LRA. For conventional mortgage loans under our MPP Advantage, credit enhancement is provided through depositing a hold back onportion of the purchase price into a lender risk account ("LRA").the LRA. The LRA is reported in Other Liabilities. Prior to DecemberNovember 29, 2010, in addition to the LRA, the PFI selling conventional loans was required to purchase supplemental mortgage insurance ("SMI,"), paid through periodic interest payments, as an enhancement to cover losses over and above losses covered by the LRA.
The MPP is designed and structured in a manner that, when necessary, requires loan servicers to foreclose and liquidate in the servicer's name rather than in our name. Therefore, we should never take title to property.do not classify MPP loans as real estate owned. Upon completion of foreclosure or through a deed in lieu of foreclosure, the servicer, under our direction and the SMI provider (if applicable), markets and ultimately liquidates the property with proceeds applied to the amounts owed on the loan (unpaid principal and interest, escrow advances and foreclosure expenses). If liquidation proceeds are less than the amounts owed, the servicers submit a claim to the SMI provider for the remaining unpaid amounts. The SMI provider pays the claim and requests reimbursement from the Bankus if LRA funds are available, up to the coverage amount under the SMI policy. If there are not sufficient LRA funds available to reimburse the SMI provider, from the LRA account, the SMI provider is still obligated up to the policy coverage amount.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Under MPP Advantage the claim process is similar to that described above, but is submitted directly to us rather than the SMI provider. Losses not covered by the LRA or SMI policy are borne by the Bank.us.
Other Fees. We may receive other non-origination fees, such as pair-off fees and price adjustment fees. Pair-off fees represent a make-whole provision, are received when the amount funded is less than a specific percentage of the delivery commitment amount and are recorded in Other Income (Loss). Price adjustment fees are received when the amount funded is greater than a specified percentage of the delivery commitment amount, represent purchase price adjustments to the related loans acquired and are recorded as a part of the loan basis.
Allowance for Credit Losses.
Establishing Allowance for Credit Loss. An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment if it is probable that impairment has occurredlosses have been incurred as of the Statement of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, a separate allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 10 –- Allowance for Credit Losses for details on each allowance methodology.
Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. We have developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for (i) Advances,credit products (Advances, letters of credit, and other extensions of credit to members (collectively referred to as "credit products")members); (ii) government-guaranteed or insured Mortgage Loans Held for Portfolio; (iii) conventional Mortgage Loans Held for Portfolio; (iv) term securities purchased under agreements to resell; and (v) term federal funds sold.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from these financing receivables. We determined that no further disaggregation of portfolio segments identified above is needed as the credit risk arising from these financing receivables is assessed and measured by us at the portfolio segment level.
Impairment Methodology. A loan is considered impaired when, based on current and historical information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Non-accrual Loans. We place a conventional mortgage loan on non-accrual status if it is determined that either (i) the collection of interest or principal is doubtful, or (ii) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements)enhancements and monthly remittances on a scheduled/scheduled basis). Therefore, we do not place conventional mortgage loans over 90 days delinquent with scheduled/scheduled payment terms on non-accrual status when losses are not expected to be incurred. Actual/actual loan types are well secured; however, servicers of actual/actual loan types contractually do not advance principal and interest due regardless of borrower creditworthiness. We place these loans on non-accrual status once they become 90 days delinquent. An FHA loan is not placed on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due because of the United States government insurance of the loan and the obligations of the servicer.
For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversedcharged against Interest Income. We record cash payments received on non-accrual loans first as Interest Income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording Interest Income. A loan on non-accrual status may be restored to accrual status when (i) none of its contractual principal and interest is due and unpaid, and we expect repayment of the remaining contractual interest and principal, or (ii) it otherwise becomes well-secured and is in the process of collection. At December 31, 2010,
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Impairment Methodology. A loan is considered impaired when, based on current and 2009,historical information and events, it is probable that we hadwill be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans are measured for impairment based on the estimated fair value of the underlying property (net of estimated selling costs) and the amount of applicable credit enhancements (including the PMI, LRA and SMI) less the estimated costs associated with maintaining and disposing of the property. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no mortgageother available and reliable source of repayment. Collateral-dependent loans placedare impaired if the estimated fair value of the underlying collateral is insufficient to recover the UPB on the loan. Interest Income on impaired loans is recognized in the same manner as non-accrual status.loans noted above. Loans that are considered collateral dependent are removed from the collective evaluation review for further analysis.
Charge-off Policy. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded ifto the extent the recorded investment in the loan will not be recovered.
Derivatives.
All derivatives are recognized in the Statement of Condition at their estimated fair values and are reported as either Derivative Assets or Derivative Liabilities, net of cash collateral and accrued interest from counterparties. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statement of Cash Flows unless the derivatives meet the criteria to be financing derivatives.
Derivative Designations. Each derivative is designated as one of the following:
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| (i) | a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment ("(a fair-value" hedge); |
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| (ii) | a qualifying hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash-flow" hedge); |
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| (iii) | a non-qualifying hedge ("economic"(economic hedge) for asset/liability management purposes; or |
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| (iv) | a non-qualifying hedge of another derivative (an "intermediation") hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties. |
Accounting for Qualifying Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for hedge accounting, and the offsetting changes in fair value of the hedged items are recorded in earnings (fair-value hedges) or OCI (cash-flow hedges). Two approaches to hedge accounting include:
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| (i) | Long-haul hedge accounting - theThe application of long-haul hedge accounting generally requires us to formally assess (both at the hedge's inception and at least quarterly) whether the derivatives used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items or forecasted transactions and whether those derivatives may be expected to remain effective in future periods. |
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| (ii) | Short-cut hedge accounting - transactionsTransactions that meet certain criteria qualify for the short-cut method of hedge accounting in which an assumption can be made that the entire change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the entire change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the derivative is considered to be effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability. We no longer apply the short-cut method to any new hedging relationships. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Effective April 1, 2008, we no longer apply the short-cut method to any new hedging relationships. All hedging relationships entered into prior to April 1, 2008, accounted for under the short-cut method remain, provided they continue to meet the assumption of effectiveness.
Derivatives are typically executed at the same time as the hedged item, and we designate the hedged item in a qualifying hedging relationship at the trade date. In many hedging relationships, we may designate the hedging relationship upon our commitment to make an Advance or trade a Consolidated Obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. We define market settlement conventions for Advances as five business days or less and for Consolidated Obligations as thirty calendar days or less, using a next business day convention. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date.
Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in Other Income (Loss) as Net Gains (Losses) on Derivatives and Hedging Activities.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge, to the extent that the hedge is effective, are recorded in OCI and remain a component of capital, until earnings are affected by the variability of thehe cash flows of the hedged transaction. We do not currently have any cash-flow hedges.
For both fair-value and cash-flow hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) is recorded in Other Income (Loss) as Net Gains (Losses) on Derivatives and Hedging Activities.
Accounting for Non-Qualifying Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify or was not designated for hedge accounting, but is an acceptable hedging strategy under our risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in earnings, but not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, we recognize only the net interest settlement and the change in fair value of these derivatives in Other Income (Loss) as Net Gains (Losses) on Derivatives and Hedging Activities with no offsetting fair-valuefair value adjustments for the assets, liabilities, or firm commitments. Cash flows associated with such stand-alone derivatives (derivatives not qualifying as a hedge) are reflected as Net Cash Provided by Operating Activities in the Statement of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. We did not act as an intermediary during 2010, 2009, or 2008.
Accrued Interest Receivables and Payables. The differences between accruals of interest receivables and payables on derivatives designated as fair-value relationshipsqualifying hedges are recognized as adjustments to the income or expense of the designated hedged item. The differences between accruals of interest receivables and payables on intermediated derivatives for members and other derivatives not in designated hedging relationships are recognized in Other Income (Loss) as Net Gains (Losses) on Derivatives and Hedging Activities.
Discontinuance of Hedge Accounting. We discontinue hedge accounting prospectively when: (i) we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; or (iv)(v) we determine that designating the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, we either terminate the derivative or continue to carry the derivative on the Statement of Condition at its estimated fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
When hedge accounting is discontinued because we determineddetermine that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, we continue to carry the derivative on the StatementsStatement of Condition at its estimated fair value and reclassify the related portion in AOCIcumulative OCI adjustment into earnings when earnings are affected by the existing hedgehedged item (i.e., the original forecasted transaction).
Under limited circumstances, when we discontinue cash-flow hedge accounting because it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period, or within the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in AOCI and is recognized as earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within the following two months, the gains and losses that were AOCI are recognized immediately in earnings.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we continue to carry the derivative on the Statement of Condition at its estimated fair value, remove from the Statement of Condition any asset or liability that was recorded to recognize the firm commitment and record it as a gain or loss in earnings.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Embedded Derivatives. We may issue debt, make Advances, or purchase financial instruments in which a derivative instrument is embedded. Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the Advance, debt or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When we determine that (i) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (ii) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at estimated fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract (the host contract and the embedded derivative) is to be measured at estimated fair value, with changes in fair value reported in current-period earnings (such as an investment security classified as trading as well as hybrid financial instruments that are eligible for the fair value option), or if we cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the Statement of Condition at estimated fair value and no portion of the contract is designated as a hedging instrument.
Premises, Software, and Equipment.
We record premises, software, and equipment at cost, less accumulated depreciation and amortization, and compute depreciation and amortization using the straight-line method over the estimated useful lives of assets, which range from one to 40 years. We amortize leasehold and building improvements using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining termlife of the asset. We capitalize improvements and major renewals, but expense ordinary maintenance and repairs when incurred. We include any gain or loss on disposal (other than abandonment) of premises, software, and equipment in Other Income (Loss). Any gain or loss on abandonment of premises, software, and equipment is included in Operating Expenses.
The cost of computer software developed or obtained for internal use, if material, is capitalized and amortized over future periods. At December 31, 2010,2011 and 2009,2010, we had $1,690$2,087 and $1,709,$1,690, respectively, in unamortized computer software costs. Amortization of computer software costs charged to expense was $419, $249$539, $419 and $205$249 for the years ended December 31, 2011, 2010 2009,, and 2008,2009, respectively.
Accumulated Depreciation and Amortization. At December 31, 2010,2011 and 2009,2010, the accumulated depreciation and amortization related to premises, software and equipment was $16,453$17,358 and $15,033,$16,453, respectively.
Depreciation and Amortization Expense. For the years ended December 31, 2011, 2010 2009,, and 2008,2009, the depreciation and amortization expense for premises, software and equipment was $1,420, $1,223$2,357, $1,420, and $1,221,$1,223, respectively.
Consolidated Obligations.
Consolidated Obligations are recorded at amortized cost.cost, adjusted for accretion, amortization, payment of cash, and fair-value hedging.
Discounts and Premiums. We accrete/amortize the discounts and premiums as well as hedging basis adjustments on CO Bonds to CO Bonds Interest Expense using a level-yield methodologythe interest method over the term to maturity of the corresponding CO Bonds.
Concessions. Concessions are paid to dealers in connection with the issuance of certain Consolidated Obligations. The Office of Finance prorates the amount of our concession based upon the percentage of the debt issued that we assume. Concessions paid on Consolidated Obligations not designated under the fair value option are deferred and amortized, using a level-yield methodology,the interest method, over the termsterm to maturity or the estimated liveslife of the corresponding Consolidated Obligations.Obligation. Unamortized concessions are included in Other Assets and the amortization of such concessions is included in CO Bonds Interest Expense.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Mandatorily Redeemable Capital Stock.
We reclassify capital stock from Capital to Liabilities as Mandatorily Redeemable Capital Stock ("MRCS") when a member withdraws from membership or attains non-member status by merger or acquisition, charter termination, relocation or other involuntary termination from membership. The members' shares are then subject to redemption, at which time a five-year redemption period commences, and meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified at estimated fair value which is equal to par value. Dividends declared on shares classified as a Liability are accrued at the expected dividend rate and reported as Interest Expense in the Statement of Income.Expense. The repurchase or redemption of MRCS is reported as a cash outflow in the Financing Activities section of the Statement of Cash Flows.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We reclassify MRCS from Liabilities to Capital when non-members subsequently become members through either acquisition, merger, or election. After the reclassification, dividends declared on that capital stock are no longer classified as Interest Expense.
Restricted Retained Earnings. In 2011 we entered into the JCE Agreement with the other FHLBanks. Under the JCE Agreement, beginning in the third quarter of 2011, we allocate 20% of our quarterly net income to a separate restricted retained earnings account that is presented separately on the Statement of Condition.
Finance Agency and Finance Board Expenses.
The FHLBs funded the costs of operating the Finance Board and fund a portion of the costs of operating the Finance Agency since its creation on July 30, 2008. The Finance Board allocated its operating and capital expenditures to the FHLBs based on each FHLB's percentage of total combined regulatory capital stock plus Retained Earnings through July 29, 2008. The portion of the Finance Agency's expenses and working capital fund not allocated to Freddie Mac and Fannie Mae is allocated among the FHLBsFHLBanks based on the pro rata share of the annual assessments (which are based on the ratio between each FHLB'sFHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLB)FHLBank).
Office of Finance ExpensesExpenses..
The FHLBs are assessed for the costs Effective January 1, 2011 our proportionate share of operating the Office of Finance. The Office of Finance allocates its 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 total Consolidated Obligations outstanding and (ii) one-third based on equal pro-rata allocation.
Prior to January 1, 2011, our allocation of Office of Finance operating and capital expenditures were based equally on each FHLB'sFHLBank's percentage of capital stock, percentage ofthe following components (i) Capital Stock, (ii) Consolidated Obligations issued and percentage of (iii)Consolidated Obligations outstanding.
Assessments.
Affordable Housing Program. The Bank Act requires each FHLBFHLBank to establish and fund an Affordable Housing Program ("AHP,"), which provides providing subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low- to moderate-income households. We charge the required funding for AHP to earnings and establish a liability. We makeissue AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. A discount on the AHP Advance and a charge against the AHP liability are recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP Advance rate and our related cost of funds for comparable maturity funding. The discount on AHP Advances is accreted to Interest Income on Advances using a level-yield methodology over the life of the Advance. As an alternative, we have the authority to make the AHP subsidy available to members as a grant. See Note 14 - Affordable Housing Program for more information.
Resolution Funding Corporation. We areThrough the second quarter of 2011, we were required to make quarterly payments to Resolution Funding Corporation ("REFCORP") to be used to pay a portion of the interest on bonds that were issued by REFCORP. Such obligation to REFCORP is a corporation established by Congress in 1989 to provide funding for the resolution and disposition of insolvent savings institutions.has been satisfied. See Note 15 –- Resolution Funding Corporation for more information.
Subsequent Events.In preparing this Form 10-K, we have evaluated events and considered transactions through the time of filing our 2011 Form 10-K with the SEC.
Note 2 - Recently Adopted and Issued Accounting Guidance
Disclosures about Offsetting Assets and Liabilities.On December 16, 2011 the FASB and the International Accounting Standards Board issued common disclosure requirements intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a company's financial position, whether a company's financial statements are prepared on the basis of GAAP or International Financial Reporting Standards. This guidance will require us to disclose both gross and net information about financial instruments, including derivative instruments, which are either offset on the statement of condition or subject to an enforceable master netting arrangement or similar agreement. This guidance will be effective for interim and annual periods beginning on January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in expanded interim and annual financial statement disclosures, but will not affect our financial condition, results of operations or cash flows.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 2 — Recently Adopted and Issued Accounting Guidance
Accounting for Transfers of Financial Assets.Disclosures about an Employer's Participation in a Multiemployer Plan. On June 12, 2009,September 21, 2011 the Financial Accounting Standards Board ("FASB") issued guidance to enhance disclosures about an employer's participation in a multiemployer pension plan. These disclosures will provide users with the following: (i) additional information about an employer's participation in significant multiemployer plans; (ii) an employer's participation level in these plans, including contributions made and whether contributions exceed 5% of total contributions made to a plan; (iii) the financial health of these plans, including information about funded status and funding improvement plans, as applicable; and (iv) the nature of employer commitments to the plan, including expiration dates of collective bargaining agreements and whether such agreements require minimum plan contributions. Previously, disclosures were limited primarily to the historical contributions made to all multiemployer pension plans. This guidance was effective for annual periods ended after December 15, 2011 and has been applied retrospectively for all prior periods presented. We participate in a multiple-employer pension plan, but follow disclosure requirements for multiemployer pension plans. Our adoption of this guidance has resulted in expanded annual financial statement disclosures, but did not affect our financial condition, results of operations or cash flows. See Note 18 - Employee Retirement and Deferred Compensation Plans for the additional disclosures.
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 intendedrequired to improvepresent the relevance, representational faithfulness,components and comparabilityamount of information thatnet income, the components of other comprehensive income and a reportingtotal for other comprehensive income, as well as a total for comprehensive income. In a two-statement approach, an entity providesis required to present the components and amount of net income in its financial reports about a transferstatement of financial assets;net income. The statement of other comprehensive income should follow immediately and include the effectscomponents 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 shareholders' equity (or statement of capital, in our case). This guidance will be effective as of the beginning of a transfer on its financial position, financial performance,fiscal reporting year, and cash flows;interim periods within that year, that begin after December 15, 2011. Early adoption is permitted. We plan to elect the two-statement approach noted above for interim and a transferor's continuing involvement in transferred financial assets. Key provisions of the guidance included: (i) the removal of the concept of qualifying special purpose entities; (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred;annual periods beginning after December 15, 2011 and (iii) the requirement that to qualify for sale accounting, the transferor must evaluate whether it maintains effective control over the transferred financial assets either directly or indirectly. The guidance also requires enhanced disclosures about transfers of financial assets and a transferor's continuing involvement. We implementedwill apply this guidance asretrospectively for all periods presented in accordance with the guidance. The adoption of January 1, 2010. The implementation didthis guidance will be limited to expanded interim and annual financial statement disclosures and will not have a material effect onaffect our financial condition, results of operations or cash flows.
Accounting for the Consolidation of Variable Interest Entities.On June 12, 2009,December 23, 2011 the FASB issued guidance that is intended to improve financial reporting by enterprises involved with variable interest entities ("VIEs"), by providing more relevant and reliable informationdefer the effective date of the new requirement to financial statement users.separately present reclassifications of items out of AOCI in the income statement. This guidance amends the manner in which entities evaluate whether consolidation is requiredwill be effective for VIEs. An entity must first perform a qualitative analysis in determining whether it must consolidate a VIE,interim and if the qualitative analysis is not determinative, the entity should perform a quantitative analysis. This 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. We implemented this guidance as ofannual periods beginning on January 1, 2010. The implementation did not have a material effect on our financial condition, results2012. We will still be required to adopt the remaining guidance contained in the new accounting standard for the presentation of operations or cash flows.comprehensive income.
Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements. Disclosures.On January 21, 2010 the FASB issued amended guidance for fair value measurements and disclosures. The update Wrequires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore,e adopted this update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3); clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers' disclosures about postretirement benefit plan assets to require that those disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance became effective onas of January 1, 2010 except for therequired disclosures about purchases, sales, issuances, and settlements in the rollforward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning on January 1, 2011, and for interim periods within those fiscal years. In the period of initial implementation, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. We implemented this guidancemeasurements, which we adopted as of January 1, 2010, with the exception2011. The adoption of the required changes noted above related to the rollforward of activity for Level 3 fair value measurements. The implementationthis amended guidance resulted in increasedexpanded interim and annual financial statement disclosures, but did not have any effect on our financial condition, results of operations or cash flows. See Note 19 –20 - Estimated Fair Values for more information.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; this guidance does 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 will be effective for interim and annual periods beginning on January 1, 2012 and will be applied prospectively. Early application by public entities is not permitted. The adoption of this guidance will result in expanded interim and annual financial statement disclosures, but will not have any effect on our financial condition, results of operations or cash flows.
Scope Exception RelatedNotes to Embedded Credit Derivatives.Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Reconsideration of Effective Control for Repurchase Agreements. On March 5, 2010,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. This guidance amends the existing criteria for determining whether or not a transferor has retained effective control over financial assets transferred under a repurchase agreement. A secured borrowing is recorded when effective control over the transferred financial assets is maintained, while a sale is recorded when effective control over the transferred financial assets has not been maintained. 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 will be effective for interim and annual periods beginning on January 1, 2012 and will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance will not have any effect on our financial condition, results of operations or cash flows.
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 was deferred pending further guidance for determining what constitutes a troubled debt restructuring.
On April 5, 2011 the FASB issued guidance to clarify thatwhich debt modifications constitute troubled debt restructurings. This guidance is intended to help creditors determine whether a modification of the only typeterms of embedded credit derivative featurea 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 was effective for interim and annual periods beginning on or after June 15, 2011. As required, we applied the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrumentnew guidance to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. Upontroubled debt restructurings occurring on or after January 1, 2011. The adoption entities are permitted to irrevocably elect the fair value option for any investment in a beneficial interest in a securitized financial asset. Any impairment would be recognized prior to applying the fair value option election. This amended guidance became effective on July 1, 2010, and we implemented this guidance on that date. The implementation of this amended guidance resulted in expanded interim and annual financial statement disclosures but did not have a material effect on our financial condition, results of operations or cash flows. See Note 10 - Allowance for Credit Losses for the additional disclosures.
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 an entity's allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires all public and nonpublic entities withan entity's financing receivables including loans, lease receivables and other long-term receivables, to provide disclosure of the following: (i) the nature of credit risk inherent in financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. Both new and existing disclosures must be
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
disaggregated by portfolio segment or class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Short-term accounts receivable, receivables measured at fair value or at the lower of cost or fair value, and debt securities are exempt from this amended guidance. The required disclosures as of the end of a reporting period arewere effective for interim and annual reporting periods endingended on or after December 31,15, 2010. The required disclosures about activity that occurs during a reporting period arewere effective for interim and annual reporting periods beginning January 1, 2011.on or after December 15, 2010. The implementationadoption of this amended guidance resulted in increasedexpanded interim and annual financial statement disclosures, but did not have any effect on our financial condition, results of operations or cash flows. See disclosures under "Allowance for Credit Losses" in Note 1 – Summary of Significant Accounting Policies and Note 10 –- Allowance for Credit Losses for more information. On January 19, 2011, the FASB issued guidance to temporarily defer the effective date ofadditional disclosures about troubled debt restructurings required by theunder this amended guidance. 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. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
Note 3 —- Cash and Due from Banks
Compensating Balances. We maintain collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 2011 and 2010, were $165,551 and $20091,072, were approximately $1,072 and $1,022, respectively.
In addition, we maintained average required balances with various Federal Reserve Banks of $5,000$5,000 for the years ended December 31, 20112010, and 20092010. These represent average balances required to be maintained over each 14-day reporting cycle; however, we may use earnings credits on these balances to pay for services received from the Federal Reserve Banks.
Pass-through Deposit Reserves. We act as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as Cash and Due from Banks includes pass-through reserves depositedwith the Federal Reserve Banks of $10,034$8,764 and $3,420$10,034 at December 31, 2011 and 2010, and 2009.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 4 —- Securities Purchased Under Agreements to Resell
We periodically hold securities purchased under agreements to resell those securities. These amounts represent short-term loans and are classified as assets in the StatementsStatement of Condition. These securities are held in safekeeping in our name by third-party custodians approved by us. If the market value of the underlying securities decreases below the market value required as collateral, then the counterparty must (i) place an equivalent amount of additional securities in safekeeping in our name or (ii) remit an equivalent amount of cash, or the dollar value of the resale agreement will be decreased accordingly.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 5 —- Available-for-Sale Securities
Major Security Types. The following table presents ourAFS securities include AAA-rated agency debentures issued or guaranteed by Government Sponsored Enterprises ("GSE") but purchased from non-member counterparties. Also included are corporate debentures guaranteed by the Federal Deposit Insurance Corporation ("FDIC") and backed by the full faith and credit of the U.S. government under the Temporary Liquidity Guarantee Program ("TLGP"), as well as private-label residential MBS ("RMBS"). AFS securities were as follows:securities:
| | | | | | | | | | | | | | | | | | | | |
| | | | | OTTI | | Gross | | Gross | | |
| | | Amortized | | Recognized | | Unrealized | | Unrealized | | Estimated |
| December 31, 2010 | | Cost (1) | | in AOCI | | Gains | | Losses | | Fair Value |
| GSE debentures | | $ | 1,771,077 | | | $ | — | | | $ | 163,110 | | | $ | (3,929 | ) | | $ | 1,930,258 | |
| TLGP debentures | | 324,193 | | | — | | | 924 | | | — | | | 325,117 | |
Private-label RMBS (2) | | 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 | |
| | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | |
| GSE debentures | | $ | 1,672,918 | | | $ | — | | | $ | 87,796 | | | $ | — | | | $ | 1,760,714 | |
| TLGP debentures | | — | | | — | | | — | | | — | | | — | |
| Private-label RMBS | | — | | | — | | | — | | | — | | | — | |
| Total AFS securities | | $ | 1,672,918 | | | $ | — | | | $ | 87,796 | | | $ | — | | | $ | 1,760,714 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | OTTI | | Gross | | Gross | | |
| | | Amortized | | Recognized | | Unrealized | | Unrealized | | Estimated |
| December 31, 2011 | | Cost (1) | | in AOCI | | Gains | | Losses | | Fair Value |
| GSE debentures | | $ | 2,011,882 |
| | $ | — |
| | $ | 14,045 |
| | $ | (232 | ) | | $ | 2,025,695 |
|
| TLGP debentures | | 321,175 |
| | — |
| | 1,267 |
| | — |
| | 322,442 |
|
| Private-label RMBS | | 720,583 |
| | (116,364 | ) | | 343 |
| | (3,253 | ) | | 601,309 |
|
| Total AFS securities | | $ | 3,053,640 |
| | $ | (116,364 | ) | | $ | 15,655 |
| | $ | (3,485 | ) | | $ | 2,949,446 |
|
| | | | | | | | | | | |
| December 31, 2010 | | | | | | | | | | |
| GSE debentures | | $ | 1,935,563 |
| | $ | — |
| | $ | 775 |
| | $ | (6,080 | ) | | $ | 1,930,258 |
|
| TLGP debentures | | 324,427 |
| | — |
| | 690 |
| | — |
| | 325,117 |
|
| Private-label RMBS | | 1,051,347 |
| | (75,825 | ) | | 7,019 |
| | — |
| | 982,541 |
|
| Total AFS securities | | $ | 3,311,337 |
| | $ | (75,825 | ) | | $ | 8,484 |
| | $ | (6,080 | ) | | $ | 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), if applicable, and fair valuefair-value hedge accounting adjustments, if applicable. |
| (2)
| Represents the amounts related to the OTTI securities that were transferred from HTM to AFS. See Securities Transferred below for more information.
adjustments. |
Premiums and Discounts. At December 31, 2011 and 2010, the amortized cost of our MBS classified as AFS securities included OTTI credit losses, OTTI-related accretion adjustments, and unamortized purchase premiums and discounts on OTTI securities totaling net purchased premiums totalingdiscounts of $116,699 and $122,173., respectively.
Reconciliations of Amounts in AOCI. Subsequent unrealized gains and losses in the estimated 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 detailsabove to the Net Unrealized Gain (Losses) on AFS Securities.Statement of Condition and AOCI rollforward presentation:
| | | | | | | | |
| Net Unrealized Gains (Losses) on AFS Securities | | December 31, 2010 | | December 31, 2009 |
| Gross Unrealized Gains - GSE debentures | | $ | 163,110 | | | $ | 87,796 | |
| Gross Unrealized Losses - GSE debentures | | (3,929 | ) | | — | |
| Gross Unrealized Gains - TLGP debentures | | 924 | | | — | |
| Less: Fair value hedging gain recognized in earnings | | 164,720 | | | 85,656 | |
| Net Unrealized Gains (Losses) on AFS Securities recognized in AOCI (before derivative and hedging adjustments) | | $ | (4,615 | ) | | $ | 2,140 | |
|
| | | | | | | | |
| Net Unrealized Gains (Losses) on AFS Securities | | December 31,
2011 | | December 31,
2010 |
| Net unrealized gains included in Estimated Fair Value | | $ | 12,170 |
| | $ | 2,404 |
|
| Less: Subsequent net unrealized gains (losses) on previously OTTI securities | | (2,910 | ) | | 7,019 |
|
| Net unrealized gains (losses) on AFS securities recognized in AOCI | | $ | 15,080 |
| | $ | (4,615 | ) |
|
| | | | | | | | |
| Net Non-Credit Portion of OTTI Losses on AFS Securities | | December 31,
2011 | | December 31,
2010 |
| OTTI Recognized in AOCI | | $ | (116,364 | ) | | $ | (75,825 | ) |
| Subsequent net unrealized gains (losses) on previously OTTI securities | | (2,910 | ) | | 7,019 |
|
| Net non-credit portion of OTTI losses on AFS securities | | $ | (119,274 | ) | | $ | (68,806 | ) |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Unrealized Loss Positions. The following table detailspresents impaired AFS securities (i.e., in an unrealized loss position), which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2010.position.
| | | | Less than 12 months | | 12 months or more | | Total | | | | | | | | | | | | | |
| | | | Less than 12 months | | 12 months or more | | Total |
| | | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized |
| December 31, 2011 | | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| Non-MBS: | | | | | | | | | | | | | |
| GSE debentures | | | $ | — |
| | $ | — |
| | $ | 113,361 |
| | $ | (232 | ) | | $ | 113,361 |
| | $ | (232 | ) |
| TLGP debentures | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Non-MBS | | | — |
| | — |
| | 113,361 |
| | (232 | ) | | 113,361 |
| | (232 | ) |
| Private-label RMBS | | | 88,161 |
| | (13,121 | ) | | 495,251 |
| | (106,496 | ) | | 583,412 |
| | (119,617 | ) |
| Total impaired AFS securities | | | $ | 88,161 |
| | $ | (13,121 | ) | | $ | 608,612 |
| | $ | (106,728 | ) | | $ | 696,773 |
| | $ | (119,849 | ) |
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | | | | | | | | | | | |
| December 31, 2010 | | Value | | Losses | | Value | | Losses | | Value | | Losses (1) | | | | | | | | | | | | |
| Non-MBS: | | | | | | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | $ | 103,652 | | | $ | (3,929 | ) | | $ | — | | | $ | — | | | $ | 103,652 | | | $ | (3,929 | ) | | $ | 1,075,827 |
| | $ | (3,841 | ) | | $ | 513,510 |
| | $ | (2,239 | ) | | $ | 1,589,337 |
| | $ | (6,080 | ) |
| TLGP debentures | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Non-MBS | | 103,652 | | | (3,929 | ) | | — | | | — | | | 103,652 | | | (3,929 | ) | | 1,075,827 |
| | (3,841 | ) | | 513,510 |
| | (2,239 | ) | | 1,589,337 |
| | (6,080 | ) |
| Private-label RMBS | | — | | | — | | | 777,955 | | | (75,825 | ) | | 777,955 | | | (75,825 | ) | | — |
| | — |
| | 777,955 |
| | (75,825 | ) | | 777,955 |
| | (75,825 | ) |
| Total impaired AFS securities | | $ | 103,652 | | | $ | (3,929 | ) | | $ | 777,955 | | | $ | (75,825 | ) | | $ | 881,607 | | | $ | (79,754 | ) | | $ | 1,075,827 |
| | $ | (3,841 | ) | | $ | 1,291,465 |
| | $ | (78,064 | ) | | $ | 2,367,292 |
| | $ | (81,905 | ) |
| | |
| (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
($ amounts in thousands unless otherwise indicated)
There were no AFS securities in an unrealized loss position as of December 31, 2009.
Redemption Terms. The amortized cost and estimated fair value of non-MBS AFS securities by contractual maturity are detailedpresented below. MBS are not presented by contractual maturity because their actual maturities will likely differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment fees.
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| | | Amortized | | Estimated | | Amortized | | Estimated | | Amortized | | Estimated | | Amortized | | Estimated |
| Year of Contractual Maturity | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value |
| Due in one year or less | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 321,175 |
| | $ | 322,442 |
| | $ | — |
| | $ | — |
|
| Due after one year through five years | | 324,193 | | | 325,117 | | | — | | | — | | | 941,496 |
| | 950,264 |
| | 324,427 |
| | 325,117 |
|
| Due after five years through ten years | | 1,771,077 | | | 1,930,258 | | | 1,672,918 | | | 1,760,714 | | | 1,070,386 |
| | 1,075,431 |
| | 1,935,562 |
| | 1,930,258 |
|
| Due after ten years | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
|
| Total Non-MBS | | 2,095,270 | | | 2,255,375 | | | 1,672,918 | | | 1,760,714 | | | 2,333,057 |
| | 2,348,137 |
| | 2,259,989 |
| | 2,255,375 |
|
| Total MBS | | 1,051,347 | | | 982,541 | | | — | | | — | | | 720,583 |
| | 601,309 |
| | 1,051,347 |
| | 982,541 |
|
| Total AFS securities | | $ | 3,146,617 | | | $ | 3,237,916 | | | $ | 1,672,918 | | | $ | 1,760,714 | | | $ | 3,053,640 |
| | $ | 2,949,446 |
| | $ | 3,311,336 |
| | $ | 3,237,916 |
|
Interest-Rate Payment Terms. The interest-rate payment terms for AFS securities are detailed below, at amortized cost.
| | | Interest-Rate Payment Terms | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Non-MBS: | | | | | | | | |
| Fixed-rate | | $ | 2,095,270 | | | $ | 1,672,918 | | | $ | 2,333,057 |
| | $ | 2,259,989 |
|
| Variable-rate | | — | | | — | | | — |
| | — |
|
| Total Non-MBS | | 2,095,270 | | | 1,672,918 | | | 2,333,057 |
| | 2,259,989 |
|
| MBS: | | | | | | | | |
| Fixed-rate | | 382,547 | | | — | | | 102,338 |
| | 382,547 |
|
| Variable-rate | | 668,800 | | | — | | | 618,245 |
| | 668,800 |
|
| Total MBS | | 1,051,347 | | | — | | | 720,583 |
| | 1,051,347 |
|
| Total AFS securities, at amortized cost | | $ | 3,146,617 | | | 1,672,918 | | | $ | 3,053,640 |
| | $ | 3,311,336 |
|
At December 31, 2010, and 2009, 84.6% and 100%, respectively, of our fixed-rate AFS were swapped to a floating rate.
Securities Transferred. In the fourth quarter of 2010, we transferred 23 private-label RMBS from HTM to AFS due to management's change in intent to no longer necessarily hold these securities to maturity resulting from a significant deterioration in the creditworthiness of the issuers and other factors. All 23 securities had an OTTI credit loss during 2010, and exhibited other forms of deterioration in creditworthiness throughout the year. At the time of transfer, these securities had an unpaid principal balance of $1,237,826 and a net book value (i.e., amortized cost net of non-credit losses) of $880,960. We sold one of these AFS securities in the fourth quarter of 2010, as described below. The transfer of the remaining 22 securities occurred subsequent to the transfer and sale of that security. Even though the remaining 22 securities are now AFS, as of December 31, 2010, we had no intention to sell these securities, nor are we under any requirement to do so.
Realized Gains and Losses.We recorded proceeds from the sale of one AFS security of $48,268 during the fourth quarter of 2010. As a result of previously recognizing OTTI credit losses of $18,433, we realized a net gain on the sale of that security of $2,396. There were no sales of AFS securities during the years ended December 31, 2009, and 2008.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Securities Transferred. During 2011 and 2010, we elected to transfer certain private-label RMBS from HTM to AFS due to the significant deterioration in the creditworthiness of the issuers and other factors. Such deterioration was evidenced by an OTTI credit loss for these securities during 2011 or 2010. These transfers allow us the option to decide to sell these securities prior to maturity in response to changes in interest rates, changes in prepayment risk, or other factors.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding as of December 31, |
| | | 2011 | | 2010 |
| | | | | | | Gross | | | | | | | | Gross | | |
| | | | | OTTI | | Unrecognized | | | | | | OTTI | | Unrecognized | | |
| | | Amortized | | Recognized | | Holding | | Estimated | | Amortized | | Recognized | | Holding | | Estimated |
| | | Cost | | in AOCI | | Gains (Losses) | | Fair Value | | Cost | | in AOCI | | Gains (Losses) | | Fair Value |
Transferred at December 31, (1) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,051,347 |
| | $ | (203,839 | ) | | $ | 135,033 |
| | $ | 982,541 |
|
| Transferred at September 30, | | 18,134 |
| | (4,312 | ) | | 3,421 |
| | 17,243 |
| | — |
| | — |
| | — |
| | — |
|
| Transferred at June 30, | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Transferred at March 31, | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 18,134 |
| | $ | (4,312 | ) | | $ | 3,421 |
| | $ | 17,243 |
| | $ | 1,051,347 |
| | $ | (203,839 | ) | | $ | 135,033 |
| | $ | 982,541 |
|
| |
(1) | Amounts exclude one security which was transferred in December 2010 and subsequently sold prior to December 31, 2010. This security was transferred with an amortized cost of $45,872 and fair value of $44,252 at the date of transfer. |
Realized Gains and Losses. The following table presents the proceeds, previously recognized OTTI credit losses including accretion, and gross gains and losses related to the sale of six AFS securities in 2011 and one AFS security in 2010. We compute gains and losses on sales of investment securities using the specific identification method.
|
| | | | | | | | | | | | |
| | | December 31, |
| Sales of AFS Securities | | 2011 | | 2010 | | 2009 |
| Proceeds from sale | | $ | 154,675 |
| | $ | 48,268 |
| | $ | — |
|
| | | | | | | |
| Previously recognized OTTI credit losses including accretion | | $ | (29,844 | ) | | $ | (18,433 | ) | | $ | — |
|
| | | | | | | |
| Gross gains | | $ | 7,091 |
| | $ | 2,396 |
| | $ | — |
|
| Gross losses | | (2,847 | ) | | — |
| | — |
|
| Net Realized Gains from Sale of Available-for-Sale Securities | | $ | 4,244 |
| | $ | 2,396 |
| | $ | — |
|
As of December 31, 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
($ amounts in thousands unless otherwise indicated)
Note 6 —- Held-to-Maturity Securities
Major Security Types. The following table presents our HTM securities consist primarily of MBS, ABS, and TLGP debentures. Our MBS include RMBS and our ABS include both manufactured housing and home equity loans. Our MBS and ABS include private-label securities, 23 of which were transferred from HTM to AFS as discussed in Note 5 - Available-for-Sale Securities. Our HTM securities also include state or local housing finance agency obligations, and agency debentures issued by GSEs. Our HTM securities, along with the impact of OTTI, of which a portion is reported in AOCI, were as follows.securities:
| | | | | | | | | | Gross | | Gross | | | | | | | | | | | | | | | |
| | | | | OTTI | | | | Unrecognized | | Unrecognized | | Estimated | | | | | | | | Gross | | Gross | | |
| | | Amortized | | Recognized | | Carrying | | Holding | | Holding | | Fair | | | | OTTI | | | | Unrecognized | | Unrecognized | | Estimated |
| | | | Amortized | | Recognized | | Carrying | | Holding | | Holding | | Fair |
| December 31, 2011 | | | Cost (1) | | In AOCI | | Value (2) | | Gains (3) | | Losses (3) | | Value |
| Non-MBS and ABS: | | | | | | | | | | | | | |
| GSE debentures | | | $ | 268,994 |
| | $ | — |
| | $ | 268,994 |
| | $ | 1,361 |
| | $ | — |
| | $ | 270,355 |
|
| TLGP debentures | | | 1,883,334 |
| | — |
| | 1,883,334 |
| | 2,505 |
| | (45 | ) | | 1,885,794 |
|
| Total Non-MBS and ABS | | | 2,152,328 |
| | — |
| | 2,152,328 |
| | 3,866 |
| | (45 | ) | | 2,156,149 |
|
| MBS and ABS: | | | | | | | | | | | | | |
| Other U.S. obligations -guaranteed RMBS | | | 2,746,474 |
| | — |
| | 2,746,474 |
| | 48,915 |
| | (13,258 | ) | | 2,782,131 |
|
| GSE RMBS | | | 3,511,831 |
| | — |
| | 3,511,831 |
| | 118,839 |
| | (2,537 | ) | | 3,628,133 |
|
| Private-label RMBS | | | 402,464 |
| | — |
| | 402,464 |
| | 227 |
| | (12,143 | ) | | 390,548 |
|
| Manufactured housing loan ABS | | | 16,757 |
| | — |
| | 16,757 |
| | — |
| | (3,482 | ) | | 13,275 |
|
| Home equity loan ABS | | | 2,716 |
| | (392 | ) | | 2,324 |
| | — |
| | (479 | ) | | 1,845 |
|
| Total MBS and ABS | | | 6,680,242 |
| | (392 | ) | | 6,679,850 |
| | 167,981 |
| | (31,899 | ) | | 6,815,932 |
|
| Total HTM securities | | | $ | 8,832,570 |
| | $ | (392 | ) | | $ | 8,832,178 |
| | $ | 171,847 |
| | $ | (31,944 | ) | | $ | 8,972,081 |
|
| | | | | | | | | | | | | | |
| December 31, 2010 | | Cost (1) | | In AOCI | | Value (2) | | Gains (3) | | Losses (3) | | Value | | | | | | | | | | | | |
| Non-MBS and ABS: | | | | | | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | $ | 294,121 | | | $ | — | | | $ | 294,121 | | | $ | 300 | | | $ | (214 | ) | | $ | 294,207 | | | $ | 294,121 |
| | $ | — |
| | $ | 294,121 |
| | $ | 300 |
| | $ | (214 | ) | | $ | 294,207 |
|
| State or local housing finance agency obligations | | — | | | — | | | — | | | — | | | — | | | — | | |
| TLGP debentures | | 2,065,994 | | | — | | | 2,065,994 | | | 4,530 | | | (3 | ) | | 2,070,521 | | | 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 | | | 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 | | |
| 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 | | | 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 | | | 725,493 |
| | (7,056 | ) | | 718,437 |
| | 5,665 |
| | (18,277 | ) | | 705,825 |
|
| Private-label ABS | | 22,188 | | | — | | | 22,188 | | | — | | | (2,477 | ) | | 19,711 | | |
| Manufactured housing loan ABS | | | 18,948 |
| | — |
| | 18,948 |
| | — |
| | (1,083 | ) | | 17,865 |
|
| Home equity loan ABS | | | 3,240 |
| | — |
| | 3,240 |
| | — |
| | (1,394 | ) | | 1,846 |
|
| Total MBS and ABS | | 6,118,768 | | | (7,056 | ) | | 6,111,712 | | | 90,487 | | | (53,536 | ) | | 6,148,663 | | | 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 | | | $ | 8,478,883 |
| | $ | (7,056 | ) | | $ | 8,471,827 |
| | $ | 95,317 |
| | $ | (53,753 | ) | | $ | 8,513,391 |
|
| | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | |
| Non-MBS and ABS: | | | | | | | | | | | | | |
| GSE debentures | | $ | 125,893 | | | $ | — | | | $ | 125,893 | | | $ | 446 | | | $ | — | | | $ | 126,339 | | |
| State or local housing finance agency obligations | | 260 | | | — | | | 260 | | | — | | | — | | | 260 | | |
| TLGP debentures | | 2,067,311 | | | — | | | 2,067,311 | | | 8,407 | | | (26 | ) | | 2,075,692 | | |
| Total Non-MBS and ABS | | 2,193,464 | | | — | | | 2,193,464 | | | 8,853 | | | (26 | ) | | 2,202,291 | | |
| MBS and ABS: | | | | | | | | | | | | | | | | | | | |
| Other U.S. Obligations -guaranteed RMBS | | 865,160 | | | — | | | 865,160 | | | 164 | | | (7,965 | ) | | 857,359 | | |
| GSE RMBS | | 2,136,381 | | | — | | | 2,136,381 | | | 58,880 | | | (2,985 | ) | | 2,192,276 | | |
| Private-label RMBS | | 2,805,348 | | | (324,041 | ) | | 2,481,307 | | | 56,915 | | | (116,891 | ) | | 2,421,331 | | |
| Private-label ABS | | 24,839 | | | — | | | 24,839 | | | — | | | (7,614 | ) | | 17,225 | | |
| Total MBS and ABS | | 5,831,728 | | | (324,041 | ) | | 5,507,687 | | | 115,959 | | | (135,455 | ) | | 5,488,191 | | |
| Total HTM securities | | $ | 8,025,192 | | | $ | (324,041 | ) | | $ | 7,701,151 | | | $ | 124,812 | | | $ | (135,481 | ) | | $ | 7,690,482 | | |
| | |
| (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 related impairmentOTTI recognized in AOCI. |
| |
(3) | Gross unrecognized holding gains (losses) representrepresents the difference between estimated fair value and carrying value. |
Premiums and Discounts. At December 31, 2011 and 2010, the amortized cost of our MBS and ABS HTM securities included credit losses, OTTI-related accretion adjustments, and unamortized purchase premiums and discounts totaling net premiums of $54,153 and $61,001, respectively.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Premiums and Discounts. The following table details the net (discounts) premiums included in the amortized cost of our HTM securities:
| | | | | | | | |
| Net (Discounts) Premiums | | December 31,
2010 | | December 31,
2009 |
| Non-MBS and ABS: | | | | |
| Net purchased premiums | | $ | 2,150 | | | $ | 4,239 | |
| Total Non-MBS and ABS | | 2,150 | | | 4,239 | |
| MBS and ABS: | | | | | | |
| Net purchased premiums | | 62,503 | | | 32,190 | |
| OTTI related credit losses | | (1,143 | ) | | (60,291 | ) |
| OTTI related accretion adjustments | | 34 | | | (1,533 | ) |
| Other - net discounts reclassified into credit losses | | (393 | ) | | (5,142 | ) |
| Total MBS and ABS | | 61,001 | | | (34,776 | ) |
| Total HTM securities, net (discounts) premiums included in amortized cost | | $ | 63,151 | | | $ | (30,537 | ) |
Unrealized Loss Positions. The following tables detailtable presents impaired HTM securities (i.e., in an unrealized loss position), which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2010, and 2009.position.
| | | | Less than 12 months | | 12 months or more | | Total | | | | | | | | | | | | | |
| | | | Less than 12 months | | 12 months or more | | Total |
| | | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized |
| December 31, 2011 | | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses (1) |
| Non-MBS and ABS: | | | | | | | | | | | | | |
| GSE debentures | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| TLGP debentures | | | 224,955 |
| | (45 | ) | | — |
| | — |
| | 224,955 |
| | (45 | ) |
| Total Non-MBS and ABS | | | 224,955 |
| | (45 | ) | | — |
| | — |
| | 224,955 |
| | (45 | ) |
| MBS and ABS: | | | | | | | | | | | | | |
| Other U.S. obligations - guaranteed RMBS | | | 599,050 |
| | (4,477 | ) | | 548,564 |
| | (8,781 | ) | | 1,147,614 |
| | (13,258 | ) |
| GSE RMBS | | | 480,432 |
| | (897 | ) | | 196,632 |
| | (1,640 | ) | | 677,064 |
| | (2,537 | ) |
| Private-label RMBS | | | 57,366 |
| | (677 | ) | | 297,791 |
| | (11,466 | ) | | 355,157 |
| | (12,143 | ) |
| Manufactured housing loan ABS | | | — |
| | — |
| | 13,275 |
| | (3,482 | ) | | 13,275 |
| | (3,482 | ) |
| Home equity loan ABS | | | — |
| | — |
| | 1,845 |
| | (871 | ) | | 1,845 |
| | (871 | ) |
| Total MBS and ABS | | | 1,136,848 |
| | (6,051 | ) | | 1,058,107 |
| | (26,240 | ) | | 2,194,955 |
| | (32,291 | ) |
| Total impaired HTM securities | | | $ | 1,361,803 |
| | $ | (6,096 | ) | | $ | 1,058,107 |
| | $ | (26,240 | ) | | $ | 2,419,910 |
| | $ | (32,336 | ) |
| | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | | | | | | | | | | | |
| December 31, 2010 | | Value | | Losses | | Value | | Losses | | Value | | Losses (1) | | | | | | | | | | | | |
| Non-MBS and ABS: | | | | | | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | $ | 168,779 | | | $ | (214 | ) | | $ | — | | | $ | — | | | $ | 168,779 | | | $ | (214 | ) | | $ | 168,779 |
| | $ | (214 | ) | | $ | — |
| | $ | — |
| | $ | 168,779 |
| | $ | (214 | ) |
| TLGP debentures | | 68,764 | | | (3 | ) | | — | | | — | | | 68,764 | | | (3 | ) | | 68,764 |
| | (3 | ) | | — |
| | — |
| | 68,764 |
| | (3 | ) |
| Total Non-MBS and ABS | | 237,543 | | | (217 | ) | | — | | | — | | | 237,543 | | | (217 | ) | | 237,543 |
| | (217 | ) | | — |
| | — |
| | 237,543 |
| | (217 | ) |
| MBS and ABS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other U.S. Obligations - guaranteed RMBS | | 994,667 | | | (7,849 | ) | | — | | | — | | | 994,667 | | | (7,849 | ) | |
| 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 | ) | | 1,034,990 |
| | (24,933 | ) | | — |
| | — |
| | 1,034,990 |
| | (24,933 | ) |
| Private-label RMBS | | 51,012 | | | (223 | ) | | 546,135 | | | (20,466 | ) | | 597,147 | | | (20,689 | ) | | 51,012 |
| | (223 | ) | | 546,135 |
| | (20,466 | ) | | 597,147 |
| | (20,689 | ) |
| Private-label ABS | | — | | | — | | | 19,711 | | | (2,477 | ) | | 19,711 | | | (2,477 | ) | |
| Manufactured housing loan ABS | | | — |
| | — |
| | 17,865 |
| | (1,083 | ) | | 17,865 |
| | (1,083 | ) |
| Home equity loan ABS | | | — |
| | — |
| | 1,846 |
| | (1,394 | ) | | 1,846 |
| | (1,394 | ) |
| Total MBS and ABS | | 2,080,669 | | | (33,005 | ) | | 565,846 | | | (22,943 | ) | | 2,646,515 | | | (55,948 | ) | | 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 | ) | | $ | 2,318,212 |
| | $ | (33,222 | ) | | $ | 565,846 |
| | $ | (22,943 | ) | | $ | 2,884,058 |
| | $ | (56,165 | ) |
| | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | |
| Non-MBS and ABS: | | | | | | | | | | | | | |
| GSE debentures | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
| TLGP debentures | | 46,263 | | | (26 | ) | | — | | | — | | | 46,263 | | | (26 | ) | |
| Total Non-MBS and ABS | | 46,263 | | | (26 | ) | | — | | | — | | | 46,263 | | | (26 | ) | |
| MBS and ABS: | | | | | | | | | | | | | | | |
| Other U.S. Obligations - guaranteed RMBS | | 746,222 | | | (7,965 | ) | | — | | | — | | | 746,222 | | | (7,965 | ) | |
| GSE RMBS | | 280,660 | | | (2,985 | ) | | — | | | — | | | 280,660 | | | (2,985 | ) | |
| Private-label RMBS | | — | | | — | | | 2,421,331 | | | (384,017 | ) | | 2,421,331 | | | (384,017 | ) | |
| Private-label ABS | | — | | | — | | | 17,225 | | | (7,614 | ) | | 17,225 | | | (7,614 | ) | |
| Total MBS and ABS | | 1,026,882 | | | (10,950 | ) | | 2,438,556 | | | (391,631 | ) | | 3,465,438 | | | (402,581 | ) | |
| Total impaired HTM securities | | $ | 1,073,145 | | | $ | (10,976 | ) | | $ | 2,438,556 | | | $ | (391,631 | ) | | $ | 3,511,701 | | | $ | (402,607 | ) | |
| | |
| (1) | As a result of OTTI accounting guidance, the total unrealized losses on private-label RMBS willmay not agree to the gross unrecognized holding losses on private-label RMBS in the major security types table above. |
Notes to Financial Statements, continued
($ 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 detailedpresented below. ExpectedMBS and ABS are not presented by contractual maturity because their actual maturities of some securities maywill likely differ from contractual maturities becauseas borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| | | | | | | Estimated | | | | | | Estimated | | | | | | Estimated | | | | | | Estimated |
| | | Amortized | | Carrying | | Fair | | Amortized | | Carrying | | Fair | | Amortized | | Carrying | | Fair | | Amortized | | Carrying | | Fair |
| Year of Contractual Maturity | | Cost (1) | | Value (1) | | Value | | Cost (1) | | Value (1) | | Value | | Cost (1) | | Value (2) | | Value | | Cost (1) | | Value (2) | | Value |
| Non-MBS and ABS: | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 306,826 | | | $ | 306,826 | | | $ | 307,306 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,883,334 |
| | $ | 1,883,334 |
| | $ | 1,885,794 |
| | $ | 306,826 |
| | $ | 306,826 |
| | $ | 307,306 |
|
| Due after one year through five years | | 2,053,289 | | | 2,053,289 | | | 2,057,422 | | | 2,193,204 | | | 2,193,204 | | | 2,202,031 | | | 268,994 |
| | 268,994 |
| | 270,355 |
| | 2,053,289 |
| | 2,053,289 |
| | 2,057,422 |
|
| Due after five years through ten years | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Due after ten years | | — | | | — | | | — | | | 260 | | | 260 | | | 260 | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Non-MBS and ABS | | 2,360,115 | | | 2,360,115 | | | 2,364,728 | | | 2,193,464 | | | 2,193,464 | | | 2,202,291 | | | 2,152,328 |
| | 2,152,328 |
| | 2,156,149 |
| | 2,360,115 |
| | 2,360,115 |
| | 2,364,728 |
|
| Total MBS and ABS | | 6,118,768 | | | 6,111,712 | | | 6,148,663 | | | 5,831,728 | | | 5,507,687 | | | 5,488,191 | | | 6,680,242 |
| | 6,679,850 |
| | 6,815,932 |
| | 6,118,768 |
| | 6,111,712 |
| | 6,148,663 |
|
| Total HTM securities | | $ | 8,478,883 | | | $ | 8,471,827 | | | $ | 8,513,391 | | | $ | 8,025,192 | | | $ | 7,701,151 | | | $ | 7,690,482 | | | $ | 8,832,570 |
| | $ | 8,832,178 |
| | $ | 8,972,081 |
| | $ | 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). |
| |
(1)(2)
| Carrying value of HTM securities represents amortized cost after adjustment for non-credit related impairmentOTTI recognized in AOCI. |
Interest-Rate Payment Terms. The interest-rate payment terms for HTM securities are detailed below, at amortized cost:
| | | Interest-Rate Payment Terms | | December 31,
2010 | | December 31,
2009 | | December 31,
2011 | | December 31,
2010 |
| Non-MBS and ABS: | | | | | | | | |
| Fixed-rate | | $ | 25,128 | | | $ | 26,153 | | | $ | — |
| | $ | 25,128 |
|
| Variable-rate | | 2,334,987 | | | 2,167,311 | | | 2,152,328 |
| | 2,334,987 |
|
| Total Non-MBS and ABS | | 2,360,115 | | | 2,193,464 | | | 2,152,328 |
| | 2,360,115 |
|
| MBS and ABS: | | | | | | | | |
| | |
|
| Fixed-rate | | 4,144,344 | | | 4,061,578 | | | 3,501,500 |
| | 4,144,344 |
|
| Variable-rate | | 1,974,424 | | | 1,770,150 | | | 3,178,742 |
| | 1,974,424 |
|
| Total MBS and ABS | | 6,118,768 | | | 5,831,728 | | | 6,680,242 |
| | 6,118,768 |
|
| Total HTM securities, at amortized cost | | $ | 8,478,883 | | | $ | 8,025,192 | | | $ | 8,832,570 |
| | $ | 8,478,883 |
|
Realized Gains and Losses. There were no sales of HTM securities during the years ended December 31, 20102011, or 20092010.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 7 —- 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 intentwhether we intend 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 loss equal to the entire difference between the security's amortized cost basis and its estimated fair value at the Statement of Condition date. For those securities that meet neither of these conditions, we perform ana cash flow analysis to determine whether we expect to recover the entire amortized cost basis of theeach security.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
OTTI Evaluation Process and Results - Private-label RMBS and ABS.
To ensure consistency in the determination of OTTI for private-label RMBS and ABS (including manufactured housing and home equity ABS) among all FHLBs,FHLBanks, the FHLBsFHLBanks enhanced the overall OTTI process in 2009 by implementing a system-wide governance committee and establishing a formal process to determineensure consistency in the key OTTI modeling assumptions used for purposes of our cash flow analyses for substantially all of these securities. We select all of our private-label RMBS and ABS to be evaluated using the FHLBs'FHLBanks' common framework and approved assumptions.assumptions for purposes of OTTI cash flow analysis. For certain private-label RMBS andone immaterial manufactured housing loan ABS for which underlying collateral data is not readily available, alternative procedures, as determined by each FHLBFHLBank, are used to evaluate these securitiesthis security for OTTI (one manufactured housing investment, representing an unpaid principal balance of $19,014 at December 31, 2010, for us).OTTI.
Our evaluation includes estimatinga projection of the cash flows that we are likely to collect based on an assessment of the structure of each security and certain assumptions, some of which are determined based upon other assumptions, such as:
| |
• | the remaining payment terms for the security; |
| |
• | prepayment speeds and 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-rate assumptions. |
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.
Our cash flow analysis uses two third-party models.models to assess whether the entire amortized cost basis of our private-label RMBS will be recovered. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying our securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. described above.
A significant modeling assumption in the first model is the forecast of future housing price changes for the relevant states and core based statistical areas ("CBSA"),CBSAs, which are based upon an assessment of the individual housing markets. CBSA refersCBSAs refer 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 with a population of 10,000 or more people. Our housing price forecast assumes CBSA level current-to-trough home price declines ranging from 1%0% (for those housing markets that are believed to 10%have reached their trough) to 8%. For those markets where further home price declines are anticipated, the declines were projected to occur over the 3- to 9-month period beginning October 1, 2010. Thereafter,2011. From the trough, home prices are projected to recover using one of five different recovery paths that vary by housing market. Under those
The following table presents projected home price recovery paths, home prices are projected to increase within a range of 0% to 2.8% in the firstby year 0% to 3.0% in the second year, 1.5% to 4.0% in the third year, 2.0% to 5.0% in the fourth year, 2.0% to 6.0% in each of the fifth and sixth years, and 2.3% to 5.6% in each subsequent year.at December 31, 2011.
|
| | | | |
| Time Period | | Recovery Range % |
| Year 1 | | 0.0% | – | 2.8% |
| Year 2 | | 0.0% | – | 3.0% |
| Year 3 | | 1.5% | – | 4.0% |
| Year 4 | | 2.0% | – | 5.0% |
| Years 5 and 6 | | 2.0% | – | 6.0% |
| Thereafter | | 2.3% | – | 5.6% |
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 securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
The projected cash flows are based on a number of assumptions and expectations, and therefore the results of these models can vary significantly with changes in assumptions and expectations. The projected cash flows based on the model approach described above reflect the most reasonableour best estimate and include a base case current-to-trough housing price forecast and base case housing price recovery path described in the prior paragraph.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
If our evaluation resultsOTTI - Significant Modeling Assumptions. For those securities that were determined to be OTTI during the year ended December 31, 2011, the following table presents the significant modeling assumptions used to determine the amount of credit loss recognized in earnings during this period as well as the related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. A zero or negative credit enhancement percentage reflects securities which have no remaining credit support from subordinated tranches and are likely to have experienced an actual principal loss. The calculated averages represent the dollar-weighted averages of the private-label RMBS in each category shown. The classification (prime, Alt-A and subprime) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Significant Modeling Assumptions for OTTI private-label RMBS (1) | | Current Credit |
| | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement |
| | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | |
| | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range |
| Year of Securitization | | % | | % | | % | | % | | % | | % | | % | | % |
| Prime: | | | | | | | | | | | | | | | | |
| 2007 | | 6.8 |
| | 5.2 - 8.0 | | 41.4 |
| | 30.7 - 53.6 | | 44.7 |
| | 37.7 - 52.1 | | 4.2 |
| | 0.4 - 9.8 |
| 2006 | | 7.6 |
| | 7.3 - 8.1 | | 22.8 |
| | 21.9 - 24.2 | | 39.9 |
| | 37.2 - 43.8 | | 2.2 |
| | 2.0 - 2.4 |
| 2005 | | 9.2 |
| | 7.5 - 10.1 | | 38.4 |
| | 28.3 - 49.8 | | 42.0 |
| | 35.4 - 48.9 | | 8.2 |
| | 4.9 - 9.7 |
| Total Prime | | 8.0 |
| | 5.2 - 10.1 | | 39.0 |
| | 21.9 - 53.6 | | 43.2 |
| | 35.4 - 52.1 | | 6.0 |
| | 0.4 - 9.8 |
| Alt-A: | | | | | | | | | | | | | | | | |
| 2006 | | 8.8 |
| | 8.8 - 8.8 | | 31.1 |
| | 31.1 - 31.1 | | 44.9 |
| | 44.9 - 44.9 | | 3.9 |
| | 3.9 - 3.9 |
| 2005 | | 8.1 |
| | 6.6 - 13.2 | | 34.1 |
| | 29.5 - 35.5 | | 46.5 |
| | 37.4 - 49.1 | | 0.6 |
| | (0.1) - 3.0 |
| Total Alt-A | | 8.3 |
| | 6.6 - 13.2 | | 33.2 |
| | 29.5 - 35.5 | | 46.0 |
| | 37.4 - 49.1 | | 1.6 |
| | (0.1) - 3.9 |
| Total OTTI private-label RMBS | | 8.0 |
| | 5.2 - 13.2 | | 38.6 |
| | 21.9 - 53.6 | | 43.4 |
| | 35.4 - 52.1 | | 5.7 |
| | (0.1) - 9.8 |
|
| | | | | | | | | | | | | | | | |
| | | Significant Modeling Assumptions for all ABS - Home Equity Loans (1) | | Current Credit |
| | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement |
| | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | |
| | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range |
| Year of Securitization | | % | | % | | % | | % | | % | | % | | % | | % |
| Subprime 2004 and prior | | 11.1 | | 11.1 - 11.1 | | 21.0 | | 21.0 - 21.0 | | 31.2 | | 31.2 - 31.2 | | 100.0 | | 100.0 - 100.0 |
| Total ABS - home equity loans | | 11.1 | | 11.1 - 11.1 | | 21.0 | | 21.0 - 21.0 | | 31.2 | | 31.2 - 31.2 | | 100.0 | | 100.0 - 100.0 |
| |
(1) | Based on the quarterly period of each security's most recent OTTI in 2011. |
OTTI - Monoline Insured. Certain private-label ABS are insured by monoline bond insurers. We performed analyses to assess the financial strength of these monoline bond insurers to establish an expected case regarding the time horizon of the monoline bond insurers' ability to fulfill their financial obligations and provide credit support. The projected time horizon of credit protection provided by an insurer is a function of claims paying resources and anticipated claims in the future. This assumption is referred to as the "burn-out period" and is expressed in months. We own one security insured by MBIA Insurance Corporation (UPB of $1,024) that was OTTI at December 31, 2011 for which we assumed a burn-out period of three months.
OTTI - Credit Loss. In performing the detailed cash flow analysis, we determine the present value of expectedthe cash flows (discountedexpected to be collected, discounted at the security's effective yield) that is less than the amortized cost basis of a security (i.e., a credit loss exists), an OTTI is considered to have occurred.yield. For variable rate and hybrid private-label RMBS, we use the effective interest rate derived from a variable-rate index (e.g., London Interbank Offered Rate ("LIBOR"))one-month LIBOR) plus the contractual spread, plus or minus a fixed spread adjustment when there is an existing discount or premium on the security. As the implied forward curve of the index changes over time, the effective interest rates derived from that index will also change over time.
For those securities for whichIf the present value of expected cash flows is less than the amortized cost basis of a security (i.e., a credit loss exists), an OTTI was determinedis considered to have occurred in any quarter during the year ended occurred.
December 31, 2010Notes to Financial Statements, the following table presents the significant modeling assumptions used to determine the amount of credit loss recognizedcontinued
($ amounts in earnings during this period as well as the related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of the private-label RMBS in each category shown. The classification (prime or Alt-A) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.thousands unless otherwise indicated)
| | | | | | | | | | | | | | | | | | | | |
| | | Significant Modeling Assumptions (1) for OTTI private-label RMBS | | Current Credit |
| | | Prepayment Rates | | Default Rates | | Loss Severities | | Enhancement |
| | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | |
| | | Average | | Range | | Average | | Range | | Average | | Range | | Average | | Range |
| Year of Securitization | | % | | % | | % | | % | | % | | % | | % | | % |
| Prime: | | | | | | | | | | | | | | | | |
| 2007 | | 7.4 | | | 5.8 - 8.5 | | 47.0 | | | 28.9 - 61.4 | | 48.2 | | | 40.3 - 54.3 | | 5.8 | | | 1.3 - 11.6 |
| 2006 | | 8.0 | | | 5.5 - 11.4 | | 23.7 | | | 14.6 - 34.1 | | 36.3 | | | 34.7 - 37.7 | | 5.3 | | | 3.8 - 8.7 |
| 2005 | | 10.6 | | | 8.3 - 11.8 | | 35.3 | | | 26.6 - 45.3 | | 40.2 | | | 35.6 - 46.5 | | 9.2 | | | 5.8 - 10.4 |
| Total Prime | | 8.6 | | | 5.5 - 11.8 | | 39.1 | | | 14.6 - 61.4 | | 43.5 | | | 34.7 - 54.3 | | 6.9 | | | 1.3 - 11.6 |
| Alt-A: | | | | | | | | | | | | | | | | |
| 2006 | | 16.2 | | | 16.2 - 16.2 | | 24.9 | | | 24.9 - 24.9 | | 41.9 | | | 41.9 - 41.9 | | 4.4 | | | 4.4 - 4.4 |
| 2005 | | 10.8 | | | 8.9 - 16.2 | | 40.4 | | | 28.5 - 44.6 | | 40.2 | | | 35.9 - 41.8 | | 4.3 | | | 4.2 - 4.3 |
| Total Alt-A | | 12.8 | | | 8.9 - 16.2 | | 34.8 | | | 24.9 - 44.6 | | 40.9 | | | 35.9 - 41.9 | | 4.3 | | | 4.2 - 4.4 |
| Total OTTI private-label RMBS | | 8.9 | | | 5.5 - 16.2 | | 38.9 | | | 14.6 - 61.4 | | 43.3 | | | 34.7 - 54.3 | | 6.8 | | | 1.3 - 11.6 |
| | |
| (1)
| For the quarter in which the last OTTI was recorded. |
Results of OTTI Evaluation Process - Private-label RMBS and ABS. As a result of our evaluations, duringfor the years ended December 31, 2011, 2010, and 2009, we recognized OTTI credit losses on 23 and 21 private-label RMBS, respectively, after we determined that it was likely that we would not recover the entire amortized cost of each of these securities.
The table below detailspresents the credit losses and net OTTI reclassified to (from) OCI for the years ended December 31, 2011, 2010, and 2009.2009. Securities are classifiedlisted based on the originator's classification at the time of origination or based on the classification by the Nationally Recognized Statistical Rating Organizations ("NRSROs") upon issuance.
| | | | OTTI | | Net OTTI | | Total | | | | | | | |
| | | Related to | | Reclassified | | OTTI | | Total | | Net OTTI | | OTTI |
| For the Year Ended December 31, 2010 | | Credit Loss | | to (from) OCI | | Losses | |
| Private-label RMBS - prime | | $ | 67,539 | | | $ | (46,128 | ) | | $ | 21,411 | | |
| | | | OTTI | | Reclassified | | Related to |
| Year Ended December 31, 2011 | | | Losses | | to (from) OCI | | Credit Loss |
| Private-label RMBS - Prime | | | $ | — |
| | $ | (24,526 | ) | | $ | (24,526 | ) |
| Private-label RMBS - Alt-A | | | (5,028 | ) | | 2,773 |
| | (2,255 | ) |
| Home equity loan ABS - Subprime | | | (422 | ) | | 392 |
| | (30 | ) |
| Total OTTI securities | | | $ | (5,450 | ) | | $ | (21,361 | ) | | $ | (26,811 | ) |
| | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | |
| Private-label RMBS - Prime | | | $ | (21,411 | ) | | $ | (46,128 | ) | | $ | (67,539 | ) |
| Private-label RMBS - Alt-A | | 2,262 | | | 222 | | | 2,484 | | | (2,484 | ) | | 222 |
| | (2,262 | ) |
| Total OTTI securities | | $ | 69,801 | | | $ | (45,906 | ) | | $ | 23,895 | | | $ | (23,895 | ) | | $ | (45,906 | ) | | $ | (69,801 | ) |
| | | | | | | | | | | | | |
| For the Year Ended December 31, 2009 | | | | | | | |
| Private-label RMBS - prime | | $ | 57,156 | | | $ | 341,000 | | | $ | 398,156 | | |
| Year Ended December 31, 2009 | | | | | | | |
| Private-label RMBS - Prime | | | $ | (398,156 | ) | | $ | 341,000 |
| | $ | (57,156 | ) |
| Private-label RMBS - Alt-A | | 3,135 | | | 11,440 | | | 14,575 | | | (14,575 | ) | | 11,440 |
| | (3,135 | ) |
| Total OTTI securities | | $ | 60,291 | | | $ | 352,440 | | | $ | 412,731 | | | $ | (412,731 | ) | | $ | 352,440 |
| | $ | (60,291 | ) |
For the years ended December 31, 2011, 2010, and 2009, we accreted $2,493, $54,820, and $28,399 respectively, of non-credit OTTI from AOCI to the carrying value of HTM securities.
The following table presents a reconciliation of the non-credit losses reclassified to (from) OCI as presented in the Statement of Income.
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| Reconciliation of Non-credit Losses | | 2011 | | 2010 | | 2009 |
| Reclassification of non-credit losses to Other Income (Loss) | | $ | (25,528 | ) | | $ | 22,458 |
| | $ | 374,580 |
|
| Non-credit losses recognized in OCI | | 4,167 |
| | (68,364 | ) | | (22,140 | ) |
| Portion of Impairment Losses Reclassified to (from) Other Comprehensive Income (Loss) | | $ | (21,361 | ) | | $ | (45,906 | ) | | $ | 352,440 |
|
The following table presents a rollforward of the cumulative credit losses. The rollforward excludes accretion of credit losses for securities that have not experienced a significant increase in cash flows.
|
| | | | | | | | | | | | |
| Credit Loss Rollforward | | 2011 | | 2010 | | 2009 |
| Balance at beginning of year | | $ | 110,747 |
| | $ | 60,291 |
| | $ | — |
|
| Additions: | | | | | | |
| Credit losses for which OTTI was not previously recognized | | 30 |
| | 4,243 |
| | 60,291 |
|
| Additional credit losses for which OTTI was previously recognized | | 26,781 |
| | 65,558 |
| | — |
|
| Reductions: | | | | | | |
| Credit losses on securities sold, matured, paid down or prepaid | | (29,847 | ) | | (18,433 | ) | | — |
|
| Significant increases in cash flows expected to be collected, recognized over the remaining life of the securities | | (2,074 | ) | | (912 | ) | | — |
|
| Balance at end of year | | $ | 105,637 |
| | $ | 110,747 |
| | $ | 60,291 |
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
For certain OTTI securities that were previously impaired and subsequently incurred $68,364 and $22,140 of additional credit losses for the years ended December 31, 2010, and 2009, respectively, amounts equal to those losses, up to each security's respective amount in AOCI, were reclassified out of non-credit losses in AOCI. For the years ended December 31, 2010, and 2009, we accreted $54,820 and $28,399, respectively, of non-credit impairment from AOCI to the carrying value of HTM securities. For the years ended December 31, 2010, and 2009, we accreted $4,495 and $1,533, respectively, of credit impairment included in the amortized cost of private-label RMBS to Net Interest Income.
The following table details a rollforward of the cumulative credit losses recognized in Other Income (Loss). The rollforward excludes the portion of OTTI losses that were recognized in OCI.
| | | | | | | | |
| Credit Loss Rollfoward | | 2010 | | 2009 |
| Balance at Beginning of Year | | $ | 60,291 | | | $ | — | |
| Additions: | | | | |
| Credit losses for which OTTI was not previously recognized | | 4,243 | | | 60,291 | |
| Additional credit losses for which OTTI was previously recognized | | 65,558 | | | — | |
| Reductions: | | | | |
| Credit losses on securities sold, matured, paid down or prepaid | | (18,433 | ) | | — | |
| Increases in cash flows expected to be collected, recognized over the remaining life of the securities | | (912 | ) | | — | |
| Balance at End of Year | | $ | 110,747 | | | $ | 60,291 | |
The following table presents the December 31, 20102011, balances and classifications of the securities with OTTI chargeslosses during the year ended December 31, 20102011. The table also detailspresents the balances and classifications of our securities for which an OTTI loss has been recognized during the life of the securities, which represents securities impaired prior to 2010,2011, as well as during 2010.2011. We classify private-label MBSRMBS as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on the classification by the NRSROs upon issuance of the MBS.
| | | | December 31, 2010 | | | | | | | | | | | | | | | |
| | | HTM Securities | | AFS Securities | | December 31, 2011 |
| | | Unpaid | | | | | | Estimated | | Unpaid | | | | Estimated | | HTM Securities | | AFS Securities |
| | | Principal | | Amortized | | Carrying | | Fair | | Principal | | Amortized | | Fair | | | | | | | | Estimated | | | | | | Estimated |
| OTTI During 2010 | | Balance | | Cost | | Value | | Value | | Balance | | Cost | | Value | |
| OTTI During 2011 | | | UPB | | Amortized Cost | | Carrying Value | | Fair Value | | UPB | | Amortized Cost | | Fair Value |
| Private-label RMBS - prime | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,120,505 | | | $ | 1,004,254 | | | $ | 942,999 | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 723,523 |
| | $ | 619,292 |
| | $ | 519,387 |
|
| Private-label RMBS - Alt-A | | — | | | — | | | — | | | — | | | 53,016 | | | 47,093 | | | 39,542 | | | — |
| | — |
| | — |
| | — |
| | 42,141 |
| | 33,934 |
| | 24,273 |
|
| Home equity loan ABS - subprime | | | 1,024 |
| | 981 |
| | 588 |
| | 588 |
| | — |
| | — |
| | — |
|
| Total OTTI securities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,173,521 | | | $ | 1,051,347 | | | $ | 982,541 | | | $ | 1,024 |
| | $ | 981 |
| | $ | 588 |
| | $ | 588 |
| | $ | 765,664 |
| | $ | 653,226 |
| | $ | 543,660 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OTTI Life-to-Date | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Private-label RMBS - prime | | $ | 43,847 | | | $ | 42,345 | | | $ | 35,289 | | | $ | 40,174 | | | $ | 1,120,505 | | | $ | 1,004,254 | | | $ | 942,999 | | | $ | 3,264 |
| | $ | 3,186 |
| | $ | 3,186 |
| | $ | 3,241 |
| | $ | 795,141 |
| | $ | 686,649 |
| | $ | 577,036 |
|
| Private-label RMBS - Alt-A | | — | | | — | | | — | | | — | | | 53,016 | | | 47,093 | | | 39,542 | | | — |
| | — |
| | — |
| | — |
| | 42,141 |
| | 33,934 |
| | 24,273 |
|
| Home equity loan ABS - subprime | | | 1,024 |
| | 981 |
| | 588 |
| | 588 |
| | — |
| | — |
| | — |
|
| Total OTTI securities | | $ | 43,847 | | | $ | 42,345 | | | $ | 35,289 | | | $ | 40,174 | | | $ | 1,173,521 | | | $ | 1,051,347 | | | $ | 982,541 | | | $ | 4,288 |
| | $ | 4,167 |
| | $ | 3,774 |
| | $ | 3,829 |
| | $ | 837,282 |
| | $ | 720,583 |
| | $ | 601,309 |
|
| Total MBS and ABS | | | | $ | 6,118,768 | | | $ | 6,111,712 | | | $ | 6,148,663 | | | | | $ | 1,051,347 | | | $ | 982,541 | | | | | $ | 6,680,242 |
| | $ | 6,679,850 |
| | $ | 6,815,932 |
| | | | $ | 720,583 |
| | $ | 601,309 |
|
| Total securities | | | | $ | 8,478,883 | | | $ | 8,471,827 | | | $ | 8,513,391 | | | | | $ | 3,146,617 | | | $ | 3,237,916 | | | | | $ | 8,832,570 |
| | $ | 8,832,178 |
| | $ | 8,972,081 |
| | | | $ | 3,053,640 |
| | $ | 2,949,446 |
|
OTTI Evaluation Process and Results - All Other AFS and HTM Securities.
The remainder of our AFS and HTM securities have experienced net unrealized losses and a decrease in fair value due to illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets. However, the decline is considered temporary as we expect to recover the entire amortized cost basis on the remaining AFS and HTM securities in unrealized loss positions and neither intend to sell these securities nor consider it more likely than not (i.e., likely) 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
($ amounts in thousands unless otherwise indicated)
Other U.S. Obligations, GSE and TLGP Securities. For other U.S. obligations, non-MBS and MBS GSEs,GSE obligations, and TLGP securities,debentures, we determined that the strength of the issuers' guarantees through direct obligations or support from the U.S.United States government is sufficient to protect us from any losses based on current expectations. As a result, we have determined that, as of December 31, 20102011, all of thesethe gross unrealized losses are temporary.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 8 —- Advances
We offer a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one dayweek to 10 years, but may be up to 30 years. Variable-rate Advances generally have maturities ranging from less than 30 daysone day to 10 years, for which the interest rates reset periodically at a fixed spread to LIBOR or otheranother specified index. At December 31, 2010, and 2009, weWe had Advances (secured loans) outstanding, including AHP Advances (see Note 14 – Affordable Housing Program), with interest rates ranging from 0.16%0.10% to 8.34%, as summarized below.presented below:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Year of Contractual Maturity | | Amount | | WAIR (1) % | | Amount | | WAIR (1) % | | Amount | | WAIR % | | Amount | | WAIR % |
| Overdrawn demand and overnight deposit accounts | | $ | 1,394 | | | 2.50 | | | $ | — | | | — | | | $ | 145 |
| | 2.49 |
| | $ | 1,394 |
| | 2.50 |
|
| Due in 1 year or less | | 2,850,291 | | | 2.81 | | | 5,045,723 | | | 3.65 | | | 2,535,953 |
| | 1.81 |
| | 2,850,291 |
| | 2.81 |
|
| Due after 1 year through 2 years | | 1,784,681 | | | 3.29 | | | 2,842,987 | | | 4.13 | | | 2,413,612 |
| | 2.55 |
| | 1,784,681 |
| | 3.29 |
|
| Due after 2 years through 3 years | | 2,646,696 | | | 3.52 | | | 4,152,585 | | | 4.01 | | | 2,050,525 |
| | 2.63 |
| | 2,646,696 |
| | 3.52 |
|
| Due after 3 years through 4 years | | 1,394,515 | | | 3.09 | | | 2,495,969 | | | 3.70 | | | 2,488,247 |
| | 3.51 |
| | 1,394,515 |
| | 3.09 |
|
| Due after 4 years through 5 years | | 2,565,321 | | | 3.66 | | | 1,003,680 | | | 3.57 | | | 3,357,569 |
| | 2.71 |
| | 2,565,321 |
| | 3.66 |
|
| Thereafter | | 6,394,940 | | | 2.44 | | | 6,168,969 | | | 2.81 | | | 4,922,264 |
| | 2.64 |
| | 6,394,940 |
| | 2.44 |
|
| Total Advances, par value | | 17,637,838 | | | 2.98 | | | 21,709,913 | | | 3.55 | | | 17,768,315 |
| | 2.64 |
| | 17,637,838 |
| | 2.98 |
|
| Unamortized discount on AHP Advances | | (104 | ) | | | | | (156 | ) | | | | |
| Unamortized discount on Advances | | (880 | ) | | | | | (243 | ) | | | | |
| Unamortized discounts on Advances (including AHP) | | | (1,027 | ) | | |
| | (984 | ) | | |
|
| Hedging adjustments | | 489,180 | | | | | | 724,297 | | | | | | 597,456 |
| | |
| | 489,180 |
| | |
|
| Unamortized deferred prepayment fees | | 149,330 | | | | | | 9,093 | | | | | | 202,958 |
| | |
| | 149,330 |
| | |
|
| Total Advances | | $ | 18,275,364 | | | | | | $ | 22,442,904 | | | | | | $ | 18,567,702 |
| | |
| | $ | 18,275,364 |
| | |
|
| | |
| (1)
| Weighted Average Interest Rate. |
We offer Advances to members that provide a member the right, based upon predetermined option exercise dates, to callprepay the Advance prior to maturity without incurring prepayment or termination fees (callable Advances). In exchange for receiving the right to call the Advance on a predetermined call schedule, the member typically pays a higher fixed rate for the Advance relative to an equivalent maturity, non-callable, fixed-rate Advance. If the call option is exercised, replacement funding may be available. Borrowers typically exercise their call options for fixed-rate Advances when interest rates decline or for adjustable-rate Advances when spreads change. OtherAll other Advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to the prepayment of the Advance. At December 31, 20102011, and December 31, 20092010, we had callable Advances outstanding of $3,610,3253,805,175 and $3,494,7813,610,325, respectively.
We offer putable and convertible Advances whichthat contain embedded options. WithUnder the terms of a putable Advance, to a member, we effectively purchase a put option from the member that allows us to put or extinguish the fixed-rate Advance to the member on predetermined exercise dates, and offer, subject to certain conditions, replacement funding at prevailing market rates. Generally, such put options are exercised when interest rates increase. At December 31, 20102011, and December 31, 20092010, we had putable Advances outstanding totaling $2,136,950581,750 and $5,240,5001,018,750, respectively.
Convertible Advances allow us to Under the terms of a convertible Advance, we may convert an Advance from one interest-payment term structure to another. We had no convertible Advances outstanding at December 31, 2011 or 2010, and 2009..
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table detailspresents Advances by the earlier of the year of contractual maturity or next call date and next put date:
| | | | Year of Contractual Maturity or Next Call Date | | Year of Contractual Maturity or Next Put Date | | | | | | | | | |
| | | December 31, | | December 31, | | December 31, | | December 31, | | Year of Contractual Maturity or Next Call Date | | Year of Contractual Maturity or Next Put Date |
| | | 2010 | | 2009 | | 2010 | | 2009 | | December 31,
2011 | | December 31,
2010 | | December 31,
2011 | | December 31,
2010 |
| Overdrawn demand and overnight deposit accounts | | $ | 1,394 | | | $ | — | | | $ | 1,394 | | | $ | — | | | $ | 145 |
| | $ | 1,394 |
| | $ | 145 |
| | $ | 1,394 |
|
| Due in 1 year or less | | 4,301,641 | | | 6,478,573 | | | 3,725,041 | | | 8,075,673 | | | 4,233,303 |
| | 4,301,641 |
| | 2,867,703 |
| | 3,725,041 |
|
| Due after 1 year through 2 years | | 2,684,681 | | | 2,732,487 | | | 1,561,681 | | | 2,763,487 | | | 2,513,612 |
| | 2,684,681 |
| | 2,395,862 |
| | 1,561,681 |
|
| Due after 2 years through 3 years | | 2,606,696 | | | 5,027,585 | | | 2,513,946 | | | 2,034,385 | | | 2,020,525 |
| | 2,606,696 |
| | 2,012,525 |
| | 2,513,946 |
|
| Due after 3 years through 4 years | | 1,347,515 | | | 2,495,969 | | | 1,341,515 | | | 2,232,719 | | | 2,457,247 |
| | 1,347,515 |
| | 2,451,747 |
| | 1,341,515 |
|
| Due after 4 years through 5 years | | 2,480,321 | | | 976,680 | | | 2,343,821 | | | 950,680 | | | 3,416,569 |
| | 2,480,321 |
| | 3,327,569 |
| | 2,343,821 |
|
| Thereafter | | 4,215,590 | | | 3,998,619 | | | 6,150,440 | | | 5,652,969 | | | 3,126,914 |
| | 4,215,590 |
| | 4,712,764 |
| | 6,150,440 |
|
| Total Advances, par value | | $ | 17,637,838 | | | $ | 21,709,913 | | | $ | 17,637,838 | | | $ | 21,709,913 | | | $ | 17,768,315 |
| | $ | 17,637,838 |
| | $ | 17,768,315 |
| | $ | 17,637,838 |
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table detailspresents interest-rate payment terms and contractual maturity dates for Advances:
| | | Interest-Rate Payment Terms | | December 31,
2010 | | December 31,
2009 | | December 31,
2011 | | December 31,
2010 |
| Fixed-rate | | | | | | | | |
| Due in one year or less | | $ | 2,143,534 | | | $ | 4,476,622 | | | $ | 1,666,587 |
| | $ | 2,143,534 |
|
| Due after one year | | 11,619,903 | | | 13,497,940 | | | 12,509,867 |
| | 11,619,903 |
|
| Total fixed-rate | | 13,763,437 | | | 17,974,562 | | | 14,176,454 |
| | 13,763,437 |
|
| Variable-rate | | | | | | | | |
| Due in one year or less | | 708,151 | | | 569,101 | | | 869,511 |
| | 708,151 |
|
| Due after one year | | 3,166,250 | | | 3,166,250 | | | 2,722,350 |
| | 3,166,250 |
|
| Total variable-rate | | 3,874,401 | | | 3,735,351 | | | 3,591,861 |
| | 3,874,401 |
|
| Total Advances, par value | | $ | 17,637,838 | | | $ | 21,709,913 | | | $ | 17,768,315 |
| | $ | 17,637,838 |
|
At December 31, 2010, and 2009, 78.8% and 76.4%, respectively, of our fixed-rate Advances were swapped to a floating rate, and 0.3% and 0.0%, respectively, of our variable-rate Advances were swapped to a different variable rate index.
Prepayment Fees.When a borrower prepays an Advance, which generally occurs when interest rates decline (fixed-rate Advances) or spreads change (variable-rate Advances), we could suffer lower future income will be lower if the principal portion of the prepaid Advance is reinvested in lower-yielding assets that continue to be funded by higher-costing debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an Advance. We recordfee. For the years ended December 31, 2011, 2010, and 2009, Advance prepayment fees received from borrowers on prepaid Advances net ofexcluding any associated hedging basis adjustments on those Advances. These fees are reflectedthat were recorded in the Statements of Income as Interest Income either immediately (as Prepayment Fees on Advances) or overAdvances at the time (as Interest Income on Advances) as further described below. Gross Advanceof the prepayment fees received from borrowers (i.e., excluding any associated hedging basis adjustments) were $46,164, $39,930, and $773 during the years ended 2010$14,346, 2009$46,164, and $200839,930, respectively.
In cases in which we fund a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance and the Advance meets the accounting criteria to qualify as a modification of the prepaid Advance, the net prepayment fee on the prepaid Advance is deferred, recorded in the basis of the modified Advance, and amortized into Interest Income over the life of the modified Advance using the level-yield method. We deferred $152,139, $3,648, and $0 of the gross Advance prepayment fees duringFor the years ended December 31, 2011, 2010, and 2009, we deferred $88,522, $152,139, and $20083,648, respectively, to be recognized in Interest Income inof these gross Advance prepayment fees. In certain cases, these prepayment fees are not collected at the future.time of the Advance modification, but rather, over the modified Advance's contractual life through an off-market contractual coupon.
Credit Risk Exposure and Security Terms. We lend to financial institutions involved in housing finance within our district according to Federal statutes, including the Bank Act. The Bank Act requires each FHLBFHLBank to hold, or have access to, sufficient collateral to fully secure its Advances.
Notes to Financial StatementsAt December 31, 2011 and 2010, continued
($ amounts in thousands unless otherwise indicated)
At December 31, 2010, and 2009, we had $5.5a total of $8.0 billion and $8.4$5.5 billion, respectively, of Advances outstanding, at par, to single borrowers with balances that were greater than or equal to $1 billion for a single borrower.$1.0 billion. These Advances, were made to two and four borrowers, respectively, representing 31.1%45% and 38.6%31%, respectively, of total Advances outstanding.outstanding, at par, on those dates, were made to four and two borrowers, respectively. At December 31, 2011 and 2010, and 2009, we held $10.913.1 billion and $$17.210.9 billion unpaid principal balance, respectively, of UPB of collateral respectively, to cover the Advances to these institutions.
We have the policies and procedures in place tothat we believe appropriately manage credit risk. Such policies and procedures include requirements for physical possession or control of pledged collateral, restrictions on borrowing, verifications of collateral and continuous monitoring of borrowings and the borrower's financial condition and creditworthiness. We expect to collect all amounts due according to the contractual terms of our Advances, based on the collateral pledged to us as security for Advances, our credit analyses of our members' financial condition and our credit extension and collateral policies. For information related to our credit risk on Advances and allowance for credit losses, see Note 10 –- Allowance for Credit Losses.Losses.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 9 —- Mortgage Loans Held for Portfolio
ThroughMortgage Loans Held for Portfolio consist of conventional and government-guaranteed or -insured loans acquired through the MPP, we holdwhich includes the original program and MPP Advantage. We purchase single-family mortgage loans through our MPP that are purchased fromoriginated or acquired by PFIs. These loans are primarily serviced by PFIs or an approved mortgage servicer. These mortgage loans are credit-enhanced as described belowby PFIs or are guaranteed or insured by Federal agencies. We are authorized to hold AMA, such as assets acquired under the MPP.
The following tables detailpresent information on Mortgage Loans Held for Portfolio:
| | Mortgage Loans Held for Portfolio by Term | | December 31,
2010 | | December 31,
2009 | |
| | By Term | | | December 31,
2011 | | December 31,
2010 |
Fixed-rate medium-term (1) mortgages | | $ | 928,797 | | | $ | 1,068,593 | | | $ | 835,737 |
| | $ | 928,797 |
|
Fixed-rate long-term (2) mortgages | | 5,735,744 | | | 6,188,534 | | | 5,079,166 |
| | 5,735,744 |
|
| Total Mortgage Loans Held for Portfolio, unpaid principal balance | | 6,664,541 | | | 7,257,127 | | |
| Total Mortgage Loans Held for Portfolio, UPB | | | 5,914,903 |
| | 6,664,541 |
|
| Unamortized premiums | | 61,181 | | | 39,907 | | | 55,682 |
| | 61,181 |
|
| Unamortized discounts | | (30,592 | ) | | (36,062 | ) | | (16,971 | ) | | (30,592 | ) |
| Hedging adjustments | | 7,946 | | | 10,923 | | | 4,828 |
| | 7,946 |
|
| Allowance for credit losses, net | | (500 | ) | | — | | |
| Allowance for loan losses | | | (3,300 | ) | | (500 | ) |
| Total Mortgage Loans Held for Portfolio | | $ | 6,702,576 | | | $ | 7,271,895 | | | $ | 5,955,142 |
| | $ | 6,702,576 |
|
| | |
| (1) | Medium-term is defined as an original term of 15 years or less. |
| |
(2) | Long-term is defined as an original term greater than 15 years. |
| | | | | | | | |
| Mortgage Loans Held for Portfolio by Type | | December 31,
2010 | | December 31,
2009 |
| Conventional | | $ | 5,653,969 | | | $ | 6,667,919 | |
Federal Housing Administration ("FHA") | | 1,010,572 | | | 589,208 | |
| Total Mortgage Loans Held for Portfolio, unpaid principal balance | | $ | 6,664,541 | | | $ | 7,257,127 | |
|
| | | | | | | | |
| By Type | | December 31,
2011 | | December 31,
2010 |
| Conventional | | $ | 4,895,073 |
| | $ | 5,653,969 |
|
| FHA | | 1,019,830 |
| | 1,010,572 |
|
| Total Mortgage Loans Held for Portfolio, UPB | | $ | 5,914,903 |
| | $ | 6,664,541 |
|
The conventional mortgage loans under the MPP are supported by some combination of primary mortgage insurance ("PMI"), SMI, and the LRA, in addition to the associated property as collateral. The LRA is funded either up front as a reduction to the purchase proceeds or through a portion of the net interest remitted monthly by the member. The LRA funds, to the extent available, are used to offset any losses that may occur. Where applicable, a portion of the periodic interest payments on the loans is used to pay the premium on SMI. When a credit loss occurs on an MPP pool, the accumulated LRA for that pool is used to cover the credit loss in excess of homeowners' equity and PMI until the LRA is exhausted. After the LRA is exhausted, pools covered by SMI are protected against credit losses down to approximately 50% of the property's original value subject to, in certain cases, an aggregate stop-loss provision in the SMI policy. LRA funds not used are returned to the member (or to the group of members participating in an aggregate MPP pool) over time. In November 2010, the Bank began offering an MPP replacement product (MPP Advantage), which eliminated the SMI policy coverage and replaced it with a supplemental LRA account.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table details the changes in the LRA:
| | | | | | | | |
| LRA Activity | | 2010 | | 2009 |
| Balance of LRA at beginning of year | | $ | 23,754 | | | $ | 21,892 | |
| Additions | | 4,738 | | | 5,352 | |
| Claims | | (6,526 | ) | | (2,193 | ) |
| Scheduled distributions | | (825 | ) | | (1,297 | ) |
| Balance of LRA at end of year | | $ | 21,141 | | | $ | 23,754 | |
For information related to our credit risk on mortgage loans and allowance for credit losses, see Note 10 – Allowance for Credit Losses.Losses.
Note 10 —- Allowance for Credit Losses
We have established an allowance methodology for each of our portfolio segments: credit products; government-guaranteed or insured-insured Mortgage Loans Held for Portfolio; conventional Mortgage Loans Held for Portfolio; term securities purchased under agreements to resell; and term federal funds sold.
Credit ProductsProducts..
We manage our credit exposure to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with conservative collateral/lending policies to limit the risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to our members in accordance with federal statutes and Finance Agency regulations. Specifically, we comply with the Bank Act, which requires weus to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. We accept certain investment securities, residential mortgage loans, deposits, and other real estate relatedestate-related assets as collateral. In addition, certain members that qualify as community financial institutionsCFIs are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans. Our capital stock owned by our members is also pledgedavailable as collateral.additional security. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the borrower. We can call for additional or substitute collateral to protect our security interest. We believe that these policies effectively manage our respective credit risk from credit products.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Based upon the financial condition of the member, we either allow a member to retain physical possession of theits collateral assignedthat is pledged to it,us, or require the member to specifically assign orand place physical possession of the collateral with us or our safekeeping agent. We also perfect our security interest in all pledged collateral. The Bank Act affords any security interest granted to us by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest. We also perfect our security interest in the collateral by filing Uniform Commercial CodeUCC financing statements with the appropriate governmental authorities against all member borrowers and any affiliates that also provide collateral for a member, except in some cases when collateral is otherwise perfected through physical possession.
Using a risk-based approach and taking into consideration each member's financial strength, we consider the quality of the collateral pledged and the borrower's financial condition to be indicators of credit quality on the borrower's credit products. At December 31, 2011 and 2010, and 2009, we had rights to collateral on a member-by-member basis with an estimated value in excess of our outstanding extensions of credit.
We continue to evaluate and make changes to our collateral guidelines, as necessary, based on current market conditions. At December 31, 2011 and 2010, and 2009, we did not have any credit products that were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during 2010,2011 and 2009.2010.
Based upon the collateral held as security, our credit extension and collateral policies, our credit analysis and the repayment history on credit products, we have determined that there were no probable credit losses on credit products for the years ended December 31, 2010, 2009, and 2008. Accordingly, we have not recorded any allowance for credit losses aton credit products. At December 31, 2011 and 2010, and 2009, nor was ano liability recorded to reflect an allowance for credit losses for off-balance sheet credit exposures as of December 31, 2010, or 2009.was recorded. For additional information on off-balance sheet credit exposure, see Note 20 –21 - Commitments and Contingencies.
Notes to Financial StatementsContingencies, continued.
($ amounts in thousands unless otherwise indicated)
Mortgage Loans –- Government-guaranteedGovernment-Guaranteed or Insured.
We invest in government-guaranteed or insured fixed-rate government mortgage loans, which are secured by one-to-four family residential properties and insured or guaranteed by the FHA. The servicer provides and maintains insurance or a guaranty from the FHA. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government mortgage loans. Any losses from such loans are expected to be recovered. Any losses fromincurred on such loans that are not recovered from the issuer or the guarantor are absorbed by the servicers.servicer. Therefore, there is nowe only have credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. Based upon our assessment of our servicers, we did not establish an allowance for loancredit losses onfor government-guaranteed or insured-insured mortgage loans.loans at December 31, 2011 or 2010. Further, due to the government guarantee or insurance, these mortgage loans are not placed on non-accrual status.
Mortgage Loans –- Conventional.
The allowance for conventional loans is determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for loan losses consists of reviewing homogeneous pools of residential mortgage loans.
Our allowance for loan losses factors inis based on our best estimate of probable losses over the loss emergence period, which we have estimated to be 12 months. We use the MPP portfolio's delinquency migration to determine whether a loss event is probable. Once a loss event is deemed to be probable, we utilize a systematic methodology that incorporates all credit enhancements associated with conventional mortgage loans underand servicer advances to establish the MPP. Specifically, the determinationallowance for loan losses. Our methodology also incorporates a calculation of the allowance generally factors in PMI, SMI, and LRA, including pooled LRA for those members participating in an aggregate MPP pool. Any incurredpotential effect of various adverse scenarios on the allowance. We assess whether the likelihood of incurring the losses that would be recoveredresulting from the credit enhancements are not reserved as partadverse scenarios during the next 12 months is probable. As a result of our methodology, our allowance for loan losses.losses reflects our best estimate of the inherent losses in our MPP portfolio (including MPP Advantage).
Collectively Evaluated Mortgage Loans. The measurement of our allowance for loan losses includes evaluating (i) homogeneous pools of delinquent residential mortgage loans; (ii) any remaining exposure to loans paid in full by the servicers; and (iii) the current portion of the loan portfolio. Our credit riskloan loss analysis includes collectively evaluating conventional loans for impairment within each pool purchased under the MPP. This credit riskloan loss analysis considers MPP pool-specific attribute data, estimated liquidation value of real estate collateral held, estimated costs associated with maintaining and disposing of the collateral, and incorporates credit enhancements.
Rollforward Delinquency reports, including foreclosed properties, provided monthly by the SMI providers, are used to determine the population of Allowance for Loan Losses on Mortgage Loans. As of December 31, 2010, we determined that anloans incorporated into the quarterly allowance for loan lossesloss analysis. Monthly remittance reports are monitored by management to determine the population of $500 should be established for our conventional mortgagedelinquent loans collectively evaluated for impairment. We did not have any allowance for loan losses as of December 31, 2009.reported by SMI providers.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Individually Evaluated Mortgage Loans. Certain conventional mortgage loans that are impaired, primarily troubled debt restructurings, although not considered collateral dependent, may be specifically identified for purposes of calculating the allowance for loan losses. The estimated loan losses on impaired loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual loan basis. The measurement of our allowance for loans individually evaluated for loan loss considers loan-specific attribute data similar to loans reviewed on a collective basis. The resulting incurred loss, if any, is equal to the estimated cost associated with maintaining and disposing of the property (which includes the UPB, interest owed on the delinquent loan to date, and estimated costs associated with disposing the collateral) less the estimated fair value of the collateral (net of estimated selling costs) and the amount of other credit enhancements including the PMI, LRA and SMI.
Non-accrual Loans. We place a conventional mortgage loan on non-accrual status if it is determined that either (i) the collection of interest or principal is doubtful, or (ii) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements and monthly settlements on a scheduled/scheduled basis).
Rollforward of Allowance for Loan Losses on Mortgage Loans. The tables below present a rollforward of our allowance for loan losses on conventional mortgage loans, the allowance for loan losses by impairment methodology, and the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net of deferred loan fees or costs, unamortized premiums or discounts (which may include the basis adjustment related to any gain or loss on a delivery commitment prior to being funded) and direct write-downs. The recorded investment is not net of any valuation allowance.
|
| | | | | | | | | | | | |
| Rollforward of Allowance | | 2011 | | 2010 | | 2009 |
| Allowance for loan losses on mortgage loans, beginning of the year | | $ | 500 |
| | $ | — |
| | $ | — |
|
| Charge-offs | | (2,100 | ) | | — |
| | — |
|
| Provision (reversal) for loan losses | | 4,900 |
| | 500 |
| | — |
|
| Allowance for loan losses on mortgage loans, end of the year | | $ | 3,300 |
| | $ | 500 |
| | $ | — |
|
|
| | | | | | | | |
| Allowance for Loan Losses | | December 31, 2011 | | December 31, 2010 |
| Conventional loans collectively evaluated for impairment | | $ | 3,291 |
| | $ | 500 |
|
Conventional loans individually evaluated for impairment (1) | | 9 |
| | — |
|
| Total allowance for loan losses | | $ | 3,300 |
| | $ | 500 |
|
| | | | | |
| Recorded Investment | | | | |
| Conventional loans collectively evaluated for impairment | | $ | 4,934,077 |
| | $ | 5,690,652 |
|
| Conventional loans individually evaluated for impairment - impaired, with or without a related allowance | | 2,496 |
| | — |
|
| Total recorded investment | | $ | 4,936,573 |
| | $ | 5,690,652 |
|
| |
(1) | We did not have any loans individually evaluated for impairment as of December 31, 2010. |
Credit Enhancements. Our allowance for loan losses considers the credit enhancements associated with conventional mortgage loans under the MPP, which includes the original program and MPP Advantage. Any estimated losses that would be recovered from the credit enhancements are not reserved as part of our allowance for loan losses. The credit enhancements are applied to the estimated losses in the following order: any remaining borrower's equity, any applicable PMI up to coverage limits, any available funds remaining in the LRA, and any SMI coverage up to the policy limits. Since we would bear any remaining loss, an estimate of the remaining loss is included in our allowance for loan losses.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table presents the impact of credit enhancements on the allowance:
|
| | | | | | | | |
| | | December 31,
2011 | | December 31,
2010 |
| Estimated losses remaining after borrower's equity, before credit enhancements | | $ | (49,349 | ) | | $ | (42,980 | ) |
| Portion of estimated losses recoverable from PMI | | 6,570 |
| | 6,277 |
|
Portion of estimated losses recoverable from LRA | | 11,659 |
| | 13,749 |
|
| Portion of estimated losses recoverable from SMI | | 27,820 |
| | 22,454 |
|
| Allowance for loan losses | | $ | (3,300 | ) | | $ | (500 | ) |
The LRA is funded either up front as a portion of the purchase proceeds or through a portion of the net interest remitted monthly by the borrower. The LRA is a lender-specific account funded in an amount approximately sufficient to cover expected losses on the pool of mortgages. The LRA funds are then used to offset any actual losses that occur. The LRA is released in accordance with the terms of the MCC. Typically after five years, any excess funds in the LRA over required balances are distributed to the member (or to the group of members participating in an aggregate MPP pool) in accordance with a step-down schedule that is established at the time of an MCC.
The LRA is recorded in Other Liabilities in the Statement of Condition. The following table presents the changes in the LRA:
|
| | | | | | | | |
| LRA Rollforward | | 2011 | | 2010 |
| Balance at beginning of year | | $ | 21,896 |
| | $ | 24,104 |
|
| Additions | | 9,522 |
| | 4,738 |
|
| Claims paid | | (7,183 | ) | | (6,121 | ) |
| Distributions | | (827 | ) | | (825 | ) |
| Balance at end of year | | $ | 23,408 |
| | $ | 21,896 |
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans (movement of loans through the various stages of delinquency), non-accrual loans, and loans in process of foreclosure, and impaired loans.foreclosure. The tabletables below summarizespresent our key credit quality indicators for mortgage loans at December 31, 2011 and 2010:
| | Credit Quality Indicators | | December 31, 2010 | |
| Mortgage Loans Held for Portfolio | | Conventional Loans | | FHA Loans | | Total | |
|
Mortgage Loans Held for Portfolio as of December 31, 2011 | | | Conventional Loans | | FHA Loans | | Total |
| Past due 30-59 days delinquent | | $ | 87,520 | | | $ | 39,155 | | | $ | 126,675 | | | $ | 77,722 |
| | $ | 50,969 |
| | $ | 128,691 |
|
| Past due 60-89 days delinquent | | 30,568 | | | 5,819 | | | 36,387 | | | 32,522 |
| | 9,064 |
| | 41,586 |
|
| Past due 90 days or more delinquent | | 127,449 | | | 914 | | | 128,363 | | | 122,960 |
| | 6,362 |
| | 129,322 |
|
| Total past due | | 245,537 | | | 45,888 | | | 291,425 | | | 233,204 |
| | 66,395 |
| | 299,599 |
|
| Total current loans | | 5,445,115 | | | 994,744 | | | 6,439,859 | | | 4,703,369 |
| | 980,033 |
| | 5,683,402 |
|
Total mortgage loans, recorded investment (1) | | 5,690,652 | | | 1,040,632 | | | 6,731,284 | | | 4,936,573 |
| | 1,046,428 |
| | 5,983,001 |
|
| Unamortized premiums and discounts | | (5,732 | ) | | (24,857 | ) | | (30,589 | ) | |
| Net unamortized premiums | | | (17,102 | ) | | (21,609 | ) | | (38,711 | ) |
| Hedging adjustments | | (6,701 | ) | | (1,245 | ) | | (7,946 | ) | | (3,786 | ) | | (1,042 | ) | | (4,828 | ) |
| Accrued interest receivable | | (24,250 | ) | | (3,958 | ) | | (28,208 | ) | | (20,612 | ) | | (3,947 | ) | | (24,559 | ) |
| Total Mortgage Loans Held for Portfolio, unpaid principal balance | | $ | 5,653,969 | | | $ | 1,010,572 | | | $ | 6,664,541 | | |
| Total Mortgage Loans Held for Portfolio, UPB | | | $ | 4,895,073 |
| | $ | 1,019,830 |
| | $ | 5,914,903 |
|
| | | | | | | | | | | | | |
| Other delinquency statistics | | | | | | | |
In process of foreclosure, included above (2) | | $ | 85,803 | | | $ | — | | | $ | 85,803 | | |
Serious delinquency rate (3) | | 2.24 | % | | 0.09 | % | | 1.91 | % | |
| Past due 90 days or more still accruing interest | | $ | 127,449 | | | $ | 914 | | | $ | 128,363 | | |
| Other delinquency statistics as of December 31, 2011 | | | | | | | |
In process of foreclosure, included above (1) | | | $ | 84,757 |
| | $ | — |
| | $ | 84,757 |
|
Serious delinquency rate (2) | | | 2.49 | % | | 0.61 | % | | 2.16 | % |
Past due 90 days or more still accruing interest (3) | | | $ | 122,918 |
| | $ | 6,362 |
| | $ | 129,280 |
|
| Loans on non-accrual status | | — | | | — | | | — | | | 239 |
| | — |
| | 239 |
|
| Troubled debt restructurings | | — | | | — | | | — | | |
| | | | | | | | |
Mortgage Loans Held for Portfolio as of December 31, 2010 | | | | | | | |
| Past due 30-59 days delinquent | | | $ | 87,520 |
| | $ | 39,155 |
| | $ | 126,675 |
|
| Past due 60-89 days delinquent | | | 30,568 |
| | 5,819 |
| | 36,387 |
|
| Past due 90 days or more delinquent | | | 127,449 |
| | 914 |
| | 128,363 |
|
| Total past due | | | 245,537 |
| | 45,888 |
| | 291,425 |
|
| Total current loans | | | 5,445,115 |
| | 994,744 |
| | 6,439,859 |
|
Total mortgage loans, recorded investment | | | 5,690,652 |
| | 1,040,632 |
| | 6,731,284 |
|
| Net unamortized premiums | | | (5,732 | ) | | (24,857 | ) | | (30,589 | ) |
| Hedging adjustments | | | (6,701 | ) | | (1,245 | ) | | (7,946 | ) |
| Accrued interest receivable | | | (24,250 | ) | | (3,958 | ) | | (28,208 | ) |
| Total Mortgage Loans Held for Portfolio, UPB | | | $ | 5,653,969 |
| | $ | 1,010,572 |
| | $ | 6,664,541 |
|
| | | | | | | | |
| Other delinquency statistics as of December 31, 2010 | | | | | | | |
In process of foreclosure, included above (1) | | | $ | 85,803 |
| | $ | — |
| | $ | 85,803 |
|
Serious delinquency rate (2) | | | 2.24 | % | | 0.09 | % | | 1.91 | % |
Past due 90 days or more still accruing interest (3) | | | $ | 127,449 |
| | $ | 914 |
| | $ | 128,363 |
|
| Loans on non-accrual status | | | — |
| | — |
| | — |
|
| | |
| (1) | The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance. |
| (2)
| Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. Loans in process of foreclosure are included in past due categories depending on their delinquency status. |
| |
(3)(2)
| Loans that areRepresents loans 90 days or more past due or(including loans in the process of foreclosureforeclosure) expressed as a percentage of the total loan portfolio class recorded investment.investment in mortgage loans. |
| |
(3) | Although our past due scheduled/scheduled loans are classified as loans past due 90 days or more based on the mortgagee's payment status, we do not consider these scheduled/scheduled loans to be non-accrual. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Real Estate Owned. We did not have any MPP loans classified as real estate owned at December 31, 2011 or 2010, as the servicers foreclose in their name and then generally pay off the delinquent loans at the completion of the foreclosure or liquidate the foreclosed properties. Subsequently, the servicers may submit claims to us for any losses, which are incorporated in the determination of our allowance for loan losses.
Troubled Debt Restructurings. Troubled debt restructurings related to mortgage loans are considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been otherwise considered. Although we do not participate in government-sponsored loan modification programs, we do consider certain conventional loan modifications to be a troubled debt restructuring when the modification agreement permits the recapitalization of past due amounts, generally up to the original loan amount. Under this type of modification, no other terms of the original loan are modified, except for the contractual maturity date on a case by case basis. In no event does the borrower's original interest rate change.
A loan considered to be a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses.
The table below summarizes our key credit quality indicators for mortgage loans at presents the recorded investment on the performing and non-performing portions of these troubled debt restructurings. There were no troubled debt restructurings in the year ended December 31, 2009:2010.
| | | | |
| Credit Quality Indicators | | December 31, 2009 |
| Mortgage Loans Held for Portfolio, net | | $ | 7,271,895 | |
| Unpaid principal balance of non-accrual mortgage loans held for portfolio | | — | |
| Unpaid principal balance of mortgage loans held for portfolio past due 30-89 days and still accruing interest | | 169,135 | |
| Unpaid principal balance of mortgage loans held for portfolio past due 90 days or more and not in process of foreclosure, still accruing interest | | 124,325 | |
| Unpaid principal balance of loans in process of foreclosure | | 58,290 | |
|
| | | | | | | | | | | | |
| | | December 31, 2011 |
Recorded Investment | | Performing | | Non-Performing (1) | | Total |
| Conventional loans | | $ | 2,298 |
| | $ | 198 |
| | $ | 2,496 |
|
| |
(1) | Represents loans on non-accrual status. |
During the year ended December 31, 2011, we had 16 troubled debt restructurings. The table below presents the financial effect of the modifications for the year ended December 31, 2011. The pre- and post-modification amounts represent the amount recorded as of the date the troubled debt restructurings were modified.
|
| | | | | | | | |
| | | Year Ended December 31, 2011 |
| Recorded Investment | | Pre-Modification | | Post-Modification |
| Conventional loans | | $ | 2,320 |
| | $ | 2,496 |
|
During the year ended December 31, 2011, two conventional loans, which were modified and considered troubled debt restructurings, experienced a payment default within the previous 12 months. The recorded investment of these loans was $216 at December 31, 2011.
As a result of adopting the new guidance on a creditor's determination of whether a restructuring is a troubled debt restructuring discussed in Note 2 - Recently Adopted and Issued Accounting Guidance, we reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. As a result, we identified certain loans as troubled debt restructurings. The allowance for loan losses on these loans had previously been measured under the collective evaluation methodology. Upon identifying those loans as troubled debt restructurings, we identified them as impaired and applied the impairment measurement guidance for those loans prospectively. As of December 31, 2011, $2,496 of conventional loans, at recorded investment, were identified as newly impaired, and an allowance for loan losses of $9 was recorded on these loans.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The tables below present the conventional loans individually evaluated for impairment which were considered impaired as of December 31, 2011. The first table presents the recorded investment, UPB and related allowance associated with these loans, while the second table presents the average recorded investment of individually impaired loans and related interest income recognized.
|
| | | | | | | | | | | | |
| | | December 31, 2011 |
Individually Evaluated Loans | | Recorded Investment | | UPB | | Related Allowance for Loan Losses |
| Conventional loans without allowance for loan losses | | $ | 2,298 |
| | $ | 2,283 |
| | $ | — |
|
| Conventional loans with allowance for loan losses | | 198 |
| | 193 |
| | 9 |
|
| Total conventional loans individually evaluated | | $ | 2,496 |
| | $ | 2,476 |
| | $ | 9 |
|
|
| | | | | | | | |
| | | Year Ended |
| | | December 31, 2011 |
Individually Impaired Loans | | Average Recorded Investment | | Interest Income Recognized |
| Conventional loans | | $ | 2,395 |
| | $ | 53 |
|
Term Securities Purchased Under Agreements to Resell and Term Federal Funds Sold.These investments are generally short-term and their recorded balance approximates estimated fair value. We invest in federal funds with investment-grade counterparties only; therefore, we only evaluate these investments for purposes of an allowance for credit losses if the investment is not paid when due. All investments in term federal funds sold as of December 31, 2011 and 2010 were repaid according to the contractual terms.
Securities Purchased Under Agreementspurchased under agreements to Resellresell are considered collateralized financing arrangements and effectively represent short-term loans with highly ratedinvestment-grade counterparties. As discussed in Note 4 –- Securities Purchased Under Agreements to Resell, the terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, or the dollar value of the resale agreement will be decreased accordingly. If an agreement to resell is deemed to be impaired, the difference between the estimated fair value of the collateral and the amortized cost of the agreement will beis charged to earnings. Based upon the collateralWe held as security, we determined that no allowance for credit losses was needed for the Securities Purchased Under Agreementsterm securities purchased under agreements to Resellresell at December 31, 2011 or 2010, and 2009..
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We invest in Federal Funds Sold with highly rated counterparties and only evaluate for purposes of an allowance for credit losses if the investment is not repaid when due. All investments in Federal Funds Sold as of December 31, 2010, and 2009, were repaid according to the contractual terms.
Note 11 — Derivative- Derivatives and Hedging Activities
Nature of Business Activity.
We are exposed to interest-rate risk primarily from the effect of interest rate changes on our interest-earning assets and our funding sources that finance thesethose assets. The goal of our interest-rate risk management strategies is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept. In addition, we monitor the risk to our interest income, net interest margin and average maturity of interest-earning assets and funding sources.
The use of derivatives is an integral part of our financial management strategy. Consistent with Finance Agency regulation, we enter into derivatives to (i) manage the interest-rate risk exposures inherent in our otherwise unhedged assets and funding positions, (ii) achieve our risk management objectives, and (iii) to act as an intermediary between our members and counterparties. Finance Agency regulation and our risk management policy prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. However, the use of derivatives is an integral part of our financial management strategy.
The most common ways in which we use derivatives are to:
| |
• | 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 CO Bond; |
| |
• | reduce the interest-rate sensitivity and repricing gaps of assets and liabilities; |
| |
• | 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 CO Bond used to fund the Advance). Without the use of derivatives, this interest-rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the bond; |
| |
• | mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., Advances or mortgage assets) and liabilities; |
| |
• | protect the value of existing asset or liability positions or of forecasted transactions; |
| |
• | manage embedded options in assets and liabilities; and |
| |
• | manage our overall asset/liability structure. |
Application of Derivatives.
Derivatives may be designated as follows:
| |
(i) | as a fair-value or cash-flow hedge of an associated financial instrument, a firm commitment or a forecasted transaction; |
| |
(ii) | as an economic hedge to manage certain defined risks inherent to our balance sheet. Economic hedges are primarily used to manage mismatches between the coupon features of our assets and liabilities. For example, we may use derivatives in our overall interest rate risk management activities to adjust the interest rate sensitivity of Consolidated Obligations to approximate more closely the interest rate sensitivity of our assets (both Advances and investments), and/or to adjust the interest rate sensitivity of Advances or investments to approximate more closely the interest rate sensitivity of our liabilities. In addition, to reduce our exposure to reset risk, we may occasionally enter into forward rate agreements, which are also treated as economic hedges; or |
| |
(iii) | as an intermediary hedge to meet the asset/liability management needs of our members, by entering into derivatives with our members and offsetting derivatives with other counterparties. This intermediation grants smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked-to-market through earnings. However, we did not act as an intermediary in the years ended December 31, 2010, 2009, or 2008.
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Application of Derivatives. Derivatives may be applied as follows:
| |
| (i) | as a fair-value or cash-flow hedge of an associated financial instrument, a firm commitment, or an anticipated transaction; or |
| |
| (ii) | as an economic hedge to manage certain risks inherent to our Statement of Condition. Economic hedges are primarily used to manage mismatches between the coupon features of our assets and liabilities; or |
| |
| (iii) | as an intermediary hedge to meet the asset or liability management needs of our members. We did not act as an intermediary in the years ended December 31, 2011, 2010, or 2009. |
The most common ways in which we use derivatives are to:
reduce funding costs by executing a derivative concurrently with the issuance of a Consolidated Obligation as the cost of a combined funding structure can be lower than the cost of a comparable CO Bond;
reduce the interest-rate sensitivity and repricing gaps of assets and liabilities;
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 CO Bond used to fund the Advance);
mitigate the adverse earnings effects of the shortening or extension of the duration of certain assets (e.g., Advances or mortgage assets) and liabilities;
protect the value of existing asset and liability positions or of commitments and anticipated transactions;
manage embedded options in assets and liabilities; and
manage our overall asset/liability structure.
Derivative financial instruments are used when they are considered to be the most cost-effective alternative to achieve our financial and risk management objectives. We reevaluate our hedging strategies from time to time, and consequently, we may change the hedging techniques we use or adopt new strategies.
Types of Derivatives.
We may use the following derivative instruments.instruments to reduce funding costs and to manage our exposure to interest-rate risks inherent in the normal course of business.
Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the manner in which the cash flows will be calculated and the dates on which they will be paid. 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 amount at a predetermined fixed rate for a given period of time. In return for this promise, the 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. Thetime.The variable rate we receive in most interest-rate exchange agreements is 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 us when planning to lend or borrow funds in the future against future interest rate changes. We purchase 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.
Interest-Rate Cap and Floor Agreements. In an interest-rate 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 an interest-rate 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 may be used in conjunction with liabilities, and floors may be used in conjunction with assets. Caps and floors are designed as protection against the interest rate on a variable-rate asset or liability falling below or rising above a certain level.
Options. An option is an agreement between two entities that conveys the right, but not the obligation, to engage in a future transaction on some underlying security or other financial asset at an agreed-upon price during a certain period of time or on a specific date. Premiums paid to acquire options in fair-value hedging relationships are considered the fair value of the derivative at inception of the hedge and are reported in Derivative Assets or Derivative Liabilities.
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 us when planning to lend or borrow funds in the future against future interest rate changes. We purchase 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.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Interest-Rate Cap and Floor Agreements. In an interest-rate 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 an interest-rate 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 may be used in conjunction with liabilities, and floors may be used in conjunction with assets. Caps and floors are designed as protection against the interest rate on a variable-rate asset or liability falling below or rising above a certain level.
Futures/Forwards Contracts. We may use futures and forwardforwards contracts in order to hedge interest-rate risk. For example, certain mortgage purchase commitments entered into by us are considered derivatives. We may hedge these commitments by selling to-be-announced ("TBA") MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price.
Types of Hedged Items.
We document at inception all relationships between the derivatives designated as hedging instruments and the hedged items, our risk management objectives and strategies for undertaking various hedge transactions, and our method of assessing effectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to (i) assets and liabilities on the Statements of Condition, (ii) firm commitments, or (iii) forecasted transactions. We also formally assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective in future periods. We use regression analyses to assess the effectiveness of our hedges.
Consolidated Obligations. We enter into derivatives to hedge the interest-rate risk associated with our specific debt issuances. We manage the risk and volatility 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.
For example, in a typical transaction, we will issue a fixed-rate Consolidated Obligation and simultaneously enter into a matching derivative in which the counterparty pays fixed cash flows to us designed to match in timing and amount the cash outflows we pay on the Consolidated Obligation. In turn, we pay a variable cash flow to the counterparty that closely matches the interest payments we receive on short-term or variable-rate Advances (typically one- or three-month LIBOR). These transactions are typically treated as fair-value hedges. As another example, we may issue variable-rate CO Bonds indexed to LIBOR, the U.S.United States prime rate, or federal funds rate and simultaneously execute interest-rate swaps to hedge the basis risk of the variable-rate debt.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
This strategy of issuing CO Bonds while simultaneously entering into derivatives enables us to offer a wider range of attractively priced Advances to our members and may allow us to reduce our funding costs. The continued attractiveness of such debt depends on yield relationships between the bond and derivative markets. If conditions in these markets change, we may alter the types or terms of the CO Bonds that we issue. By acting in both the capital and the swap markets, we can raise funds at lower costs than through the issuance of simple fixed- or variable-rate Consolidated Obligations in the capital markets alone.
Advances. We offer a wide array of Advance structures to meet members' funding needs. These Advances may have maturities up to 30 years with variable or fixed rates and may include early termination features or options. We may use derivatives to adjust the repricing and/or options characteristics of Advances in order to match more closely the characteristics of our funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, we will simultaneously execute a derivative with terms that offset the terms and embedded options, if any, in the Advance. For example, we may hedge a fixed-rate Advance with an interest-rate swap where we pay a fixed-rate coupon and receive a variable-rate coupon, effectively converting the fixed-rate Advance to a variable-rate Advance. This type of hedge is typically treated as a fair-value hedge.
When issuing convertible Advances, we have the right to convert to/from a fixed-rate Advance from/to a variable-rate Advance if interest rates increase/decrease. A convertible Advance carries ana lower interest rate lower than a comparable-maturity fixed-rate Advance that does not have the conversion feature. With a putable Advance, we effectively purchase a put option from the member that allows us to put or extinguish the fixed-rate Advance, which we normally would exercise when interest rates increase. We may hedge these Advances by entering into a cancelable interest-rate exchange agreement.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Mortgage Loans. We invest in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in prepayment speeds. We manage the interest-rate and prepayment risks associated with mortgages through a combination of debt issuance and derivatives. We issue both callable and noncallable debt and prepayment-linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. Interest-rate swaps, to the extent the payments on the mortgages result in a simultaneous reduction of the notional amount of the swaps, may receive fair-value hedge accounting.
A combination of swaps and options, including futures and forwards, may be used as a portfolio of derivatives linked to a portfolio of mortgage loans. The portfolio of mortgage loans consists of one or more pools of similar assets, as determined by factors such as product type and coupon. As the portfolio of loans changes due to new loans, liquidations and payments, the derivative portfolio is modified accordingly to hedge the interest-rate and prepayment risks effectively. A new hedging relationship is created and such relationship is treated as a fair-value hedge.
Options may also 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. We may also 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 economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and, therefore, do not receive either fair-value or cash-flow hedge accounting. These derivatives are marked-to-market through earnings.
Anticipated Streams of Future Cash Flows. We may enter into an option to hedge a specified future variable cash stream as a result of rolling over short-term, fixed-rate financial instruments such as LIBOR Advances and Discount Notes. The option will effectively cap the variable cash stream at a predetermined target rate.
Firm Commitments. Certain mortgage purchase commitments are considered derivatives. We normally hedge these commitments by selling TBA MBS or other derivatives for forward settlement. The mortgage purchase commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recorded as a Derivative Asset or Derivative Liability at estimated fair value, with changes in fair value recognized in 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.
Investments. We primarily invest in MBS and ABS, GSE and TLGP debentures, and other U.S. agency obligations and agency and corporate debentures,- guaranteed RMBS, which may be classified as HTM, AFS or trading securities. The interest-rate and prepayment risks associated with these investment securities are managed through a combination of debt issuance and derivatives. We 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, callable swaps or swaptions. We may manage prepayment and duration risk by funding investment securities with Consolidated Obligations that contain call features. We may also manage the risk and volatility arising from changing market prices and volatility of investment securities by matching the cash outflow on the derivatives with the cash inflow on the investment securities. TheOn occasion, we may hold derivatives we hold that are currently associated with HTM carried at amortized cost,and are designated as economic hedges. AFS that have been hedged may qualify as either a fair-value hedge or a cash-flow hedge.
Variable Cash Streams. We may use derivatives to hedge the variability of cash flows over a specified period of time as a result of the issuances and maturities of short-term, fixed-rate instruments such as Discount Notes, to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Managing Credit Risk on Derivatives.
Weand designate them as cash-flow hedges. The maturity dates of the cash-flow streams are subject to credit risk due to potential nonperformance by counterpartiesmatched to the derivative agreements. The degreematurity dates of counterparty risk depends on the extentderivatives. If the derivatives are terminated prior to which master netting arrangements are includedtheir maturity dates, the amount in such contracts to mitigateAOCI is recognized over the risk. We manage counterparty credit risk through credit analysis, collateral requirements and adherence toremaining lives of the requirements set forth in our policies and Finance Agency regulations. We require collateral agreements on all derivatives that establish collateral delivery thresholds. Additionally, collateral related to derivatives with member institutions includes collateral assigned to us,specified cash streams as evidenced by a written security agreement and held by the member institution for our benefit. Based on credit analyses and collateral requirements, our management does not anticipate any creditunrealized gains or losses on our derivative agreements. See Note 19 – Estimated Fair Values for discussion regarding our fair value methodology for derivative assets/liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.
The following table presents our credit risk exposure on derivative instruments, excluding circumstances where a counterparty's pledged collateral to us exceeds our net position.
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Total net exposure at fair value | $ | 6,173 | | | $ | 1,714 | |
| Cash collateral held | — | | | — | |
| Net positive exposure after cash collateral | 6,173 | | | 1,714 | |
| Other collateral | — | | | — | |
| Net exposure after collateral | $ | 6,173 | | | $ | 1,714 | |
The net exposure at fair value includes accrued interest payable of $249 and accrued interest receivable of $689 at December 31, 2010 and 2009, respectively.
We have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by a major credit rating agency, we could 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 (before cash collateral and related accrued interest on cash collateral) at December 31, 2010, was $681,396 for which we have posted collateral, including accrued interest, of $25,377 in the normal course of business. In addition, we held other derivative instruments in a net liability position of $1,012 that are not subject to credit support agreements containing credit-risk related contingent features. If our credit rating had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, we could have been required to deliver up to an additional $527,873 of collateral (at fair value) to our derivative counterparties at December 31, 2010. Our senior credit rating was not lowered during the years ended 2010 and 2009.hedging activities.
We transact most of our derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. We are not a derivative dealer and thus do not trade derivatives for short-term profit.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
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. However, the notional amount of derivatives represents neither the actual amounts exchanged nor our overall exposure to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the derivatives, the item being hedged and any offsets between the two.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table presents the estimated fair value of derivative instruments. For purposes of this disclosure, the derivative values include the estimated fair valuevalues of derivatives and the related accrued interest.
| | | | | | | | | | | | |
| | | Notional | | Fair Value | | Fair Value |
| | | Amount of | | of Derivative | | of Derivative |
| December 31, 2010 | | Derivatives | | Assets | | Liabilities |
| Derivatives designated as hedging instruments: | | | | | | |
| Interest-rate swaps | | $ | 32,667,683 | | | $ | 197,382 | | | $ | 873,504 | |
| Interest-rate futures/forwards | | — | | | — | | | — | |
| Total derivatives designated as hedging instruments | | 32,667,683 | | | 197,382 | | | 873,504 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | |
| Interest-rate swaps | | 497,596 | | | 364 | | | 1,350 | |
| Interest-rate caps/floors | | 75,000 | | | 1,369 | | | — | |
| Interest-rate futures/forwards | | 126,085 | | | 241 | | | 542 | |
| Mortgage delivery commitments | | 57,063 | | | 275 | | | 469 | |
| Total derivatives not designated as hedging instruments | | 755,744 | | | 2,249 | | | 2,361 | |
| Total derivatives before adjustments | | $ | 33,423,427 | | | 199,631 | | | 875,865 | |
| Netting adjustments | | | | | (193,458 | ) | | (193,458 | ) |
| Cash collateral and related accrued interest | | | | | — | | | (25,377 | ) |
Total adjustments (1) | | | | | (193,458 | ) | | (218,835 | ) |
| Total derivatives, net | | | | | $ | 6,173 | | | $ | 657,030 | |
| | | | | | | |
| December 31, 2009 | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Interest-rate swaps | | $ | 36,317,525 | | | $ | 196,671 | | | $ | 988,424 | |
| Interest-rate futures/forwards | | — | | | — | | | — | |
| Total derivatives designated as hedging instruments | | 36,317,525 | | | 196,671 | | | 988,424 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | |
| Interest-rate swaps | | 36,227 | | | 615 | | | 485 | |
| Interest-rate caps/floors | | — | | | — | | | — | |
| Interest-rate futures/forwards | | 41,100 | | | 765 | | | — | |
| Mortgage delivery commitments | | 38,328 | | | 4 | | | 617 | |
| Total derivatives not designated as hedging instruments | | 115,655 | | | 1,384 | | | 1,102 | |
| Total derivatives before adjustments | | $ | 36,433,180 | | | 198,055 | | | 989,526 | |
| Netting adjustments | | | | | (196,341 | ) | | (196,341 | ) |
| Cash collateral and related accrued interest | | | | | — | | | (80,469 | ) |
Total adjustments (1) | | | | | (196,341 | ) | | (276,810 | ) |
| Total derivatives, net | | | | | $ | 1,714 | | | $ | 712,716 | |
|
| | | | | | | | | | | | |
| | | Notional | | Fair Value | | Fair Value |
| | | Amount of | | of Derivative | | of Derivative |
| December 31, 2011 | | Derivatives | | Assets | | Liabilities |
| Derivatives designated as hedging instruments: | | | | | | |
| Interest-rate swaps | | $ | 33,849,773 |
| | $ | 74,405 |
| | $ | 969,179 |
|
| Total derivatives designated as hedging instruments | | 33,849,773 |
| | 74,405 |
| | 969,179 |
|
| Derivatives not designated as hedging instruments: | | |
| | |
| | |
|
| Interest-rate swaps | | 764,477 |
| | 128 |
| | 616 |
|
| Interest-rate caps/floors | | 305,000 |
| | 2,190 |
| | — |
|
| Interest-rate futures/forwards | | 70,300 |
| | — |
| | 763 |
|
| Mortgage delivery commitments | | 68,069 |
| | 417 |
| | — |
|
| Total derivatives not designated as hedging instruments | | 1,207,846 |
| | 2,735 |
| | 1,379 |
|
| Total derivatives before adjustments | | $ | 35,057,619 |
| | 77,140 |
| | 970,558 |
|
| Netting adjustments | | |
| | (76,647 | ) | | (76,647 | ) |
| Cash collateral and related accrued interest | | |
| | — |
| | (719,338 | ) |
Total adjustments (1) | | |
| | (76,647 | ) | | (795,985 | ) |
| Total derivatives, net | | |
| | $ | 493 |
| | $ | 174,573 |
|
| | | | | | | |
| December 31, 2010 | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | |
| Interest-rate swaps | | $ | 32,667,683 |
| | $ | 197,382 |
| | $ | 873,504 |
|
| Total derivatives designated as hedging instruments | | 32,667,683 |
| | 197,382 |
| | 873,504 |
|
| Derivatives not designated as hedging instruments: | | |
| | |
| | |
|
| Interest-rate swaps | | 497,596 |
| | 364 |
| | 1,350 |
|
| Interest-rate caps/floors | | 75,000 |
| | 1,369 |
| | — |
|
| Interest-rate futures/forwards | | 126,085 |
| | 241 |
| | 542 |
|
| Mortgage delivery commitments | | 57,063 |
| | 275 |
| | 469 |
|
| Total derivatives not designated as hedging instruments | | 755,744 |
| | 2,249 |
| | 2,361 |
|
| Total derivatives before adjustments | | $ | 33,423,427 |
| | 199,631 |
| | 875,865 |
|
| Netting adjustments | | |
| | (193,458 | ) | | (193,458 | ) |
| Cash collateral and related accrued interest | | |
| | — |
| | (25,377 | ) |
Total adjustments (1) | | |
| | (193,458 | ) | | (218,835 | ) |
| Total derivatives, net | | |
| | $ | 6,173 |
| | $ | 657,030 |
|
| | |
| (1) | Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and also cash collateral held or placed with the same counterparties. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table detailspresents the components of Net Gains (Losses) on Derivatives and Hedging Activities reported in Other Income (Loss):
| | | | For the Years Ended December 31, | | | | | | | |
| Net Gains (Losses) on Derivatives and Hedging Activities by Type | | 2010 | | 2009 | | 2008 | |
| | | | Years Ended December 31, |
| Net Gains (Losses) by Type | | | 2011 | | 2010 | | 2009 |
| Net gain (loss) related to fair-value hedge ineffectiveness: | | | | | | | | | | | | |
| Interest-rate swaps | | $ | 9,234 | | | $ | (5,228 | ) | | $ | 7,814 | | | $ | (8,615 | ) | | $ | 9,235 |
| | $ | (5,228 | ) |
| Interest-rate futures/forwards | | (51 | ) | | — | | | — | | | (45 | ) | | (52 | ) | | — |
|
| Total net gain (loss) related to fair-value hedge ineffectiveness | | 9,183 | | | (5,228 | ) | | 7,814 | | | (8,660 | ) | | 9,183 |
| | (5,228 | ) |
| Net gain (loss) for derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Economic hedges: | | | | | | | | | | | | |
| Interest-rate swaps | | 164 | | | 6,295 | | | 5,970 | | | 118 |
| | (719 | ) | | (5,975 | ) |
| Interest-rate swaptions | | — | | | — | | | (60 | ) | |
| Interest-rate caps/floors | | 533 | | | — | | | — | | | (2,838 | ) | | 533 |
| | — |
|
| Interest-rate futures/forwards | | (891 | ) | | 303 | | | (593 | ) | | (3,959 | ) | | (891 | ) | | 303 |
|
| Net interest settlements | | | 722 |
| | 883 |
| | 12,270 |
|
| Mortgage delivery commitments | | (1,994 | ) | | (2,733 | ) | | (1,289 | ) | | 1,259 |
| | (1,994 | ) | | (2,733 | ) |
| Total net gain (loss) for derivatives not designated as hedging instruments | | (2,188 | ) | | 3,865 | | | 4,028 | | | (4,698 | ) | | (2,188 | ) | | 3,865 |
|
| Net Gains (Losses) on Derivatives and Hedging Activities | | $ | 6,995 | | | $ | (1,363 | ) | | $ | 11,842 | | | $ | (13,358 | ) | | $ | 6,995 |
| | $ | (1,363 | ) |
The following table details,presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedging relationships, and the effect of those derivatives on Net Interest Income:
| | | | Gain (Loss) | | Gain (Loss) | | Net Fair- | | | Effect on | | | | | | | | | |
| | | on | | on Hedged | | Value Hedge | | | Net Interest | | Gain (Loss) | | Gain (Loss) | | Net Fair- | | | Effect on |
| For the Year Ended December 31, 2010 | | Derivative | | Item | | Ineffectiveness | | | Income (1) | |
| | | | on | | on Hedged | | Value Hedge | | | Net Interest |
| Year Ended December 31, 2011 | | | Derivative | | Item | | Ineffectiveness | | | Income (1) |
| Advances | | $ | 208,107 | | | $ | (198,303 | ) | | $ | 9,804 | | | | $ | (464,527 | ) | | $ | (95,964 | ) | | $ | 89,087 |
| | $ | (6,877 | ) | | | $ | (302,196 | ) |
| CO Bonds | | (35,284 | ) | | 35,147 | | | (137 | ) | | | 186,008 | | | (26,442 | ) | | 25,156 |
| | (1,286 | ) | | | 110,757 |
|
MPP (2) | | (464 | ) | | 412 | | | (52 | ) | | | (978 | ) | | (422 | ) | | 377 |
| | (45 | ) | | | (4,142 | ) |
| AFS | | (79,496 | ) | | 79,064 | | | (432 | ) | | | (67,298 | ) | |
| AFS securities | | | (86,731 | ) | | 86,279 |
| | (452 | ) | | | (70,491 | ) |
| Total | | $ | 92,863 | | | $ | (83,680 | ) | | $ | 9,183 | | | | $ | (346,795 | ) | | $ | (209,559 | ) | | $ | 200,899 |
| | $ | (8,660 | ) | | | $ | (266,072 | ) |
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2009 | | | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | | | |
| Advances | | $ | 312,551 | | | $ | (333,468 | ) | | $ | (20,917 | ) | | | $ | (556,803 | ) | | $ | 208,107 |
| | $ | (198,303 | ) | | $ | 9,804 |
| | | $ | (464,527 | ) |
| CO Bonds | | (64,841 | ) | | 83,216 | | | 18,375 | | | | 186,608 | | | (35,284 | ) | | 35,147 |
| | (137 | ) | | | 186,008 |
|
MPP (2) | | — | | | — | | | — | | | | — | | | (464 | ) | | 412 |
| | (52 | ) | | | (978 | ) |
| AFS | | 138,855 | | | (141,541 | ) | | (2,686 | ) | | | (56,781 | ) | |
| AFS securities | | | (79,496 | ) | | 79,064 |
| | (432 | ) | | | (67,298 | ) |
| Total | | $ | 386,565 | | | $ | (391,793 | ) | | $ | (5,228 | ) | | | $ | (426,976 | ) | | $ | 92,863 |
| | $ | (83,680 | ) | | $ | 9,183 |
| | $ | (346,795 | ) |
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2008 | | | | | | | | | |
| Year Ended December 31, 2009 | | | | | | | | | |
| Advances | | $ | (635,346 | ) | | $ | 658,194 | | | $ | 22,848 | | | | $ | (209,809 | ) | | $ | 312,551 |
| | $ | (333,468 | ) | | $ | (20,917 | ) | | | $ | (556,803 | ) |
| CO Bonds | | 147,224 | | | (165,150 | ) | | (17,926 | ) | | | 97,237 | | | (64,841 | ) | | 83,216 |
| | 18,375 |
| | | 186,608 |
|
MPP (2) | | — | | | — | | | — | | | | — | | | — |
| | — |
| | — |
| | | — |
|
| AFS | | (224,304 | ) | | 227,196 | | | 2,892 | | | | (13,853 | ) | |
| AFS securities | | | 138,855 |
| | (141,541 | ) | | (2,686 | ) | | | (56,781 | ) |
| Total | | $ | (712,426 | ) | | $ | 720,240 | | | $ | 7,814 | | | | $ | (126,425 | ) | | $ | 386,565 |
| | $ | (391,793 | ) | | $ | (5,228 | ) | | $ | (426,976 | ) |
| | |
| (1) | The net interest on derivatives in fair-value hedging relationships is presented in the Interest Income / Interest Expense line item of the respective hedged item. |
| |
(2) | The effect of MPP hedges on Net Interest Income includes derivatives and the related hedged items in both fair-value and economic hedging relationships. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Managing Credit Risk on Derivatives. We are subject to credit risk due to potential nonperformance by counterparties to the interest-rate exchange agreements. The degree of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. We manage counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies and Finance Agency regulations. Collateral delivery thresholds are established in the collateral agreements that we require for all LIBOR-based derivatives. See Note 20 - Estimated Fair Values for discussion regarding our fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the estimated fair value of these instruments to be affected by counterparty credit risk.
The following table presents our credit risk exposure on derivative instruments, excluding circumstances where a counterparty's pledged collateral to us exceeds our net position. Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and also cash collateral held or placed with the same counterparties.
|
| | | | | | | | |
Credit Risk Exposure | | December 31,
2011 | | December 31,
2010 |
| Total net exposure at estimated fair value | | $ | 493 |
| | $ | 6,173 |
|
| Cash collateral held | | — |
| | — |
|
| Net positive exposure after cash collateral | | 493 |
| | 6,173 |
|
| Other collateral | | — |
| | — |
|
| Net exposure after collateral | | $ | 493 |
| | $ | 6,173 |
|
The net exposure at estimated fair value includes accrued interest receivable of $70 and accrued interest payable of $249 at December 31, 2011 and 2010, respectively. Based on credit analyses and collateral requirements, our management does not anticipate any credit losses on our derivative agreements.
We have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by a major credit rating agency, we could be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate estimated fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest on cash collateral) at December 31, 2011 was $893,148 for which we have posted collateral, including accrued interest, of $719,338 in the normal course of business. In addition, we held other derivative instruments in a net liability position of $763 that are not subject to credit support agreements containing credit-risk-related contingent features. If our credit rating had been lowered by a major credit rating agency (from AA+ to AA), we could have been required to deliver up to an additional $29,837 of collateral (at estimated fair value) to our derivative counterparties at December 31, 2011.
We transact most of our derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. We are not a derivatives dealer and thus do not trade derivatives for short-term profit.
Note 12 —- Deposits
We offer demand and overnight deposits to members and qualifying non-members. In addition, we offer short-term interest-bearing deposit programs to members. A member that services mortgage loans may deposit funds collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans. We classify these items as other deposits.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Demand, overnight, and other deposits pay interest based on a daily interest rate. Time deposits pay interest based on a fixed rate determined at the issuanceorigination of the deposit. The average interest rates paid on average deposits during 2010, 2009, and 2008 were 0.04%0.02%, 0.04% and 0.08% during 2011, 0.08%2010, and 1.70%2009, respectively.
The following table detailspresents Interest-Bearing and Non-Interest-Bearing Deposits:
| | | | | | | | |
| Type of Deposits | | December 31,
2010 | | December 31,
2009 |
| Interest-Bearing: | | | | |
| Demand and overnight | | $ | 559,872 | | | $ | 806,185 | |
| Time | | 15,000 | | | 15,224 | |
| Other | | 22 | | | 22 | |
| Total Interest-Bearing | | 574,894 | | | 821,431 | |
Non-Interest-Bearing: (1) | | | | | | |
| Other | | 10,034 | | | 3,420 | |
| Total Non-Interest Bearing | | 10,034 | | | 3,420 | |
| Total Deposits | | $ | 584,928 | | | $ | 824,851 | |
|
| | | | | | | | |
| Type of Deposits | | December 31,
2011 | | December 31,
2010 |
| Interest-Bearing: | | | | |
| Demand and overnight | | $ | 620,680 |
| | $ | 559,872 |
|
| Time | | — |
| | 15,000 |
|
| Other | | 22 |
| | 22 |
|
| Total Interest-Bearing | | 620,702 |
| | 574,894 |
|
Non-Interest-Bearing: (1) | | |
| | |
|
| Other | | 8,764 |
| | 10,034 |
|
| Total Non-Interest Bearing | | 8,764 |
| | 10,034 |
|
| Total Deposits | | $ | 629,466 |
| | $ | 584,928 |
|
| | |
| (1) | Non-Interest-Bearing includes pass-through deposit reserves from members. |
Note 13 —- Consolidated Obligations
Consolidated Obligations consist of CO Bonds and Discount Notes. The FHLBsFHLBanks issue Consolidated Obligations through the Office of Finance as our agent. In connection with each debt issuance, each FHLBFHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLB.FHLBank. In addition, each FHLBFHLBank separately tracks and records as a liability its specific portion of Consolidated Obligations for which it is the primary obligor.
The Finance Agency and the U.S.United States Secretary of the Treasury have oversight over the issuance of FHLBFHLBank debt through the Office of Finance. CO Bonds are issued primarily to raise intermediate and long-term funds for the FHLBsFHLBanks and are not subject to any statutory or regulatory limits on maturity. Discount Notes are issued primarily to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature.
Although we are primarily liable for our portion of Consolidated Obligations (i.e., those issued on our behalf), we are also jointly and severally liable with the other 11 FHLBsFHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the FHLBs.FHLBanks. The Finance Agency, atin its discretion, may require any FHLBFHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of that FHLB.FHLBank. Although it has never occurred, to the extent that an FHLBFHLBank makes any payment on a Consolidated Obligation on behalf of another FHLBFHLBank that is primarily liable for such Consolidated Obligation, Finance Agency regulations provide that the paying FHLBFHLBank is entitled to reimbursement from that non-complying FHLBFHLBank for any payments made on its behalf and other associated costs (including interest to be determined by the Finance Agency). If, however, the Finance Agency determines that such non-complying FHLBFHLBank is unable to satisfy its repayment obligations, then the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBFHLBank among the remaining FHLBsFHLBanks on a pro-rata basis in proportion to each FHLB'sFHLBank's participation in all Consolidated Obligations outstanding. The Finance Agency reserves the right to allocate the outstanding liabilities for the Consolidated Obligations betweenamong the FHLBsFHLBanks in any other manner it may determine to ensure that the FHLBsFHLBanks operate in a safe and sound manner. The par values of the 12 FHLBs'FHLBanks' outstanding Consolidated Obligations, including Consolidated Obligations held by other FHLBs,FHLBanks, were approximately $691.9 billion and $796.4 billion and $930.6 billion at December 31, 2011 and 2010, and 2009, respectively.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Regulations require us to maintain unpledged qualifying assets equal to our participation in the Consolidated Obligations outstanding. Qualifying assets are defined as: (i) cash, (ii) secured Advances; (iii) assets with an assessment or rating at least equivalent to the current assessment or rating of the Consolidated Obligations;Obligations (rating modifiers are ignored when determining the applicable rating level); (iv) obligations of or fully guaranteed by the United States; (v) obligations, participations, or other instruments of or issued by Fannie Mae or the Government National Mortgage Association;Ginnie Mae; (vi) mortgages, obligations or other securities whichthat are or have ever been sold by Freddie Mac under the Bank Act; and (vii) such securities asin which fiduciary and trust funds may invest in under the laws of the state in which each FHLBFHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations. We maintained unpledged qualifying assets
Discount Notes. Our participation in Discount Notes, all of $44.9 billion and $46.5 billionwhich are due within one year of issuance, was as of December 31, 2010, and 2009, respectively, and were, therefore, in compliance with the requirement.follows:
|
| | | | | | | | |
| Discount Notes | | December 31,
2011 | | December 31,
2010 |
| Book value | | $ | 6,536,109 |
| | $ | 8,924,687 |
|
| Par value | | 6,536,400 |
| | 8,926,179 |
|
| Weighted average effective interest rate | | 0.07 | % | | 0.15 | % |
CO Bonds.The following table detailspresents our participation in CO Bonds outstanding:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Year of Contractual Maturity | | Amount | | WAIR% | | Amount | | WAIR% | | Amount | | WAIR% | | Amount | | WAIR% |
| Due in 1 year or less | | $ | 15,976,170 | | | 0.72 | | | $ | 17,740,550 | | | 1.25 | | | $ | 17,071,550 |
| | 0.54 |
| | $ | 15,976,170 |
| | 0.72 |
|
| Due after 1 year through 2 years | | 2,967,550 | | | 2.14 | | | 4,353,650 | | | 1.92 | | | 3,346,675 |
| | 1.60 |
| | 2,967,550 |
| | 2.14 |
|
| Due after 2 years through 3 years | | 2,520,405 | | | 2.25 | | | 2,943,550 | | | 2.61 | | | 1,448,150 |
| | 2.67 |
| | 2,520,405 |
| | 2.25 |
|
| Due after 3 years through 4 years | | 1,586,900 | | | 2.81 | | | 1,998,750 | | | 2.98 | | | 790,400 |
| | 2.60 |
| | 1,586,900 |
| | 2.81 |
|
| Due after 4 years through 5 years | | 1,771,350 | | | 2.24 | | | 1,981,900 | | | 3.26 | | | 796,400 |
| | 3.15 |
| | 1,771,350 |
| | 2.24 |
|
| Thereafter | | 6,957,350 | | | 4.08 | | | 6,772,200 | | | 4.69 | | | 6,839,150 |
| | 3.88 |
| | 6,957,350 |
| | 4.08 |
|
| Total CO Bonds, par value | | 31,779,725 | | | 1.90 | | | 35,790,600 | | | 2.30 | | | 30,292,325 |
| | 1.63 |
| | 31,779,725 |
| | 1.90 |
|
| Unamortized bond premiums | | 48,504 | | | | | | 35,729 | | | | | | 41,393 |
| | |
| | 48,504 |
| | |
|
| Unamortized bond discounts | | (23,421 | ) | | | | | (24,947 | ) | | | | | (20,374 | ) | | |
| | (23,421 | ) | | |
|
| Hedging adjustments | | 70,429 | | | | | | 106,407 | | | | | | 44,866 |
| | |
| | 70,429 |
| | |
|
| Total CO Bonds | | $ | 31,875,237 | | | | | | $ | 35,907,789 | | | | | | $ | 30,358,210 |
| | |
| | $ | 31,875,237 |
| | |
|
Consolidated Obligations are issued with either fixed-rate or variable-rate coupon payment terms that use a variety of indices for interest-rate resets, including the LIBOR, Constant Maturity Treasury, Treasury Bills, the prime rate, and others. To meet the expected specific needs of certain investors in CO Bonds, both fixed-rate and variable-rate CO Bonds may contain features that may result in complex coupon payment terms and call or put options. When such CO Bonds are issued, we typically enter into derivatives containing offsetting features that effectively convert the terms of the CO BondBonds to those of a simple variable-rate or a fixed-rate CO Bond.Bonds.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following tables summarize our participation in CO Bonds outstanding by feature and contractual maturity or next call date: | | | Feature | | December 31,
2010 | | December 31,
2009 | | December 31,
2011 | | December 31,
2010 |
| Non-callable | | $ | 23,801,725 | | | $ | 25,530,600 | | | $ | 22,156,325 |
| | $ | 23,801,725 |
|
| Callable | | 7,978,000 | | | 10,260,000 | | | 8,136,000 |
| | 7,978,000 |
|
| Total CO Bonds, par value | | $ | 31,779,725 | | | $ | 35,790,600 | | | $ | 30,292,325 |
| | $ | 31,779,725 |
|
| | | | | | | | |
| Year of Contractual Maturity or Next Call Date | | December 31,
2010 | | December 31,
2009 |
| Due in 1 year or less | | $ | 23,217,170 | | | $ | 26,744,550 | |
| Due after 1 year through 2 years | | 2,357,550 | | | 3,168,650 | |
| Due after 2 years through 3 years | | 1,737,405 | | | 1,594,550 | |
| Due after 3 years through 4 years | | 946,900 | | | 1,206,750 | |
| Due after 4 years through 5 years | | 469,350 | | | 676,900 | |
| Thereafter | | 3,051,350 | | | 2,399,200 | |
| Total CO Bonds, par value | | $ | 31,779,725 | | | $ | 35,790,600 | |
F- 42 |
| | | | | | | | |
| Year of Contractual Maturity or Next Call Date | | December 31,
2011 | | December 31,
2010 |
| Due in 1 year or less | | $ | 22,188,550 |
| | $ | 23,217,170 |
|
| Due after 1 year through 2 years | | 3,145,675 |
| | 2,357,550 |
|
| Due after 2 years through 3 years | | 1,137,150 |
| | 1,737,405 |
|
| Due after 3 years through 4 years | | 540,400 |
| | 946,900 |
|
| Due after 4 years through 5 years | | 475,400 |
| | 469,350 |
|
| Thereafter | | 2,805,150 |
| | 3,051,350 |
|
| Total CO Bonds, par value | | $ | 30,292,325 |
| | $ | 31,779,725 |
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
These CO Bonds, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad terms regarding either principal repayment or coupon payment terms:
| |
• | Optional Principal Redemption CO Bonds (callable bonds) that we may redeem in whole or in part at our discretion on predetermined call dates according to the terms of the callable bond offerings.
|
Optional Principal Redemption CO Bonds (callable bonds) that we may redeem in whole or in part, in our discretion, on predetermined call dates according to the terms of the callable bond offerings.
With respect to interest payments, CO Bonds may also have the following terms:
| |
• | Step-up CO Bonds pay interest at increasing fixed rates for specified intervals over the life of the CO Bond. These CO Bonds generally contain provisions enabling us to call these at our option on the step-up dates;
|
| |
• | Range CO Bonds pay interest based on the number of days a specified index is within/outside of a specified range. The computation of the variable interest rate differs for each CO Bond issue, but the CO Bond generally pays zero interest or a minimal rate if the specified index is outside the specified range; and
|
| |
• | Conversion CO Bonds have coupons that convert from fixed to variable, or from variable to fixed, or from one index to another, on predetermined dates according to the terms of the CO Bond offering.
|
Step-up CO Bonds pay interest at increasing fixed rates for specified intervals over the life of the CO Bond. These CO Bonds generally contain provisions enabling us to call them at our option on the step-up dates.
Ratchet CO Bonds pay a floating interest rate indexed on a reference range such as LIBOR. Each floating rate is subject to increasing floors, such that subsequent rates may not be lower than the previous rate.
Range CO Bonds pay interest based on the number of days a specified index is within/outside of a specified range. The computation of the variable interest rate differs for each CO Bond issue, but the CO Bond generally pays zero interest or a minimal rate if the specified index is outside the specified range.
Conversion CO Bonds have coupons that convert from fixed to variable, or from variable to fixed, or from one index to another, on predetermined dates according to the terms of the CO Bond offering.
Interest-Rate Payment Terms. The following table details CO Bonds by interest-rate payment term:
| | | Interest-Rate Payment Terms | | December 31,
2010 | | December 31,
2009 | | December 31,
2011 | | December 31,
2010 |
| Fixed-rate | | $ | 30,714,725 | | | $ | 30,959,600 | | | $ | 29,812,325 |
| | $ | 30,714,725 |
|
| Step-up | | 785,000 | | | 1,690,000 | | | 145,000 |
| | 785,000 |
|
| Simple variable-rate | | 175,000 | | | 2,916,000 | | |
| Variable-rate | | | 175,000 |
| | 175,000 |
|
| Ratchet | | | 125,000 |
| | — |
|
| Range | | 35,000 | | | — | | | — |
| | 35,000 |
|
| Conversion | | 70,000 | | | 225,000 | | | 35,000 |
| | 70,000 |
|
| Total CO Bonds, par value | | $ | 31,779,725 | | | $ | 35,790,600 | | | $ | 30,292,325 |
| | $ | 31,779,725 |
|
At December 31, 2010, and 2009, 62.1% and 63.8%, respectively, of our fixed-rate CO Bonds were swapped to a floating rate, and 100.0% and 3.6%, respectively, of our variable-rate CO Bonds were swapped to a different variable rate index.
CO Bonds Denominated in Foreign Currencies. CO Bonds issued can be denominated in foreign currencies. Concurrent with these issuances, we exchange the interest and principal payment obligations related to the issues for equivalent amounts denominated in U.S.United States dollars. There were no CO Bonds denominated in foreign currencies outstanding at December 31, 2011 or 2010.
Notes to Financial Statements, or 2009.continued
($ amounts in thousands unless otherwise indicated)
Discount Notes. Discount Notes are issued to raise short-term funds. Discount Notes are Consolidated Obligations with original maturities of up to one year. These Discount Notes are issued at less than their face amount and redeemed at par value when they mature.
Our participation in Discount Notes, all of which are due within one year, was as follows:
| | | | | | | | |
| Discount Notes | | December 31,
2010 | | December 31,
2009 |
| Book value | | $ | 8,924,687 | | | $ | 6,250,093 | |
| Par value | | 8,926,179 | | | 6,251,677 | |
| Weighted average effective interest rate | | 0.15 | % | | 0.12 | % |
At December 31, 2010, and 2009, 5.3% and 0.0%, respectively, of our fixed-rate Discount Notes were swapped to a variable rate.
Concessions on Consolidated Obligations. Unamortized concessions, included in Other Assets, were $12,454$9,552 and $14,881$12,454 at December 31, 2011 and 2010, and 2009, respectively, and the amortization of such concessions, which is included in CO Bonds Interest Expense, totaled $16,830, $19,411 and $16,667 in 2010, 2009, and 2008, respectively.$
Notes to Financial Statements14,231, continued$16,830, and $19,411 in 2011, 2010, and 2009, respectively.
($ amounts in thousands unless otherwise indicated)
Note 14 —- Affordable Housing Program
The Bank Act requires each FHLBFHLBank to establish an AHP. Each FHLBFHLBank provides subsidies in the form of direct grants and below-market interest rate Advances to members that use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBsFHLBanks must set aside for the AHP the greater of the aggregate of $100 million or 10% of net earnings, after theany assessment for REFCORP. For purposes of the AHP calculation, net earnings is defined as Income Before Assessments, plus Interest Expense related to MRCS, less theany assessment for REFCORP. The requirement to add back interest expense related to MRCS is based on an Advisory Bulletin issued by the Finance Agency. ThePrior to satisfaction by the FHLBanks of the REFCORP obligation, the AHP and REFCORP assessments arewere calculated simultaneously because of their interdependence on each other. We accrue this expense monthly based on our net earnings. We reduce the AHP liability as members use subsidies. Calculation of the REFCORP assessment is discussed in Note 15 –- Resolution Funding Corporation.
If we experienced a net loss during a quarter, but still had net earnings for the year, our obligation to the AHP would be calculated based on our year-to-date net earnings. If we had net earnings in subsequent quarters, we would be required to contribute additional amounts to meet our calculated annual obligation. If we experienced a net loss for a full year, we would have no obligation to the AHP for the year, since our required annual contribution is limited to annual net earnings. If the aggregate 10% calculation described above was less than $100 million for all 12 FHLBs, each FHLB would be required to assure that the aggregate contributions of the FHLBs equal $100 million. The pro ration would be made on the basis of our income in relation to the income of all FHLBs for the previous year, subject to the annual earnings limitation as discussed above.
There was no shortfall, as described above, in 2010, 2009, or 2008. If we determine that our required AHP contributions are contributing to financial instability, we may apply to the Finance Agency for a temporary suspension of our contributions. We did not make such an application in 2010, 2009, or 2008Corporation.
We had outstanding principal in AHP-related Advances of $2,364$125 and $2,394$2,364 at December 31, 2011 and 2010, and 2009, respectively.
The following table summarizes the activity in our AHP liability:funding obligation:
| | | | | | | | |
| | | 2010 | | 2009 |
| Balance at beginning of year | | $ | 37,329 | | | $ | 36,009 | |
| Annual assessment (expense) | | 13,856 | | | 14,860 | |
Subsidy usage, net (1) | | (15,537 | ) | | (13,540 | ) |
| Balance at end of year | | $ | 35,648 | | | $ | 37,329 | |
|
| | | | | | | | |
| | | 2011 | | 2010 |
| Balance at beginning of year | | $ | 35,648 |
| | $ | 37,329 |
|
| Annual assessment (expense) | | 13,825 |
| | 13,856 |
|
Subsidy usage, net (1) | | (16,628 | ) | | (15,537 | ) |
| Balance at end of year | | $ | 32,845 |
| | $ | 35,648 |
|
| | |
| (1) | Subsidies disbursed are reported net of returns of previously disbursed subsidies. |
Note 15 —- Resolution Funding Corporation
Each FHLBREFCORP is a corporation established by Congress in 1989 to assist in the recapitalization of the FDIC deposit insurance fund, and to provide funding for the resolution and disposition of insolvent savings institutions. We were required to paymake quarterly payments to REFCORP 20%that represented a portion of net income calculatedthe interest on bonds that were issued by REFCORP. On August 5, 2011 the Finance Agency certified that the FHLBanks had fully satisfied their REFCORP obligation with their payments made on July 15, 2011, which were accrued as applicable in accordance with GAAP afterour respective June 30, 2011 financial statements.
Prior to the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously becausesatisfaction of their interdependence on each other. We accrue our REFCORP assessment on a monthly basis and record it as a Payableobligation, we were required to make payments to REFCORP in our Statements(20% of Condition. Calculation of the AHP assessment is discussed in Note 14 –Affordable Housing Program. REFCORP has been designated as the calculation agent for the AHP and REFCORP assessments. Each FHLB provides itsannual GAAP net income before AHP and REFCORP assessments to REFCORP, which then performs the calculations for each quarter end.
The FHLBs will continue to be obligated to pay these amountsand after payment of AHP assessments) until the aggregate amountstotal amount of payments actually paid by all 12 FHLBs aremade was equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) with awhose final maturity date ofwas April 15, 2030, at which point the required payment of each FHLB to REFCORP will be fully satisfied.2030. The Finance Agency in consultation withshortened the U.S. Secretary ofperiod during which the Treasury, selects the appropriate discounting factors to be used in this annuity calculation. The cumulative amount to be paidFHLBanks made payments to REFCORP by us is not determinable at this time because it depends on the future earnings of all FHLBs and interest rates. If we experience a net loss during a quarter, but still have net income for the year-to-date, our obligation to REFCORP would be calculated based on our year-to-date GAAP net income. If we experience a net loss actual payments made relative to the referenced annuity. See Note 14 - Affordable Housing Program for a full year, we will have no obligation to REFCORP for the year.further discussion of AHP.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Due to certain other FHLBs overpaying their REFCORP assessment in prior years, and as directed by the U.S. Treasury, these FHLBs will use their respective overpayments as a credit against future REFCORP assessments (to the extent the FHLB has positive net income in the future) over an indefinite period of time.
The Finance Agency is required to extend the term of the FHLBs' obligation to REFCORP for each calendar quarter in which the quarterly payment falls short of $75 million.
The FHLBs aggregate payments through 2010 have exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening its remaining term as of December 31, 2010, to October 15, 2011. This date assumes that the FHLBs will pay exactly $75 million for each of the first two quarters of 2011 and $10 million on October 15, 2011.
Note 16 —- Capital
We are a cooperative whose member financial institutions own nearly all of our capital stock. Former members (including certain non-members that own our capital stock as a result of merger or acquisition of an FHLBFHLBank member) own the remaining capital stock to support business transactions still carried on our Statement of Condition. Member shares cannot be purchased or sold except between us and our members at the par value of one hundred dollars per share, as mandated by our capital plan.
The Gramm-Leach-Bliley Act of 1999 ("GLB Act") required each FHLBFHLBank to adopt a capital plan and convert to a new capital structure.
Our capital plan divides our Class B stock into two sub-series: Class B-1 and Class B-2. The difference between the two sub-series is that Class B-2 is required stock that awaits redemption and pays a lower dividend. The Class B-2 stock dividend is presently calculated at 80% of the amount of the Class B-1 dividend and can only be changed by amendment of our capital plan by our board of directors with approval of the Finance Agency.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Our board of directors may declare and pay dividends in either cash or capital stock or a combination thereof, assumingas long as we are in compliance with Finance Agency rules. Dividends may, but are not required to, be paid on our Class B Stock. The amount of the dividend to be paid is based on the average number of shares of each type held by the member during the dividend payment period.
The GLB Act made membership voluntary for all members. Members can redeem Class B stock by giving five years' written notice, subject to certain restrictions. Any member that withdraws from membership may not be readmitted as a member for a period of five years from the divestiture date for all capital stock that is held as a condition of membership, as that requirement is set out in our capital plan, unless the institutionmember has canceled or revoked its notice of withdrawal prior to the end of the five-year redemption period. This restriction does not apply if the member is transferring its membership from one FHLBFHLBank to another on an uninterrupted basis.
A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the five-year redemption period. OurHowever, our capital plan provides that we will charge a cancellation fee to a member whothat cancels or revokes its withdrawal notice. Our board of directors may change the cancellation fee with at least 15 days prior written notice to members.
Capital Requirements. We are subject to three capital requirements under our capital plan and the Finance Agency rules and regulations:
| |
| i. | Risk-based capital. Under this capital requirement, wecapital. We must maintain at all times permanent capital, defined as Class B stock (including MRCS) and retained earnings, in an amount at least equal to the sum of our credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require us to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. MRCS is considered capital for determining our compliance with this regulatory requirement. |
| |
| ii. | Total regulatory capital. Under this capital requirement, we We are required to maintain at all times a total capital-to-assets ratio of at least 4%. Total regulatory capital is the sum of permanent capital, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
| |
| iii. | Leverage capital. Under this third capital requirement, wecapital. We are required to maintain at all times a leverage capital-to-assets ratio of at least 5%. Leverage capital is defined as the sum of (i) permanent capital weighted 1.5 times and (ii) all other capital without a weighting factor. |
As presented in the following table, we were in compliance with the Finance Agency's capital requirements at December 31, 2011 and 2010. For regulatory purposes, AOCI is not considered capital; MRCS, however, is considered capital.
As detailed in the following table, we were in compliance with our regulatory capital requirements at December 31, 2010, and 2009.
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Regulatory Capital Requirements | | Required | | Actual | | Required | | Actual | | Required | | Actual | | Required | | Actual |
| Risk-based capital | | $ | 927,965 | | | $ | 2,695,980 | | | $ | 888,918 | | | $ | 2,830,673 | | | $ | 624,220 |
| | $ | 2,514,614 |
| | $ | 927,965 |
| | $ | 2,695,980 |
|
| Regulatory permanent capital-to-asset ratio | | 4.00 | % | | 6.00 | % | | 4.00 | % | | 6.07 | % | | 4.00 | % | | 6.23 | % | | 4.00 | % | | 6.00 | % |
| Regulatory permanent capital | | $ | 1,797,195 | | | $ | 2,695,980 | | | $ | 1,863,963 | | | $ | 2,830,673 | | | $ | 1,615,020 |
| | $ | 2,514,614 |
| | $ | 1,797,195 |
| | $ | 2,695,980 |
|
| Leverage ratio | | 5.00 | % | | 9.00 | % | | 5.00 | % | | 9.11 | % | | 5.00 | % | | 9.34 | % | | 5.00 | % | | 9.00 | % |
| Leverage capital | | $ | 2,246,494 | | | $ | 4,043,970 | | | $ | 2,329,953 | | | $ | 4,246,009 | | | $ | 2,018,774 |
| | $ | 3,771,921 |
| | $ | 2,246,494 |
| | $ | 4,043,970 |
|
Mandatorily Redeemable Capital Stock. As of December 31, 2010, and 2009, we had $658,363 and $755,660, respectively, in capital stock subject to mandatory redemption. These amounts have been classified as a liability in the Statements of Condition. For the years ended December 31, 2010, 2009, and 2008, dividends on MRCS of $13,743, $13,263, and $11,677, respectively, were recorded as Interest Expense.
The following table details the activity in MRCS:
| | | | | | | | | | | | |
| Activity | | 2010 | | 2009 | | 2008 |
| Balance at beginning of year | | $ | 755,660 | | | $ | 539,111 | | | $ | 163,469 | |
| Additions due to change in membership status | | 31,875 | | | 220,389 | | | 379,682 | |
| Reductions due to change in membership status | | (2,150 | ) | | — | | | (128 | ) |
| Redemptions/repurchases during the year | | (127,065 | ) | | (4,160 | ) | | (8,839 | ) |
| Accrued dividends | | 43 | | | 320 | | | 4,927 | |
| Balance at end of year | | $ | 658,363 | | | $ | 755,660 | | | $ | 539,111 | |
Substantially all of the 2010 repurchases occurred in the fourth quarter due to an announced repurchase program of excess stock in accordance with our capital plan.
The number of former members holding MRCS was 31, 29, and 22 at December 31, 2010, 2009, and 2008, respectively, which includes eight, five, and zero institutions, respectively, acquired by the FDIC in its capacity as receiver.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Restricted Retained Earnings. The FHLBanks entered into a JCE Agreement, which requires us to allocate 20% of our net income to a separate restricted retained earnings account, beginning in the third quarter of 2011. The purpose of the JCE Agreement is to enhance the capital position of each FHLBank. The intent of the JCE Agreement is to allocate that portion of each FHLBank's earnings historically paid to satisfy its REFCORP obligation to a separate retained earnings account at that FHLBank.
The JCE Agreement provides that we will allocate 20% of our net income each quarter to a restricted retained earnings account until the balance of that account equals at least 1% of the average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends except to the extent the restricted retained earnings balance exceeds 1.5% of our average balance of outstanding Consolidated Obligations for the previous quarter.
We amended our capital plan to implement the provisions of the JCE Agreement, and the Finance Agency approved the capital plan amendment on August 5, 2011. In accordance with the JCE Agreement, starting in the third quarter of 2011, we allocate 20% of our net income to a separate restricted retained earnings account.
Mandatorily Redeemable Capital Stock. At December 31, 2011 and 2010, we had $453,885 and $658,363, respectively, in capital stock subject to mandatory redemption, which were classified as a liability in the Statements of Condition.
The following table presents the activity in MRCS:
|
| | | | | | | | | | | | |
| Activity | | 2011 | | 2010 | | 2009 |
| Balance at beginning of year | | $ | 658,363 |
| | $ | 755,660 |
| | $ | 539,111 |
|
| Additions due to change in membership status | | 14,122 |
| | 31,875 |
| | 220,389 |
|
| Reductions due to change in membership status | | — |
| | (2,150 | ) | | — |
|
| Redemptions/repurchases during the year | | (218,611 | ) | | (127,065 | ) | | (4,160 | ) |
| Accrued dividends | | 11 |
| | 43 |
| | 320 |
|
| Balance at end of year | | $ | 453,885 |
| | $ | 658,363 |
| | $ | 755,660 |
|
There were 27, 31, and 29 former members holding MRCS at December 31, 2011, 2010, and 2009, respectively, which includes nine, eight, and five institutions, respectively, acquired by the FDIC in its capacity as receiver.
The following table presents the amount of MRCS by contractual year of redemption. The year of redemption in the table is the later of the end of the five-year redemption period, or the maturity date of the activity to which the stock is related, if the stock represents the activity-based stock purchase requirement of a non-member (a former member that withdrew from membership, merged into a non-member or was otherwise acquired by a non-member). Consistent with the current capital plan, we are not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, we may redeem the excess stock at management's discretion, subject to the Statutorystatutory and Regulatory Restrictionsregulatory restrictions on Capital Stock Redemption discussed below.capital stock redemption.
| | | | | | | | |
| Contractual Year of Redemption | | December 31,
2010 | | December 31,
2009 |
Year 1 (1) | | $ | 114,802 | | | $ | 4,395 | |
| Year 2 | | 9,450 | | | 138,923 | |
| Year 3 | | 326,194 | | | 14,422 | |
| Year 4 | | 181,780 | | | 379,681 | |
| Year 5 | | 26,137 | | | 218,239 | |
| Total MRCS | | $ | 658,363 | | | $ | 755,660 | |
|
| | | | | | | | |
| Contractual Year of Redemption | | December 31,
2011 | | December 31,
2010 |
Year 1 (1) | | $ | 6,683 |
| | $ | 114,802 |
|
| Year 2 | | 268,511 |
| | 9,450 |
|
| Year 3 | | 144,644 |
| | 326,194 |
|
| Year 4 | | 20,511 |
| | 181,780 |
|
| Year 5 | | 13,536 |
| | 26,137 |
|
| Total MRCS | | $ | 453,885 |
| | $ | 658,363 |
|
| | |
| (1) | Includes $500Balance at December 31, 2010 includes $500 of MRCS that hashad reached the end of the five-year redemption period but for which credit products remain outstanding. Accordingly, these shares of stock willwere not be redeemed until the credit products arewere no longer outstanding. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table presents distributions on MRCS:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| Distributions | | 2011 | | 2010 | | 2009 |
| Recorded as Interest Expense | | $ | 14,483 |
| | $ | 13,743 |
| | $ | 13,263 |
|
| Recorded as distributions from Retained Earnings | | 11 |
| | 43 |
| | 320 |
|
| Total | | $ | 14,494 |
| | $ | 13,786 |
| | $ | 13,583 |
|
The distributions from Retained Earnings represent dividends paid to former members for the portion of the previous quarterly period that they were members. The amounts charged to Interest Expense represent distributions to former members for the portion of the period they were not members.
Excess Capital Stock.Excess capital stock is defined as the amount of stock held by a member (oror former member)member in excess of that institution's minimum stock requirement. Finance Agency rules limit the ability of an FHLBFHLBank to issuecreate member excess stock under certain circumstances, including if excess stock exceeds 1% of Total Assets or if the issuance of excess stock would cause excess stock to exceed 1% of Total Assets. Our excess stock exceeded 1% of our Total Assetstotaled $0.9 billion at December 31, 20102011, and 2009.which equaled 2% of our Total Assets. Therefore, we are currently not permitted to issue new excess stock to members or distribute stock dividends.
Stock Redemption Requests. At December 31, 2011 and 2010, and 2009, certain members had requested redemptions of excess capital stock that havehas not been reclassified to MRCS because the requesting member may revoke its request, without substantial penalty, throughout the five-year waiting period, based on our capital plan. Therefore, these requests are not considered substantive in nature. However, we consider redemption requests related to merger or acquisition, charter termination, or involuntary termination from membership to be substantive when made and, therefore, the related stock is considered mandatorily redeemable and reclassified to liabilities.
The following table details the amount of Class B-1 and B-2 capital stock not considered MRCS that is subject to a redemption request by year of redemption:
| | | Year of Redemption | | December 31,
2010 | | December 31,
2009 | | December 31,
2011 | | December 31,
2010 |
| Year 1 | | $ | 29,669 | | | $ | — | | | $ | 2,289 |
| | $ | 29,669 |
|
| Year 2 | | 2,750 | | | 29,825 | | | — |
| | 2,750 |
|
| Year 3 | | — | | | 2,750 | | | 97,859 |
| | — |
|
| Year 4 | | 98,194 | | | — | | | 2,699 |
| | 98,194 |
|
| Year 5 | | 2,699 | | | 98,500 | | | 1,253 |
| | 2,699 |
|
| Total | | $ | 133,312 | | | $ | 131,075 | | | $ | 104,100 |
| | $ | 133,312 |
|
The number of members with redemption requests was elevennine and eighteleven at December 31, 2011 and 2010, and 2009, respectively.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 17 - Accumulated Other Comprehensive Income (Loss)
StatutoryThe following table presents the changes in AOCI for the years ended December 31, 2011, 2010, and Regulatory Restrictions on Capital StockRedemption. In accordance with the Bank Act, each class of FHLB stock is considered putable by the member. However, there are significant restrictions on our obligation, or right, to redeem the outstanding stock, including the following:2009:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Unrealized Gains (Losses) on AFS Securities | | Non-Credit OTTI on AFS Securities | | Non-Credit OTTI on HTM Securities | | Pension Benefits | | Total AOCI |
| Balance, December 31, 2008 | | $ | (66,766 | ) | | $ | — |
| | $ | — |
| | $ | (4,632 | ) | | $ | (71,398 | ) |
| | | | | | | | | | | |
| Net change in unrealized gains (losses) on AFS securities | | 68,906 |
| | | | | | | | 68,906 |
|
| | | | | | | | | | | |
| Non-credit portion of OTTI losses | | | | — |
| | (374,580 | ) | | | | (374,580 | ) |
| Reclassification of non-credit losses to Other Income (Loss) | | | | — |
| | 22,140 |
| | | | 22,140 |
|
| Accretion of non-credit portion of OTTI losses | | | | — |
| | 28,399 |
| | | | 28,399 |
|
| Net change in non-credit OTTI | | — |
| | — |
| | (324,041 | ) | | — |
| | (324,041 | ) |
| | | | | | | | | | | |
| Net change in pension benefits | | | | | | | | (2,069 | ) | | (2,069 | ) |
| | | | | | | | | | | |
| Other Comprehensive Income (Loss) | | 68,906 |
| | — |
| | (324,041 | ) | | (2,069 | ) | | (257,204 | ) |
| | | | | | | | | | | |
| Balance, December 31, 2009 | | $ | 2,140 |
| | $ | — |
| | $ | (324,041 | ) | | $ | (6,701 | ) | | $ | (328,602 | ) |
| | | | | | | | | | | |
| Net change in unrealized gains (losses) on AFS securities | | (6,755 | ) | | | | | | | | (6,755 | ) |
| | | | | | | | | | | |
| Non-credit portion of OTTI losses | | | | — |
| | (22,458 | ) | | | | (22,458 | ) |
| Reclassification of net realized (gains) to Other Income (Loss) | | | | (2,396 | ) | | — |
| | | | (2,396 | ) |
| Reclassification of non-credit losses to Other Income (Loss) | | | | — |
| | 68,364 |
| | | | 68,364 |
|
| Transfer of non-credit losses to AFS securities (from HTM securities) | | | | (216,259 | ) | | 216,259 |
| | | | — |
|
| Accretion of non-credit portion of OTTI losses | | | | — |
| | 54,820 |
| | | | 54,820 |
|
Net change in fair value of OTTI securities (1) | | | | 142,830 |
| | — |
| | | | 142,830 |
|
Subsequent unrealized gains (losses) in fair value (2) | | | | 7,019 |
| | — |
| | | | 7,019 |
|
| Net change in non-credit OTTI | | — |
| | (68,806 | ) | | 316,985 |
| | — |
| | 248,179 |
|
| | | | | | | | | | | |
| Net change in pension benefits | | | | | | | | (3,068 | ) | | (3,068 | ) |
| | | | | | | | | | | |
| Other Comprehensive Income (Loss) | | (6,755 | ) | | (68,806 | ) | | 316,985 |
| | (3,068 | ) | | 238,356 |
|
| | | | | | | | | | | |
| Balance, December 31, 2010 | | $ | (4,615 | ) | | $ | (68,806 | ) | | $ | (7,056 | ) | | $ | (9,769 | ) | | $ | (90,246 | ) |
| | | | | | | | | | | |
| Net change in unrealized gains (losses) on AFS securities | | 19,695 |
| | | | | | | | 19,695 |
|
| | | | | | | | | | | |
| Non-credit portion of OTTI losses | | | | (3,775 | ) | | (392 | ) | | | | (4,167 | ) |
| Reclassification of net realized (gains) to Other Income (Loss) | | | | (4,244 | ) | | — |
| | | | (4,244 | ) |
| Reclassification of non-credit losses to Other Income (Loss) | | | | 25,277 |
| | 251 |
| | | | 25,528 |
|
| Transfer of non-credit losses to AFS securities (from HTM securities) | | | | (4,312 | ) | | 4,312 |
| | | | — |
|
| Accretion of non-credit portion of OTTI losses | | | | — |
| | 2,493 |
| | | | 2,493 |
|
Net change in fair value of OTTI securities (3) | | | | (60,504 | ) | | — |
| | | | (60,504 | ) |
Subsequent unrealized gains (losses) in fair value (2) | | | | (2,910 | ) | | — |
| | | | (2,910 | ) |
| Net change in non-credit OTTI | | — |
| | (50,468 | ) | | 6,664 |
| | — |
| | (43,804 | ) |
| | | | | | | | | | | |
| Net change in pension benefits | | | | | | | | 814 |
| | 814 |
|
| | | | | | | | | | | |
| Other Comprehensive Income (Loss) | | 19,695 |
| | (50,468 | ) | | 6,664 |
| | 814 |
| | (23,295 | ) |
| | | | | | | | | | | |
| Balance, December 31, 2011 | | $ | 15,080 |
| | $ | (119,274 | ) | | $ | (392 | ) | | $ | (8,955 | ) | | $ | (113,541 | ) |
| |
• (1) | We may not redeem any capital stock if, following such redemption, we would failIncludes fair value adjustment on securities transferred from HTM to satisfy anyAFS of our minimum capital requirements. By law, no FHLB stock may be redeemed if we become undercapitalized.$138,814, and reversal of amounts in OCI for securities that have been sold of $4,016. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
| |
(2) | Includes subsequent changes in fair value in excess of non-credit losses. |
| |
• (3) | We mayIncludes subsequent changes in fair value not redeem any capital stock without approvalin excess of the Finance Agency if either our boardnon-credit losses of directors, or the Finance Agency, determines$(66,623), fair value adjustment on securities transferred from HTM to AFS of $3,421, and reversal of amounts in OCI for securities that we have incurred, or are likely to incur, losses resulting, or expected to result, in a charge against capital while such charges are continuing or expected to continue.been sold of $2,698. |
Additionally, we may not redeem or repurchase shares of capital stock from any member if (i) the principal or interest due on any Consolidated Obligation has not been paid in full when due; (ii) we fail to certify in writing to the Finance Agency that we will remain in compliance with our liquidity requirements and will remain capable of making full and timely payment of all of our current obligations; (iii) we notify the Finance Agency that we cannot provide the foregoing certification, project we will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of our obligations; or (iv) we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or enter or negotiate to enter into an agreement with one or more FHLBs to obtain financial assistance to meet our current obligations.
If we are liquidated, after payment in full to our creditors, our stockholders will be entitled to receive the par value of their capital stock as well as any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation, the board of directors shall determine the rights and preferences of the stockholders, subject to any terms and conditions imposed by the Finance Agency.
In addition to possessing the authority to prohibit stock redemptions, our board of directors has the right to call for our members, as a condition of membership, to make additional capital stock purchases as needed to satisfy statutory and regulatory capital requirements under the GLB Act.
Our board of directors has a statutory obligation to review and adjust member capital stock requirements in order to comply with our minimum capital requirements, and each member must comply promptly with any such requirement.
If, during the period between receipt of a stock redemption notification from a member and the actual redemption (which may last indefinitely if an FHLB is undercapitalized, does not have the required credit rating, etc.), an FHLB is either liquidated or forced to merge with another FHLB, the redemption value of the stock will be established after the settlement of all senior claims. Generally, no claims would be subordinated to the rights of FHLB stockholders.
The GLB Act states that an FHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount.
Note 17 —18 - Employee and Director Retirement and Deferred Compensation Plans
Qualified Defined Benefit Multi-employerMultiemployer Plan.We participate in the Pentegra Defined Benefit Plan for Financial Institutions ("DB Plan,"), a tax-qualified, defined-benefit pension plan. The DB Plan covers substantially all officersis treated as a multiemployer plan for accounting purposes but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and employees that meetthe Internal Revenue Code. As a result, certain eligibility requirements,multiemployer plan disclosures, including being hired before February 1, 2010. Funding and administrative costs ofthe certified zone status, are not applicable to the DB Plan. Under the DB Plan, charged to Other Operating Expenses were $9,531, $9,562, and $1,470 in 2010, 2009, and 2008, respectively. The DB Plan iscontributions made by a multi-employer plan in which assets contributed by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer.employer only. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately.
Nonqualified Supplemental Defined Benefit Retirement Plan. WeThe DB Plan covers substantially all officers and employees that meet certain eligibility requirements, including being hired before February 1, 2010. The DB Plan operates on a fiscal year from July 1 to June 30. The DB Plan files one Form 5500 on behalf of all employers who participate in the Federal Home Loan Bankplan. The Employer Identification Number is 13-5645888 and the three digit plan number is 333. There are no collective bargaining agreements in place.
The DB Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of Indianapolis 2005 Supplemental Executiveeach participating employer. The funded status is defined as the market value of assets divided by the funding target (100% of the present value of all benefit liabilities accrued at that date). As permitted by the Employee Retirement Income Security Act of 1974, the DB Plan accepts contributions for the prior plan year up to eight and a similar frozenhalf months after the asset valuation date. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan (collectively "year ended June 30.
SERP"), a single-employer, non-qualified, unfunded supplemental executive retirementThe most recent Form 5500 available for the DB Plan is for the year ended June 30, 2010. Our contributions for the plan covering certain officers. This plan restores retirement benefits otherwise reduced by applicationyears ended June 30, 2010 and 2009 were not more than 5% of certain tax laws and regulations.the total contributions to the DB Plan.
F- 48 |
| | | | | | | | | | | | | | |
| DB Plan Net Pension Cost and Funded Status | | 2011 | | | 2010 | | | 2009 |
| Net pension cost charged to Other Operating Expense for the year ended December 31 | | $ | 6,933 |
| | | $ | 9,531 |
| | | $ | 9,562 |
|
| DB Plan funded status as July 1 | | 90 | % | (a) | | 86 | % | (b) | | 94 | % |
| Our funded status as of July 1 | | 93 | % | | | 90 | % | | | 90 | % |
| |
(a) | The DB Plan's funded status as of July 1, 2011 is preliminary and may increase because the plan's participants were permitted to make contributions through March 15, 2012 for the plan year ended June 30, 2011. Contributions made on or before March 15, 2012, and designated for the plan year ended June 30, 2011 will be included in the final valuation as of July 1, 2011. The final funded status as of July 1, 2011 will not be available until the Form 5500 for the plan year July 1, 2011 through June 30, 2012 is filed (no later than April 2013). |
| |
(b) | The DB Plan's funded status as of July 1, 2010 is preliminary and may increase because the plan's participants were permitted to make contributions through March 15, 2011 for the plan year ended June 30, 2010. Contributions made on or before March 15, 2011, and designated for the plan year ended June 30, 2010 will be included in the final valuation as of July 1, 2010. The final funded status as of July 1, 2010 will not be available until the Form 5500 for the plan year July 1, 2010 through June 30, 2011 is filed (no later than April 2012). |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Qualified Defined Contribution Plans.We participate in the Pentegra Defined Contribution Plan for Financial Institutions ("DC Plan,"), a tax-qualified, defined contribution plan. The DC Plan covers substantially all officers and employees. Our contribution is equal to a percentage of voluntary employee contributions, subject to certain limitations. We contributed $734, $652,$989, $734, and $595$652 in the years ended December 31, 20102011,2009, and 2008, respectively.
Nonqualified Supplemental Defined Contribution Retirement Plans. On November 20, 2009, our board of directors adopted resolutions to terminate the following plans, effective November 30, 2009:
| |
• | Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan and a similar frozen plan (collectively "SETP"), a voluntary non-qualified, unfunded deferred compensation plan covering certain officers. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on the deferrals. We contributed $0, $22, and $32 in the years ended December 31, 2010, 2009, and 2008, respectively. Our obligation under the SETP at December 31, 2010, and 2009, was $0 and $2,909, respectively; and
|
| |
• | Federal Home Loan Bank of Indianapolis 2005 Directors' Deferred Compensation Plan and a similar frozen plan (collectively "DDCP"), a voluntary, non-qualified, unfunded deferred compensation plan for our directors. Our obligation under the DDCP at December 31, 2010, and 2009, was $0 and $1,371, respectively.
|
A Rabbi Trust was established to fund the deferred compensation for the officers and directors that participated in the SETP and DDCP. Assets in the Rabbi Trust, included as a component of Other Assets in the Statements of Condition, were $0 and $4,280, at December 31, 2010, and 2009, respectively. All account balances under these plans were distributed
Notes to participantsFinancial Statements, continued
($ amounts in lump-sum payments during 2010.thousands unless otherwise indicated)
Nonqualified Supplemental Defined Benefit Retirement Plan.We participate in the SERP, a single-employer, non-qualified, unfunded supplemental executive retirement plan covering certain officers. This plan restores all or a portion of defined benefits to participating employees who have had their qualified defined benefits limited by Internal Revenue Service regulations.
SERP. The obligations and funding status of ourOur SERP wereobligation was as follows:
| | | Change in benefit obligation | | 2010 | | 2009 | | 2011 | | 2010 |
| Projected benefit obligation at beginning of year | | $ | 11,902 | | | $ | 10,999 | | | $ | 15,791 |
| | $ | 11,902 |
|
| Service cost | | 537 | | | 329 | | | 507 |
| | 537 |
|
| Interest cost | | 847 | | | 687 | | | 689 |
| | 847 |
|
| Settlements and curtailments | | — | | | 1,494 | | | — |
| | — |
|
| Actuarial loss | | 4,165 | | | 2,644 | | | 39 |
| | 4,165 |
|
| Benefits paid | | (1,660 | ) | | (4,251 | ) | | (1,660 | ) | | (1,660 | ) |
| Projected benefit obligation at end of year | | $ | 15,791 | | | $ | 11,902 | | | $ | 15,366 |
| | $ | 15,791 |
|
The measurement date used to determine the current year's benefit obligation was December 31, 20102011. Key assumptions used for the actuarial calculations to determine the benefit obligationsobligation for our SERP were as follows:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Discount rate | | 5.50 | % | | 5.75 | % | | 4.30 | % | | 5.50 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | |
| Compensation increases | | | 5.50 | % | | 5.50 | % |
We determine the discount rate for the SERP by using a discounted cash-flow approach, which incorporates the timing of each expected future benefit payment. We estimate future benefit payments based on the census data of the SERP's participants, benefit formula and provisions, and valuation assumptions reflecting the probability of decrement and survival.
We then determine the present value of the future benefit payments by using duration-based interest rate yields from the Citibank Pension Discount Curve as of the measurement date, and solving for the single discount rate that produces the same present value of the future benefit payments.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
As shown in the table below, there are no plan assets for the SERP. The unfunded status is reported in Other Liabilities in the Statements of Condition as follows:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Projected benefit obligation at end of year | | $ | 15,791 | | | $ | 11,902 | | | $ | 15,366 |
| | $ | 15,791 |
|
| Plan assets | | — | | | — | | | — |
| | — |
|
| Unfunded status | | $ | 15,791 | | | $ | 11,902 | | | $ | 15,366 |
| | $ | 15,791 |
|
| | | | | | |
| Current obligations | | $ | 1,762 | | | $ | 1,722 | | |
| Non-current obligations | | 14,029 | | | 10,180 | | |
| Total | | $ | 15,791 | | | $ | 11,902 | | |
Although there are no plan assets, a Rabbi Trustgrantor trust has been established to fund the SERP. The assets in the Rabbi Trust,grantor trust, included as a component of Other Assets in the Statements of Condition, at December 31, 2011 and 2010, were carried at estimated fair values of $13,016 and $200912,893, were $12,893 and $10,311, respectively.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Components of the net periodic benefit cost and other amounts recognized in OCI for our SERP were:
| | | | | For the Years Ended December 31, | | Years Ended December 31, |
| 2010 | | 2009 | | 2008 | 2011 | | 2010 | | 2009 |
| Net Periodic Benefit Cost: | | | | | | | | | | | | |
| Service cost | | $ | 537 | | | $ | 329 | | | $ | 340 | | | $ | 507 |
| | $ | 537 |
| | $ | 329 |
|
| Interest cost | | 847 | | | 687 | | | 631 | | | 689 |
| | 847 |
| | 687 |
|
| Amortization of prior service benefit/cost | | (11 | ) | | (11 | ) | | (11 | ) | |
| Amortization of prior service benefit | | | (11 | ) | | (11 | ) | | (11 | ) |
| Amortization of net actuarial loss (gain) | | 1,108 | | | 586 | | | 359 | | | 864 |
| | 1,108 |
| | 586 |
|
| Net periodic benefit cost | | 2,481 | | | 1,591 | | | 1,319 | | | 2,049 |
| | 2,481 |
| | 1,591 |
|
| Settlement loss | | — | | | 1,494 | | | 823 | | | — |
| | — |
| | 1,494 |
|
| Unrealized loss (gain) on assets in Rabbi Trust | | – (1) | | | (1,535 | ) | | 2,172 | | |
Unrealized loss (gain) on assets in grantor trust (1) | | | — |
| | — |
| �� | (1,535 | ) |
| Total Expense recorded in Compensation and Benefits | | 2,481 | | | 1,550 | | | 4,314 | | | 2,049 |
| | 2,481 |
| | 1,550 |
|
| | | | | | | | |
| Amounts Recognized in OCI: | | | | | | | | | | | | |
| Actuarial loss (gain) | | 4,165 | | | 2,644 | | | (1,062 | ) | | 39 |
| | 4,165 |
| | 2,644 |
|
| Amortization of net actuarial loss (gain) | | (1,108 | ) | | (586 | ) | | (359 | ) | | (864 | ) | | (1,108 | ) | | (586 | ) |
| Amortization of prior service benefit | | 11 | | | 11 | | | 11 | | | 11 |
| | 11 |
| | 11 |
|
| Total amounts recognized in OCI | | 3,068 | | | 2,069 | | | (1,410 | ) | |
| Net (increase) decrease in OCI | | | (814 | ) | | 3,068 |
| | 2,069 |
|
| | | | | | | | |
| Total recognized in Compensation and Benefits and in OCI | | $ | 5,549 | | | $ | 3,619 | | | $ | 2,904 | | | $ | 1,235 |
| | $ | 5,549 |
| | $ | 3,619 |
|
| | |
| (1) | Beginning in 2010, unrealized gains (losses) on assets in the grantor trust are reported as Interest Income on the Statement of Income.Income instead of in Compensation and Benefits. For the yearyears ended December 31, 2011 and 2010, the equivalent amount was a gainamounts were gains of $1,082.$123 and $1,082, respectively. |
Key assumptions used for the actuarial calculations to determine net periodic benefit cost for the SERP were:
| | | | | | | | | |
| | | For the Years Ended December 31, |
| 2010 | | 2009 | | 2008 |
| Discount rate | | 5.75 | % | | 6.00 | % | | 6.25 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | | 5.50 | % |
|
| | | | | | | | | |
| | | Years Ended December 31, |
| 2011 | | 2010 | | 2009 |
| Discount rate | | 5.50 | % | | 5.75 | % | | 6.00 | % |
| Compensation increases | | 5.50 | % | | 5.50 | % | | 5.50 | % |
Pension and Postretirement Benefitsbenefits reported in AOCI relate to the SERP and consist of:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| Prior service benefit | | $ | 56 | | | $ | 67 | | | $ | 45 |
| | $ | 56 |
|
| Net actuarial loss | | (9,825 | ) | | (6,768 | ) | | (9,000 | ) | | (9,825 | ) |
| Total Pension and Postretirement Benefits reported in AOCI | | $ | (9,769 | ) | | $ | (6,701 | ) | |
| Net pension benefits reported in AOCI | | | $ | (8,955 | ) | | $ | (9,769 | ) |
The accumulated benefit obligation for the SERP was $12,004 and $11,120 as of December 31, 2011 and 2010, respectively.
The estimated prior service benefit and net actuarial loss that will be amortized from AOCI into net periodic benefit cost during the year ending December 31, 2012 are:
|
| | | | |
| | | Year Ending December 31, 2012 |
| Prior service benefit | | $ | (11 | ) |
| Net actuarial loss (gain) | | 1,244 |
|
| Net amount to be amortized | | $ | 1,233 |
|
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net periodic benefit cost in 2011 are:
| | | | |
| | | 2011 |
| Prior service cost (benefit) | | $ | (11 | ) |
| Net actuarial loss (gain) | | 1,178 | |
| Total | | $ | 1,167 | |
The net periodic benefit expense for the SERP for the year ending December 31, 2011,2012 is expected to be approximately $2,580.$2,529.
Since the SERP is a non-qualified unfunded plan, no contributions are required to be made in 2011.2012 or thereafter. The payments of benefits as listed below may be made from the related Rabbi Trustgrantor trust or from the Bank'sour general assets, and we may elect to make contributions to the Rabbi Trustgrantor trust in order to maintain a desired funding level. Estimated future benefit payments are:
| | | For the Year Ending December 31, | | Payments | | Payments |
| 2011 | | $ | 1,762 | | |
| 2012 | | 584 | | | $ | 522 |
|
| 2013 | | 669 | | | 600 |
|
| 2014 | | 523 | | | 441 |
|
| 2015 | | 625 | | | 526 |
|
| 2016-2020 | | 4,127 | | |
| 2016 | | | 609 |
|
| 2017-2021 | | | 3,860 |
|
DDCP. The following table is a summary of compensation earned and deferred by our directors under the DDCP: | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2010 | | 2009 | | 2008 |
| Compensation earned | | $ | 872 | | | $ | 903 | | | $ | 334 | |
| Compensation deferred | | — | | | 120 | | | 60 | |
Note 18 —19 - Segment Information
We have identified two primary operating segments:
| |
• | Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), and deposits; and |
| |
• | MPP, which consists of mortgage loans purchased from our members. |
Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), correspondent services, and deposits; and
MPP, which consists of mortgage loans initially purchased from our members.
Traditional includes interest income on Advances, investments and the borrowing costs related to those assets, net interest settlements related to interest rate exchange agreements, and premium and discount amortization on products other than the MPP. Traditional also includes the costs related to holding deposit products for members and other miscellaneous borrowings as well as all other miscellaneous income and expense not associated with the MPP. MPP income is derived primarily from the difference, or spread, between the interest income earned on mortgage loans, including the premium and discount amortization, and the borrowing cost related to those loans.
We measure the performance of each segment based upon the net interest spread of the underlying portfolio(s). For this reason, we have presented each segment on a net interest income basis. Direct other income and expense items have been allocated to each segment based upon actual results. The MPP segment includes the direct earnings effectsimpact of derivatives and hedging activities as well as direct salary and other expenses (including an allocation for indirect overhead) associated with operating the MPP, and volume-driven costs associated with master servicing and quality control fees. Direct other income/expense related to Traditional includes the direct earnings impact of derivatives and hedging activities related to Advances and investment products as well as all other income and expense not associated with the MPP. The assessments related to AHP and REFCORP have been allocated to each segment based upon each segment's proportionate share of Income Before Assessments.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We have not symmetrically allocated assets to each segment based upon financial results as it is impracticable to measure the performance of our segments from a total assets perspective. As a result, there is asymmetrical information presented in the tables below including, among other items, the allocation of depreciation without an allocation of the depreciable assets, derivatives and hedging earnings adjustments with no corresponding allocation to derivative assets, if any, and the recording of interest income with no allocation to accrued interest receivable.
The following tables detail our financial performance by operating segment:
| | | | | | | | | | | | |
| For the Years Ended | | | | | | |
| December 31, 2010 | | Traditional | | MPP | | Total |
| Net Interest Income | | $ | 172,874 | | | $ | 94,004 | | | $ | 266,878 | |
| Provision for credit losses | | — | | | 500 | | | 500 | |
| Other Income (Loss) | | (55,829 | ) | | (2,936 | ) | | (58,765 | ) |
| Other Expenses | | 52,508 | | | 2,546 | | | 55,054 | |
| Income Before Assessments | | 64,537 | | | 88,022 | | | 152,559 | |
| Total Assessments | | 18,244 | | | 23,353 | | | 41,597 | |
| Net Income | | $ | 46,293 | | | $ | 64,669 | | | $ | 110,962 | |
| | | | | | | |
| December 31, 2009 | | | | | | |
| Net Interest Income | | $ | 165,986 | | | $ | 106,792 | | | $ | 272,778 | |
| Provision for credit losses | | — | | | — | | | — | |
| Other Income (Loss) | | (55,731 | ) | | (2,430 | ) | | (58,161 | ) |
| Other Expenses | | 46,584 | | | 2,575 | | | 49,159 | |
| Income Before Assessments | | 63,671 | | | 101,787 | | | 165,458 | |
| Total Assessments | | 17,975 | | | 27,005 | | | 44,980 | |
| Net Income | | $ | 45,696 | | | $ | 74,782 | | | $ | 120,478 | |
| | | | | | | |
| December 31, 2008 | | | | | | |
| Net Interest Income | | $ | 214,675 | | | $ | 63,707 | | | $ | 278,382 | |
| Provision for credit losses | | — | | | — | | | — | |
| Other Income (Loss) | | 16,670 | | | (1,943 | ) | | 14,727 | |
| Other Expenses | | 38,308 | | | 2,394 | | | 40,702 | |
| Income Before Assessments | | 193,037 | | | 59,370 | | | 252,407 | |
| Total Assessments | | 52,166 | | | 15,752 | | | 67,918 | |
| Net Income | | $ | 140,871 | | | $ | 43,618 | | | $ | 184,489 | |
The following table details asset balances by segment:
| | | | | | | | | | | | |
| Asset Balances by Segment | | Traditional | | MPP | | Total |
| December 31, 2010 | | $ | 38,227,297 | | | $ | 6,702,576 | | | $ | 44,929,873 | |
| December 31, 2009 | | 39,327,171 | | | 7,271,895 | | | 46,599,066 | |
| December 31, 2008 | | 48,079,878 | | | 8,780,098 | | | 56,859,976 | |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table presents our financial performance by operating segment:
|
| | | | | | | | | | | | |
| Years Ended | | |
| December 31, 2011 | | Traditional | | MPP | | Total |
| Net Interest Income | | $ | 140,174 |
| | $ | 91,214 |
| | $ | 231,388 |
|
| Provision for Credit Losses | | — |
| | 4,900 |
| | 4,900 |
|
| Other Income (Loss) | | (30,306 | ) | | (2,745 | ) | | (33,051 | ) |
| Other Expenses | | 56,318 |
| | 2,320 |
| | 58,638 |
|
| Income Before Assessments | | 53,550 |
| | 81,249 |
| | 134,799 |
|
| Total Assessments | | 9,156 |
| | 15,576 |
| | 24,732 |
|
| Net Income | | $ | 44,394 |
| | $ | 65,673 |
| | $ | 110,067 |
|
| | | | | | | |
| December 31, 2010 | | | | | | |
| Net Interest Income | | $ | 172,874 |
| | $ | 94,004 |
| | $ | 266,878 |
|
| Provision for Credit Losses | | — |
| | 500 |
| | 500 |
|
| Other Income (Loss) | | (55,829 | ) | | (2,936 | ) | | (58,765 | ) |
| Other Expenses | | 52,508 |
| | 2,546 |
| | 55,054 |
|
| Income Before Assessments | | 64,537 |
| | 88,022 |
| | 152,559 |
|
| Total Assessments | | 18,244 |
| | 23,353 |
| | 41,597 |
|
| Net Income | | $ | 46,293 |
| | $ | 64,669 |
| | $ | 110,962 |
|
| | | | | | | |
| December 31, 2009 | | | | | | |
| Net Interest Income | | $ | 165,986 |
| | $ | 106,792 |
| | $ | 272,778 |
|
| Provision for Credit Losses | | — |
| | — |
| | — |
|
| Other Income (Loss) | | (55,731 | ) | | (2,430 | ) | | (58,161 | ) |
| Other Expenses | | 46,584 |
| | 2,575 |
| | 49,159 |
|
| Income Before Assessments | | 63,671 |
| | 101,787 |
| | 165,458 |
|
| Total Assessments | | 17,975 |
| | 27,005 |
| | 44,980 |
|
| Net Income | | $ | 45,696 |
| | $ | 74,782 |
| | $ | 120,478 |
|
The following table presents asset balances by segment:
|
| | | | | | | | | | | | |
| By Date | | Traditional | | MPP | | Total |
| December 31, 2011 | | $ | 34,420,348 |
| | $ | 5,955,142 |
| | $ | 40,375,490 |
|
| December 31, 2010 | | 38,227,297 |
| | 6,702,576 |
| | 44,929,873 |
|
| December 31, 2009 | | 39,327,171 |
| | 7,271,895 |
| | 46,599,066 |
|
Note 19 —20 - Estimated Fair Values
The estimated fair value amounts, recorded on the StatementsStatement of Condition and presented in the note disclosures, have been determined by using available market information and our best judgment of appropriate valuation methods. These estimates are based on pertinent information available to us at December 31, 2010,2011 and 2009.2010. Although we use our best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these estimated fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table presents the carrying value and estimated fair value summary table doesof financial assets and liabilities. The estimated fair values do not represent an estimate of our overall market value as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.and liabilities among other considerations:
| | | | | December 31, 2010 | | December 31, 2009 | | December 31, 2011 | | December 31, 2010 |
| | | Carrying | | Estimated | | Carrying | | Estimated | | Carrying | | Estimated | | Carrying | | Estimated |
| Financial Instruments | | Value | | Fair Value | | Value | | Fair Value | | Value | | Fair Value | | Value | | Fair Value |
| Assets: | | | | | | | | | | | | | | | | |
| Cash and Due from Banks | | $ | 11,676 | | | $ | 11,676 | | | $ | 1,722,077 | | | $ | 1,722,077 | | | $ | 512,682 |
| | $ | 512,682 |
| | $ | 11,676 |
| | $ | 11,676 |
|
| Interest-Bearing Deposits | | 3 | | | 3 | | | 25 | | | 25 | | | 15 |
| | 15 |
| | 3 |
| | 3 |
|
| Securities Purchased Under Agreements to Resell | | 750,000 | | | 750,000 | | | — | | | — | | | — |
| | — |
| | 750,000 |
| | 750,000 |
|
| Federal Funds Sold | | 7,325,000 | | | 7,325,100 | | | 5,532,000 | | | 5,532,253 | | | 3,422,000 |
| | 3,422,019 |
| | 7,325,000 |
| | 7,325,100 |
|
| AFS securities | | 3,237,916 | | | 3,237,916 | | | 1,760,714 | | | 1,760,714 | | | 2,949,446 |
| | 2,949,446 |
| | 3,237,916 |
| | 3,237,916 |
|
| HTM securities | | 8,471,827 | | | 8,513,391 | | | 7,701,151 | | | 7,690,482 | | | 8,832,178 |
| | 8,972,081 |
| | 8,471,827 |
| | 8,513,391 |
|
| Advances | | 18,275,364 | | | 18,354,184 | | | 22,442,904 | | | 22,537,027 | | | 18,567,702 |
| | 18,787,663 |
| | 18,275,364 |
| | 18,354,184 |
|
| Mortgage Loans Held for Portfolio, net | | 6,702,576 | | | 7,017,784 | | | 7,271,895 | | | 7,531,415 | | | 5,955,142 |
| | 6,378,449 |
| | 6,702,576 |
| | 7,017,784 |
|
| Accrued Interest Receivable | | 98,924 | | | 98,924 | | | 114,246 | | | 114,246 | | | 87,314 |
| | 87,314 |
| | 98,924 |
| | 98,924 |
|
| Derivative Assets | | 6,173 | | | 6,173 | | | 1,714 | | | 1,714 | | | 493 |
| | 493 |
| | 6,173 |
| | 6,173 |
|
| Rabbi Trust assets (included in Other Assets) | | 12,893 | | | 12,893 | | | 14,591 | | | 14,591 | | |
| Grantor trust assets (included in Other Assets) | | | 13,016 |
| | 13,016 |
| | 12,893 |
| | 12,893 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | 584,928 | | | 584,928 | | | 824,851 | | | 824,851 | | | 629,466 |
| | 629,466 |
| | 584,928 |
| | 584,928 |
|
| Consolidated Obligations: | | | | | | | | | | | | | | | | | | | | |
| Discount Notes | | 8,924,687 | | | 8,924,782 | | | 6,250,093 | | | 6,250,558 | | | 6,536,109 |
| | 6,536,249 |
| | 8,924,687 |
| | 8,924,782 |
|
| CO Bonds | | 31,875,237 | | | 32,147,040 | | | 35,907,789 | | | 36,054,510 | | | 30,358,210 |
| | 31,083,104 |
| | 31,875,237 |
| | 32,147,040 |
|
| Accrued Interest Payable | | 133,862 | | | 133,862 | | | 211,504 | | | 211,504 | | | 102,060 |
| | 102,060 |
| | 133,862 |
| | 133,862 |
|
| Derivative Liabilities | | 657,030 | | | 657,030 | | | 712,716 | | | 712,716 | | | 174,573 |
| | 174,573 |
| | 657,030 |
| | 657,030 |
|
| MRCS | | 658,363 | | | 658,363 | | | 755,660 | | | 755,660 | | | 453,885 |
| | 453,885 |
| | 658,363 |
| | 658,363 |
|
Fair Value Hierarchy. We record AFS securities, Derivative Assets, Rabbi Trustgrantor trust assets (publicly-traded mutual funds), and Derivative Liabilities at estimated fair value. The fair value hierarchy is usedrequires us to prioritizemaximize the significantuse of observable inputs and minimize the valuation techniques used to measureuse of unobservable inputs when measuring estimated fair value for assets and liabilities that are carried at fair value, both on a recurring and non-recurring basis, on the Statements of Condition.value. The inputs are evaluated, and an overall level for the estimated fair value measurement is determined. This overall level is an indication of market observability of the estimated fair value measurement for the asset or liability.
Outlined below is the application of theThe fair value hierarchy prioritizes the inputs used to our financial assets and financial liabilities that are carried atmeasure fair value either on a recurring or non-recurring basis.into three broad levels:
Level 1Inputs. - defined as those instruments for which fair value is determined from quotedQuoted prices (unadjusted) for identical assets or liabilities in an active markets. The types of assets and liabilities carried at Level 1 fair value generally include certain types of derivative contractsmarket that are traded in an open exchange market, investments such as U.S. Treasury securities, and publicly-traded mutual funds.the reporting entity can access on the measurement date.
Level 2 Inputs. - defined as those instrumentsInputs other than quoted prices within Level 1 that are observable inputs for which fair value is determined fromthe asset or liability, either directly or indirectly. If the asset or liability has a specified or contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (i) quoted prices for similar assets andor liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active or if a valuation methodologyin which little information is utilized,released publicly; (iii) inputs are selectedother than quoted prices that are observable for the asset or liability either directly(e.g., interest rates and yield curves that are observable at commonly quoted intervals, volatilities and prepayment speeds); and (iv) inputs that are derived principally from or indirectly,corroborated by observable market data (e.g., implied spreads).
Level 3 Inputs. Unobservable inputs for substantially the full term ofasset or liability that are supported by little or no market activity and that are significant to the financial instrument. The types of assets and liabilities carried at Level 2estimated fair value generally include AFS securities, including U.S. government and agency MBS and TLGP debentures, and derivative contracts.measurement of such asset or liability.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Level 3 - defined as those instruments for which inputs to the valuation methodology are unobservable and significant to the fair value measurement. The types of assets and liabilities that are carried at Level 3 fair value on either a recurring or non-recurring basis generally include private-label RMBS.
For instruments carried at estimated fair value, we review the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributesinputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at estimated fair value as of the beginning of the quarter in which the changes occur. There were no such transfers during the years ended December 31, 2010,2011 and 2009.2010.
Valuation Techniques and Significant Inputs.
Cash and Due from Banks.The estimated fair value equals the carrying value.
Interest-Bearing Deposits. The estimated fair value equals the carrying value.
Interest-Bearing Deposits. The estimated fair value approximates the carrying value.
Securities Purchased Under Agreements to Resell. The estimated fair value is determined by calculating the present value of the future cash flows for instruments with more than three months to maturity. The discount rates used in these calculations are the rates for securities with similar terms. For Securities Purchased Under Agreements to Resell with variable rates and fixed rates with three months or less to maturity or repricing, the estimated fair value approximatesequals the carrying value.
Federal Funds Sold. The estimated fair value of overnight Federal Funds Sold approximates the carrying value. The estimated fair value of term Federal Funds Sold is determined by calculating the present value of the expected future cash flows for instruments with more than three months to maturity. The discount rates used in these calculations are the rates for Federal funds with similar terms.
Investment securities –- non-MBS. The estimated fair value is determined using market-observable price quotes from third-party pricing services, such as the Composite Bloomberg Bond Trade screen, thus falling under the market approach. ThisThese price representsquotes are indicative of executable prices for identical assets.
Investment securities –- MBS. The estimated fair value incorporates prices from up to four designated third-party pricing vendors, when available. These pricing vendors use methods that may employ,various proprietary models to price MBS. The inputs to those models are derived from various sources including, but are not limited to, benchmark yields, recentreported trades, dealer estimates, valuation models,issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many private-label MBS do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and/orand matrix pricing. pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by us.
We establishconduct reviews of the four pricing vendors to confirm and further augment our understanding of the vendors' pricing processes, methodologies and control procedures for agency and private-label MBS.
Prior to December 31, 2011, we established a price for each of our MBS using a formula that iswas based upon the number of prices received. If four prices arewere received, the average of the middle two prices iswas used; if three prices arewere received, the middle price iswas used; if two prices arewere received, the average of the two prices iswas used; and if one price iswas received, it iswas used subject to some type of validation as described below.validation. The computed prices arewere tested for reasonableness using specified tolerance thresholds. Computed prices within thethese established thresholds arewere generally accepted unless strong evidence suggestssuggested that using the formula-driven price would not be appropriate. Preliminary estimated fair values that arewere outside the tolerance thresholds, or that management believes maybelieved might not be appropriate based on all available information (including those limited instances in which only one price iswas received), arewere subject to further analysis including, but not limited to, a comparison to the prices for similar securities and/or to non-binding dealer estimates estimates.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Effective December 31, 2011 we refined our method for estimating the fair values of MBS, consistent with the methodology changes approved by the FHLBank System MBS Pricing Governance Committee as of this date. Our revised valuation technique first requires the establishment of a "median" price for each security using the same formula-driven price described above. All prices that are within a specified tolerance threshold of the median price are included in the "cluster" of prices that are averaged to compute a "default" price. Prices that are outside the threshold ("outliers") are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the useanalysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an internal model thatoutlier (or outliers) is deemed most appropriate after consideration(are) in fact not representative of estimated fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the estimated fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all relevant facts and circumstances that a market participant would consider. outlier prices as described above.
As an additional step, we reviewed the final fair value estimates of our private-label RMBS holdings as of December 31, 2010, substantially2011 for reasonableness using an implied yield test. We calculated an implied yield for each of our private-label RMBS using the estimated fair value derived from the process described above and the security's projected cash flows from our OTTI process and compared such implied yield to the market yield for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. Significant variances were evaluated in conjunction with the other available pricing information to determine whether an adjustment to the fair value estimate was appropriate.
For all of our MBS holdings were pricedthe final price was determined using thisthe valuation technique.technique described above. The revision to the valuation technique did not have a significant impact on the estimated fair values of our MBS holdings as of December 31, 2011. Based on our reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices received for each of the securities supports(or, in those instances in which there were outliers or significant yield variances, our conclusion that theadditional analyses), we believe our final computedestimated prices areresult in reasonable estimates of fair value.value and, further, that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the current lack of significant market activity for private-label RMBS and home equity loan ABS, the recurring and non-recurring estimated fair value measurements for those securities were classified as of December 31, 2010, fell within Level 3 of the fair value hierarchy.hierarchy as of December 31, 2011 and 2010.
Advances. We determine the estimated fair value of Advances by calculating the present value of expected future cash flows from the Advances (excluding the amount of the accrued interest receivable). The discount rates used in these calculations are equivalent to the replacement Advance rates for Advances with similar terms. In accordance with the Finance Agency's Advances regulations, Advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make us financially indifferent to the borrower's decision to prepay the Advances. Therefore, the estimated fair value of Advances appropriately excludes prepayment risk.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Mortgage Loans Held for Portfolio. The estimated fair value of mortgage loans is determined based on quoted market prices for similar mortgage loans, if available, or modeled prices. The modeled prices start with prices for new MBS issued by U.S.United States GSEs or similar new mortgage loans.loans, adjusted for underlying assumptions or characteristics. Prices are then adjustedinterpolated for differences in coupon average loan rate, seasoning and cash flow remittance between our mortgage loans and the referenced MBS or mortgage loans. The prices of the referenced MBS and the mortgage loans are highly dependent upon the underlying prepayment and other assumptions. Changes in the prepayment ratesassumptions often have a material effect on the fair value estimates. These underlying prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.
Accrued interest receivable and payable. The estimated fair value approximatesequals the carrying value.
Derivative assets/liabilities. We base the estimated fair values of derivatives with similar terms on available market prices when available. However, active markets do not exist for many of our derivatives. Consequently, estimated fair values for these instruments are generally estimated using standard valuation techniques such as discounted cash-flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We are subject to credit risk in derivatives transactions due to the potential nonperformance of our derivatives counterparties, which are generally highly ratedhighly-rated institutions. To mitigate this risk, we have entered into master netting agreements for interest-rate exchange agreements with our derivative counterparties. In addition, we have entered into bilateral security agreements with all of our active derivatives counterparties that provide for the delivery of collateral at specified levels tied to those counterparties' credit ratings to limit our net unsecured credit exposure to those counterparties. We have evaluated the potential for the estimated fair value of the instruments to be affected by counterparty and our own credit risk and have determined that no adjustments were significant to the overall estimated fair value measurements.
The estimated fair values of our derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; thecounterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximateequal their carrying values due to their short-term nature. The estimated fair values of derivatives are netted by counterparty pursuantdetermined based on how a market participant would price the net risk exposure. Pursuant to the provisions of each of our master netting agreements.agreements, we net the estimated fair values of derivatives by counterparty. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.
A discounted cash flow analysis utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:
Interest-rate related:
| |
• | Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options. |
| |
• | In limited instances, fair value estimates for interest-rate related derivatives are obtained from dealers and are corroborated by using a pricing model and observable market data (e.g., the LIBOR Swap Curve). |
LIBOR Swap Curve
Volatility assumption - market-based expectations of future interest rate volatility implied from current market prices for similar options
Other - in limited instances, fair value estimates for interest-rate related derivatives are obtained from dealers and are corroborated by using a pricing model and observable market data (e.g., the LIBOR Swap Curve)
TBAs:
| |
• | TBA securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement. |
TBA securities prices - market-based prices of TBAs are determined by coupon class and expected term until settlement
Mortgage delivery commitments:
| |
• | TBA securities prices. Prices are then adjusted for differences in coupon, average loan rate and seasoning. |
TBA securities prices - prices are then adjusted for differences in coupon, average loan rate and seasoning
RabbiGrantor Trust Assets. Rabbi TrustGrantor trust assets, included as a component of Other Assets, are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Deposits. All deposits at December 31, 2010,2011 and 2009,2010 were variable ratevariable-rate deposits. For such deposits, estimated fair value approximates carrying value.
Consolidated Obligations. We determine the estimated fair value of Consolidated Obligations based on our valuation models and available market information. Our internal valuation models determine estimated fair values of Consolidated Obligations without embedded options using market-based yield curve inputs obtained from the Office of Finance. For estimated fair values of Consolidated Obligations with embedded options, the internal valuation models use market-based inputs from the Office of Finance and derivative dealers. The fair value is then estimated by calculating the present value of the expected cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms.
Mandatorily Redeemable Capital Stock. The estimated fair value of capital stock subject to mandatory redemption is generally equal to its par value. OurIn the ordinary course of business, our stock can only be acquired and redeemed at par value. It is not traded and no market mechanism exists for the exchange of our stock outside the cooperative structure. FairEstimated fair value also includes an estimated dividend earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared stock dividend.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Commitments. The estimated fair value of our letters of credit was immaterial at December 31, 2011 and 2010. We had no commitments to extend credit for standby bond purchase agreements at December 31, 2011 and 2010. The estimated fair value of commitments to extend credit for Advances follows the same valuation process as other Advances and is reported when a pre-determined rate is established before settlement date.
Subjectivity of estimates. Estimates of the fair value of Advances with options, mortgage instruments, derivatives with embedded options and Consolidated Obligations with options using the methods described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. These estimates are susceptible to material near term changes because they are made as of a specific point in time.
Commitments.Third-Party Pricing Services. TheAs part of the valuation techniques to determine estimated fair value for investments, including MBS and non-MBS, we utilize third-party pricing services. When the third-party pricing services are used in the determination of our letters of credit was immaterial at December 31, 2010, and 2009. We had no commitments to extend credit for standby bond purchase agreements at December 31, 2010, and 2009. Thethe estimated fair valuevalues, we perform certain procedures, as considered necessary, in order to gain reasonable assurance of commitments to extend credit for Advances follows the same valuation process as other Advances and is reported when a pre-determined rate is established before settlement date.validity of third-party prices.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Estimated Fair Value on a Recurring Basis.
The following tables detailpresent the estimated fair value of financial assets and liabilities by level within the fair value hierarchy, which are recorded on a recurring basis at December 31, 2010, and 2009:on our Statement of Condition:
| | | | | | | | | | | | | Netting |
| December 31, 2011 | | | Total | | Level 1 | | Level 2 | | Level 3 | | Adjustment (1) |
| AFS securities: | | | | | | | | | | | |
| GSE debentures | | | $ | 2,025,695 |
| | $ | — |
| | $ | 2,025,695 |
| | $ | — |
| | $ | — |
|
| TLGP debentures | | | 322,442 |
| | — |
| | 322,442 |
| | — |
| | — |
|
| Private-label RMBS | | | 601,309 |
| | — |
| | — |
| | 601,309 |
| | — |
|
| Total AFS securities | | | 2,949,446 |
| | — |
| | 2,348,137 |
| | 601,309 |
| | — |
|
| Derivative Assets: | | | |
| | |
| | |
| | |
| | |
|
| Interest-rate related | | | 76 |
| | — |
| | 76,723 |
| | — |
| | (76,647 | ) |
| Interest-rate futures/forwards | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Mortgage delivery commitments | | | 417 |
| | — |
| | 417 |
| | — |
| | — |
|
| Total Derivative Assets | | | 493 |
| | — |
| | 77,140 |
| | — |
| | (76,647 | ) |
| Grantor trust (included in Other Assets) | | | 13,016 |
| | 13,016 |
| | — |
| | — |
| | — |
|
| Total assets at estimated fair value | | | $ | 2,962,955 |
| | $ | 13,016 |
| | $ | 2,425,277 |
| | $ | 601,309 |
| | $ | (76,647 | ) |
| | | | |
| | |
| | |
| | |
| | |
|
| Derivative Liabilities: | | | |
| | |
| | |
| | |
| | |
|
| Interest-rate related | | | $ | 173,810 |
| | $ | — |
| | $ | 969,795 |
| | $ | — |
| | $ | (795,985 | ) |
| Interest-rate futures/forwards | | | 763 |
| | — |
| | 763 |
| | — |
| | — |
|
| Mortgage delivery commitments | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Derivative Liabilities | | | 174,573 |
| | — |
| | 970,558 |
| | — |
| | (795,985 | ) |
| Total liabilities at estimated fair value | | | $ | 174,573 |
| | $ | — |
| | $ | 970,558 |
| | $ | — |
| | $ | (795,985 | ) |
| | | | | | | | | | | Netting | | | | | | | | | | |
| December 31, 2010 | | Total | | Level 1 | | Level 2 | | Level 3 | | Adjustment (1) | | | | | | | | | | |
| AFS securities: | | | | | | | | | | | | | | | | | | | | |
| GSE debentures | | $ | 1,930,258 | | | $ | — | | | $ | 1,930,258 | | | $ | — | | | $ | — | | | $ | 1,930,258 |
| | $ | — |
| | $ | 1,930,258 |
| | $ | — |
| | $ | — |
|
| TLGP debentures | | 325,117 | | | — | | | 325,117 | | | — | | | — | | | 325,117 |
| | — |
| | 325,117 |
| | — |
| | — |
|
| Private-label RMBS | | 982,541 | | | — | | | — | | | 982,541 | | | — | | | 982,541 |
| | — |
| | — |
| | 982,541 |
| | — |
|
| Total AFS securities | | 3,237,916 | | | — | | | 2,255,375 | | | 982,541 | | | — | | | 3,237,916 |
| | — |
| | 2,255,375 |
| | 982,541 |
| | — |
|
| Derivative Assets: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Interest-rate related | | 5,657 | | | — | | | 199,115 | | | — | | | (193,458 | ) | | 5,657 |
| | — |
| | 199,115 |
| | — |
| | (193,458 | ) |
| Interest-rate futures/forwards | | 241 | | | — | | | 241 | | | — | | | — | | | 241 |
| | — |
| | 241 |
| | — |
| | — |
|
| Mortgage delivery commitments | | 275 | | | — | | | 275 | | | — | | | — | | | 275 |
| | — |
| | 275 |
| | — |
| | — |
|
| Total Derivative Assets | | 6,173 | | | — | | | 199,631 | | | — | | | (193,458 | ) | | 6,173 |
| | — |
| | 199,631 |
| | — |
| | (193,458 | ) |
| Rabbi Trust (included in Other Assets) | | 12,983 | | | 12,983 | | | — | | | — | | | — | | |
| Total assets at fair value | | $ | 3,257,072 | | | $ | 12,983 | | | $ | 2,455,006 | | | $ | 982,541 | | | $ | (193,458 | ) | |
| Grantor trust (included in Other Assets) | | | 12,893 |
| | 12,893 |
| | — |
| | — |
| | — |
|
| Total assets at estimated fair value | | | $ | 3,256,982 |
| | $ | 12,893 |
| | $ | 2,455,006 |
| | $ | 982,541 |
| | $ | (193,458 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Derivative Liabilities: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Interest-rate related | | $ | 656,018 | | | $ | — | | | $ | 874,854 | | | $ | — | | | $ | (218,836 | ) | | $ | 656,018 |
| | $ | — |
| | $ | 874,854 |
| | $ | — |
| | $ | (218,836 | ) |
| Interest-rate futures/forwards | | 543 | | | — | | | 543 | | | — | | | — | | | 543 |
| | — |
| | 543 |
| | — |
| | — |
|
| Mortgage delivery commitments | | 469 | | | — | | | 469 | | | — | | | — | | | 469 |
| | — |
| | 469 |
| | — |
| | — |
|
| Total Derivative Liabilities | | 657,030 | | | — | | | 875,866 | | | — | | | (218,836 | ) | | 657,030 |
| | — |
| | 875,866 |
| | — |
| | (218,836 | ) |
| Total liabilities at fair value | | $ | 657,030 | | | $ | — | | | $ | 875,866 | | | $ | — | | | $ | (218,836 | ) | |
| | | | | | | | | | | | |
| December 31, 2009 | | | |
| AFS securities: | | | | | | | | | | | |
| GSE debentures | | $ | 1,760,714 | | | $ | — | | | $ | 1,760,714 | | | $ | — | | | $ | — | | |
| TLGP debentures | | — | | | — | | | — | | | — | | | — | | |
| Total AFS securities | | 1,760,714 | | | — | | | 1,760,714 | | | — | | | — | | |
| Derivative Assets | | 1,714 | | | — | | | 198,055 | | | — | | | (196,341 | ) | |
| Rabbi Trust (included in Other Assets) | | 14,591 | | | 14,591 | | | — | | | — | | | — | | |
| Total assets at fair value | | $ | 1,777,019 | | | $ | 14,591 | | | $ | 1,958,769 | | | $ | — | | | $ | (196,341 | ) | |
| | | | | | | | | | | | |
| Derivative Liabilities | | $ | 712,716 | | | $ | — | | | $ | 989,526 | | | $ | — | | | $ | (276,810 | ) | |
| Total liabilities at fair value | | $ | 712,716 | | | $ | — | | | $ | 989,526 | | | $ | — | | | $ | (276,810 | ) | |
| Total liabilities at estimated fair value | | | $ | 657,030 |
| | $ | — |
| | $ | 875,866 |
| | $ | — |
| | $ | (218,836 | ) |
| | |
| (1) | Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same counterparties. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The table below presents a reconciliation of assets and liabilitiesour AFS private-label RMBS measured at estimated fair value on a recurring basis which used leveland classified as Level 3 significant inputs duringat the yearyears ended December 31, 2011 and 2010. There were none during the year ended December 31, 2009.
| | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | AFS Private-label RMBS |
| December 31, 2009 | | $ | — | |
| Total gains or losses (realized/unrealized): | | |
| Included in net gains on sale of AFS securities | | 2,396 | |
| Incuded in net gains (losses) on changes in fair value included in earnings | | — | |
| Included in AOCI | | — | |
| Purchases, issuances and settlements | | (34,669 | ) |
Transfers from HTM to AFS securities (1) | | 1,014,814 | |
| December 31, 2010 | | $ | 982,541 | |
|
| | | | | | | | |
| Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | 2011 | | 2010 |
| Balance, beginning of year | | $ | 982,541 |
| | $ | — |
|
| Total realized and unrealized gains (losses): | | | | |
| Included in Net Realized Gains from Sale of AFS Securities | | 4,244 |
| | 2,396 |
|
| Included in net gains (losses) on changes in fair value included in Interest Income and Other Income (Loss) | | (23,122 | ) | | — |
|
Included in OCI (1) | | (48,031 | ) | | — |
|
| Purchases, issuances, sales and settlements: | | | | |
| Sales | | (161,305 | ) | | (46,648 | ) |
| Settlements | | (170,261 | ) | | — |
|
| Transfers from HTM to AFS securities | | 17,243 |
| | 1,026,793 |
|
| Balance, end of year | | $ | 601,309 |
| | $ | 982,541 |
|
| | | | | |
| Net gains (losses) included in Other Income (Loss) attributable to changes in fair value relating to assets still held at end of year | | $ | (21,926 | ) | | $ | — |
|
| | |
| (1) | InThis amount is included in OCI within the fourth quarternon-credit portion of 2010, we transferred certain private-label RMBS from HTMOTTI losses, reclassification of non-credit losses to AFS. See Note 5 - Available-for-Sale Securities for additional information on these transfers. AsOther Income (Loss), subsequent unrealized (gains) losses in fair value in excess of December 31, 2010,non-credit losses, and subsequent changes in fair value not in excess of non-credit losses (a portion of the net change in fair value of these securities continued to be determined using significant unobservable inputs (Level 3)OTTI securities). |
Estimated Fair Value on a Nonrecurring Basis. We measure certain HTM securities at estimated fair value on a nonrecurring basis. These assets are not measuredcarried at estimated fair value on an ongoing basis, but are subject to fair-valuefair value adjustments only in certain circumstances (e.g., when there is evidence of OTTI). These amounts fall under Level 3 in the fair value hierarchy.
The table below presents the estimated fair value of HTM securities by level within the fair value hierarchy that are recorded on a non-recurring basis at December 31, 2011.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| December 31, 2011 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Home equity loan ABS | | $ | 588 |
| | $ | — |
| | $ | — |
| | $ | 588 |
|
| Total nonrecurring assets at estimated fair value | | $ | 588 |
| | $ | — |
| | $ | — |
| | $ | 588 |
|
As of December 31, 2010, none of our HTM securities were carried at estimated fair value. However, we recorded certain HTM securities at fair value and recognized OTTI losses on those HTM securities during the years ended December 31, 2010, and 2009, which were included in Other Income (Loss). At December 31, 2009, the fair value of such securities was $513,234.
Note 20 —21 - Commitments and Contingencies
The following table summarizespresents our off-balance-sheet commitments:commitments at their notional amounts:
| | | | December 31, 2010 | | December 31, 2009 | | | | | | | | | | | | | |
| Notional amount | | Expire within one year | | Expire after one year | | Total | | Total | |
| | | | December 31, 2011 | | December 31, 2010 |
| By Commitment | | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Standby letters of credit outstanding (1) | | $ | 41,616 | | | $ | 485,220 | | | $ | 526,836 | | | $ | 589,654 | | | $ | 240,599 |
| | $ | 271,567 |
| | $ | 512,166 |
| | $ | 41,616 |
| | $ | 485,220 |
| | $ | 526,836 |
|
| Unused lines of credit | | 762,418 | | | — | | | 762,418 | | | 170,580 | | | 780,409 |
| | — |
| | 780,409 |
| | 762,418 |
| | — |
| | 762,418 |
|
Commitments to fund additional Advances (2) | | 15,633 | | | — | | | 15,633 | | | 37,681 | | | 12,052 |
| | — |
| | 12,052 |
| | 15,633 |
| | — |
| | 15,633 |
|
| Commitment to fund or purchase mortgage loans | | 57,063 | | | — | | | 57,063 | | | 38,328 | | | 68,069 |
| | — |
| | 68,069 |
| | 57,063 |
| | — |
| | 57,063 |
|
Unsettled CO Bonds, at par (3) | | 412,000 | | | — | | | 412,000 | | | 1,994,500 | | | 275,000 |
| | — |
| | 275,000 |
| | 412,000 |
| | — |
| | 412,000 |
|
| Unsettled Discount Notes, at par | | — | | | — | | | — | | | — | | |
F-67
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
| | |
| (1) | We had no outstanding commitments to issue standby letters of credit at December 31, 2010,2011 or 2009.2010. |
| |
| (2) | Commitments to fund additional Advances are generally for periods up to 126 months. |
| |
(3) | Unsettled CO Bonds of $250,000$250,000, at December 31, 2011 and $1,650,0002010 were hedged with associated interest-rate swaps at December 31, 2010, and 2009, respectively.swaps. |
Commitments to Extend Credit.Standby letters of credit are executed for members for a fee. A standby letter of credit is a financing arrangement between us and one of our members.members, and is executed for members for a fee. Commitments to extend credit are fully collateralized at the time of issuance. If we are required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. The original terms of these standby letters of credit, including related commitments, range from less than three6 months to 20 years, including a final expiration in 2,0292029. The carrying value of guarantees related to standby letters of credit areis recorded in Other Liabilities and were $was 5,859$3,580 and $4,969$5,859 at December 31, 2010,2011 and 2009,2010, respectively.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We monitor the creditworthiness of our standby letters of credit based on an evaluation of the financial condition of our members. We have established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. Based on credit analyses performed by us as well as collateral requirements, we have not deemed it necessary to record any additional liability on these commitments. Commitments to extend credit are fully collateralized at the time of issuance. See Note 8 –- Advances and Note 10 - Allowance for Credit Losses for more information.
Commitments to Fund or Purchase Mortgage Loans.Commitments that unconditionally obligate us to fund or purchase mortgage loans are generally for periods not to exceed 91 days. Such commitments are reported as Derivative Assets or Derivative Liabilities at their estimated fair value.
Pledged Collateral.We generally execute derivatives with large banks and major broker-dealers and generally enter into bilateral pledge (collateral) agreements. We had pledged $31,200$719,292 and $80,457$31,200 of cash collateral, at par, at December 31, 2011 and 2010, and 2009, respectively. At December 31, 2010,2011 and 2009,2010, we had not pledged any securities as collateral.
Lease Commitments. We charged to operating expensesOther Operating Expenses net rental and related costs of approximately $152, $131, $151 and $156$151 for the years ended December 31, 2011, 2010 2009,, and 2008,2009, respectively. Future minimum rental payments required under our operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2010,2011 are as follows:
| | | | Premises | | Equipment | | Total | Premises | | Equipment | | Total |
| Year 1 | $ | 77 | | | $ | 16 | | | $ | 93 | | $ | 80 |
| | $ | 14 |
| | $ | 94 |
|
| Year 2 | 80 | | | 8 | | | 88 | | 82 |
| | 7 |
| | 89 |
|
| Year 3 | 82 | | | 2 | | | 84 | | 84 |
| | 5 |
| | 89 |
|
| Year 4 | 84 | | | — | | | 84 | | 84 |
| | — |
| | 84 |
|
| Year 5 | 84 | | | — | | | 84 | | 63 |
| | — |
| | 63 |
|
| Thereafter | 63 | | | — | | | 63 | | — |
| | — |
| | — |
|
| Total | $ | 470 | | | $ | 26 | | | $ | 496 | | $ | 393 |
| | $ | 26 |
| | $ | 419 |
|
Legal Proceedings. On May 9, 2011 we received a Derivatives Alternative Dispute Resolution notice from the bankruptcy estate of Lehman Brothers Holding Company, the guarantor for one of our former derivatives counterparties, Lehman Brothers Special Financing (Lehman). This matter was mediated in accordance with the Alternative Dispute Resolution Procedure Order entered by the Bankruptcy Court, dated September 17, 2009 (Order). The mediation conducted pursuant to the Order commenced on December 15, 2011 and concluded with a confidential settlement and payment in December 2011, which was immaterial to our financial condition and results of operations.
We are also subject to other legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition or results of operations.
FurtherAdditional discussion of other commitments and contingencies is provided in Note 8 –- Advances; Note 9 –- Mortgage Loans Held for Portfolio; Note 11 –- Derivative and Hedging Activities; Note 13 –- Consolidated Obligations; Note 16 –- Capital; and Note 19 –20 - Estimated Fair Value.Values.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 21 —22 - Transactions with Related Parties and Other FHLBs
Transactions with Members. We are a cooperative whose members own the majority of our outstanding capital stock. Former members and certain nonmembers own the remaining capital stock and are required to maintain their investment in our capital stock until their outstanding transactions have matured or are paid off and their capital stock is redeemed in accordance with our capital plan or regulatory requirements. See Note 16 –- Capital for more information.
All of our Advances are initially issued to members, and all Mortgage Loans Held for Portfolio were initially purchased from members. We also maintain demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances. Such transactions with members are entered into during the normal course of business. Finance Agency regulations require us to price our credit products consistently and without discrimination to all members applying for Advances. We are also prohibited from pricing our Advances below our marginal cost of matching term and maturity funds in the marketplace, including embedded options, and the administrative cost associated with making such Advances to members. However, we may price Advances on a differential basis, based on the credit and other risks to us of lending to any particular member, or other reasonable criteria applied equally to all members. We apply such standards and criteria consistently, and without discrimination, to all members applying for Advances.
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
In addition, we may enter intopurchase investments in Federal Funds Sold, Securities Purchased Under Agreements to Resell, CDs,certificates of deposit, and MBS withfrom members or their affiliates. Our MBS are purchased through securities brokers or dealers, and allAll investments are transacted at market prices without preference to the status of the counterparty or the issuer of the investment as a member, nonmember, or affiliate thereof.
As provided by statute and Finance Agency regulations, the only voting rights conferred upon our members are for the election of directors. In accordance withdirectors and, under certain circumstances, the Bank Act (as amended by HERA) and Finance Agency regulations, members elect allratification of our directors. Under the statute and regulations, each member directorship is designated to one of the two states in our district, and each member is entitled to vote only for member directorship candidates for the state in which the member's principal place of business is located. Independent directors are elected at-large by all members in our district. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of our capital stock that were required to be held by all members in that state as of the record date for voting. Previous member shareholders are not entitled to cast votes for the election of directors.proposed merger agreement. At December 31, 2010,2011 and 2009,2010, no member owned more than 10% of our voting interests due to statutory limits on members' voting rights as discussed above.rights.
Transactions with Related Parties.For purposes of these financial statements, we define related parties as those members and former members and their affiliates with capital stock outstanding in excess of 10% of our total outstanding Capital Stock and MRCS. Transactions with such members are entered into in the normal course of business and are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other similar transactions, and do not involve more than the normal risk of collectability.
The following table sets forth significantpresents outstanding balances as of December 31, 2010, and 2009 with respect to transactions with related parties.
| | | | | | | | |
| Related Party Activity | | December 31, 2010 | | December 31, 2009 |
| Advances, par value | | $ | 4,626,477 | | | $ | 5,350,000 | |
| % of Total Advances | | 26 | % | | 25 | % |
| Mortgage Loans Held for Portfolio, unpaid principal balance | | $ | 2,863,456 | | | $ | 2,951,010 | |
| % of Total Mortgage Loans Held for Portfolio | | 43 | % | | 41 | % |
| Capital Stock, including MRCS, par value | | $ | 618,807 | | | $ | 707,553 | |
| % of Total Capital Stock, including MRCS | | 27 | % | | 28 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock, including MRCS | | Advances | | Mortgage Loans Held for Portfolio |
| December 31, 2011 | | Balance, par value | | % of Total | | Balance, par value | | % of Total | | Balance, UPB | | % of Total |
| Flagstar Bank, FSB | | $ | 301,737 |
| | 15 | % | | $ | 3,953,000 |
| | 22 | % | | $ | 752,284 |
| | 13 | % |
Bank of America, N.A. (1) | | 224,921 |
| | 11 | % | | 400,000 |
| | 2 | % | | 1,641,156 |
| | 27 | % |
| Total | | $ | 526,658 |
| | 26 | % | | $ | 4,353,000 |
| | 24 | % | | $ | 2,393,440 |
| | 40 | % |
| | | | | | | | | | | | | |
| December 31, 2010 | | | | | | | | | | | | |
| Flagstar Bank, FSB | | $ | 337,190 |
| | 15 | % | | $ | 3,726,477 |
| | 21 | % | | $ | 721,335 |
| | 11 | % |
Bank of America, N.A. (1) | | 281,617 |
| | 12 | % | | 900,000 |
| | 5 | % | | 2,142,121 |
| | 32 | % |
| Total | | $ | 618,807 |
| | 27 | % | | $ | 4,626,477 |
| | 26 | % | | $ | 2,863,456 |
| | 43 | % |
During the years ended December 31, 2011, 2010, and 2009, we had net Advances to (repayments from) related parties as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| Net Advances to (repayments from) related parties | | 2011 | | 2010 | | 2009 |
| Flagstar Bank, FSB | | $ | 226,523 |
| | $ | (173,523 | ) | | $ | (1,300,000 | ) |
Bank of America, N.A. (1) | | (500,000 | ) | | (550,000 | ) | | (3,550,165 | ) |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
During the years ended December 31, 2011, 2010, and 2009, we acquired mortgage loans from related parties as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| Mortgage loans purchased from related parties | | 2011 | | 2010 | | 2009 |
| Flagstar Bank, FSB | | $ | 81,260 |
| | $ | 570,125 |
| | $ | — |
|
Bank of America, N.A. (1) | | — |
| | — |
| | — |
|
Transactions with Directors' Financial Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors ("Directors' Financial Institutions").directors. In accordance with Finance Agency regulations, require that transactions with Directors' Financial Institutions bedirectors' financial institutions are made on the same terms as those with any other member. We had Advances, Mortgage Loans Held for Portfolio, and Capital Stock
The following table presents outstanding (including MRCS) to Directors' Financial Institutions as follows:balances with directors' financial institutions.
| | | | | | | | |
| Balances with Directors' Financial Institutions | | December 31,
2010 | | December 31,
2009 |
| Advances, par value | | $ | 4,408,276 | | | $ | 4,889,358 | |
| % of Total Advances | | 25 | % | | 23 | % |
| Mortgage Loans Held for Portfolio, unpaid principal balance | | $ | 758,879 | | | $ | 216,217 | |
| % of Total Mortgage Loans Held for Portfolio | | 11 | % | | 3 | % |
| Capital Stock, including MRCS, par value | | $ | 406,555 | | | $ | 453,813 | |
| % of Total Capital Stock, including MRCS | | 18 | % | | 18 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Capital Stock, including MRCS | | Advances | | Mortgage Loans Held for Portfolio |
Balances with directors' financial institutions (1) | | Balance, par value | | % of Total | | Balance, par value | | % of Total | | Balance, UPB | | % of Total |
| December 31, 2011 | | $ | 66,652 |
| | 3 | % | | $ | 543,309 |
| | 3 | % | | $ | 42,746 |
| | 1 | % |
| December 31, 2010 | | 406,555 |
| | 18 | % | | 4,408,276 |
| | 25 | % | | 758,879 |
| | 11 | % |
| |
(1) | The director from Flagstar Bank, FSB served in 2010, but not in 2011. |
During the years ended December 31, 2011, and 2010, and 2009, we had net Advances to (repayments from) directors' financial institutions and2008, we acquired mortgage loans from Directors' Financial Institutions, presented as ofdirectors' financial institutions, taking into account the datedates of the directors' appointments and resignations, as follows:
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2010 | | 2009 | | 2008 |
| Mortgage Loans purchased from Directors' Financial Institutions | $ | 584,337 | | | $ | 41,882 | | | $ | 6,723 | |
F- 60 |
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2011 | | 2010 | | 2009 |
Net Advances to (repayments from) directors' financial institutions (1) | | $ | (45,363 | ) | | $ | (459,771 | ) | | $ | (1,803,233 | ) |
Mortgage loans purchased from directors' financial institutions (1) | | 8,945 |
| | 584,337 |
| | 41,882 |
|
| |
(1) | The director from Flagstar Bank, FSB served in 2009 and 2010, but not in 2011. |
Notes to Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Transactions with other FHLBsFHLBanks. Occasionally, we loan (or borrow) short-term funds to (from) other FHLBs.FHLBanks. There were no loans to or from other FHLBsFHLBanks outstanding at December 31, 20112010, or 20092010.
Loans to other FHLBsFHLBanks and principal repayments of these loans were as follows:
| | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| 2010 | | 2009 | | 2008 |
| Loans to other FHLBs and related principal repayments | | $ | 236,735 | | | $ | 180,000 | | | $ | 1,169,000 | |
| Interest income earned from other FHLBs | | 1 | | | 1 | | | 64 | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| 2011 | | 2010 | | 2009 |
| Loans to other FHLBanks | | $ | 50,000 |
| | $ | 236,735 |
| | $ | 180,000 |
|
| Principal repayments | | (50,000 | ) | | (236,735 | ) | | (180,000 | ) |
Borrowings from other FHLBsFHLBanks and principal repayments on these loans were as follows:
| | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| 2010 | | 2009 | | 2008 |
| Borrowings from other FHLBs and related principal repayments | | $ | 114,000 | | | $ | 236,000 | | | $ | 22,000 | |
| Interest expense incurred to other FHLBs | | – (1) | | | 2 | | | 1 | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| 2011 | | 2010 | | 2009 |
| Borrowings from other FHLBanks | | $ | — |
| | $ | 114,000 |
| | $ | 236,000 |
|
| Principal repayments | | — |
| | (114,000 | ) | | (236,000 | ) |
| | |
| (1)
| Interest expense incurred is less than one thousand dollars for the year ended December 31, 2010. |
GLOSSARY OF TERMS
ABS: Asset-backed securities
Advances: Secured loans to members, former members or housing associates
AFS: Available-for-sale
AHP: Affordable Housing Program
AMA: Acquired Member Assets
AOCI: Accumulated Other Comprehensive Income (Loss)
Bank Act: Federal Home Loan Bank Act of 1932, as amended
CBSA: Core Based Statistical Areas
CDFI: Community Development Financial Institution
CFI: Community Financial Institution
CFTC: Commodity Futures Trading Commission
CMO: Collateralized Mortgage Obligation
CO Bonds: Consolidated Obligation Bonds
Consolidated Obligations: CO Bonds and Discount Notes
DB Plan: Pentegra Defined Benefit Plan for Financial Institutions
DC Plan: Pentegra Defined Contribution Plan for Financial Institutions
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted July 21, 2010
Exchange Act: Securities Exchange Act of 1934, as amended
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FOMC: Federal Open Market Committee
FHA: Federal Housing Administration
FHLBank: A Federal Home Loan Bank
FHLBanks: The 12 Federal Home Loan Banks or subset thereof
FHLBank System: The 12 FHLBanks and the Office of Finance
Finance Agency: Federal Housing Finance Agency
Finance Board: Federal Housing Finance Board
Fitch: Fitch Ratings, Inc.
Form 8-K: Current Report on Form 8-K as filed with the SEC under the Securities Exchange Act of 1934
Form 10-K: Annual Report on Form 10-K as filed with the SEC under the Securities Exchange Act of 1934
Form 10-Q: Quarterly Report on Form 10-Q as filed with the SEC under the Securities Exchange Act of 1934
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally accepted accounting principles in the United States of America
Genworth: Genworth Residential Mortgage Insurance Corporation of North Carolina
Ginnie Mae: Government National Mortgage Association
GLB Act: Gramm-Leach-Bliley Act of 1999
GSE: Government-sponsored enterprise
HERA: Housing and Economic Recovery Act of 2008
Housing Associate: Non-Member Housing Associates
HTM: Held-to-maturity
HUD: United States Department of Housing and Urban Development
JCE Agreement: Joint Capital Enhancement Agreement, as amended
LIBOR: London Interbank Offered Rate
LRA: Lender risk account
LTV: Loan-to-Value
MRCS: Mandatorily Redeemable Capital Stock
MBS: Mortgage-backed securities
MCC: Master Commitment Contract
NRSRO: Nationally Recognized Statistical Rating Organization
NYSE: New York Stock Exchange
GLOSSARY OF TERMS
OCI: Other Comprehensive Income
ORERC: Other Real Estate-Related Collateral
OTTI: Other-than-temporary impairment or impaired (as the context indicates)
PFI: Participating Financial Institution
PMI: Primary mortgage insurance
REFCORP: Resolution Funding Corporation
REMIC: Real Estate Mortgage Investment Conduit
RMBS: Residential mortgage-backed securities
RMP: Risk management policy of the Bank
S&P: Standard & Poor's Rating Service
SEC: Securities and Exchange Commission
SERP: Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Retirement Plan and a similar frozen plan
SMI: Supplemental mortgage insurance
TBA: To Be Announced
TLGP: The FDIC's Temporary Liquidity Guarantee Program
UCC: Uniform Commercial Code
UPB: Unpaid principal balance
VaR: Value at risk
VIE: Variable Interest Entity
WAIR: Weighted average interest rate