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EX-12 - EXHIBIT 12 - Federal Home Loan Bank of Boston | a2197398zex-12.htm |
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Boston | a2197398zex-31_1.htm |
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Boston | a2197398zex-31_2.htm |
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Boston | a2197398zex-32_1.htm |
EX-32.2 - EXHIBIT 32.2 - Federal Home Loan Bank of Boston | a2197398zex-32_2.htm |
EX-10.7.4 - EXHIBIT 10.7.4 - Federal Home Loan Bank of Boston | a2197398zex-10_74.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 |
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OR |
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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: 000-51402
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter)
Federally chartered corporation (State or other jurisdiction of incorporation or organization) |
04-6002575 (I.R.S. Employer Identification Number) |
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111 Huntington Avenue Boston, Massachusetts (Address of principal executive offices) |
02199 (Zip Code) |
(617) 292-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 this Form 10-K or any amendment to this Form 10-K. ý
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):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
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, 2009 the aggregate par value of the stock held by members of the registrant was $3,706,351,500. As of February 28, 2010, we had 37,357,575 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
General
The Federal Home Loan Bank of Boston (the Bank) is a federally chartered corporation organized by Congress in 1932 and is a government-sponsored enterprise (GSE). The Bank is privately capitalized and its mission is to serve the residential-mortgage and community-development lending activities of its member institutions and housing associates located in the New England region. Altogether, there are 12 district Federal Home Loan Banks (FHLBanks) located across the United States (U.S.), each supporting the lending activities of member financial institutions within their specific regions. Each FHLBank is a separate entity with its own board of directors, management, and employees.
Unless otherwise indicated or unless the context requires otherwise, all references in this discussion to "the Bank," "we," "us," "our" or similar references mean the Federal Home Loan Bank of Boston.
The Bank combines private capital and public sponsorship that enables its member institutions and housing associates to assure the flow of credit and other services for housing and community development. The Bank serves the public through its member institutions and housing associates by providing these institutions with a readily available, low-cost source of funds, thereby enhancing the availability of residential-mortgage and community-investment credit. In addition, the Bank provides members a means of liquidity through a mortgage-loan finance program. Under this program, members are offered the opportunity to originate mortgage loans for sale to the Bank. The Bank's primary source of income is derived from the spread between interest-earning assets and interest-bearing liabilities. The Bank is generally able to borrow funds at favorable rates due to its GSE status.
The Bank's members and housing associates are comprised of institutions located throughout the New England region. The region is comprised of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Institutions eligible for membership include thrift institutions (savings banks, savings and loan associations, and cooperative banks), commercial banks, credit unions, community development financial institutions (CDFIs), and insurance companies that are active in housing finance. The Bank is also authorized to lend to certain nonmember institutions (called housing associates) such as state housing-finance agencies located in New England. Members are required to purchase and hold the Bank's capital stock for advances and certain other activities transacted with the Bank. The par value of the Bank's capital stock is $100 per share and is not publicly traded on any stock exchange. The U.S. government does not guarantee either the member's investment in or any dividend on the Bank's stock. The Bank is capitalized by the capital stock purchased by its members and by retained earnings. Members may receive dividends, which are determined by the Bank's board of directors, and may redeem their capital stock at par value after satisfying certain requirements discussed further in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital.
The Federal Housing Finance Board (the Finance Board), an independent agency in the executive branch of the U.S. government, supervised and regulated the FHLBanks through July 29, 2008. With the passage of the Housing and Economic Recovery Act of 2008 (HERA), the newly-established, independent Federal Housing Finance Agency (the Finance Agency) became the new regulator of the FHLBanks, effective July 30, 2008. All existing regulations, orders, and decisions of the Finance Board remain in effect until modified or superseded. In accordance with HERA, the Finance Board was abolished one year after the date of enactment of HERA.
The Office of Finance was established by the predecessor of the Finance Board to facilitate the issuing and servicing of debt in the form of consolidated obligations (COs) of the FHLBanks. COs are issued on a joint basis. The FHLBanks, through the Office of Finance as their agent, are the issuers of COs for which they are jointly and severally liable. The Office of Finance also provides the FHLBanks
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with credit and market data and maintains the FHLBanks' joint relationships with credit-rating agencies. Additionally, the Office of Finance manages the Resolution Funding Corporation (REFCorp) and Financing Corporation programs.
Available Information
The Bank's web site (www.fhlbboston.com) provides a link to the section of the Electronic Data Gathering and Reporting (EDGAR) web site, as maintained by the Securities and Exchange Commission (the SEC), containing all reports electronically filed, or furnished, including the Bank's annual report on Form 10-K, the Bank's quarterly reports on Form 10-Q, and current reports on Form 8-K as well as any amendments to such reports. These reports are made available free of charge on the Bank's web site as soon as reasonably practicable after electronically filing or being furnished to the SEC. These reports may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports and other information regarding the Bank's electronic filings located at (http://www.sec.gov). The web site addresses of the SEC and the Bank have been included as inactive textual references only. Information on those web sites is not part of this report.
Employees
As of February 28, 2010, the Bank had 182 full-time and one part-time employee.
Membership
The Bank's members are financial institutions with their principal places of business located in the six New England states. The following table summarizes the Bank's membership, by type of institution, as of December 31, 2009, 2008, and 2007.
Membership Summary
Number of Members by Institution Type(1)
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December 31, | |||||||||
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2009 | 2008 | 2007 | |||||||
Commercial banks |
71 | 72 | 77 | |||||||
Thrift institutions |
221 | 225 | 225 | |||||||
Credit unions |
147 | 145 | 142 | |||||||
Insurance companies |
23 | 19 | 13 | |||||||
Total members |
462 | 461 | 457 | |||||||
- (1)
- CDFIs have also become eligible for Bank membership as of February 4, 2010, pursuant to a Finance Agency regulation issued January 5, 2010. CDFIs are private institutions that provide financial services dedicated to economic development and community revitalization in underserved markets. For additional information, see Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsRecent Legislative and Regulatory Developments.
As of December 31, 2009, 2008, and 2007, approximately 76.0 percent, 80.3 percent, and 77.2 percent, respectively, of the Bank's members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and nonmember borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Nonmember borrowers consist of institutions that are former members or that have acquired
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former members and assumed the advances held by those former members. Nonmember borrowers are required to hold capital stock to support outstanding advances with the Bank until those advances either mature or are paid off, at which time the nonmember borrower's affiliation with the Bank is terminated. In addition, nonmember borrowers are required to deliver all required collateral to the Bank or the Bank's safekeeping agent until all outstanding advances either mature or are paid off. During the period that the advances remain outstanding, nonmember borrowers may not request new advances and are not permitted to extend or renew the assumed advances.
The Bank's membership includes the majority of Federal Deposit Insurance Corporation (FDIC)-insured institutions and large credit unions in its district that are eligible to become members. The Bank does not anticipate that a substantial number of additional FDIC-insured institutions will become members. Many other eligible nonmembers, such as insurance companies, smaller credit unions, and CDFIs have thus far elected not to join the Bank.
The Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and rights to any dividends declared on members' investment in the Bank's capital stock.
Business Segments
The Bank has identified two main operating business segments: traditional business activities and mortgage-loan finance, which are further described below. The products and services provided reflect the manner in which financial information is evaluated by management. Refer to Item 8Financial Statements and Supplementary DataFinancial StatementsNote 17Segment Information for additional financial information related to the Bank's business segments.
Traditional Business Activities
The Bank's traditional business segment includes products such as advances and investments and their related funding. Income from this segment is derived primarily from the difference, or spread, between the yield on advances and investments and the borrowing and hedging costs related to those assets. Capital is allocated to the segments based upon asset size.
Advances. The Bank serves as a source of liquidity and makes loans, called advances, to its members and eligible housing associates on the security of mortgages and other collateral that members pledge. The Bank offers a wide array of fixed and variable-rate advances, with maturities ranging from one day to 30 years or even longer with the approval of the Bank's credit committee. The Bank had 351 members, four eligible housing associates, and three nonmember institutions with advances outstanding as of December 31, 2009.
The Bank establishes either a blanket lien on all financial assets of the member that may be eligible to be pledged as collateral or, for insurance company members in some instances and subject to the Bank's receipt of additional safeguards from such a member, a specific lien on assets specifically pledged as collateral to the Bank to secure outstanding advances. The Bank also reserves the right to require either specific listing of eligible collateral or delivery of eligible collateral to secure a member's outstanding advances obligations. All advances, at the time of issuance, must be secured by eligible collateral. Eligible collateral for Bank advances includes: fully disbursed whole first mortgage loans on improved residential real estate; debt instruments issued or guaranteed by the U.S. or any agency thereof; mortgage-backed securities (MBS) issued or guaranteed by the U.S. or any agency thereof; certain private-label MBS representing an interest in whole first mortgage loans on improved residential real estate; and cash on deposit at the Bank that is specifically pledged to the Bank as collateral. The Bank also accepts as collateral secured small-business, small agri-business, and
3
small-farm loans from member community financial institutions (CFIs). In certain circumstances, other real-estate-related collateral may be considered by the Bank. Such real-estate-related collateral must have a readily ascertainable value, and the Bank must be able to perfect a security interest in it. In accordance with Finance Agency regulations, the Bank accepts home-equity loans, home-equity lines of credit, and first mortgage loans on commercial real estate as well as other real-estate-related collateral. The Bank applies a collateral discount to all eligible collateral, based on the Bank's analysis of the risk factors inherent in the collateral. The Bank reserves the right, in its sole discretion, to refuse certain collateral, or to adjust collateral discounts applied. Qualified loan collateral must not have been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable collateral provided that no payment is overdue by more than 45 days. In addition, mortgages and other loans are considered qualified collateral, regardless of delinquency status, to the extent that the mortgages or loans are insured or guaranteed by the U.S. government or any agency thereof. The Bank's collateral policy complies with all applicable regulatory requirements.
All parties that pledge collateral to the Bank are required to execute a representations and warranties document with respect to any mortgage loans and MBS pledged as collateral to the Bank. This document requires the pledging party to certify to knowledge of the Bank's anti-predatory lending policies, and to their compliance with those policies. In the event that any loan in a collateral pool or MBS that is pledged as collateral is (1) found not to comply in all material respects with applicable local, state, and federal laws, or (2) not accepted as qualified collateral as defined by the Bank, the pledging party must immediately remove the collateral and replace it with qualified collateral of equivalent value. The pledging party also agrees to indemnify and hold the Bank harmless for any and all claims of any kind relating to the loans and MBS pledged to the Bank as collateral.
Insurance company members may borrow from the Bank pursuant to a structure that uses either the Bank's ordinary advance agreements or a funding agreement. From the Bank's perspective, advances provided pursuant to funding agreements are treated in the same manner as advances under the Bank's ordinary advances agreement. As of December 31, 2009, the Bank had approximately $325.0 million of advances outstanding to Metlife Insurance Company of Connecticut pursuant to a funding agreement.
Members that have an approved line of credit with the Bank may from time to time overdraw their demand-deposit account. These overdrawn demand-deposit accounts are reported as advances in the statements of condition. These line of credit advances are fully secured by eligible collateral pledged by the member to the Bank. In cases where the member overdraws its demand-deposit account by an amount that exceeds its approved line of credit, the Bank may assess a penalty fee to the member.
In addition to making advances to member institutions, the Bank is permitted under the Federal Home Loan Bank Act of 1932 (FHLBank Act) to make advances to eligible housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law and have succession, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to capital-stock-purchase requirements; however, they are subject to the same underwriting standards as members, but may be more limited in the forms of collateral that they may pledge to secure advances.
Advances support the Bank's members' and housing associates' short-term and long-term borrowing needs, including their liquidity and funding requirements as well as funding mortgage loans and other assets retained in their portfolios. Advances may also be used to provide funds to any member CFIs. Because members may originate loans that they are unwilling or unable to sell in the secondary mortgage market, the Bank's advances can serve as a funding source for a variety of conforming and nonconforming mortgages. Thus, advances support important housing markets,
4
including those focused on low- and moderate-income households. For those members and housing associates that choose to sell or securitize their mortgages, the Bank's advances can provide interim funding.
Additionally, the Bank's advances can provide funding to smaller members that lack diverse funding sources generally available to larger financial entities. The Bank gives these smaller members access to competitively priced wholesale funding.
Through a variety of specialized advance programs, the Bank provides funding for targeted initiatives that meet defined criteria for providing assistance either to very low- or moderate-income households or for economic development of areas that are economically disadvantaged. As such, these programs help members meet their Community Reinvestment Act (CRA) responsibilities. Through programs such as the Affordable Housing Program (AHP) and the Community Development Advance (CDA), members have access to subsidized and other low-cost funding to create affordable rental and homeownership opportunities, and for commercial and economic-development activities that benefit low- and moderate-income neighborhoods, thus contributing to the revitalization of these communities.
The Bank's advances products can also help members in their asset-liability management. The Bank offers advances that members can use to match the cash-flow patterns of their mortgage loans. Such advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. Principal repayment terms may be structured as 1) interest-only to maturity (sometimes referred to as bullet advances) or to an optional early termination date (see putable and callable advances as described below) or 2) as amortizing advances, which are fixed-rate and term structures with equal monthly payments of interest and principal. Repayment terms are offered up to 20 years. Amortizing advances are also offered with partial principal repayment and a balloon payment at maturity. At December 31, 2009, the Bank held $2.2 billion in amortizing advances.
Advances with original fixed maturities of greater than six months may be prepaid at any time, subject to a prepayment fee that makes the Bank economically indifferent to the member's decision to prepay the advance. Certain advances contain provisions that allow the member to receive a prepayment fee in the event that interest rates have increased. Advances with original maturities of six months or less may not be prepaid. Adjustable-rate advances are prepayable at rate-reset dates with a fee equal to the present value of a predetermined spread for the remaining life of the advance, or without a fee. The formulas for the calculation of prepayment fees for the Bank's advances products are included in the advance application for each product. The formulas are standard for each product and apply to all members.
In November 2009, the Bank began offering an advances restructuring program under which the prepayment fee on prepaid advances may be satisfied by the member's agreement to pay an interest rate on a new advance to the same member sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paid in immediately available funds to the Bank. During the year ended December 31, 2009, members restructured $306.2 million of advances under this program, resulting in a deferred payment of $10.9 million of prepayment fees to be collected from the members over the life of the replacement advances.
In addition to fixed-rate and simple variable-rate advances, the Bank's advances program includes products with embedded caps and floors, callable advances, putable advances, and combinations of these features.
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- Putable advances are intermediate- and long-term advances for which the Bank holds the option to cancel the advance on certain specified dates after an initial lockout period. Putable advances are offered with fixed rates, with an adjustable rate to the first put date, or with a capped floating rate. Borrowers may also choose a structure that will be terminated automatically if the London Interbank Offered Rate (LIBOR) hits or exceeds a predetermined strike rate on
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- Callable advances are fixed-rate, fixed term structures that include a provision whereby the borrower may
prepay the advance prior to maturity on certain specified call dates without fee. At December 31, 2009, the Bank held $11.5 million in outstanding callable advances.
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- LIBOR-indexed advances with declining-rate participation are floating-rate advances with a defined strike rate, below which the advance's rate changes at twice the rate at which its LIBOR index changes (to a minimum rate of zero). At December 31, 2009, the Bank held $5.5 million in outstanding LIBOR-indexed advances with declining-rate participation.
specified dates. At December 31, 2009, the Bank held $8.4 billion in outstanding putable advances.
Advances that have embedded options and advances with coupon structures containing derivatives are usually hedged in order to offset the embedded derivative feature. See the Interest-Rate-Exchange Agreements discussion below for additional information.
Because advances are a wholesale funding source for the Bank's members that must be competitively priced relative to other potential sources of wholesale funds to the Bank's members, and because they are fully secured and possess very little credit risk, advances are priced at profit margins that are much smaller than those realized by most banking institutions. By regulation, the Bank may not price advances at rates that are less than the Bank's cost of funds for the same maturity, inclusive of the cost of hedging any embedded call or put options in the advance.
Investments. The Bank maintains a portfolio of investments for liquidity purposes and to provide additional earnings. To better meet potential member credit needs at times when access to the CO debt market is unavailable (either due to requests that follow the end of daily debt issuance activities or due to a market disruption event impacting CO issuance) and in support of certain statutory and regulatory liquidity requirements, as discussed in Item 7AQuantitative and Qualitative Disclosures About Market Risk, the Bank maintains a portfolio of short-term investments issued by highly rated institutions, including overnight federal funds, term federal funds, interest-bearing certificates of deposits, and securities purchased under agreements to resell (secured by securities that have the highest rating from a nationally recognized statistical-rating organization [NRSRO]).
The Bank also endeavors to enhance interest income and further support its contingent liquidity needs and mission by maintaining a longer-term investment portfolio, which includes debentures issued by U.S. government agencies and instrumentalities, supranational banks, MBS, and asset-backed securities (ABS) that are issued either by GSE mortgage agencies or by other private-sector entities provided that they carried the highest ratings from an NRSRO as of the date of purchase. The Bank's ABS holdings are limited to securities backed by loans secured by real estate. The Bank has also purchased bonds issued by housing-finance agencies that have at least the second-highest rating from an NRSRO as of the date of purchase. The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets.
Under Finance Agency regulations, the Bank is prohibited from investing in certain types of securities, including:
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- instruments, such as common stock, that represent ownership in an entity, other than stock in small-business investment
companies, or certain investments targeted to low-income persons or communities;
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- 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 purchase by the Bank;
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- non-U.S. dollar-denominated securities; and
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- whole mortgages or other whole loans, or other interests in mortgages or loans, other than 1) those acquired under the Bank's mortgage-purchase program; 2) certain investments targeted to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal-government units or agencies, having at least the second-highest credit rating from an NRSRO; 4) MBS or ABS backed by manufactured-housing loans or home-equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLBank Act.
The Finance Agency's requirements limit the Bank's investment in MBS and ABS to 300 percent of the Bank's previous monthend capital on the day it purchases the securities. In addition, the Bank is prohibited from purchasing:
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- interest-only or principal-only stripped MBS;
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- residual-interest or interest-accrual classes of collateralized mortgage obligations and real-estate
mortgage-investment conduits, except as described in the following paragraph; or
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- fixed-rate MBS or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of plus or minus 300 basis points.
A Finance Agency resolution authorizes each FHLBank to invest up to an additional 300 percent of its total capital in MBS issued or backed by pools of mortgage loans guaranteed by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), including collateralized mortgage obligations or real estate mortgage-investment conduits backed by such MBS. The mortgage loans underlying any securities that are purchased under this expanded authority must be originated after January 1, 2008, and underwritten to conform to standards imposed by the federal banking agencies in the Interagency Guidance on Nontraditional Mortgage Product Risks, dated October 4, 2006, and the Statement on Subprime Mortgage Lending, dated July 10, 2007. Among other things, the FHLBank is required to notify the Finance Agency prior to its first acquisition under the expanded authority and include in its notification a description of the risk-management practices underlying its purchases. On July 18, 2008, the board of directors of the Bank authorized the Bank to invest up to an additional 100 percent of its capital in agency MBS pursuant to the Finance Agency's resolution. At this time the Bank does not intend to use this expanded authority which expires on March 31, 2010.
Other Banking Activities. The Bank offers standby letters of credit (LOC), which are financial instruments issued by the Bank at the request of a member, promising payment to a third party (beneficiary) on behalf of a member. The Bank agrees to honor drafts or other payment demands made by the beneficiary in the event the member cannot fulfill its obligations. In guaranteeing the obligations of the member, the Bank assists the member in facilitating its transaction with the beneficiary and receives a fee in return. The Bank evaluates a member for eligibility, collateral requirements, limits on maturity, and other credit standards required by the Bank before entering into any LOC transactions. Members must fully collateralize the face amount of LOCs to the same extent that they are required to collateralize advances. The Bank may also issue LOCs on behalf of housing associates such as state and local housing agencies upon approval by the Bank. For the years ended December 31, 2009 and 2008, the fee income earned in connection with the issuance of LOC totaled $1.5 million and $2.0 million, respectively. During those two years, the Bank did not make any payment to any beneficiary to satisfy its obligation for the guarantee.
The Bank enters into standby bond-purchase agreements with state-housing-finance agencies whereby the Bank, for a fee, agrees to purchase and hold the agency's bonds until the designated marketing agent can find a suitable investor or the housing agency repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bond. Each of the outstanding bond-purchase commitments
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entered into by the Bank expires either three or five years following the start of the commitment. For the years ended December 31, 2009 and 2008, the fee income earned in connection with standby bond-purchase agreements totaled $712,000 and $759,000, respectively.
In June 2009, the Bank resumed offering members the service of intermediating interest-rate derivatives, including caps and floors, which is a service the Bank had previously offered until March 2007. For each intermediated derivative, the Bank enters into a mirror derivative with a credit-worthy derivatives counterparty. The related participating member bears the expense of the mirror derivative and pays the Bank additional spread income for the service. The Bank bears the credit risk of the participating members and requires participating members to pledge collateral to cover this risk. The Bank did not earn any income from the service in 2009.
The Bank also acts as a correspondent for deposit, disbursement, funds transfer and safekeeping services on behalf of and solely at the direction of its members. For the years ended December 31, 2009 and 2008, the fee income earned in connection with these correspondent services totaled $1.7 million and $1.6 million, respectively.
Mortgage-Loan Finance
Introduction
The Bank participates in the Mortgage Partnership Finance® (MPF®) program, which is a secondary mortgage market structure under which the Bank either purchases or facilitates Fannie Mae's purchase of eligible mortgage loans from participating financial institution members (PFIs) (collectively, MPF loans). MPF loans are conforming conventional mortgage loans or government mortgage loans (MPF Government loans) that are insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS), or the Department of Housing and Urban Development (HUD) secured by one- to-four family residential properties with maturities ranging from five years to 30 years or participations in such mortgage loans.
The Bank offers five MPF loan products from which PFIs may choose. These products (Original MPF, MPF 125, MPF Plus, MPF Government, and MPF Xtra) are closed-loan products in which either the Bank, or Fannie Mae in the case of MPF Xtra, purchases loans that have been acquired or have already been closed by the PFI with its own funds. The PFI performs all the traditional retail loan origination functions under these MPF products.
The FHLBank of Chicago (MPF Provider) developed the MPF program in order to help fulfill the housing mission of the FHLBanks, to diversify assets beyond the traditional member finance segment, and to provide an additional source of liquidity to our members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolio. Finance Agency regulations (the AMA regulation) define the acquisition of acquired member assets as a core mission activity of the FHLBanks. In order for MPF loans to meet the AMA regulation requirements, purchases are structured so that the credit risk associated with MPF loans is shared with PFIs.
The MPF program is designed to allocate the risks of MPF loans among the FHLBanks that participate in the MPF Program (the MPF Banks) and PFIs and to take advantage of their respective strengths. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate MPF loans, whether through retail or wholesale operations, and to retain or acquire servicing of MPF loans, the MPF program gives control of those functions that most impact credit quality to PFIs. The MPF Banks are responsible for managing the interest-rate risk, prepayment risk, and liquidity risk associated with the MPF loans in which they invest.
- ®
- "Mortgage Partnership Finance," "MPF," "eMPF" and "MPF Xtra" are registered trademarks of the Federal Home Loan Bank of Chicago.
8
For conventional MPF loan products (MPF loan products other than MPF Government and MPF Xtra), PFIs assume or retain a portion of the credit risk on the MPF loans they sell to an MPF Bank by providing credit enhancement (CE amount) either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance (SMI). The PFI's CE amount covers losses for MPF loans under a master commitment in excess of the MPF Bank's first loss account (FLA). PFIs are paid a credit enhancement fee (CE fee) for managing credit risk and in some instances all or a portion of the CE fee may be performance based. See MPF Credit Enhancement Structure section, below, for a detailed discussion of the credit enhancement and risk-sharing arrangements for the MPF program.
The Bank also offers the MPF Xtra product which provides the Bank's PFIs with the ability to sell certain fixed-rate loans to Fannie Mae, as a third-party investor. Loans sold under MPF Xtra are first sold to the MPF Provider which concurrently sells them to Fannie Mae. The MPF Provider is the master servicer for such loans. Such loans are not held on the Bank's balance sheet and the related credit and market risk are transferred to Fannie Mae. Unlike other MPF products, under the MPF Xtra product, PFIs do not provide any CE amount and do not receive CE fees because the credit risk of such loans is transferred to Fannie Mae. The MPF Provider receives a transaction fee for its master servicing, and custodial and administrative activities for such loans from the PFIs, and the MPF Provider pays the Bank a counterparty fee for the costs and expenses of marketing activities for these loans. The Bank indemnifies the MPF Provider for certain retained risks, including the risk of the MPF Provider's required repurchase of loans in the event of fraudulent or inaccurate representations and warranties from the PFI regarding the sold loans. The Bank may, in turn, seek reimbursement from the related PFI in any such circumstance, however the value of such a reimbursement right may be limited in the event of the related PFI's insolvency. See Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskMortgage Loans for additional discussion of such credit risk.
MPF Provider
The MPF Provider establishes the eligibility standards under which an MPF Bank member may become a PFI, the structure of MPF loan products and the eligibility rules for MPF loans. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans as master servicer and master custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF program. The MPF Provider also has contracted with other custodians meeting MPF program eligibility standards at the request of certain PFIs. These other custodians are typically affiliates of PFIs, and in some cases a PFI may act as self-custodian.
The MPF Provider publishes and maintains the MPF Origination Guide, MPF Servicing Guide and MPF Underwriting Guide (together, the MPF guides), which detail the requirements PFIs must follow in originating or selling and servicing MPF loans. They maintain the infrastructure through which MPF Banks may purchase MPF loans through their PFIs. This infrastructure includes both a telephonic delivery system and a web-based delivery system accessed through the eMPF® web site. In exchange for providing these services, the MPF Provider receives a fee from each of the MPF Banks.
PFI Eligibility
Members and eligible housing associates may apply to become a PFI of their respective MPF Bank. If a member is an affiliate of a holding company, which has another affiliate that is an active PFI, the member is only eligible to become a PFI if it is a member of the same MPF Bank as the existing PFI. The MPF Bank reviews the general eligibility of the member, its servicing qualifications and ability to supply documents, data, and reports required to be delivered by PFIs under the MPF program. The member and its MPF Bank sign an MPF Program Participating Financial Institution Agreement (the PFI Agreement) that provides the terms and conditions for the sale of MPF loans,
9
including required credit enhancement, and establishes the terms and conditions for servicing MPF loans. All of the PFI's obligations under the PFI Agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with the MPF Bank. The MPF Bank has the right under the advances agreement to request additional collateral to secure the PFI's obligations.
Mortgage Standards
Mortgage loans delivered under the MPF program must meet the underwriting and eligibility requirements in the MPF guides, as amended by any waiver granted to a PFI exempting it from complying with specified provisions of the MPF guides. PFIs may utilize an approved automated underwriting system or underwrite MPF loans manually. The current underwriting and eligibility guidelines under the MPF guides with respect to MPF loans are broadly summarized as follows:
-
- Mortgage characteristics. MPF loans must be qualifying
five-year to 30-year conforming conventional or government fixed-rate, fully amortizing mortgage loans, secured by first liens on owner-occupied one- to
-four unit single-family residential properties, and single unit second homes. Conforming loan size is established annually as required by Finance Agency regulations. Condominium, planned
unit development, and manufactured homes are acceptable property types as are mortgages on leasehold estates (though manufactured homes must be on land owned in fee simple by the borrower). Loans
secured by manufactured homes are subject to additional restrictions as set forth in the MPF guides.
-
- Loan-to-Value Ratio and Primary Mortgage
Insurance. The maximum loan-to-value ratio (LTV) for conventional MPF loans may not exceed 95 percent, or
90 percent for loans sold under MPF Xtra that are for amounts in excess of generally applicable agency loan limits but are within agency requirements for high-cost areas, while
FHLBank AHP mortgage loans may have LTVs up to 100 percent (but may not exceed 105 percent total LTV, which compares the property value with the total amount of all mortgages outstanding
against a property). Government MPF loans may not exceed the LTV limits set by the applicable federal agency. Conventional MPF loans with LTVs greater than 80 percent require certain amounts of
mortgage guaranty insurance (MI), called primary MI, from an MI company that is rated at least triple-B by Standard & Poor's Ratings Services (S&P) and is acceptable to S&P.
-
- Documentation and Compliance with Applicable Law. The
mortgage documents and mortgage transaction must comply with all applicable laws and mortgage loans must be documented using standard Fannie Mae/Freddie Mac Uniform Instruments.
-
- Ineligible Mortgage Loans. The following types of mortgage loans are not eligible for delivery under the MPF program: (1) mortgage loans that are not ratable by S&P; (2) mortgage loans not meeting the MPF program eligibility requirements as set forth in the MPF guides and agreements; and (3) mortgage loans that are classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act loans or loans in similar categories defined under predatory lending or abusive lending laws.
PFIs are required to comply with the MPF program policies contained in the MPF guides which include anti-predatory lending policies, eligibility requirements for PFIs such as insurance requirements and annual certification requirements, loan documentation, and custodian requirements. The MPF guides also detail the PFI's servicing duties and responsibilities for reporting, remittances, default management, and disposition of properties acquired by foreclosure or deed in lieu of foreclosure.
A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. We take measures that we consider reasonable and appropriate to reduce our exposure to potential liability under these laws and
10
are not aware of any claim, action, or proceeding asserting that we are liable under these laws. However, we cannot assure that we will never have any liability under predatory or abusive lending laws.
MPF Loan Delivery Process
In order to deliver mortgage loans under the MPF program, the PFI and MPF Bank enter into a best efforts master commitment (master commitment), which provides the general terms under which the PFI will deliver mortgage loans to either an MPF Bank or the MPF Provider for concurrent transfers to Fannie Mae in the case of MPF Xtra, including a maximum loan delivery amount, maximum CE amount, if applicable, and expiration date. For MPF Xtra, the Bank assigns each master commitment entered into with its PFIs to the MPF Provider. PFIs may then request to enter into one or more mandatory purchase commitments (each, a delivery commitment), which is a mandatory commitment of the PFI to sell or originate eligible mortgage loans. Each MPF loan delivered must conform to specified ranges of interest rates, maturity terms, and business days for delivery (which may be extended for a fee) detailed in the delivery commitment or it will be rejected as ineligible by the MPF Provider. Each MPF loan under a delivery commitment is linked to a master commitment so that the cumulative credit enhancement level can be determined for each master commitment.
The sum of MPF loans delivered by the PFI under a specific delivery commitment cannot exceed the amount specified in the delivery commitment without the assessment of a price adjustment fee. Delivery commitments that are not fully funded by their expiration dates are subject to pair-off fees (fees charged to a PFI for failing to deliver the amount of loans specified in a delivery commitment) or extension fees (fees charged to a PFI for extending the time deadline to deliver loans on a delivery commitment), which protect the MPF Bank, or Fannie Mae in the case of MPF Xtra, against changes in market prices.
In connection with each sale to an MPF Bank, or the MPF Provider for concurrent transfer to Fannie Mae in the case of MPF Xtra, the PFI makes customary representations and warranties in the PFI Agreement and under the MPF guides. These include eligibility and conformance of the MPF loans with the requirements in the MPF guides, compliance with predatory lending laws, and the integrity of the data transmitted to the MPF Provider. In addition, the MPF guides require each PFI to maintain errors and omissions insurance and a fidelity bond and to provide an annual certification with respect to its insurance and its compliance with the MPF program requirements. Once an MPF loan is purchased, the PFI must deliver a qualifying promissory note and certain other required documents to the designated custodian, who reports to the MPF Provider whether the documentation package meets MPF program requirements.
The MPF Provider conducts an initial quality assurance review of a selected sample of MPF loans from each PFI's initial MPF loan delivery. The MPF Provider also performs periodic reviews of a sample of MPF loans to determine whether the reviewed MPF loans complied with the MPF program requirements at the time of acquisition. Any exception that indicates a negative trend is discussed with the PFI and can result in the suspension or termination of a PFI's ability to deliver new MPF loans if the concern is not adequately addressed.
Reasons for which a PFI could be required to repurchase an MPF loan include but are not limited to, MPF loan ineligibility, breach of representation or warranty under the PFI Agreement or the MPF guides, failure to deliver the required MPF loan documents to an approved custodian, servicing breach, or fraud.
The Bank does not currently conduct any quality assurance reviews of MPF Government loans. However, the Bank does allow its PFIs to repurchase delinquent MPF Government loans so that they may comply with loss-mitigation requirements of the applicable government agency in order to preserve the insurance or guaranty coverage. The repurchase price for each such delinquent loan is equal to the
11
current scheduled principal balance and accrued interest on the MPF Government loan. In addition, as with conventional MPF loans, if a PFI fails to comply with the requirements of the PFI Agreement, MPF guides, applicable laws, or terms of mortgage documents, the PFI may be required to repurchase the affected MPF Government loans.
MPF Products
A variety of MPF loan products have been developed to meet the differing needs of PFIs. The Bank offers five MPF products that its PFIs may choose from: Original MPF, MPF Government, MPF 125, MPF Plus, , and MPF Xtra. The products have different credit-risk-sharing characteristics based upon the different levels for the FLA and CE amount and the types of CE fees (performance-based, fixed amount or none). There is no FLA, CE amount, or CE fees for MPF Xtra because the credit risk for such loans is transferred to Fannie Mae. The table below provides a comparison of the MPF products.
Product Name
|
Bank's First-Loss Account Size |
PFI Credit- Enhancement Size Description |
Credit- Enhancement Fee Paid to the Member |
Credit- Enhancement Fee Offset(1) |
Servicing Fee to Servicer |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Original MPF |
3 to 6 basis points added each year | Equivalent to double-A rating. | 7 to 11 basis points per year paid monthly | No | 25 basis points per year | |||||
MPF Government |
N/A |
N/A Unreimbursed servicing expenses. |
N/A(2) |
N/A |
44 basis points per year(2) |
|||||
MPF 125 |
100 basis points fixed based on the size of loan pool at closing |
After first-loss account, up to double-A rating. |
7 to 10 basis |
Yes |
25 basis points per year |
|||||
MPF Plus |
An agreed upon amount no less than expected losses |
0 to 20 basis points, after first-loss account and supplemental mortgage insurance, up to double-A rating. |
7 basis |
Yes |
25 basis points per year |
|||||
MPF Xtra |
N/A |
N/A |
None |
N/A |
25 basis points per year |
- (1)
- Future
payouts of performance-based CE fees are reduced when losses are allocated to the FLA.
- (2)
- For master commitments issued prior to February 2, 2007, the PFI is paid a monthly government loan fee equal to 0.02 percent (two basis points) per annum based on the month-end outstanding aggregate principal balance of the master commitment which is in addition to the customary 0.44 percent (44 basis points) per annum servicing fee that continues to apply for master commitments issued after February 2, 2007, and that is retained by the PFI on a monthly basis based on the outstanding aggregate principal balance of the MPF Government loans.
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MPF Loan Participations
The Bank may purchase participation interests in MPF loans originated by other MPF Banks and may sell participation interests in MPF loans originated by it to other MPF Banks, excluding loans sold pursuant to MPF Xtra, which cannot be participated. The Bank has previously sold participation interests to other MPF Banks at the time the MPF loans were acquired, but has not purchased participation interests in MPF loans originated by other MPF Banks, although it may do so in the future.
Participation interests may be full (a 100 percent participation) or partial (any percentage between zero and 100 percent) as determined by agreement among the MPF Bank selling the participation interests (the Owner Bank), the MPF Provider, and the MPF Bank purchasing the participation interests (the participant MPF Bank).
The Owner Bank is responsible for:
-
- evaluating, monitoring, and certifying to each participant MPF Bank the creditworthiness of each PFI initially, and at
least annually thereafter;
-
- ensuring that adequate collateral is available from each of its PFIs to secure any direct obligation portion of the PFI's
CE amount; and
-
- enforcing the PFI's obligations under its PFI Agreement.
The risk-sharing and rights of the Owner Bank and participating MPF Bank(s) are as follows:
-
- each pays its pro rata share of each MPF loan acquired under a delivery commitment and related master commitment based
upon the participation percentage in effect at the time;
-
- each receives its pro rata share of principal and interest payments and is responsible for CE fees based upon its
participation percentage for each MPF loan under the related delivery commitment;
-
- each is responsible for its pro rata share of FLA exposure and losses incurred with respect to the master commitment based
upon the overall risk-sharing percentage for the master commitment; and
-
- each may economically hedge its share of the delivery commitments as they are issued during the open period.
The FLA and CE amount apply to all MPF loans in a master commitment regardless of participation arrangements, so an MPF Bank's share of credit losses is based on its respective participation interest in the entire master commitment. For example, assume an MPF Bank's specified participation percentage was 25 percent under a $100 million master commitment and that no changes were made to the master commitment. The MPF Bank risk-sharing percentage of credit losses would be 25 percent. In the case where an MPF Bank changed its initial percentage in the master commitment, the risk-sharing percentage will also change. For example, if an MPF Bank were to acquire 25 percent of the first $50 million and 50 percent of the second $50 million of MPF loans delivered under a master commitment, the MPF Bank would share in 37.5 percent of the credit losses in that $100 million master commitment, while it would receive principal and interest payments on the individual MPF loans that remain outstanding in a given month, some in which it may own a 25 percent interest and the others in which it may own a 50 percent interest.
MPF Servicing
The PFI or its servicing affiliate generally retains the right and responsibility for servicing MPF loans it delivers. The PFI is responsible for collecting the borrower's monthly payments and otherwise managing the relationship with the borrower with respect to the MPF loan and the mortgaged
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property. Based on monthly reports the PFI is required to provide the master servicer, appropriate withdrawals are made from the PFI's deposit account with the applicable MPF Bank. In some cases, the PFI has agreed to advance principal and interest payments on the scheduled remittance date when the borrower has failed to pay, provided that the collateral securing the MPF loan is sufficient to reimburse the PFI for advanced amounts. The PFI recovers the advanced amounts either from future collections or upon the liquidation of the collateral securing the MPF loans.
If an MPF loan becomes delinquent, the PFI is required to contact the borrower to determine the cause of the delinquency and whether the borrower will be able to cure the default. Upon any MPF loan becoming 90 days or more delinquent, the master servicer monitors and reviews the PFI's default management activities for that MPF loan, including timeliness of notices to the mortgagor, forbearance proposals, property protection activities, and foreclosure referrals, all in accordance with the MPF guides. Upon liquidation of any MPF loan and submission of each realized loss calculation from the PFI, the master servicer reviews the realized loss calculation for conformity with the primary mortgage insurance (MI) requirements, if applicable, and conformity to the cost and timeliness standards of the MPF guides. The master servicer disallows the reimbursement to the PFI of any servicing advances related to the PFI's failure to perform in accordance with the MPF guides. If there is a loss on a conventional MPF loan, the loss is allocated to the master commitment and shared in accordance with the risk-sharing structure for that particular master commitment. The servicer pays any gain on sale of real-estate-owned property to the MPF Bank, or in the case of a participation, to the MPF Banks based upon their respective interest in the MPF loan. However, the amount of the gain is available to reduce subsequent losses incurred under the master commitment before such losses are allocated between the MPF Bank and the PFI.
The MPF Provider monitors the PFI's compliance with MPF program requirements throughout the servicing process and brings any material concerns to the attention of the MPF Bank. Minor lapses in servicing are charged to the PFI via offsets against amounts owed to the PFI. Major lapses in servicing could result in a PFI's servicing rights being terminated for cause and the servicing of the particular MPF loans being transferred to a new, qualified servicing PFI.
Although PFIs or their servicing affiliates generally service the MPF loans delivered by the PFI, certain PFIs choose to sell the servicing rights on a concurrent basis (servicing released) or in a bulk transfer to another PFI which is permitted with the consent of the MPF Banks involved. One PFI has been designated to acquire servicing under the MPF program's concurrent sale of servicing option. In addition, several PFIs have acquired servicing rights on a concurrent servicing-released basis or bulk transfer basis without the direct support from the MPF program.
MPF Credit Enhancement Structure
Overview
Other than for MPF Xtra under which all credit and market risk is transferred to Fannie Mae, the MPF Bank and PFI share the risk of credit losses on MPF loans under the MPF programs by structuring potential losses on conventional MPF loans into layers with respect to each master commitment. The first layer or portion of credit losses that an MPF Bank is potentially obligated to incur is determined based upon the MPF product selected by the PFI and is referred to as the FLA. The FLA functions as a tracking mechanism for determining the point after which the PFI, in its role as credit enhancer, would be required to cover losses. The FLA is not a cash collateral account, and does not give an MPF Bank any right or obligation to receive or pay cash or any other collateral. For MPF products with performance-based CE fees, the MPF Bank may withhold CE fees to recover losses at the FLA level, essentially transferring a portion of the first layer risk of credit loss to the PFI.
The portion of credit losses that a PFI is potentially obligated to incur is referred to as its CE amount. The PFI's CE amount represents a direct liability to pay credit losses incurred with respect to
14
a master commitment or the requirement of the PFI to obtain and pay for a supplemental mortgage guaranty insurance (SMI) policy insuring the MPF Bank for a portion of the credit losses arising from the master commitment. The PFI may procure SMI to cover losses equal to all or a portion of the CE amount. SMI does not cover special hazard losses, which are the direct liability of the PFI or the MPF Bank. The final CE amount is determined once the master commitment is closed (that is, when the maximum amount of MPF loans are delivered or the expiration date has occurred). For a description of how each PFI's CE amount is determined, see Mortgage-Loan FinanceSetting Credit Enhancement Levels below.
The PFI receives a CE fee in exchange for providing the CE amount which may be used to pay for SMI. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans under the master commitment. The CE fee and CE amount may vary depending on the MPF product selected. CE fees payable to a PFI as compensation for assuming credit risk are recorded as an offset to MPF loan interest income when paid by us. We also pay performance CE fees which are based on actual performance of the pool of MPF loans in each master commitment. For the Original MPF product, the CE fee is a fixed payment to the PFI. For the MPF 125 product, the CE fee is performance-based and losses to the MPF Bank can be reimbursed by the MPF Bank withholding the performance-based CE fee. Under the MPF Plus product, we also pay performance-based and fixed CE fees. Losses experienced by the MPF Bank in this product can be reimbursed by the MPF Bank withholding the performance-based CE fee. The fixed fee can be used to pay the SMI premium. To the extent that losses in the current month exceed performance CE fees accrued, the remaining losses may be recovered from withholding future performance CE fees payable to the PFI. For the MPF Government product, the PFI is paid a CE fee equal to 0.02 percent (two basis points) per annum for master commitments issued prior to February 2, 2007 but no CE fee for master commitments issued after that date. There are no CE fees for the MPF Xtra product.
Loss Allocation
Other than MPF Xtra, credit losses on conventional MPF loans not absorbed by the borrower's equity in the mortgaged property, property insurance, or primary mortgage insurance are allocated between the MPF Bank and PFI as follows:
-
- First, to the MPF Bank, up to an agreed-upon amount, called the FLA.
Original MPF. The FLA starts out at zero on the day the first MPF loan under a master commitment is purchased but increases monthly over the life of the master commitment at a rate that ranges from 0.03 percent to 0.06 percent (three to six basis points) per annum based on the monthend outstanding aggregate principal balance of the master commitment. The FLA is structured so that over time, it should cover expected losses on a master commitment, though losses early in the life of the master commitment could exceed the FLA and be charged in part to the PFI's CE amount.
MPF 125. The FLA is equal to 1.00 percent (100 basis points) of the aggregate principal balance of the MPF loans funded under the master commitment. Once the master commitment is fully funded, the FLA is expected to cover expected losses on that master commitment, although the MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE fees payable to the PFI.
MPF Plus. The FLA is equal to an agreed-upon number of basis points of the aggregate principal balance of the MPF loans funded under the master commitment that is not less than the amount of expected losses on the master commitment. Once the master commitment is fully funded, the FLA is expected to cover expected losses on that master commitment, although the MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE fees payable to the PFI.
15
-
- Second, to the PFI under its CE obligation, losses for each master commitment in excess of the FLA, if any, up to the CE
amount. The CE amount may consist of a direct liability of the PFI to pay credit losses up to a specified amount, a contractual obligation of the PFI to provide SMI or a combination of both. For a
description of the CE amount calculation see Mortgage-Loan FinanceSetting Credit Enhancement Levels below.
-
- Third, any remaining unallocated losses are absorbed by the MPF Bank.
With respect to participation interests, MPF loan losses allocable to the MPF Bank are allocated among the participating MPF Banks pro rata based upon their respective participation interests in the related master commitment. For a description of the risk sharing by participant MPF Banks see MPF Loan Participations, above.
Setting Credit Enhancement Levels
Other than for MPF Xtra under which all credit and market risk is transferred to Fannie Mae, Finance Agency regulations require that MPF loans be sufficiently credit enhanced at the time of purchase so that the Bank's risk of loss is limited to the losses of an investor in a double-A-rated MBS. In cases where the Bank's risk of loss is greater than that of an investor in a double-A-rated MBS, the Bank holds additional credit risk-based capital in accordance with Finance Agency regulations based on the putative credit rating of the pool. The MPF Provider analyzes the risk characteristics of each MPF loan (as provided by the PFI) using S&P's LEVELS® model in order to determine the required CE amount for a loan or group of loans to be acquired by an MPF Bank (MPF program methodology). The PFI's CE amount (including the SMI policy for MPF Plus) is calculated using the MPF program methodology to equal the difference between the amount needed for the master commitment to have a rating equivalent to a double-A-rated MBS and our initial FLA exposure (which is zero for the Original MPF product).
For MPF Plus, the PFI is required to provide an SMI policy covering the MPF loans in the master commitment and having a deductible initially equal to the FLA. Depending upon the amount of the SMI policy (determined in part by the amount of the CE fees paid to the PFI), the PFI may or may not have any direct liability on the CE amount.
The Bank is required to recalculate the estimated credit rating of a master commitment if there is evidence of a decline in credit quality of the related MPF loans.
Credit Enhancement Fees
The structure of the CE fee payable to the PFI depends upon the product type selected. There is no CE amount and accordingly no CE fee payable to the PFI for MPF Xtra. For Original MPF, the PFI is paid a monthly CE fee between 0.07 percent and 0.11 percent (seven and 11 basis points) per annum and paid monthly based on the aggregate outstanding principal balance of the MPF loans in the master commitment.
For MPF 125, the PFI is paid a monthly CE fee between 0.07 percent and 0.10 percent (seven and 10 basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF loans in the master commitment. The PFI's monthly CE fee is performance-based in that it is reduced by losses charged to the FLA. For MPF 125, the CE fee is performance-based for the entire life of the master commitment.
- ®
- "Standard & Poor's LEVELS" and "LEVELS" are registered trademarks of Standard & Poor's, a division of the McGraw-Hill Companies, Inc.
16
For MPF Plus, the performance-based portion of the CE fee is typically 0.06 percent (six basis points) per annum and paid monthly on the aggregate outstanding balance of the MPF loans in the master commitment. The performance-based CE fee is reduced by losses charged to the FLA and is paid one year after accrued, based on monthly outstanding balances. The fixed portion of the CE fee is typically 0.07 percent (seven basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF loans in the master commitment. The lower performance CE fee is for master commitments without a direct PFI CE amount.
For MPF Government, the PFI provides and maintains insurance or a guaranty from the applicable federal agency (that is, the FHA, VA, RHS, or HUD) for MPF Government loans and the PFI is responsible for compliance with all federal agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted MPF Government loans. Only PFIs that are licensed or qualified to originate and service government loans by the applicable federal agency or agencies and that maintain a mortgage loan delinquency ratio that is acceptable to the Bank and that is comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association are eligible to sell and service MPF Government loans under the MPF program.
The table below summarizes the average PFI CE fee of all master commitments:
Average PFI CE Fee as a Percent of Master Commitments
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Loan Type
|
2009 | 2008 | |||||
Original MPF |
0.10 | % | 0.10 | % | |||
MPF 125 |
0.10 | 0.10 | |||||
MPF Plus |
0.13 | 0.13 | |||||
MPF Government(1) |
N/A | N/A | |||||
MPF Xtra |
N/A | N/A |
- (1)
- For master commitments for issued prior to February 2, 2007, the PFI is paid a monthly government loan fee equal to 0.02 percent (two basis points) per annum based on the month-end outstanding aggregate principal balance of the master commitments. As a percent of these master commitments, these fees averaged 0.02 percent (two basis points) at each of December 31, 2009 and December 31, 2008.
Credit Risk Exposure on MPF Loans
The Bank's credit risk from the MPF loans in which it invests is the potential for financial loss due to borrower default. The amount of any such loss may be impacted by depreciation in the value of the real estate collateral securing the MPF loan, offset by the PFI's CE amount. Under the MPF program, the PFI's CE amount may take the form of a contingent performance-based CE fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment and the CE amount (which represents a direct liability to pay credit losses incurred with respect to that master commitment or may require the PFI to obtain and pay for an SMI policy insuring the MPF Bank for a portion of the credit losses arising from the master commitment). Under the AMA regulation, any portion of the CE amount that is a PFI's direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI's obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement and further, that we may request additional collateral to secure the PFI's obligations.
The Bank also has credit risk of loss on MPF loans to the extent such losses are not recoverable from the PFI either directly or indirectly through performance-based CE fees, or from an SMI insurer,
17
as applicable. See Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskMortgage Loans.
The risk sharing of credit losses between MPF Banks for participations is based on each MPF Banks' percentage interest in the participated MPF loans, with each MPF Bank assuming its percentage share of such losses. See MPF Loan Participations, above.
Deposits
The Bank offers demand and overnight-deposit programs to its members and housing associates. Term deposit programs are also offered to members. The Bank cannot predict the timing and amount of deposits that it receives from members and therefore does not rely on deposits as a funding source for advances, investments and loan purchases. Proceeds from deposit issuance are generally invested in short-term investments to ensure that the Bank can liquidate deposits on request.
The Bank must maintain compliance with statutory liquidity requirements that require the Bank to hold cash, obligations of the U.S., and advances with a maturity of less than five years in an amount not less than the amount of deposits of members. The following table provides the Bank's liquidity position with respect to this requirement.
Liquidity Reserves for Deposits
(dollars in thousands)
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Liquid assets |
||||||||
Cash and due from banks |
$ | 191,143 | $ | 5,735 | ||||
Interest-bearing deposits |
81 | 3,279,075 | ||||||
Advances maturing within five years |
32,131,742 | 50,390,148 | ||||||
Total liquid assets |
32,322,966 | 53,674,958 | ||||||
Total deposits |
772,457 | 611,070 | ||||||
Excess liquid assets |
$ | 31,550,509 | $ | 53,063,888 | ||||
Refer to the Liquidity Risk section in Item 7AQuantitative and Qualitative Disclosures about Market Risk for further information regarding the Bank's liquidity requirements.
Consolidated Obligations
The Bank funds its assets primarily through the sale of debt securities known as consolidated obligations, and referred to herein as COs. The Bank's ability to access the money and capital marketsacross a wide maturity spectrum, in a variety of debt structures through the sale of COshas historically allowed the Bank to manage its balance sheet effectively and efficiently. The FHLBanks compete with Fannie Mae, Freddie Mac, and other GSEs for funds raised through the issuance of unsecured debt in the agency debt market.
COs, consisting of bonds and discount notes, represent the primary source of debt used by the Bank to fund advances, mortgage loans, and investments. All COs are issued on behalf of an FHLBank (as the primary obligor) through the Office of Finance, but all COs are the joint and several obligation of each of the 12 FHLBanks. COs are not obligations of the U.S. government and the U.S. government does not guarantee them. Moody's Investors Service (Moody's) currently rates COs Aaa/P-1, and S&P currently rates them AAA/A-1+. These ratings measure the predicted likelihood of timely payment of principal and interest on the COs. The GSE status of the FHLBanks and the ratings of the COs have
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historically provided the FHLBanks with ready capital-market access. The credit crisis, which commenced in mid-2007 and deepened greatly in the second half of 2008, resulted in the Bank's increasing reliance on short-term COs based on funding costs for longer-term COs that were higher than historical norms due to investor preference for short-term investments at that time. The Bank's long-term funding costs improved during 2009 relative to the higher long-term funding costs experienced in 2008 due to the credit crisis and government responses thereto. The improvement in long-term funding costs is due in part to general improvement in the confidence of investors as markets stabilized in 2009; lower demand by the FHLBanks for proceeds of CO debt issuances primarily due to declining advances balances across all the FHLBanks (the FHLBank System) from the historical highs experienced during the credit crisis; purchases of GSE debt by the Federal Reserve Bank of New York pursuant to the GSE debt-purchase initiative, described under Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsRecent Legislative and Regulatory Developments; and improved investor demand for long-term CO bonds both through negotiated transactions and public issuances. See Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity for more information.
CO Bonds. CO bonds may have maturities of up to 30 years (although there is no statutory or regulatory limit on maturities), and CO bonds have been traditionally issued to raise intermediate and long-term funds. However, during the recent credit crisis, CO bonds were used to raise more short-term and intermediate funds.
CO bonds may be issued with either fixed-rate coupon-payment terms, zero-coupon terms, or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets including LIBOR, Constant Maturity Treasury (CMT), and others. CO bonds may also contain embedded options that affect the term or yield structure of the bond. Such options include call options under which the Bank can redeem bonds prior to maturity.
CO bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. The FHLBanks are among the world's most active issuers of debt, issuing on a near-daily basis, including sometimes multiple issuances in a single day. The Bank frequently participates in these issuances. Each FHLBank requests funding through the Office of Finance and the Office of Finance endeavors to issue the requested bonds and allocate proceeds in accordance with each FHLBank's requested funding. In some cases, proceeds from partially fulfilled offerings must be allocated in accordance with predefined rules that apply to particular issuance programs. The Office of Finance also prorates the amounts paid to dealers in connection with the sale of COs to the Bank based upon the percentage of debt issued that is assumed by the Bank.
Discount Notes. CO discount notes are short-term obligations issued at a discount to par with no coupon. Terms range from overnight up to one year. The Bank generally participates in CO discount note issuance on a daily basis as a means of funding short-term assets and managing its short-term funding gaps. During 2009, the Bank also periodically funded longer-term assets through the issuance of CO discount notes rather than CO bonds when CO discount notes could be issued at more favorable pricing than CO bonds, as further discussed under Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital ResourcesLiquidity. Each FHLBank submits commitments to issue CO discount notes in specific amounts with specific terms to the Office of Finance, which in turn, aggregates these commitments into offerings to securities dealers. Such commitments may specify yield limits that the Bank has specified in its commitment, above which the Bank will not accept funding. CO discount notes are sold either at auction on a scheduled basis or through a direct bidding process on an as-needed basis through a group of dealers known as the selling group, who may turn to other dealers to assist in the ultimate distribution of the securities to investors. The selling group dealers receive no selling concession if the bonds are sold at auction. Otherwise, the Bank pays the dealer a selling concession.
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Finance Agency regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total COs outstanding:
-
- Cash;
-
- Obligations of, or fully guaranteed by, the U.S. government;
-
- Secured advances;
-
- Mortgages, which have any guaranty, insurance, or commitment from the U.S. government or any agency of the U.S.;
-
- Investments described in Section 16(a) of the FHLBank Act, which, among other items, includes 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 or higher than the rating or assessment assigned by that NRSRO to COs.
The following table illustrates the Bank's compliance with this regulatory requirement:
Ratio of Non-Pledged Assets to Total Consolidated Obligations by Carrying Value
(dollars in thousands)
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Non-pledged asset totals |
||||||||
Cash and due from banks |
$ | 191,143 | $ | 5,735 | ||||
Advances |
37,591,461 | 56,926,267 | ||||||
Investments(1) |
20,947,464 | 18,864,899 | ||||||
Mortgage loans, net |
3,505,975 | 4,153,537 | ||||||
Accrued interest receivable |
147,689 | 288,753 | ||||||
Less: pledged assets |
(443,098 | ) | (916,068 | ) | ||||
Total non-pledged assets |
$ | 61,940,634 | $ | 79,323,123 | ||||
Total consolidated obligations |
$ | 57,686,832 | $ | 74,726,268 | ||||
Ratio of non-pledged assets to consolidated obligations |
1.07 | 1.06 |
- (1)
- Investments include interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
Although each FHLBank is primarily liable for the portion of COs corresponding to the proceeds received by that FHLBank, each FHLBank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all COs. Under Finance Agency regulations, if the principal or interest on any CO issued on behalf of one of the FHLBanks is not paid in full when due, then the FHLBank responsible for the payment may not pay dividends to, or redeem or repurchase shares of stock from, any member of such FHLBank. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.
To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the Finance Agency determines that an FHLBank is unable to satisfy its
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obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding, or on any other basis the Finance Agency may determine.
Neither the Finance Agency nor any predecessor regulator of the Bank has ever required the Bank to repay obligations in excess of the Bank's participation nor have they allocated to the Bank any outstanding liability of any other FHLBank's COs.
Capital Resources
Capital Plan. The Bank's Class B stock may be issued, redeemed, and repurchased by the Bank only at its par value of $100 per share. The Bank's Class B stock is exempt from registration under the Securities Act of 1933. The Bank's capital plan is provided as Exhibit 4 to this Form 10-K.
Activity-Based Stock-Investment Requirement (ABSIR). Members must hold Class B stock based on certain outstanding activity with the Bank. The ABSIR for advances is as follows:
For advances with a term of:
|
The ABSIR is the following percentage of outstanding advance balances |
|||
---|---|---|---|---|
Overnight (one business day) |
3.0 | % | ||
More than one business day through three months |
4.0 | |||
Greater than three months |
4.5 |
For standby letters of credit, the ABSIR is 4.5 percent of the credit equivalent amount of the standby letter of credit as defined in Finance Agency regulations (currently 50 percent of the face amount of the standby letter of credit). For outstanding member-intermediated derivatives, the ABSIR is 4.5 percent of the sum of 1) the current credit exposure of the derivative, and 2) the potential future exposure as defined in Finance Agency regulations.
For loans purchased on or after November 2, 2009, the ABSIR for MPF activities was suspended to encourage growth in this business line as part of the revised operating plan, which is discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview and Executive SummaryPrincipal Business Developments. For loans purchased prior to November 2, 2009, the ABSIR for MPF activities is either zero percent or 4.5 percent, as determined by the date the loan was funded and/or the date the master commitment was entered into.
Membership Stock-Investment Requirement (MSIR). In addition to the ABSIR, members must hold the MSIR. The MSIR is equal to 0.35 percent of the value of certain member assets eligible to secure advances subject to a current minimum balance of $10,000 and a current maximum balance of $25.0 million.
Total Stock-Investment Requirement (TSIR). The sum of the ABSIR and the MSIR is the TSIR. Any stock held by a member in excess of its TSIR is considered excess capital stock. At December 31, 2009, members and nonmembers with capital stock outstanding held excess capital stock totaling $1.5 billion, representing approximately 40.9 percent of total capital stock outstanding.
Members may submit a written request for redemption of excess capital stock. The stock subject to the request will be redeemed at par value by the Bank upon expiration of a five-year stock-redemption period. Also subject to a five-year redemption period are shares of stock held by a member that (1) gives notice of intent to withdraw from membership, or (2) becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. At the end of the five-year stock-redemption period, the Bank must comply with the redemption request unless doing so would cause the Bank to fail to comply with its minimum regulatory capital requirements, would cause
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the member to fail to comply with its total stock-investment requirements, or would violate any other regulatory prohibitions.
Repurchases of Excess Capital Stock. The Bank may, at its sole discretion, repurchase excess capital stock from any member at par value upon 15 days prior written notice to the member, unless a shorter notice period is agreed to in writing with the member, if the repurchase will not cause the Bank to fail to meet any of its regulatory capital requirements or violate any other regulatory prohibitions. However, in accordance with the moratorium on excess stock repurchases described below, the Bank did not complete any repurchases of excess capital stock in 2009, except for $1.5 million of excess stock repurchase requests that had been submitted to the Bank prior to the commencement of the moratorium.
The Bank has an Excess Stock Repurchase Program (the ESRP) that is intended to enhance the Bank's ability to manage the level of excess stock and, therefore, more efficiently utilize its capital. Under the ESRP, on a monthly basis, management determines available capital required to support incremental business activity and determines the desired amount of stock, if any, to repurchase from members. Under the ESRP, the Bank may unilaterally repurchase this amount of excess capital stock from members of the Bank whose ratio of total capital stock held to their TSIR amount exceeds a periodically defined level in accordance with timing and notice provisions established by the plan. This program is intended to enable the Bank to manage its capital and financial leverage in order to address asset fluctuations. In some months, management may decide not to exercise its discretion to initiate repurchases under the ESRP. Under the program the Bank will not repurchase any excess capital stock from a member if such repurchase would result in that member's capital-stock balance being less than the member's TSIR amount plus $200,000. However, in accordance with the moratorium on excess stock repurchases described below, the Bank did not repurchase excess capital stock under the ESRP during the year ended December 31, 2009.
The Bank implemented a moratorium on excess stock repurchases which was adopted on December 8, 2008. This is designed to help the Bank preserve capital in the light of the challenges the Bank continues to face, which principally arise from losses on its investment portfolio of private-label MBS, which is discussed under Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationFinancial ConditionInvestments.
The Bank's board of directors has a right and an obligation to call for additional capital-stock purchases by the Bank's members, as a condition of membership, as needed to satisfy statutory and regulatory capital requirements. These requirements include the maintenance of a stand-alone credit rating of no lower than double-A from an NRSRO. Since the adoption of the Bank's capital plan on April 19, 2004, the Bank's board of directors has not called for any additional capital-stock purchases by members for this reason.
Mandatorily Redeemable Capital Stock. The Bank reclassifies stock subject to redemption from equity to a liability once a member exercises a written redemption right, gives notice of intent to withdraw from membership, or attains a nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, since the member shares will then meet the definition of a mandatorily redeemable financial instrument. We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability, because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on member shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the statement of operations. The repayment of these mandatorily redeemable financial instruments is reflected as financing cash outflows in the statement of cash flows once settled. At December 31, 2009, the Bank had $90.9 million in capital stock subject to mandatory redemption
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from eight former members or withdrawing members. This amount has been classified as a liability for mandatorily redeemable capital stock in the statement of condition. The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of the five-year notice of redemption or until the activity no longer remains outstanding. If activity-based stock becomes excess capital stock as a result of an activity no longer outstanding, the Bank may, at its sole discretion, repurchase the excess activity-based stock as described above.
Retained Earnings. The Bank's methodology for determining retained earnings adequacy incorporates the Bank's assessment of the various risks that could potentially adversely affect retained earnings if trigger stress scenario conditions occurred. Principal elements of this risk are market risk and credit risk. Market risk is represented through the Bank's value-at-risk (VaR) market-risk measurement which captures 99 percent of potential changes in the Bank's market value of equity due to potential parallel and nonparallel shifts in yield curves applicable to the Bank's assets, liabilities, and off-balance-sheet transactions. Credit risk is represented through incorporation of valuation deterioration due to but not limited to actual and potential adverse ratings migrations for the Bank's assets and actual and potential defaults.
The Bank's current retained earnings target is $925.0 million, a target adopted to accumulate capital in light of the various challenges to the Bank, including the growth in accumulated other comprehensive losses primarily related to the Bank's portfolio of held-to-maturity private-label MBS, discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationFinancial ConditionInvestments. For further discussion of the Bank's retained earnings target, see Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Bank's retained earnings target could be revised in response to potential Finance Agency mandates or due to potential changes in the Bank's risk profile. See Item 1ARisk Factors. At December 31, 2009, the Bank had retained earnings of $142.6 million.
Dividends. The Bank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. Refer to Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Bank's board of directors may declare and pay dividends in either cash or capital stock. In no event may the Bank pay a dividend if, having done so, the Bank's retained earnings level would be less than zero. The Bank's board of directors has a policy under which the Bank may pay up to 50 percent of the prior quarter's net income while the Bank's retained earnings are less than its retained earnings target. However, on February 22, 2010, the Bank announced that its board of directors does not expect to declare any dividends during at least the first half of 2010 irrespective of net income as the Bank continues to focus on building retained earnings. The Bank's board of directors will re-examine the issue during the second half of the year to assess progress toward retained earnings goals and determine the likelihood of quarterly dividend declarations for the remainder of 2010.
Interest-Rate-Exchange Agreements
Finance Agency regulations establish guidelines for interest-rate-exchange agreements. The Bank can use interest-rate swaps, swaptions, interest-rate-cap and floor agreements, calls, puts, futures, and forward contracts as part of its interest-rate-risk management and funding strategies. Finance Agency regulations require the documentation of non-speculative use of these instruments and the establishment of limits to credit risk arising from these instruments.
In general, the Bank uses interest-rate-exchange agreements in three ways: 1) as a fair-value or cash-flow hedge of a hedged financial instrument, firm commitments, or a forecasted transaction, 2) as economic hedges in asset-liability management that are not designated as hedges, or 3) by acting as an intermediary between members and the capital markets. In addition to using interest-rate-exchange agreements to manage mismatches of interest rates between assets and liabilities, the Bank also uses
23
interest-rate-exchange agreements to manage embedded options in assets and liabilities; to hedge the market value of existing assets, liabilities, and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs.
The Bank may enter into interest-rate-exchange agreements concurrently with the issuance of COs to reduce funding costs. This allows the Bank to create synthetic floating-rate debt at a cost that is lower than the cost of a floating-rate cash instrument issued directly by the Bank. This strategy of issuing bonds while simultaneously entering into interest-rate-exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of the debt depends on price relationships in both the bond market and interest-rate-exchange markets. When conditions in these markets change, the Bank may alter the types or terms of COs issued.
The most common ways in which the Bank uses derivatives are:
-
- To reduce funding costs by combining a derivative and a CO. The combined funding structure can be lower in cost
than a comparable CO bond;
-
- To preserve a favorable interest-rate spread between the yield of an asset (for example, an advance) and the
cost of the supporting liability (for example, the CO bond used to fund the advance). Without the use of derivatives, this interest-rate spread could be reduced or eliminated when the
interest rate on the advance and/or the interest rate on the bond change differently or change at different times;
-
- To mitigate the adverse earnings effects of the shortening or extension of certain assets (for example, advances or
mortgage assets) and liabilities; and
-
- To protect the value of existing asset or liability positions or of anticipated transactions.
Competition
Advances. Demand for the Bank's advances is affected by, among other things, the cost of other available sources of liquidity for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment-banking concerns, commercial banks, the Federal Reserve and, in certain circumstances, other FHLBanks. Smaller members may have access to alternative funding sources, including sales of securities under agreements to repurchase and brokered certificates of deposit, while larger members may also have access to federal funds, negotiable certificates of deposit, bankers' acceptances, and medium-term notes, and may also have independent access to the national and global credit markets. Since 2008 and throughout 2009, members have also been able to access a myriad of liquidity programs established in response to the continuing credit crisis, including the Troubled Assets Relief Program's (TARP's) capital injections which directly increases each recipient's ability to lend, favorable changes to the Federal Reserve Board's requirements for borrowing directly from the Federal Reserve Banks, the Federal Reserve Board's commercial paper facility, and the FDIC's Temporary Liquidity Guarantee Program (the Temporary Liquidity Guarantee Program), pursuant to which the FDIC has guaranteed certain debt issuances by financial institutions, as surrogates to the Bank's traditional advance products. However, these alternative liquidity facilities either have been or are beginning to be scaled back and/or phased out, and this competition is expected to diminish in 2010. The availability of alternative funding sources to members can significantly influence the demand for the Bank's advances and can vary as a result of other factors including, among others, market conditions, members' creditworthiness, and availability of collateral. Further, demand for the Bank's advances may be adversely impacted by certain legislative and regulatory developments. For example, on February 27, 2009, the FDIC approved a final rule to increase deposit insurance premium assessments based on secured liabilities, including the Bank's advances, to the extent that the institution's ratio of secured liabilities to domestic deposits exceeds 25 percent is further described under Item 7Management's Discussion and Analysis of
24
Financial Condition and Results of OperationsRecent Legislative and Regulatory Developments. Bank members impacted by this final rule may decrease their demand for advances from the Bank due to the increased all-in cost from their increased deposit insurance premium assessments.
Mortgage Loans Held for Portfolio. The activities of the Bank's MPF portfolio are subject to significant competition in purchasing conventional, conforming fixed-rate mortgage and government-insured loans. The Bank faces competition in customer service, the prices paid for these assets, and in ancillary services such as automated underwriting. Historically, the most direct competition for mortgages came from other housing GSEs that also purchase conventional, conforming fixed-rate mortgage loans, specifically Fannie Mae and Freddie Mac. Since 2008, a Federal Reserve Board agency MBS purchase program instituted to make housing more affordable has contributed to the ability of Fannie Mae and Freddie Mac to offer low mortgage rates. Comparative MPF mortgage rates, which are a function of the FHLBank debt issuance costs, have not been as competitive from time to time. The net effect, all other things being equal, weakens member demand for MPF products. The Federal Reserve Board agency MBS purchase program, is described in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsRecent Legislation and Regulatory Developments.
Debt Issuance and Interest-Rate Exchange Agreements. The Bank competes with corporate, sovereign, and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and cost of funds raised through the issuance of certain types of unsecured debt may be adversely affected by regulatory initiatives that discourage investments by certain institutions in unsecured debt with certain volatility or interest-rate-sensitivity characteristics. These factors may adversely impact the Bank's ability to effectively complete transactions in the swap market. Because the Bank uses interest-rate-exchange agreements to modify the terms of many of its CO bond issues, conditions in the swap market may affect the Bank's cost of funds.
In addition, the sale of callable debt and the simultaneous execution of callable interest-rate-exchange agreements that mirror the debt have been important sources of competitive funding for the Bank. As such, the availability of markets for callable debt and interest-rate-exchange agreements may be an important determinant of the Bank's relative cost of funds. There is considerable competition among high-credit-quality issuers in the markets for callable debt and for interest-rate-exchange agreements. There can be no assurance that the current breadth and depth of these markets will be sustained.
Throughout 2009, the FHLBanks have also faced competition in their funding operations from liquidity programs established in response to the credit crisis, as more fully discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesLiquidity.
Assessments
REFCorp Assessment. Although the Bank is exempt from all federal, state, and local taxation, except for property taxes, it is obligated to make payments to REFCorp in the amount of 20 percent of net earnings after AHP expenses. There is no REFCorp payment obligation when net earnings are zero or less, as was the case for 2009. The REFCorp contribution requirement was established by Congress in 1989 to provide funds to pay a portion of the interest on debt issued by the Resolution Trust Corporation that was used to assist failed savings and loan institutions. These interest payments totaled $300 million per year, or $75 million per quarter for the 12 FHLBanks through 1999. In 1999, the Gramm-Leach-Bliley Act of 1999 (GLB Act) changed the annual assessment to a flat rate of 20 percent of net earnings (defined as net income determined in accordance with accounting principles generally
25
accepted in the United States of America (GAAP)) after AHP expense. Since 2000, the FHLBanks have been required to make payments to REFCorp until the total amount of payments made is equivalent to a $300 million annual annuity with a final maturity date of April 15, 2030. The expiration of the obligation is shortened as the 12 FHLBanks make payments in excess of $75 million per quarter.
Because the FHLBanks contribute a fixed percentage of their net earnings to REFCorp, the aggregate amounts paid have exceeded the required $75 million per quarter for the past several years. As specified in the Finance Agency regulation that implements 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 bonds issued by the U.S. Department of the Treasury (the U.S. Treasury) 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 U.S. Treasury, selects the appropriate zero-coupon yields used in this calculation. Through December 31, 2009, the FHLBanks' aggregate payments have satisfied $2.3 million of the $75 million requirement for April 15, 2012, and all scheduled payments thereafter. These defeased payments, or portions thereof, could be restored in the future if actual REFCorp payments of the 12 FHLBanks fall short of $75 million in any given quarter. Contributions to REFCorp will be discontinued once all obligations have been fulfilled. However, due to the interrelationships of all future earnings of the 12 FHLBanks, the total cumulative amount to be paid by the Bank to REFCorp is not determinable.
If the Bank experienced a net loss during a quarter, but still had net income for the year, the Bank's obligation to the REFCorp would be calculated based on the Bank's year-to-date GAAP net income. The Bank would be able to reduce future assessment payments by the amounts paid in excess of its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCorp for the year.
The Bank recorded an annual net loss of $186.8 million for the year ended December 31, 2009, and so had no REFCorp obligation for the year. During the fourth quarter of 2008, the Bank recorded a loss before assessments of $331.5 million which resulted in an overpayment of the Bank's 2008 REFCorp obligation. The amount of the overpayment is recorded as a prepaid asset on the statement of condition and will be used towards future assessments.
AHP Assessment. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of the current year's net income before charges for AHP and interest expense associated with mandatorily redeemable capital stock. The calculation of the AHP assessment has been determined by the Finance Agency.
In annual periods where the Bank's regulatory net income is zero or less, as was the case for 2009, the AHP assessment for the Bank is zero. However, if the annual 10 percent contribution provided by each individual FHLBank is less than the minimum $100 million contribution required for FHLBanks as a whole, the shortfall is allocated among the FHLBanks based upon the ratio of each FHLBank's income before AHP and REFCorp to the sum of the income before AHP and REFCorp of the 12 FHLBanks combined, except that the required annual AHP contribution for an FHLBank shall not exceed its net earnings for the year. REFCorp determines allocation of this shortfall. There was no such shortfall in any of the preceding three years.
The actual amount of the AHP contribution is dependent upon both the Bank's regulatory net income minus payments to REFCorp, and the income of the other FHLBanks; thus future contributions are not determinable.
26
Through the AHP, the Bank is able to address some of the affordable-housing needs of the communities served by its members. The Bank partners with member financial institutions to work with housing organizations to apply for funds to support initiatives that serve very low- to moderate-income households. The Bank uses funds contributed to the AHP program to award grants and low-interest-rate advances to its member financial institutions that make application for such funds for eligible, largely nonprofit, affordable housing development organizations in their respective communities. Such funds are awarded on the basis of an AHP Implementation Plan adopted by the Bank's board of directors, which implements a nationally based scoring methodology mandated by the Finance Agency.
The AHP and REFCorp assessments are calculated simultaneously due to their interdependence. The REFCorp has been designated as the calculation agent for AHP and REFCorp assessments. Each FHLBank provides its net income before AHP and REFCorp assessments to the REFCorp, which then performs the calculations at each quarterend date.
For the year ended December 31, 2009, the Bank experienced a net loss and did not set aside any AHP funding to be awarded during 2010. However, as allowed per AHP regulations, the Bank has elected to allot up to $5.0 million of future periods' required AHP contributions to be awarded during 2010 (referred to as the accelerated AHP). The accelerated AHP allows the Bank to commit and disburse AHP funds to meet the Bank's mission when it would otherwise be unable to do so, based on regulations. The Bank will offset the accelerated AHP contribution against required AHP contributions over the next five years.
The following discussion summarizes some of the more important risks that the Bank faces. This discussion is not exhaustive, and there may be other risks that the Bank faces, which are not described below. The risks described below, if realized, could result in the Bank being prohibited from paying dividends, and/or repurchasing and redeeming its common stock and may adversely impact the Bank's business operations, financial condition, and future results of operations.
CREDIT RISKS
The Bank is subject to credit risk exposures related to the mortgage loans that back its MBS investments. Increased delinquency rates and credit losses beyond those currently expected may adversely impact the yield on or value of those investments.
The Bank has invested in private-label MBS, which are backed by prime, subprime, and/or Alt-A mortgage loans. Although the Bank only invested in senior tranches with the highest long-term debt rating when purchasing private-label MBS, many of these securities are projected to sustain credit losses under current assumptions, and have been downgraded by various NRSRO's. See Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskInvestments for a description of the Bank's portfolio of investments in these securities.
As described in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Estimates, other-than-temporary-impairment assessment is a subjective and complex determination by management. Throughout 2009, increasing delinquency and loss severity trends experienced on the loans underlying MBS, particularly subprime and Alt-A mortgage loans as well as challenging macroeconomic factors, particularly unemployment levels, have caused the FHLBanks' OTTI Governance Committee, and therefore the Bank, to adopt more pessimistic assumptions than in prior periods for other-than-temporary-impairment assessments of private-label MBS. These assumptions resulted in projected future credit losses thereby causing other-than-temporary impairment losses from certain of these securities. The Bank recognized credit losses of $72.4 million and decreases to other comprehensive loss of $24.4 million for MBS that
27
management determined were other other-than-temporarily impaired for the quarter ended December 31, 2009. The Bank incurred credit losses of $444.1 million and increases to other comprehensive loss of $885.4 million for MBS that management determined were other-than-temporarily impaired for the year ended December 31, 2009. If macroeconomic trends or collateral credit performance within the Bank's private-label MBS portfolio deteriorate further than currently anticipated, more pessimistic assumptions including but not limited to housing price changes, loan default rates, loss severities, and prepayment speeds may be adopted by the FHLBanks' OTTI Governance Committee. As a possible outcome, the Bank may recognize additional credit losses and increases to other comprehensive loss, which may be substantial. For example, a cash-flow analysis was also performed for each of these securities under a more stressful housing price scenario. The more stressful scenario was based on a housing price forecast that was five percentage points lower at the trough than the base-case scenario followed by a flatter recovery path. Under this more stressful scenario, the Bank would be projected to realize an additional $111.2 million in credit losses and an additional decrease to other comprehensive loss of $51.2 million.
Investment rating downgrades and decreases in the fair value of the Bank's investments may increase the Bank's risk-based capital requirement.
At December 31, 2009, the Bank's total risk-based capital requirement was approximately $1.5 billion. At December 31, 2009, the Bank had permanent capital of $3.9 billion and so was in excess of its risk-based capital requirement by $2.4 billion. However, further ratings downgrades on the Bank's investments or decreases in the fair value of the Bank's assets may increase the Bank's risk-based capital requirement. If the Bank is unable to satisfy its risk-based capital requirement, the Bank would be subject to certain capital restoration requirements and be prohibited from paying dividends, irrespective of whether the Bank has retained earnings or current net income, and redeeming or repurchasing capital stock without the prior approval of the Finance Agency. For a discussion of our risk-based capital requirements, see Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital.
Rising delinquency rates on the Bank's investments in MPF loans may adversely impact the Bank's financial condition.
As discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionMortgage Loans, at December 31, 2009, delinquency rates on the Bank's investments in MPF loans had risen to 4.50 percent of total par value of mortgage loans outstanding from 2.61 percent of total par value of mortgage loans outstanding at December 31, 2008. In response to both the rise in delinquency rates and the general deterioration in nationwide housing prices, the Bank has increased its allowance for credit losses on mortgage loans to $2.1 million at December 31, 2009 from $350,000 at December 31, 2008. While the Bank has not changed its base methodology for calculating the allowance for loan losses since December 31, 2008, the Bank increased the loss severity estimates that the Bank applies to projected defaulted loans. This revision in loss assumptions reflects the prolonged deterioration in U.S. housing markets and resulting expectations as to the length and depth of depressed housing prices and impact on realized losses. To the extent that economic conditions further weaken and regional or national home prices continue to decline, the Bank could determine to further increase its allowance for credit losses on mortgage loans. Further, the Bank may be exposed to servicer defaults and PFI failures to satisfy their credit enhancement obligations if the financial condition of PFI members materially deteriorates.
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Declines in the value of mortgage loans that serve as collateral may adversely impact the Bank's business operations and/or financial condition.
To secure advances, the Bank accepts collateral from members that includes some amounts of prime, subprime, and Alt-A residential mortgage loans, as well as MBS that may be backed by prime mortgage loans. During 2009, delinquencies and losses with respect to residential mortgage loans have increased, particularly for subprime, and Alt-A mortgage loans, including pay-option adjustable-rate mortgage loans. In addition, residential property values in many areas continued to decline throughout 2009. If delinquency and loss rates on residential mortgage loans continue to increase, or if there is a further decline in residential real estate values, the Bank would be exposed to a greater risk that the collateral that has been pledged to secure advances would be inadequate in the event of default on an outstanding advance.
The Bank has geographic concentrations that may adversely impact its business operations and/or financial condition.
The Bank has concentrations of mortgage loans in some geographic areas based on its investments in MPF loans and private-label MBS and on its receipt of collateral pledged for advances. See Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit Risk for additional information on these concentrations. To the extent that any of these geographic areas experiences significant further declines in the local housing markets, declining economic conditions, or a natural disaster, the Bank could experience increased losses on its investments in the MPF loans or the related MBS or be exposed to a greater risk that the pledged collateral securing related advances would be inadequate in the event of default on such an advance.
As mortgage servicers continue their loan modification and liquidation efforts, the yield on or value of the Bank's MBS investments may be adversely impacted.
Mortgage servicers continue their efforts to modify delinquent loans in order to mitigate losses. Such loan modifications may include reductions in interest rate and/or principal on these loans. Losses from such loan modifications may be allocated to investors in MBS backed by these loans in the form of lower interest payments and/or reductions in future principal amounts received.
This activity may result in higher losses being allocated to the Bank's MBS investments backed by such loans than the Bank may have expected or experienced to date.
Counterparty credit risk could adversely impact the Bank.
The Bank assumes some unsecured credit risk when entering into money-market transactions and financial derivatives transactions with counterparties. 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 the Bank's financial condition and results of operations.
The Bank relies upon derivative instruments to reduce its interest-rate risk, however the Bank may not be able to enter into effective derivative instruments on acceptable terms.
The Bank uses derivative instruments to reduce its interest-rate risk . If the Bank is unable to manage its hedging positions properly, or is unable to enter into hedging instruments upon acceptable terms, the Bank may be unable to effectively manage its interest-rate and other risks, which could adversely impact the Bank's financial condition and results of operations.
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Changes in the Bank's or other FHLBanks' credit ratings or other negative news may adversely impact the Bank's cost and availability of financing.
The Bank currently has the highest credit rating from Moody's and S&P. In addition, the COs of the FHLBanks have been rated Aaa/P-1 by Moody's and AAA/A-1+ by S&P. These ratings are subject to reduction or withdrawal at any time by the rating agencies; therefore, the Bank may not be able to maintain these credit ratings. S&P has assigned two FHLBanks a stable rating with long-term ratings of AA+ as of February 28, 2010. Although the credit ratings of the COs of the FHLBanks have not been affected by these ratings, similar ratings actions may adversely affect the Bank's cost of funds and ability to issue COs on acceptable terms, which could adversely impact the Bank's financial condition and results of operations. Similarly, in the absence of rating-agency actions, the revelation of negative news affecting any FHLBank, such as material losses or increased risk of losses, may also adversely impact the Bank's cost of funds.
A reduction in the Bank's ratings would also trigger additional collateral posting requirements under the Bank's derivative collateral agreements. At December 31, 2009, the impact of a downgrade to AA+ would have required $257.4 million of after-haircut valued collateral to be posted to our derivatives counterparties.
STRATEGIC RISKS
The Bank may fail to meet its minimum regulatory capital requirements and/or maintain a capital classification of adequately capitalized, which would result in prohibitions on dividends, excess capital stock repurchases, and capital stock redemption and could result in additional regulatory prohibitions.
The Bank is required to satisfy certain minimum regulatory capital requirements, including risk-based capital requirements and certain regulatory capital and leverage ratios, which are described in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital and is subject to the Finance Agency's regulation on FHLBank capital classification and critical capital levels (the Capital Rule). Additionally, the Bank is required to satisfy certain regulatory capital and leverage ratio requirements. Any failure to satisfy these requirements will result in the Bank becoming subject to certain capital restoration requirements and being prohibited from paying dividends, irrespective of whether the Bank has retained earnings or current net income, and redeeming or repurchasing capital stock without the prior approval of the Finance Agency.
The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. The Bank satisfied these requirements at December 31, 2009. However, pursuant to the Capital Rule, the Finance Agency has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If the Bank becomes classified into a capital classification other than adequately capitalized, the Bank would be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.
The board of directors' decisions not to declare dividends may decrease demand for advance products and increase membership withdrawals.
The Bank's board of directors has not declared a dividend since the fourth quarter of 2008 as it seeks to preserve capital in light of certain challenges the Bank continues to face, which principally relate to losses from its investments in private-label MBS, as discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationOverview and Executive SummaryPrincipal Business Developments. On February 22, 2010, the Bank announced that its board
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of directors does not expect to declare a quarterly dividend based on quarterly results until it demonstrates a consistent pattern of positive net income, which will preclude a declaration of dividends for at least the first two quarters of 2010 irrespective of net income in those quarters as the Bank continues to focus on building retained earnings.
The Bank's ability to pay dividends is also subject to statutory and regulatory requirements. For example, regulations may be issued requiring higher levels of retained earnings. Further, events such as changes in the Bank's market-risk profile, credit quality of assets held, and increased volatility of net income effects of the application of certain GAAP may affect the adequacy of the Bank's retained earnings. This in turn may require the Bank to further increase its retained earnings target and extend the elimination of dividends or reduce its dividends, as the case may be, in order to achieve and maintain the future targeted amounts of retained earnings.
Should the board of directors continue not to declare dividends or declare dividends of relatively low yield, the Bank may experience decreased member demand for advances requiring capital stock purchases and increased membership requests for withdrawals that may adversely impact the Bank's business operations and financial condition.
The Bank's moratorium on excess stock repurchase may decrease demand for advance products and increase membership withdrawals.
The Bank must meet its minimum regulatory capital requirements at all times. If the Bank were to fail to maintain an adequate level of total capital to comply with minimum regulatory capital requirements, it would be precluded from repurchasing excess capital stock or from redeeming capital stock until it restored compliance, which could cause members to withdraw from membership.
Since December 8, 2008, the Bank has continued a moratorium on excess stock repurchases in light of certain challenges the Bank continues to face, which principally relate to losses from its investments in private-label MBS, as discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationOverview and Executive SummaryPrincipal Business Developments. This moratorium may be an incentive for members to withdraw from membership and a disincentive to prospective members from becoming members, either of which may adversely impact the Bank's business operations and financial condition.
The loss of significant members may result in lower demand for the Bank's products and services.
At December 31, 2009, the Bank's five largest members held 50.8 percent of the Bank's stock. In addition, the Bank's two largest members held multiple memberships in the FHLBank System, allowing them the flexibility of borrowing from less capital-constrained FHLBanks. The loss of significant members or a significant reduction in the level of business they conduct with the Bank could lower demand for the Bank's products and services in the future and adversely impact the performance of the Bank.
Also, consolidations within the financial services industry may reduce the number of current and potential members in the Bank's district. Industry consolidation could also cause the Bank to lose members whose business and stock investments are so substantial that their loss could threaten the viability of the Bank. In turn, the Bank might be forced to seek a merger with another FHLBank district.
A decrease in demand for the Bank's products and services due to the loss of significant members may adversely impact the Bank's results of operations and financial condition, the impact of which may be greater during periods when the Bank is experiencing losses or reduced net income.
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The Bank is subject to a complex body of laws and regulations, which could change in a manner detrimental to the Bank's business operations and/or financial condition.
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and, as such, are governed by federal laws and regulations promulgated, adopted, and applied by the Finance Agency, an independent agency in the executive branch of the federal government, that regulates the Bank. Congress may amend the FHLBank Act or other statutes in ways that significantly affect (1) the rights and obligations of the FHLBanks and (2) the manner in which the FHLBanks carry out their housing-finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Finance Agency or other financial services regulators could adversely impact the Bank's ability to conduct business or the cost of doing business. For a discussion of certain recent legislation and regulatory developments that may impact the Bank, see Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationRecent Legislative and Regulatory Developments.
The Bank cannot predict what additional regulations will be issued or what additional legislation will be enacted, and the Bank cannot predict the effect of any such additional regulations or legislation on the Bank's business operations and/or financial condition. Additional changes in regulatory or statutory requirements could result in, for example, an increase in the FHLBanks' cost of funding, a change in permissible business activities, or a decrease in the size, scope, or nature of the FHLBanks' lending, investment, or mortgage-financing activities, which could adversely impact the Bank's financial condition and results of operations. The enactment of legislation and regulations may also have an indirect, adverse impact on the Bank. See Market RiskThe Bank faces competition for loan demand and loan purchases, which could adversely impact results of operations in this Item for discussion of the enactment of certain federal legislation and regulations that have increased competition to the Bank as a supplier of advances and may adversely impact the Bank's earnings. See also Proposed legislation in response to the U.S. housing and economic recession may adversely impact the Bank's advances business and investments below for a discussion of proposed legislation that may adversely impact the Bank's investments and member borrowing capacity.
Proposed legislation in response to the U.S. housing and economic recession may adversely impact the Bank's advance business and investments.
Certain proposed federal legislation in response to the continuing U.S. housing and economic recession may adversely impact the Bank's investments and advances business. For example, in 2009, federal legislation was proposed that would have allowed bankruptcy cramdowns on first mortgages of owner-occupied homes as a response to the U.S. economic recession and attendant U.S. housing recession. The proposed legislation would have allowed a bankruptcy judge to reduce the principal amount of such mortgages to the current market value of the property (a cramdown), which is currently prohibited by the Bankruptcy Reform Act of 1994. Some of the private-label MBS in which the Bank has invested contain a cap on bankruptcy losses, and when such cap is exceeded, bankruptcy losses are allocated among all classes of such MBS on a pro-rata basis among the classes of such MBS rather than by seniority. In the event that this legislation is enacted so as to apply to all existing mortgage debt (including first mortgages of owner-occupied homes), then the Bank could face increased risk of credit losses on its private-label MBS that include such bankruptcy caps due to the erosion of its credit protection it would have otherwise had via its senior class of such MBS. Any such credit losses may lead to other-than-temporary impairment charges for affected private-label MBS in the Bank's held-to-maturity portfolio. Additionally, bankruptcy cramdowns could adversely impact the value of the collateral held in support of the Bank's loans to members, resulting in reduction of member borrowing capacity, and could adversely impact value of the MPF mortgage loans held by the Bank.
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Compliance with regulatory contingency liquidity guidance could adversely impact the Bank's results of operations.
The Bank is required to maintain sufficient liquidity through short-term investments in an amount at least equal to the Bank's cash outflows under two different scenarios, as discussed in Item 7AQuantitative and Qualitative Disclosures About Market RiskLiquidity Risk. The requirement is designed to enhance the Bank's protection against temporary disruptions in access to the FHLBank debt markets in response to a rise in capital markets volatility. To satisfy this additional requirement, the Bank maintains balances in shorter-term investments, which may earn lower interest rates than alternate investment options and may, in turn, adversely impact net interest income. In certain circumstances, the Bank may need to fund overnight or shorter-term advances with short-term discount notes that have maturities beyond the maturities of the related advances, thus increasing the Bank's short-term advance pricing or reducing net income through lower net interest spread. To the extent these increased prices make the Bank's advances less competitive, advance levels and, therefore, the Bank's net interest income may be adversely impacted.
The Bank may not be able to realize the goals of the revised operating plan.
As discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationOverview and Executive SummaryPrincipal Business Developments, management and the board of directors have implemented a revised operating plan that includes goals as to certain revenue enhancement and expense reduction initiatives intended to help restore the Bank to a position where it can once again repurchase excess capital stock, pay members a dividend, and better fund the AHP. The plan calls for enhanced product offerings, strategies to encourage membership and credit products growth, prudent and profitable investment strategies, potential flexibility in capital requirements to promote new credit activity, greater operational efficiencies, and expense reduction. However, certain portions of the plan require the prior approval of the Finance Agency, and there can be no assurance that the Finance Agency will approve such portions of the plan. In addition, the success of many elements of the plan depend on factors outside of the Bank's control. For example, efforts to encourage new credit activity among the Bank's members may be offset by alternative funding sources available to them, including, but not limited to, such sources developed by the federal government in response to the continuing U.S. economic recession, as discussed in Market RisksThe Bank faces competition for loan demand and loan purchases which could adversely impact results of operations.
Required AHP contribution rates could decrease available funds to pay as dividends to members.
If the total annual net income before AHP expenses of the 12 FHLBanks were to fall below $1 billion, each FHLBank would be required to contribute more than 10 percent of its net income after REFCorp expenses to its AHP to meet the minimum $100 million annual contribution. Increasing the Bank's AHP contribution in such a scenario would reduce the Bank's net income after AHP charges and thereby reduce available funds to pay as dividends.
MARKET RISKS
Any inability of the Bank to access the capital markets could adversely impact its business operations, financial condition, and results of operations.
The Bank's primary source of funds is the sale of COs in the capital markets. The Bank's ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets at that time, which are beyond the Bank's control. Accordingly, the Bank cannot make any assurance that it will be able to obtain funding on terms acceptable to the Bank, if at all. If the Bank cannot access funding when needed, the Bank's ability to support and continue its operations would be adversely
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impacted, which would thereby adversely impact the Bank's financial condition and results of operations.
The credit crisis, which commenced in mid-2007 and deepened greatly in the second half of 2008, resulted in the Bank's increasing reliance on short-term COs resulting from funding spreads for longer-term COs that were higher than historical norms due to investor preference for short-term investments at that time. As a result, the Bank has also become more reliant on the ongoing issuance of discount notes, which are COs with maturities of one year or less, for funding, which reliance continued into 2010. If the Bank cannot access funding when needed on acceptable terms, its ability to support and continue its operations could be adversely impacted, which could adversely impact its financial condition and results of operations, and the value of membership in the Bank.
Notably, the Federal Reserve Board has announced its intention to cease purchasing GSE debt, as discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationRecent Legislative and Regulatory Developments. The Bank's funding costs could be adversely impacted by the removal of this support.
The Bank faces competition for loan demand and loan purchases that could adversely impact results of operations.
The Bank's primary business is providing liquidity to its members by making advances to, and purchasing mortgage loans from, its members. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, and, in certain circumstances, other FHLBanks. Many of the Bank's competitors are not subject to the same body of regulation applicable to the Bank. This is one factor among several that may enable the Bank's competitors to offer wholesale funding on terms that the Bank is not able to offer and that members deem more desirable than the terms offered by the Bank on its advances.
The availability to the Bank's members of different products from alternative funding sources, with terms more attractive than the terms of products offered by the Bank, may significantly decrease the demand for the Bank's advances and/or loan purchases. Further, any change made by the Bank in the pricing of its advances in an effort to compete effectively with these competitive funding sources may decrease the profitability on advances, which may reduce earnings. More generally, a decrease in the demand for advances and/or loan purchases, or a decrease in the Bank's profitability on advances and/or loan purchases, may adversely impact the Bank's financial condition and results of operations.
For example, certain federal government responses to the continuing U.S. economic recession led to increased competition for the Bank's advances products. Examples of such responses are:
-
- the reduction on the required discount on pledged collateral and lowered interest rates on Federal Reserve Bank loans,
which are in direct competition with the Bank's advances products;
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- the Federal Reserve Board's establishment of a commercial paper funding facility providing eligible institutions with the
ability to raise funds in direct competition with the Bank's advances products;
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- a proposed program funded with $30 billion of TARP proceeds that permits financial institutions with fewer than
$10 billion in assets to borrow money at a low interest rate from the U.S. Treasury; and
-
- the Temporary Liquidity Guarantee Program, which may decrease the funding costs of any Bank member that participates in the program which, in turn, may reduce member demand for advances products from the Bank.
Similarly, certain federal government responses to the continuing U.S. economic recession have increased competition for the Bank's purchases of loans through the MPF program which may have an
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adverse impact on the Bank's earnings. One such response is the Federal Reserve Board's agency MBS purchase program, which was initiated to drive mortgage rates lower. The program has resulted in very low mortgage yields for new mortgage loans. As a result of these pricing pressures, in 2009 the Bank was not able to purchase as many mortgage loans under the MPF program as in prior years, as discussed in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionMortgage Loans. So long as pricing remains less competitive than other pricing available from other agencies, including Fannie Mae and Freddie Mac, the Bank expects member demand for MPF products to be weak, which may have an adverse impact on the Bank.
The Bank's efforts to maintain adequate capital levels could hamper its ability to generate asset growth including, but not limited to, meeting member advance requests.
The Bank is mandated to maintain minimum regulatory capital thresholds including, but not limited to, a minimum total regulatory capital ratio of 4.0 percent, which is a percentage equal to permanent capital divided by total assets. This requirement does not permit the Bank to leverage its asset size by borrowing to invest in assets in excess of 4.0 percent of asset financing. As a condition for borrowing advances from the Bank, members are required to invest in capital stock of the Bank, permitting members to leverage their member stock investment to borrow at multiples of that stock investment. In certain scenarios, members seeking to leverage their excess stock availability at the Bank may be unable to borrow at the fullest capacity if overall asset growth causes the Bank's total regulatory capital ratio to fall below 4.0 percent, even after discretionary assets, including, but not limited to, short-term investments, are disposed.
Additional declines in U.S. home prices or in activity in the U.S. housing market could adversely impact the Bank's business operations and/or financial condition.
The deterioration of the U.S. housing market and national decline in home prices, which began in 2007 and remains depressed in to 2010, may adversely impact the financial condition of a number of the Bank's members, particularly those whose businesses are concentrated in the mortgage industry. One or more of the Bank's members may default on its obligations to the Bank for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged by the Bank's members to the Bank as collateral may further decrease. If a member defaulted, and the Bank was unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, the Bank could incur losses. A default by a member with significant obligations to the Bank could result in significant financial losses, which would adversely impact the Bank's results of operations and financial condition.
Further, the deterioration of the U.S. housing market and national decline in home prices, may result in further increases in delinquency rates and loss severities on the mortgage loans underlying the Bank's investments in mortgages and MBS, the risks of which are discussed under Credit RisksThe Bank is subject to credit risk exposures related to the mortgage loans that back its MBS investments. Increased delinquency rates and credit losses beyond those currently expected may adversely impact the yield on or value of those investments andRising delinquency rates on the Bank's investments in MPF loans may adversely impact the Bank's financial condition.
The recent announcements by Fannie Mae and Freddie Mac that they intend to purchase seriously delinquent loans at par value from MBS pools may adversely impact the Bank's financial performance.
In February 2010, Fannie Mae and Freddie Mac announced that they intend to repurchase seriously delinquent loans, defined as loans 120 days or more delinquent, out of collateral pools backing the MBS they have issued at par value. While details of the repurchase programs are not fully known, the repurchase of seriously delinquent loans by Fannie Mae and Freddie Mac would result in
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significant levels of principal received by investors in a short period of time resulting in an increase in market liquidity. This may, in turn, serve to limit the Bank's opportunities to reinvest these prepayments profitably as other investors would be seeking to re-deploy these prepayments simultaneously, elevating purchase prices and reducing effective yields on the new investments.
Additionally, if these GSEs access the capital markets to fund these prepayments, the Bank's own funding costs may be adversely impacted. The funding costs for these GSEs and the FHLBanks traditionally track each other closely. Therefore, any material increase in these GSEs accessing the capital markets from these prepayment programs could result in higher funding costs realized by these GSEs and the FHLBanks as well.
The public perception of GSEs may adversely impact the Bank's funding costs.
The housing-related GSEsFannie Mae, Freddie Mac, and the FHLBanksissue highly rated agency debt to fund their operations. From time to time negative announcements by Fannie Mae and Freddie Mac concerning accounting problems, risk-management issues, and regulatory enforcement actions have created pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk. Similar announcements by the FHLBanks may contribute to this pressure on debt pricing.
The FHLBank System may have to pay a higher rate of interest on its COs to make them attractive to investors. If the Bank maintains its existing pricing on advances, the resulting increased costs of issuing COs may adversely impact the Bank's financial condition and results of operations and could cause advances to be less profitable for the Bank. If, in response to this decrease in spreads, the Bank changes the pricing of its advances, the advances may be less attractive to members, and the amount of new advances and the Bank's outstanding advance balances may decrease. In either case, the increased cost of issuing COs may adversely impact the Bank's financial condition and results of operations.
The Bank may become liable for all or a portion of the consolidated obligations of the FHLBanks, which could adversely impact the Bank's financial condition and results of operations.
Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of COs. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, the Bank could incur significant liability beyond its primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could adversely impact the Bank's financial condition and results of operations.
Additionally, due to the Bank's relationship with other FHLBanks, the Bank could be impacted by events other than the default of a CO. Events that impact other FHLBanks such as member failures, capital deficiencies, and other-than-temporary impairment charges may cause the Finance Agency, at its discretion, to require another FHLBank to either provide capital to or purchase assets of another FHLBank. The Bank's financial condition and results of operations could be adversely impacted if it were required to either so provide capital or purchase assets.
Changes in interest rates could adversely impact the Bank's financial condition and results of operations.
Like many financial institutions, the Bank realizes income primarily from the spread between interest earned on the Bank's outstanding loans and investments and interest paid on the Bank's
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borrowings and other liabilities, as measured by its net interest spread. Although the Bank uses various methods and procedures to monitor and manage exposures due to changes in interest rates, the Bank may experience instances when either the Bank's interest-bearing liabilities will be more sensitive to changes in interest rates than its interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment and extension risk, which is the risk that mortgage-related assets will be refinanced in low-interest-rate environments, or will remain outstanding at below-market yields when interest rates increase. In any case, interest-rate moves could adversely impact the Bank's financial condition and results of operations.
OPERATIONAL RISKS
The Bank relies heavily upon information systems and other technology and any failure of such information systems or other technology could adversely impact the Bank's financial condition and results of operations.
The Bank relies heavily upon information systems and other technology to conduct and manage its business. To the extent that the Bank experiences a failure or interruption in any of these systems or other technology, the Bank may be unable to conduct and manage its business effectively, including, without limitation, its hedging and advances activities. While the Bank has implemented a disaster recovery and business continuity plan, the Bank can make no assurance that it will be able to prevent, or timely and adequately address, the negative effects of any such failure or interruption. Any failure or interruption could significantly harm the Bank's customer relations, risk management, and profitability, and could adversely impact the Bank's financial condition and results of operations.
The Bank relies on the FHLBank of Chicago in participating in the MPF program in that FHLBank's capacity as MPF provider and could be adversely impacted if the FHLBank of Chicago changed or ceased to operate the MPF program, or experienced information systems or other technological interruptions, or failures in its capacity as MPF Provider.
As part of its business, the Bank participates in the MPF program with the FHLBank of Chicago, which accounts for 5.6 percent of the Bank's total assets and 16.9 percent of interest income as of December 31, 2009. The Bank relies on the FHLBank of Chicago as the MPF provider to operate and administer the MPF program. If the FHLBank of Chicago changes, or ceases to operate the MPF program or experiences a failure or interruption in its information systems and other technology in its operation of the MPF program, the Bank's mortgage-purchase business could be adversely affected, and the Bank could experience a related decrease in its net interest margin, financial condition, and profitability. In the same way, the Bank could be adversely affected if any of the FHLBank of Chicago's third-party vendors it engages in the operation of the MPF program were to experience operational or technological difficulties.
The Bank relies on models to value financial instruments and the assumptions used may have a significant effect on the Bank's financial position, the results of operations, and the assessment of risk exposure.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While models used by the Bank to value instruments and measure risk exposures are subject to periodic validation by independent parties, rapid changes in market conditions in the
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interim could impact the Bank's financial position. The use of different models and assumptions, as well as changes in market conditions, could significantly impact the Bank's financial position and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
The Bank occupies 60,744 square feet of leased office space at 111 Huntington Avenue, Boston, Massachusetts 02199. The Bank also maintains 9,969 square feet of leased property for an off-site back-up facility in Westborough, Massachusetts. The Bank believes its properties are adequate to meet its requirements for the foreseeable future.
The Bank from time to time is subject to various pending 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 adverse effect on the Bank's financial condition or results of operations.
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ITEM 4. (REMOVED AND RESERVED)
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Bank capital stock is issued and redeemed at its par value of $100 per share. The Bank's stock is not publicly traded and can be purchased only by the Bank's members. As of February 28, 2010, 460 members and three nonmembers held a total of 37.4 million shares of the Bank's Class B stock, which is the only class of stock outstanding.
During 2009, the Bank did not declare any dividends. In 2008 the Bank declared quarterly cash dividends as outlined in the following table. Dividend rates are quoted in the form of an interest rate, which is then applied to each member's average capital-stock-balance outstanding during the quarter to determine the dollar amount of the dividend that each member will receive. Dividends are solely within the discretion of the Bank's board of directors. Historically, the dividend rate has been based upon a spread to average short-term interest rates experienced during the quarter.
Quarterly Dividends Declared
(dollars in thousands)
|
2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividends Declared in the Quarter Ending
|
Average Capital Stock(1) |
Dividend Amount(2) |
Annualized Dividend Rate |
|||||||
March 31 |
$ | 3,281,473 | $ | 49,627 | 6.00 | % | ||||
June 30 |
3,263,508 | 32,456 | 4.00 | |||||||
September 30 |
3,356,801 | 25,456 | 3.05 | |||||||
December 31 |
3,549,547 | 22,306 | 2.50 |
- (1)
- Average
capital stock amounts do not include average balances of mandatorily redeemable stock.
- (2)
- The dividend amounts do not include the interest expense on mandatorily redeemable stock.
Dividends are declared and paid in accordance with a schedule adopted by the board of directors that enables the Bank's board of directors to declare each quarterly dividend after net income is known, rather than basing the dividend on estimated net income. For example, in 2008, quarterly dividends were declared in February, May, August, and November based on the immediately preceding quarter's net income and were paid on the second business day of the month that followed the month of declaration.
Dividends may be paid only from current net earnings or previously retained earnings. In accordance with the FHLBank Act and Finance Agency regulations, the Bank may not declare a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fall below its minimum capital requirements or would not be adequately capitalized as a result of a dividend except, in this latter case, with the Director of the Finance Agency's permission. Further, the Bank may not pay dividends to its members if the principal and interest due on any CO issued through the Office of Finance on which it is the primary obligor has not been paid in full, or under certain circumstances, if the Bank becomes a noncomplying FHLBank as that term is defined in Finance Agency regulations as a result of its inability to either comply with regulatory liquidity requirements or satisfy its current obligations.
39
Additionally, the Bank may not pay dividends in the form of capital stock or issue new excess stock to members if the Bank's excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the Bank's excess stock to exceed one percent of its total assets. At December 31, 2009, the Bank had excess capital stock outstanding totaling $1.5 billion or 2.4 percent of its total assets.
The Bank's board of directors has adopted a quarterly dividend payout restriction that limits the quarterly dividend payout to no more than 50 percent of quarterly earnings in the event that the retained earnings target exceeds the Bank's current level of retained earnings. The Bank's retained earnings target is $925.0 million and the Bank had retained earnings of $142.6 million at December 31, 2009. On February 22, 2010, the Bank announced that its board of directors does not expect to declare any dividends until it demonstrates a consistent pattern of positive net income, which will likely preclude a declaration of dividends for at least the first two quarters of 2010 irrespective of net income as the Bank continues to focus on its plan to build retained earnings. The Bank's board of directors will re-examine the issue during the second half of the year to assess progress toward retained earnings goals and determine the likelihood of quarterly dividend declarations for the remainder of the year.
In addition, as part of the revised operating plan, the Bank adopted a minimum capital level in excess of regulatory requirements to provide further protection for the Bank's capital base. This adopted minimum capital level provides that the Bank will maintain a minimum capital level equal to four percent of its total assets plus its retained earnings target, an amount equal to $3.4 billion at December 31, 2009. The Bank's permanent capital level was $3.9 billion at December 31, 2009, so the Bank was in excess of this higher requirement by $452.1 million on that date. If necessary to satisfy this adopted minimum capital level, however, the Bank will take steps to control asset growth and/or maintain capital levels, the latter of which could limit future dividends. For additional information on the Bank's revised operating plan, see Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview and Executive SummaryPrincipal Business Developments.
40
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31, 2009, 2008, 2007, 2006, and 2005, have been derived from the Bank's audited financial statements. Financial information is included elsewhere in this report in regards to the Bank's financial condition as of December 31, 2009 and 2008, and the Bank's results of operations for the years ended December 31, 2009, 2008, and 2007. This selected financial data should be read in conjunction with the Bank's financial statements and the related notes thereto appearing in this report.
SELECTED FINANCIAL DATA
(dollars in thousands)
|
December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Statement of Condition |
|||||||||||||||||
Total assets |
$ | 62,487,000 | $ | 80,353,167 | $ | 78,200,338 | $ | 57,387,952 | $ | 57,675,766 | |||||||
Investments(1) |
20,947,464 | 18,864,899 | 17,862,559 | 15,242,161 | 14,466,788 | ||||||||||||
Advances |
37,591,461 | 56,926,267 | 55,679,740 | 37,342,125 | 38,067,896 | ||||||||||||
Mortgage loans held for portfolio, net(2) |
3,505,975 | 4,153,537 | 4,091,314 | 4,502,182 | 4,886,494 | ||||||||||||
Deposits and other borrowings |
772,457 | 611,070 | 713,126 | 1,040,560 | 577,305 | ||||||||||||
Consolidated obligations |
|||||||||||||||||
Bonds |
35,409,147 | 32,254,002 | 30,421,987 | 35,518,442 | 29,442,073 | ||||||||||||
Discount notes |
22,277,685 | 42,472,266 | 42,988,169 | 17,723,515 | 24,339,903 | ||||||||||||
Total consolidated obligations |
57,686,832 | 74,726,268 | 73,410,156 | 53,241,957 | 53,781,976 | ||||||||||||
Mandatorily redeemable capital stock |
90,896 | 93,406 | 31,808 | 12,354 | 8,296 | ||||||||||||
Class B capital stock outstandingputable(3) |
3,643,101 | 3,584,720 | 3,163,793 | 2,342,517 | 2,531,145 | ||||||||||||
Retained earnings (accumulated deficit) |
142,606 | (19,749 | ) | 225,922 | 187,304 | 135,086 | |||||||||||
Accumulated other comprehensive (loss) income |
(1,021,649 | ) | (134,746 | ) | (2,201 | ) | 2,693 | 11,518 | |||||||||
Total capital |
2,764,058 | 3,430,225 | 3,387,514 | 2,532,514 | 2,677,749 | ||||||||||||
Results of Operations |
|||||||||||||||||
Net interest income |
$ | 311,714 | $ | 332,667 | $ | 312,446 | $ | 302,188 | $ | 253,607 | |||||||
Provision for credit losses |
1,750 | 225 | (9 | ) | (1,704 | ) | 502 | ||||||||||
Net impairment losses on held-to-maturity securities recognized in earnings |
(444,068 | ) | (381,745 | ) | | | | ||||||||||
Other income (loss) |
7,421 | (10,215 | ) | 11,137 | 11,750 | (29,734 | ) | ||||||||||
Other expense |
60,068 | 56,308 | 53,618 | 49,055 | 46,184 | ||||||||||||
AHP and REFCorp assessments |
| | 71,740 | 70,796 | 49,045 | ||||||||||||
Net (loss) income |
(186,751 | ) | (115,826 | ) | 198,234 | 195,791 | 135,260 | ||||||||||
Other Information |
|||||||||||||||||
Dividends declared |
$ | | $ | 129,845 | $ | 159,616 | $ | 143,573 | $ | 96,040 | |||||||
Dividend payout ratio(4) |
N/A | N/A | 80.52 | % | 73.33 | % | 71.00 | % | |||||||||
Weighted-average dividend rate(5) |
N/A | 3.86 | % | 6.62 | 5.51 | 4.36 | |||||||||||
Return on average equity(6) |
(6.49 | ) | (3.17 | ) | 6.96 | 7.19 | 5.79 | ||||||||||
Return on average assets |
(0.27 | ) | (0.14 | ) | 0.30 | 0.33 | 0.27 | ||||||||||
Net interest margin(7) |
0.44 | 0.41 | 0.48 | 0.51 | 0.51 | ||||||||||||
Average equity to average assets |
4.09 | 4.42 | 4.35 | 4.57 | 4.66 | ||||||||||||
Total regulatory capital ratio(8) |
6.20 | 4.55 | 4.37 | 4.42 | 4.64 |
- (1)
- Investments
include available-for-sale securities, held-to-maturity securities, trading securities,
interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
- (2)
- The
allowance for credit losses amounted to $2.1 million, $350,000, $125,000, $125,000 and $1.8 million for the years ended
December 31, 2009, 2008, 2007, 2006, and 2005, respectively.
- (3)
- Capital
stock is putable at the option of a member.
- (4)
- The
dividend payout ratio for 2009 and 2008 is not meaningful.
- (5)
- Weighted-average
dividend rate is dividend amount declared divided by the average daily balance of capital stock eligible for dividends.
- (6)
- Return
on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other
comprehensive (loss) income and retained earnings.
- (7)
- Net
interest margin is net interest income before mortgage-loan-loss provision as a percentage of average earning assets.
- (8)
- Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus retained earnings as a percentage of total assets. See Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionCapital regarding the Bank's regulatory capital ratios.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This document includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank that are "forward-looking statements". These statements may use forward-looking terminology such as, but not limited to, "anticipates," "believes," "could," "estimates," "may," "should," "will," "likely," or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A and the risks set forth below, and that actual results could differ materially from those expressed or implied in these forward-looking statements. As a result, you are cautioned not to place undue reliance on such statements. The Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank.
Forward-looking statements in this annual report include, among others, the following:
-
- the Bank's projections regarding income, retained earnings, and dividend payouts;
-
- the Bank's projections regarding credit losses on advances, purchased whole mortgages and mortgage-related securities;
-
- the Bank's expectations relating to future balance-sheet growth;
-
- the Bank's targets under the Bank's retained earnings plan;
-
- the Bank's expectations regarding the size of its mortgage-loan portfolio, particularly as compared to prior
periods; and
-
- statements about the Bank's expectations of its ability to achieve the goals of the revised operating plan and related projections and expectations, such as meeting the target for retained earnings.
Actual results may differ from forward-looking statements for many reasons, including but not limited to:
-
- changes in interest rates, housing prices, employment rates and the general economy;
-
- changes in the size and volatility of the residential mortgage market;
-
- changes in demand for Bank advances and other products resulting from changes in members' deposit flows and credit demands
or otherwise;
-
- the willingness of the Bank's members to do business with the Bank despite the absence of dividend payments in 2009 and
the continuing moratorium on the repurchase of excess capital stock;
-
- changes in the financial health of the Bank's members;
-
- insolvencies of the Bank's members;
-
- increases in borrower defaults on mortgage loans and fluctuations in the housing market;
-
- deterioration in the loan credit performance of the Bank's private-label MBS portfolio beyond forecasted assumptions
concerning loan default rates, loss severities, and prepayment speeds resulting in the realization of additional other-than-temporary impairment charges;
-
- an increase in advance prepayments as a result of changes in interest rates or other factors;
42
-
- the volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security
for obligations of Bank members and counterparties to interest-rate-exchange agreements and similar agreements;
-
- political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members,
counterparties, and/or investors in the COs of the FHLBanks;
-
- competitive forces including, without limitation, other sources of funding available to Bank members, other entities
borrowing funds in the capital markets, and the ability to attract and retain skilled employees;
-
- the pace of technological change and the ability of the Bank to develop and support technology and information systems
sufficient to manage the risks of the Bank's business effectively;
-
- the loss of large members through mergers and similar activities;
-
- changes in investor demand for COs and/or the terms of interest-rate-exchange-agreements and
similar agreements;
-
- the timing and volume of market activity;
-
- the volatility of reported results due to changes in the fair value of certain assets and liabilities, including, but not
limited to, private-label MBS;
-
- the ability to introduce newor adequately adapt currentBank products and services and
successfully manage the risks associated with those products and services, including new types of collateral used to secure advances;
-
- the availability of derivative financial instruments of the types and in the quantities needed for risk management
purposes from acceptable counterparties;
-
- the realization of losses arising from litigation filed against one or more of the FHLBanks;
-
- the realization of losses arising from the Bank's joint and several liability on COs;
-
- inflation or deflation;
-
- issues and events within the FHLBank System and in the political arena that may lead to regulatory, judicial, or other
developments may affect the marketability of the COs, the Bank's financial obligations with respect to COs, and the Bank's ability to access the capital markets.
-
- significant business disruptions resulting from natural or other disasters, acts of war or terrorism; and
-
- the effect of new accounting standards, including the development of supporting systems.
Risks and other factors could cause actual results of the Bank to differ materially from those implied by any forward-looking statements. Our risk factors are not exhaustive. The Bank operates in a changing economic and regulatory environment, and new risk factors will emerge from time to time. Management cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on the business of the Bank or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.
Overview and Executive Summary
Principal Business Developments
The Bank recognized a net loss of $186.8 million for the year ended December 31, 2009 versus a net loss of $115.8 million for the year ended December 31, 2008. The primary challenge for the Bank continues to be losses due to the other-than-temporary impairment of many of its investments in
43
private-label MBS resulting in a credit loss of $444.1 million and a net increase to accumulated other comprehensive loss of $885.4 million for the year ended December 31, 2009. The annual net loss left the Bank with $142.6 million in retained earnings at December 31, 2009. The outstanding par balance of advances was $36.9 billion at December 31, 2009, as such balances continued to decline from the levels of 2008 that were historically high due to the credit related liquidity crisis. The Bank remains in compliance with all regulatory capital ratios as of December 31, 2009.
The credit quality of the loans underlying the Bank's portfolio of private-label MBS was the principal cause of the 2009 net loss and it remains vulnerable to the housing and capital markets, which could result in additional losses. Accordingly, the Bank has taken the following steps in an effort to protect its capital base and build retained earnings:
-
- The Bank has not declared any dividends since the fourth quarter of 2008, and the Bank's board of directors has announced
that it does not expect to declare any dividends until the Bank demonstrates a consistent pattern of positive net income, which will likely preclude a declaration of dividends for at least the first
two quarters of 2010 as the Bank continues to focus on building retained earnings. The Bank's dividend policy is discussed in Item 5Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
-
- The Bank has adopted a retained earnings target of $925.0 million. The Bank's retained earnings target is discussed
in Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.
-
- The moratorium on excess stock repurchases that commenced December 8, 2008, remains in effect.
-
- The Bank has implemented a revised operating plan (the revised operating plan) that includes goals as to certain revenue-enhancement and expense-reduction initiatives as well as a capital use limitation, as described in greater detail below.
Additional information on the Bank's principal business developments for the year ending December 31, 2009, follows:
-
- Investments in Private-Label MBS. As of
December 31, 2009, management has determined that 106 of its private-label MBS, representing an aggregated par value of $2.6 billion as of December 31, 2009, were
other-than-temporarily impaired resulting in a credit loss of $444.1 million for the year and a net increase to accumulated other comprehensive loss of
$885.4 million. The Bank continues to use modeling assumptions reflecting current and forecasted market conditions, inputs, and methodologies in its analyses of these securities for
other-than-temporary-impairment, as is described under Item 8Notes to the Financial
StatementsNote 7Held-to-Maturity Securities and Critical Accounting
EstimatesOther-Than-Temporary-Impairment of Securities in this Item. Given the ongoing deterioration in the performance of many Alt-A mortgage loans
originated in the 2005 to 2007 period, which comprise a significant portion of loans backing private-label MBS owned by the Bank, the Bank has used increasingly stressful assumptions on an ongoing
basis to reflect current developments in experienced loan performance and attendant forecasts. Despite some signs of economic recovery observed over the recent quarter, many of the factors impacting
the underlying loans continued to show little if any improvement and resulted in slower recovery assumptions; such factors include prolonged, elevated unemployment rates, some further decline in
housing prices followed by slower housing price recovery, and extremely limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages.
-
- Revised Operating Plan. Management and the board of directors have completed a detailed analysis of the Bank's operations, risks, and growth opportunities and adopted a revised operating plan that includes certain revenue enhancement and expense reduction initiatives as
44
well as a capital use limitation. The plan calls for enhanced product offerings, strategies to encourage membership and credit products growth, investment strategies that we believe are prudent and profitable, potential flexibility in capital requirements to promote new credit activity, greater operational efficiencies, and expense reduction.
-
- Decline in Advances Balances. The outstanding par balance of advances to members declined from $55.8 billion at December 31, 2008, to $36.9 billion at December 31, 2009. The reduction is attributable to a significant increase in deposits held by member financial institutions, delevering of balance sheets by member financial institutions, and the use of competing wholesale funding products (including those offered by Federal Reserve Banks and other government-sponsored programs developed in response to the credit market crisis) by member financial institutions. This trend appears to have leveled off in the second half of 2009, however, as illustrated by the following graph of quarter end total advances (dollars in billions):
The plan has been further revised since it was initially adopted in September 2009 to adopt a required minimum capital level in excess of regulatory requirements in an effort to provide further protection for the Bank's capital base and to build retained earnings. This adopted minimum capital level provides that the Bank will maintain a minimum capital level equal to four percent of its total assets plus its retained earnings target, an amount equal to $3.4 billion at December 31, 2009. The Bank's permanent capital level was $3.9 billion at December 31, 2009, so the Bank was in excess of this higher adopted minimum capital level by $452.1 million on that date. If necessary to satisfy this adopted minimum capital level, however, the Bank will take steps to control asset growth and/or maintain capital levels, accordingly.
The revised operating plan has been evaluated under a range of economic scenarios, and under each scenario, the Bank expects to remain in compliance with its regulatory capital ratios. Further, certain portions of the plan have already been implemented. The Bank's efficiency and expense review, for example, resulted in the reduction of approximately five percent of the current operating expense budget, including $3.0 million on an annual basis driven by the reduction or elimination of certain operational expenses and salary due to the elimination of nine percent of staff positions. Also, the activity-based stock investment requirement for participation in its MPF program has been suspended to encourage growth in this business line. In addition, the Bank has undertaken measures to prevent a significant reduction in its net interest spread in the event that interest rates remain at current low levels for an extended period by extending its duration of equity, as discussed under Item 7AQuantitative and Qualitative Disclosures about Market RiskMarket and Interest-Rate RiskMeasurement of Market and Interest-Rate Risk. Over time, the revised operating plan is expected to help restore the Bank to a position where it can once again repurchase stock, pay members a dividend, and fund the AHP.
-
- Growth in Net Interest Margin Contributing to Net Interest Income. Net interest income declined from $332.7 million for the year ended December 31, 2008, to $311.7 million for the year ended December 31, 2009. The decline was attributable to the decline in advances balances noted
45
-
- Management Changes. The Bank has made certain changes to its senior management as part of changes that have been adopted to improve the Bank's operations and financial condition. Specifically, Edward A. Hjerpe III commenced employment as the Bank's president and chief executive officer succeeding M. Susan Elliott who served as interim president and chief executive officer following Michael A. Jessee's retirement on April 30, 2009. Subsequently, Ms. Elliott was appointed executive vice president and chief business officer with continuing responsibility for member services and new responsibility for corporate communications and government and community relations.
above and to the effects of lower short-term interest rates. Average total assets for 2009 were $70.3 billion, a decline of $12.2 billion from $82.5 billion in average total assets for 2008. However, net interest margin for the year ended December 31, 2009, was 0.44 percent, a three basis point increase from net interest margin for the year ended December 31, 2008, while net interest spread for the year ended December 31, 2009, was 0.36 percent, a 10 basis-point increase from net interest spread for the year ended December 31, 2008. The increase in net interest spread was attributable to a steeper interest yield curve, more favorable pricing of the FHLBank System's CO debt, and the effect of refinancing significant volume of callable debt in the historically low interest-rate environment that characterized 2009. The steepness of the yield curve enabled the Bank to earn a higher spread on assets whose average term to repricing were longer than those of corresponding liabilities. As interest rates remained at historically low levels, the Bank also was able to refinance callable debt used to fund its fixed-rate residential mortgage assets, including fixed-rate residential MBS and whole mortgage loans. However, in contrast to typical periods of extraordinarily low interest rates, prepayments of fixed-rate mortgages were relatively muted due to the inability of many homeowners to refinance mortgages because of diminished house prices and tightening credit standards. In addition to these environmental factors, the Bank's net interest income benefitted from elevated prepayment fees as members paid off relatively high-coupon advances, and from the accretion of discounts stemming from credit losses attributable to other-than-temporarily impaired MBS.
Additionally, Earl W. Baucom was appointed senior vice president and chief operations officer and assumed responsibility for operations, information technology, and information security with continued oversight of strategic planning. Concurrently, Brian G. Donahue, first vice president and controller, assumed Mr. Baucom's former responsibilities as chief accounting officer.
Financial Market Conditions
The Bank's primary source of revenues is derived from net interest income from advances, investments, and mortgage loans. These interest-earning asset volumes and yields are primarily impacted by economic conditions, market-interest rates, and other factors such as competition.
During 2009, the Federal Reserve Board maintained a target overnight federal funds range of between 0.00 percent and 0.25 percent at yearend, a range the Federal Reserve Board began to target in 2008.
46
The following table provides a summary of key market interest rates for 2009 and 2008.
|
Average Rate for the Year Ended December 31, |
Ending Rate as of December 31, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Rate 2009 vs. 2008 Variance |
Ending Rate 2009 vs. 2008 Variance |
||||||||||||||
|
2009 | 2008 | 2009 | 2008 | ||||||||||||
Federal Funds Target |
0.25 | % | 2.08 | % | 0.25 | % | 0.00 - 0.25 | % | (1.83 | )% | 0.25 - 0.00 | % | ||||
3-month LIBOR |
0.69 | 2.93 | 0.25 | 1.43 | (2.24 | ) | (1.18 | ) | ||||||||
2-year U.S. Treasury |
0.96 | 2.01 | 1.14 | 0.76 | (1.05 | ) | 0.38 | |||||||||
5-year U.S. Treasury |
2.20 | 2.80 | 2.69 | 1.55 | (0.60 | ) | 1.14 | |||||||||
10-year U.S. Treasury |
3.26 | 3.66 | 3.85 | 2.25 | (0.40 | ) | 1.60 | |||||||||
15-year residential mortgage note rate |
4.59 | 5.59 | 4.57 | 4.80 | (1.00 | ) | (0.23 | ) | ||||||||
30-year residential mortgage note rate |
5.03 | 6.02 | 5.08 | 5.03 | (0.99 | ) | 0.05 |
The level of interest rates during a reporting period impacts the Bank's profitability, primarily due to the short-term structure of earning assets and the impact of interest rates on invested shareholder capital. As of December 31, 2009, approximately 29.8 percent of the outstanding advances, had stated original maturities of less than one year. As of December 31, 2008, 45.9 percent of outstanding advances had original maturities of less than one year. Additionally, a significant portion of the Bank's assets either has floating-rate coupons or has been hedged with interest-rate-exchange agreements in which a short-term rate is received.
The level of interest rates also directly affects the Bank's earnings on invested shareholder capital. Because the Bank operates at relatively low, but stable, net spreads between the yield earned on assets and the cost of liabilities, a relatively high proportion of net interest income is generated from the investment of member-supplied capital at the average asset yield. Because a high proportion of the Bank's assets are short-term, have variable coupons, or are hedged with interest-rate swaps on which the Bank receives a floating rate, changes in asset yields tend to have a relatively significant effect on the Bank's net income.
The broad-based deterioration of credit performance of residential mortgage loans and the accompanying decline in residential real estate values in many parts of the nation increase the level of credit risk to which the Bank is exposed due to four of our activities:
-
- making advances to members;
-
- purchasing whole mortgage loans through the MPF program;
-
- investing in mortgage-related and other securities, and funds placement; and
-
- derivatives activities directly with non-member financial institutions
These risks are discussed in the Credit Risk section of Item 7AQuantitative and Qualitative Disclosures about Market Risk. The Bank's risk exposure to these areas is elevated in the current environment and is likely to remain so in 2010.
Results for the year ended December 31, 2009, versus the year ended December 31, 2008
For the years ended December 31, 2009 and 2008, the Bank recognized net losses of $186.8 million and $115.8 million, respectively. This $70.9 million increase in net loss was primarily driven by the increase in other-than-temporary impairment of certain private-label MBS. Other-than-temporary impairment losses of these securities resulted in credit losses of $444.1 million and $381.7 million for the years ended December 31, 2009 and 2008, respectively which are reflected in earnings.
47
In 2008, accounting guidance required that the full decline in fair value on other-than-temporarily impaired securities be recognized through earnings, including both the credit-related component and the non-credit-related component. Effective January 1, 2009 the Bank adopted amended accounting guidance related to other-than-temporary impairment which requires only the credit-related component of an other-than-temporary impairment charge to be recognized in earnings, while the noncredit component is recognized in accumulated other comprehensive income, provided that the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the security. On January 1, 2009 the Bank recognized the cumulative effect of initially applying the amended guidance as an adjustment to the beginning balance of retained earnings in the amount of $349.1 million. This amount represents the noncredit component of the other-than-temporary impairment charge that had been recorded through earnings in 2008. The credit-related component of the 2008 other-than-temporary impairment losses was $32.6 million. See Item 8Financial Statements and Supplementary DataFinancial StatementsNote 2Recently Issued Accounting Standards for additional information on the adoption of this revised guidance.
Significant inputs to the analyses of these securities include projected prepayment rates, default rates and loss severities. During 2009 the Bank has used increasingly stressful assumptions that reduce its projections of prepayment rates and increase its projections of default rates and loss severities for the loans underlying these securities. Despite some signs of economic recovery the Bank has again increased the severity of its assumptions for the assessment of the quarter ended December 31, 2009 based on trends impacting the underlying loans; such trends including continued elevated unemployment rates, some further decline in housing prices followed by slower housing price recovery, and extremely limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages.
For the year ended December 31, 2009 compared to the year ended December 31, 2008 there was a decrease of $21.0 million in net interest income, a $1.5 million increase in the provision for credit losses, and an increase of $2.4 million in operating expenses. These decreases to net income were partially offset by a $2.6 million decrease in loss on early extinguishment of debt, and a $13.1 million increase in net gains on derivatives and hedging activities.
Net interest income for the year ended December 31, 2009, was $311.7 million, compared with $332.7 million for the same period in 2008, which decrease was primarily attributable to the decline in advances balances, as discussed in Overview and Executive SummaryPrincipal Business Developments in this Item. The average yield on interest-earning assets dropped 170 basis points from 3.33 percent for the year ended December 31, 2008, to 1.63 percent for the year ended December 31, 2009. Prepayment-fee income recognized during the year ended December 31, 2009, compared with the same period in 2008, increased by $5.3 million.
For the years ended December 31, 2009 and 2008, average total assets were $70.3 billion and $82.5 billion, respectively, a decline primarily attributable to the decline in advances balances, as discussed in Overview and Executive SummaryPrincipal Business Developments. Annual return on average assets and return on average equity were (0.27 percent) and (6.49 percent), respectively, for the year ended December 31, 2009, compared with (0.14 percent) and (3.17 percent), respectively, for the year ended December 31, 2008.
Net interest spread for the years ended December 31, 2009, and 2008, was 0.36 percent and 0.26 percent, respectively. Net interest margin for the year ended December 31, 2009, was 0.44 percent, a three basis point increase from net interest margin for the same period of 2008.
48
Financial Condition at December 31, 2009, versus December 31, 2008
The composition of the Bank's total assets changed during the year ended December 31, 2009, as follows:
-
- Advances decreased to 60.2 percent of total assets at December 31, 2009, down from 70.8 percent of
total assets at December 31, 2008. This decrease in the proportion of advances to assets reflects both a decrease in advances outstanding and an increase in investments and cash outstanding at
December 31, 2009, as the Bank increased its liquid investments to offset the decline in advances. As of December 31, 2009, advances balances decreased by approximately
$19.3 billion, ending the period at $37.6 billion. The reduction is discussed in Overview and Executive SummaryPrincipal Business Developments.
-
- Short-term money-market investments increased slightly to 11.1 percent of total assets at
December 31, 2009, up from 10.4 percent of total assets at December 31, 2008. As of December 31, 2009, federal funds sold increased $3.1 billion while
interest-bearing deposits decreased by $3.3 billion due to the decrease in the Bank's account with the Federal Reserve Bank of Boston, and securities purchased under agreements to resell
decreased by $1.3 billion from December 31, 2008, to December 31, 2009.
-
- Investment securities increased to 22.4 percent of total assets at December 31, 2009, up from
13.1 percent of total assets at December 31, 2008. From December 31, 2008, to December 31, 2009, investment securities increased by $3.5 billion. The increase is
largely attributable to a $5.3 billion increase in available-for-sale securities due to the purchase of certificates of deposit, FDIC-insured corporate bonds
and GSE debt as the Bank has grown its investments in these assets to improve its operating income without significantly increasing its risk profile. The increase in
available-for-sale securities was offset by a $1.8 billion decline in held-to-maturity securities primarily due to $1.3 billion in
fair-value write-downs to the held-to-maturity MBS portfolio and a $565.0 million decrease in held-to-maturity certificates of
deposit. At December 31, 2009, and December 31, 2008, the Bank's MBS and Small Business Administration (SBA) holdings represented 207 percent and 225 percent of capital,
respectively.
-
- Net mortgage loans increased to 5.6 percent of total assets at December 31, 2009, up from 5.2 percent at December 31, 2008. This increase is due to the overall decrease in total assets of $17.9 billion as mortgage loans decreased by $647.6 million, ending the period at $3.5 billion. The decrease was principally driven by better price execution being offered by other housing GSEs during the year, for reasons more fully described under Financial ConditionMortgage Loans in this Item.
The Bank's total GAAP capital declined $666.2 million to $2.8 billion at December 31, 2009, from $3.4 billion at December 31, 2008. The decline was primarily attributable to the recognition of $444.1 million of credit losses as well as $885.4 million of noncredit losses recorded in other comprehensive loss, all associated with other-than-temporary impairments of private-label MBS, which was partially offset by accretion of the noncredit portion of impairment losses on held-to-maturity securities of $305.0 million, and income from other sources of $257.3 million.
49
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 2009, versus the year ended December 31, 2008
Net Interest Spread and Net Interest Margin
Net interest income for the year ended December 31, 2009, was $311.7 million, compared with $332.7 million for the year ended December 31, 2008, decreasing 6.3 percent from the previous year. Net interest margin for 2009 in comparison with 2008 increased to 44 basis points from 41 basis points, and net interest spread increased to 36 basis points from 26 basis points.
See Overview and Executive SummaryPrincipal Business Developments for additional information regarding the increase in net interest spread and net interest margin.
Prepayment-fee income recognized on advances and investments increased $5.3 million to $13.9 million for the year ended December 31, 2009, from $8.6 million for the year ended December 31, 2008.
The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. The primary source of earnings for the Bank is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other borrowings. Net interest spread is the difference between the yields on interest-earning assets and interest-bearing liabilities. Net interest margin is expressed as the percentage of net interest income to average earning assets.
50
Net Interest Spread and Margin
(dollars in thousands)
|
For the Years Ended December 31, | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||||||||||||||||||||
|
Average Balance |
Interest Income / Expense |
Average Yield |
Average Balance |
Interest Income / Expense |
Average Yield |
Average Balance |
Interest Income / Expense |
Average Yield |
||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||
Advances |
$ | 43,330,465 | $ | 677,709 | 1.56 | % | $ | 61,578,072 | $ | 1,984,347 | 3.22 | % | $ | 44,623,835 | $ | 2,307,079 | 5.17 | % | |||||||||||
Interest-bearing deposits |
4,256,319 | 10,855 | 0.26 | 69,137 | 178 | 0.26 | 55 | 3 | 5.45 | ||||||||||||||||||||
Securities purchased under agreements to resell |
2,141,781 | 4,795 | 0.22 | 719,331 | 12,035 | 1.67 | 1,133,904 | 59,496 | 5.25 | ||||||||||||||||||||
Federal funds sold |
5,731,424 | 9,624 | 0.17 | 2,427,441 | 34,593 | 1.43 | 3,913,636 | 204,688 | 5.23 | ||||||||||||||||||||
Investment securities(1) |
11,216,298 | 251,231 | 2.24 | 12,857,390 | 480,170 | 3.73 | 10,635,415 | 576,894 | 5.42 | ||||||||||||||||||||
Mortgage loans |
3,851,510 | 193,761 | 5.03 | 4,065,776 | 208,841 | 5.14 | 4,273,757 | 217,675 | 5.09 | ||||||||||||||||||||
Other earning assets |
693 | 1 | 0.14 | | | | 274 | 12 | 4.38 | ||||||||||||||||||||
Total interest-earning assets |
70,528,490 | 1,147,976 | 1.63 | % | 81,717,147 | 2,720,164 | 3.33 | % | 64,580,876 | 3,365,847 | 5.21 | % | |||||||||||||||||
Other non-interest-earning assets |
561,120 | 713,062 | 799,836 | ||||||||||||||||||||||||||
Fair value adjustment on investment securities |
(769,436 | ) | 74,315 | 44,239 | |||||||||||||||||||||||||
Total assets |
$ | 70,320,174 | $ | 1,147,976 | 1.63 | % | $ | 82,504,524 | $ | 2,720,164 | 3.30 | % | $ | 65,424,951 | $ | 3,365,847 | 5.14 | % | |||||||||||
Liabilities and capital |
|||||||||||||||||||||||||||||
Consolidated obligations |
|||||||||||||||||||||||||||||
Discount notes |
$ | 32,600,682 | $ | 153,094 | 0.47 | % | $ | 43,506,235 | $ | 1,154,405 | 2.65 | % | $ | 25,777,636 | $ | 1,280,158 | 4.97 | % | |||||||||||
Bonds |
32,384,864 | 682,336 | 2.11 | 33,199,670 | 1,214,031 | 3.66 | 34,953,730 | 1,730,553 | 4.95 | ||||||||||||||||||||
Deposits |
761,711 | 667 | 0.09 | 970,153 | 17,171 | 1.77 | 866,926 | 40,984 | 4.73 | ||||||||||||||||||||
Mandatorily redeemable capital stock |
91,136 | | | 65,063 | 1,189 | 1.83 | 21,044 | 1,400 | 6.65 | ||||||||||||||||||||
Other borrowings |
145,948 | 165 | 0.11 | 37,775 | 701 | 1.86 | 8,770 | 306 | 3.49 | ||||||||||||||||||||
Total interest-bearing liabilities |
65,984,341 | 836,262 | 1.27 | % | 77,778,896 | 2,387,497 | 3.07 | % | 61,628,106 | 3,053,401 | 4.95 | % | |||||||||||||||||
Other non-interest-bearing liabilities |
1,457,646 | 1,075,120 | 948,562 | ||||||||||||||||||||||||||
Total capital |
2,878,187 | 3,650,508 | 2,848,283 | ||||||||||||||||||||||||||
Total liabilities and capital |
$ | 70,320,174 | $ | 836,262 | 1.19 | % | $ | 82,504,524 | $ | 2,387,497 | 2.89 | % | $ | 65,424,951 | $ | 3,053,401 | 4.67 | % | |||||||||||
Net interest income |
$ | 311,714 | $ | 332,667 | $ | 312,446 | |||||||||||||||||||||||
Net interest spread |
0.36 | % | 0.26 | % | 0.26 | % | |||||||||||||||||||||||
Net interest margin |
0.44 | % | 0.41 | % | 0.48 | % |
- (1)
- The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.
51
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The decrease in net interest income is discussed in Overview and Executive SummaryPrincipal Business Developments. The following table summarizes changes in interest income and interest expense between the years ended December 31, 2009 and 2008, and between the years ended December 31, 2008 and 2007. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
Rate and Volume Analysis
(dollars in thousands)
|
For the Years Ended December 31, 2009 vs. 2008 |
For the Years Ended December 31, 2008 vs. 2007 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase (decrease) due to |
Increase (decrease) due to |
||||||||||||||||||
|
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||
Interest income |
||||||||||||||||||||
Advances |
$ | (477,447 | ) | $ | (829,191 | ) | $ | (1,306,638 | ) | $ | 710,740 | $ | (1,033,472 | ) | $ | (322,732 | ) | |||
Interest-bearing deposits |
10,679 | (2 | ) | 10,677 | 181 | (6 | ) | 175 | ||||||||||||
Securities purchased under agreements to resell |
9,464 | (16,704 | ) | (7,240 | ) | (16,577 | ) | (30,884 | ) | (47,461 | ) | |||||||||
Federal funds sold |
21,882 | (46,851 | ) | (24,969 | ) | (58,335 | ) | (111,760 | ) | (170,095 | ) | |||||||||
Investment securities |
(55,357 | ) | (173,582 | ) | (228,939 | ) | 105,454 | (202,178 | ) | (96,724 | ) | |||||||||
Mortgage loans |
(10,843 | ) | (4,237 | ) | (15,080 | ) | (10,670 | ) | 1,836 | (8,834 | ) | |||||||||
Other earning assets |
| 1 | 1 | (6 | ) | (6 | ) | (12 | ) | |||||||||||
Total interest income |
(501,622 | ) | (1,070,566 | ) | (1,572,188 | ) | 730,787 | (1,376,470 | ) | (645,683 | ) | |||||||||
Interest expense |
||||||||||||||||||||
Consolidated obligations |
||||||||||||||||||||
Discount notes |
(233,734 | ) | (767,577 | ) | (1,001,311 | ) | 635,956 | (761,709 | ) | (125,753 | ) | |||||||||
Bonds |
(29,070 | ) | (502,625 | ) | (531,695 | ) | (83,187 | ) | (433,335 | ) | (516,522 | ) | ||||||||
Deposits |
(3,043 | ) | (13,461 | ) | (16,504 | ) | 4,392 | (28,205 | ) | (23,813 | ) | |||||||||
Mandatorily redeemable capital stock |
169 | (1,358 | ) | (1,189 | ) | 1,351 | (1,562 | ) | (211 | ) | ||||||||||
Other borrowings |
339 | (875 | ) | (536 | ) | 597 | (202 | ) | 395 | |||||||||||
Total interest expense |
(265,339 | ) | (1,285,896 | ) | (1,551,235 | ) | 559,109 | (1,225,013 | ) | (665,904 | ) | |||||||||
Change in net interest income |
$ | (236,283 | ) | $ | 215,330 | $ | (20,953 | ) | $ | 171,678 | $ | (151,457 | ) | $ | 20,221 | |||||
52
The average balance of total advances decreased $18.2 billion, or 29.6 percent, for the year ended December 31, 2009, compared with the same period in 2008. This decrease is discussed in Overview and Executive SummaryPrincipal Business Developments in this Item. The following table summarizes average balances of advances outstanding during 2009, 2008, and 2007 by product type.
Average Balances of Advances Outstanding
By Product Type
(dollars in thousands)
|
2009 Average Balance |
2008 Average Balance |
2007 Average Balance |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Overnight advancespar value |
$ | 841,862 | $ | 2,795,805 | $ | 1,035,782 | |||||
Fixed-rate advancespar value |
|||||||||||
Short-term |
14,613,672 | 29,510,796 | 20,822,525 | ||||||||
Long-term |
11,562,867 | 12,116,430 | 8,904,897 | ||||||||
Amortizing |
2,388,128 | 2,485,658 | 2,406,454 | ||||||||
Putable |
8,679,158 | 9,103,145 | 6,483,049 | ||||||||
Callable |
10,077 | 11,779 | 30,000 | ||||||||
|
37,253,902 | 53,227,808 | 38,646,925 | ||||||||
Variable-rate indexed advancespar value |
|||||||||||
Simple variable |
4,177,075 | 5,077,852 | 4,864,487 | ||||||||
Putable, convertible to fixed |
193,795 | 12,000 | 24,474 | ||||||||
LIBOR-indexed with declining-rate participation |
11,007 | 15,500 | 21,240 | ||||||||
|
4,381,877 | 5,105,352 | 4,910,201 | ||||||||
Total average par value |
42,477,641 | 61,128,965 | 44,592,908 | ||||||||
Net premiums and (discounts) |
(12,443 | ) | (13,385 | ) | (12,137 | ) | |||||
Hedging adjustments |
865,267 | 462,492 | 43,064 | ||||||||
Total average advances |
$ | 43,330,465 | $ | 61,578,072 | $ | 44,623,835 | |||||
Putable advances that are classified as fixed-rate advances in the table above are typically hedged with interest-rate-exchange agreements in which a short-term rate is received, typically three-month LIBOR. In addition, 41.7 percent of average long-term fixed- rate advances were similarly hedged with interest-rate swaps. Therefore, a significant portion of the Bank's advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market-interest-rate trends. The average balance of these advances totaled $33.3 billion for 2009, representing 78.5 percent of the total average balance of advances outstanding during 2009. For 2008, the average balance of these advances totaled $52.9 billion, representing 86.5 percent of the total average balance of advances outstanding during 2008.
Prepayment Fees
Included in net interest income are prepayment fees related to advances and investment securities. Prepayment fees make the Bank financially indifferent to the prepayment of advances or investments and are net of any hedging fair-value adjustments. For the years ended December 31, 2009 and 2008, net prepayment fees on advances were $13.1 million and $4.7 million, respectively, and prepayment fees on investments were $794,000 and $3.9 million, respectively. Excluding the impact of prepayment-fee
53
income, net interest spread increased nine basis points to 34 basis points and net interest margin increased two basis points to 42 basis points from December 31, 2008, to December 31, 2009.
Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates. Because prepayment-fee income recognized during these periods does not necessarily represent a trend that will continue in future periods, and due to the fact that prepayment-fee income represents a one-time fee recognized in the period in which the corresponding advance or investment security is prepaid, we believe it is important to review the results of net interest spread and net interest margin excluding the impact of prepayment-fee income. These results are presented in the following table.
Net Interest Spread and Margin without Prepayment-Fee Income
(dollars in thousands)
|
For the Years Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||||||||||
|
Interest Income |
Average Yield |
Interest Income |
Average Yield |
Interest Income |
Average Yield |
|||||||||||||
Advances |
$ | 664,647 | 1.53 | % | $ | 1,979,653 | 3.21 | % | $ | 2,304,104 | 5.16 | % | |||||||
Investment securities |
250,437 | 2.23 | 476,286 | 3.70 | 573,836 | 5.40 | |||||||||||||
Total interest-earning assets |
1,134,120 | 1.61 | 2,711,586 | 3.32 | 3,359,814 | 5.20 | |||||||||||||
Net interest income |
297,858 | 324,089 | 306,413 | ||||||||||||||||
Net interest spread |
0.34 | % | 0.25 | % | 0.25 | % | |||||||||||||
Net interest margin |
0.42 | % | 0.40 | % | 0.47 | % |
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $8.9 billion, or 277.2 percent, for the year ended December 31, 2009, from the average balances for the year ended December 31, 2008. The higher average balances for year ended December 31, 2009 resulted from the increased activity in federal funds sold, securities purchased under agreements to resell, and higher balances held as interest-bearing deposits as advances declined during the year. During this period the Bank held interest-bearing deposits averaging $4.3 billion with the Federal Reserve Bank of Boston, which were substantially withdrawn after July 2, 2009, at which time the Federal Reserve Banks stopped paying interest on excess balances held by non member institutions in accordance with an amendment to the Federal Reserve's Regulation D. See Recent Legislative and Regulatory Developments in this Item for additional information on that amendment and its expected impact on the Bank. The yield earned on short-term money-market investments is tied directly to short-term market-interest rates. These investments are used for liquidity management and to manage the Bank's leverage ratio in response to fluctuations in other asset balances.
Average investment-securities balances decreased $1.6 billion or 12.8 percent for the year ended December 31, 2009, compared with the year ended December 31, 2008. The decrease in average investments is the result of the $2.0 billion decrease in average held-to- maturity certificates of deposit, and a $1.6 billion decrease in average held-to-maturity MBS, which is mainly due to the Bank's credit and noncredit losses incurred in 2009. These decreases were partially offset by a $1.3 billion increase in average available-for-sale securities due to the purchase of certificates of deposit, corporate bonds, and GSE debt.
Average mortgage-loan balances for the year ended December 31, 2009, were $214.3 million lower than the average balance for the year ended December 31, 2008, representing a decrease of 5.3 percent.
54
Overall, the yield on the mortgage-loan portfolio decreased 11 basis points for the year ended December 31, 2009, compared with the year ended December 31, 2008. This decrease is attributable to the following factors:
-
- the average stated coupon rate of the mortgage-loan portfolio decreased eight basis points due to the
acquisition of loans at lower interest rates in 2009 relative to the coupon rates on pre-existing loans and prepayments of pre-existing loans that had higher coupon rates
relative to new loans purchased during the year; and
-
- premium/discount amortization expense has increased $1.0 million, or 21.4 percent, representing a decrease in the average yield of three basis points, due to an increased volume of loan prepayments in the year ended December 31, 2009, versus the same period in 2008.
Composition of the Yields of Mortgage Loans
(dollars in thousands)
|
For the Years Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||||||||||
|
Interest Income |
Average Yield |
Interest Income |
Average Yield |
Interest Income |
Average Yield |
|||||||||||||
Coupon accrual |
$ | 203,542 | 5.28 | % | $ | 217,975 | 5.36 | % | $ | 228,255 | 5.34 | % | |||||||
Premium/discount amortization |
(5,792 | ) | (0.15 | ) | (4,770 | ) | (0.12 | ) | (5,938 | ) | (0.14 | ) | |||||||
Credit-enhancement fees |
(3,989 | ) | (0.10 | ) | (4,364 | ) | (0.10 | ) | (4,642 | ) | (0.11 | ) | |||||||
Total interest income |
$ | 193,761 | 5.03 | % | $ | 208,841 | 5.14 | % | $ | 217,675 | 5.09 | % | |||||||
Average CO balances decreased $11.7 billion, or 15.3 percent, from the year ended December 31, 2008, to the year ended December 31, 2009, based on the Bank's reduced funding needs due to the decline in member demand for advances, as discussed under Overview and Executive SummaryPrincipal Business Developments in this Item. This decline consisted of decreases of $10.9 billion in CO discount notes and $814.8 million in CO bonds.
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. The Bank generally utilizes derivative instruments that qualify for hedge accounting as an interest-rate-risk management tool. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of the Bank's risk-management strategy. The following table provides a summary of the impact of derivative instruments on interest income and interest expense.
55
Impact of Derivatives on Gross Interest Income and Gross Interest Expense
(dollars in thousands)
|
For the Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Gross interest income before effect of derivatives |
$ | 1,627,297 | $ | 2,891,406 | $ | 3,299,936 | ||||
Net interest adjustment for derivatives |
(479,321 | ) | (171,242 | ) | 65,911 | |||||
Total interest income reported |
$ | 1,147,976 | $ | 2,720,164 | $ | 3,365,847 | ||||
Gross interest expense before effect of derivatives |
$ | 1,049,155 | $ | 2,510,106 | $ | 3,015,620 | ||||
Net interest adjustment for derivatives |
(212,893 | ) | (122,609 | ) | 37,781 | |||||
Total interest expense reported |
$ | 836,262 | $ | 2,387,497 | $ | 3,053,401 | ||||
Reported net interest margin for the years ended December 31, 2009 and 2008, was 0.44 percent and 0.41 percent, respectively. If derivative instruments had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.82 percent and 0.47 percent, respectively.
Interest paid and received on interest-rate-exchange agreements that are used by the Bank in its asset and liability management, but which do not meet hedge-accounting requirements (economic hedges), are classified as net gain (loss) on derivatives and hedging activities in other income. As shown in the Other Income (Loss) and Operating Expenses section below, interest accruals on derivatives classified as economic hedges totaled a net expense of $4.5 million and $2.2 million for the years ended December 31, 2009 and 2008, respectively.
For more information about the Bank's use of derivative instruments to manage interest-rate risk, see Item 7AQuantitative and Qualitative Disclosures about Market RiskMarket and Interest-Rate Risk.
Other Income (Loss) and Operating Expenses
The following table presents a summary of other (loss) income for the years ended December 31, 2009, 2008, and 2007. Additionally, detail on the components of net gain (loss) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
56
Other (Loss) Income
(dollars in thousands)
|
For the Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||||
Gains (losses) on derivatives and hedging activities: |
||||||||||||
Net gains related to fair-value hedge ineffectiveness |
$ | 2,404 | $ | 1,210 | $ | 8,367 | ||||||
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with: |
||||||||||||
Advances |
907 | (4,997 | ) | 3,281 | ||||||||
Trading securities |
3,381 | (855 | ) | (1,695 | ) | |||||||
Consolidated obligations |
| (3,375 | ) | | ||||||||
Mortgage delivery commitments |
(264 | ) | (945 | ) | 601 | |||||||
Net interest-accruals related to derivatives not receiving hedge accounting |
(4,458 | ) | (2,183 | ) | (2,939 | ) | ||||||
Net gains (losses) on derivatives and hedging activities |
1,970 | (11,145 | ) | 7,615 | ||||||||
Net impairment losses on held-to-maturity securities recognized in income |
(444,068 | ) | (381,745 | ) | | |||||||
Loss on early extinguishment of debt |
(66 | ) | (2,699 | ) | (641 | ) | ||||||
Service-fee income |
4,031 | 4,564 | 4,336 | |||||||||
Net unrealized and realized losses on trading securities |
(467 | ) | (937 | ) | (267 | ) | ||||||
Realized loss from sale of available-for-sale securities |
| (80 | ) | | ||||||||
Realized gain (loss) from sale of held-to-maturity securities |
1,970 | (52 | ) | | ||||||||
Other |
(17 | ) | 134 | 94 | ||||||||
Total other (loss) income |
$ | (436,647 | ) | $ | (391,960 | ) | $ | 11,137 | ||||
As noted in the Other Income (Loss) table above, accounting for derivatives and hedged items introduces the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.
During the year ended December 31, 2009, it was determined that 106 of the Bank's 215 held-to-maturity private-label MBS, representing an aggregated par value of $2.6 billion as of December 31, 2009, were other-than-temporarily impaired, an increase from 19 securities with an aggregate par value of $586.4 million as of December 31, 2009, that were determined to be other-than-temporarily impaired at December 31, 2008.
For the securities on which we recognized other-than-temporary impairment during 2009, the average credit enhancement was not sufficient to cover projected expected credit losses. The average credit enhancement at December 31, 2009, was approximately 21.8 percent and the expected average collateral loss was approximately 37.9 percent. Accordingly, the Bank recorded an other-than-temporary impairment related to a credit loss of $72.4 million during the fourth quarter of 2009 while the credit loss for the year ended December 31, 2009, amounted to $444.1 million. The Bank does not intend to sell these securities, and we believe that it is not likely that the Bank will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis.
57
In subsequent periods we will account for the other-than-temporarily impaired securities as if the securities had been purchased on the measurement date of the other-than-temporary impairment.
Although prices of private-label MBS improved somewhat during the year ended December 31, 2009, as demonstrated by the graph labeled Average Monthend MBS Prices by Category under Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskCredit Risk-Investments, the prices continued to reflect a significant discount to cost due to poor underlying loan performance, uncertainty about the future of the housing market and broader economy, and ongoing illiquidity in these markets. As a result, the current fair value of many of these securities may be less than what is indicated by the performance of the collateral underlying the securities and our calculation of the expected cash flows of the securities, although we believe that the gap has narrowed due to the price recovery.
We will continue to monitor and analyze the performance of these securities to assess the collectability of principal and interest as of each balance-sheet date. As U.S. macroeconomic conditions, including the housing and mortgage markets, continue to change over time, the amount of projected credit losses could also change. Significant additional other-than-temporary impairment amounts may be recognized if economic conditions deteriorate beyond our current expectations, resulting in higher borrower defaults and/or greater loss severities realized on the disposition of the underlying properties. See Item 7AQuantitative and Qualitative Disclosures about Market RiskCredit RiskInvestments.
The following table displays the Bank's held-to-maturity securities for which other-than-temporary impairment was recognized in the year ending December 31, 2009, based on the Bank's impairment analysis of its investment portfolio (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
|
At December 31, 2009 | For the Year Ended December 31, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other-Than-Temporarily Impaired Investment:
|
Par Value | Amortized Cost |
Carrying Value |
Fair Value | Other-than-Temporary Impairment Related to Credit Loss |
|||||||||||
Private-label residential MBSPrime |
$ | 98,284 | $ | 92,639 | $ | 59,814 | $ | 65,307 | $ | (4,915 | ) | |||||
Private-label residential MBSAlt-A |
2,472,086 | 2,018,170 | 1,122,463 | 1,251,344 | (438,586 | ) | ||||||||||
ABS backed by home equity loansSubprime |
2,536 | 1,981 | 1,251 | 1,388 | (567 | ) | ||||||||||
Total other-than-temporarily impaired securities |
$ | 2,572,906 | $ | 2,112,790 | $ | 1,183,528 | $ | 1,318,039 | $ | (444,068 | ) | |||||
Upon recognition of an other-than-temporary impairment, the carrying value of the investment will be equal to the fair value of the security. Subsequent declines in fair values of held-to-maturity securities are recognized only when there is a subsequent other-than-temporary impairment, and subsequent improvements in fair values of held-to-maturity securities are not recognized. In the absence of a subsequent other-than-temporary impairment, the difference between carrying value and amortized cost of a held-to-maturity security will be accreted to the carrying value of the security over the remaining estimated life of the security.
Changes in the fair value of trading securities are recorded in other (loss) income. For the years ended December 31, 2009 and 2008, the Bank recorded net unrealized losses on trading securities of $467,000 and $937,000, respectively. These securities are economically hedged with interest-rate-exchange agreements that do not qualify for hedge accounting, but are acceptable hedging strategies under the Bank's risk-management program. Changes in the fair value of these economic
58
hedges are recorded in current-period earnings and amounted to a net gain of $3.4 million and a net loss of $855,000 for the years ended December 31, 2009 and 2008, respectively. Also included in other (loss) income are interest accruals on these economic hedges, which resulted in a net expense of $1.5 million and $1.9 million for the years ended December 31, 2009 and 2008, respectively.
During 2009, the Bank sold held-to-maturity MBS with a book value of $19.6 million and recognized a gain of $2.0 million on the sale of these securities. For these securities, the Bank had already collected at least 85 percent of the principal outstanding at acquisition. As a result, these sales are considered to be maturities and management has determined that these sales do not impact the Bank's ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates.
Operating expenses for the years ended December 31, 2009, 2008, and 2007, are summarized in the following table:
Operating Expenses
(dollars in thousands)
|
For the Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Salaries, incentive compensation, and benefits |
$ | 33,575 | $ | 30,595 | $ | 30,214 | ||||
Occupancy costs |
4,339 | 4,251 | 4,142 | |||||||
Other operating expenses |
15,115 | 15,811 | 14,145 | |||||||
Total operating expenses |
$ | 53,029 | $ | 50,657 | $ | 48,501 | ||||
Ratio of operating expenses to average assets |
0.08 | % | 0.06 | % | 0.07 | % |
For the year ended December 31, 2009, total operating expenses increased $2.4 million from the same period in 2008. This increase was mainly due to a $3.0 million increase in salaries and benefits offset by a $696,000 decrease in other operating expenses. The $3.0 million increase in salaries and benefits is due primarily to increases of $1.9 million and $2.0 million in salary expenses and employee benefits, respectively, primarily attributable to the retirement of the Bank's former chief executive officer, which was partially offset by a $691,000 decrease in incentive compensation due to the board of director's decision to not implement an executive incentive plan for 2009.
The Bank, together with the other FHLBanks, is charged for the cost of operating the Finance Agency and the Office of Finance. The Finance Agency's operating costs are also shared by Fannie Mae and Freddie Mac, and HERA prohibits assessments on the FHLBanks for such costs in excess of the costs and expenses related to the FHLBanks. See the Recent Legislative and Regulatory Developments section for additional information. These expenses totaled $5.8 million and $4.5 million for the years ended December 31, 2009 and 2008, respectively, and are included in other expense.
Comparison of the year ended December 31, 2008, versus the year ended December 31, 2007
Overview
Net loss for the year ended December 31, 2008, was $115.8 million, compared with net income of $198.2 million for the year ended December 31, 2007. This $314.1 million decrease was primarily due to an other-than-temporary impairment charge of $381.7 million on held-to-maturity securities, which was partially offset by a reduction in assessments of $71.7 million and an increase in net interest income of $20.2 million.
59
Net interest income for the year ended December 31, 2008, was $332.7 million, compared with $312.4 million for the year ended December 31, 2007. This $20.2 million increase was primarily attributable to strong asset and capital growth during 2008, resulting from continued growth in advances due to the liquidity shortage that impacted the U.S. banking system throughout the year that was partially offset by:
-
- a sharp drop in interest rates associated with deepening weakness in the economy,
-
- an increasing cost of maintaining short-term liquidity as the short-term yield curve steepened,
-
- higher relative borrowing costs associated with long-term debt through much of the year, and
-
- an increased cost arising from the Bank's contingency-liquidity plans, which were modified in accordance with Finance Agency guidance in the second half of 2008 to add a requirement that the Bank maintain sufficient liquidity, through short-term investments, in an amount at least equal to our anticipated cash outflows under two different scenarios. This requirement is discussed in Item 7AQuantitative and Qualitative Disclosures About Market RiskLiquidity Risk. To satisfy this additional requirement, the Bank maintained significantly higher balances in shorter-term investments, earning a much lower interest rate than alternate investment options and thereby negatively impacting net interest income.
Additionally, prepayment-fee income recognized during 2008 compared with 2007 increased modestly by $2.5 million.
For the years ended December 31, 2008 and 2007, average total assets were $82.5 billion and $65.4 billion, respectively. Return on average assets and return on average equity were (0.14 percent) and (3.13 percent), respectively, for the year ended December 31, 2008, compared with 0.30 percent and 6.97 percent, respectively, for the year ended December 31, 2007. The return on average assets and the return on average equity declined due to the net loss in 2008 primarily resulting from the other-than-temporary impairment charge on held-to-maturity securities.
Net interest spread was 0.26 percent for both 2008 and 2007. Net interest margin for 2008 was 0.41 percent, a seven-basis-point decline from net interest margin for 2007. See Results of OperationsNet Interest Spread and Net Interest Margin below for additional discussion of these topics.
Financial Condition at December 31, 2008, versus December 31, 2007
The composition of the Bank's total assets changed during the year ended December 31, 2008, as follows:
-
- Advances decreased to 70.8 percent of total assets at December 31, 2008, down from 71.2 percent of
total assets at December 31, 2007. This decrease in the proportion of advances to assets reflects an increase in investments and cash outstanding at December 31, 2008, as the Bank
increased its liquid investments to satisfy its modified contingent-liquidity plans, as discussed above, as well as to maintain an adequate capital to asset ratio based on the Bank's growth in excess
capital stock resulting from the Bank's moratorium on the repurchase of excess stock. During 2008, advances balances increased by approximately $1.2 billion, ending the year at
$56.9 billion.
-
- Short-term money-market investments increased to 10.4 percent of total assets at December 31, 2008, up from 4.4 percent of total assets at December 31, 2007. As of December 31, 2008, interest-bearing deposits had increased by $3.3 billion due to the increase in the Bank's account with the Federal Reserve Bank of Boston, and securities purchased under agreements to resell increased by $2.0 billion while federal funds sold decreased by $368.0 million from December 31, 2007, to December 31, 2008.
60
-
- Investment securities declined to 13.1 percent of total assets at December 31, 2008, down from
18.5 percent of total assets at December 31, 2007. From December 31, 2007, to December 31, 2008, investment securities decreased by $3.9 billion. The decrease was
due to a $4.8 billion decline in held-to-maturity certificates of deposits, which was partially offset by a $788.5 million increase in
held-to-maturity MBS. The increase in held-to-maturity MBS was due to increased purchases of GSE MBS of $3.4 billion during 2008. These purchases
were made under the Bank's ongoing authority to purchase MBS up to 300 percent of capital. At December 31, 2008, and December 31, 2007, the Bank's MBS and Small Business
Administration (SBA) holdings represented 225 percent and 226 percent of capital, respectively.
-
- Net mortgage loans remained consistent at 5.2 percent of total assets at December 31, 2007, and December 31, 2008.
Net Interest Spread and Net Interest Margin
Net interest income for the year ended December 31, 2008, was $332.7 million, compared with $312.4 million for the year ended December 31, 2007, increasing 6.5 percent from the previous year. However, net interest margin for 2008 in comparison with 2007 decreased from 48 basis points to 41 basis points, and net interest spread remained consistent at 26 basis points.
The increase in net interest income was largely attributable to a significant increase in the average size of the balance sheet in 2008 as compared to 2007. Average total earning assets were $17.1 billion higher in 2008 than in 2007, which was largely attributable to the $17.0 billion increase in average advances balances.
Net interest margin for 2008 was 0.41 percent, a seven basis point decline from net interest margin for 2007, which was attributable to the following factors:
-
- The average yield on interest-bearing assets funded by non-interest-bearing equity capital dropped in 2008 as
a result of lower interest rates; and
-
- the amount of low-margin money-market investments and short-term advances has increased. In particular, as the yield curve steepened in the second half of 2008, it became more costly for the Bank to carry a significant portfolio of overnight funds placements that are used as a source of liquidity to fund potential intraday advance demand, as these assets are funded by longer-term debt and capital.
Both of the above factors have contributed to lower net interest spreads, despite the fact that CO debt funding costs have declined relative to broader market interest rates, such as U.S. dollar interest-rate-swap yields.
For the year ended December 31, 2008, the average yields on total interest-earning assets decreased 188 basis points and yields on total interest-bearing liabilities decreased 188 basis points, compared with the year ended December 31, 2007.
Prepayment-fee income recognized on advances and investments increased $2.5 million to $8.6 million for the year ended December 31, 2008, from $6.0 million for the year ended December 31, 2007. Excluding the impact of prepayment-fee income, net interest spread remained at 25 basis points and net interest margin declined seven basis points to 40 basis points from December 31, 2007, to December 31, 2008.
The average balance of total advances increased $17.0 billion, or 38.0 percent, for the year ended December 31, 2008, compared with the same period in 2007. The increase in average advances was attributable to strong member demand for short-term advances, while long-term fixed-rate and variable-rate advances showed only a moderate increase during 2008 as compared to 2007. The increase
61
reflects a continued increase in member demand caused by market conditions during the period and was attributable to the following product types:
-
- The average balance of short-term fixed-rate advances increased by approximately
$8.7 billion during the year ended December 31, 2008. The yield spread to the Bank's funding cost for these advances was generally narrower for short-term products than for
other products with longer terms to maturity.
-
- The average balance of long-term fixed-rate advances increased by approximately
$3.2 billion during the year ended December 31, 2008.
-
- Average fixed-rate putable advances increased by $2.6 billion from the year ended December 31,
2007, to the same period in 2008.
-
- The average balance of variable-rate indexed advances increased $195.2 million from the year ended
December 31, 2007, to the same period in 2008.
-
- Average overnight advances increased $1.8 billion from the year ended December 31, 2007, to the same period in 2008.
A significant portion of the Bank's advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, approximately 52.5 percent of fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market-interest-rate trends. The average balance of these advances totaled $52.9 billion for 2008, representing 86.5 percent of the total average balance of advances outstanding during 2008. For 2007, the average balance of these advances totaled $36.4 billion, representing 81.6 percent of total average advances outstanding during 2007.
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $1.8 billion, or 36.3 percent, for the year ended December 31, 2008, from the average balances for the year ended December 31, 2007. The yield earned on short-term money-market investments is tied directly to short-term market-interest rates. These investments are used for liquidity management and to manage the Bank's leverage ratio in response to fluctuations in other asset balances.
Average investment-securities increased $2.2 billion or 20.9 percent for the year ended December 31, 2008, compared with the year ended December 31, 2007. The growth in average investments was the result of the increase in average held-to-maturity MBS of $1.7 billion, which was mainly due to purchases of agency MBS. The increase was attributable to the Bank's expanded capacity to purchase MBS due to the increase in capital that occurred during the first half of 2008. Average total capital increased by $802.2 million during the year ended December 31, 2008, in comparison with the same period in 2007. Furthermore, due to decreased global demand for agency MBS stemming from the credit crisis and its impact on the mortgage market, net interest spread opportunities with respect to agency MBS improved over the course of 2007 and 2008, as compared with prior periods. Accordingly, the Bank was able to purchase agency MBS at more favorable risk-adjusted net interest spreads during the first half of 2008 than during prior periods.
Average mortgage-loan balances for the year ended December 31, 2008, were $208.0 million lower than the average balance for the year ended December 31, 2007, representing a decrease of 4.9 percent, although year-ending balances increased $62.2 million or 1.5 percent, from December 31, 2007, to December 31, 2008. The decline in average mortgage-loan balances reflected the fact that balances had been declining steadily through 2007 and the first three quarters of 2008, before beginning to trend modestly upward.
62
Overall, the yield on the mortgage-loan portfolio increased five basis points for the year ended December 31, 2008, compared with the year ended December 31, 2007. This increase was attributable to the following factors:
-
- The average stated coupon rate of the mortgage-loan portfolio increased two basis points due to the
acquisition of loans at higher interest rates in the latter half of 2007 and into 2008 relative to the coupons on pre-existing loans; and
-
- Premium/discount amortization expense has declined $1.2 million, or 19.7 percent, representing an improvement in the average yield of two basis points, due to a reduced volume of loan prepayments in the year ended December 31, 2008, versus the same period in 2007.
Average CO balances increased $16.0 billion, or 26.3 percent, from the year ended December 31, 2007, to the year ended December 31, 2008. This increase was due to an increase of $17.7 billion in CO discount notes offset by a decline of $1.8 billion in CO bonds. This increase funded the growth of the advances portfolio.
Reported net interest margin for the years ended December 31, 2008 and 2007, was 0.41 percent and 0.48 percent, respectively. If derivative instruments had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.47 percent and 0.44 percent, respectively.
Other Income (Loss) and Operating Expenses
During the fourth quarter of 2008, it was determined that 19 of the Bank's private-label MBS were other-than-temporarily impaired. The estimated credit loss for these securities, which is the difference between the amortized cost basis and the present value of the cash flows expected to be collected, discounted at the effective yield of each security, was $32.6 million. However, the accounting rules in effect during 2008 required that we record the full decline in fair value on these securities as the other-than-temporary impairment charge which totaled a loss of $381.7 million for 2008. This amount is reflected in the statement of operations as total other-than-temporary impairment loss on investment securities.
Losses on early extinguishment of debt totaled $2.7 million and $641,000 for the years ended December 31, 2008 and 2007, respectively. During the years ended December 31, 2008 and 2007, the Bank extinguished debt with book values totaling $84.0 million and $22.3 million, respectively.
For the years ended December 31, 2008 and 2007, the Bank recorded net unrealized losses on trading securities of $937,000 and $267,000, respectively. These securities are economically hedged with interest-rate-exchange agreements that do not qualify for hedge accounting, but are acceptable hedging strategies under the Bank's risk-management program. Changes in the fair value of these economic hedges are recorded in current-period earnings and amounted to a loss of $855,000 and $1.7 million for the years ended December 31, 2008 and 2007, respectively. Also included in other (loss) income are interest accruals on these economic hedges, which resulted in net (expense) income of ($1.9 million) and $616,000 for the years ended December 31, 2008 and 2007, respectively.
During the third quarter of 2008, the Bank sold available-for-sale MBS with a book value of $2.7 million and recognized a loss of $80,000 on the sale of these securities. These MBS had been pledged as collateral to Lehman Brothers Special Financing, Inc. (Lehman) on out-of-the-money derivatives transactions. See Item 8Financial Statements and Supplementary DataFinancial StatementsNote 6Available-for-Sale Securities for additional information regarding the transaction. This event was determined by the Bank to be isolated, nonrecurring, and unusual and could not have been reasonably anticipated. As such, management determined that the sale does not impact the Bank's ability and intent to hold the remaining available-for-sale securities that are in an unrealized loss position through to a recovery of fair value, which may be maturity.
63
During the third quarter of 2008, the Bank sold held-to-maturity MBS with a book value of $5.7 million and recognized a loss of $52,000 on the sale of these securities. These MBS had been pledged as collateral to Lehman on out-of-the-money derivatives transactions. See Item 8Financial Statements and Supplementary DataFinancial StatementsNote 7Held-to-Maturity Securities for additional information regarding the transaction. Management determined that the sale does not impact the Bank's ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates.
For the year ended December 31, 2008, total operating expenses increased $2.2 million from the same period in 2007. This increase was mainly due to a $381,000 increase in salaries and benefits and a $1.7 million increase in other operating expenses. The $381,000 increase in salaries and benefits is due primarily to a $2.1 million increase in salary expenses attributable to planned staffing increase and annual merit increases, an increase of $162,000 in employee benefits, and an increase of $133,000 in employee training. These increases were offset by a decline of $2.1 million in incentive compensation, which was impacted by the large growth in unrealized losses in the Bank's portfolio of held-to-maturity private-label MBS and related need to preserve and build capital in 2008. At December 31, 2008, staffing levels increased 3.5 percent to 206.0 full-time equivalent positions compared with 199.0 full-time equivalent positions at December 31, 2007.
The $1.7 million increase in other operating expenses is largely attributable to a $342,000 increase legal expenses in connection with a review of regulatory compliance matters, a $641,000 increase in contractual services, a $353,000 increase in equipment expenses, and a $277,000 increase in director fees due to the board eliminating prior caps on director fees.
FINANCIAL CONDITION
Advances
At December 31, 2009, the advances portfolio totaled $37.6 billion, a decrease of $19.3 billion compared with a total of $56.9 billion at December 31, 2008. This decrease was primarily in the following product types:
-
- a $15.1 billion decline in fixed-rate advances;
-
- a $2.1 billion decrease in floating-rate advances; and
-
- a $1.8 billion decrease in overnight advances.
Reasons for the decline in member demand for advances are discussed in this Item under Overview and Executive SummaryPrincipal Business Developments.
64
The following table summarizes advances outstanding at December 31, 2009 and 2008, by year of contractual maturity.
Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)
|
2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year of Contractual Maturity
|
Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
|||||||||
Overdrawn demand-deposit accounts |
$ | 10,316 | 0.43 | % | $ | 28,444 | 0.46 | % | |||||
2009 |
| | 32,363,291 | 2.42 | |||||||||
2010 |
17,014,988 | 1.34 | 5,418,310 | 4.23 | |||||||||
2011 |
4,802,734 | 3.04 | 4,953,624 | 3.27 | |||||||||
2012 |
2,916,158 | 3.87 | 2,507,092 | 4.30 | |||||||||
2013 |
5,518,784 | 2.32 | 5,119,387 | 2.43 | |||||||||
2014 |
1,868,762 | 3.64 | 909,815 | 4.42 | |||||||||
Thereafter |
4,791,566 | 3.99 | 4,530,059 | 4.08 | |||||||||
Total par value |
36,923,308 | 2.37 | % | 55,830,022 | 2.92 | % | |||||||
Premiums |
20,632 |
9,279 |
|||||||||||
Discounts |
(25,586 | ) | (20,883 | ) | |||||||||
Hedging adjustments |
673,107 | 1,107,849 | |||||||||||
Total |
$ | 37,591,461 | $ | 56,926,267 | |||||||||
Advances originated by the Bank are recorded at par. However, the Bank may record premiums or discounts on advances in the following cases:
-
- advances may be acquired from another FHLBank when a member of the Bank acquires a member of another FHLBank. In these
cases, the Bank may purchase the advance from the other FHLBank at a price that results in a fair market yield for the acquired advance.
-
- in the event that a hedge of an advance is discontinued, the cumulative hedging adjustment is recorded as a premium or
discount and amortized over the remaining life of the advance.
-
- when the prepayment of an advance is followed by disbursement of a new advance and the transactions effectively represent
a modification of the previous advance the prepayment fee received is deferred, recorded as a discount to the modified advance, and accreted over the life of the new advance.
-
- when the Bank makes an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank's related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance. An AHP advance is an advance with an interest rate that is subsidized with funds from the Bank's AHP program. For additional information on the Bank's AHP program, see Item 1BusinessAssessmentsAHP Assessment.
The Bank offers advances to members that may be prepaid on pertinent dates (call dates) without incurring prepayment or termination fees (callable advances). At December 31, 2009, and December 31, 2008, the Bank had outstanding callable advances of $11.5 million and $5.5 million, respectively. The following table summarizes advances outstanding at December 31, 2009 and 2008, by year of contractual maturity or next call date for callable advances.
65
Advances Outstanding by Year of Contractual Maturity or Next Call Date
(dollars in thousands)
|
2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year of Contractual Maturity or Next Call Date
|
Par Value | Percentage of Total |
Par Value | Percentage of Total |
|||||||||
Overdrawn demand-deposit accounts |
$ | 10,316 | | % | $ | 28,444 | | % | |||||
2009 |
| | 32,368,791 | 58.0 | |||||||||
2010 |
17,014,988 | 46.1 | 5,418,310 | 9.7 | |||||||||
2011 |
4,802,734 | 13.0 | 4,948,124 | 8.9 | |||||||||
2012 |
2,927,658 | 7.9 | 2,507,092 | 4.5 | |||||||||
2013 |
5,518,784 | 15.0 | 5,119,387 | 9.2 | |||||||||
2014 |
1,862,262 | 5.0 | 909,815 | 1.6 | |||||||||
Thereafter |
4,786,566 | 13.0 | 4,530,059 | 8.1 | |||||||||
Total par value |
$ | 36,923,308 | 100.0 | % | $ | 55,830,022 | 100.0 | % | |||||
The Bank also offers putable advances, in which the Bank purchases a put option from the member that allows the Bank to terminate the related advance on specific dates through its term. At December 31, 2009 and 2008, the Bank had putable advances outstanding totaling $8.4 billion and $9.3 billion, respectively. The following table summarizes advances outstanding at December 31, 2009, and December 31, 2008, by year of contractual maturity or next put date for putable advances.
Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)
|
2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year of Contractual Maturity or Next Put Date
|
Par Value | Percentage of Total |
Par Value | Percentage of Total |
|||||||||
Overdrawn demand-deposit accounts |
$ | 10,316 | | % | $ | 28,444 | | % | |||||
2009 |
| | 39,061,566 | 70.0 | |||||||||
2010 |
22,710,413 | 61.5 | 4,529,960 | 8.1 | |||||||||
2011 |
4,810,434 | 13.0 | 4,906,824 | 8.8 | |||||||||
2012 |
2,042,108 | 5.5 | 1,599,042 | 2.9 | |||||||||
2013 |
4,707,984 | 12.8 | 4,277,587 | 7.7 | |||||||||
2014 |
1,314,762 | 3.6 | 360,815 | 0.6 | |||||||||
Thereafter |
1,327,291 | 3.6 | 1,065,784 | 1.9 | |||||||||
Total par value |
$ | 36,923,308 | 100.0 | % | $ | 55,830,022 | 100.0 | % | |||||
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The following table summarizes advances outstanding by product type at December 31, 2009 and 2008.
Advances Outstanding by Product Type
(dollars in thousands)
|
December 31, 2009 | December 31, 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Par Value | Percent of Total |
Par Value | Percent of Total |
||||||||||
Overnight advances |
$ | 583,224 | 1.6 | % | $ | 2,350,846 | 4.2 | % | ||||||
Fixed-rate advances |
||||||||||||||
Short-term |
11,392,788 | 30.8 | 22,893,070 | 41.0 | ||||||||||
Long-term |
10,734,687 | 29.1 | 12,866,170 | 23.1 | ||||||||||
Putable |
8,242,575 | 22.3 | 9,273,175 | 16.6 | ||||||||||
Amortizing |
2,169,034 | 5.9 | 2,565,761 | 4.6 | ||||||||||
Callable |
11,500 | | 5,500 | | ||||||||||
|
32,550,584 | 88.1 | 47,603,676 | 85.3 | ||||||||||
Variable-rate advances |
||||||||||||||
Simple variable |
3,581,000 | 9.7 | 5,860,000 | 10.5 | ||||||||||
Putable, convertible to fixed |
203,000 | 0.6 | | | ||||||||||
LIBOR-indexed with declining-rate participation |
5,500 | | 15,500 | | ||||||||||
|
3,789,500 | 10.3 | 5,875,500 | 10.5 | ||||||||||
Total par value |
$ |
36,923,308 |
100.0 |
% |
$ |
55,830,022 |
100.0 |
% |
||||||
The Bank lends to member financial institutions chartered within the six New England states. Advances are diversified across the Bank's member institutions. December 31, 2009, the Bank had advances outstanding to 351, or 76.0 percent, of its 462 members. At December 31, 2008, the Bank had advances outstanding to 370, or 80.3 percent, of its 461 members.
The following table provides a summary of advances outstanding to the Bank's members by member institution type for each of the last five fiscal years.
Advances Outstanding by Member Type
(dollars in millions)
|
Commercial Banks |
Thrifts | Credit Unions |
Insurance Companies |
Other(1) | Total Par Value |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2009 |
$ | 18,565.3 | $ | 14,988.8 | $ | 2,767.1 | $ | 487.0 | $ | 115.1 | $ | 36,923.3 | |||||||
December 31, 2008 |
32,151.1 | 18,930.7 | 3,751.8 | 857.1 | 139.3 | 55,830.0 | |||||||||||||
December 31, 2007 |
35,692.0 | 16,286.0 | 2,518.1 | 757.8 | 131.0 | 55,384.9 | |||||||||||||
December 31, 2006 |
18,585.7 | 15,834.0 | 1,773.3 | 938.4 | 227.4 | 37,358.8 | |||||||||||||
December 31, 2005 |
20,582.6 | 14,233.3 | 1,802.7 | 1,134.8 | 295.2 | 38,048.6 |
- (1)
- "Other" includes advances of former members involved in mergers with nonmembers where the resulting institution is not a member of the Bank, as well as advances outstanding to eligible nonmember housing associates.
67
Top Five Advance-Holding Members
(dollars in thousands)
|
|
|
As of December 31, 2009 | |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Advances Interest Income for the Year Ended December 31, 2009 |
||||||||||||||
Name
|
City | State | Par Value of Advances |
Percent of Total Advances |
Weighted-Average Rate(1) |
||||||||||||
RBS Citizens, N.A. |
Providence | RI | $ | 10,712,640 | 29.0 | % | 0.26 | % | $ | 50,275 | |||||||
Bank of America Rhode Island, N.A. |
Providence | RI | 3,059,312 | 8.3 | 0.71 | 97,068 | |||||||||||
NewAlliance Bank |
New Haven | CT | 1,752,412 | 4.7 | 4.22 | 87,858 | |||||||||||
Salem Five Cents Savings Bank |
Salem | MA | 610,134 | 1.7 | 4.42 | 28,258 | |||||||||||
Washington Trust Company |
Westerly | RI | 607,325 | 1.6 | 4.24 | 28,140 |
- (1)
- Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that may be used by the Bank as a hedging instrument.
The Bank prices advances based on the marginal cost of funding with a similar maturity profile, as well as market rates for comparable funding alternatives. In accordance with regulations, the Bank prices its advance products in a consistent and nondiscriminatory manner to all members. However, the Bank may price its products on a differential basis, which is based on the creditworthiness of the member, volume, or other reasonable criteria applied consistently to all members. Differences in the weighted-average rates of advances outstanding to the five largest members noted in the table above result from several factors, including the disbursement date of the advances, the product type selected, and the term to maturity.
Prepayment Fees. Advances with a maturity of six months or less may not be prepaid, whereas advances with a term to maturity greater than six months generally require a fee to make the Bank financially indifferent should a member decide to prepay an advance. During the year ended December 31, 2009, advances totaling $1.5 billion were prepaid, resulting in gross prepayment-fee income of $40.7 million, which was partially reduced by $18.6 million related to fair-value hedging adjustments on the prepaid advances. Additionally, $9.1 million of the prepayment fees were deferred as a result of disbursement of a new advance to the member and the transactions were deemed to be a modification. During the year ended December 31, 2008, advances totaling $1.0 billion were prepaid, resulting in gross prepayment-fee income of $6.5 million, which was reduced by $1.8 million related to fair-value hedging adjustments and a $7,000 premium write-off on those prepaid advances. Advance prepayments may increase as a result of changes in interest rates or other factors. A declining interest-rate environment may result in an increase in prepayment fees but also a reduced rate of return on the Bank's interest-earning assets. Thus, the amount of future advance prepayments and the impact of such prepayments on the Bank's future earnings is unpredictable.
Investments
At December 31, 2009, investment securities and short-term money-market instruments totaled $20.9 billion, compared with $18.9 billion at December 31, 2008. Under the Bank's pre-existing authority to purchase MBS, additional investments in MBS and certain securities issued by the Small Business Administration (SBA) are prohibited if the Bank's investments in such securities exceed 300 percent of capital as measured at the previous monthend unless the Bank takes advantage of a temporary increase in MBS investment authority granted to the FHLBanks by the Finance Board in March 2008, which it has not, as described in greater detail under Item 1BusinessTraditional Business ActivitiesInvestments. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. At December 31, 2009 and 2008, the Bank's MBS and SBA holdings represented 207 percent and 225 percent of capital, respectively.
68
Held-to-Maturity Securities
The following table provides a summary of the Bank's held-to-maturity securities.
Investment Securities Classified as Held-to-Maturity
(dollars in thousands)
|
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Carrying Value(1) |
Fair Value |
Amortized Cost(2) |
Fair Value |
Amortized Cost(2) |
Fair Value |
||||||||||||||||
Certificates of deposit |
$ | | $ | | $ | | $ | 565,000 | $ | 565,157 | $ | 5,330,000 | $ | 5,332,096 | |||||||||
U.S. agency obligations |
30,801 | 30,801 | 33,061 | 39,995 | 41,259 | 51,634 | 53,465 | ||||||||||||||||
State or local housing-finance-agency obligations |
246,257 | 246,257 | 215,130 | 278,128 | 196,122 | 299,653 | 287,228 | ||||||||||||||||
Government-sponsored enterprises |
18,897 | 18,897 | 18,597 | | | | | ||||||||||||||||
|
295,955 | 295,955 | 266,788 | 883,123 | 802,538 | 5,681,287 | 5,672,789 | ||||||||||||||||
Mortgage-backed securities: |
|||||||||||||||||||||||
U.S. government guaranteed |
98,610 | 98,610 | 98,397 | 11,870 | 12,515 | 13,661 | 14,297 | ||||||||||||||||
Government-sponsored enterprises |
4,872,366 | 4,872,366 | 4,987,923 | 4,384,215 | 4,359,784 | 1,658,407 | 1,682,370 | ||||||||||||||||
Private-label |
3,089,990 | 2,160,482 | 2,069,573 | 3,989,016 | 2,409,945 | 5,924,526 | 5,748,175 | ||||||||||||||||
|
8,060,966 | 7,131,458 | 7,155,893 | 8,385,101 | 6,782,244 | 7,596,594 | 7,444,842 | ||||||||||||||||
Total |
$ |
8,356,921 |
$ |
7,427,413 |
$ |
7,422,681 |
$ |
9,268,224 |
$ |
7,584,782 |
$ |
13,277,881 |
$ |
13,117,631 |
|||||||||
- (1)
- Carrying
value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit related impairment
recognized in accumulated other comprehensive income.
- (2)
- At December 31, 2008 and 2007, carrying value equaled amortized cost.
State or Local Housing-Finance-Agency Obligations. Within this category of investment securities in the held-to-maturity portfolio are gross unrealized losses totaling $31.9 million as of December 31, 2009. Management has reviewed the state or local housing-finance-agency obligations and has determined that unrealized losses reflect the impact of normal market yield and spread fluctuations attendant with security markets. The Bank has determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral. As of December 31, 2009, none of the Bank's held-to-maturity investments in state or local housing-finance-agency obligations were rated below investment grade by an NRSRO. Because the decline in market value is attributable to changes in interest rates and credit spreads and illiquidity in the credit markets, and not to a deterioration in the fundamental credit quality of these obligations, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Mortgage-Backed Securities. During the year ended December 31, 2009, management has determined that 106 of its private-label MBS were other-than-temporarily impaired resulting in a credit loss of $444.1 million and a net increase to accumulated other comprehensive loss of $885.4 million. The Bank has continued to update its modeling assumptions, inputs, and methodologies in its analyses of these securities for other-than-temporary-impairment, as is described under Critical Accounting EstimatesOther-Than-Temporary Impairment of Securities in this Item and Item 8Financial Statements and Supplementary DataNotes to the Financial StatementsNote 7Held-to-Maturity Securities. Given the ongoing flux in the nation's housing markets and economic outlook, the Bank has used increasingly stressful assumptions on an ongoing basis to reflect current developments in experienced loan performance and attendant forecasts. Despite some signs of economic recovery observed during the second half of 2009, many of the trends impacting the underlying loans continued to show little if any improvement and resulted in slower recovery assumptions; such trends include
69
prolonged, elevated unemployment rates, some further decline in housing prices followed by slower housing price recovery, and extremely limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages.
The maturities, amortized cost, and weighted-average yields of non-MBS classified as held-to-maturity as of December 31, 2009, are provided in the following table.
Redemption Terms of Held-to-Maturity Securities
(dollars in thousands)
|
Due in one year or less |
Due after one year through five years |
Due after five years through 10 years |
Due after 10 years | |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Total | ||||||||||||||||||||
U.S. agency obligations |
$ | | | % | $ | | | % | $ | 30,801 | 6.06 | % | $ | | | % | $ | 30,801 | |||||||||||
State or local housing-finance-agency obligations |
355 | 7.04 | 5,133 | 7.41 | 31,721 | 6.55 | 209,048 | 1.13 | 246,257 | ||||||||||||||||||||
Government-sponsored enterprises |
| | 18,897 | 2.18 | | | | | 18,897 | ||||||||||||||||||||
Total |
$ | 355 | 7.04 | % | $ | 24,030 | 3.30 | % | $ | 62,522 | 6.31 | % | $ | 209,048 | 1.13 | % | $ | 295,955 | |||||||||||
Available-for-Sale Securities
The Bank classifies certain investment securities as available-for-sale to enable liquidation at a future date or to enable the application of hedge accounting using interest-rate swaps. By classifying investments as available-for-sale, the Bank can consider these securities to be a source of short-term liquidity, if needed. From time to time, the Bank invests in certain securities and simultaneously enters into matched-term interest-rate swaps to achieve a LIBOR-based variable yield, particularly when the Bank can earn a wider interest spread between the swapped yield on the investment and short-term debt instruments than it can earn between the bond's fixed yield and comparable-term fixed-rate debt. Because an interest-rate swap can only be designated as a hedge of an available-for-sale investment security, the Bank classifies these investments as available-for-sale. The following table provides a summary of the Bank's available-for-sale securities.
Investment Securities Classified as Available-for-Sale
(dollars in thousands)
|
December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||||||||||||
|
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||||
Certificates of deposit |
$ | 2,600,000 | $ | 2,600,000 | $ | | $ | | $ | | $ | | ||||||||
Supranational banks |
415,744 | 381,011 | 501,890 | 458,984 | 394,678 | 396,341 | ||||||||||||||
Corporate bonds |
702,754 | 701,779 | | | | | ||||||||||||||
U.S. government corporations |
253,009 | 221,502 | 334,345 | 275,856 | 235,200 | 237,204 | ||||||||||||||
Government-sponsored enterprises |
1,772,115 | 1,752,319 | 164,478 | 143,130 | 156,221 | 156,064 | ||||||||||||||
State or local housing-finance-agency obligations |
| | 21,685 | 21,685 | | | ||||||||||||||
|
5,743,622 | 5,656,611 | 1,022,398 | 899,655 | 786,099 | 789,609 | ||||||||||||||
Mortgage-backed securities |
||||||||||||||||||||
U.S. government guaranteed |
16,551 | 16,704 | | | | | ||||||||||||||
Government-sponsored enterprises |
816,519 | 813,317 | 322,486 | 314,749 | 277,749 | 274,150 | ||||||||||||||
|
833,070 | 830,021 | 322,486 | 314,749 | 277,749 | 274,150 | ||||||||||||||
Total |
$ |
6,576,692 |
$ |
6,486,632 |
$ |
1,344,884 |
$ |
1,214,404 |
$ |
1,063,848 |
$ |
1,063,759 |
||||||||
70
Unrealized LossesSupranational Banks, Corporate Bonds,U.S Government Corporations, and Government-Sponsored Enterprises. Within the supranational banks, corporate bonds, U.S. government corporations, and GSE categories of investment securities held in the available-for-sale portfolio are gross unrealized losses totaling $34.7 million, $2.0 million, $31.5 million, and $19.8 million, respectively, as of December 31, 2009. Regarding those agency debentures that were in an unrealized loss position as of December 31, 2009, the Bank has concluded that the probability of default for Federal National Mortgage Association (Fannie Mae) is remote given its status as a GSE and its support from the U.S. federal government. Corporate bonds held by the Bank are guaranteed by the FDIC through the Temporary Liquidity Guarantee Program. Debentures issued by a supranational entity and owned by the Bank that were in an unrealized loss position as of December 31, 2009 are viewed as being likely to return contractual principal and interest since such supranational entity is rated the highest long-term rating by each of the three NRSROs. Because the decline in market value is largely attributable to illiquidity in the credit markets and not to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Mortgage-Backed Securities. Within the GSE category of investment securities held in the available-for-sale portfolio are gross unrealized losses totaling $4.9 million as of December 31, 2009. The Bank's available-for-sale securities portfolio has experienced unrealized losses and a decrease in hedged fair value due to interest-rate volatility and reduced liquidity in the marketplace. However, the decline is considered temporary as the Bank expects to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intends to sell these securities nor is it likely that the Bank will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Further, MBS issued by Fannie Mae are backed by conforming mortgage loans and the GSE's credit guarantee as to full return of principal and interest. Because the decline in market value is largely attributable to illiquidity in the credit markets and not to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2009.
The maturities, amortized cost, and weighted-average yields of non-MBS classified as available-for-sale as of December 31, 2009, are provided in the following table.
Redemption Terms of Available-for-Sale Securities
(dollars in thousands)
|
Due in one year or less |
Due after one year through five years |
Due after five years through 10 years |
Due after 10 years | |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Amortized Cost |
Weighted Average Yield |
Total | ||||||||||||||||||||
Certificates of deposit |
$ | 2,600,000 | 0.19 | % | $ | | | % | $ | | | % | $ | | | % | $ | 2,600,000 | |||||||||||
Supranational banks |
| | | | | | 415,744 | 6.79 | 415,744 | ||||||||||||||||||||
Corporate bonds |
| | 702,754 | 1.41 | | | | | 702,754 | ||||||||||||||||||||
U.S. government corporations |
| | | | | | 253,009 | 6.15 | 253,009 | ||||||||||||||||||||
Government-sponsored enterprises |
| | 1,664,167 | 2.55 | | | 107,948 | 6.11 | 1,772,115 | ||||||||||||||||||||
Total |
$ | 2,600,000 | 0.19 | % | $ | 2,366,921 | 2.21 | % | $ | | | % | $ | 776,701 | 6.49 | % | $ | 5,743,622 | |||||||||||
71
Trading Securities
The Bank also classifies certain investments acquired for purposes of meeting short-term contingency liquidity needs and asset/liability management as trading securities and carries them at fair value. However, the Bank does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates the Bank's liquidity needs. The following table provides a summary of the Bank's trading securities.
Trading Securities
(dollars in thousands)
|
December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||
Mortgage-backed securities |
|||||||||||
U.S. government guaranteed |
$ | 23,972 | $ | 26,533 | $ | 32,827 | |||||
Government-sponsored enterprises |
83,366 | 36,663 | 47,754 | ||||||||
Other |
| | 32,288 | ||||||||
Total |
$ | 107,338 | $ | 63,196 | $ | 112,869 | |||||
At December 31, 2009, the Bank held securities from the following issuers with total book values greater than 10 percent of total capital, as follows:
Issuers with Total Carrying Value Greater than 10 Percent of Total Capital
(dollars in thousands)
Name of Issuer
|
Carrying Value(1) |
Fair Value |
||||||
---|---|---|---|---|---|---|---|---|
Non-Mortgage-backed securities: |
||||||||
Federal National Mortgage Association |
$ | 1,107,598 | $ | 1,107,598 | ||||
Federal Home Loan Mortgage Corporation |
663,619 | 663,319 | ||||||
Citibank, N.A.(2) |
651,054 | 651,054 | ||||||
Calyon |
515,000 | 515,000 | ||||||
Banco Bilbao Vizcaya Argentaria |
400,000 | 400,000 | ||||||
Inter-American Development Bank |
381,011 | 381,011 | ||||||
Fortis Bank SA/NV |
340,000 | 340,000 | ||||||
Skandinaviska Enskilda Banken AB |
340,000 | 340,000 | ||||||
Natixis |
340,000 | 340,000 | ||||||
Societe Generale |
340,000 | 340,000 | ||||||
Bank of Nova Scotia |
325,000 | 325,000 | ||||||
Mortgage-backed securities: |
||||||||
Federal National Mortgage Association |
$ | 3,643,948 | $ | 3,738,601 | ||||
Federal Home Loan Mortgage Corporation |
2,125,101 | 2,146,005 |
- (1)
- Carrying
value for trading securities and available-for-sale securities represents fair value.
- (2)
- Guaranteed by the FDIC through the Temporary Liquidity Guarantee Program.
72
The Bank's MBS investment portfolio consists of the following categories of securities by carrying value as of December 31, 2009 and 2008.
Mortgage-Backed Securities
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
U.S. government-guaranteed and GSE residential mortgage-backed securities |
73.2 | % | 54.5 | % | |||
Private-label residential mortgage-backed securities |
24.8 | 43.4 | |||||
Private-label commercial mortgage-backed securities |
1.6 | 1.6 | |||||
Home-equity loans |
0.4 | 0.5 | |||||
Total mortgage-backed securities |
100.0 | % | 100.0 | % | |||
Mortgage Loans
Under the MPF program (other than MPF Xtra), the Bank invests in fixed-rate mortgages that are purchased from members that are PFIs. In the case of MPF Xtra the Bank facilitates Fannie Mae's investment in certain mortgages purchased from PFIs. The Bank bears the liquidity, interest-rate, and prepayment-option risks of the mortgages it purchases, while the member retains the marketing and servicing activities. PFIs provide a measure of credit-loss protection to the Bank on loans the Bank purchases, for which PFIs receive a CE fee. The MPF program, including MPF Xtra, is further described in Item 1BusinessMortgage Loan Finance and Item 7AQuantitative and Qualitative Disclosures about Market RiskCredit RiskMortgage Loans.
Mortgage loans as of December 31, 2009, totaled $3.5 billion, a decrease of $647.6 million from the December 31, 2008 balance of $4.2 billion. As of December 31, 2009, 149 of the Bank's 462 members have been approved to participate in the MPF program, and for the year ended December 31, 2009, 70 members sold loans into the MPF program. Mortgage-loan purchases amounted to $336.2 million par value, for the year ending December 31, 2009, and $620.3 million par value for the year ending December 31, 2008. This 45.8 percent decrease in mortgage-loan purchases is primarily attributable to competition with Fannie Mae and Freddie Mac.
The activities of the Bank's MPF portfolio are subject to significant competition in purchasing conventional, conforming fixed-rate mortgages and government-insured loans. The Bank faces competition in customer service, the prices paid for these assets, and in ancillary services such as automated underwriting. Historically, the most direct competition for mortgages came from other housing GSEs that also purchase conventional, conforming fixed-rate mortgage loans, specifically Fannie Mae and Freddie Mac. Since 2008, a Federal Reserve Board agency MBS purchase program instituted to make housing more affordable has contributed to the ability of Fannie Mae and Freddie Mac to offer low mortgage rates. Comparative MPF mortgage rates, which are a function of the FHLBank debt issuance costs, have not been as competitive from time to time as a result. The net pricing effect, all other things being equal, weakens member demand for MPF products.
To encourage growth in the Bank's MPF program in October 2009, the board of directors approved a suspension of the activity-based stock investment requirement for participating in the MPF program, the suspension will remain in effect at the discretion of the Bank's board of directors. See Item 1BusinessCapital ResourcesActivity-Based Stock-Investment Requirement for additional information.
73
The following table presents information relating to the Bank's mortgage portfolio for the five-year period ended December 31, 2009.
Mortgage Loans Held for Investment
(dollars in thousands)
|
December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Real estate |
|||||||||||||||||
Fixed-rate 15-year single-family mortgages |
$ | 821,978 | $ | 1,027,058 | $ | 1,129,572 | $ | 1,321,762 | $ | 1,480,555 | |||||||
Fixed-rate 20- and 30-year single-family mortgages |
2,671,482 | 3,107,424 | 2,938,886 | 3,152,175 | 3,370,391 | ||||||||||||
Premiums |
25,802 | 32,476 | 35,252 | 42,274 | 51,501 | ||||||||||||
Discounts |
(9,444 | ) | (11,576 | ) | (11,270 | ) | (12,758 | ) | (13,051 | ) | |||||||
Deferred derivative gains and losses |
(1,743 | ) | (1,495 | ) | (1,001 | ) | (1,146 | ) | (1,059 | ) | |||||||
Total mortgage loans held for investment |
3,508,075 | 4,153,887 | 4,091,439 | 4,502,307 | 4,888,337 | ||||||||||||
Less: allowance for credit losses |
(2,100 | ) | (350 | ) | (125 | ) | (125 | ) | (1,843 | ) | |||||||
Total mortgage loans, net of allowance for credit losses |
$ | 3,505,975 | $ | 4,153,537 | $ | 4,091,314 | $ | 4,502,182 | $ | 4,886,494 | |||||||
Volume of mortgage-loan purchases |
|||||||||||||||||
Conventional loans |
|||||||||||||||||
Original MPF |
$ | 309,729 | $ | 479,766 | $ | 122,487 | $ | 109,905 | $ | 220,823 | |||||||
MPF 125 |
3,723 | 74,264 | 51,293 | 41,473 | 56,474 | ||||||||||||
MPF Plus |
| 60,684 | | 110,032 | 1,477,647 | ||||||||||||
Total conventional loans |
313,452 | 614,714 | 173,780 | 261,410 | 1,754,944 | ||||||||||||
Government-insured or guaranteed loans |
|||||||||||||||||
MPF Government |
22,793 | 5,567 | | | | ||||||||||||
Total par value purchased |
$ | 336,245 | $ | 620,281 | $ | 173,780 | $ | 261,410 | $ | 1,754,944 | |||||||
Mortgage loans outstanding |
|||||||||||||||||
Conventional loans |
|||||||||||||||||
Original MPF |
$ | 1,121,309 | $ | 1,120,573 | $ | 735,629 | $ | 684,482 | $ | 642,015 | |||||||
MPF 125 |
307,713 | 403,016 | 377,046 | 361,937 | 361,050 | ||||||||||||
MPF Plus |
1,728,542 | 2,231,626 | 2,524,915 | 2,914,273 | 3,219,238 | ||||||||||||
Total conventional loans |
3,157,564 | 3,755,215 | 3,637,590 | 3,960,692 | 4,222,303 | ||||||||||||
Government-insured or guaranteed loans |
|||||||||||||||||
MPF Government |
335,896 | 379,267 | 430,868 | 513,245 | 628,643 | ||||||||||||
Total par value outstanding |
$ | 3,493,460 | $ | 4,134,482 | $ | 4,068,458 | $ | 4,473,937 | $ | 4,850,946 | |||||||
The FHLBank of Chicago, which acts as the MPF provider and provides operational support to the MPF Banks and their PFIs, calculates and publishes daily prices, rates, and fees associated with the various MPF products. The Bank has the option, on a daily basis, to opt out of participation in the MPF program. To date, the Bank has never opted out of daily participation. The FHLBank of Chicago had advised the Bank that, until further notice, it would no longer purchase participation interests in MPF loans acquired by other MPF Banks including the Bank. As a result, (1) the FHLBank of Chicago will not purchase participation interests in loans originated by the Bank's PFIs, and (2) in the event that the Bank elects to opt out of purchasing MPF loans on a given day, the FHLBank of Chicago will forgo its option to purchase 100 percent of the loans originated by the Bank's PFIs on that date. Given currently available information, market conditions, and the Bank's financial management strategies for the MPF loan portfolio, the Bank's management does not believe that this business decision by the FHLBank of Chicago will have any material impact on the Bank's results of operations or financial
74
condition, although it could from time to time require the Bank to restrict the volume of loans that it purchases from its PFIs. However, under different business conditions, the decision could have a material impact on the Bank's results of operations and financial condition. For example, if the Bank elected to opt out of purchasing MPF loans, it could adversely affect customer relationships and future business flows.
The following table presents information relating to the Bank's regional and state concentrations of mortgage loans outstanding at December 31, 2009 and 2008.
Regional Concentration of Mortgage Loans Outstanding(1)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Regional concentration(2) |
|||||||
Midwest |
7 | % | 8 | % | |||
Northeast |
52 | 49 | |||||
Southeast |
11 | 12 | |||||
Southwest |
10 | 10 | |||||
West |
20 | 21 | |||||
Total |
100 | % | 100 | % | |||
State concentration(3) |
|||||||
Massachusetts |
28 | % | 25 | % | |||
California |
15 | 16 | |||||
Connecticut |
9 | 8 |
- (1)
- Percentages
calculated based on unpaid principal balance at the end of each period.
- (2)
- Midwest
includes IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI.
Northeast includes CT, DE, MA, ME, NH, NJ, NY, PA, RI, and VT.
Southeast includes AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV.
Southwest includes AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT.
West includes AK, CA, HI, ID, MT, NV, OR, WA, and WY.
- (3)
- State concentrations are provided for any individual state in which the Bank has a concentration of 5 percent or more.
75
The following tables provide the portfolio characteristics of mortgage loans held by the Bank.
Characteristics of the Bank's Mortgage-Loan Portfolio(1)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Loan-to-value ratio at origination |
|||||||
< 60.00% |
44 | % | 46 | % | |||
60.01% to 70.00% |
14 | 14 | |||||
70.01% to 80.00% |
18 | 17 | |||||
80.01% to 90.00% |
14 | 13 | |||||
Greater than 90.00% |
10 | 10 | |||||
Total |
100 | % | 100 | % | |||
Weighted average loan-to-value ratio |
64 | % | 63 | % | |||
FICO score |
|||||||
< 620 |
3 | % | 3 | % | |||
620 to < 660 |
7 | 7 | |||||
660 to < 700 |
14 | 13 | |||||
700 to < 740 |
20 | 20 | |||||
³ 740 |
55 | 56 | |||||
Not available |
1 | 1 | |||||
Total |
100 | % | 100 | % | |||
Weighted average FICO score |
737 | 738 |
- (1)
- Percentages calculated based on unpaid principal balance at the end of each period.
Government MPF loans may not exceed the loan-to-value limits set by the applicable federal agency. Conventional MPF loans with loan-to-value limits greater than 80 percent require certain amounts of primary mortgage insurance, from a mortgage insurance company rated at least triple-B (or equivalent rating).
The Bank has certain customer concentrations in connection with its mortgage-loan purchases. The following table presents the Bank's retained mortgage-loan purchases from PFIs that represent greater than 10 percent of total mortgage-loan purchases for the year ended December 31, 2009.
Mortgage-Loan Purchases from PFIs
(dollars in thousands)
|
For the Year Ended December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Stoneham Bank |
|||||||||||||||||
Dollar amount purchased |
$ | 59,814 | $ | 10,839 | $ | | $ | 417 | $ | 4,515 | |||||||
Percent of total mortgage-loan purchases |
17.8 | % | 1.7 | % | | % | 0.2 | % | 0.3 | % |
The Bank has certain servicing concentrations in connection with its mortgage-loan purchases as well. As of December 31, 2009, BAC Home Loans Servicing L.P, a subsidiary of Bank of America Corporation, and Webster Bank individually service more than five percent of the Bank's outstanding mortgage loans. As of December 31, 2009, BAC Home Loans Servicing LP serviced approximately 51.1 percent of the Bank's mortgage loans and Webster Bank services approximately 5.4 percent.
76
Neither of these members has received preferential pricing on the mortgage loans the Bank purchased from them as compared to any other member.
When a PFI fails to comply with its representations and warranties concerning its duties and obligations described within the PFI Agreement and the MPF origination and servicing guides, applicable laws, or terms of mortgage documents, the PFI may be required to repurchase the MPF loans which are impacted by such failure. Reasons for which a PFI could be required to repurchase an MPF loan may include, but are not limited to, MPF loan ineligibility, failure to deliver documentation to an approved custodian, a servicing breach, fraud, or other misrepresentation. Additionally, the Bank does allow its PFIs to repurchase delinquent MPF Government loans so that they may comply with loss-mitigation requirements of the applicable government agency in order to preserve the insurance or guaranty coverage. The repurchase price for each such delinquent loan is equal to the current scheduled principal balance and accrued interest on the MPF Government loan. The following table provides a summary of MPF loans that have been repurchased by our PFIs.
Summary of MPF Loan Repurchases
(dollars in thousands)
|
For The Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Conventional loans |
$ | 1,934 | $ | 3,107 | $ | 963 | $ | 2,903 | $ | 689 | ||||||
Government-insured or guaranteed loans |
1,857 | 106 | 2,373 | 2,743 | 276 | |||||||||||
Total |
$ | 3,791 | $ | 3,213 | $ | 3,336 | $ | 5,646 | $ | 965 | ||||||
The following tables present the scheduled repayments for mortgage loans outstanding at December 31, 2009 and 2008.
Redemption Terms of Mortgage Loans
As of December 31, 2009
(dollars in thousands)
|
Due in one year or less |
Due after one year through five years |
Due after five years |
Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed-rate conventional loans |
$ | 119,453 | $ | 721,035 | $ | 2,317,076 | $ | 3,157,564 | |||||
Fixed-rate government-insured or guaranteed loans |
7,731 | 48,772 | 279,393 | 335,896 | |||||||||
Total par value |
$ | 127,184 | $ | 769,807 | $ | 2,596,469 | $ | 3,493,460 | |||||
Redemption Terms of Mortgage Loans
As of December 31, 2008
(dollars in thousands)
|
Due in one year or less |
Due after one year through five years |
Due after five years |
Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed-rate conventional loans |
$ | 136,123 | $ | 624,771 | $ | 2,994,321 | $ | 3,755,215 | |||||
Fixed-rate government-insured or guaranteed loans |
8,702 | 40,450 | 330,115 | 379,267 | |||||||||
Total par value |
$ | 144,825 | $ | 665,221 | $ | 3,324,436 | $ | 4,134,482 | |||||
77
Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $2.1 million and $350,000 at December 31, 2009 and 2008, respectively. This increase in allowance is due to the continued deterioration in general economic and labor market conditions and the ongoing decline in house prices nationwide, which has resulted in a trend of increasing delinquencies in the mortgage portfolio. See Critical Accounting EstimatesAllowance for Loan Losses for a description of the Bank's methodology for estimating the allowance for loan losses. While the Bank has not changed its base methodology for calculating the allowance for loan losses during 2009, the key variables that drive the calculation have changed to reflect the deterioration in portfolio performance and economic conditions. In particular, the loss severity estimates that the Bank applies to defaulted loans have increased to reflect the deterioration in house prices.
The following table presents the Bank's allowance for credit losses activity.
Allowance for Credit Losses Activity
(dollars in thousands)
|
As of and for the Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Balance at January 1 |
$ | 350 | $ | 125 | $ | 125 | $ | 1,843 | $ | 1,379 | ||||||
Charge-offs |
| | | (14 | ) | (38 | ) | |||||||||
Recoveries |
| | 9 | | | |||||||||||
Net recoveries (charge-offs) |
| | 9 | (14 | ) | (38 | ) | |||||||||
Provision for credit losses |
1,750 | 225 | (9 | ) | (1,704 | ) | 502 | |||||||||
Balance at December 31 |
$ | 2,100 | $ | 350 | $ | 125 | $ | 125 | $ | 1,843 | ||||||
The following table presents the Bank's allocation of allowance for credit losses.
Allocation of Allowance for Credit Losses
(dollars in thousands)
|
December 31, | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||
|
Amount | Percent of Total Loans |
Amount | Percent of Total Loans |
Amount | Percent of Total Loans |
Amount | Percent of Total Loans |
Amount | Percent of Total Loans |
||||||||||||||||||||||
Conventional loans |
$ | 2,100 | 90.4 | % | $ | 350 | 90.8 | % | $ | 125 | 89.4 | % | $ | 125 | 88.5 | % | $ | 1,843 | 87.0 | % | ||||||||||||
Government-insured or guaranteed loans |
| 9.6 | | 9.2 | | 10.6 | | 11.5 | | 13.0 | ||||||||||||||||||||||
Total |
$ | 2,100 | 100.0 | % | $ | 350 | 100.0 | % | $ | 125 | 100.0 | % | $ | 125 | 100.0 | % | $ | 1,843 | 100.0 | % | ||||||||||||
The Bank places conventional mortgage loans on nonaccrual when the collection of the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. The Bank monitors the delinquency levels of the mortgage-loan portfolio on a monthly basis. A summary of mortgage-loan delinquencies at December 31, 2009, and December 31, 2008, are provided in the following tables.
78
Summary of Delinquent Mortgage Loans
As of December 31, 2009
(dollars in thousands)
Days Delinquent
|
Conventional | Government(1) | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
30 days |
$ | 49,975 | $ | 17,701 | $ | 67,676 | ||||
60 days |
17,309 | 7,281 | 24,590 | |||||||
90 days or more and accruing |
| 19,822 | 19,822 | |||||||
90 days or more and nonaccruing |
44,969 | | 44,969 | |||||||
Total delinquencies |
$ | 112,253 | $ | 44,804 | $ | 157,057 | ||||
Total par value of mortgage loans outstanding |
$ | 3,157,564 | $ | 335,896 | $ | 3,493,460 | ||||
Total delinquencies as a percentage of total par value of mortgage loans outstanding |
3.56 | % | 13.34 | % | 4.50 | % | ||||
Delinquencies 90 days or more as a percentage of total par value of mortgage loans outstanding |
1.42 | % | 5.90 | % | 1.85 | % | ||||
- (1)
- MPF Government loans continue to accrue interest after 90 or more days delinquent since the U.S. government insures or guarantees the repayment of principal and interest.
Summary of Delinquent Mortgage Loans
As of December 31, 2008
(dollars in thousands)
Days Delinquent
|
Conventional | Government(1) | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
30 days |
$ | 37,101 | $ | 17,709 | $ | 54,810 | ||||
60 days |
10,354 | 7,130 | 17,484 | |||||||
90 days or more and accruing |
| 14,207 | 14,207 | |||||||
90 days or more and nonaccruing |
21,325 | | 21,325 | |||||||
Total delinquencies |
$ | 68,780 | $ | 39,046 | $ | 107,826 | ||||
Total par value of mortgage loans outstanding |
$ | 3,755,215 | $ | 379,267 | $ | 4,134,482 | ||||
Total delinquencies as a percentage of total par value of mortgage loans outstanding |
1.83 | % | 10.30 | % | 2.61 | % | ||||
Delinquencies 90 days or more as a percentage of total par value of mortgage loans outstanding |
0.57 | % | 3.75 | % | 0.86 | % | ||||
- (1)
- MPF Government loans continue to accrue interest after 90 or more days delinquent since the U.S. government insures or guarantees the repayment of principal and interest.
79
Although delinquent loans in the portfolio are spread throughout the U.S., states with more than five percent of the Bank's holdings of conventional mortgage loans delinquent by more than 30 days, by outstanding principal balance, are shown in the following table:
State Concentration of Delinquent Conventional Mortgage Loans
|
December 31, 2009 |
December 31, 2008 |
|||||
---|---|---|---|---|---|---|---|
State concentration |
|||||||
California |
25 | % | 18 | % | |||
Massachusetts |
22 | 24 | |||||
Connecticut |
6 | 7 |
Loan-Portfolio Analysis. The Bank's par value of outstanding mortgage loans, nonperforming loans, and loans 90 days or more past due and accruing interest for the five-year period ended December 31, 2009, are provided in the following table.
Loan-Portfolio Analysis
(dollars in thousands)
|
As of December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Real-estate mortgages |
$ | 3,493,460 | $ | 4,134,482 | $ | 4,068,458 | $ | 4,473,937 | $ | 4,850,946 | |||||||
Nonperforming real-estate mortgages |
$ | 44,969 | $ | 21,325 | $ | 7,982 | $ | 4,796 | $ | 6,387 | |||||||
Real-estate mortgages past due 90 days or more and still accruing(1) |
$ | 19,822 | $ | 14,207 | $ | 10,723 | $ | 8,544 | $ | 6,788 | |||||||
Interest contractually due during the period |
$ | 2,454 | $ | 1,120 | $ | 442 | $ | 294 | $ | 388 | |||||||
Interest actually received during the period |
2,316 | 1,041 | 420 | 278 | 349 | ||||||||||||
Shortfall |
$ | 138 | $ | 79 | $ | 22 | $ | 16 | $ | 39 | |||||||
- (1)
- Only MPF Government loans continue to accrue interest after 90 or more days delinquent.
As of December 31, 2009 and 2008, loans in foreclosure totaled $26.7 million and $12.0 million, respectively, and real-estate owned (REO) was $4.4 million and $3.9 million, respectively. REO is recorded on the statement of condition in other assets.
Higher-Risk Loans. The Bank's portfolio includes certain higher-risk conventional mortgage loans. These include high loan-to-value ratio mortgage loans and subprime mortgage loans. The higher-risk loans represent a relatively small portion of the Bank's total conventional portfolio (8.3 percent by outstanding principal balance), but a disproportionately higher portion of the conventional portfolio delinquencies (32.9 percent by outstanding principal balance). The Bank's allowance for loan losses reflects the expected losses associated with these higher-risk loan types. The table below shows the balance of higher-risk conventional mortgage loans and their delinquency rates as of December 31, 2009.
80
Summary of Higher-Risk Conventional Mortgage Loans
As of December 31, 2009
(dollars in thousands)
High-Risk Loan Type
|
Total Par Value |
Percent Delinquent 30 Days |
Percent Delinquent 60 Days |
Percent Delinquent 90 Days or More and Nonaccruing |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Subprime loans(1) |
$ | 254,535 | 6.23 | % | 2.88 | % | 5.06 | % | |||||
High loan-to-value loans(2) |
7,521 | 3.15 | | 7.98 | |||||||||
Subprime and high loan-to-value loans(3) |
1,580 | | | | |||||||||
Total high-risk loans |
$ | 263,636 | 6.11 | % | 2.78 | % | 5.11 | % | |||||
- (1)
- Subprime
loans are loans to borrowers with FICO® credit scores lower than 660. FICO is a widely used credit-industry model developed by Fair
Isaac, and Company, Inc. to assess borrower credit quality with scores ranging from a low of 300 to a high of 850.
- (2)
- High
loan-to-value loans are loans with an estimated current loan-to-value ratio greater than
100 percent based on movements in property values in the core-based statistical areas (CBSAs) where the property securing the loan is located.
- (3)
- These loans are subprime and also have a current estimated loan-to-value ratio greater than 100 percent.
The Bank's portfolio consists solely of fixed-rate conventionally amortizing first-lien mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates.
Loan Modification. Effective July 15, 2009, the Bank introduced a temporary loan payment modification plan (the modification plan) for participating PFIs, which will be available until December 21, 2011. Borrowers with conventional loans secured by their primary residence that were originated prior to January 1, 2009, are eligible for the modification plan. This modification plan pertains to borrowers currently in default or in imminent danger of default. In addition, there are specific eligibility requirements that must be met and procedures that the PFIs must follow to participate in the modification plan. To date, there has been no activity under this modification plan.
Sale of REO Assets. During the years ended December 31, 2009, 2008, and 2007 the Bank sold REO assets with a recorded carrying value of $7.5 million, $5.3 million, and $3.7 million, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains totaling $9,000, $122,000, and $112,000 on the sale of REO assets during the years ended December 31, 2009, 2008, and 2007, respectively. Gains and losses on the sale of REO assets are recorded in other income.
First-Loss Account. The Bank's conventional mortgage-loan portfolio currently consists of four MPF products: Original MPF, MPF 125, MPF Government, and MPF Plus, which differ from each other in the way the first-loss account is determined, as described in Item 1BusinessMortgage-Loan Finance.
The aggregated amount of the first-loss account is memorialized and tracked but is neither recorded nor reported as a loan-loss reserve in the Bank's financial statements. As credit and special hazard losses are realized that are not covered by the liquidation value of the real property or primary mortgage insurance, they are first charged to the Bank, with a corresponding reduction of the first-loss account for that master commitment up to the amount accumulated in the first-loss account at that
81
time. Over time, the first-loss account may cover the expected credit losses on a master commitment, although losses that are greater than expected or that occur early in the life of the master commitment could exceed the amount accumulated in the first-loss account. In that case, the excess losses would be charged next to the member's CE amount, then to the Bank after the member's CE amount has been exhausted. At December 31, 2009 and 2008, the amount of first loss account remaining for losses was $31.4 million and $30.6 million, respectively. Except with respect to Original MPF, our losses incurred under the first loss account can be mitigated by withholding future performance CE fees that would otherwise be payable to our PFIs.
Debt FinancingConsolidated Obligations
At December 31, 2009 and 2008, outstanding COs, including both CO bonds and CO discount notes, totaled $57.7 billion and $74.7 billion, respectively. The decrease reflects the Bank's reduced need for funding as its advances balances contracted, as discussed in Overview and Executive SummaryPrincipal Business Developments in this Item.
CO bonds are generally issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets. In addition, to meet the needs of the Bank and of certain investors in COs, fixed-rate bonds and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, the Bank either enters into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond, or use the bond to fund assets with characteristics similar to those of the bond. For additional information on COs, including their issuance, see Item 1BusinessConsolidated Obligations.
The following is a summary of the Bank's CO bonds outstanding at December 31, 2009 and 2008, by the year of contractual maturity, for which the Bank is primarily liable.
Consolidated Obligation Bonds Outstanding
by Year of Contractual Maturity
(dollars in thousands)
|
2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year of Contractual Maturity
|
Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
|||||||||
2009 |
$ | | | % | $ | 15,200,275 | 2.85 | % | |||||
2010 |
15,707,110 | 1.45 | 5,338,110 | 3.49 | |||||||||
2011 |
6,901,350 | 1.84 | 2,598,350 | 3.87 | |||||||||
2012 |
4,230,580 | 2.61 | 1,735,580 | 4.70 | |||||||||
2013 |
2,971,750 | 3.36 | 2,454,000 | 4.06 | |||||||||
2014 |
1,801,800 | 3.17 | 500,300 | 5.09 | |||||||||
Thereafter |
4,004,700 | 5.04 | 5,504,700 | 5.63 | |||||||||
Total par value |
35,617,290 | 2.31 | % | 33,331,315 | 3.71 | % | |||||||
Premiums |
85,316 |
80,586 |
|||||||||||
Discounts |
(426,464 | ) | (1,481,762 | ) | |||||||||
Hedging adjustments |
133,005 | 323,863 | |||||||||||
Total |
$ | 35,409,147 | $ | 32,254,002 | |||||||||
82
CO bonds outstanding at December 31, 2009 and 2008, include issued callable bonds totaling $5.4 billion and $9.4 billion, respectively. The Bank may also enter into an interest-rate swap (in which the Bank pays variable and receives fixed) with structural characteristics that directly offset the coupon and any embedded call options or other termination features of the bond. The combined sold callable swap and callable debt effectively creates floating-rate funding at rates that are more attractive than other available alternatives.
The discount associated with CO bonds is primarily attributable to zero-coupon callable bonds. The zero-coupon callable bonds are issued at substantial discounts to their par amounts because they have very long terms with no coupon. The Bank has hedged these bonds with interest-rate swaps, resulting in a LIBOR-based funding rate on the original bond proceeds over the life of the bonds.
The following table summarizes CO bonds outstanding at December 31, 2009 and 2008, by the earlier of the year of contractual maturity or next call date.
Consolidated Obligation Bonds Outstanding
by Year of Contractual Maturity or Next Call Date
(dollars in thousands)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Year of Contractual Maturity or Next Call Date
|
2009 | 2008 | |||||
2009 |
$ | | $ | 19,800,275 | |||
2010 |
20,768,360 | 5,959,110 | |||||
2011 |
6,156,350 | 2,258,350 | |||||
2012 |
3,330,580 | 1,230,580 | |||||
2013 |
2,390,500 | 1,878,000 | |||||
2014 |
751,800 | 125,300 | |||||
Thereafter |
2,219,700 | 2,079,700 | |||||
Total par value |
$ | 35,617,290 | $ | 33,331,315 | |||
Interest-Rate-Payment Terms. The following table details interest-rate-payment terms for CO bonds at December 31, 2009 and 2008.
Consolidated Obligation Bonds by
Interest-Rate-Payment Terms
(dollars in thousands)
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Par value of CO bonds |
||||||||
Fixed-rate bonds |
$ | 28,515,040 | $ | 28,151,315 | ||||
Simple variable-rate bonds |
5,537,000 | 3,050,000 | ||||||
Step-up bonds |
1,115,250 | 350,000 | ||||||
Zero-coupon bonds |
450,000 | 1,780,000 | ||||||
Total par value |
$ | 35,617,290 | $ | 33,331,315 | ||||
CO discount notes are also a significant funding source for the Bank. CO discount notes are short-term instruments with maturities ranging from overnight to one year. The Bank uses CO discount notes primarily to fund short-term advances and investments and longer-term advances and investments with short repricing intervals. CO discount notes comprised 38.6 percent and 56.8 percent of
83
outstanding COs at December 31, 2009 and 2008, respectively, but accounted for 97.9 percent and 98.1 percent of the proceeds from the issuance of COs during the years ended December 31, 2009 and 2008, respectively, due, in particular, to the Bank's frequent overnight CO discount note issuances.
The Bank's outstanding CO discount notes, all of which are due within one year, were as follows:
CO Discount Notes Outstanding
(dollars in thousands)
|
Book Value | Par Value | Weighted Average Rate |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
December 31, 2009 |
$ | 22,277,685 | $ | 22,281,433 | 0.10 | % | ||||
December 31, 2008 |
42,472,266 | 42,567,305 | 1.59 |
The Bank's average COs outstanding for the year ended December 31, 2009, 2008, and 2007 were as follows:
Average Consolidated Obligations Outstanding
(dollars in thousands)
|
For the Year Ended December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||||||||||||
|
Average Balance |
Yield | Average Balance |
Yield | Average Balance |
Yield | ||||||||||||||
Overnight discount notes |
$ | 4,228,244 | 0.09 | % | $ | 4,019,432 | 2.04 | % | $ | 3,764,623 | 4.79 | % | ||||||||
Term discount notes |
28,372,438 | 0.53 | 39,486,803 | 2.72 | 22,013,013 | 5.00 | ||||||||||||||
Total discount notes |
32,600,682 | 0.47 | 43,506,235 | 2.65 | 25,777,636 | 4.97 | ||||||||||||||
Bonds |
32,384,864 | 2.11 | 33,199,670 | 3.66 | 34,953,730 | 4.95 | ||||||||||||||
Total consolidated obligations |
$ | 64,985,546 | 1.29 | % | $ | 76,705,905 | 3.09 | % | $ | 60,731,366 | 4.96 | % | ||||||||
The average balances of COs for the year ended December 31, 2009 were lower than the average balances for the year ended December 31, 2008, which is consistent with the decrease in total average assets, primarily in short-term advances. The average balance of term CO discount notes decreased $11.1 billion while overnight CO discount notes increased $208.8 million for the year ended December 31, 2009. Average balances of CO bonds decreased $814.8 million from the prior year. The average balance of CO discount notes represented approximately 50.2 percent of total average COs during the year ended December 31, 2009, as compared with 56.7 percent of total average COs during the year ended December 31, 2008, and the average balance of bonds represented 49.8 percent and 43.3 percent of total average COs outstanding during the years ended December 31, 2009 and 2008, respectively.
Although the Bank is primarily liable for its portion of COs, that is, those issued on its behalf, the Bank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on COs issued by all of the FHLBanks. The par amounts of the FHLBank's outstanding COs, including COs held by other FHLBanks, was $930.6 billion and $1.3 trillion at December 31, 2009 and 2008, respectively. COs are backed only by the combined financial resources of the 12 FHLBanks. COs are not obligations of the U.S. government, and the U.S. government does not guarantee them. The Bank has not paid any obligations on behalf of the other FHLBanks during the years ended December 31, 2009 and 2008.
84
The FHLBank Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase COs of the FHLBanks aggregating not more than $4.0 billion under certain conditions. The terms, conditions, and interest rates are determined by the Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the year ended December 31, 2009.
In addition, pursuant to the Housing Act, the U.S. Secretary of the Treasury was given emergency powers, for a limited period, to purchase an indeterminate amount of obligations provided the U.S. Secretary of the Treasury determines the purchases are necessary to provide stability to the financial markets; prevent disruptions in the availability of mortgage finance; and protect the taxpayer. This temporary authorization expired on December 31, 2009.
Deposits
The Bank offers demand and overnight deposits, custodial mortgage accounts, and term deposits to its members. Deposit programs are intended to provide members a low-risk earning asset that satisfies liquidity requirements. Deposit balances depend on members' needs to place excess liquidity and can fluctuate significantly. Due to the relatively small size of the Bank's deposit base and the unpredictable nature of member demand for deposits, the Bank does not rely on deposits as a core component of its funding.
As of December 31, 2009, deposits totaled $772.5 million compared with $611.1 million at December 31, 2008, an increase of $161.4 million. This increase was mainly the result of a higher level of member deposits in the Bank's overnight and demand-deposit accounts, which provide members with a short-term liquid investment.
For the years ended December 31, 2009, and December 31, 2008, average demand- and overnight-deposit balances were $722.0 million and $923.2 million, respectively, and the average rate paid was 0.05 percent and 1.74 percent, respectively.
The following table presents term deposits issued in amounts of $100,000 or greater at December 31, 2009 and 2008.
Term Deposits Greater than $100,000
(dollars in thousands)
|
December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||||||
Term Deposits by Maturity
|
Amount | Weighted Average Rate |
Amount | Weighted Average Rate |
|||||||||
Three months or less |
$ | 990 | 0.72 | % | $ | 37,000 | 1.96 | % | |||||
Over three months through six months |
450 | 0.09 | 1,000 | 2.98 | |||||||||
Over six months through 12 months |
500 | 0.30 | | | |||||||||
Greater than 12 months(1) |
26,250 | 4.19 | 26,250 | 4.19 | |||||||||
Total par value |
$ | 28,190 | 3.93 | % | $ | 64,250 | 2.89 | % | |||||
- (1)
- Represents eight term deposit accounts totaling $6.3 million with maturity dates of August 31, 2011, and one term deposit totaling $20.0 million with a maturity date of September 22, 2014.
Capital
The board of directors of the Bank may, but is not required to, declare and pay noncumulative dividends in cash, stock, or a combination thereof. Dividends may only be paid from current net
85
earnings or previously retained earnings. In addition, the Bank's board of directors has adopted certain dividend policies that further impact the declaration of dividends, which are described under Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. At December 31, 2009, the Bank had retained earnings of $142.6 million.
Legal and Regulatory Capital Requirements. The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (1) permanent capital in an amount equal to at least its regulatory risk-based capital requirement; (2) total capital in an amount equal to at least 4.0 percent of its total assets; and (3) leverage capital in an amount equal to at least 5.0 percent of its total assets. Further, the Bank is subject to the Capital Rule, which is described in this Item underRecent Legislative and Regulatory Developments.
Only permanent capital, defined as retained earnings plus Class B stock (including mandatorily redeemable capital stock) is considered capital for regulatory purposes, and can satisfy the risk-based capital requirement. The Bank has remained in compliance with these requirements through December 31, 2009, as set forth in the following table.
Risk-Based Capital Requirements
(dollars in thousands)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Permanent capital |
|||||||
Class B capital stock |
$ | 3,643,101 | $ | 3,584,720 | |||
Mandatorily redeemable capital stock |
90,896 | 93,406 | |||||
Retained earnings (accumulated deficit) |
142,606 | (19,749 | ) | ||||
Total permanent capital |
$ | 3,876,603 | $ | 3,658,377 | |||
Risk-based capital requirement |
|||||||
Credit-risk capital |
$ | 570,260 | $ | 215,514 | |||
Market-risk capital |
603,446 | 1,425,551 | |||||
Operations-risk capital |
352,112 | 492,319 | |||||
Total risk-based capital requirement |
$ | 1,525,818 | $ | 2,133,384 | |||
Excess of risk-based capital requirement |
$ | 2,350,785 | $ | 1,524,993 | |||
The Bank's credit-risk-based capital requirement, as defined by the Finance Agency's risk-based capital rules whereby assets are assigned risk-adjusted weightings based on asset type and, for advances and non-mortgage assets, tenor or final maturity of the asset, increased by $354.7 million due to downgrades of the credit ratings of private-label MBS from December 31, 2008, to December 31, 2009.
The Bank's market value of permanent capital to its book value of permanent capital increased from 48.3 percent at December 31, 2008, to 74.8 percent at December 31, 2009. See Item 7AQuantitative and Qualitative Disclosures about Market RiskMeasurement of Market and Interest Rate Risk for further discussion. Under Finance Agency regulations, the dollar amount by which the Bank's market value of permanent capital is less than 85 percent of its book value of permanent capital must be added to the market-risk component of its risk-based capital requirement. This incremental risk-based capital requirement was $396.0 million and $1.3 billion as of December 31, 2009 and 2008, respectively. Management believes that the current ratio of the Bank's market value of permanent capital to its book value of permanent capital is temporarily depressed and will recover as liquidity
86
returns to the MBS market allowing prices to rise, as the Bank realizes credit losses, and as the Bank accumulates retained earnings from income expected in future periods.
In addition to the risk-based capital requirements, the Bank is subject to a five percent minimum leverage ratio requirement based on total capital using a 1.5 weighting factor applied to permanent capital, and a four percent minimum capital ratio requirement that does not include a weighting factor applicable to permanent capital. The Bank was in compliance with these requirements throughout 2008 and 2009, and remained in compliance at December 31, 2009.
Capital Ratio Requirements
(dollars in thousands)
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Capital ratio |
|||||||
Minimum capital (4% of total assets) |
$ | 2,499,480 | $ | 3,214,127 | |||
Actual capital (capital stock plus retained earnings) |
3,876,603 | 3,658,377 | |||||
Total assets |
62,487,000 | 80,353,167 | |||||
Capital ratio (permanent capital as a percentage of total assets) |
6.2 | % | 4.6 | % | |||
Leverage ratio |
|||||||
Minimum leverage capital (5% of total assets) |
$ | 3,124,350 | $ | 4,017,658 | |||
Leverage capital (permanent capital multiplied by a 1.5 weighting factor) |
5,814,905 | 5,487,565 | |||||
Leverage ratio (leverage capital as a percentage of total assets) |
9.3 | % | 6.8 | % |
For more information on the Bank's capital ratio requirements, see Item 8Financial Statements and Supplementary DataFinancial StatementsNote 15Capital.
In addition to the capital ratio requirements, the Bank is subject to the Capital Rule, which, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the Finance Agency to determine on no less than a quarterly basis the capital classification of each FHLBank. On January 12, 2010, the Bank received notification that the Director of the Finance Agency had determined that the Bank was adequately capitalized for the quarter ended September 30, 2009. The Director of the Finance Agency has not yet notified the Bank of its capital classification for the quarter ended December 31, 2009. For more information on the Capital Rule, seeRecent Legislative and Regulatory Developments later in this Item.
In January 2010, as part of the adoption of the revised operating plan, the Bank's board of directors adopted a new minimum capital requirement whereby the amount of paid-in capital stock and retained earnings must exceed the sum of the Bank's regulatory capital requirement plus its retained earnings target. As of December 31, 2009, this requirement equaled $3.4 billion, which was satisfied by the Bank's actual capital of $3.9 billion.
Derivative Instruments
All derivative instruments are recorded on the statement of condition at fair value, and are classified as assets or liabilities according to the net fair value of derivatives aggregated by counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $16.8 million and $28.9 million as of December 31, 2009 and 2008, respectively. Derivative liabilities' net fair value net of cash collateral and accrued interest totaled $768.3 million and $1.2 billion as of December 31, 2009 and 2008, respectively.
87
The Bank offsets fair-value amounts recognized for derivative instruments and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master-netting arrangement.
The Bank bases the estimated fair values of these agreements on the cost of interest-rate-exchange agreements with similar terms or available market prices. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash-flow analysis and comparison with 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 and the selection of discount rates that appropriately reflect market and credit risks. The Bank formally establishes hedging relationships associated with balance-sheet items to obtain economic results. These hedge relationships may include fair-value and cash-flow hedges, as well as economic hedges.
The Bank had commitments for which it was obligated to purchase mortgage loans with par values totaling $3.7 million and $32.7 million at December 31, 2009, and December 31, 2008, respectively. All mortgage-loan-purchase commitments are recorded at fair value on the statement of condition as derivative instruments. Upon fulfillment of the commitment, the recorded fair value is then reclassified as a basis adjustment of the purchased mortgage assets.
The following table presents a summary of the notional amounts and estimated fair values of the Bank's outstanding derivative instruments, excluding accrued interest, and related hedged item by product and type of accounting treatment as of December 31, 2009, and December 31, 2008. The hedge designation "fair value" represents the hedge classification for transactions that qualify for hedge-accounting treatment and are hedged with the benchmark interest rate. The hedge designation "economic" represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under the Bank's risk-management policy.
88
Hedged Item and Hedge-Accounting Treatment
As of December 31, 2009 and 2008
(dollars in thousands)
|
|
|
December 31, 2009 | December 31, 2008 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hedged Item
|
Derivative | Hedge Designation |
Notional Amount |
Estimated Fair Value |
Notional Amount |
Estimated Fair Value |
||||||||||||
Advances |
Swaps | Fair value | $ | 11,952,709 | $ | (678,566 | ) | $ | 15,401,359 | $ | (1,113,240 | ) | ||||||
|
Swaps | Economic | 83,250 | (3,247 | ) | 111,250 | (5,716 | ) | ||||||||||
|
Caps and floors | Economic | 16,500 | 103 | 66,500 | 294 | ||||||||||||
Total associated with advances |
12,052,459 | (681,710 | ) | 15,579,109 | (1,118,662 | ) | ||||||||||||
Available-for-sale securities |
Swaps |
Fair value |
907,131 |
(186,240 |
) |
932,131 |
(394,526 |
) |
||||||||||
Trading securities |
Swaps |
Economic |
95,000 |
967 |
46,500 |
(2,413 |
) |
|||||||||||
Consolidated obligations |
Swaps |
Fair value |
14,597,075 |
130,716 |
14,190,223 |
321,139 |
||||||||||||
Deposits |
Swaps |
Fair value |
20,000 |
4,745 |
20,000 |
6,414 |
||||||||||||
Member intermediated |
Caps and floors |
Not applicable |
|
|
15,000 |
|
||||||||||||
Total |
27,671,665 | (731,522 | ) | 30,782,963 | (1,188,048 | ) | ||||||||||||
Mortgage delivery commitments |
3,706 |
(31 |
) |
32,672 |
(365 |
) |
||||||||||||
Forward contracts |
| | 10,000 | (133 | ) | |||||||||||||
Total derivatives |
$ | 27,675,371 | (731,553 | ) | $ | 30,825,635 | (1,188,546 | ) | ||||||||||
Accrued interest |
(10,322 | ) | 89,788 | |||||||||||||||
Cash collateral |
(9,631 | ) | (46,101 | ) | ||||||||||||||
Net derivatives |
$ | (751,506 | ) | $ | (1,144,859 | ) | ||||||||||||
Derivative asset |
$ | 16,803 | $ | 28,935 | ||||||||||||||
Derivative liability |
(768,309 | ) | (1,173,794 | ) | ||||||||||||||
Net derivatives |
$ | (751,506 | ) | $ | (1,144,859 | ) | ||||||||||||
The following four tables provide a summary of the Bank's hedging relationships for fair-value hedges of advances and COs which qualify for hedge accounting, by year of contractual maturity, next put date for putable advances, and next call date for callable COs. Interest accruals on interest-rate exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying hedge relationships of advances and COs totals $26.5 billion, representing 95.9 percent of all derivatives outstanding as of December 31, 2009. Economic hedges are not included within the four tables below.
89
Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of December 31, 2009
(dollars in thousands)
|
|
|
|
|
Weighted-Average Yield(2) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivatives | Advances | |
Derivatives | |
||||||||||||||||||||
Year of Maturity
|
Notional | Fair Value |
Hedged Amount |
Fair Value Adjustment(1) |
Advances | Receive Floating Rate |
Pay Fixed Rate |
Net Receive Result |
|||||||||||||||||
2010 |
$ | 2,677,224 | $ | (55,806 | ) | $ | 2,677,224 | $ | 55,350 | 4.61 | % | 0.27 | % | 4.51 | % | 0.37 | % | ||||||||
2011 |
1,866,250 | (77,311 | ) | 1,866,250 | 77,108 | 4.13 | 0.27 | 4.03 | 0.37 | ||||||||||||||||
2012 |
1,640,750 | (106,737 | ) | 1,640,750 | 106,403 | 4.34 | 0.27 | 4.24 | 0.37 | ||||||||||||||||
2013 |
1,524,010 | (88,882 | ) | 1,524,010 | 88,540 | 3.80 | 0.27 | 3.68 | 0.39 | ||||||||||||||||
2014 |
666,300 | (51,384 | ) | 666,300 | 51,008 | 4.27 | 0.27 | 4.11 | 0.43 | ||||||||||||||||
Thereafter |
3,578,175 | (298,446 | ) | 3,578,175 | 294,698 | 3.97 | 0.27 | 3.83 | 0.41 | ||||||||||||||||
Total |
$ | 11,952,709 | $ | (678,566 | ) | $ | 11,952,709 | $ | 673,107 | 4.18 | % | 0.27 | % | 4.07 | % | 0.38 | % | ||||||||
- (1)
- The
fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the
designated benchmark interest rate, LIBOR.
- (2)
- The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2009.
Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity or Next Put Date for Putable Advances
As of December 31, 2009
(dollars in thousands)
|
|
|
|
|
Weighted-Average Yield(2) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivatives | Advances | |
Derivatives | |
||||||||||||||||||||
Year of Maturity or Next Put Date |
Notional | Fair Value |
Hedged Amount |
Fair Value Adjustment(1) |
Advances | Receive Floating Rate |
Pay Fixed Rate |
Net Receive Result |
|||||||||||||||||
2010 |
$ | 8,367,899 | $ | (483,179 | ) | $ | 8,367,899 | $ | 478,104 | 4.29 | % | 0.27 | % | 4.16 | % | 0.40 | % | ||||||||
2011 |
1,874,950 | (86,907 | ) | 1,874,950 | 86,589 | 3.73 | 0.27 | 3.64 | 0.36 | ||||||||||||||||
2012 |
777,450 | (52,171 | ) | 777,450 | 52,198 | 4.23 | 0.27 | 4.16 | 0.34 | ||||||||||||||||
2013 |
706,210 | (40,193 | ) | 706,210 | 40,172 | 3.92 | 0.27 | 3.86 | 0.33 | ||||||||||||||||
2014 |
112,300 | (5,673 | ) | 112,300 | 5,657 | 4.19 | 0.27 | 3.97 | 0.49 | ||||||||||||||||
Thereafter |
113,900 | (10,443 | ) | 113,900 | 10,387 | 4.85 | 0.27 | 4.92 | 0.20 | ||||||||||||||||
Total |
$ | 11,952,709 | $ | (678,566 | ) | $ | 11,952,709 | $ | 673,107 | 4.18 | % | 0.27 | % | 4.07 | % | 0.38 | % | ||||||||
- (1)
- The
fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the
designated benchmark interest rate, LIBOR.
- (2)
- The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2009.
90
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of December 31, 2009
(dollars in thousands)
|
|
|
|
|
Weighted-Average Yield(2) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivatives | CO Bonds & Discount Notes | |
Derivatives | |
||||||||||||||||||||
Year of Maturity
|
Notional | Fair Value |
Hedged Amount |
Fair Value Adjustment(1) |
CO Bonds & DNs |
Receive Fixed Rate |
Pay Floating Rate |
Net Pay Result |
|||||||||||||||||
2010 |
$ | 7,456,642 | $ | 29,354 | $ | 7,456,642 | $ | (29,440 | ) | 1.32 | % | 1.34 | % | 0.09 | % | 0.07 | % | ||||||||
2011 |
2,320,000 | 15,314 | 2,320,000 | (15,572 | ) | 1.47 | 1.51 | 0.29 | 0.25 | ||||||||||||||||
2012 |
1,904,250 | 12,866 | 1,904,250 | (13,202 | ) | 1.94 | 1.96 | 0.15 | 0.13 | ||||||||||||||||
2013 |
1,088,750 | 36,642 | 1,088,750 | (36,316 | ) | 3.35 | 3.39 | 0.29 | 0.25 | ||||||||||||||||
2014 |
620,000 | (3,540 | ) | 620,000 | 3,013 | 2.25 | 2.25 | 0.05 | 0.05 | ||||||||||||||||
Thereafter |
1,207,433 | 40,080 | 1,207,433 | (41,637 | ) | 4.67 | 4.68 | 0.65 | 0.64 | ||||||||||||||||
Total |
$ | 14,597,075 | $ | 130,716 | $ | 14,597,075 | $ | (133,154 | ) | 1.89 | % | 1.92 | % | 0.19 | % | 0.16 | % | ||||||||
- (1)
- The
fair-value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to
changes in the designated benchmark interest rate, LIBOR.
- (2)
- The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2009. For discount notes and zero coupon bonds, the yield represents the yield to maturity.
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity or Next Call Date for Callable Consolidated Obligations
As of December 31, 2009
(dollars in thousands)
|
|
|
|
|
Weighted-Average Yield(2) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivatives | CO Bonds & Discount Notes | |
Derivatives | |
||||||||||||||||||||
Year of Maturity or Next Call Date
|
Notional | Fair Value |
Hedged Amount |
Fair Value Adjustment(1) |
CO Bonds & DNs |
Receive Fixed Rate |
Pay Floating Rate |
Net Pay Result |
|||||||||||||||||
2010 |
$ | 9,429,325 | $ | 26,627 | $ | 9,429,325 | $ | (27,429 | ) | 1.50 | % | 1.51 | % | 0.08 | % | 0.07 | % | ||||||||
2011 |
1,975,000 | 13,601 | 1,975,000 | (13,755 | ) | 1.54 | 1.59 | 0.31 | 0.26 | ||||||||||||||||
2012 |
1,339,250 | 12,640 | 1,339,250 | (12,781 | ) | 2.05 | 2.08 | 0.18 | 0.15 | ||||||||||||||||
2013 |
943,500 | 36,404 | 943,500 | (36,038 | ) | 3.53 | 3.59 | 0.33 | 0.27 | ||||||||||||||||
2014 |
75,000 | (906 | ) | 75,000 | 805 | 2.66 | 2.66 | 0.39 | 0.39 | ||||||||||||||||
Thereafter |
835,000 | 42,350 | 835,000 | (43,956 | ) | 5.05 | 5.06 | 0.98 | 0.97 | ||||||||||||||||
Total |
$ | 14,597,075 | $ | 130,716 | $ | 14,597,075 | $ | (133,154 | ) | 1.89 | % | 1.92 | % | 0.19 | % | 0.16 | % | ||||||||
- (1)
- The
fair-value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to
changes in the designated benchmark interest rate, LIBOR.
- (2)
- The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2009. For discount notes and zero coupon bonds, the yield represents the yield to maturity.
The Bank has entered into derivative contracts with its members in which the Bank acts as an intermediary between the member and a derivative counterparty. For additional information on those derivatives, see Item 1BusinessTraditional Business ActivitiesOther Business Activities. The Bank also engages in derivatives directly with affiliates of certain of the Bank's members, which act as derivatives dealers to the Bank. These derivative contracts are entered into for the Bank's own risk-management purposes and are not related to requests from the Bank's members to enter into such contracts.
91
Outstanding Derivative Contracts with Members and Affiliates of Members
(dollars in thousands)
|
|
|
December 31, 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Derivatives Counterparty
|
Affiliate Member | Primary Relationship |
Notional Outstanding |
Percent of Total Derivatives Outstanding(1) |
|||||||
Bank of America, N.A. |
Bank of America Rhode Island, N.A. | Dealer | $ | 3,068,404 | 11.09 | % | |||||
Royal Bank of Scotland, PLC |
RBS Citizens, N.A. | Dealer | 985,260 | 3.56 |
- (1)
- The percent of total derivatives outstanding is based on the stated notional amount of all derivative contracts outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank's liquidity and capital resources are designed to support these financial strategies. The Bank's primary source of liquidity is its access to the capital markets through CO issuance, which is described in Item 1BusinessConsolidated Obligations. The Bank's equity capital resources are governed by the Bank's capital plan, certain elements of which are described under Capital below, as well as by applicable legal and regulatory requirements.
Liquidity
The Bank strives to maintain the liquidity necessary to meet member-credit demands, repay maturing COs, meet other obligations and commitments, and respond to changes in membership composition. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities, and cover unforeseen liquidity demands.
The Bank is not able to predict future trends in member-credit needs since they are driven by complex interactions among a number of factors, including, but not limited to: mortgage originations, other loan portfolio growth, deposit growth, and the attractiveness of the pricing and availability of advances versus other wholesale borrowing alternatives. However, the Bank regularly monitors current trends and anticipates future debt-issuance needs in an effort to be prepared to fund its members' credit needs and its investment opportunities.
The Bank manages its liquidity needs to ensure that it is able to meet all of its contractual obligations and operating expenditures as they come due and to support its members' daily liquidity needs. Through the Bank's contingency liquidity plans, the Bank attempts to ensure that it is able to meet its obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.
For information and discussion of the Bank's guarantees and other commitments, see Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesOff-Balance Sheet Arrangements and Aggregate Contractual Obligations, and for further information and discussion of the Bank's joint and several liability for FHLBank COs, see Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionDebt Financing-Consolidated Obligations.
The Bank's short-term liquidity management practices and contingent liquidity plans, which provide protection against temporary disruptions in access to the CO debt markets, are described in Item 7AQuantitative and Qualitative Disclosures About Market RiskLiquidity Risk.
92
The Bank has an additional source of external liquidity through the Federal Home Loan Banks P&I Funding Contingency Plan Agreement (the Agreement), which became effective in 2006. Under the terms of the Agreement, in the event the Bank does not fund its principal and interest payments under a CO by deadlines established in the Agreement, the other FHLBanks will be obligated to fund any shortfall in funding to the extent that any of the other FHLBanks have a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. The Bank would then be required to repay the funding FHLBanks.
Until December 31, 2009, the Bank also had a source of external liquidity through a lending agreement the Bank entered into in the third quarter of 2008 with the U.S. Treasury in connection with the U.S. Treasury's establishment of the Government Sponsored Enterprise Credit Facility (GSECF). The GSECF was a lending facility under which funding was available to be provided by the U.S. Treasury in exchange for eligible collateral, which was limited to guaranteed MBS issued by Freddie Mac and Fannie Mae as well as advances by the Bank to its members. The maximum borrowings under the GSECF were based on eligible collateral. The GSECF expired in accordance with its terms on December 31, 2009, and the Bank never borrowed under the GSECF.
During 2009, investor confidence in GSE debt improved and the Bank experienced improved market access and long-term funding costs relative to 2008. This improvement was due in part to the Federal Reserve Bank of New York's initiative to purchase up to $175 billion in GSE debt, including FHLBank debt, announced November 25, 2008, which is described underRecent Legislative and Regulatory Developments in this Item. Following this announcement, FHLBank long-term CO bond pricing improved relative to U.S. Treasury securities and interest rate swaps, a trend which continued throughout 2009. Through March 1, 2010, the Federal Reserve Bank of New York has purchased approximately $169 billion in such debt, of which approximately $37 billion was FHLBank term debt. The Federal Reserve Bank of New York is expected to complete its purchases of GSE debt in the near term.
Investor confidence in GSE debt has also been supported by an announcement by the U.S. Treasury in late December 2009, that it had effectively removed its $200 billion funding commitment cap for the next three years to Fannie Mae and Freddie Mac and agreed to increase its support as needed to accommodate any financial deterioration in these GSEs. Investors appear to have interpreted this as a U.S. Treasury guarantee of Fannie Mae's and Freddie Mac's liabilities for the next several years. The combined effect of the removal of that funding commitment cap and increased investor demand seems to have offset the adverse impact that the end of Federal Reserve Bank of New York purchases of GSE debt may have.
GSE investor demand remains robust as investors continue to seek both safety and liquidity of the GSE debt market. With the continued low rate environment, the relative LIBOR spread of discount notes versus term debt has greatly diminished. These low short term rates have caused investors in search of higher rates of return to increase their demand for medium-term GSE debt which is paying more favorable rates of return.
The FHLBanks issued a total of $506.4 billion par value of CO bonds during the year ended December 31, 2009, a decrease of $48.3 billion compared with the $554.7 billion par value issued during the year ended December 31, 2008.
Capital
The Bank's ability to expand in response to member-credit needs is based primarily on the capital-stock requirements for advances. Members are required to increase their capital-stock investment in the
93
Bank as their outstanding advances increase. The capital-stock requirement for advances is currently based on the original term to maturity of the advances, as follows:
-
- 3.0 percent for overnight advances;
-
- 4.0 percent for advances with an original maturity greater than overnight and up to three months; and
-
- 4.5 percent for all other advances.
The Bank's minimum capital-to-assets leverage limit is currently 5.0 percent based on Finance Agency requirements. The additional capital stock from higher balances of advances expands the Bank's capacity to issue COs, which are used not only to support the increase in these balances but also to increase the amount of the Bank's investments.
The Bank can also contract its balance-sheet and liquidity requirements in response to members' reduced credit needs. Member-credit needs that result in reduced advance and mortgage-loan balances will result in capital stock in excess of the amount required by the Bank's capital plan. Although the Bank has the discretion to repurchase excess capital stock subject to certain regulatory and capital plan limitations, the Bank continues its moratorium on excess stock repurchases to help preserve the Bank's capital in light of the various challenges to the Bank, including the growth in other comprehensive losses arising primarily from the Bank's portfolio of held-to-maturity private-label MBS, as discussed in Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskInvestments. During the year ended December 31, 2009, the Bank did repurchase capital stock totaling $1.5 million, which represented excess stock repurchase requests that were already outstanding at the time the Bank announced its moratorium on excess stock repurchases.
Also subject to a five-year stock-redemption period are shares of capital stock held by a member that either gives notice of intent to withdraw from membership, or becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. Capital stock subject to the five-year stock-redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $90.9 million and $93.4 million at December 31, 2009, and December 31, 2008, respectively. The following table summarizes the anticipated stock-redemption period for these shares of capital stock as of December 31, 2009 and 2008 (dollars in thousands):
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
Contractual Year of Redemption
|
2009 | 2008 | |||||
Past redemption date(1) |
$ | 4,185 | $ | | |||
2009 |
| 4,185 | |||||
2010 |
103 | 103 | |||||
2011 |
| | |||||
2012 |
| 2,520 | |||||
2013 |
86,598 | 86,598 | |||||
2014 |
10 | | |||||
Total |
$ | 90,896 | $ | 93,406 | |||
- (1)
- Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption period but member-related activity remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
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Members may submit a written request for redemption of excess capital stock. The shares of capital stock subject to the redemption request will be redeemed at par value by the Bank upon expiration of a five-year stock-redemption period, provided that the member continues to meet its total stock-investment requirement at that time and that the Bank would remain in compliance with its minimum capital requirements as well as any other applicable laws and regulations. In the event that the Finance Agency were to deem the Bank to be other than adequately capitalized, the Bank would not be permitted to honor redemption requests at the expiration of their respective notice periods without the permission of the Finance Agency.
The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of the five-year notice of redemption or the termination of the related activity. If activity-based stock becomes excess capital stock as a result of the termination of the related activity, the Bank may, in its sole discretion, repurchase the excess activity-based stock prior to the expiration of the five-year redemption notice period, provided that it would continue to meet its minimum regulatory capital requirements after the redemption. However, the moratorium on excess stock repurchases discussed above continues, and the Bank cannot predict when the moratorium will be lifted.
A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the five-year stock-redemption period. The Bank's capital plan provides that the Bank will charge the member a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. The Bank will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business purpose for waiving the imposition of the fee, and the waiver is consistent with Section 7(j) of the FHLBank Act.
At December 31, 2009 and 2008, members and nonmembers with capital stock outstanding held $1.5 billion and $677.3 million, respectively, in excess capital stock. The following table summarizes member capital stock requirements as of December 31, 2009 and 2008 (dollars in thousands):
|
Membership Stock Investment Requirement |
Activity-Based Stock Requirement |
Total Stock Investment Requirement(1) |
Outstanding Class B Capital Stock(2) |
Excess Class B Capital Stock |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2009 |
$ | 586,599 | $ | 1,655,784 | $ | 2,242,406 | $ | 3,733,997 | $ | 1,491,591 | ||||||
December 31, 2008 |
530,263 |
2,470,559 |
3,000,843 |
3,678,126 |
677,283 |
- (1)
- Total
stock-investment requirement is rounded up to the nearest $100 on an individual member basis.
- (2)
- Class B capital stock outstanding includes mandatorily redeemable capital stock.
Provisions of the Bank's capital plan are also discussed in Item 8Financial Statements and Supplementary DataFinancial StatementsNote 15Capital.
Internal Capital Practices and Policies
The Bank has historically targeted an operating range of 4.0 percent to 5.5 percent for its capital ratio. This range, referred to as the operating capital ratio range, had been adopted by the Bank's board of directors in connection with the Bank's originally adopted capital plan. Due to the decrease in advances that occurred during 2009, in conjunction with the Bank's capital preservation measures, the Bank's board of directors approved an operating capital ratio range of 4.0 percent to 7.5 percent in 2009. The Bank's capital increases in connection with required purchases as a condition of membership, which vary based on each member's total assets, and in connection with each member's use of Bank products that requires a purchase of capital stock, such as in connection with Bank advances. The Bank's capital can decrease in connection with stock redemptions, Bank repurchases of excess stock, or if retained earnings are depleted. However, the Bank continues a moratorium on repurchases of excess
95
stock that it has maintained since December 8, 2008, and had $142.6 million in retained earnings at December 31, 2009. The Bank's capital ratio of 6.2 percent is therefore in excess of its historically targeted range.
In addition, as part of the revised operating plan, the Bank has adopted a minimum capital level in excess of regulatory requirements to provide further protection for the Bank's capital base. This adopted minimum capital level provides that the Bank will maintain a minimum capital level equal to four percent of its total assets plus its retained earnings target, a combined amount equal to $3.4 billion at December 31, 2009. The Bank's capital level was $3.9 billion at December 31, 2009, so the Bank was in excess of this higher requirement by $452.1 million on that date. If necessary to satisfy this adopted minimum capital level, the Bank would take steps to control asset growth and/or maintain capital levels, the latter of which could limit future dividends. For additional information on the revised operating plan, see Overview and Executive SummaryPrincipal Business Developments.
Retained Earnings Target and Dividends. The Bank's retained earnings target is $925.0 million, a target adopted in connection with the Bank's revised operating plan to preserve capital in light of the various challenges to the Bank, including the potential for realization of future losses as indicated by the growth in accumulated other comprehensive losses primarily related to the Bank's portfolio of held-to-maturity private-label MBS, discussed in Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskInvestments, as well as continued deterioration of the performance of loans that support these securities. The Bank monitors its retained earnings target relative to the risks inherent in its balance sheet and operations, and has revised its retained earnings model in an effort to better reflect trends and risks to the Bank's net income stream that could result in further charges to retained earnings, including, but not limited to, the impact of losses in the Bank's portfolio of private-label MBS. The retained earnings target has increased significantly over the last two years particularly as the expected performance of private-label MBS has deteriorated beyond prior estimates. Over time, as some unrealized losses become realized losses and the performance of this portfolio begins to stabilize with recovery in the housing markets and in the economy at large, management expects that the retained earnings target will begin to decline. However, we expect that the retained earnings target will be sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. For example, a further sharp deterioration in expected performance of loans underlying private-label MBS would likely cause the Bank to adopt a higher target, whereas stabilization or improvement of the performance of these loans may lead to a faster reduction in the retained earnings target. Management has analyzed the likelihood of the Bank meeting the retained earnings target as it evolves over a five-year horizon and projects that the retained earnings target will be met within that time horizon, however, general economic developments more adverse than the Bank's projections or other factors outside of the Bank's control may cause the Bank to require additional time beyond the five year horizon to meet the target.
At December 31, 2009, the Bank had retained earnings of $142.6 million. The Bank has adopted a dividend payout restriction under which the Bank may pay up to 50 percent of the prior quarter's net income while the Bank's retained earnings are less than its targeted retained earnings level. However, the Bank's board of directors has announced that it does not expect to declare any dividends until it demonstrates a consistent pattern of positive net income, which will likely preclude a declaration of dividends for at least the first two quarters of 2010 as the Bank continues to focus on building retained earnings.
The Bank's retained earnings target could be superseded by Finance Agency mandates, either in the form of an order specific to the Bank or by promulgation of new regulations requiring a level of retained earnings that is different from the Bank's currently targeted level. Moreover, management and the board of directors of the Bank may, at any time, change the Bank's methodology or assumptions for modeling the Bank's retained earnings target. Either of these could result in the Bank further increasing its retained earnings target or reducing or eliminating the dividend payout, as necessary.
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Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
The Bank's significant off-balance-sheet arrangements consist of the following:
-
- commitments that legally bind and obligate the Bank for additional advances;
-
- standby letters of credit;
-
- commitments for unused lines-of-credit advances;
-
- standby bond-purchase agreements with state housing finance agencies; and
-
- unsettled COs.
Off-balance-sheet arrangements are more fully discussed in Item 8Financial Statements and Supplementary DataFinancial StatementsNote 19Commitments and Contingencies.
The Bank is required to pay 20 percent of its net earnings (after its AHP obligation) to REFCorp to support payment of part of the interest on bonds issued by REFCorp. The Bank must make these payments to REFCorp until the total amount of payments made by all FHLBanks is equivalent to a $300 million annual annuity with a final maturity date of April 15, 2030. Additionally, the FHLBanks must annually set aside for the AHP the greater of an aggregate of $100 million or 10 percent of the current year's income before charges for AHP (but after expenses for REFCorp). Due to the net loss for the year ended December 31, 2009, the Bank has no AHP or REFCorp assessments for the year ended December 31, 2009. See Item 1BusinessAssessments for additional information regarding REFCorp and AHP assessments. For the year ended December 31, 2009, the Bank experienced a net loss and did not set aside any AHP funding to be awarded during 2010. However, as allowed per AHP regulations, the Bank has elected to allot up to $5.0 million of future periods' required AHP contributions to be awarded during 2010 (referred to as the accelerated AHP). The accelerated AHP allows the Bank to commit and disburse AHP funds to meet the Bank's mission when it would otherwise be unable to do so, based on regulations. The Bank will offset the accelerated AHP contribution against required AHP contributions over the next five years.
Contractual Obligations. The following table presents contractual obligations of the Bank as of December 31, 2009.
Contractual Obligations as of December 31, 2009
(dollars in thousands)
|
Payment Due By Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
|
Total | Less than one year |
One to three years |
Three to five years |
More than five years |
|||||||||||
Long-term debt obligations(1) |
$ | 35,617,290 | $ | 15,707,110 | $ | 11,131,930 | $ | 4,773,550 | $ | 4,004,700 | ||||||
Estimated interest payments on long-term debt(2) |
3,562,920 | 744,137 | 979,170 | 563,889 | 1,275,724 | |||||||||||
Operating lease obligations |
11,092 | 3,675 | 7,379 | 38 | | |||||||||||
Purchase obligations(3) |
2,086,506 | 2,085,231 | 1,275 | | | |||||||||||
Members' unused lines of credit(4) |
1,426,065 | 1,426,065 | | | | |||||||||||
Mandatorily redeemable capital stock |
90,896 | 4,288 | | 86,608 | | |||||||||||
Consolidated obligations traded not settled(5) |
1,210,750 | 1,005,750 | 100,000 | 55,000 | 50,000 | |||||||||||
Total contractual obligations |
$ | 44,005,519 | $ | 20,976,256 | $ | 12,219,754 | $ | 5,479,085 | $ | 5,330,424 | ||||||
- (1)
- Includes
CO bonds outstanding at December 31, 2009, at par value, based on contractual maturity date of the CO bonds. No effect for call dates on
callable CO bonds has been considered in determining these amounts.
- (2)
- Includes estimated interest payments for CO bonds. For floating-rate CO bonds, the forward interest-rate curve of the underlying index as of December 31, 2009, has been used to project future interest payments. No effect for call dates on callable CO bonds has been considered in determining these amounts.
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- (3)
- Includes
standby letters of credit, unconditional commitments for advances, standby bond-purchase agreements, and commitments to fund/purchase
mortgage loans.
- (4)
- Many
of the members' unused lines of credit are not expected to be drawn upon, and therefore the commitment amount does not necessarily represent future
cash requirements.
- (5)
- Payments due by period for COs, which were traded but not settled as of December 31, 2009, represent the eventual maturity of the COs.
CRITICAL ACCOUNTING 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 reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
The Bank has identified five accounting estimates that it believes are critical because they require management to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Bank's audit committee of the board of directors has reviewed these estimates.
Accounting for Derivatives
Derivative instruments are required to be carried at fair value on the statement of condition. Any change in the fair value of a derivative is required to be recorded each period in current period earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. All of the Bank's derivatives are either: 1) inherent to another activity, such as forward commitments to purchase mortgage loans under the MPF program, or 2) derivative contracts structured to offset some or all of the risk exposure inherent in its member-lending, mortgage-purchase, investment, and funding activities. The Bank is required to recognize unrealized losses or gains on derivative positions, regardless of whether offsetting gains or losses on the associated assets or liabilities being hedged are permitted to be recognized in a symmetrical manner. Therefore, the accounting framework imposed can introduce the potential for considerable income variability. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash-flow variability. Therefore, during periods of significant changes in interest rates and other market factors, the Bank's reported earnings may exhibit considerable variability. The Bank generally employs hedging techniques that are effective under the hedge-accounting requirements. However, not all of the Bank's hedging relationships meet the hedge-accounting requirements. In some cases, the Bank has elected to retain or enter into derivatives that are economically effective at reducing risk but do not meet the hedge-accounting requirements, either because the cost of the hedge was economically superior to nonderivative hedging alternatives or because no nonderivative hedging alternative was available. As required by Finance Agency regulation and Bank policy, derivative instruments that do not qualify as hedging instruments pursuant to GAAP may be used only if the Bank documents a nonspeculative purpose.
A hedging relationship is created from the designation of a derivative financial instrument as either hedging the Bank's exposure to changes in the fair value of a recognized asset, liability, or unrecognized firm commitment, or changes in future variable cash flows attributable to a recognized asset or liability or forecasted transaction. Fair-value hedge accounting allows for the offsetting changes in the fair value of the hedged risk in the hedged item to also be recorded in current period earnings.
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In many hedging relationships that use the shortcut method, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a CO provided that the period of time between the trade date and the settlement date of the hedged item is within established conventions for the advances and CO markets. The Bank defines these market-settlement conventions to be five business days or less for advances and 30 calendar days or less, using a next business day convention, for COs. In such circumstances, although the advance or CO will not be recognized in the financial statements until settlement date, the hedge relationship qualifies for applying the shortcut method. We then record changes in the fair value of the derivative and hedged item beginning on the trade date.
If the hedge does not meet the criteria for shortcut accounting, it is treated as a long-haul fair-value hedge, where the change in the value of the hedged item attributable to changes in the benchmark interest rate must be measured separately from the derivative and effectiveness testing must be performed with results falling within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked through current-period earnings without any offset related to the hedged item.
For derivative transactions that potentially qualify for long-haul fair-value hedge-accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging changes in the estimated fair values of the hedged items attributable to the risks being hedged. Hedge-effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis. The Bank performs testing at hedge inception based on regression analysis of the hypothetical performance of the hedge relationship using historical market data. The Bank then performs regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. Specifically, each month the Bank uses a consistently applied statistical methodology that uses a sample of at least 31 historical interest-rate environments and includes an R-square test, a slope test, and an F-statistic test. These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, the R-square must be greater than 0.8, the slope must be between -0.8 and -1.25, and the computed F-statistic test significance must be less than 0.05.
Given that a derivative qualifies for long-haul fair-value hedge-accounting treatment, the most important element of effectiveness testing is the price sensitivity of the derivative and the hedged item in response to changes in interest rates and volatility as expressed by their effective durations. The effective duration will be affected mostly by the final maturity and any option characteristics. In general, the shorter the effective duration, the more likely it is that effectiveness testing would fail. This is because, given a relatively short duration, the floating-rate leg of the swap is a relatively important component of the monthly change in the derivative's estimated fair value, and there is no offsetting floating-rate leg in the hedged item. In this circumstance, the slope criterion is the more likely factor to cause the effectiveness test to fail.
The fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or mutual optional termination at par. Since these fair values fluctuate throughout the hedge period and eventually return to par value on the maturity date, the effect of fair values is normally only a timing issue.
For derivative instruments and hedged items that meet the requirement described above, the Bank does not anticipate any significant impact on its financial condition or operating performance. For derivative instruments where no identified hedged item qualifies for hedge accounting, changes in the market value of the derivative are reflected in earnings. As of December 31, 2009, the Bank held derivatives that are marked to market with no offsetting qualifying hedged item including $16.5 million notional of interest-rate caps and floors, $178.3 million notional of interest-rate swaps, and $3.7 million notional of mortgage-delivery commitments. The total fair value of these positions as of December 31,
99
2009, was an unrealized loss of $2.2 million. The following table shows the estimated changes in the fair value of these derivatives under alternative parallel interest-rate shifts:
Change in Fair Value of Undesignated Derivatives
As of December 31, 2009
(dollars in thousands)
|
+50 basis points | +100 basis points | |||||
---|---|---|---|---|---|---|---|
Change from base case |
|||||||
Interest-rate caps, floors, and swaps(1) |
$ | 3,069 | $ | 6,014 |
- (1)
- Given the low interest-rate environment experienced at the end of 2009, the Bank does not believe that technical valuations generated through a down 100 basis point and a down 50 basis point rate shock is representative of potential shifts in the instruments' values.
These derivatives economically hedge certain advances, and the trading securities portfolio. Although these economic hedges do not qualify or were not designated for hedge accounting, they are an acceptable hedging strategy under the Bank's risk-management program. The Bank's projections of changes in value of the derivatives have been consistent with actual experience.
Fair-Value Estimates
The Bank measures certain assets and liabilities, including investment securities classified as available-for-sale and trading, as well as all derivatives and mandatorily redeemable capital stock at fair value on a recurring basis. Additionally, certain held-to-maturity securities are measured at fair value on a non-recurring basis due to the recognition of other-than-temporary impairment. Management also estimates the fair value of collateral that borrowers pledge against advance borrowings to confirm that collateral is sufficient to meet regulatory requirements and to protect against losses. Fair values play an important role in the valuation of certain Bank assets, liabilities, and derivative transactions. Accounting guidance defines fair value, establishes a framework for measuring fair value, establishes fair-value hierarchy based on the inputs used to measure fair value, and enhances disclosure requirements for fair-value measurements. The book values and fair values of our financial assets and liabilities, along with a description of the valuation techniques used to determine the fair values of these financial instruments, is disclosed in Item 8Financial Statements and Supplementary DataFinancial StatementsNote 18Estimated Fair Values.
The Bank generally considers a market to be inactive if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes we receive vary significantly either over time or among independent pricing services or dealers; and (4) there is a limited availability of public market information.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, or an exit price. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.
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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, fair values are determined based on valuation models that use either:
-
- discounted cash flows, using market estimates of interest rates and volatility; or
-
- dealer prices and prices of similar instruments.
Pricing models and their underlying assumptions are based on management's best estimate with respect to:
-
- discount rates;
-
- prepayments;
-
- market volatility; and
-
- other factors.
These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings.
Accounting guidance establishes a three-level fair value hierarchy for classifying financial instruments that is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The three levels of the fair-value hierarchy are described below:
-
- Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities.
-
- Level 2Observable market-based inputs, other than quoted prices in active markets for identical assets
or liabilities.
-
- Level 3Unobservable inputs.
Each asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement. The majority of our financial instruments carried at fair value fall within the Level 2 category and are valued primarily using inputs and assumptions that are observable in the market, that can be derived from observable market data or that can be corroborated by recent trading activity of similar instruments with similar characteristics.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. The use of different models and assumptions as well as changes in market conditions could significantly affect the Bank's financial position and results of operations.
For purposes of estimating the fair value of derivatives and items for which the Bank is hedging the changes in fair value attributable to changes in the designated benchmark interest rate, the Bank employs a valuation model that uses market data from the Eurodollar futures, cash LIBOR, U.S. Treasury obligations, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard financial market techniques.
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The valuation adjustments for the Bank's hedged items in which the designated risk is the risk of changes in fair value attributable to changes in the benchmark LIBOR interest rate are calculated using the same model that is used to calculate the fair values of the associated hedging derivatives.
In an effort to achieve consistency among all of the FHLBanks, the FHLBanks formed the MBS Pricing Governance Committee which was responsible for developing a fair-value methodology for private-label MBS that all FHLBanks could adopt. In this regard, the Bank changed the methodology used to estimate the fair value of private-label MBS during the quarter ended September 30, 2009. Under the methodology approved by the MBS Pricing Governance Committee, the Bank requests prices for all private-label MBS from four specific third-party vendors, and, depending on the number of prices received for each security, selects a median or average price as defined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (for example, prices are outside of variance thresholds or the third-party services do not provide a price), the Bank will obtain a price from securities dealers or internally model a price that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. Prices for private-label MBS held in common with other FHLBanks are reviewed for consistency among the FHLBanks holding such securities. In adopting this common methodology, each FHLBank remains responsible for the selection and application of its fair-value methodology and the reasonableness of assumptions and inputs used. Prior to the quarter ended September 30, 2009, the Bank had used a single third-party vendor for pricing of private-label MBS. This change in pricing methodology did not have a significant impact on the Bank's estimated fair values of its MBS.
Certain held-to-maturity private-label MBS carried at amortized cost that have been written down to fair value as of December 31, 2009, due to impairment are classified as non-recurring. The fair value of these Level 3 non-recurring financial assets totaled $254.6 million at December 31, 2009.
Deferred Premium/Discount Associated with Prepayable Mortgage-backed Securities
When the Bank purchases MBS, it often pays an amount that is different than the unpaid principal balance. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher, and a discount if the purchase price is lower. Accounting guidance permits the Bank to amortize (or accrete) these premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset's estimated life.
The Bank typically pays more than the unpaid principal balances when the interest rates on the purchased mortgages are greater than prevailing market rates for similar mortgages on the transaction date. The net purchase premiums paid are then amortized using the constant-effective-yield method over the expected lives of the mortgages as a reduction in their book yields (that is, interest income). Similarly, if the Bank pays less than the unpaid principal balances due to interest rates on the purchased mortgages being lower than prevailing market rates on similar mortgages on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the mortgages' book yields. The constant-effective-yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models that describe the likely rate of consumer refinancing activity in response to incentives created (or removed) by changes in interest rates. Changes in interest rates have the greatest effect on the extent to which mortgages may prepay. When interest rates decline, prepayment speeds are likely to increase, which accelerates the amortization of premiums and the accretion of discounts. The opposite occurs when interest rates rise.
The Bank estimates prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of cash flows, from which the Bank determines expected asset lives. The
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constant-effective-yield method uses actual historical prepayments received and projected future prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that should be recognized so that the book yield of each MBS is constant for each month until maturity.
Amortization of mortgage premiums could accelerate in falling interest-rate environments or decelerate in rising interest-rate environments. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization will also depend on the accuracy of prepayment projections compared with actual experience. Prepayment projections are inherently subject to uncertainty because it is difficult to accurately predict future market conditions and the response of borrowing consumers in terms of refinancing activity to future market conditions even if the market conditions were known. In general, lower interest rates are expected to result in the acceleration of premium and discount amortization and accretion, compared with the effect of higher interest rates that would tend to decelerate the amortization and accretion of premiums and discounts.
If the Bank determines that an other-than-temporary impairment exists, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis reduced by the other-than-temporary impairment recognized in income. The difference between the new amortized cost basis and the cash flows expected to be collected is amortized or accreted into interest income prospectively over the remaining life of the investment security based on the amount and timing of future estimated cash flows.
Upon subsequent evaluation of a debt security where there is no additional other-than-temporary impairment, the Bank adjusts the accretable yield on a prospective basis if there is a significant increase in the security's expected cash flows. Regardless of whether such an increase is significant, the Bank may choose to update the accretable yield each quarter. The new accretable yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. The estimated cash flows and accretable yield are re-evaluated on a quarterly basis.
Prepayment behavior can also be affected by factors not contingent on interest rates. In February 2010, Fannie Mae and Freddie Mac announced their respective intentions to purchase seriously delinquent loans, defined by the GSEs as loans 120 or more days delinquent, from the collateral pools supporting MBS they have issued. While the details surrounding the program are currently uncertain, such prepayments could necessitate acceleration of premium amortization and/or discount accretion associated with the Bank's MBS holdings.
The effect on net income from the amortization and accretion of premiums and discounts on MBS, including MBS in both the held-to-maturity and available-for-sale portfolios, for the years ended December 31, 2009, 2008, and 2007, was a net increase (reduction of) income of $15.8 million, ($8.4 million), and ($1.3 million), respectively.
Allowance for Loan Losses
Advances. The Bank has experienced no credit losses on advances and management currently does not anticipate any credit losses on advances. Based on the collateral held as security for advances, management's credit analyses, and prior repayment history, no allowance for losses on advances is deemed necessary. The Bank is required by statute to obtain sufficient collateral on advances to protect against losses, and to accept as collateral on such advances only certain types of qualified collateral, which are primarily U.S. government or government-agency securities, residential mortgage loans, deposits in the Bank, and other real-estate-related assets.
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At December 31, 2009, and December 31, 2008, the Bank had rights to collateral, either loans or securities, on a member-by-member basis, with an estimated fair value in excess of outstanding advances. Management believes that policies and procedures are in place to appropriately manage the credit risk associated with advances.
Mortgage Loans. The Bank purchases both conventional mortgage loans and government-guaranteed or -insured mortgage loans under the MPF program. Management has determined that no allowance for losses is necessary for government-guaranteed orinsured loans. Conventional loans, in addition to having the related real estate as collateral, are also credit enhanced either by qualified collateral pledged by the member, or by SMI purchased by the member. The CE amount is the PFI's potential loss in the second-loss position after the first loss account is exhausted. The Bank incurs all losses in excess of the CE amount.
The Bank's allowance for loan-losses methodology estimates the amount of probable incurred losses that are inherent in the portfolio, but have not yet been realized. The allowance for the Bank's conventional loan pools is based on an analysis of the migration of the Bank's delinquent loans to default since the inception of the MPF program. The Bank then analyzes the probable loss severity on that portion of the delinquent loans that the migration analysis indicates will default within one year. The combination of these factors, as well as an additional judgmental amount determined by management due to uncertainties inherent in the estimation process, represents the estimated losses from conventional MPF loans. The Bank then applies the risk-mitigating features of the MPF program to the estimated loss. The allowance is derived from the estimated loss on defaulting MPF loans, net of the risk-mitigating features of the MPF program.
The process of determining the allowance for loan losses requires judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions. Due to variability in the data underlying the assumptions made in the process of determining the allowance for loan losses, estimates of the portfolio's inherent risks will adjust as warranted by changes in the level of delinquency in the portfolio and changes in the economy, particularly the residential mortgage market and fluctuations in house prices. The Bank periodically reviews general economic conditions to determine if the loan-loss reserve is adequate in view of economic or other risk factors that may affect markets in which the Bank's mortgage loans are located. The degree to which any particular change would affect the allowance for loan losses would depend on the severity of the change.
As of December 31, 2009 and 2008, the allowance for loan losses on the conventional mortgage-loan portfolio was $2.1 million and $350,000, respectively. The allowance reflects the Bank's estimate of probable incurred losses inherent in the MPF portfolio as of December 31, 2009 and 2008.
Other-Than-Temporary Impairment of Investment Securities
The Bank evaluates held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment. This evaluation requires management judgment and a consideration of many factors, including but not limited to the severity and duration of the impairment, recent events specific to the issuer and/or the industry to which the issuer belongs, an analysis of projected cash flows as further described below, and external credit ratings. Although external rating agency action or a change in a security's external rating is one criterion in our assessment of other-than-temporary impairment, a rating action alone is not necessarily indicative of other-than-temporary impairment.
For debt securities we assess whether (a) we have the intent to sell the debt security, or (b) it is more likely than not that we will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security must be recognized. Further, if the present value of cash flows expected to be collected (discounted at the
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security's effective yield) is less than the amortized cost basis of the security, an other-than-temporary impairment is considered to have occurred because the entire amortized cost basis of the security will not be recovered.
These evaluations are inherently subjective and consider a number of qualitative factors. In addition to monitoring the credit ratings of these securities for downgrades, as well as placement on negative outlook or credit watch, the Bank's management evaluates other factors that may be indicative of other-than-temporary impairment. Depending on the type of security, these include, but are not limited to, an evaluation of the type of security, the length of time and extent to which the fair value of a security has been less than its cost, any credit enhancement or insurance, and certain other collateral-related characteristics such as FICO credit scores, loan-to-value ratios, delinquency and foreclosure rates, geographic concentrations, and the security's performance. If either the Bank's initial analysis identifies securities at risk of other-than-temporary impairment or the security is a private-label MBS, the Bank performs additional testing of these investments.
At-risk securities and all private-label residential MBS are evaluated by estimating projected cash flows using models that incorporate projections and assumptions that are typically based on the structure of the security and certain economic assumptions, such as geographic housing prices, delinquency and default rates, loss severity on the collateral supporting the Bank's security, based on underlying loan-level borrower and loan characteristics, and prepayment speeds while factoring in the underlying collateral and credit enhancement. The projected cash flows and losses are allocated to various security classes, including the security classes owned by the Bank, based on the cash flow and loss allocation rules of the individual security.
The Bank has completed its other-than-temporary impairment analysis for its private-label residential MBS using key modeling assumptions, inputs, and methodologies provided by the FHLBanks' OTTI Governance Committee for its cash-flow projections used in analyzing credit losses and determining other-than-temporary impairment for private-label MBS. The FHLBanks' OTTI Governance Committee was formed by the FHLBanks to effect consistency among the FHLBanks in their analyses of other-than-temporary impairment of private-label MBS in accordance with certain related guidance provided by the Finance Agency. Each of the FHLBanks' OTTI Governance Committee and the related Finance Agency guidance is described in greater detail underRecent Legislative and Regulatory Developments later in this Item. The modeling assumptions, inputs, and methodologies are material to the determination of other-than-temporary impairment. Accordingly, management has reviewed the assumptions approved by the FHLBanks' OTTI Governance Committee and determined that they are reasonable. However, any changes to the assumptions, inputs, or methodologies for the other-than-temporary impairment analyses as described in this section could result in materially different outcomes to this analysis including the realization of additional other-than-temporary impairment charges, which may be substantial.
Also in accordance with related Finance Agency guidance, the Bank has contracted with the FHLBanks of San Francisco and Chicago to perform cash-flow analyses for certain of its residential private-label MBS, as described in Item 8Financial Statements and Supplementary DataNotes to the Financial StatementsNote 7Held-to-Maturity Securities. The Bank has tested the results of the FHLBank of San Francisco and the FHLBank of Chicago's cash-flow modeling based on the Bank's internal modeling and determined that these results are reasonable. For each of these analyses, third-party models are employed to project expected losses associated with the underlying loan collateral and to model the resultant lifetime cash flows as to how they would pass through the deal structures underlying the Bank's MBS investments. These models use expected borrower default rates, projected loss severities, and forecasted voluntary prepayment speeds, all tailored to individual security product type. These analyses are based on the expected behavior of the underlying loans, whereby these loan-performance scenarios are applied against each security's credit-support structure to monitor credit-enhancement sufficiency to protect the Bank's investment. Model output includes projected cash
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flows, including any shortfalls in the capacity of the underlying collateral in conjunction with credit enhancements to fully return all contractual cash flows. For securities that have credit insurance from third parties, the Bank performs a qualitative assessment as to the ability of the respective insurer to cover any projected shortfall of principal or interest for the security as further discussed in Item 7AQuantitative and Qualitative Disclosures About Market RiskCredit RiskInvestments.
Significant inputs to the analyses of these securities include projected prepayment rates, default rates, and loss severities. Since December 31, 2008, the Bank has used increasingly stressful assumptions that reduce its projections of prepayment rates and increase its projections of default rates and loss severities for the loans underlying these securities. Despite some signs of economic recovery, the Bank has again increased the severity of its assumptions for the assessment for the quarter ended December 31, 2009 based on trends impacting the underlying loans; such trends including continued elevated unemployment rates, some further decline in housing prices followed by slower housing price recovery, and extremely limited refinancing opportunities for borrowers whose houses are now worth less than the balance of their mortgages.
Certain private-label MBS owned by the Bank are insured by third-party bond insurers (referred to as monoline insurers). The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. The cash-flow analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, considering its embedded credit enhancement(s), which may be in the form of excess spread, overcollateralization, and/or credit subordination to determine the collectability of all amounts due. If these protections are deemed insufficient to make timely payment of all amounts due, then the Bank considers the capacity of the third-party bond insurer to cover any shortfalls. Certain of the monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. Accordingly, the Bank has performed analyses to assess the financial strength of these monoline insurers to establish an expected case regarding the time horizon of the 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 claim-paying resources and anticipated claims in the future. This projection is referred to as the burn-out period and is expressed in months. Beginning with the cash-flow analysis for the fourth quarter of 2009 the burn-out period for each monoline insurer was incorporated in the third-party cash-flow model, as a key input. Any cash-flow shortfalls that occurred beyond the end of the burn-out period were considered not recoverable and the insured security was then deemed to be credit impaired.
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected, discounted at the security's effective yield, and the amortized cost basis) exists, but the Bank does not intend to sell the debt security and it is not likely that the Bank will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. If the Bank's cash-flow analysis results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, a credit loss exists), an other-than-temporary impairment is considered to have occurred. If the Bank determines that an other-than-temporary impairment exists, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis reduced by the other-than-temporary impairment recognized in income. The difference between the new amortized cost basis and the cash flows expected to be collected is amortized or accreted into interest income prospectively over the remaining life of the investment security based on the amount and timing of future estimated cash flows.
During the quarter ended December 31, 2009, in conjunction with the other FHLBanks, the Bank changed its estimation technique used to determine the present value of estimated cash flows expected
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to be collected for its variable-rate private-label MBS. Specifically, the Bank employed a technique that allows it to update the effective interest rate used in its present value calculation to be consistent with the interest rates used to generate cash flow projections, which isolates subsequent movements in the underlying interest-rate indices from its measurement of credit loss. Prior to this change, the Bank had determined the effective interest rate on each security prior to its first impairment, and continued to use that effective interest rate in subsequent periods for calculating the present value of cash flows expected to be collected, even though the underlying interest-rate indices changed over time.
The Bank recorded an other-than-temporary impairment credit loss of $444.1 million for the year ended December 31, 2009, which incorporates the use of the revised present value estimation technique for its variable-rate and hybrid private-label MBS. If the Bank had continued to use its previous estimation technique, the other-than-temporary impairment credit losses would have been $464.4 million for the year ended December 31, 2009.
See Item 8Financial Statements and Supplementary DataNotes to the Financial StatementsNote 7Held-to-Maturity Securities and Part IItem 2Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations for additional information related to management's other-than-temporary impairment analysis for the current period.
In addition to evaluating the risk-based selection of its residential private-label MBS under a base-case (or best estimate) scenario, a cash-flow analysis was also performed for each of these securities under a more stressful housing price index (HPI) scenario that was determined by the FHLBanks' OTTI Governance Committee. The more stressful scenario was based on a housing price forecast that was five percentage points lower at the trough than the base-case scenario followed by a flatter recovery path. Under the base-case scenario, the housing price forecast assumed current-to-trough home price declines ranging from zero percent to 15 percent over the next nine to 15 months per the respective states CBSAs, which are based upon an assessment of the individual housing markets. (The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) Thereafter, home prices are projected to increase zero percent in the first six months after the trough, 0.5 percent in the next six months, three percent in the second year, and four percent in each subsequent year. Under the more stressful scenario, current-to-trough home price declines were projected to worsen from the base-case scenario by an incremental five percent, resulting in a current-to-trough price decline range of five percent to 20 percent over the next nine to 15 months. Thereafter, home prices were projected to increase 0.0 percent in the first year, one percent in the second year, two percent in the third and fourth years, and three percent in each subsequent year.
The following table represents the impact to credit-related other-than-temporary impairment using the more stressful scenario of the HPI, described above, compared with actual credit-related other-than-temporary impairment recorded using our base-case HPI assumptions as of December 31, 2009 (dollars in thousands):
|
Credit Losses as Reported | Sensitivity AnalysisAdverse HPI Scenario | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
For the Quarter Ended December 31, 2009
|
Number of Securities |
Par Value | Credit- Related OTTI in Net Income |
Number of Securities |
Par Value | Credit- Related OTTI |
|||||||||||||
Prime |
4 | $ | 73,475 | $ | (573 | ) | 4 | $ | 73,475 | $ | (2,727 | ) | |||||||
Alt-A |
90 | 2,301,613 | (71,867 | ) | 104 | 2,487,757 | (180,940 | ) | |||||||||||
Subprime |
| | | 1 | 241 | (11 | ) | ||||||||||||
Total private-label MBS |
94 | $ | 2,375,088 | $ | (72,440 | ) | 109 | $ | 2,561,473 | $ | (183,678 | ) | |||||||
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RECENT ACCOUNTING DEVELOPMENTS
See Item 8Financial Statements and Supplementary DataFinancial StatementsNote 2Recently Issued Accounting Standards for a discussion on the Bank's recent accounting developments.
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
Finance Agency Guidance for Determining Other-Than-Temporary Impairment
On April 28, 2009, and May 7, 2009, the Finance Agency issued guidance to the FHLBanks on the process for determining other-than-temporary impairment with respect to each FHLBank's holdings of private-label MBS and the Bank's adoption of authoritative FASB guidance for determining other-than-temporary impairment in the first quarter of 2009. The Finance Agency guidance provides certain guidelines to the FHLBanks for determining other-than-temporary impairment with the objective of promoting consistency in the determination of other-than-temporary impairment for private-label MBS among the FHLBanks. In general terms, these guidelines provide that each FHLBank:
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- will identify the private-label MBS in its portfolio that should be subject to a cash-flow analysis consistent
with GAAP and other applicable regulatory guidance;
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- will use the same key modeling assumptions, inputs, and methodologies as the other FHLBanks for generating the
cash-flow projections used in analyzing credit losses and determining other-than-temporary impairment for private-label MBS;
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- will consult with other FHLBank that holds any common private-label MBS with it to ensure consistent results regarding the
recognition of other-than-temporary impairment, including the determination of fair value and the credit-loss component, for each such security;
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- is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and
methodologies used and performing the required present value calculations using appropriate historical cost bases and yields; and
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- may engage another FHLBank to perform the cash-flow projections underlying its other-than-temporary impairment determination.
Beginning with the second quarter of 2009, consistent with the objective of the Finance Agency guidance, the FHLBanks formed an FHLBanks' OTTI Governance Committee which has the responsibility for reviewing and approving the key modeling assumptions, inputs, and methodologies to be used by the FHLBanks to generate cash-flow projections used in analyzing credit losses and determining other-than-temporary impairment for private-label MBS. The FHLBanks' OTTI Governance Committee provides a formal process by which each FHLBank can provide feedback on and approve the key modeling assumptions, inputs, and methodologies. The FHLBanks' OTTI Governance Committee also has established control procedures whereby the FHLBanks that are performing cash-flow projections select a sample group of private-label MBS and perform cash-flow projections on all such test MBS to ensure consistent results. In addition to those controls, the FHLBanks' OTTI Governance Committee has adopted additional processes intended to further the objective of promoting FHLBank consistency in these assessments. These additional processes include that each FHLBank now:
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- subjects its entire residential private-label MBS portfolio to the cash-flow analysis for determining
other-than-temporary impairment;
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- uses consistent assumptions regarding the impact of any third-party-provided bond insurance, referred to as monoline insurance, on the cash-flow projections of a private-label MBS;
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-
- uses the same methodology as each other FHLBank to determine whether a private-label MBS is
other-than-temporarily impaired and the size of the credit loss to be recognized; and
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- uses the same methodology as each other FHLBank for estimating the fair value of its private-label MBS.
For the year ended December 31, 2009, the Bank has completed its other-than-temporary impairment analysis in accordance with the Finance Agency guidance using the key modeling assumptions, inputs, and methodologies approved by the FHLBanks' OTTI Governance Committee. The Bank has contracted with the FHLBank of San Francisco to perform cash-flow projections for its residential private-label MBS other than subprime private-label MBS and has contracted with the FHLBank of Chicago to perform cash-flow projections for its subprime private-label MBS. In the event that neither the FHLBank of San Francisco or the FHLBank of Chicago has the ability to model a particular MBS owned by the Bank due to a lack of detailed loan-level data for a security, the Bank has sourced the loan-level data required by the third-party models used by the FHLBanks of San Francisco and Chicago and has projected the expected cash-flows for that security based on the same models and input assumptions adopted by the OTTI Governance Committee and used by the FHLBanks of San Francisco and Chicago in their determination of projected cash flows on private-label MBS. These assumptions are based on factors including but not limited to loan-level data for each security and modeling variables expectations for securities similar in nature modeled by either the FHLBank of San Francisco or the FHLBank of Chicago. The Bank forms these expectations for those securities by reviewing, when available, loan-level data for each such security, and, when such loan-level data is not available for a security, by reviewing loan-level data for similar loan pools as a proxy for such data. For additional information regarding the Bank's other-than-temporary impairment analysis of its private-label MBS portfolio, including detail on the key modeling assumptions, inputs, and methodologies, see both Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Estimates and Item 8Financial Statements and Supplementary DataFinancial StatementsNote 7Held-to-Maturity Securities.
Final Regulation on FHLBank Capital Classification and Critical Capital Levels
On August 4, 2009, the Finance Agency issued a final rule on capital classifications and critical capital levels for the FHLBanks (the Capital Rule) that became effective the same day. The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the Finance Agency to determine on no less than a quarterly basis the capital classification of each FHLBank. Each FHLBank is required to notify the Director of the Finance Agency within 10 calendar days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level necessary to maintain its assigned capital classification. The following describes each capital classification and its related corrective action requirements, if any.
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- Adequately capitalized. An FHLBank is adequately
capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that are adequately capitalized have no corrective
action requirements.
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- Undercapitalized. An FHLBank is undercapitalized if it does not have sufficient permanent or total capital to meet one or more of its risk-based and minimum capital requirements, but such deficiency is not large enough to classify the FHLBank as significantly undercapitalized or critically undercapitalized. An FHLBank classified as undercapitalized must submit a capital restoration plan that conforms with regulatory requirements to the Director of the Finance Agency for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and not permit growth of its average total assets in any calendar quarter beyond the average total assets of the preceding quarter unless otherwise approved by the Director of the Finance Agency.
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-
- Significantly undercapitalized. An FHLBank is
significantly undercapitalized if either (1) the amount of permanent or total capital held by the FHLBank is less than 75 percent of any one of its risk-based or minimum
capital requirements, but such deficiency is not large enough to classify the FHLBank as critically undercapitalized or (2) an undercapitalized FHLBank fails to submit or adhere to a
Director-approved capital restoration plan in conformance with regulatory requirements. An FHLBank classified as significantly undercapitalized must submit a capital restoration plan that conforms
with regulatory requirements to the Director of the Finance Agency for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and is prohibited
from paying a bonus to or increasing the compensation of its executive officers without prior approval of the Director of the Finance Agency.
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- Critically undercapitalized. An FHLBank is critically undercapitalized if either (1) the amount of total capital held by the FHLBank is less than two percent of the Bank's total assets or (2) a significantly undercapitalized FHLBank fails to submit or adhere to a Director-approved capital restoration plan in conformance with regulatory requirements. The Director of the Finance Agency may place an FHLBank in conservatorship or receivership. An FHLBank will be placed in mandatory receivership if (1) the assets of an FHLBank are less than its obligations during a 60-day period or (2) the FHLBank is not, and during a 60-day period has not, been paying its debts on a regular basis. Until such time the Finance Agency is appointed as conservator or receiver for a critically undercapitalized FHLBank, the FHLBank is subject to all mandatory restrictions and obligations applicable to a significantly undercapitalized FHLBank.
Each required capital restoration plan must be submitted within 15 business days following notice from the Director of the Finance Agency unless an extension is granted and is subject to the Director of the Finance Agency review and must set forth a plan to restore permanent and total capital levels to levels sufficient to fulfill its risk-based and minimum capital requirements.
The Director of the Finance Agency has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director of the Finance Agency determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank's compliance with its risk-based and minimum capital requirements. Further, the Capital Rule provides the Director of the Finance Agency discretion to reclassify an FHLBank's capital classification if the Director of the Finance Agency determines that:
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- the FHLBank is engaging in conduct that could result in the rapid depletion of permanent or total capital;
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- the value of collateral pledged to the FHLBank has decreased significantly;
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- the value of property subject to mortgages owned by the FHLBank has decreased significantly;
-
- the FHLBank is in an unsafe and unsound condition following notice to the FHLBank and an informal hearing before the
Director of the Finance Agency; or
-
- the FHLBank is engaging in an unsafe and unsound practice because the FHLBank's asset quality, management, earnings, or liquidity were found to be less than satisfactory during the most recent examination, and such deficiency has not been corrected.
If the Bank becomes classified into a capital classification other than adequately capitalized, the Bank may be adversely impacted by the corrective action requirements for that capital classification.
Proposed Regulation on Temporary Increases in Minimum Capital Levels
On February 8, 2010, the Finance Agency issued a proposed regulation with a comment deadline of April 9, 2010, that, if adopted as proposed, would set forth certain standards and procedures that
110
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 FHLBanks, Fannie Mae, and Freddie Mac. To the extent that the final rule results in an increase in the Bank's capital requirements, the Bank's ability to pay dividends and repurchase or redeem capital stock may be adversely impacted. The Bank cannot predict when a final regulation will be issued.
Final and Proposed Regulations on FHLBank Board of Director Elections and Director Eligibility
This subsection sets forth the final and proposed regulations issued by the Finance Agency during the period covered by this report on FHLBank director elections and director eligibility, each of which impacts, or if adopted would impact, the Bank's corporate governance. The Bank's corporate governance is described in Item 10Directors, Executive Officers, and Corporate Governance.
Final Regulation on FHLBank Board of Director Elections and Director Eligibility
On October 7, 2009, the Finance Agency issued a final regulation on FHLBank director elections and director eligibility, which became effective on November 6, 2009. The final regulation generally continues the prior rules governing elected director nominations, balloting, voting, and reporting of results but makes certain changes as well. Such changes include:
-
- adds the requirement that each independent director nominee receive at least 20 percent of the votes eligible to be
cast in the election, unless the FHLBank's board of directors nominates more persons than there are independent directorships to be filled in the election;
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- provides that the Director of the Finance Agency will annually determine the size of the board for each FHLBank, with the
designation of member directorships based on the number of shares of FHLBank stock required to be held by members in each state using the method of equal proportions;
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- requires each FHLBank's board of directors to determine annually how many of its independent directors are to be
designated public interest directors, subject to a minimum of at least two public interest directors;
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- provides that when an FHLBank's board of directors fills a vacancy on the board, the institution at which the candidate
serves as an officer or director must be a member of that FHLBank at the time the individual is elected by the board;
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- sets terms for each directorship commencing after January 1, 2009, at four years; and
-
- modifies related conflict-of-interest rules to:
-
- prohibit independent directors from serving as officers, employees, or directors of any member of the FHLBank on whose
board the director serves, or of any recipient of advances from that FHLBank, consistent with HERA;
-
- create a safe harbor for serving as an officer, employee, or director of a holding company that controls a member or a
recipient of advances if the assets of the member or recipient of advances are less than 35 percent of the holding company's assets;
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- attribute to independent directors any officer, employee, or director positions held by the director's spouse;
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- remove the safe harbor for gifts of token value and for reasonable and customary entertainment;
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-
- permit officers, attorneys, employees, agents, the board, the Bank's advisory council, and directors to support the
candidacy of the board's nominees for independent directorships; and
-
- permit directors, officers, employees, attorneys, and agents, acting in their personal capacity, to support the nomination or election of candidates for member directorships.
Proposed Regulation on FHLBank Board of Director Elections and Director Eligibility
On December 1, 2009, the Finance Agency issued a proposed regulation with a comment deadline of December 31, 2009, regarding the process by which successor directors are selected after an FHLBank directorship is re-designated to a new state prior to the end of its term as a result of the annual designation of FHLBank directorships. The current regulations deem the re-designation to create a vacancy on the board, which is filled by the remaining directors. The proposed amendment would deem the re-designation to cause the original directorship to terminate and a new directorship to be created, which would then be filled by an election of the members. Accordingly, the proposed regulation would impact the Bank's corporate governance. The Bank cannot predict when a final regulation will be issued.
Final Regulation on FHLBank Membership for Community Development Financial Institutions (CDFIs)
On January 5, 2010, the Finance Agency issued a final regulation establishing the eligibility and procedural requirements allowing certain newly eligible CDFIs to become FHLBank members, which became effective on February 4, 2010. CDFIs are private institutions that provide financial services dedicated to economic development and community revitalization in underserved markets. The newly eligible CDFIs include community development loan funds, venture capital funds, and state-chartered credit unions without federal deposit insurance. The Bank is unable to predict how many of the newly eligible CDFIs are interested in becoming a member of the Bank and so is unable to predict the impact of the final regulation on it.
Final Regulation on the Reporting of Fraudulent Financial Instruments and Loans
On January 27, 2010, the Finance Agency issued a final regulation, which became effective on February 26, 2010, requiring Fannie Mae, Freddie Mac, and the FHLBanks to report to the Finance Agency any such entity's purchase or sale of fraudulent financial instruments or loans, or financial instruments or loans such entity 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. The Bank 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 Bank's programs and products. Given such a scope, it potentially creates significant investigatory and reporting obligations for the Bank. The adopting release for the regulation provides that the Finance Agency will issue certain guidance specifying the investigatory and reporting obligations under the regulation. The Bank will be in a position to assess the significance of the reporting obligations once the Finance Agency has promulgated additional guidance with respect to specific requirements of the regulation.
Proposed Regulation Regarding Restructuring the Office of Finance
On August 4, 2009, the Finance Agency issued a proposed regulation regarding the restructuring of the board of directors of the Office of Finance with a comment deadline of November 4, 2009. The Office of Finance is governed by a board of directors, the composition and functions of which are determined by regulations of the Finance Agency. The proposed regulation would reconstitute the
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Office of Finance's board of directors by comprising it with the 12 FHLBank presidents and three to five independent directors that satisfy certain qualifications. Additionally, the Office of Finance's audit committee would be charged with oversight of greater consistency in accounting policies and procedures among the FHLBanks, which the Finance Agency has stated is intended to enhance the value of the combined financial reports of the FHLBanks. The Bank is unable to predict when a final regulation may be promulgated and what impact any final regulation may have on the Bank.
Proposed Regulation on Minority and Women Inclusion
On January 11, 2010, the Finance Agency issued a proposed regulation with a comment deadline of April 26, 2010 that would require each FHLBank and the Office of Finance to:
-
- establish and maintain an office of minority and women inclusion or designate an office to perform the responsibilities of
the new regulation;
-
- provide the new office or designated office with sufficient human, technological, and financial resources to comply with
the rule;
-
- publish annually a statement endorsed by the chief executive officer and approved by the board of directors confirming its
commitment to the principles of equal opportunity in employment and in contracting regardless of race, color, national origin, sex, religion, age, disability status, or genetic information;
-
- establish and maintain certain policies and procedures to ensure, to the maximum extent possible, the inclusion and
utilization of minorities, women, and individuals with disabilities in all business and activities at all levels based on certain minimum requirements that would impact internal complaints of
discrimination, external contracting, accommodations for individuals, and nominating or soliciting nominees for directorships;
-
- establish certain outreach programs in contracting, including the requirement that diversity is considered in contracting;
and
-
- adhere to certain periodic reporting requirements pertaining to the rule.
The Bank cannot predict when a final regulation will be issued.
Final and Proposed Regulations and Guidance on Compensation
This sub-section sets forth the final and proposed regulations and guidance regarding compensation at the FHLBanks that the Finance Agency has issued during the period covered by this report.
Proposed Regulation on Executive Compensation
On June 5, 2009, the Finance Agency issued a proposed regulation with a comment deadline of August 4, 2009, regarding executive compensation for Fannie Mae, Freddie Mac, and the FHLBanks. If implemented as proposed, each FHLBank will be required to submit proposed compensation actions to the Finance Agency for prior review for certain executive positions. The Director of the Finance Agency will be required to prohibit FHLBanks from providing compensation that is not reasonable and comparable for the position based upon a review of relevant factors. The Bank cannot predict when a final regulation will be issued.
Regulation Regarding Golden Parachute Payments
On January 29, 2009, the Finance Agency issued a final regulation regarding golden parachute payments effective on that same day. The regulation includes a list of factors the Director of the
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Finance Agency must consider in determining whether to prohibit or limit golden parachute payments. Such factors primarily relate to the relative culpability of the proposed recipient of the payment in such FHLBank's becoming insolvent, entering into conservatorship or receivership, or being in a troubled condition. The Bank cannot predict what impact this regulation will have on it.
Proposed Regulation Regarding Golden Parachute and Indemnification Payments
On June 29, 2009, the Finance Agency promulgated a proposed regulation with comment deadline of July 29, 2009, setting forth the standards that the Finance Agency shall take into consideration when limiting or prohibiting golden parachute and indemnification payments if adopted as proposed. The primary effects of this proposed regulation are to better conform existing Finance Agency regulations on golden parachutes with FDIC rules and to further refine limitations on golden parachute payments to further limit such payments made by Fannie Mae, Freddie Mac, or an FHLBank that is assigned certain less than satisfactory composite Finance Agency examination ratings. It is unclear what impact this proposed regulation may have on the Bank. The Bank cannot predict when a final regulation will be issued.
Finance Agency Advisory Bulletin on Executive Compensation Principles
On October 27, 2009, the Finance Agency issued an advisory bulletin establishing certain principles for executive compensation at the FHLBanks and the Office of Finance. These principles include that:
-
- executive compensation must be reasonable and comparable to that offered to executives in similar positions at comparable
financial institutions;
-
- executive compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock;
-
- a significant percentage of executive incentive-based compensation should be tied to the FHLBank's longer-term
condition and performance and outcome-indicators; a significant percentage of executive incentive-based compensation that is linked to the FHLBank's financial performance should be deferred and made
contingent upon performance over several years; and
-
- the board of directors should promote accountability and transparency in the process of setting compensation.
The Bank has updated its compensation policies accordingly.
Proposed Regulation on FHLBank Director Compensation
On October 23, 2009, the Finance Agency issued a proposed regulation on FHLBank directors' compensation and expenses with a comment deadline of December 7, 2009. The proposed regulation would subject director compensation to the authority of the Director of the Finance Agency to object to, and to prohibit prospectively, compensation and/or the payment of expense that the Director of the Finance Agency determines are not reasonable. The Bank is unable to determine what impact any final regulation may have on the Bank. The Bank cannot predict when a final regulation will be issued.
Proposed Regulation on Community Development Loans by CFIs and Secured Lending by FHLBanks to Members and Their Affiliates
On February 23, 2010, the Finance Agency issued a proposed regulation with a comment deadline of April 26, 2010 that includes two provisions that would:
- (1)
- permit CFIs to secure advances from FHLBanks with community development loans; and
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- (2)
- deem all secured extensions of credit by an FHLBank to a member of any FHLBank to be an advance subject to applicable Finance Agency regulations on advances.
The Bank is unable to predict the potential impact of the first provision may have on it if adopted, however, the second provision may effectively limit the parties with whom the Bank may enter into repurchase agreements to Bank members, since such agreements would be subject to applicable Finance Agency regulations, including capitalization requirements, and non-members may not purchase Bank stock. At December 31, 2009, the Bank was party to $1.3 billion in outstanding repurchase agreements, elsewhere denoted herein as "securities purchased under agreements to resell". Additionally, the second provision may also limit the ability of the Bank to engage in derivatives transactions (which require the posting of collateral) with entities that are affiliates of any member of any FHLBank, which could result in a substantial reduction in the number of derivatives counterparties available to the Bank. The Bank cannot predict when a final regulation will be issued.
Fannie Mae and Freddie Mac Delinquent Loan Purchase Program
On February 10, 2010, Fannie Mae and Freddie Mac announced that they intend to repurchase seriously delinquent loans, defined as loans 120 days or more delinquent, out of collateral pools backing the MBS they have issued at par value. While details of the repurchase programs are not fully known, the repurchase of seriously delinquent loans by Fannie Mae and Freddie Mac would result in significant levels of principal received by investors in a short period of time resulting in an increase in market liquidity. This may, in turn, serve to limit the Bank's opportunities to reinvest these prepayments profitably as other investors would be seeking to re-deploy these prepayments simultaneously, elevating purchase prices and reducing effective yields on the new investments.
Additionally, if these GSEs access the capital markets to fund these prepayments, the Bank's own funding costs may be adversely impacted. The funding costs for these GSEs and the FHLBanks traditionally track each other closely. Therefore, any material increase in these GSEs accessing the capital markets from these prepayment programs could result in higher funding costs realized by these GSEs and the FHLBanks as well.
Federal Reserve Board GSE Debt Purchase Initiative
On November 25, 2008, the Federal Reserve Board announced an initiative for the Federal Reserve Bank of New York to purchase up to $100 billion of the debt of Freddie Mac, Fannie Mae, and the FHLBanks. On March 18, 2009, the Federal Reserve Board committed to purchase up to an additional $100 billion of such debt. On November 4, 2009, the Federal Reserve Board announced that it will cease purchasing such debt when the aggregated purchases reach $175 billion. The program is expected to expire no later than the end of the first quarter of 2010. Through March 1, 2010, the Federal Reserve Bank of New York has purchased approximately $169 billion in such term debt, of which approximately $37 billion was FHLBank term debt. These purchases have had a positive effect on the Bank's funding costs and the cessation of these purchases may adversely impact the Bank's funding costs, however, the Bank's funding costs are impacted by a variety of factors, including FHLBank demand for funds and investor preferences that vary from time to time. Accordingly, the Bank cannot predict what impact the cessation of these purchases will have on it.
Federal Reserve Board Amendment to Regulation D Concerning Interest on Excess Balances
On May 29, 2009, the Federal Reserve Board published a final rule amending its Regulation D, effective July 2, 2009. The new rule amends the interim final rule published by the Federal Reserve Board on October 9, 2008, which deemed any excess balance held by a pass-through correspondent in the correspondent's account, when the correspondent was not itself an eligible institution, to be held on behalf of the pass-through correspondent's respondents. Further, the interim final rule permitted, but
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did not require, pass-through correspondents to pass back to their respondents the interest paid on balances held on behalf of respondents. Accordingly, the Bank had been earning interest at the targeted federal funds rate on all excess balances deposited with the Federal Reserve Bank of Boston. Under the new final rule, any excess balance in the account of a correspondent that is not an eligible institution will be attributable to the correspondent, and no earnings will be paid on the excess balance in that account. As a result, since July 2, 2009, the Bank has reduced its excess interest-bearing balances held at the Federal Reserve Bank of Boston, which had averaged $8.5 billion during the first six months of 2009, to zero. The Bank has since invested its excess balances in alternative investments providing a lower effective yield, which the Bank estimates to have resulted in a reduction to investment income before assessments of approximately $10.0 million during the second half of 2009.
Federal Reserve Board Program to Purchase MBS Issued by Housing GSEs
On November 25, 2008, the Federal Reserve Board announced a program to purchase up to $500 billion in MBS backed by Fannie Mae, Freddie Mac, and the Government National Mortgage Association to reduce the cost and increase the availability of credit for the purchase of houses. On March 18, 2009, the Federal Reserve Board committed to purchase up to an additional $750 billion of such MBS. On March 16, 2010, the Federal Reserve Board announced that it expected to complete these purchases and end the program by the end of March 2010. This program, initiated to drive mortgage rates lower, make housing more affordable, and help stabilize home prices, has resulted in low agency mortgage pricing by Fannie Mae and Freddie Mac. MPF price execution, which is a function of the FHLBank debt issuance costs, has been less competitive and resulted in weakened member demand for MPF products throughout 2009 and into 2010.
Federal Reserve Board Proposal to Create a Term Deposit Program.
On December 28, 2009, the Federal Reserve Board announced a proposal to offer a term deposit program for certain eligible Federal Reserve Board member institutions. The FHLBanks are not eligible to participate in this program. The program would enable such eligible institutions to: (1) deposit funds with the Federal Reserve Board outside of the Federal Reserve program; (2) earn interest on the funds; and (3) pledge such deposits as collateral for loans from the Federal Reserve Board.
Helping Families Save Their Homes Act of 2009 and Other Mortgage Modification Legislation
On May 20, 2009, the Helping Families Save Their Home Act of 2009 was enacted to encourage loan modifications in order to prevent mortgage foreclosures and to support the Federal deposit insurance system. One provision in the act provides a safe harbor from liability for mortgage servicers who modify the terms of a mortgage consistent with certain qualified loan modification plans. At this time it is uncertain what effect the provisions regarding loan modifications will have on the value of the Bank's mortgage asset portfolio, the mortgage loan collateral pledged by members to secure their advances from the Bank or the value of the Bank's MBS. As mortgage servicers modify mortgages under the various government incentive programs and otherwise, the value of the Bank's MBS and mortgage loans held for investment and mortgage assets pledged as collateral for member advances may be reduced. At this point, legislation to allow bankruptcy cramdowns on mortgages secured by owner-occupied homes (referred to as cramdown legislation) has been defeated in the U.S. Senate; however, similar legislation could be re-introduced. With this potential change in the law, the risk of losses on mortgages due to borrower bankruptcy filings could become material. The previously proposed legislation permitted a bankruptcy judge, in specified circumstances, to reduce the mortgage amount to today's market value of the property, reduce the interest rate paid by the debtor, and/or extend the repayment period. In the event that this legislation would again be proposed, passed and applied to existing mortgage debt (including residential MBS), the Bank could face increased risk of
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credit losses on its private label MBS that include bankruptcy carve-out provisions and allocate bankruptcy losses over a specified dollar amount on a pro-rata basis across all classes of a security.
Wall Street Reform and Consumer Protection Act
On December 11, 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act (the Reform Act), which, if passed by the U.S. Senate and signed into law by the President, would, among other things: (1) create a consumer financial protection agency; (2) create an inter-agency oversight council that will identify and regulate systemically important financial institutions; (3) regulate the over-the-counter derivatives market; (4) reform the credit rating agencies; (5) provide shareholders with an advisory vote on the compensation practices of the entity in which they invest including executive compensation and golden parachutes; and (6) create a federal insurance office that will monitor the insurance industry. Depending on whether the Reform Act, or similar legislation, is signed into law and on the final content of any such legislation, the Bank's business operations, funding costs, rights, obligations, and/or the manner in which the Bank carries out its housing-finance mission may be impacted. For example, regulations on the over-the-counter derivatives market that may be issued under the Reform Act could materially impact the Bank's ability to hedge its interest-rate risk exposure from advances, achieve the Bank's risk-management objectives, and act as an intermediary between its members and counterparties. However, the Bank cannot predict whether any such legislation will be enacted and what the content of any such legislation or regulations issued under any such legislation would be and so cannot predict what impact the Reform Act or similar legislation may have on the Bank.
FDIC Regulation on Deposit Insurance Assessments
On February 27, 2009, the FDIC issued a final regulation on increases in deposit insurance premium assessments to restore the Deposit Insurance Fund. The final regulation is effective April 1, 2009. The assessments adopted by the FDIC are higher for institutions that use secured liabilities in excess of 25 percent of deposits. Secured liabilities are defined to include FHLBank advances. The rule may tend to decrease demand for advances from Bank members affected by the rule due to the increase in the effective all-in cost from the increased premium assessments.
FDIC Temporary Liquidity Guarantee Program (TLGP) and Other FDIC Actions
On August 26, 2009, the FDIC approved the extension of its guarantee for noninterest bearing transaction accounts through June 30, 2010 for those participating institutions that do not opt-out of the program. On February 10, 2009, the FDIC extended the guarantee of eligible debt under the TLGP from June 30, 2009 to October 31, 2009, in exchange for an additional premium for the guarantee. On May 19, 2009, Congress passed legislation continuing the FDIC-insured deposit limit of $250,000 through 2013.
Proposed TARP Funding Program
The President has proposed a program to be funded with $30.0 billion of TARP proceeds that would permit financial institutions with fewer than $10.0 billion in assets to borrow money at a low interest rate from the U.S. Treasury. If the program is adopted, the program could adversely impact demand for advances from the Bank due to this alternative, low-cost avenue for funding that would be available to those of the Bank's members that would qualify. The Bank cannot predict when any such program will be finalized.
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Other Financial Regulatory Reform
In January 2010, the U.S. Treasury and President Obama, announced two proposals impacting financial institutions, including banking institutions. The first proposal is the imposition of a 15 basis point financial responsibility fee that financial firms with assets of greater than $50.0 billion would pay on their covered liabilities. In the event that covered liabilities are defined to include FHLBank advances to members the fee could impact member borrowing by affected firms. The second proposal would require the largest financial firms to separate their investment banking and proprietary trading from their commercial banking activities. Previously, on June 17, 2009, President Obama issued a proposal to improve the effectiveness of the federal regulatory structure that would, among other things, cause a restructuring of the current bank regulatory system. One provision of the plan would require the U.S. Treasury and the Department of Housing and Urban Development to analyze and make recommendations regarding the future of the FHLBanks, along with Fannie Mae and Freddie Mac, although the Secretary of the U.S. Treasury announced on February 24, 2010 that this analysis is unlikely to be completed until 2011. Recent reports in 2010 indicate that GSE reform, including the FHLBanks may be part of larger comprehensive legislation regarding the nation's housing finance system. The Bank is unable to predict what versions of such legislation will ultimately be passed and therefore is unable to predict the impact of such legislation on the Bank or its members' activity with the Bank.
U.S. Treasury's Financial Stability Plan
On March 23, 2009, the U.S. Treasury announced the Public-Private Investment Program (PPIP), which is a program designed to attract private investors to purchase certain real estate loans and illiquid MBS (originally AAA-rated) owned by financial institutions using up to $100 billion in TARP capital funds. These funds could be levered with debt funding also provided by the U.S. Treasury to expand the capacity of the program. On July 8, 2009, the U.S. Treasury announced that it had selected the initial nine PPIP fund managers to purchase legacy securities including commercial and residential MBS originally issued prior to 2009 that were originally rated AAA by two or more NRSROs. On September 30, 2009, the U.S. Treasury announced the initial closings of two Public Private Investment Funds (PPIFs) established under PPIP to purchase legacy securities. The PPIP's activities in purchasing such residential MBS could impact the values of residential MBS. On September 18, 2009, the U.S. Treasury ended its temporary program to sustain money market funds at stable net asset values. Since its selection of the initial PPIP fund managers in 2009, as of December 31, 2009 the PPIP funds have drawn-down approximately $4.3 billion of total capital which has been invested in eligible assets and cash equivalents pending investment. The total market value of non-agency residential MBS and commercial MBS held by all PPIFs was approximately $3.4 billion. In addition, in 2010 the FDIC entered the market with guaranteed structured notes backed by commercial MBS, residential MBS and other asset-backed securities that the banking regulator has acquired from various failed depository institutions.
RECENT REGULATORY ACTIONS AND CREDIT RATING AGENCY ACTIONS
On April 28, 2009, the Bank was ordered by the Director of the Finance Agency to limit the payment of salary-based severance to Michael A. Jessee, former president and chief executive officer of the Bank, to 12 months of such payments rather than the awarded 18 months following the date of his retirement. In accordance with that order, the Bank and Mr. Jessee entered into an amendment to the agreement that awarded such payments to limit such payments to 12 months following the date of his retirement. Mr. Jessee retired from the Bank effective April 30, 2009.
All FHLBanks have joint and several liability for FHLBank COs. The joint and several liability regulation of the Finance Agency authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on COs for which another FHLBank is the primary obligor.
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The Bank has never been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. The par amount of the outstanding COs of all 12 FHLBanks was $930.6 billion at December 31, 2009, and $1.3 trillion at December 31, 2008.
Some of the other FHLBanks have been the subject of regulatory actions pursuant to which their boards of directors and/or management have entered into formal written agreements with the Division of Bank Regulation of the Finance Agency to, among other things, maintain higher levels of capital. While such agreements generally are publicly announced by the Finance Agency, the Bank cannot provide assurance that it has been informed or will be informed of regulatory actions taken at other FHLBanks. In addition, the Bank or any other FHLBank may be the subject of regulatory actions in the future.
The following table provides credit ratings of each of the FHLBanks as of February 28, 2010, from S&P and Moody's.
Federal Home Loan Banks
Long-Term and Short-Term Credit Ratings
As of February 28, 2010
|
S&P | Moody's | ||||||
---|---|---|---|---|---|---|---|---|
|
Long-Term/ Short-Term Rating |
Outlook | Long-Term/ Short-Term Rating |
Outlook | ||||
FHLBank of Atlanta |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Boston |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Chicago |
AA+/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Cincinnati |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Dallas |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Des Moines |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Indianapolis |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of New York |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Pittsburgh |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of San Francisco |
AAA/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Seattle |
AA+/A-1+ | Stable | Aaa/P-1 | Stable | ||||
FHLBank of Topeka |
AAA/A-1+ | Stable | Aaa/P-1 | Stable |
The Bank has evaluated the financial condition of the other FHLBanks based on known regulatory actions, publicly available financial information, and individual long-term credit-rating downgrades as of each period-end presented. Management believes that the probability that the Bank will be required by the Finance Agency to repay any principal or interest associated with COs for which the Bank is not the primary obligor has not materially increased.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank has a comprehensive risk-governance structure. The Bank's risk-management policy identifies seven major risk categories relevant to business activities:
-
- Credit risk is the risk to earnings or capital of an obligor's failure to meet the terms of any contract with the Bank or
otherwise perform as agreed. The Credit Committee oversees credit risk primarily through ongoing oversight and limits on credit exposure.
-
- Market risk is the risk to earnings or market value of equity (MVE) due to adverse movements in interest rates, market
prices, or interest-rate spreads. Market risk is overseen by the Asset-Liability Committee through ongoing review of value at risk (VaR) and the economic value of capital. The
Asset-Liability Committee also reviews income simulations to oversee potential exposure to future earnings volatility.
-
- Liquidity risk is the risk that the Bank may be unable to meet its funding requirements, or meet the credit needs of
members, at a reasonable cost and in a timely manner. The Asset-Liability Committee, through its regular reviews of funding and liquidity, oversees liquidity risk.
-
- Leverage risk is the risk that the capital of the Bank is not sufficient to support the level of assets. The risk results
from a deterioration of the Bank's capital base, a deterioration of the assets, or from overbooking assets. The Bank's treasurer, under the direction of the chief financial officer, provides primary
oversight of leverage activity.
-
- Business risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of
those decisions, or from external factors as may occur in both the short- and long-run. Business risk is overseen by the Management Committee through the development of the strategic
business plan.
-
- Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, human error, or
from internal or external events, inclusive of exposure to potential litigation resulting from inappropriate conduct of Bank personnel. The Bank's enterprise risk-management department
provides primary oversight of operational risk. The Operational Risk Committee primarily oversees operational risk.
-
- Reputation risk is the risk to earnings or capital arising from negative public opinion, which can affect the Bank's ability to establish new business relationships or to maintain existing business relationships. The Management Committee oversees reputation risk.
The board of directors determines the desired risk profile of the Bank and provides risk oversight through the review and approval of the Bank's risk-management policy. The board of directors also evaluates and approves risk tolerances and risk limits. The board of directors' Risk Committee provides additional oversight for market risk and credit risk. The board of director's Audit Committee provides additional oversight for operational risk. The board of directors also reviews the result of an annual risk assessment conducted by management for its major business processes.
Management establishes a quantifiable connection between the Bank's desired risk profile and the Bank's risk tolerances and risk limits as expressed in the Bank's risk-management policy. Management is responsible for maintaining internal policies consistent with the risk-management policy. The Bank's chief risk officer is responsible for communicating changes to these internal policies to the board of director's Risk Committee. Management is also responsible for monitoring, measuring, and reporting risk exposures to the board of directors.
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Management further delineates the Bank's desired risk profile for specific business activities and provides risk oversight through the following committees:
-
- Management Committee is the Bank's overall risk-governance, strategic-planning, and policymaking group. The
committee, which is comprised of the Bank's senior officers, reviews and recommends to the board of directors for approval all revisions to major policies of the organization. All decisions by this
committee are subject to final approval by the president of the Bank.
-
- Asset-Liability Committee is responsible for approving policies and risk limits for the management of market risk,
including liquidity and options risks. The Asset-Liability Committee also conducts monitoring and oversight of these risks on an ongoing basis, and promulgates strategies to enhance the Bank's
financial performance within established risk limits consistent with the strategic business plan.
-
- Credit Committee oversees the Bank's credit-underwriting functions and collateral eligibility standards. The committee
also reviews the creditworthiness of the Bank's investments, including purchased mortgage assets, and oversees the classification of the Bank's assets and the adequacy of its loan-loss
reserves.
-
- Operational Risk Committee reviews and assesses the Bank's exposure to operational risks and determines tolerances for
potential operational threats that may arise from new products and services, staff turnover, and new regulations affecting products and operations. The committee may also discuss operational
exceptions and assess appropriate control actions to mitigate reoccurrence and improve future detection.
-
- Information Technology and Security Oversight Committee provides senior management oversight and governance of the
information technology, information security, and business-continuity functions of the Bank. The committee approves the major priorities and overall level of funding for these functions, within the
context of the Bank's strategic business priorities and established risk-management objectives.
-
- Disclosure Committee oversees all financial disclosures made by the Bank to its membership, regulatory agencies, and the general public and helps to ensure that disclosures made by the Bank comply with applicable laws and regulations.
This list of internal management committees or their respective missions may change from time to time based on new business or regulatory requirements.
Credit Risk
Credit RiskAdvances. The Bank endeavors to minimize credit risk on advances by monitoring the financial condition of its borrowing entities and by holding sufficient collateral to protect itself from losses. The Bank is prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. The Bank has never experienced a credit loss on an advance.
The Bank closely monitors the financial condition of all members and housing associates by reviewing 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, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, the Bank has access to most members' regulatory examination reports. The Bank analyzes this information on a regular basis.
Throughout 2008 and continuing into 2009, the overall performance and financial condition of the Bank's membership weakened as the broader economy deteriorated, leading to increases in delinquent
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and nonperforming loans, significant loan loss provisions, losses in investment securities portfolios, and the impact of increased deposit insurance premiums. The Bank's membership reported an aggregate loss of $117.4 million for the nine-month period ended September 30, 2009. This followed an aggregate net loss of $1.3 billion for 2008. Average nonperforming assets for depository institution members increased from 0.91 percent of total assets as of December 31, 2008, to 1.50 percent of assets as of September 30, 2009. The average ratio of tangible capital to assets among the membership increased from 8.09 percent as of December 31, 2008, to 10.08 percent as of September 30, 2009. Through the 26-month period ending February 28, 2010, there were no failures or defaults among the Bank's membership. All extensions of credit by the Bank to members are secured by eligible collateral as noted herein. However, if a member were to default, and the value of the collateral pledged by the member declined to a point such that the Bank was unable to realize sufficient value from the pledged collateral to cover the member's obligations and the Bank was unable to obtain additional collateral to make up for the reduction in value of such collateral, the Bank could incur losses. A default by a member with significant obligations to the Bank could result in significant financial losses, which would adversely impact the Bank's results of operations and financial condition.
Based upon the financial condition of the member, the Bank classifies each member into one of three collateral categories as shown below: blanket-collateral status, listing-collateral status, or delivery-collateral status.
-
- The Bank assigns members that it has determined are in good financial condition to blanket-lien status.
-
- Members that demonstrate characteristics that evidence potential weakness in their financial condition are assigned to
listing-collateral status. The Bank may also assign members with a high level of borrowings as a percentage of their assets to listing-collateral status regardless of their financial condition. The
Bank has established an advances borrowing limit of 50 percent of the member's assets. This limit may be waived by the president of the Bank after considering factors such as the member's
credit rating, collateral quality, and earnings stability. Members whose total advances exceed 50 percent of assets are placed in listing-collateral status.
-
- The Bank assigns members that it has determined are financially weak to delivery-collateral status. The Bank also assigns all insurance company members that have an NRSRO long-term debt rating lower than BBB- or its equivalent, insurance company members that do not have an NRSRO long-term debt rating, and all housing associates to delivery-collateral status.
The assignment of a member to a collateral-status category reflects the Bank's increasing level of control over the collateral pledged by the member as a member's financial condition deteriorates. When the Bank classifies a member as being in blanket-lien status, the member retains possession of eligible one- to four-family mortgage-loan collateral pledged to the Bank, provided the member executes a written security agreement and agrees to hold such collateral for the benefit of the Bank. Members in blanket-lien status must specifically list with the Bank all mortgage-loan collateral other than loans secured by first-mortgage loans on owner-occupied one- to four-family residential property. Under listing-collateral status, the member retains possession of eligible mortgage-loan collateral, however, the Bank requires the member to specifically list all mortgage-loan collateral with the Bank. Securities pledged to the Bank by members in either blanket-lien or listing-collateral status must be delivered to the Bank, the Bank's approved safekeeping agent, with which the Bank has an exclusive control agreement, or held by a member's securities corporation in a custodial account at the Bank. For members in delivery-collateral status, the Bank requires the member to place physical possession of all pledged eligible collateral with the Bank or the Bank's approved safekeeping agent with which the Bank has an exclusive control agreement.
The Bank's agreements with its borrowers require each borrowing entity to pledge sufficient eligible collateral to the Bank to fully secure all outstanding extensions of credit, including advances,
122
accrued interest receivable, standby letters of credit, MPF credit- enhancement obligations, and lines of credit (collectively, extensions of credit) at all times. The assets that constitute eligible collateral to secure extensions of credit are set forth in Section 10(a) of the FHLBank Act. In accordance with the FHLBank Act, the Bank accepts the following assets as collateral:
-
- fully disbursed, whole first mortgages on improved residential property (not more than 45 days delinquent), or
securities representing a whole interest in such mortgages;
-
- securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including without limitation, MBS
issued or guaranteed by Freddie Mac, Fannie Mae, and the Government National Mortgage Association);
-
- cash or deposits with an FHLBank; and
-
- other real-estate-related collateral acceptable to the Bank if such collateral has a readily ascertainable value and the Bank can perfect its interest in the collateral.
In addition, in the case of any community financial institution, as defined in accordance with the FHLBank Act, the Bank may accept as collateral secured loans for small business and agriculture, or securities representing a whole interest in such secured loans.
In order to mitigate the credit risk, market risk, liquidity risk, and operational risk associated with collateral, the Bank applies a discount to the book value or market value of pledged collateral to establish the lending value of the collateral to the Bank. Collateral that the Bank has determined to contain a low level of risk, such as U.S. government obligations, is discounted at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. The Bank periodically analyzes the discounts applied to all eligible collateral types to verify that current discounts are sufficient to fully secure the Bank against losses in the event of a borrower default. The Bank's agreements with its members and borrowers grant the Bank authority, in its sole discretion, to adjust the discounts applied to collateral at any time based on the Bank's assessment of the member's financial condition, the quality of collateral pledged, or the overall volatility of the value of the collateral.
The Bank generally requires all borrowing members and housing associates to execute a security agreement that grants the Bank a blanket lien on all assets of such borrower that consist of, among other types of collateral: fully disbursed whole first mortgages and deeds of trust constituting first liens against real property, U.S. federal, state, and municipal obligations, GSE securities, corporate debt obligations, commercial paper, funds placed in deposit accounts at the Bank, COs, such other items or property of the borrower that are offered to the Bank by the borrower as collateral, and all proceeds of all of the foregoing. In the case of insurance companies, in some instances the Bank establishes a specific lien instead of a blanket lien subject to the Bank's receipt of additional safeguards from such members. The Bank protects its security interest in these assets by filing a Uniform Commercial Code (UCC) financing statement in the appropriate jurisdiction. The Bank also requires that borrowers in blanket-lien and listing-collateral status submit to the Bank, on at least an annual basis, an audit opinion that confirms that the borrower is maintaining sufficient amounts of qualified collateral in accordance with the Bank's policies. However, blanket-lien and listing-collateral status members that have voluntarily delivered all of their collateral to the Bank may not be required, at the Bank's discretion, to submit such an audit opinion. Bank employees conduct onsite reviews of collateral pledged by borrowers to confirm the existence of the pledged collateral and to determine that the pledged collateral conforms to the Bank's eligibility requirements. The Bank may conduct an onsite collateral review at any time.
The Bank's agreements with borrowers allow the Bank, in its 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. The Bank also may require members to pledge additional collateral
123
regardless of whether the collateral would be eligible to originate a new extension of credit. The Bank's agreements with its borrowers also afford the Bank the right, in its sole discretion, to declare any borrower to be in default if the Bank deems itself to be insecure.
Beyond these provisions, Section 10(e) of the FHLBank Act affords any security interest granted by a federally insured depository institution member or such a member's affiliate to the Bank 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, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. In this regard, the priority granted to the security interests of the Bank under Section 10(e) may not apply when lending to insurance company members. This is due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to the Bank. However, the Bank protects its security interests in the collateral pledged by its borrowers, including insurance company members, by filing UCC financing statements, or by taking possession or control of such collateral, or by taking other appropriate steps. Advances outstanding to insurance companies totaled $487.0 million at December 31, 2009.
Advances outstanding to borrowers in blanket-lien status at December 31, 2009, totaled $31.9 billion. For these advances, the Bank had access to collateral through security agreements, where the borrower agrees to hold such collateral for the benefit of the Bank, totaling $58.9 billion as of December 31, 2009. Of this total, $6.3 billion of securities have been delivered to the Bank or to a third-party custodian, an additional $2.2 billion of securities are held by borrowers' securities corporations, and $17.5 billion of residential mortgage loans have been pledged by borrowers' real-estate-investment trusts.
The following table shows the asset quality of the one-to-four family mortgage loan portfolios held on the balance sheets of the Bank's borrower institutions. One- to four-family mortgage loans constitute the largest asset type pledged as collateral to the Bank. Note that these figures include all one- to four-family mortgage loans on borrowers' balance sheets. The figures in this table include some loans that are not pledged as collateral to the Bank. Qualified collateral does not include loans that have been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable provided no payment is overdue by more than 45 days, unless the collateral is insured or guaranteed by the U.S. or any agency thereof.
124
2009 Quarterly Borrower Asset Quality
(dollars in thousands)
|
2009Quarter Ended (1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
March 31 | June 30 | September 30 | |||||||
Total borrower assets |
$ | 646,916,851 | $ | 635,716,494 | $ | 641,769,779 | ||||
Total 1-4 family mortgage loans |
$ | 124,354,004 | $ | 119,416,778 | $ | 113,216,853 | ||||
1-4 family mortgage loans as a percent of borrower assets |
19.22 | % | 18.78 | % | 17.64 | % | ||||
1-4 family mortgage loans delinquent 30-89 days as a percentage of 1-4 family mortgage loans |
1.26 | % | 1.16 | % | 1.28 | % | ||||
1-4 family mortgage loans delinquent 90 days as a percentage of 1-4 family mortgage loans |
1.37 | % | 1.93 | % | 2.01 | % | ||||
REO as a percentage of 1-4 family mortgage loans |
0.14 | % | 0.15 | % | 0.18 | % | ||||
- (1)
- September information is the most recent data available for inclusion in this table.
The following table provides information regarding advances outstanding with members and nonmember borrowers in listing- and delivery-collateral status at December 31, 2009, along with their corresponding collateral balances.
Advances Outstanding by Borrower
Collateral Status
As of December 31, 2009
(dollars in thousands)
|
Number of Borrowers |
Advances Outstanding |
Discounted Collateral |
Ratio of Collateral to Advances |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Listing-collateral status |
28 | $ | 4,149,284 | $ | 13,432,196 | 323.7 | % | ||||||
Delivery-collateral status |
29 | 827,190 | 1,427,870 | 172.6 | |||||||||
Total par value |
57 | $ | 4,976,474 | $ | 14,860,066 | 298.6 | % | ||||||
The Bank assigns borrowers to blanket-lien status, listing-collateral status, and delivery-collateral status based on the Bank's assessment of the financial condition of the borrower. The method by which a borrower pledges collateral is dependent upon the collateral status to which it is assigned based on its financial condition and on the type of collateral that the borrower pledges. For example, securities collateral pledged by a borrower that is in blanket-lien status based on its financial condition appears in the table below as being in collateral delivered to the Bank, since all securities collateral must be delivered to the Bank or to a Bank-approved third-party custodian. Based upon the method by which borrowers pledge collateral to the Bank, the following table shows the total potential lending value of the collateral that borrowers have pledged to the Bank, net of the Bank's collateral valuation discounts.
125
Collateral by Pledge Type
As of December 31, 2009
(dollars in thousands)
|
Amount of Collateral | |||
---|---|---|---|---|
Collateral pledged under blanket lien |
$ | 49,241,295 | ||
Collateral specifically listed and identified |
10,536,242 | |||
Collateral delivered to the Bank |
17,962,301 |
Based upon the collateral held as security on advances, the Bank's experience with advance repayment history, and the protections provided by Section 10(e) of the FHLBank Act, the Bank does not believe that an allowance for losses on advances is necessary at this time.
Credit RiskInvestments. The Bank is subject to credit risk on unsecured investments consisting primarily of money-market instruments issued by high-quality counterparties and debentures issued by U.S. agencies and instrumentalities. The Bank places money-market funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or its equivalent rating) on an unsecured basis for terms of up to 275 days; most such placements expire within 35 days. Management actively monitors the credit quality of these counterparties. At December 31, 2009, the Bank's unsecured credit exposure, including accrued interest related to money-market instruments and debentures, was $11.4 billion to 26 counterparties and issuers, of which $2.6 billion was for certificates of deposit, $5.7 billion was for federal funds sold, and $3.1 billion was for debentures. As of December 31, 2009, there were no counterparties or issuers that individually accounted for at least 10 percent or more of the Bank's total unsecured credit exposure of $11.4 billion.
The Bank also is invested in and is subject to secured credit risk related to MBS, ABS, and state and local housing-finance-agency obligations (HFA) that are directly or indirectly supported by underlying mortgage loans. Investments in MBS and ABS may be purchased as long as the balance of outstanding MBS/ABS is equal to or less than 300 percent of the Bank's total capital, and must be rated the highest long-term debt rating at the time of purchase. The only exception to the 300 percent limitation would be if the Bank were to takes advantage of a temporary increase in MBS investment authority granted to the FHLBanks by the Finance Board in March 2008, which it has not done. HFA bonds must carry a credit rating of double-A (or its equivalent rating) or higher as of the date of purchase.
126
Credit ratings on these investments as of December 31, 2009, are provided in the following table.
Credit Ratings of Investments at Carrying Value
As of December 31, 2009
(dollars in thousands)
|
Short-Term Credit Rating |
Long-Term Credit Rating(1) | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
Below Triple-B |
|
|||||||||||||||||
Investment Category
|
A-1 | Triple-A | Double-A | Single-A | Triple-B | Unrated | |||||||||||||||||
Money-market instruments(2): |
|||||||||||||||||||||||
Interest-bearing deposits |
$ | | $ | 81 | $ | | $ | | $ | | $ | | $ | | |||||||||
Certificates of deposit |
| | 1,240,000 | 1,360,000 | | | | ||||||||||||||||
Federal funds sold |
| | 3,855,000 | 1,821,000 | | | | ||||||||||||||||
Securities purchased under agreements to resell |
750,000 | | | 500,000 | | | | ||||||||||||||||
Investment securities: |
|||||||||||||||||||||||
U.S. agency obligations |
| 30,801 | | | | | | ||||||||||||||||
U.S. government corporations |
| 221,502 | | | | | | ||||||||||||||||
Government-sponsored enterprises |
| 1,771,216 | | | | | | ||||||||||||||||
Supranational banks |
| 381,011 | | | | | | ||||||||||||||||
Corporate bonds |
| 701,779 | | | | | | ||||||||||||||||
State or local housing-finance-agency obligations |
| 29,386 | 160,668 | 2,683 | 51,410 | | 2,110 | ||||||||||||||||
GSE MBS |
| 5,908,335 | | | | | | ||||||||||||||||
Private-label MBS |
| 381,530 | 146,564 | 171,323 | 127,280 | 1,303,784 | | ||||||||||||||||
ABS backed by home-equity loans |
| 19,612 | 2,905 | | | 7,484 | | ||||||||||||||||
Total investments |
$ | 750,000 | $ | 9,445,253 | $ | 5,405,137 | $ | 3,855,006 | $ | 178,690 | $ | 1,311,268 | $ | 2,110 | |||||||||
- (1)
- Ratings
are obtained from Moody's, Fitch, Inc. (Fitch), and S&P. If there is a split rating, the lowest rating is used.
- (2)
- The issuer rating is used, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.
127
The following table details the Bank's investment securities with a long-term credit rating below investment grade as of December 31, 2009 (dollars in thousands).
Credit Ratings of Investments Below Investment Grade at Carrying Value
As of December 31, 2009
(dollars in thousands)
Investment Category
|
Double-B | Single-B | Triple-C | Double-C | Single-D | Total Below Investment Grade |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Private-label MBS |
$ | 194,846 | $ | 265,974 | $ | 701,003 | $ | 118,490 | $ | 23,471 | $ | 1,303,784 | |||||||
ABS backed by home-equity loans |
417 | 4,874 | 2,193 | | | 7,484 | |||||||||||||
Total |
$ | 195,263 | $ | 270,848 | $ | 703,196 | $ | 118,490 | $ | 23,471 | $ | 1,311,268 | |||||||
Of the Bank's $9.5 billion in par value of MBS and ABS investments at December 31, 2009, $3.6 billion in par value are private-label MBS. Of this amount, $2.9 billion in par value are securities backed primarily by Alt-A loans, while $600.4 million in par value are backed primarily by prime loans. Only $31.5 million in par value of these investments are backed primarily by subprime mortgages. While there is no universally accepted definition for prime and Alt-A underwriting standards, in general, prime underwriting implies a borrower without a history of delinquent payments as well as documented income and a loan amount that is at or less than 80 percent of the market value of the house, while Alt-A underwriting implies a prime borrower with limited income documentation and/or a loan-to-value ratio of higher than 80 percent. While the Bank generally follows the collateral type definitions provided by S&P, it does review the credit performance of the underlying collateral, and revise the classification where appropriate, an approach that is likewise incorporated into the modeling assumptions provided by the FHLBanks' OTTI Governance Committee in accordance with the related Finance Agency guidance. See Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsRecent Legislative and Regulatory Developments for additional information on the FHLBanks' OTTI Governance Committee and related Finance Agency guidance. The third-party collateral loan performance platform used by the FHLBank of San Francisco, with whom the Bank has contracted to perform these analyses, assesses eight bonds owned by the Bank to have collateral that is Alt-A in nature, while that same collateral is held as prime by S&P. Accordingly, these bonds, too, have been modeled using the same credit assumptions applied to Alt-A collateral. Four of these bonds, with a total par value of $73.5 million as of December 31, 2009, were deemed to be other-than-temporarily impaired as of December 31, 2009. These bonds are reported as Prime in the various tables in this section. In addition, one prime collateral bond, with $2.5 million in par value as of December 31, 2009, was viewed as Alt-A under certain credit performance thresholds outlined in the FHLBank System-wide modeling assumptions provided by the FHLBanks' OTTI Governance Committee in accordance with related Finance Agency guidance. This bond was not deemed to be other-than-temporarily impaired as of December 31, 2009. It likewise is classified as Prime in the various tables in this section. The Bank does not hold any collateralized debt obligations. See Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Estimates for information on the Bank's key inputs, assumptions, and modeling employed by the Bank in its other-than-temporary impairment assessments.
128
The following table stratifies the Bank's private-label MBS by credit rating.
Credit Ratings of Private-Label MBS at Amortized Cost
As of December 31, 2009
(dollars in thousands)
Collateral Type and Credit Rating
|
Amortized Cost |
Gross Unrealized Losses |
Weighted Average Collateral Delinquency %(1) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
ABS backed by home equity loans: |
||||||||||
Subprime AAA |
$ | 19,612 | $ | (5,857 | ) | 27.56 | % | |||
Subprime AA |
2,905 | (899 | ) | 33.15 | ||||||
Subprime BB |
417 | (74 | ) | 15.47 | ||||||
Subprime B |
4,874 | (1,548 | ) | 21.45 | ||||||
Subprime CCC |
3,169 | (1,297 | ) | 32.20 | ||||||
Total ABS backed by home equity loans |
30,977 | (9,675 | ) | 27.52 | ||||||
Private-label residential MBS: |
||||||||||
Prime AAA |
138,259 | (24,915 | ) | 8.61 | ||||||
Prime AA |
52,653 | (11,019 | ) | 8.44 | ||||||
Prime A |
45,129 | (3,311 | ) | 8.42 | ||||||
Prime BBB |
3,786 | (1,251 | ) | 12.91 | ||||||
Prime BB |
171,628 | (34,104 | ) | 14.41 | ||||||
Prime B |
18,946 | (2,899 | ) | 13.35 | ||||||
Prime CCC |
30,847 | (7,256 | ) | 21.72 | ||||||
Alt-A AAA |
110,867 | (29,036 | ) | 19.09 | ||||||
Alt-A AA |
104,612 | (36,091 | ) | 20.10 | ||||||
Alt-A A |
127,532 | (46,792 | ) | 33.10 | ||||||
Alt-A BBB |
144,593 | (60,549 | ) | 35.02 | ||||||
Alt-A BB |
57,202 | (21,431 | ) | 41.65 | ||||||
Alt-A B |
435,832 | (173,285 | ) | 45.65 | ||||||
Alt-A CCC |
1,237,151 | (483,071 | ) | 45.86 | ||||||
Alt-A CC |
192,970 | (45,992 | ) | 46.88 | ||||||
Alt-A D |
54,601 | (26,432 | ) | 47.40 | ||||||
Total private-label residential MBS |
2,926,608 | (1,007,434 | ) | 38.57 | ||||||
Private-label commercial MBS: |
||||||||||
Prime AAA |
132,405 | (4,507 | ) | 5.56 | ||||||
Total private-label MBS |
$ | 3,089,990 | $ | (1,021,616 | ) | 37.24 | % | |||
- (1)
- Represents loans that are 60 days or more delinquent.
129
The following two tables provide a summary of credit ratings downgrades that have occurred during the period from January 1, 2010, through March 15, 2010, for the Bank's private-label MBS.
Private-Label MBS Ratings Downgrades
During the Period from January 1, 2010, through March 15, 2010
(dollars in thousands)
|
To BBB | To Below Investment Grade |
Total | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Downgraded from AA |
|||||||||||||||||||
Private-label residential MBS |
$ | 15,828 | $ | 15,828 | $ | | $ | | $ | 15,828 | $ | 15,828 | |||||||
Downgraded from A |
|||||||||||||||||||
Private-label residential MBS |
10,941 | 10,941 | | | 10,941 | 10,941 | |||||||||||||
Downgraded from BBB |
|||||||||||||||||||
Private-label residential MBS |
| | 18,961 | 22,195 | 18,961 | 22,195 |
Private-Label MBS
Downgraded and/or Placed on Negative Watch
from January 1, 2010 through March 15, 2010
(dollars in thousands)
|
Based on Carrying Value as of December 31, 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Downgraded and Stable |
Downgraded and Placed on Negative Watch |
Not Downgraded but Placed on Negative Watch |
|||||||
Private-label residential MBS: |
||||||||||
Amount of private-label residential MBS rated below investment grade |
$ | 422,115 | $ | | $ | 415,874 | ||||
Percentage of total private-label residential MBS |
21.1 | % | | % | 20.8 | % | ||||
ABS backed by home equity loans: |
||||||||||
Amount of ABS backed by home equity loans rated below investment grade |
$ | 513 | $ | | $ | | ||||
Percentage of total ABS backed by home equity loans |
1.7 | % | | % | | % | ||||
Total Private-label MBS |
||||||||||
Amount of private-label MBS rated below investment grade |
$ | 422,628 | $ | | $ | 415,874 | ||||
Percentage of total private-label MBS |
19.6 | % | | % | 20.8 | % |
130
The following table stratifies the Bank's private-label MBS by collateral type at December 31, 2009, and December 31, 2008.
Private-Label MBS by Type of Collateral
Par Values as of December 31, 2009, and December 31, 2008
(dollars in thousands)
|
December 31, 2009 | December 31, 2008 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Private-label MBS
|
Fixed Rate | Variable Rate |
Total | Fixed Rate | Variable Rate |
Total | |||||||||||||
Private-label residential MBS |
|||||||||||||||||||
Prime |
$ | 18,693 | $ | 449,238 | $ | 467,931 | $ | 38,662 | $ | 563,229 | $ | 601,891 | |||||||
Alt-A |
87,221 | 2,832,100 | 2,919,321 | 121,315 | 3,471,077 | 3,592,392 | |||||||||||||
Total private-label residential MBS |
105,914 | 3,281,338 | 3,387,252 | 159,977 | 4,034,306 | 4,194,283 | |||||||||||||
Private-label commercial MBS |
|||||||||||||||||||
Prime |
132,477 | | 132,477 | 144,311 | | 144,311 | |||||||||||||
ABS backed by home equity loans |
|||||||||||||||||||
Prime |
| | | | 4,341 | 4,341 | |||||||||||||
Subprime |
16,395 | 15,147 | 31,542 | 16,495 | 18,717 | 35,212 | |||||||||||||
Total ABS backed by home equity loans |
16,395 | 15,147 | 31,542 | 16,495 | 23,058 | 39,553 | |||||||||||||
Total par value of private-label MBS |
$ |
254,786 |
$ |
3,296,485 |
$ |
3,551,271 |
$ |
320,783 |
$ |
4,057,364 |
$ |
4,378,147 |
|||||||
131
The following table provides additional information related to the Bank's MBS issued by private trusts and ABS backed by home-equity loans, indicating whether the underlying mortgage collateral is considered to be prime, Alt-A, or subprime at the time of issuance. Additionally, the amounts outstanding as of December 31, 2009, are stratified by year of issuance of the security.
Par Value of Private-Label MBS and
Home Equity Loan Investments by Year of Securitization
At December 31, 2009
(dollars in thousands)
|
Triple-A | Double-A | Single-A | Triple-B | Below Investment Grade |
Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Private-label residential MBS |
|||||||||||||||||||
Prime |
|||||||||||||||||||
2007 |
$ | | $ | | $ | | $ | | $ | 129,718 | $ | 129,718 | |||||||
2006 |
| | 40,070 | | 24,809 | 64,879 | |||||||||||||
2005 |
16,116 | 4,469 | | | 56,131 | 76,716 | |||||||||||||
2004 and prior |
122,218 | 48,187 | 5,059 | 3,786 | 17,368 | 196,618 | |||||||||||||
Total residential MBS prime |
138,334 | 52,656 | 45,129 | 3,786 | 228,026 | 467,931 | |||||||||||||
Alt-A |
|||||||||||||||||||
2007 |
23,974 | | | | 805,469 | 829,443 | |||||||||||||
2006 |
| | 16,382 | 14,473 | 1,213,481 | 1,244,336 | |||||||||||||
2005 |
52,843 | 71,720 | 88,427 | 121,877 | 412,141 | 747,008 | |||||||||||||
2004 and prior |
34,050 | 32,937 | 23,231 | 8,316 | | 98,534 | |||||||||||||
Total residential MBS Alt-A |
110,867 | 104,657 | 128,040 | 144,666 | 2,431,091 | 2,919,321 | |||||||||||||
Total private-label residential MBS |
249,201 |
157,313 |
173,169 |
148,452 |
2,659,117 |
3,387,252 |
|||||||||||||
Home equity loans |
|||||||||||||||||||
Subprime |
|||||||||||||||||||
2004 and prior |
19,622 | 2,905 | | | 9,015 | 31,542 | |||||||||||||
Private-label commercial MBS |
|||||||||||||||||||
Prime |
|||||||||||||||||||
2004 and prior |
132,477 | | | | | 132,477 | |||||||||||||
Total prime |
270,811 | 52,656 | 45,129 | 3,786 | 228,026 | 600,408 | |||||||||||||
Total Alt-A |
110,867 |
104,657 |
128,040 |
144,666 |
2,431,091 |
2,919,321 |
|||||||||||||
Total subprime |
19,622 |
2,905 |
|
|
9,015 |
31,542 |
|||||||||||||
Total private-label MBS |
$ |
401,300 |
$ |
160,218 |
$ |
173,169 |
$ |
148,452 |
$ |
2,668,132 |
$ |
3,551,271 |
|||||||
132