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EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Bostonex311_2011q1.htm
EX-32.2 - EXHIBIT 32.2 - Federal Home Loan Bank of Bostonex322_2011q1.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Bostonex312_2011q1.htm
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Bostonex321_2011q1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
––––––––––––––––––––––––––––––––––––––––––––––––––––
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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)
 
 
 
 
 
 
 
111 Huntington Avenue
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(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 Exchange Act).  o Yes  x No 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding
as of April 30, 2011
Class A Stock, par value $100
 
zero
Class B Stock, par value $100
 
37,823,270
 

Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
March 31, 2011
 
December 31, 2010
ASSETS
 
 
 
Cash and due from banks
$
390,656
 
 
$
6,151
 
Interest-bearing deposits
202
 
 
155
 
Securities purchased under agreements to resell
250,000
 
 
2,175,000
 
Federal funds sold
7,135,000
 
 
5,585,000
 
Investment securities:
 
 
 
 
Trading securities
5,611,733
 
 
5,579,741
 
Available-for-sale securities - includes $104,850 and $102,949 pledged as collateral at March 31, 2011, and December 31, 2010, respectively that may be repledged
6,293,246
 
 
7,335,035
 
Held-to-maturity securities - includes $19,246 and $62,770 pledged as collateral at March 31, 2011, and December 31, 2010, respectively that may be repledged (a)
6,617,420
 
 
6,459,544
 
Total investment securities
18,522,399
 
 
19,374,320
 
Advances
25,938,797
 
 
28,034,949
 
Mortgage loans held for portfolio, net of allowance for credit losses of $8,696 and $8,653 at March 31, 2011, and December 31, 2010, respectively
3,165,483
 
 
3,245,954
 
Accrued interest receivable
125,815
 
 
145,177
 
Resolution Funding Corporation (REFCorp) prepaid assessment
7,809
 
 
13,590
 
Premises, software, and equipment, net
4,154
 
 
4,547
 
Derivative assets
12,370
 
 
14,818
 
Other assets
43,018
 
 
47,640
 
Total Assets
$
55,595,703
 
 
$
58,647,301
 
LIABILITIES
 
 
 
 
 
Deposits:
 
 
 
 
 
Interest-bearing
$
794,416
 
 
$
711,222
 
Non-interest-bearing
16,113
 
 
34,299
 
Total deposits
810,529
 
 
745,521
 
Consolidated obligations, net:
 
 
 
 
Bonds
34,020,141
 
 
35,102,750
 
Discount notes
16,492,730
 
 
18,524,841
 
Total consolidated obligations, net
50,512,871
 
 
53,627,591
 
Mandatorily redeemable capital stock
106,608
 
 
90,077
 
Accrued interest payable
159,262
 
 
141,141
 
Affordable Housing Program (AHP) payable
23,695
 
 
23,138
 
Derivative liabilities
624,871
 
 
729,220
 
Other liabilities
13,348
 
 
15,108
 
Total liabilities
52,251,184
 
 
55,371,796
 
Commitments and contingencies (Note 18)
 
 
 
 
 
CAPITAL
 
 
 
 
 
Capital stock – Class B – putable ($100 par value), 36,460 shares and 36,644 shares issued and outstanding at March 31, 2011, and December 31, 2010, respectively
3,646,009
 
 
3,664,425
 
Retained earnings
269,544
 
 
249,191
 
Accumulated other comprehensive loss:
 
 
 
 
Net unrealized loss on available-for-sale securities
(19,930
)
 
(15,193
)
Net unrealized loss relating to hedging activities
(338
)
 
(341
)
Net noncredit portion of other-than-temporary impairment losses on investment securities
(549,742
)
 
(621,528
)
Pension and postretirement benefits
(1,024
)
 
(1,049
)
Total accumulated other comprehensive loss
(571,034
)
 
(638,111
)
Total capital
3,344,519
 
 
3,275,505
 
Total Liabilities and Capital
$
55,595,703
 
 
$
58,647,301
 
_______________________________________
(a)   Fair values of held-to-maturity securities were $6,731,104 and $6,564,181 at March 31, 2011, and December 31, 2010, respectively.
The accompanying notes are an integral part of these financial statements.

3


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2011
 
2010
INTEREST INCOME
 
 
 
Advances
$
86,488
 
 
$
102,930
 
Prepayment fees on advances, net
1,193
 
 
572
 
Securities purchased under agreements to resell
540
 
 
284
 
Federal funds sold
2,401
 
 
2,665
 
Trading securities
5,397
 
 
1,852
 
Available-for-sale securities
18,188
 
 
13,437
 
Held-to-maturity securities
39,928
 
 
46,384
 
Prepayment fees on investments
14
 
 
 
Mortgage loans held for portfolio
38,334
 
 
43,326
 
Total interest income
192,483
 
 
211,450
 
INTEREST EXPENSE
 
 
 
Consolidated obligations - bonds
120,126
 
 
137,259
 
Consolidated obligations - discount notes
5,139
 
 
5,727
 
Deposits
129
 
 
91
 
Mandatorily redeemable capital stock
136
 
 
 
Other borrowings
2
 
 
2
 
Total interest expense
125,532
 
 
143,079
 
NET INTEREST INCOME
66,951
 
 
68,371
 
Provision for credit losses
51
 
 
431
 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
66,900
 
 
67,940
 
OTHER INCOME (LOSS)
 
 
 
Total other-than-temporary impairment losses on investment securities
(6,787
)
 
(20,547
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(23,797
)
 
(2,276
)
Net other-than-temporary impairment losses on investment securities recognized in income
(30,584
)
 
(22,823
)
Service fees
2,045
 
 
1,444
 
Net unrealized (losses) gains on trading securities
(1,897
)
 
1,846
 
Net gains (losses) on derivatives and hedging activities
1,821
 
 
(2,832
)
Realized gain from sale of available-for-sale securities
8,369
 
 
 
Other
154
 
 
66
 
Total other loss
(20,092
)
 
(22,299
)
OTHER EXPENSE
 
 
 
Compensation and benefits
8,171
 
 
8,050
 
Other operating expenses
4,375
 
 
4,325
 
Federal Housing Finance Agency (Finance Agency)
1,298
 
 
910
 
Office of Finance
940
 
 
893
 
Other
536
 
 
292
 
Total other expense
15,320
 
 
14,470
 
INCOME BEFORE ASSESSMENTS
31,488
 
 
31,171
 
AHP
2,584
 
 
2,545
 
REFCorp
5,781
 
 
5,725
 
Total assessments
8,365
 
 
8,270
 
NET INCOME
$
23,123
 
 
$
22,901
 
 
The accompanying notes are an integral part of these financial statements.

4


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
THREE MONTHS ENDED MARCH 31, 2011 and 2010
(dollars and shares in thousands)
(unaudited)
 
 
Capital Stock
Class B – Putable
 
Retained Earnings
 
Accumulated
Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
 
 
Total
Capital
BALANCE, DECEMBER 31, 2009
36,431
 
 
$
3,643,101
 
 
$
142,606
 
 
$
(1,021,649
)
 
$
2,764,058
 
Proceeds from sale of capital stock
31
 
 
3,100
 
 
 
 
 
 
3,100
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
22,901
 
 
 
 
22,901
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
 
 
 
 
 
 
15,059
 
 
15,059
 
Noncredit portion of other-than-temporary impairment losses on investment securities
 
 
 
 
 
 
(16,944
)
 
(16,944
)
Reclassification adjustment of noncredit component of impairment losses included in net income relating to investment securities
 
 
 
 
 
 
19,220
 
 
19,220
 
Accretion of noncredit portion of impairment losses on investment securities
 
 
 
 
 
 
77,532
 
 
77,532
 
Reclassification adjustment for previously deferred hedging gains and losses included in income
 
 
 
 
 
 
4
 
 
4
 
Pension and postretirement benefits
 
 
 
 
 
 
45
 
 
45
 
Total comprehensive income
 
 
 
 
 
 
 
 
117,817
 
BALANCE, MARCH 31, 2010
36,462
 
 
$
3,646,201
 
 
$
165,507
 
 
$
(926,733
)
 
$
2,884,975
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2010
36,644
 
 
$
3,664,425
 
 
$
249,191
 
 
$
(638,111
)
 
$
3,275,505
 
Proceeds from sale of capital stock
16
 
 
1,584
 
 
 
 
 
 
1,584
 
Shares reclassified to mandatorily redeemable capital stock
(200
)
 
(20,000
)
 
 
 
 
 
(20,000
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
23,123
 
 
 
 
23,123
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
 
 
 
 
 
 
3,632
 
 
3,632
 
Less: reclassification adjustment for realized gain included in net income relating to available-for-sale securities
 
 
 
 
 
 
(8,369
)
 
(8,369
)
Noncredit portion of other-than-temporary impairment losses on investment securities
 
 
 
 
 
 
(5,026
)
 
(5,026
)
Reclassification adjustment of noncredit component of impairment losses included in net income relating to investment securities
 
 
 
 
 
 
28,823
 
 
28,823
 
Accretion of noncredit portion of impairment losses on investment securities
 
 
 
 
 
 
47,989
 
 
47,989
 
Reclassification adjustment for previously deferred hedging gains and losses included in income
 
 
 
 
 
 
3
 
 
3
 
Pension and postretirement benefits
 
 
 
 
 
 
25
 
 
25
 
Total comprehensive income
 
 
 
 
 
 
 
 
90,200
 
Cash dividends on capital stock (0.30%)
 
 
 
 
(2,770
)
 
 
 
(2,770
)
BALANCE, MARCH 31, 2011
36,460
 
 
$
3,646,009
 
 
$
269,544
 
 
$
(571,034
)
 
$
3,344,519
 
 
The accompanying notes are an integral part of these financial statements.

5


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
 
For the Three Months Ended March 31,
 
2011
 
2010
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
23,123
 
 
$
22,901
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
(316
)
 
(4,214
)
Provision for credit losses
51
 
 
431
 
Change in net fair-value adjustments on derivatives and hedging activities
3,614
 
 
6,707
 
Net other-than-temporary impairment losses on investment securities recognized in income
30,584
 
 
22,823
 
Other adjustments
(146
)
 
(69
)
Realized gain from sale of available-for-sale securities
(8,369
)
 
 
Net change in:
 
 
 
 
Market value of trading securities
1,897
 
 
(1,846
)
Accrued interest receivable
19,362
 
 
9,711
 
Other assets
1,366
 
 
1,685
 
Net derivative accrued interest
(24,838
)
 
(9,501
)
Accrued interest payable
18,121
 
 
11,671
 
Other liabilities
4,273
 
 
4,293
 
Total adjustments
45,599
 
 
41,691
 
Net cash provided by operating activities
68,722
 
 
64,592
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
 
Net change in:
 
 
 
 
 
Interest-bearing deposits
(47
)
 
(14
)
Securities purchased under agreements to resell
1,925,000
 
 
(250,000
)
Federal funds sold
(1,550,000
)
 
231,000
 
Premises, software, and equipment
(104
)
 
(50
)
Trading securities:
 
 
 
 
 
Net increase in short-term
(35,000
)
 
 
Proceeds from long-term maturities
1,111
 
 
1,312
 
Purchases of long-term
 
 
(150,744
)
Available-for-sale securities:
 
 
 
 
 
Net increase in short-term
 
 
(250,000
)
Proceeds from long-term maturities
127,680
 
 
40,735
 
Proceeds from long-term sales
1,378,772
 
 
 
Purchases of long-term
(492,011
)
 
(1,226,466
)
Held-to-maturity securities:
 
 
 
 
 
Proceeds from long-term maturities
376,270
 
 
491,343
 
Purchases of long-term
(489,575
)
 
(482,750
)
Advances to members:
 
 
 
 
 
Proceeds
44,133,804
 
 
45,069,636
 
Disbursements
(42,130,996
)
 
(42,664,453
)
Mortgage loans held for portfolio:
 
 
 
 
 
Proceeds
211,503
 
 
158,576
 
Purchases
(135,596
)
 
(49,609
)
Proceeds from sale of foreclosed assets
2,751
 
 
2,431
 
Net cash provided by investing activities
3,323,562
 
 
920,947
 

6


 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
 
Net change in deposits
65,326
 
 
(104,584
)
Net payments on derivative contracts with a financing element
(8,403
)
 
(9,878
)
Net proceeds from issuance of consolidated obligations:
 
 
 
 
 
Discount notes
225,522,901
 
 
301,530,700
 
Bonds
1,925,539
 
 
9,156,210
 
Payments for maturing and retiring consolidated obligations:
 
 
 
 
 
Discount notes
(227,553,487
)
 
(304,724,189
)
Bonds
(2,955,000
)
 
(6,751,321
)
Proceeds from issuance of capital stock
1,584
 
 
3,100
 
Payments for redemption of mandatorily redeemable capital stock
(3,469
)
 
(93
)
Cash dividends paid
(2,770
)
 
 
Net cash used in financing activities
(3,007,779
)
 
(900,055
)
Net increase in cash and due from banks
384,505
 
 
85,484
 
Cash and due from banks at beginning of the year
6,151
 
 
191,143
 
Cash and due from banks at period end
$
390,656
 
 
$
276,627
 
Supplemental disclosures:
 
 
 
Interest paid
$
127,518
 
 
$
131,876
 
AHP payments
$
1,930
 
 
$
1,781
 
Noncash transfers of mortgage loans held for portfolio to real estate owned (REO)
$
2,862
 
 
$
2,857
 
 
The accompanying notes are an integral part of these financial statements. 

7


FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 
Note 1 — Basis of Presentation
 
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2011. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's (the Bank's) audited financial statements and related notes in the Bank's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (the SEC) on March 18, 2011 (the 2010 Annual Report).
 
Note 2 — Recently Issued Accounting Standards and Interpretations
 
Reconsideration of Effective Control for Repurchase Agreements. On April 29, 2011, the Financial Accounting Standards Board (FASB) issued guidance to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This guidance amends the existing criteria for determining whether or not a transferor has retained effective control over financial assets transferred under a repurchase agreement. A secured borrowing is recorded when effective control over the transferred financial assets is maintained while a sale is recorded when effective control over the transferred financial assets has not been maintained. The new guidance removes from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem financial assets before their maturity on substantially the agreed terms, even in the event of the transferee's default, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective for the Bank's interim and annual periods beginning on January 1, 2012. This guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Bank is currently evaluating the effect of the adoption of this guidance on the Bank's financial condition, results of operations, or cash flows.
 
A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. On April 5, 2011, the FASB issued guidance to clarify which debt modifications constitute troubled debt restructurings. It is intended to help creditors determine whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for presenting previously deferred disclosures related to troubled debt restructurings. This guidance is effective for interim and annual periods beginning on or after June 15, 2011 (July 1, 2011, for the Bank), and applies retrospectively to troubled debt restructurings occurring on or after the beginning of the annual period of adoption. Early adoption is permitted. The adoption of this amended guidance could result in increased annual and interim financial statement disclosures, but is not expected to have a material effect on the Bank's financial condition, results of operations, or cash flows.
 
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the FASB issued amended guidance to enhance disclosures about an entity's allowance for credit losses and the credit quality of its financing receivables. The required disclosures as of the end of a reporting period became effective for interim and annual reporting periods ending on December 31, 2010. The required disclosures about activity that occurs during a reporting period became effective for interim and annual reporting periods beginning on January 1, 2011. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not affect the Bank's financial condition, results of operations, or cash flows.
 
On January 19, 2011, the FASB issued guidance to temporarily defer the effective date of disclosures about troubled debt restructurings required by the amended guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The effective date for these new disclosures will be coordinated with the effective date of the guidance for determining what constitutes a troubled debt restructuring.
 
Fair-Value Measurements and Disclosures-Improving Disclosures about Fair-Value Measurements. On January 21, 2010, the

8


FASB issued amended guidance for fair-value measurements and disclosures. The Bank adopted this guidance on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair-value measurements, which was adopted on January 1, 2011. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this amended guidance resulted in increased annual and interim financial statement disclosures, but did not affect the Bank's financial condition, results of operations, or cash flows.
 
Note 3 — Trading Securities
 
Major Security Types. Trading securities as of March 31, 2011, and December 31, 2010, were as follows (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Certificates of deposit
$
5,354,930
 
 
$
5,319,921
 
Mortgage-backed securities (MBS)
 
 
 
 
United States (U.S.) government-guaranteed - residential
20,692
 
 
21,366
 
Government-sponsored enterprises - residential
7,973
 
 
8,438
 
Government-sponsored enterprises - commercial
228,138
 
 
230,016
 
 
256,803
 
 
259,820
 
Total
$
5,611,733
 
 
$
5,579,741
 
 
Net unrealized (losses) gains on trading securities for the three months ended March 31, 2011 and 2010, amounted to $(1.9) million and $1.8 million for securities held on March 31, 2011 and 2010, respectively.
 
The Bank does not participate in speculative trading practices and typically holds these investments over a longer time horizon.
 
Note 4 — Available-for-Sale Securities
 
Major Security Types. Available-for-sale securities as of March 31, 2011, were as follows (dollars in thousands):
 
 
 
 
Amounts Recorded in
Accumulated Other
Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational banks
$
428,305
 
 
$
 
 
$
(30,744
)
 
$
397,561
 
Corporate bonds (2)
567,129
 
 
1,765
 
 
 
 
568,894
 
U.S. government corporations
261,753
 
 
 
 
(25,001
)
 
236,752
 
Government-sponsored enterprises
3,193,387
 
 
40,170
 
 
(12,571
)
 
3,220,986
 
 
4,450,574
 
 
41,935
 
 
(68,316
)
 
4,424,193
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
159,304
 
 
354
 
 
(61
)
 
159,597
 
Government-sponsored enterprises - residential
1,451,920
 
 
6,967
 
 
(110
)
 
1,458,777
 
Government-sponsored enterprises - commercial
251,378
 
 
111
 
 
(810
)
 
250,679
 
 
1,862,602
 
 
7,432
 
 
(981
)
 
1,869,053
 
Total
$
6,313,176
 
 
$
49,367
 
 
$
(69,297
)
 
$
6,293,246
 
_______________________
(1)         Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair value hedge accounting adjustments.
(2)    Consists of corporate debentures guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the FDIC's Temporary Liquidity Guarantee Program. The FDIC guarantee carries the full faith and credit of the U.S. government.
 
Available-for-sale securities as of December 31, 2010, were as follows (dollars in thousands):
 

9


 
 
 
Amounts Recorded in
Accumulated Other
Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Supranational banks
$
437,525
 
 
$
 
 
$
(36,855
)
 
$
400,670
 
Corporate bonds (2)
1,169,173
 
 
5,628
 
 
 
 
1,174,801
 
U.S. government-owned corporations
269,291
 
 
 
 
(31,090
)
 
238,201
 
Government-sponsored enterprises
3,481,405
 
 
51,640
 
 
(14,587
)
 
3,518,458
 
 
5,357,394
 
 
57,268
 
 
(82,532
)
 
5,332,130
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
166,780
 
 
496
 
 
(75
)
 
167,201
 
Government-sponsored enterprises - residential
1,572,036
 
 
10,911
 
 
 
 
1,582,947
 
Government-sponsored enterprises - commercial
254,018
 
 
145
 
 
(1,406
)
 
252,757
 
 
1,992,834
 
 
11,552
 
 
(1,481
)
 
2,002,905
 
Total
$
7,350,228
 
 
$
68,820
 
 
$
(84,013
)
 
$
7,335,035
 
_______________________
(1)         Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair value hedge accounting adjustments.
(2)         Consists of corporate debentures guaranteed by the FDIC under the FDIC's Temporary Liquidity Guarantee Program. The FDIC guarantee carries the full faith and credit of the U.S. government.
 
The following table summarizes available-for-sale securities with unrealized losses as of March 31, 2011, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational banks
$
 
 
$
 
 
$
397,561
 
 
$
(30,744
)
 
$
397,561
 
 
$
(30,744
)
U.S. government-owned corporations
 
 
 
 
236,752
 
 
(25,001
)
 
236,752
 
 
(25,001
)
Government-sponsored enterprises
263,210
 
 
(3,264
)
 
102,355
 
 
(9,307
)
 
365,565
 
 
(12,571
)
 
263,210
 
 
(3,264
)
 
736,668
 
 
(65,052
)
 
999,878
 
 
(68,316
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
38,974
 
 
(61
)
 
 
 
 
 
38,974
 
 
(61
)
Government-sponsored enterprises - residential
188,242
 
 
(110
)
 
 
 
 
 
188,242
 
 
(110
)
Government-sponsored enterprises - commercial
 
 
 
 
225,467
 
 
(810
)
 
225,467
 
 
(810
)
 
227,216
 
 
(171
)
 
225,467
 
 
(810
)
 
452,683
 
 
(981
)
Total temporarily impaired
$
490,426
 
 
$
(3,435
)
 
$
962,135
 
 
$
(65,862
)
 
$
1,452,561
 
 
$
(69,297
)
 
The following table summarizes available-for-sale securities with unrealized losses as of December 31, 2010, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).
 

10


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational banks
$
 
 
$
 
 
$
400,670
 
 
$
(36,855
)
 
$
400,670
 
 
$
(36,855
)
U.S. government-owned corporations
 
 
 
 
238,201
 
 
(31,090
)
 
238,201
 
 
(31,090
)
Government-sponsored enterprises
264,775
 
 
(2,839
)
 
102,869
 
 
(11,748
)
 
367,644
 
 
(14,587
)
 
264,775
 
 
(2,839
)
 
741,740
 
 
(79,693
)
 
1,006,515
 
 
(82,532
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
96,978
 
 
(75
)
 
 
 
 
 
96,978
 
 
(75
)
Government-sponsored enterprises - commercial
 
 
 
 
227,216
 
 
(1,406
)
 
227,216
 
 
(1,406
)
 
96,978
 
 
(75
)
 
227,216
 
 
(1,406
)
 
324,194
 
 
(1,481
)
Total temporarily impaired
$
361,753
 
 
$
(2,914
)
 
$
968,956
 
 
$
(81,099
)
 
$
1,330,709
 
 
$
(84,013
)
 
Redemption Terms. The amortized cost and fair value of available-for-sale securities by contractual maturity at March 31, 2011, and December 31, 2010, are shown below (dollars in thousands).
 
March 31, 2011
 
December 31, 2010
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$
452,086
 
 
$
454,843
 
 
$
1,370,953
 
 
$
1,379,527
 
Due after one year through five years
3,196,768
 
 
3,232,682
 
 
3,165,009
 
 
3,210,864
 
Due after five years through 10 years
 
 
 
 
 
 
 
Due after 10 years
801,720
 
 
736,668
 
 
821,432
 
 
741,739
 
 
4,450,574
 
 
4,424,193
 
 
5,357,394
 
 
5,332,130
 
Mortgage-backed securities (1)
1,862,602
 
 
1,869,053
 
 
1,992,834
 
 
2,002,905
 
Total
$
6,313,176
 
 
$
6,293,246
 
 
$
7,350,228
 
 
$
7,335,035
 
_______________________
(1)     MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
As of March 31, 2011, the amortized cost of the Bank's available-for-sale securities included net premiums of $118.8 million. Of that amount, $124.4 million of net premiums relate to non-MBS and $5.6 million of net discounts relate to MBS. As of December 31, 2010, the amortized cost of the Bank's available-for-sale securities included net premiums of $118.1 million. Of that amount, $123.7 million of net premiums related to non-MBS and $5.6 million of net discounts related to MBS.
 
At March 31, 2011, and December 31, 2010, 22.2 percent and 19.0 percent, respectively, of the Bank's fixed-rate available-for-sale securities were swapped to a floating rate.
 
Gain on Sale. During the three months ended March 31, 2011, the Bank sold non-MBS available-for-sale securities with a carrying value of $1.4 billion and recognized a gain of $8.4 million on the sale.
 
Note 5 — Held-to-Maturity Securities
 
Major Security Types. Held-to-maturity securities as of March 31, 2011, were as follows (dollars in thousands):
 
 

11


 
Amortized Cost
 
Other-Than-
Temporary
Impairment
Recognized in
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair Value
U.S. agency obligations
$
23,491
 
 
$
 
 
$
23,491
 
 
$
1,865
 
 
$
 
 
$
25,356
 
State or local housing-finance-agency obligations
232,775
 
 
 
 
232,775
 
 
112
 
 
(41,154
)
 
191,733
 
Government-sponsored enterprises
72,204
 
 
 
 
72,204
 
 
1,652
 
 
 
 
73,856
 
 
328,470
 
 
 
 
328,470
 
 
3,629
 
 
(41,154
)
 
290,945
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed -residential
60,005
 
 
 
 
60,005
 
 
946
 
 
(2
)
 
60,949
 
Government-sponsored enterprises - residential
3,095,677
 
 
 
 
3,095,677
 
 
69,353
 
 
(7,143
)
 
3,157,887
 
Government-sponsored enterprises - commercial
1,359,082
 
 
 
 
1,359,082
 
 
63,330
 
 
(10,785
)
 
1,411,627
 
Private-label - residential
2,260,630
 
 
(549,245
)
 
1,711,385
 
 
127,120
 
 
(86,718
)
 
1,751,787
 
Private-label - commercial
34,852
 
 
 
 
34,852
 
 
690
 
 
(110
)
 
35,432
 
Asset-backed securities (ABS) backed by home equity loans
28,446
 
 
(497
)
 
27,949
 
 
223
 
 
(5,695
)
 
22,477
 
 
6,838,692
 
 
(549,742
)
 
6,288,950
 
 
261,662
 
 
(110,453
)
 
6,440,159
 
Total
$
7,167,162
 
 
$
(549,742
)
 
$
6,617,420
 
 
$
265,291
 
 
$
(151,607
)
 
$
6,731,104
 
 
Held-to-maturity securities as of December 31, 2010, were as follows (dollars in thousands):
 
Amortized Cost
 
Other-Than-
Temporary
Impairment
Recognized in
Accumulated
Other
Comprehensive
Loss
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair Value
U.S. agency obligations
$
24,856
 
 
$
 
 
$
24,856
 
 
$
2,100
 
 
$
 
 
$
26,956
 
State or local housing-finance-agency obligations
235,735
 
 
 
 
235,735
 
 
413
 
 
(46,415
)
 
189,733
 
Government-sponsored enterprises
72,617
 
 
 
 
72,617
 
 
1,993
 
 
 
 
74,610
 
 
333,208
 
 
 
 
333,208
 
 
4,506
 
 
(46,415
)
 
291,299
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed -residential
64,975
 
 
 
 
64,975
 
 
1,184
 
 
 
 
66,159
 
Government-sponsored enterprises - residential
2,899,360
 
 
 
 
2,899,360
 
 
76,784
 
 
(7,109
)
 
2,969,035
 
Government-sponsored enterprises - commercial
1,303,343
 
 
 
 
1,303,343
 
 
75,665
 
 
(8,758
)
 
1,370,250
 
Private-label - residential
2,379,610
 
 
(620,927
)
 
1,758,683
 
 
117,796
 
 
(102,557
)
 
1,773,922
 
Private-label - commercial
71,799
 
 
 
 
71,799
 
 
743
 
 
(491
)
 
72,051
 
ABS backed by home equity loans
28,777
 
 
(601
)
 
28,176
 
 
229
 
 
(6,940
)
 
21,465
 
 
6,747,864
 
 
(621,528
)
 
6,126,336
 
 
272,401
 
 
(125,855
)
 
6,272,882
 
Total
$
7,081,072
 
 
$
(621,528
)
 
$
6,459,544
 
 
$
276,907
 
 
$
(172,270
)
 
$
6,564,181
 
  
The following table summarizes the held-to-maturity securities with unrealized losses as of March 31, 2011, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 

12


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
State or local housing-finance-agency obligations
$
27,277
 
 
$
(9
)
 
$
152,925
 
 
$
(41,145
)
 
$
180,202
 
 
$
(41,154
)
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
928
 
 
(2
)
 
 
 
 
 
928
 
 
(2
)
Government-sponsored enterprises - residential
323,796
 
 
(6,444
)
 
51,628
 
 
(699
)
 
375,424
 
 
(7,143
)
Government-sponsored enterprises - commercial
324,225
 
 
(10,785
)
 
 
 
 
 
324,225
 
 
(10,785
)
Private-label - residential
 
 
 
 
1,717,676
 
 
(509,646
)
 
1,717,676
 
 
(509,646
)
Private-label - commercial
 
 
 
 
24,211
 
 
(110
)
 
24,211
 
 
(110
)
ABS backed by home equity loans
 
 
 
 
22,477
 
 
(5,969
)
 
22,477
 
 
(5,969
)
 
648,949
 
 
(17,231
)
 
1,815,992
 
 
(516,424
)
 
2,464,941
 
 
(533,655
)
Total
$
676,226
 
 
$
(17,240
)
 
$
1,968,917
 
 
$
(557,569
)
 
$
2,645,143
 
 
$
(574,809
)
 
The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2010, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
State or local housing-finance-agency obligations
$
 
 
$
 
 
$
149,256
 
 
$
(46,415
)
 
$
149,256
 
 
$
(46,415
)
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises - residential
265,701
 
 
(6,399
)
 
54,754
 
 
(710
)
 
320,455
 
 
(7,109
)
Government-sponsored enterprises - commercial
172,958
 
 
(8,758
)
 
 
 
 
 
172,958
 
 
(8,758
)
Private-label - residential
 
 
 
 
1,767,929
 
 
(606,497
)
 
1,767,929
 
 
(606,497
)
Private-label - commercial
 
 
 
 
57,630
 
 
(491
)
 
57,630
 
 
(491
)
ABS backed by home equity loans
 
 
 
 
21,465
 
 
(7,312
)
 
21,465
 
 
(7,312
)
 
438,659
 
 
(15,157
)
 
1,901,778
 
 
(615,010
)
 
2,340,437
 
 
(630,167
)
Total
$
438,659
 
 
$
(15,157
)
 
$
2,051,034
 
 
$
(661,425
)
 
$
2,489,693
 
 
$
(676,582
)
 
Redemption Terms. The amortized cost and fair value of held-to-maturity securities by contractual maturity at March 31, 2011, and December 31, 2010, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
March 31, 2011
 
December 31, 2010
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
1,266
 
 
$
1,266
 
 
$
1,265
 
 
$
1,266
 
 
$
1,266
 
 
$
1,277
 
Due after one year through five years
74,025
 
 
74,025
 
 
75,740
 
 
74,478
 
 
74,478
 
 
76,562
 
Due after five years through 10 years
65,960
 
 
65,960
 
 
66,466
 
 
68,470
 
 
68,470
 
 
69,158
 
Due after 10 years
187,219
 
 
187,219
 
 
147,474
 
 
188,994
 
 
188,994
 
 
144,302
 
 
328,470
 
 
328,470
 
 
290,945
 
 
333,208
 
 
333,208
 
 
291,299
 
Mortgage-backed securities (2)
6,838,692
 
 
6,288,950
 
 
6,440,159
 
 
6,747,864
 
 
6,126,336
 
 
6,272,882
 
Total
$
7,167,162
 
 
$
6,617,420
 
 
$
6,731,104
 
 
$
7,081,072
 
 
$
6,459,544
 
 
$
6,564,181
 
_______________________
(1)         Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related

13


other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)     MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
As of March 31, 2011, the amortized cost of the Bank's held-to-maturity securities includes net discounts of $536.1 million. Of that amount, net premiums of $4.9 million relate to non-MBS and net discounts of $541.0 million relate to MBS. As of December 31, 2010, the amortized cost of the Bank's held-to-maturity securities includes net discounts of $523.4 million. Of that amount, net premiums of $5.3 million relate to non-MBS and net discounts of $528.7 million relate to MBS.
 
Note 6 — Other-Than-Temporary Impairment
 
The Bank evaluates its individual available-for-sale and held-to-maturity securities for other-than-temporary impairment on a quarterly basis. As part of its evaluation of securities for other-than-temporary impairment, the Bank considers its intent to sell each debt security or whether it is more likely than not that the Bank will be required to sell the security before the anticipated recovery of the remaining amortized cost. If either of these conditions is met, the Bank recognizes an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance-sheet date. For securities that meet neither of these conditions and for all residential private-label MBS, the Bank performs additional analysis to determine if any of these securities are other-than-temporarily impaired.
 
Available-for-Sale Securities
 
As a result of these evaluations, the Bank determined that none of its available-for-sale securities were other-than-temporarily impaired at March 31, 2011. The Bank's available-for-sale securities portfolio has experienced unrealized losses that reflect the impact of normal yield and spread fluctuations attendant with security markets. However, the declines are 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 more likely than not that the Bank will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Regarding securities that were in an unrealized loss position as of March 31, 2011:
 
•    Debentures issued by a supranational bank that were in an unrealized loss position as of March 31, 2011, are expected to return contractual principal and interest, based on the Bank's review and analysis of independent third-party credit reports on the supranational entity, and such supranational entity is rated triple-A by each of the three nationally recognized statistical rating organizations (NRSROs).
 
•    Debentures issued by U.S. government corporations are not obligations of the U.S. government and not guaranteed by the U.S. government. However, these securities are rated triple-A by the three NRSROs. These ratings reflect the U.S. government's implicit support of the government corporation as well as the entity's underlying business and financial risk.
 
U.S government-guaranteed securities consist of MBS issued by the National Credit Union Administration. The Bank determined that the strength of the issuer's guarantees through direct obligation from the U.S. government is sufficient to protect the Bank from losses based on current expectations.
  
•    The Bank has concluded that the probability of default on debt issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) is remote given their status as government-sponsored enterprises (GSEs) and their support from the U.S. government. Further, MBS issued by Fannie Mae and Freddie Mac are backed by mortgage loans conforming with those GSEs' underwriting requirements and the GSEs' credit guarantees as to full return of principal and interest.
 
Held-to-Maturity Securities
 
State or Local Housing-Finance-Agency Obligations. Management has reviewed the state and local housing-finance-agency (HFA) obligations and has determined that unrealized losses reflect the impact of normal market yield and spread fluctuations and illiquidity in the credit markets. The Bank has determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral, including an assessment of past payment history, property vacancy rates, debt service ratios, overcollateralization, and third-party bond insurance as applicable. As of March 31, 2011, none of the Bank's held-to-maturity investments in HFA 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 significant deterioration in the fundamental credit quality of these obligations, and because the Bank does not intend to sell the

14


investments nor is it more likely than not that the Bank will be required to sell the investments before recovery of the amortized cost basis, the Bank does not consider these investments to be other-than-temporarily impaired at March 31, 2011.
 
MBS Issued by GSEs. For MBS issued by GSEs, the Bank determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses based on current expectations. As a result, the Bank has determined that, as of March 31, 2011, all of the gross unrealized losses on such MBS are temporary. The Bank does not believe that the declines in market value of these securities are attributable to credit quality, and because the Bank does not intend to sell the investments, nor is it more likely than not that the Bank will be required to sell the investments before recovery of the amortized cost basis. Accordingly, the Bank does not consider any of these investments to be other-than-temporarily impaired at March 31, 2011.
 
Private-Label Commercial MBS. Based upon the Bank's assessment of the creditworthiness of the issuers of private-label commercial MBS, the credit ratings assigned by the NRSROs, the performance of the underlying loans, and the credit support provided by the subordinate securities, the Bank expects that its holdings of private-label commercial MBS would not be settled at an amount less than the amortized cost bases in these investments. Furthermore, since the Bank does not believe that the declines in market value of these securities are attributable to credit quality, the Bank does not intend to sell the investments, nor is it more likely than not that the Bank will be required to sell the investments before recovery of the amortized cost basis, the Bank does not consider any of these investments to be other-than-temporarily impaired at March 31, 2011.
 
Private-Label Residential MBS and Home Equity Loan Investments. The Bank invested in private-label residential MBS, which as of the date of purchase were all rated triple-A. Each private-label residential MBS may contain one or more forms of credit protection/enhancements, including but not limited to guarantee of principal and interest, subordination, over-collateralization and excess interest, and third-party bond insurance.
 
To ensure consistency in determination of the other-than-temporary impairment for private-label residential MBS and certain home equity loan investments (including home equity ABS) among all Federal Home Loan Banks (FHLBanks), the FHLBanks enhanced their overall other-than-temporary impairment process in 2009 by implementing a system-wide governance committee and establishing a formal process to ensure consistency in key other-than-temporary impairment modeling assumptions used for purposes of their cash-flow analyses for the majority of these securities. The Bank uses the FHLBanks' common framework and approved assumptions for purposes of its other-than-temporary impairment cash-flow analysis on its private-label residential MBS and certain home equity loan investments. For certain private-label residential MBS and home equity loan investments where underlying collateral data is not available, the Bank has used alternative procedures to assess these securities for other-than-temporary impairment. The Bank is responsible for making its own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields.
 
The Bank's evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of all available information, including the structure of the applicable security and certain assumptions to determine whether the Bank will recover the entire amortized cost basis of the security, such as:
 
the remaining payment terms for the security;
prepayment speeds;
default rates;
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
expected housing price changes, and
interest-rate assumptions
 
In performing a detailed cash-flow analysis, the Bank identifies the best estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security's effective yield) that is less than the amortized cost basis of a security (that is, a credit loss exists), other-than-temporary impairment is considered to have occurred. For determining the present value of variable-rate and hybrid private-label residential MBS, the Bank uses the effective interest rate derived from a variable-rate index such as, one-month London Interbank Offered Rate (LIBOR) plus the contractual spread, plus or minus a fixed spread adjustment when there is an existing discount or premium on the security. As the implied forward curve of the index changes over time, the effective interest rates derived from that index will also change over time.
 
In accordance with related guidance from the Finance Agency, the Bank has contracted with the FHLBanks of San Francisco and Chicago to perform the cash-flow analysis underlying the Bank's other-than-temporary impairment decisions in certain

15


instances. In the event that neither the FHLBank of San Francisco nor the FHLBank of Chicago have the ability to model a particular MBS owned by the Bank, the Bank projects the expected cash flows for that security based on the Bank's expectations as to how the underlying collateral and impact on deal structure resultant from collateral cash flows are forecasted to occur over time. 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.
 
Specifically, the Bank has contracted with the FHLBank of San Francisco to perform cash-flow analyses for its residential private-label MBS other than subprime private-label MBS, and with the FHLBank of Chicago to perform cash-flow analyses for its subprime private-label MBS. The following table summarizes the analyses of the FHLBanks contracted to perform cash-flow analysis for the Bank (dollars in thousands).
 
As of March 31, 2011
 
Number of
Securities
 
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
FHLBank of San Francisco
173
 
$
2,703,164
 
 
$
2,187,154
 
 
$
1,655,063
 
 
$
1,699,211
 
FHLBank of Chicago
16
 
$
24,675
 
 
$
24,033
 
 
$
23,672
 
 
$
19,216
 
Bank's own cash-flow projections
13
 
$
89,942
 
 
$
74,268
 
 
$
56,978
 
 
$
52,198
 
 
To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of the Bank's private-label residential MBS were performed. These analyses use two third-party models.
 
The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with the assumptions about future changes in home prices and interest rates, and projects prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing-price changes for the relevant states and core-based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank's housing-price forecast as of March 31, 2011, assumed current-to-trough home price declines ranging from 0.0 percent (for those housing markets that are believed to have reached their trough) to 10.0 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the three- to nine-month period beginning January 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of 0.0 percent to 2.8 percent in the first year, 0.0 percent to 3.0 percent in the second year, 1.5 percent to 4.0 percent in the third year, 2.0 percent to 5.0 percent in the fourth year, 2.0 percent to 6.0 percent in each of the fifth and sixth years, and 2.3 percent to 5.6 percent in each subsequent year.
 
The month-by-month projections of future loan performance are derived from the first model to determine projected prepayments, defaults, and loss severities. These projections are then input into a second model that calculates the projected loan-level cash flows and then allocates those cash flows and losses to the various classes in the securitization structure in accordance with the cash-flow and loss-allocation rules prescribed by the securitization structure.
 
The Bank does not intend to sell these securities and believes it is not more likely than not that the Bank will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. The Bank recorded other-than-temporary impairment credit losses of $30.6 million for the three months ended March 31, 2011. For held-to-maturity securities, the portion of an other-than-temporary impairment charge that is recognized in other comprehensive loss is accreted from accumulated other comprehensive loss to the carrying value of the security over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows. This accretion continues until the security is sold or matures, or an additional other-than-temporary impairment charge is recorded in earnings, which could result in a reclassification adjustment and the establishment of a new amount to be accreted. For the three months ended March 31, 2011, the Bank accreted $48.0 million of noncredit impairment from accumulated other comprehensive loss to the carrying value of held-to-maturity securities. For certain other-than-temporarily impaired securities that were previously impaired and have subsequently incurred additional credit losses during the three months ended March 31, 2011, the additional credit losses, up to the amount in accumulated other comprehensive loss, were reclassified out of noncredit-related losses in accumulated other comprehensive loss and charged to earnings. This amount was $28.8 million for the three months ended March 31, 2011.
 
For those securities for which an other-than-temporary impairment was determined to have occurred during the quarter ended

16


March 31, 2011 (that is, a determination was made that less than the entire amortized cost basis is expected to be recovered), the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings during the three months ended March 31, 2011, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS and home equity loan investments in each category shown (dollars in thousands).
 
 
 
 
 
Significant Inputs
 
 
 
 
 
 
 
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Current
Credit Enhancement
Private-label MBS by
Year of Securitization
 
Par Value
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
Private-label residential MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2006
 
$
19,867
 
 
10.3
%
 
10.3
%
 
40.9
%
 
40.9
%
 
43.3
%
 
43.3
%
 
3.1
%
 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
$
422,838
 
 
6.6
%
 
3.7 - 11.0
 
 
80.2
%
 
49.4 - 87.4
 
 
57.0
%
 
47.4 - 60.5
 
 
8.0
%
 
0.0 - 46.3
 
2006
 
915,143
 
 
6.8
 
 
   3.8 - 9.9
 
 
77.7
 
 
 64.4 - 89.7
 
 
56.7
 
 
 47.3 - 61.3
 
 
19.3
 
 
 0.0 - 45.2
 
2005
 
343,069
 
 
9.2
 
 
  6.9 - 12.8
 
 
56.7
 
 
 34.3 - 75.2
 
 
49.6
 
 
 37.6 - 59.6
 
 
18.2
 
 
 1.5 - 47.8
 
Total
 
$
1,681,050
 
 
7.2
%
 
3.7 - 12.8
 
 
74.0
%
 
34.3 - 89.7
 
 
55.3
%
 
37.6 - 61.3
 
 
16.2
%
 
0.0 - 47.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ABS backed by home equity loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
 
$
1,075
 
 
12.3
%
 
12.3
%
 
52.4
%
 
52.4
%
 
94.7
%
 
94.7
%
 
%
 
%
_______________________
(1)         Securities are classified in the table above based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than the classification of the security at the time of issuance.
 
Certain private-label MBS owned by the Bank are insured by third-party bond insurers (monoline insurers). The FHLBanks 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 claims-paying resources and anticipated claims in the future. This assumption is referred to as the “burnout period” and is expressed in months. Of the five monoline insurers, the financial guarantee from Assured Guaranty Municipal Corp. is considered sufficient to cover all future claims and is, therefore, excluded from the burnout analysis discussed above. Conversely, the burnout period for three monoline insurers, Syncora Guarantee Inc., Financial Guarantee Insurance Corp., and Ambac Assurance Corp. (Ambac), are not considered applicable due to regulatory intervention that has generally suspended all claims payments to effectively zero. For the remaining monoline insurer, MBIA Insurance Corp. (MBIA), the burnout period as of March 31, 2011, is three months, ending in June 2011. No securities guaranteed by MBIA were determined to have an other-than-temporary impairment credit losses at March 31, 2011.
 
The following table displays the Bank's securities for which other-than-temporary impairment credit losses were recognized in the three months ending March 31, 2011 (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
 
March 31, 2011
Other-Than-Temporarily Impaired Investment
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
68,811
 
 
$
61,091
 
 
$
44,063
 
 
$
50,857
 
Private-label residential MBS – Alt-A
1,632,106
 
 
1,183,663
 
 
811,008
 
 
902,538
 
ABS backed by home equity loans – Subprime
1,075
 
 
724
 
 
503
 
 
602
 
Total other-than-temporarily impaired securities
$
1,701,992
 
 
$
1,245,478
 
 
$
855,574
 
 
$
953,997
 
 
The following table displays the Bank's securities for which other-than-temporary impairment credit losses were recognized during the life of the security through March 31, 2011, (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.

17


 
 
March 31, 2011
Other-Than-Temporarily Impaired Investment
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
84,097
 
 
$
76,211
 
 
$
53,241
 
 
$
60,917
 
Private-label residential MBS – Alt-A
2,143,766
 
 
1,620,764
 
 
1,094,489
 
 
1,212,741
 
ABS backed by home equity loans – Subprime
2,629
 
 
1,948
 
 
1,451
 
 
1,674
 
Total other-than-temporarily impaired securities
$
2,230,492
 
 
$
1,698,923
 
 
$
1,149,181
 
 
$
1,275,332
 
 
The following table displays the Bank's securities for which other-than-temporary impairment credit losses were recognized for the three months ended March 31, 2011, (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
 
For the Three Months Ended March 31, 2011
Other-Than-Temporarily Impaired Investment
Total Other-Than-Temporary Impairment Losses on
Investment Securities
 
Net Amount of
Impairment Losses
Reclassified from
Accumulated Other
Comprehensive Loss
 
Net Impairment Losses on
Investment Securities
Recognized in Income
Private-label residential MBS – Prime
$
 
 
$
(515
)
 
$
(515
)
Private-label residential MBS – Alt-A
(6,787
)
 
(23,217
)
 
(30,004
)
ABS backed by home equity loans – Subprime
 
 
(65
)
 
(65
)
Total other-than-temporarily impaired securities
$
(6,787
)
 
$
(23,797
)
 
$
(30,584
)
 
The following table presents a roll-forward of the amounts related to credit losses recognized into earnings. The roll-forward relates to the amount of credit losses on investment securities held by the Bank for which a portion of other-than-temporary impairment charges were recognized into accumulated other comprehensive loss (dollars in thousands).
 
 
For the Three Months Ended March 31,
 
2011
 
2010
Balance at beginning of period
$
523,881
 
 
$
471,094
 
Additions:
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized
2
 
 
39
 
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
30,582
 
 
22,784
 
Reductions:
 
 
 
 
Securities matured during the period
(13,444
)
 
(2,174
)
Increase in cash flows expected to be collected which are recognized over the remaining life of the security
(842
)
 
 
Balance at end of period
$
540,179
 
 
$
491,743
 
_______________________
(1)    For the three months ended March 31, 2011 and 2010, additional credit losses for which an other-than-temporary impairment charge was previously recognized relates to all securities that were also previously impaired prior to January 1, 2011 and 2010.
 
The following table presents a roll-forward of the amounts related to the net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities included in accumulated other comprehensive loss (dollars in thousands).
 

18


 
For the Three Months Ended March 31,
 
2011
 
2010
Balance at beginning of period
$
(621,528
)
 
$
(929,508
)
Amounts reclassified from (to) accumulated other comprehensive loss:
 
 
 
 
 
Noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
(5,026
)
 
(16,944
)
Reclassification adjustment of noncredit component of impairment losses included in net income relating to held-to-maturity securities
28,823
 
 
19,220
 
Net amount of impairment losses reclassified from accumulated other comprehensive loss
23,797
 
 
2,276
 
Accretion of noncredit portion of impairment losses on held-to-maturity securities
47,989
 
 
77,532
 
Balance at end of period
$
(549,742
)
 
$
(849,700
)
 
Note 7 — Advances
 
General Terms. At both March 31, 2011, and December 31, 2010, the Bank had advances outstanding, including AHP advances at interest rates ranging from 0.00 percent to 8.37 percent, as summarized below (dollars in thousands). Advances with interest rates of 0.00 percent include AHP-subsidized advances and certain structured advances.
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
19,475
 
 
0.51
%
 
$
3,816
 
 
0.52
%
Due in one year or less
7,950,603
 
 
1.37
 
 
9,925,269
 
 
1.43
 
Due after one year through two years
3,677,727
 
 
3.14
 
 
3,141,974
 
 
3.43
 
Due after two years through three years
5,580,657
 
 
2.18
 
 
6,176,646
 
 
2.26
 
Due after three years through four years
2,320,737
 
 
3.29
 
 
2,205,918
 
 
3.40
 
Due after four years through five years
1,742,827
 
 
3.13
 
 
1,664,257
 
 
3.18
 
Thereafter
4,101,798
 
 
3.99
 
 
4,278,296
 
 
4.00
 
Total par value
25,393,824
 
 
2.52
%
 
27,396,176
 
 
2.51
%
Premiums
30,648
 
 
 
 
 
33,447
 
 
 
 
Discounts
(24,747
)
 
 
 
 
(25,657
)
 
 
 
Hedging adjustments
539,072
 
 
 
 
 
630,983
 
 
 
 
Total
$
25,938,797
 
 
 
 
 
$
28,034,949
 
 
 
 
 
The Bank offers callable advances that provide members with the right, based upon predetermined option exercise dates, to call the advance prior to maturity without incurring prepayment or termination fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At March 31, 2011, and December 31, 2010, the Bank had callable advances outstanding totaling $6.5 million and $11.5 million, respectively.
 
The following table summarizes advances outstanding by year of contractual maturity or next call date for callable advances (dollars in thousands):

19


 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity or Next Call Date
Par Value
 
Percentage
 of Total
 
Par Value
 
Percentage
of Total
Overdrawn demand-deposit accounts
$
19,475
 
 
0.1
%
 
$
3,816
 
 
0.0
%
Due in one year or less
7,954,603
 
 
31.3
 
 
9,925,269
 
 
36.2
 
Due after one year through two years
3,680,227
 
 
14.5
 
 
3,153,474
 
 
11.5
 
Due after two years through three years
5,576,657
 
 
22.0
 
 
6,176,646
 
 
22.6
 
Due after three years through four years
2,318,237
 
 
9.1
 
 
2,199,418
 
 
8.0
 
Due after four years through five years
1,742,827
 
 
6.9
 
 
1,664,257
 
 
6.1
 
Thereafter
4,101,798
 
 
16.1
 
 
4,273,296
 
 
15.6
 
Total par value
$
25,393,824
 
 
100.0
%
 
$
27,396,176
 
 
100.0
%
 
The Bank also offers putable advances that provide the Bank with the right to put the fixed-rate advance to the member (and thereby extinguish the advance) on predetermined exercise dates, and offer, subject to certain conditions, replacement funding at then-current Bank rates. Generally, such put options are exercised when interest rates increase. At March 31, 2011, and December 31, 2010, the Bank had putable advances outstanding totaling $6.3 billion and $6.8 billion, respectively.
 
The following table summarizes advances outstanding by year of contractual maturity or next put date for putable advances (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity or Next Put Date
Par Value
 
Percentage
of Total
 
Par Value
 
Percentage
of Total
Overdrawn demand-deposit accounts
$
19,475
 
 
0.1
%
 
$
3,816
 
 
0.0
%
Due in one year or less
13,251,928
 
 
52.2
 
 
15,478,394
 
 
56.5
 
Due after one year through two years
2,714,927
 
 
10.7
 
 
2,358,424
 
 
8.6
 
Due after two years through three years
5,140,407
 
 
20.2
 
 
5,381,346
 
 
19.6
 
Due after three years through four years
1,792,487
 
 
7.0
 
 
1,666,918
 
 
6.1
 
Due after four years through five years
1,413,327
 
 
5.6
 
 
1,335,007
 
 
4.9
 
Thereafter
1,061,273
 
 
4.2
 
 
1,172,271
 
 
4.3
 
Total par value
$
25,393,824
 
 
100.0
%
 
$
27,396,176
 
 
100.0
%
 
Interest-Rate-Payment Terms. The following table details interest-rate-payment terms for outstanding advances (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Par value of advances
 
 
 
 
 
Fixed-rate
$
20,995,069
 
 
$
23,024,360
 
Variable-rate
4,398,755
 
 
4,371,816
 
Total par value
$
25,393,824
 
 
$
27,396,176
 
 
At both March 31, 2011, and December 31, 2010, 45.9 percent of the Bank's fixed-rate advances were swapped to a floating rate and 2.7 percent and 0.6 percent, respectively, of the Bank's variable-rate advances were swapped to a different variable-rate index.
 
Credit Risk Exposure and Security Terms.
The Bank's potential credit risk from advances is principally concentrated in commercial banks, savings institutions, and credit unions. At March 31, 2011, and December 31, 2010, the Bank had $7.4 billion and $8.8 billion, respectively, of advances outstanding that were greater than or equal to $1.0 billion per borrower. These advances were made to three members at both March 31, 2011, and December 31, 2010, representing 29.3 percent and 32.2 percent, respectively, of total advances outstanding.
The Bank lends to its members and state and local housing authorities (housing associates) chartered within the six New England states in accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (the

20


FHLBank Act). The FHLBank Act generally requires the Bank to hold, or have access to, collateral to secure the Bank's advances. While the Bank has never experienced a credit loss on an advance to a borrower, weakening economic conditions, severe credit market conditions, along with the expanded statutory collateral rules for community financial institutions (CFIs) and the incremental risk inherent in lending to housing associates, insurance companies, and community development financial institutions, provide the potential for additional credit risk for the Bank. The Bank has policies and procedures in place to manage credit risk including, without limitation, requirements for physical possession or control of pledged collateral, restrictions on borrowing, specific review of each advance request, verifications of collateral, and continuous monitoring of borrowings and the borrower's financial condition. Based on the collateral pledged as security for advances, management's credit analysis of the borrower's financial condition, and credit extension and collateral policies, the Bank does not expect any losses on advances and expects to collect all amounts due according to the contractual terms of the advances. Therefore, the Bank has not provided any allowance for losses on advances. For information related to the Bank's credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.
 
Note 8 — Mortgage Loans Held for Portfolio
 
The Bank invests in fixed-rate single-family mortgages through the Mortgage Partnership Finance® (MPF®) program. These investments in mortgage loans are guaranteed or insured by federal agencies or are credit-enhanced by participating financial institutions. All such mortgage loans are held for portfolio. These investments in mortgage loans are originated, and credit-enhanced by the originating institution. The majority of these loans are serviced by the originating institution. A portion of these loans are sold servicing released by the participating financial institution and serviced by a third party servicer.
 
The following table presents certain characteristics of the mortgage loans in which the Bank invests (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Real estate
 
 
 
 
 
Fixed-rate 15-year single-family mortgages
$
703,274
 
 
$
718,333
 
Fixed-rate 20- and 30-year single-family mortgages
2,447,638
 
 
2,513,030
 
Premiums
30,867
 
 
31,235
 
Discounts
(6,883
)
 
(7,344
)
Deferred derivative gains and losses, net
(717
)
 
(647
)
Total mortgage loans held for portfolio
3,174,179
 
 
3,254,607
 
Less: allowance for credit losses
(8,696
)
 
(8,653
)
Total mortgage loans, net of allowance for credit losses
$
3,165,483
 
 
$
3,245,954
 
 
The following table details the par value of mortgage loans held for portfolio (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Conventional mortgage loans
$
2,832,657
 
 
$
2,908,587
 
Government-insured or -guaranteed mortgage loans
318,255
 
 
322,776
 
Total par value
$
3,150,912
 
 
$
3,231,363
 
 
For information related to the Bank's credit risk on mortgage loans and allowance for credit losses see Note 9 — Allowance for Credit Losses.
 
 
 
 
 
 
 
 
 
 
® “MPF Xtra” is a trademark and “Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.
 
 

21


Note 9 — Allowance for Credit Losses
 
The Bank has established an allowance methodology for each of the Bank's portfolio segments: credit products; conventional mortgage loans held for portfolio, government-insured or -guaranteed mortgage loans held for portfolio, securities purchased under agreements to resell, and federal funds sold.
Allowance for Credit Losses Policy
An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in the Bank's portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.
Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for 1) advances, letters of credit, and other extensions of credit to members, collectively referred to as credit products, 2) government-guaranteed or -insured mortgage loans held for portfolio, 3) conventional mortgage loans held for portfolio, 4) securities purchased under agreements to resell, and 5) federal funds sold.
Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from these financing receivables. The Bank determined that no further disaggregation of portfolio segments identified above is needed as the credit risk arising from these financing receivables is assessed and measured by the Bank at the portfolio segment level.
Impairment Methodology. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans that are on nonaccrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as nonaccrual loans as discussed below.
Nonaccrual Loans. The Bank places conventional mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income in the current period. The Bank generally records cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on nonaccrual status may be restored to accrual status when the collection of the contractual principal and interest is less than 90 days past due. Government-insured and -guaranteed loans are not placed on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of (1) the U.S. government guarantee of the loan and (2) the contractual obligation of the loan servicer.
Charge-Off Policy. The Bank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the Bank determines that the recorded investment in the loan is not likely to be recovered.
Credit Products
 
The Bank manages its credit exposure to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition, and is coupled with conservative collateral/lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends in accordance with federal statutes and Finance Agency regulations. Specifically, the Bank complies with the FHLBank Act, which requires the Bank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral pledged to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The Bank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. The Bank requires all borrowers that pledge securities collateral to place physical possession of such securities collateral with the Bank's safekeeping agent or the borrower's securities corporation, subject to a control agreement giving the Bank appropriate control over such collateral. In addition, CFIs are eligible to utilize

22


expanded statutory collateral provisions for small business and agriculture loans. The Bank's capital stock owned by members is also pledged as collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition, performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest. Management believes these policies effectively manage the Bank's respective credit risk from credit products.
 
Based upon the financial condition of the borrower, the Bank may allow the borrower to retain possession of loan collateral pledged to the Bank while agreeing to hold such collateral for the benefit of the Bank or require the borrower to specifically assign or place physical possession of such loan collateral with the Bank or a third-party custodian approved by the Bank.
 
The Bank is provided an additional safeguard for its security interests by Section 10(e) of the FHLBank Act, which affords any security interest granted by a member or borrower to the Bank priority over the claims and rights of any other party. The exceptions to this prioritization are limited to claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with higher priority perfected security interests. However, the priority granted to the security interests of the Bank under Section 10(e) of the FHLBank Act 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 perfects its security interests in the collateral pledged by its members, including insurance company members, by filing UCC-1 financing statements, or by taking possession or control of such collateral, or by taking other appropriate steps.
 
Using a risk-based approach and taking into consideration each borrower's financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At March 31, 2011, the Bank had rights to collateral, on a borrower-by-borrower basis, with an estimated value in excess of its outstanding extensions of credit. The estimated value of the collateral required to secure each member's obligations is calculated by applying collateral discounts or haircuts.
 
The Bank continues to evaluate and make changes to its collateral guidelines, as the Bank believes necessary, based on current market conditions. At March 31, 2011, and December 31, 2010, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, there have been no troubled debt restructurings related to credit products during the three months ended March 31, 2011 and 2010.
 
Based upon the collateral held as security, its credit extension and collateral policies, management's credit analysis, and the repayment history on credit products, the Bank has not recorded any allowance for credit losses on credit products at March 31, 2011, and December 31, 2010. At March 31, 2011, and December 31, 2010, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on the Bank's off-balance-sheet credit exposure.
 
Mortgage Loans - Government-insured or -guaranteed
 
The Bank invests in government-insured or -guaranteed fixed-rate mortgage loans secured by one- to four-family residential properties. Government-guaranteed mortgage loans are mortgage loans insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture, and/or by the U.S. Department of Housing and Urban Development. The servicer provides and maintains insurance or a guaranty from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government-guaranteed mortgage loans. Any losses incurred on such loans that are not recovered from the issuer or guarantor are absorbed by the servicers. Therefore, the Bank only has credit risk for these loans if the servicers fail to pay for losses not covered by the applicable government agency. Based on the Bank's assessment of its servicers for these loans, there is no allowance for credit losses for the government-insured and-guaranteed mortgage loans portfolio as of March 31, 2011, and December 31, 2010. In addition, due to the government guarantee or insurance, these mortgage loans are not placed on nonaccrual status.
 
Mortgage Loans - Conventional
 
The allowance for conventional mortgage loans is determined by analysis that includes consideration of various data including past performance, current performance, loan portfolio characteristics, collateral-related characteristics, the state of the housing industry, and prevailing economic conditions. The measurement of the allowance for loan losses may consist of (1) reviewing all residential mortgage loans as pool loans based on individual master commitments; (2) reviewing specifically identified

23


collateral-dependent loans for impairment; (3) reviewing homogeneous pools of residential mortgage loans; and/or (4) estimating credit losses in the remaining portfolio.
 
The Bank's allowance for credit losses factors in the credit enhancements associated with conventional mortgage loans (which may include primary or supplemental mortgage insurance) under the MPF program. Any incurred losses that would be recovered from the credit enhancements are not reserved as part of the Bank's allowance for loan losses. In such cases, a receivable is generally established to reflect the expected recovery from credit enhancement fees. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage-loan-interest income. The Bank incurred credit enhancement fees of $794,000 and $877,000 for the three months ended March 31, 2011 and 2010, respectively.
 
For conventional mortgage loans, credit losses that are not paid by primary mortgage insurance are allocated to the Bank up to the first-loss account. The aggregated amount of the first-loss account is documented and tracked but is neither recorded nor reported as an allowance for loan losses 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 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 credit enhancement amount, then to the Bank after the member's credit enhancement amount has been exhausted. At March 31, 2011, and December 31, 2010, the amount of first-loss account remaining for losses was $27.3 million and $27.8 million, respectively. For certain MPF products, the Bank's losses incurred under the first-loss account can be mitigated by withholding future performance credit enhancement fees that would otherwise be payable to the participating financial institutions.
 
Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional mortgage loans evaluated collectively for impairment considers loan pool specific attribute data at the master commitment pool level, applies estimated loss severities, and incorporates the credit enhancements of the MPF program. Migration analysis is a methodology for estimating, through the Bank's experience over a historical period, the rate of loss incurred on pools of similar loans. The Bank applies migration analysis to loans based on its experience with loans that are currently not past due, loans that are 30 to 59 days past due, 60 to 89 days past due, and 90 or more days past due, as well as to loans 60 or more days past due following receipt of notice of filing from the bankruptcy court. The Bank then estimates the dollar amount of loans in these categories that may migrate to a realized loss position and apply a loss severity factor to estimate losses incurred at the statement of condition date.
 
Individually Evaluated Mortgage Loans. Certain conventional mortgage loans (typically impaired mortgage loans that are considered collateral dependent), may be specifically identified for purposes of calculating the allowance for credit losses.
A mortgage loan is considered collateral dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no credit enhancement from a PFI to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual loan basis. The Bank applies an estimated loss severity rate, which is used to estimate the fair value of the collateral. The resulting loss recorded is equal to the carrying value of the loan less the estimated fair value of the collateral less estimated selling costs.
 
Estimating Credit Loss in the Remaining Portfolio. The Bank also assesses a factor for the margin for imprecision to the estimation of credit losses for the homogeneous population. The margin for imprecision is a factor in the allowance for credit losses that recognizes the imprecise nature of the measurement process and is included as part of the mortgage loan allowance for credit loss. This amount represents a subjective management judgment based on facts and circumstances that exist as of the reporting date that is unallocated to any specific measurable economic or credit event and is intended to cover other inherent losses that may not be captured in the methodology described within. The actual loss that may occur on homogeneous populations of mortgage loans may be more or less than the estimated loss.
 
Roll-Forward of Allowance for Credit Losses on Mortgage Loans. As of March 31, 2011, and December 31, 2010, the Bank determined that an allowance for credit losses should be established for credit losses on its conventional mortgage loans. The following table presents a roll-forward of the allowance for credit losses on mortgage loans for the three months ended March 31, 2011 and 2010, as well as the recorded investment in mortgage loans by impairment methodology at March 31, 2011 (dollars in thousands). The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is not net of any valuation allowance.
 

24


 
For the Three Months Ended March 31,
 
2011
 
2010
Allowance for credit losses
 
 
 
Balance at beginning of period
$
8,653
 
 
$
2,100
 
Charge-offs
(8
)
 
(31
)
Provision for credit losses
51
 
 
431
 
Balance at end of period
$
8,696
 
 
$
2,500
 
Ending balance, individually evaluated for impairment
$
 
 
 
Ending balance, collectively evaluated for impairment
$
8,696
 
 
 
Recorded investment, end of period (1)
 
 
 
Individually evaluated for impairment
$
 
 
 
Collectively evaluated for impairment
$
2,867,966
 
 
 
_________________________
(1)     Excludes government-guaranteed or -insured loans.
 
Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The table below summarizes the Bank's key credit quality indicators for mortgage loans at March 31, 2011, and December 31, 2010 (dollars in thousands):
 
March 31, 2011
 
 Conventional Mortgage Loans
 
 Government-insured or -guaranteed Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
36,288
 
 
$
13,456
 
 
$
49,744
 
Past due 60-89 days delinquent
11,730
 
 
5,621
 
 
17,351
 
Past due 90 days or more delinquent
52,256
 
 
19,675
 
 
71,931
 
Total past due
100,274
 
 
38,752
 
 
139,026
 
Total current loans
2,767,692
 
 
285,805
 
 
3,053,497
 
Total mortgage loans
$
2,867,966
 
 
$
324,557
 
 
$
3,192,523
 
Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
30,501
 
 
$
7,827
 
 
$
38,328
 
Serious delinquency rate (2)
1.86
%
 
6.10
%
 
2.29
%
Past due 90 days or more still accruing interest
$
 
 
$
19,675
 
 
$
19,675
 
Loans on nonaccrual status (3)
$
52,256
 
 
$
 
 
$
52,256
 
Troubled debt restructurings
$
245
 
 
$
 
 
$
245
 
_______________________
(1)     Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2)     Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class recorded investment.
(3)     Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.

25


 
December 31, 2010
 
 Conventional Mortgage Loans
 
 Government-insured or -guaranteed Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
42,624
 
 
$
15,924
 
 
$
58,548
 
Past due 60-89 days delinquent
16,336
 
 
6,661
 
 
22,997
 
Past due 90 days or more delinquent
54,935
 
 
20,322
 
 
75,257
 
Total past due
113,895
 
 
42,907
 
 
156,802
 
Total current loans
2,829,988
 
 
286,298
 
 
3,116,286
 
Total mortgage loans
$
2,943,883
 
 
$
329,205
 
 
$
3,273,088
 
Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
31,456
 
 
$
7,731
 
 
$
39,187
 
Serious delinquency rate (2)
1.89
%
 
6.17
%
 
2.32
%
Past due 90 days or more still accruing interest
$
 
 
$
20,322
 
 
$
20,322
 
Loans on nonaccrual status (3)
$
54,935
 
 
$
 
 
$
54,935
 
Troubled debt restructurings
$
238
 
 
$
 
 
$
238
 
_______________________
(1)     Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2)     Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class recorded investment.
(3)     Represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.
 
Real Estate Owned Assets. 
The Bank's REO includes assets that have been received in satisfaction of debt or as a result of actual foreclosures. REO is initially recorded as other assets in the statement of condition and is carried at the lower of cost or fair value less estimated selling costs. Fair value is defined as the amount that a willing seller could expect from a willing buyer in an arm's-length transaction. If the fair value of the REO is less than the recorded investment in the MPF loan at the date of transfer, the Bank recognizes a charge-off to the allowance for credit losses. Subsequent realized gains and realized or unrealized losses are included in other income (loss) in the statement of operations.
At March 31, 2011, and December 31, 2010, the Bank had $6.2 million and $6.5 million, respectively, in assets classified as REO. During the three months ended March 31, 2011 and 2010, the Bank sold REO assets with a recorded carrying value of $2.7 million and $2.1 million, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains totaling $146,000 and $69,000 on the sale of REO assets during the three months ended March 31, 2011 and 2010, respectively. Gains and losses on the sale of REO assets are recorded in other income.
 
Federal Funds Sold and Securities Purchased Under Agreements to Resell
 
These investments are generally short-term (primarily overnight) and the recorded balance approximates fair value. The Bank invests in federal funds sold with highly rated counterparties and are only evaluated for purposes of an allowance for credit losses if the investment is not paid when due. All investments in federal funds sold as of March 31, 2011, and December 31, 2010, were repaid according to the contractual terms. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans to highly rated counterparties. The terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must provide additional securities as collateral in an amount equal to the decrease or remit cash in such amount, or the dollar value of the resale agreement will be decreased accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the securities purchased under agreements to resell at March 31, 2011, and December 31, 2010.
 
Purchases, Sales, and Reclassifications

26


 
During the three months ended March 31, 2011, there were no significant purchases or sales of financing receivables. Furthermore, there were no reclassifications of financing receivables to held for sale during the period.
 
Note 10 — Derivatives and Hedging Activities     
All derivatives are recognized on the statement of condition at fair value. 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. Derivative assets and derivative liabilities reported on the statement of condition also include net accrued interest.
Each derivative is designated as one of the following:
 
(1)          a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment (a fair-value hedge);
 
(2)          a qualifying hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash-flow hedge);
 
(3)          a nonqualifying hedge of an asset or liability (economic hedge) for asset-liability-management purposes; or
 
(4)          a nonqualifying hedge of another derivative (an intermediation instrument) that is offered as a product to members or used to offset other derivatives with nonmember counterparties.
 
Accounting for Qualifying Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded either in earnings (fair value hedges) or accumulated other comprehensive loss (cash flow hedges). Two approaches to hedge accounting include:
 
(1)
Long-haul hedge accounting - The application of long-haul hedge accounting generally requires the Bank to formally assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items or forecasted transactions and whether those derivatives may be expected to remain effective in future periods. 
 
(2)
Short-cut hedge accounting - Transactions that meet certain criteria qualify for the short-cut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the shortcut method, the entire change in fair value of the interest-rate swap is considered to be effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability.
 
Derivatives are typically executed at the same time as the hedged items, and the Bank designates the hedged item in a qualifying hedge relationship as of the trade date. 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 consolidated obligation (CO) that settles within the shortest period of time possible for the type of instrument based on market-settlement conventions. In such circumstances, although the advance or CO will not be recognized in the financial statements until settlement date, the hedge meets the criteria for applying the short-cut method, provided all other short-cut criteria are also met. The Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.
 
Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in other income (loss) as net gains (losses) on derivatives and hedging activities.
 
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge, to the extent that the hedge is effective, are recorded in accumulated other comprehensive loss, a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction.
 
For both fair-value and cash-flow hedges, any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative differ from the change in the fair value of the hedged item or the variability in the cash flows of the

27


forecasted transaction) is recorded in other income (loss) as net gains (losses) on derivatives and hedging activities.
 
Accounting for Nonqualifying Hedges. An economic hedge is defined as a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for hedge accounting, but is an acceptable hedging strategy under the Bank's risk-management policy. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities, or firm commitments. As a result, the Bank recognizes only the net interest and the change in fair value of these derivatives in other income (loss) as net gains (losses) on derivatives and hedging activities with no offsetting fair-value adjustments for the economically hedged assets, liabilities, or firm commitments. Cash flows associated with such stand-alone derivatives (derivatives not qualifying as a hedge) are reflected as cash flows from operating activities in the statement of cash flows unless the derivative meets the criteria to be a financing derivative.
 
Accrued Interest Receivable and Payable. The differential between accrual of interest receivable and payable on derivatives designated as a fair-value hedge or as a cash-flow hedge is recognized through adjustments to the interest income or interest expense of the designated hedged investment securities, advances, COs, deposits, or other financial instruments. The differential between accrual of interest receivable and payable on intermediated derivatives for members and other economic hedges is recognized in other income (loss), along with changes in fair value of these derivatives, as net gains (losses) on derivatives and hedging activities.
   
Discontinuance of Hedge Accounting. The Bank may discontinue hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur in the originally expected period; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.
 
When hedge accounting is discontinued because the Bank determines that the derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, the Bank either terminates the derivative or continues to carry the derivative on the statement of condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and begins to amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method.
 
When hedge accounting is discontinued because the Bank determines that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, the Bank continues to carry the derivative on the statement of condition at its fair value and amortizes the cumulative other comprehensive loss adjustment to earnings when earnings are affected by the existing hedged item.
 
Under limited circumstances, when the Bank discontinues cash-flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable that the transaction will still occur in the future, the gain or loss on the derivative remains in accumulated other comprehensive loss and is recognized in earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months thereafter, the gain or loss that was accumulated in other comprehensive loss is recognized immediately in earnings.
 
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
 
Embedded Derivatives. The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is embedded. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt, deposit, or other financial instrument (the host contract) and whether a separate, nonembedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the Bank determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative

28


instrument. If the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (for example, an investment security classified as trading, as well as hybrid financial instruments) or if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the statement of condition at fair value and no portion of the contract is designated as a hedging instrument. The Bank has determined that all embedded derivatives in currently outstanding transactions as of March 31, 2011, are clearly and closely related to the host contracts, and therefore no embedded derivatives have been bifurcated from the host contract.
Credit Risk. The table below presents credit risk exposure on derivative instruments, excluding instances where a counterparty's pledged cash collateral to the Bank exceeds the Bank's net position (dollars in thousands).
 
 
March 31, 2011
 
December 31, 2010
Total net exposure at fair value(1)
 
$
19,001
 
 
$
17,098
 
Cash collateral held
 
6,631
 
 
2,280
 
Net exposure after collateral
 
$
12,370
 
 
$
14,818
 
_______________________
(1)  Includes net accrued interest receivable of $3.3 million and $2.2 million at March 31, 2011, and December 31, 2010, respectively.
 
Certain of the Bank's derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank's credit rating. If the Bank's credit rating is lowered by a major credit-rating agency, the Bank would be required to deliver additional collateral on derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2011, was $624.9 million for which the Bank has posted collateral with a post-haircut value of $321.4 million in the normal course of business. If the Bank's credit rating had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver up to an additional $237.7 million of post-haircut-valued collateral to its derivatives counterparties at March 31, 2011. However, the Bank's credit rating has not changed during the previous 12 months.
 
The Bank executes derivatives with counterparties with long-term ratings of single-A (or equivalent) or better by Standard & Poor's Rating Services (S&P) and Moody's Investor Services (Moody's) at the time of the transaction. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 12 — Consolidated Obligations for additional information. Note 18 — Commitments and Contingencies discusses assets pledged by the Bank to these counterparties. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
Financial Statement Impact and Additional Financial Information. Net gains (losses) on derivatives and hedging activities for the three months ended March 31, 2011 and 2010, were as follows (dollars in thousands).
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
Derivatives and hedged items in fair-value hedging relationships:
 
 
 
 
   Interest-rate swaps
 
$
732
 
 
$
922
 
Derivatives not designated as hedging instruments:
 
 
 
 
   Economic hedges:
 
 
 
 
      Interest-rate swaps
 
1,027
 
 
(3,891
)
      Interest-rate caps or floors
 
(11
)
 
(13
)
   Mortgage-delivery commitments
 
73
 
 
150
 
Total net gains (losses) related to derivatives not designated as hedging instruments
 
1,089
 
 
(3,754
)
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
$
1,821
 
 
$
(2,832
)
The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedge relationships and the impact of those derivatives on the Bank's net interest income for the three months ended March 31, 2011 and 2010 (dollars in thousands):

29


 
For the Three Months Ended March 31, 2011
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 
 
 
 
 
 
 
 
 
 
 
Advances
$
92,266
 
 
$
(91,911
)
 
$
355
 
 
$
(77,263
)
Investments
22,666
 
 
(22,248
)
 
418
 
 
(12,188
)
Deposits
(408
)
 
408
 
 
 
 
394
 
COs - bonds
(41,327
)
 
41,286
 
 
(41
)
 
42,676
 
 
$
73,197
 
 
$
(72,465
)
 
$
732
 
 
$
(46,381
)
_______________________
(1)  The net interest on derivatives in fair-value hedge relationships is presented in the interest income or interest expense of the respective hedged item in the statement of operations.
 
 
For the Three Months Ended March 31, 2010
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 
 
 
 
 
 
 
 
 
 
 
Advances
$
14,322
 
 
$
(14,102
)
 
$
220
 
 
$
(110,160
)
Investments
(3,444
)
 
3,714
 
 
270
 
 
(12,938
)
Deposits
113
 
 
(113
)
 
 
 
396
 
COs - bonds
32,762
 
 
(32,411
)
 
351
 
 
60,656
 
COs - discount notes
(67
)
 
148
 
 
81
 
 
75
 
 
$
43,686
 
 
$
(42,764
)
 
$
922
 
 
$
(61,971
)
_______________________
(1)  The net interest on derivatives in fair-value hedge relationships is presented in the interest income or interest expense of the respective hedged item in the statement of operations.
 
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the derivatives, the item being hedged, and any offsets between the two.
 
The following table presents the fair value of derivative instruments as of March 31, 2011 (dollars in thousands):
 
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
$
21,535,887
 
 
$
232,937
 
 
$
(829,546
)
Derivatives not designated as hedging instruments
 
 
 
 
 
Interest-rate swaps
297,250
 
 
 
 
(9,321
)
Interest-rate caps or floors
16,500
 
 
130
 
 
(110
)
Mortgage-delivery commitments (1)
11,610
 
 
50
 
 
(10
)
Total derivatives not designated as hedging instruments
325,360
 
 
180
 
 
(9,441
)
Total notional amount of derivatives
$
21,861,247
 
 
 
 
 
 
 
Total derivatives before netting and collateral adjustments
 
 
 
233,117
 
 
(838,987
)
Netting adjustments (2)
 
 
 
(214,116
)
 
214,116
 
Cash collateral and related accrued interest
 
 
 
(6,631
)
 
 
Derivative assets and derivative liabilities
 
 
 
$
12,370
 
 
$
(624,871
)
_______________________

30


(1)         Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)         Amounts represent the effect of master-netting agreements intended to allow the Bank to settle positive and negative positions.
 
The following table presents the fair value of derivative instruments as of December 31, 2010 (dollars in thousands):
 
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
$
23,368,625
 
 
$
260,837
 
 
$
(955,170
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
298,250
 
 
 
 
(13,193
)
Interest-rate caps or floors
16,500
 
 
195
 
 
(163
)
Mortgage-delivery commitments (1)
28,217
 
 
55
 
 
(242
)
Total derivatives not designated as hedging instruments
342,967
 
 
250
 
 
(13,598
)
Total notional amount of derivatives
$
23,711,592
 
 
 
 
 
 
 
Total derivatives before netting and collateral adjustments
 
 
 
261,087
 
 
(968,768
)
Netting adjustments (2)
 
 
 
(239,548
)
 
239,548
 
Cash collateral and related accrued interest
 
 
 
(6,721
)
 
 
Derivative assets and derivative liabilities
 
 
 
$
14,818
 
 
$
(729,220
)
_______________________
(1)          Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)         Amounts represent the effect of master-netting agreements intended to allow the Bank to settle positive and negative positions.
 
Note 11 — Deposits
 
The Bank offers demand and overnight deposits for members and qualifying nonmembers. In addition, the Bank offers short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit in the Bank funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans; the Bank classifies these items as other in the following table.    
Deposits at March 31, 2011, and December 31, 2010, include hedging adjustments of $4.4 million and $4.7 million, respectively.
The following table details interest-bearing and non-interest-bearing deposits (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Interest bearing
 
 
 
 
Demand and overnight
$
762,363
 
 
$
677,568
 
Term
28,633
 
 
28,882
 
Other
3,420
 
 
4,772
 
Non-interest bearing
 
 
 
 
 
Other
16,113
 
 
34,299
 
Total deposits
$
810,529
 
 
$
745,521
 
 
Note 12 — Consolidated Obligations
COs consist of CO bonds and CO discount notes. CO bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. CO discount notes are issued to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature.
The following is a summary of the Bank's participation in CO bonds outstanding at March 31, 2011, and December 31, 2010, by year of contractual maturity (dollars in thousands):
 

31


 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
$
12,301,050
 
 
0.90
%
 
$
12,400,350
 
 
1.13
%
Due after one year through two years
7,799,880
 
 
2.09
 
 
7,873,080
 
 
1.90
 
Due after two years through three years
5,624,800
 
 
2.31
 
 
6,063,750
 
 
2.31
 
Due after three years through four years
2,331,795
 
 
2.93
 
 
2,323,845
 
 
2.48
 
Due after four years through five years
2,011,000
 
 
2.78
 
 
2,434,000
 
 
2.94
 
Thereafter
3,686,700
 
 
4.03
 
 
3,705,700
 
 
4.01
 
Total par value
33,755,225
 
 
2.00
%
 
34,800,725
 
 
2.03
%
Premiums
147,516
 
 
 
 
 
146,434
 
 
 
 
Discounts
(34,268
)
 
 
 
 
(37,363
)
 
 
 
Hedging adjustments
151,668
 
 
 
 
 
192,954
 
 
 
 
Total
$
34,020,141
 
 
 
 
 
$
35,102,750
 
 
 
 
 
The Bank's CO bonds outstanding at March 31, 2011, and December 31, 2010, included (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Par value of CO bonds
 
 
 
 
 
Noncallable and non-putable
$
28,731,225
 
 
$
29,556,725
 
Callable
5,024,000
 
 
5,244,000
 
Total par value
$
33,755,225
 
 
$
34,800,725
 
 
The following is a summary of the Bank's participation in CO bonds outstanding at March 31, 2011, and December 31, 2010, by year of contractual maturity or next call date for callable CO bonds (dollars in thousands):
Year of Contractual Maturity or Next Call Date
 
March 31, 2011
 
December 31, 2010
Due in one year or less
 
$
16,842,050
 
 
$
17,161,350
 
Due after one year through two years
 
7,279,880
 
 
7,303,080
 
Due after two years through three years
 
4,451,800
 
 
5,355,750
 
Due after three years through four years
 
1,921,795
 
 
1,528,845
 
Due after four years through five years
 
1,301,000
 
 
1,559,000
 
Thereafter
 
1,958,700
 
 
1,892,700
 
Total par value
 
$
33,755,225
 
 
$
34,800,725
 
 
The following table details CO bonds by interest-rate-payment type at March 31, 2011, and December 31, 2010 (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
Par value of CO bonds
 
 
 
 
 
Fixed-rate
$
25,950,225
 
 
$
26,980,725
 
Simple variable-rate
6,600,000
 
 
6,600,000
 
Step-up
1,205,000
 
 
1,220,000
 
Total par value
$
33,755,225
 
 
$
34,800,725
 
 
At March 31, 2011, and December 31, 2010, 40.4 percent and 42.5 percent of the Bank's fixed-rate CO bonds were swapped to a floating rate.
 
Consolidated Obligation Discount Notes. The Bank's participation in CO discount notes, all of which are due within one year, was as follows (dollars in thousands):
 

32


 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
March 31, 2011
$
16,492,730
 
 
$
16,494,021
 
 
0.08
%
December 31, 2010
$
18,524,841
 
 
$
18,526,985
 
 
0.11
%
_______________________
(1)          The CO discount notes' weighted-average rate represents a yield to maturity.
 
Note 13 — Affordable Housing Program
The Bank charges the amount set aside for AHP to income and recognizes it as a liability. The Bank then reduces the AHP liability as members use subsidies. The Bank had outstanding principal in AHP-related advances of $95.0 million and $95.3 million at March 31, 2011, and December 31, 2010, respectively.
The following table is an analysis of the AHP liability for the three months ended March 31, 2011, and year ended December 31, 2010 (dollars in thousands):
 
 
March 31, 2011
 
December 31, 2010
Balance at beginning of period
$
23,138
 
 
$
23,994
 
AHP expense for the period
2,584
 
 
11,843
 
AHP direct grant disbursements
(1,930
)
 
(10,125
)
AHP subsidy for below-market-rate advance disbursements
(249
)
 
(2,895
)
Return of previously disbursed grants and subsidies
152
 
 
321
 
Balance at end of period
$
23,695
 
 
$
23,138
 
 
Note 14 — Capital
 
The Bank is subject to three capital requirements under its capital structure plan and Finance Agency rules and regulations:
 
1.               Risk-based capital. Under this capital requirement, the Bank must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit-risk capital requirement, its market-risk capital requirement, and its operations-risk capital requirement, calculated in accordance with Bank policy and Finance Agency rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies this risk-based capital requirement. The Finance Agency may require the Bank to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.
 
2.               Total regulatory capital. Under this capital requirement, the Bank is required to maintain at all times a total capital-to-assets ratio of at least 4 percent. Total regulatory capital is the sum of permanent capital, any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.
 
3.               Leverage capital. Under this third capital requirement, the Bank is required to maintain at all times a leverage capital-to-assets ratio of at least 5 percent. A leverage capital-to-assets ratio is defined as permanent capital weighted 1.5 times divided by total assets.
 
Mandatorily redeemable capital stock, which is classified as a liability under GAAP, is considered capital for determining the Bank's compliance with its regulatory capital requirements.
 
The following tables demonstrate the Bank's compliance with its regulatory capital requirements at March 31, 2011, and December 31, 2010 (dollars in thousands):

33


Risk-Based Capital Requirements
March 31,
2011
 
December 31,
2010
 
 
 
 
Permanent capital
 
 
 
 
 
Class B capital stock
$
3,646,009
 
 
$
3,664,425
 
Mandatorily redeemable capital stock
106,608
 
 
90,077
 
Retained earnings
269,544
 
 
249,191
 
Total permanent capital
$
4,022,161
 
 
$
4,003,693
 
Risk-based capital requirement
 
 
 
 
 
Credit-risk capital (1)
$
662,460
 
 
$
636,913
 
Market-risk capital (2)
259,742
 
 
113,226
 
Operations-risk capital
276,660
 
 
225,042
 
Total risk-based capital requirement
$
1,198,862
 
 
$
975,181
 
Excess of risk-based capital requirement
$
2,823,299
 
 
$
3,028,512
 
_______________________
(1)    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 nonmortgage assets, tenor or final maturity of the asset, increased by $25.5 million primarily due to downgrades of the credit ratings of private-label MBS from December 31, 2010, to March 31, 2011.
 
(2)    The Bank's market-risk based capital requirement increased by $146.5 million from December 31, 2010 to March 31, 2011. The increase resulted from significant increases in intermediate and long-term swap yields and significant increases in intermediate and long-term yields in the Bank's funding curve during the quarter ended March 31, 2011. The Bank believes that the increases causing the increase in the market-risk based capital requirement are a result of changing market expectations regarding interest rates over intermediate and long-term horizons due to inflation concerns.
 
 
March 31, 2011
 
December 31, 2010
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
1,198,862
 
 
$
4,022,161
 
 
$
975,181
 
 
$
4,003,693
 
Total regulatory capital
 
$
2,223,828
 
 
$
4,022,161
 
 
$
2,345,892
 
 
$
4,003,693
 
Total capital-to-asset ratio
 
4.0
%
 
7.2
%
 
4.0
%
 
6.8
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
2,779,785
 
 
$
6,033,242
 
 
$
2,932,365
 
 
$
6,005,540
 
Leverage capital-to-assets ratio
 
5.0
%
 
10.9
%
 
5.0
%
 
10.2
%
 
Note 15 — Employee Retirement Plans
     
Qualified Defined Benefit Multi-Employer Plan. The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is a multi-employer plan in which assets contributed by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. As a result, disclosure of the accumulated benefit obligations, plan assets, and the components of annual pension expense attributable to the Bank is not made. The plan covers substantially all officers and employees of the Bank. Funding and administrative costs of the Pentegra Defined Benefit Plan charged to compensation and benefit expense were $924,000 and $1.2 million for the three months ended March 31, 2011, and 2010, respectively.
Qualified Defined Contribution Plan. The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The plan covers substantially all officers and employees of the Bank. The Bank contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank's matching contributions charged to compensation and benefit expense were $217,000 and $209,000 in the three months ended March 31, 2011 and 2010, respectively.
Nonqualified Defined Contribution Plan. The Bank also maintains the Thrift Benefit Equalization Plan (Thrift BEP), a

34


nonqualified, unfunded deferred compensation plan covering certain senior officers and directors of the Bank, as defined in the plan. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. The Bank's contributions to this plan totaled $41,000 and $8,000 in the three months ended March 31, 2011 and 2010, respectively. The Bank's obligation from this plan, was $3.2 million and $2.9 million at March 31, 2011, and December 31, 2010, respectively.
Nonqualified Supplemental Defined Benefit Retirement Plan. The Bank also maintains a nonqualified, unfunded defined-benefit plan covering certain senior officers, as defined in the plan. The Bank maintains a rabbi trust intended to meet future benefit obligations. There are no funded plan assets that have been designated to provide supplemental retirement benefits.
 
Postretirement Benefits. The Bank sponsors a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. The Bank provides life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.
 
In connection with the nonqualified supplemental defined benefit retirement plan and postretirement benefits, the Bank recorded the following amounts as of March 31, 2011, and December 31, 2010 (dollars in thousands):
 
 
Nonqualified Supplemental Defined Benefit Retirement Plan
 
Postretirement Benefits 
 
March 31, 2011
 
December 31, 2010
 
March 31, 2011
 
December 31, 2010
Change in benefit obligation (1)
 
 
 
 
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
3,859
 
 
$
5,090
 
 
$
499
 
 
$
458
 
Service cost
54
 
 
205
 
 
7
 
 
24
 
Interest cost
53
 
 
221
 
 
7
 
 
25
 
Actuarial (gain) loss
 
 
(293
)
 
 
 
9
 
Benefits paid
 
 
(1,364
)
 
 
 
(17
)
Benefit obligation at end of period
3,966
 
 
3,859
 
 
513
 
 
499
 
Change in plan assets
 
 
 
 
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
 
 
 
 
 
 
 
Employer contribution
 
 
1,364
 
 
 
 
17
 
Benefits paid
 
 
(1,364
)
 
 
 
(17
)
Fair value of plan assets at end of period
 
 
 
 
 
 
 
Funded status at end of period
$
(3,966
)
 
$
(3,859
)
 
$
(513
)
 
$
(499
)
______________________
(1)          Represents projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and accumulated postretirement benefit obligation for postretirement benefits.
 
The following table presents the components of net periodic benefit cost and other amounts recognized in accumulated other comprehensive loss for the Bank's nonqualified supplemental defined benefit retirement plan and postretirement benefits for the three months ended March 31, 2011 and 2010 (dollars in thousands):
 
 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Three Months Ended March 31,
 
Postretirement Benefits For the Three Months Ended March 31,
 
 
2011
 
2010
 
2011
 
2010
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
54
 
 
$
68
 
 
$
7
 
 
$
9
 
Interest cost
 
53
 
 
72
 
 
7
 
 
7
 
Amortization of prior service cost
 
 
 
(4
)
 
 
 
 
Amortization of net actuarial loss
 
24
 
 
48
 
 
1
 
 
 
Net periodic benefit cost
 
$
131
 
 
$
184
 
 
$
15
 
 
$
16
 
 

35


Note 16 — Segment Information
 
In the first quarter of 2011, the Bank began reporting on an enterprise-wide basis rather than providing separate segment information for the MPF program. The enterprise-wide method of evaluating the Bank's financial information reflects the manner in which the chief operating decision maker manages the business. Accordingly, the Bank will no longer present separate Mortgage Loan Finance segment information.
 
Note 17 — Fair Values
 
The carrying values and fair values of the Bank’s financial instruments at March 31, 2011, and December 31, 2010, were as follows (dollars in thousands):
 
 
March 31, 2011
 
December 31, 2010
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial instruments
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
390,656
 
 
$
390,656
 
 
$
6,151
 
 
$
6,151
 
Interest-bearing deposits
202
 
 
202
 
 
155
 
 
155
 
Securities purchased under agreements to resell
250,000
 
 
250,000
 
 
2,175,000
 
 
2,174,965
 
Federal funds sold
7,135,000
 
 
7,134,954
 
 
5,585,000
 
 
5,584,920
 
Trading securities
5,611,733
 
 
5,611,733
 
 
5,579,741
 
 
5,579,741
 
Available-for-sale securities
6,293,246
 
 
6,293,246
 
 
7,335,035
 
 
7,335,035
 
Held-to-maturity securities
6,617,420
 
 
6,731,104
 
 
6,459,544
 
 
6,564,181
 
Advances
25,938,797
 
 
26,194,097
 
 
28,034,949
 
 
28,334,306
 
Mortgage loans, net
3,165,483
 
 
3,306,380
 
 
3,245,954
 
 
3,406,467
 
Accrued interest receivable
125,815
 
 
125,815
 
 
145,177
 
 
145,177
 
Derivative assets
12,370
 
 
12,370
 
 
14,818
 
 
14,818
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
(810,529
)
 
(810,311
)
 
(745,521
)
 
(745,276
)
Consolidated obligations:
 
 
 
 
 
 
 
Bonds
(34,020,141
)
 
(34,380,125
)
 
(35,102,750
)
 
(35,519,770
)
Discount notes
(16,492,730
)
 
(16,492,923
)
 
(18,524,841
)
 
(18,525,104
)
Mandatorily redeemable capital stock
(106,608
)
 
(106,608
)
 
(90,077
)
 
(90,077
)
Accrued interest payable
(159,262
)
 
(159,262
)
 
(141,141
)
 
(141,141
)
Derivative liabilities
(624,871
)
 
(624,871
)
 
(729,220
)
 
(729,220
)
Other:
 
 
 
 
 
 
 
Commitments to extend credit for advances
 
 
(1,301
)
 
 
 
(1,756
)
Standby bond-purchase agreements
 
 
6,078
 
 
 
 
4,556
 
Standby letters of credit
(671
)
 
(671
)
 
(891
)
 
(891
)
 
Fair-Value Methodologies and Techniques
 
The fair-value amounts above have been determined by the Bank using available market information and the Bank's best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at March 31, 2011, and December 31, 2010. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank's financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank's judgment of how a market participant would estimate the fair values. The fair-value summary table above does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
 

36


Cash and Due from Banks. The fair value approximates the recorded carrying value.
 
Interest-Bearing Deposits. The fair value is determined by calculating the present value of expected future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.
 
Investment Securities. For investment securities other than HFA obligations, the Bank requests prices 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. In obtaining such valuation information from third parties, the Bank generally reviews the valuation methodologies used to develop the fair values to determine whether such valuations are representative of an exit price in the Bank's principal markets.
 
Investment SecuritiesHousing-Finance-Agency Obligations. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms.
 
Securities Purchased under Agreements to Resell. The fair value is determined by calculating the present value of expected future cash flows. The discount rates used in these calculations are the rates for transactions with similar terms.
 
Federal Funds Sold. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds sold with similar terms.
 
Advances. The Bank determines the fair value of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of accrued interest receivable. The discount rates used in these calculations are the current replacement rates for advances with similar terms. In accordance with the Finance Agency's advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower's decision to prepay the advances. Therefore, the fair value of advances does not assume prepayment risk. The Bank does not account for credit risk in determining the fair value of the Bank's advances due to the strong credit protections that mitigate the credit risk associated with advances. Collateral requirements for advances provide surety for the repayment such that the probability of credit losses on advances is very low. The Bank has the ability to establish a blanket lien on all financial assets of most members, and in the case of FDIC-insured institutions, the Bank’s lien has a statutory priority over all other creditors with respect to collateral that has not been perfected by other parties. All of these factors serve to mitigate credit risk on advances.
 
Mortgage Loans. The fair values for mortgage loans are determined based on quoted market prices of similar mortgage-loan pools available in the market or modeled prices adjusted for factors specific to the Bank's mortgage loans including but not limited to differences in coupon, average loan rate, seasoning, and cash-flow remittance between the Bank's mortgage loans and the MBS. The prices of the referenced MBS and the mortgage loans are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in the prepayment rates could have a material effect on the fair value. Since these underlying prepayment assumptions are made at a specific point in time, they are susceptible to material changes in the near term.
Real Estate Owned. Fair value is defined as the amount that a willing seller could expect from a willing buyer in an arm's-length transaction. If the fair value of the REO is less than the recorded investment in the MPF loan at the date of transfer, the Bank recognizes a charge-off to the allowance for credit losses. Subsequent realized gains and realized or unrealized losses are included in other income (loss) in the statement of operations.
Accrued Interest Receivable and Payable. The fair value is the recorded book value.
 
Derivative Assets/LiabilitiesInterest-Rate-Exchange Agreements. The Bank bases the fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The fair value is based on the LIBOR swap curve and forward rates at period-end and, for agreements containing options, the market's expectations of future interest-rate volatility implied from current market prices of similar options. The fair value methodology uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments. The fair values are netted by counterparty, including cash collateral received from or delivered to the counterparty, where an offset right exists. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. The Bank enters into master-netting agreements for interest-rate-exchange agreements with

37


institutions that have long-term senior unsecured credit ratings that are at or above single-A by S&P and Moody's. The Bank establishes master-netting agreements to reduce its exposure from counterparty defaults, and enters into bilateral-collateral-exchange agreements that require credit exposures beyond a defined amount to be secured by U.S. government or GSE securities or cash. All of these factors serve to mitigate credit and nonperformance risk to the Bank.
 
Derivative Assets/LiabilitiesCommitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are recorded as derivatives in the statement of condition. The fair values of such commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago, which are derived from MBS to be announced (TBA) delivery commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.
 
Deposits. The Bank determines fair values of deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount by any accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
 
Consolidated Obligations. The Bank estimates fair values based on the cost of issuing comparable term debt, excluding noninterest selling costs. Fair values of COs without embedded options are determined based on internal valuation models which use market-based yield curve inputs obtained from the Office of Finance. Fair values of COs with embedded options are determined based on internal valuation models with market-based inputs obtained from the Office of Finance and derivative dealers.
 
Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally at par. Capital stock can only be acquired by the Bank's members at par value and redeemed at par value. The Bank's capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.
 
Commitments. The fair value of the Bank's standby bond-purchase agreements is based on the present value of the estimated fees the Bank is to receive for providing these agreements, taking into account the remaining terms of such agreements. For fixed-rate advance commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
 
Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options, and CO bonds with options are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest-rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair-value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes.
 
Fair-Value Hierarchy. The Bank records trading securities, available-for-sale securities, derivative assets, and derivative liabilities at fair value. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and, therefore, represents 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 asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in that market.
 
The fair-value hierarchy prioritizes the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level within the fair-value hierarchy for the fair-value measurement is determined. This overall level is an indication of the market observability of the fair-value measurement. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). 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 within the fair-value hierarchy.
 
Outlined below is the application of the fair-value hierarchy to the Bank's financial assets and financial liabilities that are carried at fair value.
 
Level 1                     Defined as those instruments for which inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to

38


provide pricing information on an ongoing basis. The types of assets and liabilities carried at Level 1 fair value generally include certain types of derivative contracts that are traded in an open exchange market and investments such as U.S. Department of the Treasury (U.S. Treasury) securities.
 
Level 2                     Defined as those instruments for which inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The types of assets and liabilities carried at Level 2 fair value generally include investment securities, including U.S. government and agency securities, and derivative contracts.
 
Level 3                     Defined as those instruments for which inputs to the valuation methodology are unobservable and significant to the fair-value measurement. Unobservable inputs are supported by little or no market activity and reflect the Bank's own assumptions. The types of assets and liabilities carried at Level 3 fair value generally include certain private-label MBS.
 
The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is first determined based on quoted market prices or market-based prices, where available. If quoted market prices or market-based prices are not available, fair value is determined based on valuation models that use market-based information available to the Bank as inputs to the models.
 
Fair Value Measured on a Recurring Basis
 
The following tables present the Bank's assets and liabilities that are measured at fair value on the statement of condition at March 31, 2011, and December 31, 2010, by fair-value hierarchy level (dollars in thousands):
 

39


 
March 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
 
 
$
5,354,930
 
 
$
 
 
$
 
 
$
5,354,930
 
U.S. government-guaranteed - residential MBS
 
 
20,692
 
 
 
 
 
 
20,692
 
Government-sponsored enterprises - residential MBS
 
 
7,973
 
 
 
 
 
 
7,973
 
Government-sponsored enterprises - commercial MBS
 
 
228,138
 
 
 
 
 
 
228,138
 
Total trading securities
 
 
5,611,733
 
 
 
 
 
 
5,611,733
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supranational banks
 
 
397,561
 
 
 
 
 
 
397,561
 
Corporate bonds
 
 
568,894
 
 
 
 
 
 
568,894
 
U.S. government-owned corporations
 
 
236,752
 
 
 
 
 
 
236,752
 
Government-sponsored enterprises
 
 
3,220,986
 
 
 
 
 
 
3,220,986
 
U.S. government guaranteed - residential MBS
 
 
159,597
 
 
 
 
 
 
159,597
 
Government-sponsored enterprises - residential MBS
 
 
1,458,777
 
 
 
 
 
 
1,458,777
 
Government-sponsored enterprises - commercial MBS
 
 
250,679
 
 
 
 
 
 
250,679
 
Total available-for-sale securities
 
 
6,293,246
 
 
 
 
 
 
6,293,246
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements
 
 
233,067
 
 
 
 
(220,747
)
 
12,320
 
Mortgage delivery commitments
 
 
50
 
 
 
 
 
 
50
 
Total derivative assets
 
 
233,117
 
 
 
 
(220,747
)
 
12,370
 
Total assets at fair value
$
 
 
$
12,138,096
 
 
$
 
 
$
(220,747
)
 
$
11,917,349
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements
$
 
 
$
(838,977
)
 
$
 
 
$
214,116
 
 
$
(624,861
)
Mortgage delivery commitments
 
 
(10
)
 
 
 
 
 
(10
)
Total derivative liabilities
 
 
(838,987
)
 
 
 
214,116
 
 
(624,871
)
Total liabilities at fair value
$
 
 
$
(838,987
)
 
$
 
 
$
214,116
 
 
$
(624,871
)
_______________________
(1)         Amounts represent the effect of master-netting agreements intended to allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparty. Net cash collateral associated with derivative contracts, including accrued interest, as of March 31, 2011, totaled $6.6 million.
 
 

40


 
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
 
 
$
5,319,921
 
 
$
 
 
$
 
 
$
5,319,921
 
U.S. government-guaranteed - residential MBS
 
 
21,366
 
 
 
 
 
 
21,366
 
Government-sponsored enterprises - residential MBS
 
 
8,438
 
 
 
 
 
 
8,438
 
Government-sponsored enterprises - commercial MBS
 
 
230,016
 
 
 
 
 
 
230,016
 
Total trading securities
 
 
5,579,741
 
 
 
 
 
 
5,579,741
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supranational banks
 
 
400,670
 
 
 
 
 
 
400,670
 
Corporate bonds
 
 
1,174,801
 
 
 
 
 
 
1,174,801
 
U.S. government corporations
 
 
238,201
 
 
 
 
 
 
238,201
 
Government-sponsored enterprises
 
 
3,518,458
 
 
 
 
 
 
3,518,458
 
U.S. government guaranteed - residential MBS
 
 
167,201
 
 
 
 
 
 
167,201
 
Government-sponsored enterprises - residential MBS
 
 
1,582,947
 
 
 
 
 
 
1,582,947
 
Government-sponsored enterprises - commercial MBS
 
 
252,757
 
 
 
 
 
 
252,757
 
Total available-for-sale securities
 
 
7,335,035
 
 
 
 
 
 
7,335,035
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements
 
 
261,032
 
 
 
 
(246,269
)
 
14,763
 
Mortgage delivery commitments
 
 
55
 
 
 
 
 
 
55
 
Total derivative assets
 
 
261,087
 
 
 
 
(246,269
)
 
14,818
 
Total assets at fair value
$
 
 
$
13,175,863
 
 
$
 
 
$
(246,269
)
 
$
12,929,594
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements
$
 
 
$
(968,526
)
 
$
 
 
$
239,548
 
 
$
(728,978
)
Mortgage delivery commitments
 
 
(242
)
 
 
 
 
 
(242
)
Total derivative liabilities
 
 
(968,768
)
 
 
 
239,548
 
 
(729,220
)
Total liabilities at fair value
$
 
 
$
(968,768
)
 
$
 
 
$
239,548
 
 
$
(729,220
)
_______________________
(1)       Amounts represent the effect of master-netting agreements intended to allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparty. Net cash collateral associated with derivative contracts, including accrued interest, as of December 31, 2010, totaled $6.7 million.
 
For instruments carried at fair value, the Bank reviews the fair-value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities, and those reclassifications will be reported as a transfer between levels at fair value in the quarter in which the change occurs. Transfers between levels will be reported as of the beginning of the period; however the Bank did not have any transfers between levels during the three months ended March 31, 2011.
 
Fair Value on a Nonrecurring Basis
 
The Bank measures certain held-to-maturity investment securities and REO at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).
 
The following tables present the fair value of financial assets by level within the fair value hierarchy which are recorded on a

41


nonrecurring basis at March 31, 2011, and December 31, 2010 (dollars in thousands).
 
 
March 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
 
 
$
 
 
$
119,925
 
 
$
119,925
 
REO
 
 
 
 
1,282
 
 
1,282
 
 
 
 
 
 
 
 
 
Total nonrecurring assets at fair value
$
 
 
$
 
 
$
121,207
 
 
$
121,207
 
 
 
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
 
 
$
 
 
$
119,433
 
 
$
119,433
 
REO
 
 
 
 
1,071
 
 
1,071
 
 
 
 
 
 
 
 
 
Total nonrecurring assets at fair value
$
 
 
$
 
 
$
120,504
 
 
$
120,504
 
 
Significant Inputs of Recurring and Nonrecurring Fair-Value Measurements
 
The following represents the significant inputs used to determine fair value of those instruments carried on the balance sheet at fair value which are classified as Level 2 or Level 3 within the fair-value hierarchy. The descriptions below do not differentiate between recurring and nonrecurring fair-value measurements and should be read in conjunction with the fair-value methodology disclosures for all financial instruments provided above.
 
Investment Securities. For the Bank's investment securities carried at fair value the Bank's valuation technique incorporates prices from up to four designated third-party pricing vendors when available, consistent with the method agreed upon by the FHLBanks. These pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The Bank establishes a price for each of its investment securities using a formula that is based upon the number of prices received.
 
The computed prices are tested for reasonableness using specified tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the formula-driven price would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis including but not limited to a comparison with the prices for similar securities and/or to nonbinding dealer estimates or use of an internal model that is deemed most appropriate after consideration of all relevant facts and circumstances that a market participant would consider. As of March 31, 2011, vendor prices were received for substantially all of the FHLBanks' investment securities and all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the Bank's conclusion that the final computed prices are reasonable estimates of fair value. Based on the current lack of significant market activity for private-label residential MBS, the nonrecurring fair-value measurements for such securities as of March 31, 2011, fell within Level 3 of the fair-value hierarchy. 
 
Derivative Assets/Liabilities. Fair value of derivatives is generally determined using discounted cash-flow analysis (the income approach) and comparisons with similar instruments (the market approach). The discounted cash-flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:
 
Interest-rate-exchange agreements:
LIBOR swap curve, and
Market-based expectations of future interest-rate volatility implied from current market prices for similar options for agreements containing options.
 

42


Mortgage delivery commitments:
MBS TBA price. Market-based prices of TBAs are determined by coupon class and expected term until settlement.
 
The Bank generally uses a midmarket pricing convention as a practical expedient for fair-value measurements within a bid-ask spread. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes.
 
Note 18 — Commitments and Contingencies
 
Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. 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 and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. The Bank evaluates the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of March 31, 2011, and through the filing of this report, the Bank does not believe that it is reasonably likely to be required to repay the principal or interest on any CO on behalf of another FHLBank.
 
The Bank has considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of the Bank's joint and several liability for all of the COs. The joint and several obligation is mandated by Finance Agency regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, the Bank has not recognized a liability for its joint and several obligation related to other FHLBanks' COs at March 31, 2011, and December 31, 2010. The par amounts of other FHLBanks' outstanding COs for which the Bank is jointly and severally liable totaled approximately $715.7 billion and $743.0 billion at March 31, 2011, and December 31, 2010, respectively. See Note 12 — Consolidated Obligations for additional information.
 
Off-Balance-Sheet Commitments
 
The following table shows the Bank's off-balance-sheet commitments as of March 31, 2011, and December 31, 2010 (dollars in thousands):
 
 
 
March 31, 2011
 
December 31, 2010
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
832,598
 
 
$
708,532
 
 
$
1,541,130
 
 
$
821,443
 
 
$
693,309
 
 
$
1,514,752
 
Commitments for standby bond purchases
 
239,000
 
 
315,115
 
 
554,115
 
 
239,000
 
 
315,115
 
 
554,115
 
Commitments for unused lines of credit - advances (2)
 
1,307,510
 
 
 
 
1,307,510
 
 
1,335,113
 
 
 
 
1,335,113
 
Commitments to make additional advances
 
72,131
 
 
55,189
 
 
127,320
 
 
43,333
 
 
63,766
 
 
107,099
 
Commitments to invest in mortgage loans
 
11,610
 
 
 
 
11,610
 
 
28,217
 
 
 
 
28,217
 
Unsettled CO bonds, at par (3)
 
46,000
 
 
 
 
46,000
 
 
34,500
 
 
 
 
34,500
 
Unsettled CO discount notes, at par
 
1,040,000
 
 
 
 
1,040,000
 
 
29,400
 
 
 
 
29,400
 
Unsettled securities purchased under agreements to resell
 
1,000,000
 
 
 
 
1,000,000
 
 
 
 
 
 
 
__________________________
(1)     Excludes unconditional commitments to issue standby letters of credit that expire within one year totaling $3.5 million as of March 31, 2011.
(2)     Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future

43


liquidity requirements.
(3) The Bank had $40.0 million in unsettled CO bonds which were hedged with associated interest-rate swaps at March 31, 2011. No unsettled CO bonds were hedged with associated interest-rate exchange agreements at December 31, 2010.
 
Commitments to Extend Credit. Standby letters of credit are executed with members or housing associates for a fee. A standby letter of credit is a financing arrangement between the Bank and a member or housing associate pursuant to which the Bank (for a fee) agrees to fund the associated member's or housing associate's obligation to a third-party beneficiary should that member or housing associate fail to fund such obligation. If the Bank is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized advance to the member or housing associate. The original terms of these standby letters of credit, including related commitments, range from one month to 20 years, including a final expiration in 2024.
 
Unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $671,000 and $891,000 at March 31, 2011, and December 31, 2010, respectively. Based on management's credit analyses and collateral requirements, the Bank has not deemed it necessary to record any additional liability on these commitments. Commitments are fully collateralized at the time of issuance.
The Bank monitors the creditworthiness of its members that have standby letter of credit agreements outstanding based on an evaluation of the financial condition of the member. The Bank reviews 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.
Standby Bond-Purchase Agreements. The Bank has entered into standby bond-purchase agreements with state housing authorities whereby the Bank, for a fee, agrees to purchase and hold the housing authority’s bonds until the designated remarketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bonds. The standby bond-purchase commitments entered into by the Bank expire between one and three years following the start of the commitment, currently no later than 2013. At March 31, 2011, and December 31, 2010, the Bank had standby bond purchase agreements with two state housing authorities. During the three months ended March 31, 2011, and year ended December 31, 2010, the Bank was not required to purchase any bonds under these agreements.
 
Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.
 
Pledged Collateral. The Bank executes derivatives with counterparties with long-term ratings of single-A (or equivalent) or better by either S&P or Moody’s, and enters into bilateral-collateral agreements. As of March 31, 2011, and December 31, 2010, the Bank had pledged as collateral securities with a carrying value, including accrued interest, of $318.6 million and $397.2 million, respectively, to counterparties that have credit-risk exposure to the Bank related to derivatives. These amounts pledged as collateral were subject to contractual agreements whereby some counterparties had the right to sell or repledge the collateral.
 
Legal Proceedings. As previously reported, on September 15, 2008, Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Special Financing Inc. (LBSF) and a guarantor of LBSF's obligations, announced it had filed a petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. This filing precipitated the termination of the Bank's derivative transactions with LBSF, and in connection with those terminations, the Bank calculated the net amount it owed LBSF to be approximately $14.0 million. After netting against the fair value of collateral that had been pledged to LBSF in connection with those transactions, the Bank made a payment to LBSF of approximately $6.9 million in satisfaction of the net amount due to LBSF.
 
On October 29, 2010, the Bank received a Derivatives Alternative Dispute Resolution (ADR) Notice from LBSF making a demand on the Bank for approximately $10.1 million including approximately $2.6 million in interest calculated at a default rate based on LBSF's view of how the settlement amount should have been calculated. LBSF asserts in the notice that interest at such default rate will continue to accrue until the Bank pays LBSF the full amount that LBSF claims it is owed. The Bank believes that it correctly calculated and fully satisfied its obligation to LBSF, and the Bank does not believe that LBSF's demand has any merit. A protocol issued by the bankruptcy court with jurisdiction over this insolvency provides that parties receiving such a Derivatives ADR Notice are subject to mandatory, nonbinding mediation. The Bank intends to vigorously defend its position in this matter. Accordingly, no loss has been accrued based on this matter.

44


 
In addition to the foregoing, the Bank is subject to various other pending legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.
 
Note 19 — Transactions with Related Parties and Other FHLBanks
 
Transactions with Related Parties. The Bank defines related parties as those members whose capital stock holdings are in excess of 10 percent of the Bank's total capital stock outstanding. The following table presents member holdings of 10 percent or more of total capital stock outstanding at March 31, 2011, and December 31, 2010 (dollars in thousands):
 
March 31, 2011
 
December 31, 2010
 
Capital Stock
Outstanding
 
Percent
of Total
 
Capital Stock
Outstanding
 
Percent
of Total
Bank of America Rhode Island, N.A. (1)
$
1,084,710
 
 
28.9
%
 
$
1,084,710
 
 
28.9
%
RBS Citizens N.A.
515,748
 
 
13.7
 
 
515,748
 
 
13.7
 
_________________________
(1)    Capital stock outstanding at both March 31, 2011, and December 31, 2010, includes $2.2 million held by CW Reinsurance Company, a subsidiary of Bank of America Corporation.
 
The following table presents advances outstanding to related parties and total accrued interest receivable from those advances as of March 31, 2011, and December 31, 2010 (dollars in thousands):
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
RBS Citizens N.A.
$
4,022,385
 
 
15.8
%
 
$
613
 
 
1.0
%
Bank of America Rhode Island, N.A.
1,336,395
 
 
5.3
 
 
6,811
 
 
11.4
 
As of December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
RBS Citizens N.A.
$
4,132,514
 
 
15.1
%
 
$
901
 
 
1.4
%
Bank of America Rhode Island, N.A.
2,586,906
 
 
9.4
 
 
8,962
 
 
13.7
 
 
The following table presents an analysis of advances activity with related parties for the three months ended March 31, 2011 (dollars in thousands):
 
Balance at
 
For the Three Months Ended March 31, 2011
 
Balance at
 
December 31,
2010
 
Disbursements to
Members
 
Payments from
Members
 
March 31,
2011
RBS Citizens N.A.
$
4,132,514
 
 
$
250,000
 
 
$
(360,129
)
 
$
4,022,385
 
Bank of America Rhode Island, N.A.
2,586,906
 
 
755
 
 
(1,251,266
)
 
1,336,395
 
 
The Bank held sufficient collateral to cover the advances to the above institutions such that the Bank does not expect to incur any credit losses on these advances.
 
The Bank recognized interest income on outstanding advances from the above members during the three months ended March 31, 2011 and 2010, as follows (dollars in thousands):
 
 
For the Three Month Ended March 31,
 
 
2011
 
2010
Bank of America Rhode Island, N.A.
 
$
4,780
 
 
$
5,157
 
RBS Citizens N.A.
 
3,970
 
 
7,225
 
 
The following table presents an analysis of outstanding derivative contracts with affiliates of related parties at March 31, 2011, and December 31, 2010 (dollars in thousands):

45


 
 
 
 
 
 
 
March 31, 2011
 
December 31, 2010
Derivatives Counterparty
 
Affiliate Member
 
Primary
Relationship
 
Notional
Amount
 
Percent of
Total
Derivatives (1)
 
Notional
Amount
 
Percent of
Total
Derivatives (1)
Bank of America, N.A.
 
Bank of America Rhode Island, N.A.
 
Dealer
 
$
1,203,105
 
 
5.5
%
 
$
1,377,805
 
 
5.8
%
Royal Bank of Scotland, PLC
 
RBS Citizens, N.A.
 
Dealer
 
149,300
 
 
0.7
 
 
149,300
 
 
0.6
 
_________________________
(1)          The percent of total derivatives outstanding is based on the stated notional amount of all derivative contracts outstanding.
 
Transactions with Other FHLBanks.
 
The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
 
Overnight Funds. The Bank may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included within other interest income and interest expense from other borrowings in the statement of operations.
 
Interest expense on borrowings from other FHLBanks for the three months ended March 31, 2011, and 2010 is shown in the following table, by FHLBank (dollars in thousands):
 
 
 
For the Three Months Ended March 31,
Interest Expense on Borrowings from Other FHLBanks
 
2011
 
2010
FHLBank of Cincinnati
 
1
 
 
1
 
FHLBank of San Francisco
 
 
 
1
 
FHLBank of Topeka
 
1
 
 
 
Total
 
$
2
 
 
$
2
 
 
MPF Mortgage Loans. The Bank pays a transaction-services fee to the FHLBank of Chicago for the Bank’s participation in the MPF program. This fee is assessed monthly, and is based upon the amount of MPF loans in which the Bank invested after January 1, 2004, and which remain outstanding on the Bank’s statement of condition. The Bank recorded $278,000 and $264,000 in MPF transaction-services fee expense to the FHLBank of Chicago during the three months ended March 31, 2011, and 2010, respectively, which has been recorded in the statement of operations as other expense.
 
Note 20 — Subsequent Events
 
On April 21, 2011, the board of directors approved payment of a cash dividend at an annualized rate of 0.31 percent based on capital stock balances outstanding during the first quarter of 2011. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $2.9 million and was paid on May 3, 2011.

46


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank that are “forward-looking statements” including, but not limited to, the Bank's ability to achieve its retained earnings target in the projected time horizons. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” "expects," "plans," "intends," "may,” “could,” “estimates,” “assumes,” “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 — Risk Factors of the 2010 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report, 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 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, investments in 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; and
the Bank's expectations regarding the size of its mortgage-loan portfolio, particularly as compared to prior periods.
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 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 from November 2008 until February 2011 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 in the housing market;
deterioration in the 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;
deterioration in the credit performance of the Bank’s investments in mortgage loans and increases in loss severities from those investments;
an increase in advance prepayments as a result of changes in interest rates or other factors;
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

47


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 new (or adequately adapt current) Bank 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 across the 12 FHLBanks (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, the Bank's ability to access the capital markets, the manner in which the Bank operates, or the organization and structure of the FHLBank System;
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.
These 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.
 
The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank's interim financial statements and notes, which begin on page 3, and the 2010 Annual Report.
 
EXECUTIVE SUMMARY
 
The Bank recognized net income of $23.1 million for the three months ended March 31, 2011, versus $22.9 million for the same period in 2010. Credit losses from the other-than-temporary impairment of investments in private-label MBS totaled $30.6 million for the three months ended March 31, 2011, compared with a credit loss of $22.8 million for the comparable period of 2010. Additionally:
 
retained earnings increased from $249.2 million at December 31, 2010, to $269.5 million at March 31, 2011;
accumulated other comprehensive loss related to the noncredit portion of other-than-temporary impairment losses on held-to-maturity securities improved from an accumulated deficit of $621.5 million at December 31, 2010, to an accumulated deficit of $549.7 million at March 31, 2011; and
the Bank continues to be in compliance with all regulatory capital requirements.
 
Based on the continuing improvement in the Bank's financial condition, on April 21, 2011, the Bank's board of directors declared a cash dividend that was the equivalent to an annual yield of 0.31 percent. In declaring the dividend, the board re-affirmed its expectation that the Bank would pay quarterly dividends throughout the remainder of 2011 but that dividends were likely to be modest. Additionally, the board noted that an adverse event or trend, such as a negative trend in credit losses on the Bank's private label MBS or mortgage loan portfolio or a meaningful decline in income could cause the quarterly dividend to

48


be suspended.
 
Notwithstanding the improvements in the Bank's financial condition, the Bank still faces challenges, the foremost of which arises from its investments in private-label MBS. Although the amortized cost of the Bank's total investments in private-label MBS has fallen to $2.3 billion at March 31, 2011, compared with $4.0 billion at December 31, 2008, the date on which the Bank first incurred credit losses from that portfolio, additional losses from that portfolio are possible. Accordingly, the Bank has taken various steps throughout the period covered by this report as part of its effort to protect members' capital and restore profitability in accordance with the Bank's strategic business plan. These steps include:
 
maintaining the Bank's retained earnings target at $925.0 million;
continuing the Bank's moratorium on excess stock repurchases; and
amending of the Bank's capital plan effective January 22, 2011, which, among other things, allows members to satisfy certain activity-based stock-investment requirements using stock from the Bank's available excess stock pool ($250.0 million as of March 31, 2011) and gives the Bank authority to issue Class A capital stock, par value $100, although the Bank has not issued and does not plan to issue Class A capital stock at this time.
 
These amendments to the Bank's capital plan are discussed in the 2010 Annual Report under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary.
 
•    Investments in Private-Label MBS. Management has determined that 86 of its private-label MBS, representing an aggregated par value of $1.7 billion, incurred additional other-than-temporary impairment credit losses of $30.6 million for the quarter ended March 31, 2011. 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 modeling assumptions to reflect current developments in loan performance and attendant forecasts. Despite some signs of economic recovery observed in recent periods, many of the factors impacting the underlying loans continue to show little if any improvement; such factors include elevated unemployment rates, extremely high levels of foreclosures and troubled real estate loans, projections of further drops in housing prices and slow housing price recovery, and limited financing opportunities for many borrowers, especially those whose houses are now worth less than the balance of their mortgages. Further, recent foreclosure moratoriums by several major mortgage servicers may result in loss severities beyond current expectations should such moratoriums be prolonged, potentially resulting in disruption to cash flows from impacted securities and further depression in real estate prices.
 
•    Decline in Advances Balances. The outstanding par balance of advances to members declined from $27.4 billion at December 31, 2010, to $25.4 billion at March 31, 2011. This reduction is primarily attributable to the high levels of deposits that members continue to experience relative to historical norms. This reduction in demand for advances has occurred across the Bank's membership including among the Bank's five largest borrowers of advances, as discussed under — Financial Condition — Advances. The Bank's decline in net interest income to $67.0 million for the three months ended March 31, 2011, compared with $68.4 million for the same period in 2010, is primarily the result of the decline in advances balances.
 
This trend in advances balances is illustrated by the following graph of quarter-end total advances balances:

49


 
Strong Net Interest Margin. The Bank continues to achieve a favorable net interest margin, which mitigates to some extent the lower demand for advances. Net interest margin for the quarter ended March 31, 2011, was 0.49 percent, a six-basis-point increase from net interest margin for the quarter ended March 31, 2010. The increase was achieved despite the historically low-interest-rate environment due in part to a steeper interest-rate yield curve and continued demand for the FHLBank System's CO debt in the face of shrinking supply. The steepness of the yield curve enabled the Bank to earn a higher spread on assets whose average terms to maturity were longer than those of corresponding liabilities. As interest rates remained at historically low levels, the Bank also continued to benefit from having refinanced callable debt used to fund its fixed-rate residential mortgage assets in prior periods as interest rates fell. During the twelve months ended March 31, 2011, the Bank exercised redemption options on $3.7 billion of callable bonds that were not swapped to a synthetic floating rate coupon. However, this activity has declined significantly during the three months ended March 31, 2011. Other factors behind the improvement in net interest margin include an increase in prepayment fee income and an increase in yields on certain previously other-than-temporarily impaired private-label MBS for which a significant improvement in cash flows has been projected.
 
Additional key developments during the period covered by this report include the following.
 
FHLBanks' Voluntary Capital Initiative. On February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the Agreement) with the other 11 FHLBanks, as part of a voluntary capital initiative intended to build greater safety and soundness in the FHLBank System. Generally, the Agreement will obligate each FHLBank to allocate an amount at least equal to 20 percent of its quarterly net income (net of that FHLBank's obligation to its AHP) to a restricted retained earnings account beginning with the calendar quarter-end following the satisfaction of the FHLBanks' obligation to make payments to REFCorp. The FHLBanks' obligation to REFCorp is described in the 2010 Annual Report under Item 1 — Business — Assessments. Depending on the earnings of the FHLBanks, the REFCorp obligation could be satisfied as of the end of the second quarter of 2011. The Bank's total required contribution to the restricted retained earnings account is an amount equal to 1.0 percent of the daily average carrying value of the Bank's outstanding total consolidated obligations (excluding fair-value adjustments) for the calendar quarter. At March 31, 2011, the Bank's total required contribution to the restricted retained earnings account would have been $499.3 million. Amounts in the restricted retained earnings account cannot be used to pay dividends. The Agreement also provides that each FHLBank will submit applications to the Finance Agency to request approval to amend their respective capital plans consistent with the terms of the Agreement. For additional information on the Agreement, see the 2010 Annual Report under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Joint Capital Enhancement Agreement. As of the date of this report, the Bank is considering amending its capital plan to incorporate the terms of the Agreement, which if approved by the Finance Agency, would result in conforming amendments to the Agreement, including, among other things, possible revisions to the termination provisions and related provisions affecting restrictions on the separate restricted retained earnings account.
 
Regulatory Developments under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Various regulations have been proposed to implement the Dodd-Frank Act that are likely to impact the Bank's business operations, funding costs, obligations, and/or the environment in which the Bank carries out its housing-finance mission. For example, the Bank expects regulations proposed by the U.S. Commodity Futures Trading Commission (the CFTC) under the Dodd-Frank Act, including such regulations proposed during the period covered by this report, to impact its derivatives activities and result in incremental costs for the Bank in complying with those regulations. For additional information on the Dodd-Frank Act's possible impact on the Bank, see — Legislative and Regulatory Developments.
 
Housing GSE Reform. On February 11, 2011, the U.S. Treasury and the U.S. Department of Housing and Urban Development released a report with certain proposals for housing GSE reform, including proposals for certain reforms that would impact the FHLBanks, including certain advances, membership, and investment limitations. For those reasons and others described under — Legislative and Regulatory Developments, housing GSE reform is likely to impact the Bank, however the impact cannot be known until legislation is enacted to implement such reform. For additional information on housing GSE reform, see — Legislative and Regulatory Developments.
 
Financial Highlights
 
The following financial highlights for the statement of condition for December 31, 2010, have been derived from the Bank's audited financial statements. Financial highlights for the quarter-ends have been derived from the Bank's unaudited financial statements. 

50


SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
(dollars in thousands)
 
 
March 31,
2011
 
December 31,
2010
 
September 30,
2010
 
June 30,
2010
 
March 31,
2010
Statement of Condition Data at Quarter End
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
55,595,703
 
 
$
58,647,301
 
 
$
62,002,647
 
 
$
64,706,788
 
 
$
61,568,720
 
Investments (1)
25,907,601
 
 
27,134,475
 
 
28,283,283
 
 
25,094,658
 
 
22,299,907
 
Advances
25,938,797
 
 
28,034,949
 
 
30,205,259
 
 
36,015,723
 
 
35,174,620
 
Mortgage loans held for portfolio (2)
3,165,483
 
 
3,245,954
 
 
3,274,414
 
 
3,316,901
 
 
3,392,872
 
Deposits
810,529
 
 
745,521
 
 
743,909
 
 
780,296
 
 
664,505
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
34,020,141
 
 
35,102,750
 
 
39,031,906
 
 
38,129,830
 
 
37,840,458
 
Discount notes
16,492,730
 
 
18,524,841
 
 
17,751,082
 
 
21,635,424
 
 
19,077,842
 
Total consolidated obligations
50,512,871
 
 
53,627,591
 
 
56,782,988
 
 
59,765,254
 
 
56,918,300
 
Mandatorily redeemable capital stock
106,608
 
 
90,077
 
 
86,608
 
 
86,618
 
 
90,803
 
Class B capital stock outstanding - putable (3)
3,646,009
 
 
3,664,425
 
 
3,662,292
 
 
3,658,866
 
 
3,646,201
 
Retained earnings
269,544
 
 
249,191
 
 
225,569
 
 
184,231
 
 
165,507
 
Accumulated other comprehensive loss
(571,034
)
 
(638,111
)
 
(712,950
)
 
(806,144
)
 
(926,733
)
Total capital
3,344,519
 
 
3,275,505
 
 
3,174,911
 
 
3,036,953
 
 
2,884,975
 
Other Information
 
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio (4)
7.2
%
 
6.8
%
 
6.4
%
 
6.1
%
 
6.3
%
_________________________
(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 $8.7 million, $8.7 million, $2.9 million, $2.5 million, and $2.5 million, as of March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010, and March 31, 2010, respectively.
(3)          Capital stock is putable at the option of a member.
(4)          Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus retained earnings as a percentage of total assets. See Liquidity and Capital Resources — Capital regarding the Bank's regulatory capital ratios.

51



52


SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
(dollars in thousands)
 
 
For the Three Months Ended
 
March 31,
2011
 
December 31,
2010
 
September 30,
2010
 
June 30,
2010
 
March 31,
2010
Results of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
66,951
 
 
$
79,483
 
 
$
75,320
 
 
$
74,409
 
 
$
68,371
 
Provision for credit losses
51
 
 
5,813
 
 
453
 
 
4
 
 
431
 
Net impairment losses on investment securities recognized in income
(30,584
)
 
(25,620
)
 
(5,876
)
 
(30,443
)
 
(22,823
)
Other income (loss)
10,492
 
 
863
 
 
1,219
 
 
(4,088
)
 
524
 
Other expense
15,320
 
 
16,761
 
 
13,944
 
 
14,389
 
 
14,470
 
AHP and REFCorp assessments
8,365
 
 
8,530
 
 
14,928
 
 
6,761
 
 
8,270
 
Net income
23,123
 
 
23,622
 
 
41,338
 
 
18,724
 
 
22,901
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Information
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
$
2,770
 
 
$
 
 
$
 
 
$
 
 
$
 
Dividend payout ratio
11.98
%
 
N/A
 
 
N/A
 
 
N/A
 
 
N/A
 
Weighted average dividend rate (1)
0.30
 
 
N/A
 
 
N/A
 
 
N/A
 
 
N/A
 
Return on average equity (2)
2.83
 
 
2.89
%
 
5.30
%
 
2.54
%
 
3.28
%
Return on average assets
0.17
 
 
0.15
 
 
0.26
 
 
0.12
 
 
0.15
 
Net interest margin (3)
0.49
 
 
0.52
 
 
0.48
 
 
0.46
 
 
0.43
 
Average equity to average assets
5.98
 
 
5.34
 
 
4.94
 
 
4.56
 
 
4.43
 
___________________________
(1)    Weighted-average dividend rate is dividend amount declared divided by the average daily balance of capital stock eligible for dividends.
(2)          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, and retained earnings.
(3)          Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

53


 
RESULTS OF OPERATIONS
 
For the three months ended March 31, 2011 and 2010, the Bank recognized net income of $23.1 million and $22.9 million, respectively. This increase was driven by an $8.4 million realized gain from the sale of available-for-sale securities and a $4.7 million increase in net gains (losses) on derivatives and hedging activities. These gains were offset by a decrease of $1.4 million in net interest income, an increase of $7.8 million in other-than-temporary impairment losses of certain private-label MBS, and a $3.7 million increase in net unrealized losses on trading securities.
 
Net Interest Income
 
Net interest income for the three months ended March 31, 2011, was $67.0 million, compared with $68.4 million for the same period in 2010. This decrease was primarily attributable to the decline in average earning assets, which declined by $8.8 billion from $64.1 billion for the three months ended March 31, 2010, to $55.3 billion for the three months ended March 31, 2011. However, the effects of the decline in average earning asset balances were partially offset by an increase in interest spread, which resulted from an increase of seven basis points in the yield on interest earning assets to 1.41 percent, partially offset by an increase of three basis points in the average cost of interest-bearing liabilities to 1.00 percent. Prepayment-fee income recognized during the three months ended March 31, 2011, compared with the same period in 2010, increased by $635,000. Net interest margin for the three months ended March 31, 2011, in comparison with the same period in 2010, increased to 49 basis points from 43 basis points, and net interest spread increased to 41 basis points from 37 basis points for the same period in 2010. Several factors underlying the increase in net interest margin are discussed under — Executive Summary.
 
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.
 
 
 

54


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield (1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield (1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
26,885,170
 
 
$
87,681
 
 
1.32
%
 
$
36,264,460
 
 
$
103,502
 
 
1.16
%
Interest-bearing deposits
 
203
 
 
 
 
0.53
 
 
99
 
 
 
 
0.04
 
Securities purchased under agreements to resell
 
1,169,444
 
 
540
 
 
0.19
 
 
850,000
 
 
284
 
 
0.14
 
Federal funds sold
 
5,824,922
 
 
2,401
 
 
0.17
 
 
7,573,644
 
 
2,665
 
 
0.14
 
Investment securities(2)
 
18,220,859
 
 
63,527
 
 
1.41
 
 
16,015,363
 
 
61,673
 
 
1.56
 
Mortgage loans
 
3,208,609
 
 
38,334
 
 
4.85
 
 
3,447,324
 
 
43,326
 
 
5.10
 
Other earning assets
 
556
 
 
 
 
0.17
 
 
 
 
 
 
 
Total interest-earning assets
 
55,309,763
 
 
192,483
 
 
1.41
%
 
64,150,890
 
 
211,450
 
 
1.34
%
Other non-interest-earning assets
 
497,681
 
 
 
 
 
 
 
 
593,290
 
 
 
 
 
 
 
Fair-value adjustments on investment securities
 
(453,387
)
 
 
 
 
 
 
 
(821,663
)
 
 
 
 
 
 
Total assets
 
$
55,354,057
 
 
$
192,483
 
 
1.41
%
 
$
63,922,517
 
 
$
211,450
 
 
1.34
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
15,226,270
 
 
$
5,139
 
 
0.14
%
 
$
22,264,827
 
 
$
5,727
 
 
0.10
%
Bonds
 
34,887,862
 
 
120,126
 
 
1.40
 
 
36,886,861
 
 
137,259
 
 
1.51
 
Deposits
 
787,739
 
 
129
 
 
0.07
 
 
657,320
 
 
91
 
 
0.06
 
Mandatorily redeemable capital stock
 
90,864
 
 
136
 
 
0.61
 
 
90,814
 
 
 
 
 
Other borrowings
 
6,211
 
 
2
 
 
0.13
 
 
11,533
 
 
2
 
 
0.07
 
Total interest-bearing liabilities
 
50,998,946
 
 
125,532
 
 
1.00
%
 
59,911,355
 
 
143,079
 
 
0.97
%
Other non-interest-bearing liabilities
 
1,043,589
 
 
 
 
 
 
 
 
1,181,565
 
 
 
 
 
 
 
Total capital
 
3,311,522
 
 
 
 
 
 
 
 
2,829,597
 
 
 
 
 
 
 
Total liabilities and capital
 
$
55,354,057
 
 
$
125,532
 
 
0.92
%
 
$
63,922,517
 
 
$
143,079
 
 
0.91
%
Net interest income
 
 
 
 
$
66,951
 
 
 
 
 
 
 
 
$
68,371
 
 
 
 
Net interest spread
 
 
 
 
 
 
 
0.41
%
 
 
 
 
 
 
 
0.37
%
Net interest margin
 
 
 
 
 
 
 
0.49
%
 
 
 
 
 
 
 
0.43
%
_________________________
(1) Yields are annualized.
(2)        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 or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.
 
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 principally a result of declines in advances balances, as discussed under Executive Summary. The following table summarizes changes in interest income and interest expense for the three months ended March 31, 2011 and 2010. 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.
 

55


Rate and Volume Analysis
(dollars in thousands)
 
 
For the Three Months Ended March 31, 2011 vs. 2010
 
Increase (Decrease) due to
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
Advances
$
(29,231
)
 
$
13,410
 
 
$
(15,821
)
Securities purchased under agreements to resell
127
 
 
129
 
 
256
 
Federal funds sold
(676
)
 
412
 
 
(264
)
Investment securities
8,017
 
 
(6,163
)
 
1,854
 
Mortgage loans
(2,914
)
 
(2,079
)
 
(4,993
)
Total interest income
(24,677
)
 
5,709
 
 
(18,968
)
Interest expense
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
Discount notes
(2,095
)
 
1,507
 
 
(588
)
Bonds
(7,205
)
 
(9,928
)
 
(17,133
)
Deposits
20
 
 
18
 
 
38
 
Mandatorily redeemable capital stock
 
 
136
 
 
136
 
Other borrowings
(1
)
 
1
 
 
 
Total interest expense
(9,281
)
 
(8,266
)
 
(17,547
)
Change in net interest income
$
(15,396
)
 
$
13,975
 
 
$
(1,421
)
 
The average balance of total advances decreased $9.4 billion, or 25.9 percent, for the three months ended March 31, 2011, compared with the same period in 2010. The trend of decreasing member demand for advances is discussed under Executive Summary. The following table summarizes average balances of advances outstanding during the quarters ending March 31, 2011 and 2010, by product type.
 

56


Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
 
Three Months Ended March 31,
 
 
2011
Average
Balance
 
2010
Average
Balance
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
10,184,861
 
 
$
10,720,912
 
Putable
 
6,653,120
 
 
8,294,941
 
Short-term
 
2,752,540
 
 
9,931,475
 
Amortizing
 
1,697,401
 
 
2,083,736
 
Overnight
 
592,235
 
 
467,947
 
Expander
 
10,000
 
 
 
Callable
 
7,000
 
 
11,500
 
 
 
21,897,157
 
 
31,510,511
 
 
 
 
 
 
Variable-rate indexed advances—par value
 
 
 
 
Simple variable
 
4,362,500
 
 
4,024,083
 
Overnight
 
12,245
 
 
19,129
 
LIBOR-indexed with declining-rate participation
 
5,500
 
 
5,500
 
Capped floating rate
 
778
 
 
 
 
 
4,381,023
 
 
4,048,712
 
Total average par value
 
26,278,180
 
 
35,559,223
 
Net premiums and (discounts)
 
6,839
 
 
(4,212
)
Hedging adjustments
 
600,151
 
 
709,449
 
Total average advances
 
$
26,885,170
 
 
$
36,264,460
 
 
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, approximately 32.3 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 $17.7 billion for the three months ended March 31, 2011, representing 67.3 percent of the total average balance of advances outstanding during the three months ended March 31, 2011. The average balance of these advances totaled $26.2 billion for the three months ended March 31, 2010, representing 73.7 percent of the total average balance of advances outstanding during the three months ended March 31, 2010.
 
Prepayment fees related to advances and investment securities are included in net interest income. Prepayment fees make the Bank financially indifferent to the prepayment of advances or investments. For the three months ended March 31, 2011 and 2010, net prepayment fees on advances were $1.2 million and $572,000, respectively. For the three months ended March 31, 2011, prepayment fees on investments were $14,000. There were no prepayment fees on investments for the three months ended March 31, 2010. 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.
 
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $1.4 billion, or 17.0 percent, for the three months ended March 31, 2011, from the average balances for the three months ended March 31, 2010. 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. In 2011, there was an increase of $319.4 million in securities purchased under agreements to resell and a decrease of $1.7 billion in federal funds sold.
 
Average investment-securities balances increased $2.2 billion or 13.8 percent for the three months ended March 31, 2011,

57


compared with the same period in 2010. This increase was due to a $4.6 billion increase in average trading securities mainly due to purchases of certificates of deposit. This increase was partially offset by a $1.4 billion decrease in average available-for-sale securities due to a reduction in certificates of deposit offset with purchases in U.S. agency obligations and agency MBS. In addition, average held-to-maturity securities decreased $1.0 billion due to a reduction in held-to-maturity MBS.
 
Average mortgage loans for the three months ended March 31, 2011, were $238.7 million lower than the average balance for the three months ended March 31, 2010, representing a decrease of 6.9 percent.
 
The yield on the mortgage-loan portfolio was 4.85 percent and 5.10 percent for the three months ended March 31, 2011 and 2010.
 
Composition of the Yields on Mortgage Loans
(dollars in thousands)
 
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
 
 
Interest
Income
 
Average
Yield (1)
 
Interest
Income
 
Average
Yield (1)
Coupon accrual
 
$
40,361
 
 
5.10
 %
 
$
45,107
 
 
5.31
 %
Premium/discount amortization
 
(1,233
)
 
(0.15
)
 
(904
)
 
(0.11
)
Credit-enhancement fees
 
(794
)
 
(0.10
)
 
(877
)
 
(0.10
)
Total interest income
 
$
38,334
 
 
4.85
 %
 
$
43,326
 
 
5.10
 %
_________________________
(1) Yields are annualized.
 
Average CO balances decreased $9.0 billion, or 15.3 percent, for the three months ended March 31, 2011, compared with the same period in 2010, resulting from the Bank's reduced funding needs due to the decline in member demand for advances, as discussed under Executive Summary. This overall decline consisted of a decrease of $7.0 billion in CO discount notes and a decrease of $2.0 billion in CO bonds.
Average Consolidated Obligations Outstanding
(dollars in thousands) 
 
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
 
 
Average
Balance
 
Average
Yield (1)
 
Average
Balance
 
Average
Yield (1)
Overnight discount notes
 
$
3,148,971
 
 
0.10
%
 
$
4,162,140
 
 
0.09
%
Term discount notes
 
12,077,299
 
 
0.15
 
 
18,102,687
 
 
0.11
 
Total discount notes
 
15,226,270
 
 
0.14
 
 
22,264,827
 
 
0.10
 
Bonds
 
34,887,862
 
 
1.40
 
 
36,886,861
 
 
1.51
 
Total consolidated obligations
 
$
50,114,132
 
 
1.01
%
 
$
59,151,688
 
 
0.98
%
_________________________
(1) Yields are annualized.
 
The average balance of term CO discount notes decreased $6.0 billion and overnight CO discount notes decreased $1.0 billion for the three months ended March 31, 2011. Average balances of CO bonds decreased $2.0 billion from the prior period. The average balance of CO discount notes represented approximately 30.4 percent of total average COs during the three months ended March 31, 2011, as compared with 37.6 percent of total average COs during the three months ended March 31, 2010. The average balance of bonds represented 69.6 percent and 62.4 percent of total average COs outstanding during the three months ended March 31, 2011 and 2010, respectively. The relative increase in the proportion of CO bonds as compared to total COs is due to the net decline in short-term assets, including short-term advances and money market investments, and to the increase in long-term assets, including U.S. agency debentures.
 
Impact of Derivative and Hedging Activity
 

58


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 tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities and net unrealized (losses) gains on trading securities for the three months ended March 31, 2011 and 2010 (dollars in thousands).
 
 
For the Three Months Ended March 31, 2011
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
CO Discount Notes
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
 
 
$
143
 
 
$
87
 
 
$
 
 
$
164
 
 
$
 
 
$
394
 
 
Net interest settlements included in net interest income (2)
 
(77,263
)
 
(12,188
)
 
 
 
394
 
 
42,676
 
 
 
 
(46,381
)
 
Total net interest income
 
(77,263
)
 
(12,045
)
 
87
 
 
394
 
 
42,840
 
 
 
 
(45,987
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
355
 
 
418
 
 
 
 
 
 
(41
)
 
 
 
732
 
 
(Losses) gains on derivatives not receiving hedge accounting
 
(21
)
 
1,037
 
 
 
 
 
 
 
 
 
 
1,016
 
 
Other
 
 
 
 
 
73
 
 
 
 
 
 
 
 
73
 
 
Net gains (losses) on derivatives and hedging activities
 
334
 
 
1,455
 
 
73
 
 
 
 
(41
)
 
 
 
1,821
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(76,929
)
 
(10,590
)
 
160
 
 
394
 
 
42,799
 
 
 
 
(44,166
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities (3)
 
 
 
1,906
 
 
 
 
 
 
 
 
 
 
1,906
 
 
Total net effect of derivatives and hedging activities
 
$
(76,929
)
 
$
(8,684
)
 
$
160
 
 
$
394
 
 
$
42,799
 
 
$
 
 
$
(42,260
)
 
_____________________
(1) Represents the amortization/accretion of hedging fair-value adjustments for both open and closed hedge positions.
(2) Represents interest income/expense on derivatives included in net interest income.
(3) Includes only those gains or losses on trading securities that have an economic derivative assigned, and therefore, this line does not reconcile with the statement of operations.
 

59


 
 
For the Three Months Ended March 31, 2010
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
CO Discount Notes
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
 
 
$
138
 
 
$
54
 
 
$
 
 
$
605
 
 
$
 
 
$
797
 
Net interest settlements included in net interest income (2)
 
(110,160
)
 
(12,938
)
 
 
 
396
 
 
60,656
 
 
75
 
 
(61,971
)
Total net interest income
 
(110,160
)
 
(12,800
)
 
54
 
 
396
 
 
61,261
 
 
75
 
 
(61,174
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
220
 
 
269
 
 
 
 
 
 
352
 
 
81
 
 
922
 
Losses on derivatives not receiving hedge accounting
 
(550
)
 
(3,354
)
 
 
 
 
 
 
 
 
 
(3,904
)
Other
 
 
 
 
 
150
 
 
 
 
 
 
 
 
150
 
Net (losses) gains on derivatives and hedging activities
 
(330
)
 
(3,085
)
 
150
 
 
 
 
352
 
 
81
 
 
(2,832
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(110,490
)
 
(15,885
)
 
204
 
 
396
 
 
61,613
 
 
156
 
 
(64,006
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities (3)
 
 
 
1,847
 
 
 
 
 
 
 
 
 
 
1,847
 
Total net effect of derivatives and hedging activities
 
$
(110,490
)
 
$
(14,038
)
 
$
204
 
 
$
396
 
 
$
61,613
 
 
$
156
 
 
$
(62,159
)
_____________________
(1) Represents the amortization/accretion of hedging fair-value adjustments for both open and closed hedge positions.
(2) Represents interest income/expense on derivatives included in net interest income.
(3) Includes only those gains or losses on trading securities that have an economic derivative assigned.
 
Net interest margin for the three months ended March 31, 2011 and 2010, was 0.49 percent and 0.43 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 0.83 percent and 0.82 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 loss on derivatives and hedging activities in other income. As shown under Other Income (Loss) and Operating Expenses below, interest accruals on derivatives classified as economic hedges totaled a net expense of $2.5 million and $2.0 million, respectively, for the three months ended March 31, 2011 and 2010.
 
For more information about the Bank's use of derivative instruments to manage interest-rate risk, see Item 3 — Quantitative and Qualitative Disclosures about Market Risk — Market and Interest-Rate Risk.
 
Other Income (Loss) and Operating Expenses
 
The following table presents a summary of other income (loss) for the three months ended March 31, 2011 and 2010. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
 

60


Other Income (Loss)
(dollars in thousands)
 
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
Gains (losses) on derivatives and hedging activities:
 
 
 
 
Net gains related to fair-value hedge ineffectiveness
 
$
732
 
 
$
922
 
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
 
 
 
 
Advances
 
581
 
 
125
 
Trading securities
 
2,962
 
 
(2,052
)
Mortgage delivery commitments
 
73
 
 
151
 
Net interest-accruals related to derivatives not receiving hedge accounting
 
(2,527
)
 
(1,978
)
Net gains (losses) on derivatives and hedging activities
 
1,821
 
 
(2,832
)
Net impairment losses on held-to-maturity securities recognized in income
 
(30,584
)
 
(22,823
)
Service-fee income
 
2,045
 
 
1,444
 
Net unrealized (losses) gains on trading securities
 
(1,897
)
 
1,846
 
Realized gain from sale of available-for-sale securities
 
8,369
 
 
 
Other
 
154
 
 
66
 
Total other loss
 
$
(20,092
)
 
$
(22,299
)
 
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.
For the securities on which we recognized other-than-temporary impairment during 2011, the average credit enhancement was not sufficient to cover projected expected credit losses. The average credit enhancement at March 31, 2011, was approximately 16.1 percent and the expected average collateral loss was approximately 42.0 percent. Accordingly, the Bank recorded an other-than-temporary impairment related to a credit loss of $30.6 million during the first quarter of 2011.
The following table displays the Bank's held-to-maturity securities for which other-than-temporary impairment was recognized in the three months ending March 31, 2011 and 2010, based on whether the security is newly impaired or previously impaired (dollars in thousands).
 
For the Three Months Ended March 31, 2011
 
For the Three Months Ended March 31, 2010
Other-Than-
Temporarily Impaired
Investment:
Total Other-
Than-
Temporary
Impairment
Losses on
Investment
Securities
 
Net Amount of
Impairment
Losses
Reclassified
(from) to
Accumulated
Other
Comprehensive
Loss
 
Net
Impairment
Losses on
Investment
Securities
Recognized in
Income
 
Total Other-
Than-Temporary
Impairment
Losses on
Investment
Securities
 
Net Amount of
Impairment
Losses
Reclassified
(from) to
Accumulated
Other
Comprehensive Loss
 
Net Impairment
Losses on
Investment
Securities
Recognized in
Income
Securities newly- impaired during the year
$
(4,928
)
 
$
4,926
 
 
$
(2
)
 
$
(15,704
)
 
$
15,666
 
 
$
(38
)
Securities previously impaired prior to current period
(1,859
)
 
(28,723
)
 
(30,582
)
 
(4,843
)
 
(17,942
)
 
(22,785
)
Total other-than-temporarily impaired securities
$
(6,787
)
 
$
(23,797
)
 
$
(30,584
)
 
$
(20,547
)
 
$
(2,276
)
 
$
(22,823
)
 
The following table displays the Bank's held-to-maturity securities for which other-than-temporary impairment was recognized in the three months ending March 31, 2011 (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.

61


 
At March 31, 2011
 
For the Three Months
Ended
March 31, 2011
Other-Than-Temporarily Impaired Investment:
Par Value
 
Amortized
Cost
 
Carrying
Value
 
Fair Value
 
Other-than-Temporary
Impairment Related to
Credit Loss
Private-label residential MBS - Prime
$
68,811
 
 
$
61,091
 
 
$
44,063
 
 
$
50,857
 
 
$
(515
)
Private-label residential MBS - Alt-A
1,632,106
 
 
1,183,663
 
 
811,008
 
 
902,538
 
 
(30,004
)
ABS backed by home equity loans - Subprime
1,075
 
 
724
 
 
503
 
 
602
 
 
(65
)
Total other-than-temporarily impaired securities
$
1,701,992
 
 
$
1,245,478
 
 
$
855,574
 
 
$
953,997
 
 
$
(30,584
)
 
See Item 1 — Notes to the Financial Statements — Note 5 — Held-to-Maturity Securities, Note 6 — Other-Than-Temporary Impairment, and Investments Credit Risk below for additional detail and analysis of the Bank's portfolio of held-to-maturity investments in private-label MBS.
 
Changes in the fair value of trading securities are recorded in other income (loss). The Bank recorded net unrealized losses on trading securities of $1.9 million and net unrealized gains of $1.8 million for the three months ended March 31, 2011 and 2010, respectively. Changes in the fair value of the associated economic hedges amounted to a net gain of $3.0 million and a net loss of $2.1 million for the three months ended March 31, 2011 and 2010, respectively. Also included in other income (loss) are interest accruals on these economic hedges, which resulted in a net loss of $1.9 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively.
 
Operating expenses for the three months ended March 31, 2011 and 2010, are summarized in the following table:
 
Compensation and Benefits and Other Operating Expenses
(dollars in thousands)
 
 
 
For the Three Months Ended March 31,
 
 
2011
 
2010
Compensation and benefits
 
$
8,171
 
 
$
8,050
 
Other operating expenses
 
4,375
 
 
4,325
 
Total compensation and benefits and other operating expenses
 
$
12,546
 
 
$
12,375
 
Ratio of compensation and benefits and other operating expenses to average assets
 
0.09
%
 
0.08
%
 
For the three months ended March 31, 2011, total compensation and benefits and other operating expenses increased $171,000 from the same period in 2010, and consists of an increase of $121,000 in compensation and benefits and an increase of $50,000 in other operating expenses.
 
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. These expenses totaled $2.2 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively. These costs are expected to rise in 2011 based on the Finance Agency's plans to add staff to its Office of the Inspector General.
 
FINANCIAL CONDITION
 
Advances
 
At March 31, 2011, the advances portfolio totaled $25.9 billion, a decrease of $2.1 billion compared with $28.0 billion at December 31, 2010. The majority of the net decrease was seen in short-term fixed-rate advances, which declined $1.4 billion. See Executive Summary for information regarding the decline in advances.
 
The following table summarizes advances outstanding by product type at March 31, 2011, and December 31, 2010.
 

62


Advances Outstanding by Product Type
(dollars in thousands)
 
March 31, 2011
 
December 31, 2010
 
Par Value
 
Percent of
Total
 
Par Value
 
Percent of
Total
Fixed-rate advances
 
 
 
 
 
 
 
 
 
 
 
     Overnight
$
574,830
 
 
2.3
%
 
$
552,685
 
 
2.0
%
Long-term
10,354,286
 
 
40.8
 
 
10,403,154
 
 
38.0
 
Putable
6,349,125
 
 
25.0
 
 
6,842,175
 
 
25.0
 
Short-term
2,044,692
 
 
8.1
 
 
3,416,107
 
 
12.5
 
Amortizing
1,655,636
 
 
6.5
 
 
1,788,739
 
 
6.5
 
Callable
6,500
 
 
 
 
11,500
 
 
 
  Expander
10,000
 
 
 
 
10,000
 
 
 
 
20,995,069
 
 
82.7
 
 
23,024,360
 
 
84.0
 
 
 
 
 
 
 
 
 
Variable-rate advances
 
 
 
 
 
 
 
 
 
 
 
     Overnight
20,755
 
 
0.1
 
 
3,816
 
 
 
Simple variable
4,362,500
 
 
17.2
 
 
4,352,500
 
 
16.0
 
Capped floating rate
10,000
 
 
 
 
10,000
 
 
 
LIBOR-indexed with declining-rate participation
5,500
 
 
 
 
5,500
 
 
 
 
4,398,755
 
 
17.3
 
 
4,371,816
 
 
16.0
 
Total par value
$
25,393,824
 
 
100.0
%
 
$
27,396,176
 
 
100.0
%
 
See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.
 
The Bank lends to members and housing associates with principal places of business within the six New England states. Advances are diversified across the Bank's member institutions. At March 31, 2011, the Bank had advances outstanding to 332, or 72.6 percent, of its 457 members. At December 31, 2010, the Bank had advances outstanding to 333, or 72.5 percent, of its 459 members.
 
The following table presents the top five advance-borrowing members at March 31, 2011, and the interest earned by the Bank on outstanding advances to such members during the first quarter of 2011.
Top Five Advance-Borrowing Members
(dollars in thousands)
 
 
March 31, 2011
 
 
Name
 
Par Value of
Advances
 
Percent of Total Par Value of
Advances
 
Weighted-Average
Rate (1)
 
Advances Interest Income for the Three Months Ended
March 31, 2011
RBS Citizens, N.A.
 
$
4,022,385
 
 
15.8
%
 
0.27
%
 
$
3,970
 
NewAlliance Bank
 
2,079,092
 
 
8.2
 
 
2.49
 
 
13,507
 
Bank of America Rhode Island, N.A.
 
1,336,395
 
 
5.3
 
 
1.19
 
 
4,780
 
Salem Five Cents Savings Bank
 
552,086
 
 
2.2
 
 
3.98
 
 
5,494
 
The Washington Trust Company
 
469,235
 
 
1.8
 
 
3.97
 
 
4,732
 
_______________________
(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.
 
As with other members, the top five advance-borrowing members have reduced their demand for advances since December 31, 2010. At March 31, 2011, the par value of advances for these members aggregated to $8.5 billion falling from $10.2 billion at December 31, 2010.
 
In April 2011, First Niagara Financial Group Inc., a nonmember, acquired NewAlliance Bancshares, Inc. (parent of member

63


New Alliance Bank). Nonmembers, excluding housing associates, are ineligible to borrow from the Bank. Among the top five advance-borrowing members, NewAlliance Bank was the largest source of advances interest income for the quarter ended March 31, 2011, as shown in the above table. Accordingly, the acquisition of NewAlliance Bank by First Niagara Financial Group Inc. could adversely impact the Bank's advances interest income.
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 advance-borrowing 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.
 
Advances Credit Risk
 
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. All pledged collateral is subject to haircuts assigned by the Bank based on the Bank's opinion of the incremental risk that such collateral presents. 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.
 
The Bank's membership continues to be challenged by the current economic conditions, such as high unemployment and resultant loan delinquencies. Aggregate nonperforming assets for depository institution members increased from 1.72 percent of total assets as of December 31, 2009, to 1.94 percent of assets as of December 31, 2010. The aggregate ratio of tangible capital to assets among the membership increased from 9.56 percent as of December 31, 2009, to 10.25 percent as of December 31, 2010. December 31, 2010, is the most recent date of the Bank's data on its membership for purposes of this report. Between 1994 and 2010, one member was placed into receivership by its regulator and one member was placed into conservatorship by its regulator and subsequently liquidated. There were no defaults on member obligations to the Bank. Through the four-month period ending April 30, 2011, there were no member failures. 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.
The Bank assigns each borrower into one of three collateral categories: Category 1 (blanket) collateral status, Category 2 (listing) collateral status, or Category 3 (delivery) collateral status.
 
The Bank assigns members that it has determined are in good financial condition to Category 1 (blanket) status.
 
The Bank assigns members that demonstrate characteristics that evidence potential weakness in their financial condition to Category 2 (listing) collateral status. The Bank may also assign members with a high level of borrowings as a percentage of their assets to Category 2 (listing) collateral status regardless of their financial condition.
 
The Bank assigns members that it has determined are financially weak to Category 3 (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 Category 3 (delivery) collateral status.
 
For additional information on the Bank's classification of its borrowers, see the 2010 Annual Report under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk.  

64


 
Advances outstanding to borrowers in Category 1 (blanket) status at March 31, 2011, totaled $18.3 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 $44.7 billion as of March 31, 2011. Of this total, $7.0 billion of securities have been delivered to the Bank or to an approved third-party custodian, an additional $2.3 billion of securities are held by borrowers' securities corporations, and $14.4 billion of residential mortgage loans have been pledged by borrowers' real-estate-investment trusts.
 
The following table provides information regarding advances outstanding with the Bank's borrowers in Category 1 (blanket), Category 2 (listing) and Category 3 (delivery) status at March 31, 2011, along with their corresponding collateral balances.
 
Advances Outstanding by Borrower Collateral Status
As of March 31, 2011
(dollars in thousands)
 
Number of
Borrowers
 
Advances
Outstanding
 
Discounted
Collateral
 
Ratio of 
Discounted
 Collateral
to Advances
Category 1 (blanket) status
277
 
 
$
18,271,428
 
 
$
44,739,623
 
 
244.9
%
Category 2 (listing) status
31
 
 
6,372,009
 
 
20,999,818
 
 
329.6
 
Category 3 (delivery) status
30
 
 
750,387
 
 
1,169,741
 
 
155.9
 
Total
338
 
 
$
25,393,824
 
 
$
66,909,182
 
 
263.5
%
 
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 as of March 31, 2011.
Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
37,337,786
 
Collateral specifically listed and identified
17,835,812
 
Collateral delivered to the Bank
15,489,422
 
 
Beyond the Bank's practices in taking security interests in collateral, 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 due to the antipreemption 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 $568.7 million at March 31, 2011.
The Bank accepts nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for Bank advances as detailed in the 2010 Annual Report under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk. At March 31, 2011, the amount of pledged nontraditional and subprime loan collateral was 4 percent of total member borrowing capacity at quarter-end compared with 8 percent of total member borrowing capacity at December 31, 2010.
 
Based upon the collateral held as security on advances, the Bank's collateral practices and policies, the Bank's prior 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.
 
For additional information on the Bank's collateral policies and practices, See Item 7 Management’s Discussion and

65


Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk in the 2010 Annual Report.
 
Investments
 
At March 31, 2011, investment securities and short-term money-market instruments totaled $25.9 billion, compared with $27.1 billion at December 31, 2010. This decrease reflects management's intent to maintain its level of investments at a level approximately equal to or less than 50 percent of total assets.
 
Investment securities declined $851.9 million to $18.5 billion at March 31, 2011, compared with $19.4 billion at December 31, 2010. The Bank sold $1.4 billion of available-for sale securities in the first quarter of 2011, contributing to a $605.9 million decrease in corporate bonds and a $297.5 million decrease in non-MBS GSE securities.
 
Short-term money-market investments totaled $7.4 billion at March 31, 2011, compared with $7.8 billion at December 31, 2010. This $375.0 million net decrease resulted from a $1.9 billion decrease in securities purchased under agreements to resell and a $1.6 billion increase in federal funds sold.
 
Under the Bank's regulatory authority to purchase MBS, additional investments in MBS, ABS, 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 month-end. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. At March 31, 2011, and December 31, 2010, the Bank's MBS and SBA holdings represented 209 percent and 210 percent of capital, respectively.
 
The Bank's MBS investment portfolio consists of the following categories of securities as of March 31, 2011, and December 31, 2010. The percentages in the table below are based on carrying value.
 
Mortgage-Backed Securities
 
March 31, 2011
 
December 31, 2010
U.S. government-guaranteed and GSE residential mortgage-backed securities
57.1
%
 
56.5
%
GSE commercial mortgage-backed securities
21.9
 
 
21.3
 
Private-label residential mortgage-backed securities
20.3
 
 
21.0
 
Private-label commercial mortgage-backed securities
0.4
 
 
0.9
 
ABS backed by home-equity loans
0.3
 
 
0.3
 
Total mortgage-backed securities
100.0
%
 
100.0
%
 
See Item 1 — Notes to the Financial Statements — Note 3 — Trading Securities, Note 4 — Available-for-Sale Securities, Note 5 — Held-to-Maturity Securities, and Note 6 — Other-Than-Temporary Impairment for additional information on the Bank's investment securities.
 
Investments Credit Risk. 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 and supranationals. The Bank may place 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; currently all such placements expire within 95 days. Management actively monitors the credit quality of these counterparties. At March 31, 2011, the Bank's unsecured credit exposure, including accrued interest related to money-market instruments and debentures, was $17.4 billion to 30 counterparties and issuers, of which $5.4 billion was for certificates of deposit, $7.1 billion was for federal funds sold, and $4.9 billion was for debentures. As of March 31, 2011, one counterparty individually accounted for 12.7 percent of the Bank's total unsecured credit exposure.
 
The Bank also is invested in and is subject to secured credit risk related to MBS, ABS, and HFA obligations that are directly or indirectly supported by underlying mortgage loans. Investments in MBS and ABS must be rated the highest long-term debt rating at the time of purchase. HFA bonds must carry a credit rating of double-A (or its equivalent rating) or higher as of the date of purchase.
 
Credit ratings on these investments are provided in the following table.
 

66


Credit Ratings of Investments at Carrying Value
As of March 31, 2011
(dollars in thousands)
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
 
 
$
202
 
 
$
 
 
$
 
 
$
 
 
$
 
Certificates of deposit
 
 
 
2,944,927
 
 
2,410,003
 
 
 
 
 
 
 
Securities purchased under agreements to resell
 
 
 
 
 
250,000
 
 
 
 
 
 
 
Federal funds sold
 
 
 
3,035,000
 
 
4,100,000
 
 
 
 
 
 
 
Total money-market instruments
 
 
 
5,980,129
 
 
6,760,003
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations
 
23,491
 
 
 
 
 
 
 
 
 
 
 
U.S. government-owned corporations
 
236,752
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
 
3,293,190
 
 
 
 
 
 
 
 
 
 
 
Supranational banks
 
397,561
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
568,894
 
 
 
 
 
 
 
 
 
 
 
HFA obligations
 
25,340
 
 
152,376
 
 
2,114
 
 
51,070
 
 
 
 
1,875
 
Total non-MBS
 
4,545,228
 
 
152,376
 
 
2,114
 
 
51,070
 
 
 
 
1,875
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential
 
240,294
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
 
4,562,427
 
 
 
 
 
 
 
 
 
 
 
GSE - commercial
 
1,837,899
 
 
 
 
 
 
 
 
 
 
 
Private-label - residential
 
117,310
 
 
63,078
 
 
65,760
 
 
47,137
 
 
1,418,100
 
 
 
Private-label - commercial
 
34,852
 
 
 
 
 
 
 
 
 
 
 
ABS backed by home-equity loans
 
8,376
 
 
6,784
 
 
5,487
 
 
 
 
7,302
 
 
 
Total MBS
 
6,801,158
 
 
69,862
 
 
71,247
 
 
47,137
 
 
1,425,402
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
11,346,386
 
 
$
6,202,367
 
 
$
6,833,364
 
 
$
98,207
 
 
$
1,425,402
 
 
$
1,875
 
 _______________________
(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 for these investments, 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.
 
The following table details the Bank's investment securities with a long-term credit rating below investment grade as of March 31, 2011.
Credit Ratings of Investments Below Investment Grade at Carrying Value
As of March 31, 2011
(dollars in thousands)
Investment Category
 
Double-B
 
Single-B
 
Triple-C
 
Double-C
 
Single-C
 
Single-D
 
Total Below
Investment
Grade
Private-label residential MBS
 
$
30,421
 
 
$
150,460
 
 
$
782,390
 
 
$
240,802
 
 
$
28,418
 
 
$
185,609
 
 
$
1,418,100
 
ABS backed by home-equity loans
 
 
 
5,353
 
 
1,446
 
 
 
 
 
 
503
 
 
7,302
 
Total
 
$
30,421
 
 
$
155,813
 
 
$
783,836
 
 
$
240,802
 
 
$
28,418
 
 
$
186,112
 
 
$
1,425,402
 
 

67


The following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs relating to the Bank's private-label MBS during the quarter ended March 31, 2011, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS and home equity loan investments in each category shown, regardless of whether or not the securities have incurred an other-than-temporary credit loss (dollars in thousands).
 
 
 
 
Significant Inputs
 
 
 
 
 
 
 
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Current
Credit Enhancement
Private-label MBS by
Year of Securitization
 
Par Value (1)
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
 
Weighted
Average
Percent
 
Range
Percent
Private-label residential MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
$
100,826
 
 
8.7
%
 
7.7 - 9.9%
 
25.9
%
 
8.8 - 34.7%
 
35.7
%
 
25.4 - 39.6%
 
10.8
%
 
3.9 - 13.8%
2006
 
48,431
 
 
9.8
 
 
9.5 - 10.3
 
29.0
 
 
20.6 - 40.9
 
42.3
 
 
41.6 - 43.3
 
10.0
 
 
3.1 - 14.8
2005
 
8,630
 
 
8.3
 
 
8.1 - 8.4
 
22.8
 
 
21.3 - 23.9
 
33.6
 
 
32.7 - 34.7
 
22.0
 
 
12.3 - 29.2
2004 and prior
 
140,351
 
 
12.3
 
 
3.5 - 19.2
 
13.6
 
 
0.7 - 56.1
 
29.9
 
 
20.0 - 77.9
 
12.9
 
 
5.5 - 69.4
Total
 
$
298,238
 
 
10.5
%
 
3.5 - 19.2%
 
20.5
%
 
0.7 - 56.1%
 
34.0
%
 
20.0 - 77.9%
 
12.0
%
 
3.1 - 69.4%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
$
659,957
 
 
6.7
%
 
3.7 - 12.7%
 
77.7
%
 
33.6 - 87.6%
 
55.3
%
 
47.0 - 60.5%
 
14.9
%
 
0.0 - 46.9%
2006
 
1,029,049
 
 
7.0
 
 
3.8 - 11.0
 
75.8
 
 
49.5 - 89.7
 
56.1
 
 
47.3 - 61.3
 
18.0
 
 
0.0 - 45.3
2005
 
711,905
 
 
10.0
 
 
6.9 - 14.9
 
52.1
 
 
27.3 - 75.2
 
46.3
 
 
34.7 - 59.6
 
24.9
 
 
1.5 - 57.3
2004 and prior
 
89,495
 
 
12.6
 
 
8.6 - 17.5
 
36.0
 
 
2.3 - 59.8
 
40.1
 
 
22.1 - 57.3
 
27.0
 
 
7.3 - 40.7
Total
 
$
2,490,406
 
 
8.0
%
 
3.7 - 17.5%
 
68.1
%
 
2.3 - 89.7%
 
52.5
%
 
22.1 - 61.3%
 
19.5
%
 
0.0 - 57.3%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ABS backed by home equity loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
 
$
29,137
 
 
10.2
%
 
0.0 - 13.8%
 
36.6
%
 
25.4 - 52.4%
 
86.3
%
 
64.2 - 102.8%
 
38.2
%
 
0.0 - 99.8%
_______________________
(1)         The Bank's commercial private-label MBS with a par value of $34.9 million were not included in this table as well as a private-label residential MBS with a par value of $3.5 million that is backed by the Federal Housing Administration and the Department of Veteran Affairs loans.
(2)    Securities are classified in the table above based upon the current performance characteristics of the underlying pool and therefore the manner in which the collateral pool group backing the security has been modeled (as prime, Alt-A, or subprime), rather than the classification of the security at the time of issuance.
 
The Bank classifies private-label residential and commercial MBS and ABS backed by home equity loans as prime, Alt-A, or subprime based on the originator's classification at the time of origination or based on the classification by an NRSRO upon issuance of the MBS. In some instances, the NRSROs may have changed their classification subsequent to origination which would not necessarily be reflected in the following tables.
 
Of the Bank's $9.5 billion in par value of MBS and ABS investments at March 31, 2011, $2.9 billion in par value are private-label MBS. Of this amount, $2.4 billion in par value are securities backed primarily by Alt-A loans, while $417.7 million in par value are backed primarily by prime loans. Only $29.1 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 revises the classification where appropriate, an approach that is likewise incorporated into the modeling assumptions provided by the FHLBank System's other-than-temporary impairment governance committee. For additional information on the governance committee, see the 2010 Annual Report under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates. 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

68


Bank, holding $86.0 million in par value as of March 31, 2011, to have collateral that is Alt-A in nature, while that same collateral is classified as prime by S&P. Accordingly, these bonds have been modeled using the same credit assumptions applied to Alt-A collateral. Two of these bonds, with a total par value of $48.9 million as of March 31, 2011, were deemed to be other-than-temporarily impaired as of March 31, 2011. These bonds are reported as prime in the various tables below in this section. In addition, one bond classified as Alt-A collateral by S&P, of which the Bank held $5.0 million in par value as of March 31, 2011, is classified and modeled as prime by the third-party modeling software. However this bond is reported as Alt-A in the various tables below in this section in accordance with S&P's classification. See — Critical Accounting Estimates for information on the Bank's key inputs, assumptions, and modeling employed by the Bank in its other-than-temporary impairment assessments.
 
Unpaid Principal Balance of Private-Label MBS and Home Equity Loans
by Fixed Rate or Variable Rate
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2011
 
December 31, 2010
Private-label MBS
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
 
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
Private-label residential MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
$
25,774
 
 
$
357,047
 
 
$
382,821
 
 
$
26,737
 
 
$
374,034
 
 
$
400,771
 
Alt-A
46,533
 
 
2,362,823
 
 
2,409,356
 
 
48,758
 
 
2,445,071
 
 
2,493,829
 
Total private-label residential MBS
72,307
 
 
2,719,870
 
 
2,792,177
 
 
75,495
 
 
2,819,105
 
 
2,894,600
 
Private-label commercial MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
10,586
 
 
24,322
 
 
34,908
 
 
10,586
 
 
61,271
 
 
71,857
 
ABS backed by home equity loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime
 
 
29,137
 
 
29,137
 
 
 
 
29,424
 
 
29,424
 
Total par value of private-label MBS
$
82,893
 
 
$
2,773,329
 
 
$
2,856,222
 
 
$
86,081
 
 
$
2,909,800
 
 
$
2,995,881
 
_______________________
 (1)     The determination of fixed or variable rate is based upon the contractual coupon type of the security.
 
The following tables provide 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 March 31, 2011, are stratified by year of issuance of the security. The tables also set forth the credit ratings and summary credit enhancements associated with the Bank's private-label MBS and ABS, stratified by collateral type and vintage. Average current credit enhancements as of December 31, 2010, reflect the percentage of subordinated class outstanding balances as of March 31, 2011, to the Bank's senior class outstanding balances as of March 31, 2011, weighted by the par value of the Bank's respective senior class securities, and shown by underlying loan collateral type and issuance vintage. Average current credit enhancements as of March 31, 2011, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted. The average current credit enhancements do not fully reflect the Bank's credit protection in its private-label MBS holdings as prioritization in the timing of receipt of cash flows and credit event triggers accelerate the return of the Bank's investment before losses can no longer be absorbed by subordinate classes.
 

69


Private-Label MBS and
ABS Backed by Home Equity Loans
by Year of Securitization - Prime
At March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Private-label residential MBS - Prime
Total
 
2007
 
2006
 
2005
 
2004 and prior
Par value by credit rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Triple-A
$
92,081
 
 
$
 
 
$
 
 
$
 
 
$
92,081
 
   Double-A
37,684
 
 
 
 
 
 
 
 
37,684
 
   Single-A
5,148
 
 
 
 
 
 
 
 
5,148
 
   Triple-B
32,959
 
 
24,372
 
 
 
 
 
 
8,587
 
Below Investment Grade
 
 
 
 
 
 
 
 
 
   Double-B
5,092
 
 
 
 
 
 
 
 
5,092
 
   Single-B
69,653
 
 
14,763
 
 
28,564
 
 
17,493
 
 
8,833
 
   Triple-C
120,337
 
 
61,691
 
 
 
 
48,945
 
 
9,701
 
   Double-C
19,867
 
 
 
 
19,867
 
 
 
 
 
Total
382,821
 
 
100,826
 
 
48,431
 
 
66,438
 
 
167,126
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
374,293
 
 
100,267
 
 
44,658
 
 
62,487
 
 
166,881
 
Gross unrealized losses
(40,253
)
 
(6,779
)
 
(535
)
 
(12,707
)
 
(20,232
)
Fair value
334,058
 
 
93,488
 
 
44,123
 
 
49,780
 
 
146,667
 
Other-than-temporary impairment for the three months ended March 31, 2011:
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
 
 
 
 
 
 
 
 
 
Net amount of impairment losses reclassified (from) to accumulated other comprehensive loss
(515
)
 
 
 
(350
)
 
(165
)
 
 
Net impairment losses on investment securities recognized in income
(515
)
 
 
 
(350
)
 
(165
)
 
 
Weighted average percentage of fair value to par value
87.26
%
 
92.72
%
 
91.11
%
 
74.93
%
 
87.76
%
Original weighted average credit support
10.87
 
 
10.18
 
 
11.01
 
 
20.94
 
 
7.25
 
Weighted average credit support
14.28
 
 
10.82
 
 
9.96
 
 
18.51
 
 
15.94
 
Weighted average collateral delinquency (1)
12.45
 
 
8.65
 
 
12.90
 
 
22.28
 
 
10.69
 
 
 
 
 
 
 
 
 
 
 
Private-label commercial MBS - Prime
Total
 
2007
 
2006
 
2005
 
2004 and prior
Par value by credit rating
 
 
 
 
 
 
 
 
 
   Triple-A
$
34,908
 
 
$
 
 
$
 
 
$
 
 
$
34,908
 
Amortized cost
34,852
 
 
 
 
 
 
 
 
34,852
 
Gross unrealized losses
(110
)
 
 
 
 
 
 
 
(110
)
Fair value
35,432
 
 
 
 
 
 
 
 
35,432
 
Weighted average percentage of fair value to par value
101.50
%
 
%
 
%
 
%
 
101.50
%
Original weighted average credit support
19.25
 
 
 
 
 
 
 
 
19.25
 
Weighted average credit support
32.16
 
 
 
 
 
 
 
 
32.16
 
Weighted average collateral delinquency (1)
3.83
 
 
 
 
 
 
 
 
3.83
 
_______________________
 (1)          Represents loans that are 60 days or more delinquent.
 

70


Private-Label MBS and
ABS Backed by Home Equity Loans
by Year of Securitization - Alt-A
At March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Private-label residential MBS - Alt-A
Total
 
2007
 
2006
 
2005
 
2004 and prior
Par value by credit rating
 
 
 
 
 
 
 
 
 
   Triple-A
$
25,309
 
 
$
 
 
$
 
 
$
15,650
 
 
$
9,659
 
   Double-A
25,394
 
 
9,337
 
 
 
 
 
 
16,057
 
   Single-A
60,612
 
 
 
 
 
 
52,339
 
 
8,273
 
   Triple-B
14,178
 
 
 
 
 
 
2,097
 
 
12,081
 
Below Investment Grade
 
 
 
 
 
 
 
 
 
   Double-B
25,329
 
 
 
 
 
 
25,329
 
 
 
   Single-B
84,683
 
 
279
 
 
4,007
 
 
60,214
 
 
20,183
 
   Triple-C
1,192,522
 
 
256,469
 
 
563,768
 
 
372,285
 
 
 
   Double-C
507,073
 
 
191,077
 
 
231,567
 
 
84,429
 
 
 
   Single-C
52,893
 
 
11,139
 
 
 
 
41,754
 
 
 
   Single-D
421,363
 
 
191,656
 
 
229,707
 
 
 
 
 
Total
2,409,356
 
 
659,957
 
 
1,029,049
 
 
654,097
 
 
66,253
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
1,886,337
 
 
471,199
 
 
757,926
 
 
590,959
 
 
66,253
 
Gross unrealized losses
(469,393
)
 
(117,601
)
 
(197,441
)
 
(142,669
)
 
(11,682
)
Fair value
1,417,729
 
 
354,187
 
 
560,494
 
 
448,477
 
 
54,571
 
Other-than-temporary impairment for the three months ended March 31, 2011:
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(6,787
)
 
(1,003
)
 
(856
)
 
(4,928
)
 
 
Net amount of impairment losses reclassified (from) to accumulated other comprehensive loss
(23,217
)
 
(4,476
)
 
(18,126
)
 
(615
)
 
 
Net impairment losses on investment securities recognized in income
(30,004
)
 
(5,479
)
 
(18,982
)
 
(5,543
)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to par value
58.84
%
 
53.67
%
 
54.47
%
 
68.56
%
 
82.37
%
Original weighted average credit support
27.23
 
 
27.26
 
 
28.23
 
 
27.12
 
 
12.62
 
Weighted average credit support
19.36
 
 
14.91
 
 
18.01
 
 
25.47
 
 
24.09
 
Weighted average collateral delinquency (1)
40.63
 
 
46.26
 
 
45.35
 
 
29.71
 
 
18.87
 
_______________________
(1)          Represents loans that are 60 days or more delinquent.
 

71


Private-Label MBS and
ABS Backed by Home Equity Loans
by Year of Securitization - Subprime
At March 31, 2011
(dollars in thousands)
 
 
 
ABS backed by home equity loans - Subprime
 
2004 and prior
Par value by credit rating
 
 
 
   Triple-A
 
$
8,386
 
   Double-A
 
6,784
 
   Single-A
 
5,487
 
Below Investment Grade
 
 
   Single-B
 
5,353
 
   Triple-C
 
2,052
 
   Single-D
 
1,075
 
Total
 
29,137
 
 
 
 
Amortized cost
 
28,446
 
Gross unrealized losses
 
(5,969
)
Fair value
 
22,477
 
Other-than-temporary impairment for the three months ended March 31, 2011:
 
 
Total other-than-temporary impairment losses on investment securities
 
 
Net amount of impairment losses reclassified (from) to accumulated other comprehensive loss
 
(65
)
Net impairment losses on investment securities recognized in income
 
(65
)
 
 
 
Weighted average percentage of fair value to par value
 
77.14
%
Original weighted average credit support
 
9.81
 
Weighted average credit support
 
38.18
 
Weighted average collateral delinquency (1)
 
23.06
 
_______________________
(1)          Represents loans that are 60 days or more delinquent.
 
The following table provides a summary of investments on negative watch as April 30, 2011. Carrying values and fair values are as of March 31, 2011.
 
Rating Agency Actions (1) 
Investments on Negative Watch as of April 30, 2011
(dollars in thousands)
 
 
 
Private-Label Residential MBS
State or Local Housing-Finance-Agency Obligations
 
Investment Ratings
 
Carrying Value
 
Fair Value
Carrying Value
 
Fair Value
 
Triple-A
 
$
3,617
 
 
$
3,250
 
 
$
 
 
$
 
 
Single-A
 
 
 
 
 
2,114
 
 
2,117
 
 
Triple-C
 
28,856
 
 
31,781
 
 
 
 
 
 
_______________________
(1)     Represents the lowest rating available for each security based on NRSROs used by the Bank.
 
The following table provides a summary of credit-rating downgrades that have occurred during the period from April 1, 2011, through April 30, 2011, for the Bank's investments. Carrying values and fair values are as of March 31, 2011.
 

72


Rating Agency Actions (1) 
Investment Downgrades
from April 1, 2011, through April 30, 2011
(dollars in thousands)
 
At March 31, 2011
 
At April 30, 2011
 
Private-Label Residential MBS
 
From
 
To
 
Carrying Value
 
Fair Value
 
Triple-A
 
Double-A
 
$
35,875
 
 
$
33,811
 
 
Triple-A
 
Single-A
 
8,403
 
 
7,422
 
 
Triple-A
 
Triple-B
 
11,382
 
 
10,361
 
 
Triple-A
 
Double-B
 
21,752
 
 
19,560
 
 
 
 
 
 
 
 
 
 
Double-A
 
Single-A
 
18,837
 
 
17,308
 
 
Double-A
 
Triple-B
 
12,015
 
 
10,215
 
 
 
 
 
 
 
 
 
 
Single-A
 
Triple-B
 
2,894
 
 
2,318
 
 
_______________________
(1)     Represents the lowest rating available for each security based on NRSROs used by the Bank.
 
Characteristics of Private-Label MBS in a Gross Unrealized Loss Position
As of March 31, 2011
(dollars in thousands)
 
 
 
 
 
March 31, 2011
 
April 30, 2011, MBS ratings based on March 31, 2011, par value
 
Par Value
 
Amortized
Cost
 
Gross
Unrealized
Losses
 
Weighted
Average
Collateral
Delinquency
Rates
 
 
Percent AAA
 
Percent AAA
 
Percent
Investment
Grade
 
Percent
Below
Investment
Grade
 
Percent Watch List
Private-label residential MBS backed by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime first lien
$
379,307
 
 
$
370,692
 
 
$
(40,253
)
 
12.37
%
 
23.4
%
 
2.9
%
 
37.6
%
 
62.4
%
 
1.0
%
Alt-A option ARM
925,236
 
 
796,051
 
 
(228,760
)
 
45.68
 
 
 
 
 
 
0.2
 
 
99.8
 
 
 
Alt-A other
1,431,590
 
 
1,060,578
 
 
(240,633
)
 
37.71
 
 
1.8
 
 
1.8
 
 
8.7
 
 
91.3
 
 
3.5
 
Total private-label residential MBS
2,736,133
 
 
2,227,321
 
 
(509,646
)
 
36.89
 
 
4.2
 
 
1.3
 
 
9.8
 
 
90.2
 
 
2.0
 
Private-label commercial MBS backed by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime first lien
24,322
 
 
24,322
 
 
(110
)
 
4.64
 
 
100.0
 
 
100.0
 
 
100.0
 
 
 
 
 
ABS backed by home equity loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime first lien
29,137
 
 
28,446
 
 
(5,969
)
 
23.06
 
 
28.8
 
 
28.8
 
 
70.9
 
 
29.1
 
 
 
Total private-label MBS
$
2,789,592
 
 
$
2,280,089
 
 
$
(515,725
)
 
36.50
%
 
5.3
%
 
2.5
%
 
11.2
%
 
88.8
%
 
2.0
%
 
The following table provides the geographic concentration by state and by metropolitan statistical area of the Bank's private-label MBS and ABS as of March 31, 2011, where such concentrations are five percent or greater of our total private-label MBS and ABS investments.
 

73


Geographic Concentration of Private-Label MBS and ABS
 
 
State concentration
Percentage of Total Private-Label MBS and ABS
    California
39.6
%
    Florida
12.6
 
    All Other
47.8
 
 
100.0
%
Metropolitan Statistical Area
 
    Los Angeles - Long Beach, CA
10.0
%
    Washington, D.C.-MD-VA-WV
5.7
 
    All Other
84.3
 
 
100.0
%
 
The geographic areas represented in the table above have experienced mortgage loan default rates and home price depreciation rates that are significantly higher than national averages.
 
Since 2008, actual and projected delinquency, foreclosure, and loss rates for prime, subprime, and Alt-A mortgages have increased significantly nationwide. While trends have improved in some of these actual measures and their projected assumptions, they remain elevated as of the date of this report. In addition, home prices are severely depressed in many areas and nationwide unemployment rates are high, increasing the likelihood and magnitude of potential losses to lenders on troubled and/or foreclosed real estate. The widespread impact of these trends has led to the recognition of significant losses by financial institutions, including commercial banks, investment banks, and financial guaranty providers. Actual and expected credit losses on these securities together with uncertainty as to the degree, direction, and duration of these loss trends has led to the reduction in the market values of securities backed by residential mortgages, and has elevated the potential for additional credit losses due to the other-than-temporary impairment of some of these securities. Nonetheless, the average prices of these securities in the Bank's portfolio have recovered somewhat from their lows as increased investor appetite for higher yields coupled with renewed leverage and limited supply have combined to narrow mortgage yield spreads to U.S. Treasury obligations.
 
The following graph demonstrates how average prices changed with respect to various asset classes in the Bank's MBS portfolio during the 12 months ended March 31, 2011:
 
Insured Investments
 
Certain private-label MBS owned by the Bank are insured by monoline insurers, which guarantee the timely payment of principal and interest on such MBS if such payments cannot be satisfied from the cash flows of the underlying mortgage pool.

74


The assessment for other-than-temporary impairment of the MBS protected by such third-party insurance is described in Item 1 — Notes to the Financial Statements — Note 6 — Other-Than-Temporary Impairment.
 
The following table provides the credit ratings of the third-party insurers.
 
Monoline Insurance and GSE Guarantees of MBS and
ABS Backed by Home Equity Loan Investments
Credit Ratings and Outlook
As of April 30, 2011
 
 
Moody's
 
S&P
 
Fitch
 
Credit Rating
 
Outlook
 
Credit Rating
 
Outlook
 
Credit Rating
 
Outlook
Ambac Assurance Corporation (1)
Removed
 
NA
 
Removed
 
NA
 
Not Rated
 
Not Rated
Assured Guaranty Municipal Corp.
Aa3
 
Negative
 
AA+
 
Stable
 
Not Rated
 
Not Rated
MBIA Insurance Corporation
B3
 
Negative
 
B
 
Negative
 
Not Rated
 
Not Rated
Syncora Guarantee Inc.
Ca
 
Developing
 
Removed
 
NA
 
Not Rated
 
Not Rated
Financial Guaranty Insurance Company
Not Rated
 
Not Rated
 
Not Rated
 
Not Rated
 
Not Rated
 
Not Rated
Fannie Mae
Aaa
 
Stable
 
AAA
 
Negative
 
AAA
 
Stable
Freddie Mac
Aaa
 
Stable
 
AAA
 
Negative
 
AAA
 
Stable
_______________________
(1)         On November 8, 2010, Ambac filed a petition for bankruptcy.
 
The following table shows the Bank's private-label MBS and ABS backed by home equity loan investments covered by monoline insurance and related gross unrealized losses.
 
Par Value of Monoline Insurance Coverage and Related Unrealized Losses
of Private-Label MBS and
ABS Backed by Home Equity Loan Investments by Year of Securitization
At March 31, 2011
(dollars in thousands)
 
 
Ambac
 Assurance Corp (1)
 
Assured Guaranty
Municipal Corp
 
MBIA
 Insurance Corp (2)
 
Syncora
Guarantee Inc. (1)
 
Financial Guaranty
Insurance Co. (1)
 
Monoline
Insurance
Coverage
 
Unrealized
Losses
 
Monoline
Insurance
Coverage
 
Unrealized
Losses
 
Monoline
Insurance
Coverage
 
Unrealized
Losses
 
Monoline
Insurance
Coverage
 
Unrealized
Losses
 
Monoline
Insurance
Coverage
 
Unrealized
Losses
Private-label MBS by Year of Securitization
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
$
69,801
 
 
$
(12,645
)
 
$
9,338
 
 
$
(332
)
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
2006
15,265
 
 
(4,812
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2005
32,321
 
 
(8,708
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
1,531
 
 
(208
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Alt-A
118,918
 
 
(26,373
)
 
9,338
 
 
(332
)
 
 
 
 
 
 
 
 
 
 
 
 
Subprime
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
2,108
 
 
(143
)
 
7,168
 
 
(1,741
)
 
14,579
 
 
(2,448
)
 
4,263
 
 
(1,267
)
 
1,019
 
 
(371
)
Total private-label MBS
$
121,026
 
 
$
(26,516
)
 
$
16,506
 
 
$
(2,073
)
 
$
14,579
 
 
$
(2,448
)
 
$
4,263
 
 
$
(1,267
)
 
$
1,019
 
 
$
(371
)
_______________________
(1) The Bank placed no reliance on these monoline insurers in its models estimating the projected cash flows to determine other-than-temporary impairment. See Item 1 — Notes to the Financial Statements — Note 6 — Other-Than-Temporary Impairment for additional information.
(2) MBIA Insurance Corp.'s burnout period ends in June 2011. See Item 1 — Notes to the Financial Statements — Note 6 — Other-Than-Temporary Impairment for additional information.
 
Some of the Bank’s investments in bonds issued by HFAs are also insured by third-party bond insurers. The following table provides the credit ratings of these third-party bond insurers for HFA bonds, along with the amount of investment securities outstanding as of March 31, 2011.

75


HFA Investments Insured by Financial Guarantors
Amortized Cost as of March 31, 2011
(dollars in thousands)
 
Financial Guarantors
 
Insurer Financial
Strength Ratings
(Fitch/Moody's/S&P)
As of April 30, 2011
 
HFA
Bonds
Ambac Assurance Corp.
 
Not Rated/Caa2/Removed
 
$
28,989
 
Assured Guaranty Municipal Corp.
 
Not Rated/Aa3/AA+
 
119,025
 
National Public Finance Guarantee
 
Not Rated/Baa1/BBB
 
51,070
 
Total
 
 
 
$
199,084
 
 
The following table provides the geographic concentration by state of the Bank's HFA investments where such concentrations are five percent or greater of our total HFA investments as of March 31, 2011.
 
State Concentration of HFAs
 
Percent of Total HFA Investments
Massachusetts
50.8
%
Rhode Island
13.2
 
Connecticut
10.7
 
North Carolina
9.6
 
Maine
6.4
 
All Other
9.3
 
 
100.0
%
 
Standby Bond-Purchase Agreements. The Bank has entered into standby bond-purchase agreements with two state HFAs whereby the Bank, for a fee, agrees to purchase and hold the agencies' unremarketed bonds until the designated remarketing agent can find a new investor or the state housing finance agency repurchases the bonds according to a schedule established by the agreement. Each commitment agreement contains termination provisions in the event of a rating downgrade of the subject bond. Total commitments for bond purchases were $554.1 million at March 31, 2011, of which $549.9 million were to one HFA. All of the bonds underlying the $549.9 million commitments to this one HFA maintain standalone ratings of triple-A from two rating agencies, even though some are backed by Ambac Assurance Corporation which has been downgraded below triple-A and has filed a petition for bankruptcy. The bond underlying the $4.2 million to the other HFA is rated AA+/Aa3 by S&P and Moody's, respectively.
 
Mortgage Loans
 
As of March 31, 2011, the Bank's mortgage loan investment portfolio totaled $3.2 billion, a decrease of $80.5 million from the December 31, 2010, balance of $3.2 billion. References to the Bank's investments in mortgage loans throughout this report include the 100 percent participation interests in mortgage loans purchased under a participation agreement it has with the FHLBank of Chicago. The expiration date of this agreement has been extended to June 30, 2012. As of March 31, 2011, the Bank had $101.1 million in participation interests outstanding which had been purchased under this agreement. For additional information on this agreement, see the 2010 Annual Report under Item 1 — Business — MPF Loan Participations with the FHLBank of Chicago.
 
The FHLBank of Chicago acts as the MPF Provider and provides operational support to the MPF Banks and participating financial institutions and calculates and publishes daily prices, rates, and fees associated with the various MPF products. Beginning on March 26, 2011, the Bank has the right to adjust its pricing for MPF products once per day for the loans in which it invests and once per day for loans sold pursuant to MPF Xtra. Any such adjusted pricing would then become the Bank's pricing for such loans until such time as the Bank again adjusts its pricing. In connection with the commencement of this right of the Bank to adjust its pricing, the Bank's option to opt out of participation in the MPF program has been eliminated (although the Bank never used this option). However, the Bank believes it can effectively opt out of the program by adjusting pricing should it determine to do so. Alternatively, the Bank has the right to turn off its master commitments at any time for such duration as it selects.

76


 
Mortgage Loans Credit Risks. The Bank is subject to credit risk from the mortgage loans in which it invests due to the Bank's exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit enhancement and/or servicing obligations. 
 
Although the Bank's mortgage-loan portfolio includes loans throughout the U.S., states with loan concentrations five percent or greater of the outstanding principal balance of the Bank's conventional mortgage-loan portfolio are shown in the following table:
State Concentration by Outstanding Principal Balance
 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage-Loan Portfolio
 
March 31, 2011
 
December 31, 2010
State concentration
 
 
 
 
 
    Massachusetts
34
%
 
33
%
    California
13
 
 
13
 
    Connecticut
9
 
 
10
 
    Maine
6
 
 
6
 
    All others
38
 
 
38
 
    Total
100
%
 
100
%
Although delinquent loans in the Bank's portfolio are spread throughout the U.S., states with delinquent loan concentrations five percent or greater of the outstanding principal balance of the Bank's total conventional mortgage loans delinquent by more than 30 days are shown in the following table:
 
State Concentration of Delinquent Conventional Mortgage Loans
 
Percentage of Total Outstanding Principal Balance of Delinquent Conventional Mortgage Loans
 
March 31, 2011
 
December 31, 2010
State concentration
 
 
 
 
 
    California
25
%
 
24
%
    Massachusetts
21
 
 
23
 
    Connecticut
8
 
 
9
 
    Arizona
5
 
 
5
 
    All others
41
 
 
39
 
    Total
100
%
 
100
%
 
Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $8.7 million at both March 31, 2011, and December 31, 2010. See Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Allowance for Loan Losses in the 2010 Annual Report for a description of the Bank's methodology for estimating the allowance for loan losses.
 
The following tables present the Bank's delinquent loans and allowance for credit losses activity (dollars in thousands).
 
March 31, 2011
 
December 31, 2010
 
Total par value past due 90 days or more and still accruing interest
$
19,259
 
 
$
19,874
 
 
Nonaccrual loans, par value
51,790
 
 
54,401
 
 
Troubled debt restructuring
245
 
 
246
 
 
 

77


 
For the Three Months Ended March 31,
 
 
2011
 
2010
 
Nonaccrual loans:
 
 
 
 
Gross amount of interest that would have been recorded based on original terms
$
750
 
 
$
685
 
 
Interest actually recognized in income during the period
596
 
 
629
 
 
Shortfall
$
154
 
 
$
56
 
 
 
 
 
 
 
Allowance for credit losses on mortgage loans, balance at beginning of period
$
8,653
 
 
$
2,100
 
 
Charge-offs
(8
)
 
(31
)
 
Provision for credit losses
51
 
 
431
 
 
Allowance for credit losses on mortgage loans, balance at end of period
$
8,696
 
 
$
2,500
 
 
 
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 (8.5 percent by outstanding principal balance), but a disproportionately higher portion of the conventional portfolio delinquencies (37.6 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 March 31, 2011.
 
Summary of Higher-Risk Conventional Mortgage Loans
As of March 31, 2011
(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)
 
$
217,092
 
 
6.21
%
 
1.90
%
 
7.06
%
High loan-to-value loans (2)
 
20,868
 
 
1.07
 
 
 
 
16.07
 
Subprime and high loan-to-value loans (3)
 
2,530
 
 
13.59
 
 
 
 
19.83
 
Total high-risk loans
 
$
240,490
 
 
5.84
%
 
1.71
%
 
7.97
%
_______________________
(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 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.
 
The Bank is exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of March 31, 2011, the Bank was the beneficiary of primary mortgage insurance coverage on $214.5 million of conventional mortgage loans, and the Bank was the beneficiary of supplemental mortgage insurance coverage on mortgage pools with a total unpaid principal balance of $38.2 million. Eight mortgage insurance companies provide all of the coverage under these policies.
 
As of April 30, 2011, all of these mortgage insurance companies have a credit rating of triple-B or lower (or its equivalent) by at least one NRSRO. The table below shows the ratings of these companies as of April 30, 2011.
 
The Bank has analyzed its potential loss exposure to all of the mortgage insurance companies and does not expect incremental losses due to these rating actions. This expectation is based on the credit-enhancement features of the Bank's master

78


commitments (exclusive of mortgage insurance), the underwriting characteristics of the loans that back the Bank's master commitments, the seasoning of the loans that back these master commitments, and the strong performance of the loans to date. The Bank closely monitors the financial condition of these mortgage insurance companies. Further, the Bank requires that all new supplemental mortgage insurance policies be with companies rated AA- or higher by S&P. Accordingly, none of the eight mortgage insurance companies previously approved by the Bank are currently eligible to write new supplemental mortgage insurance policies for loan pools sold to the Bank. The Bank has established limits on exposure to individual mortgage insurance companies to ensure that the insurance coverage is sufficiently diversified.
 
Mortgage Insurance Companies that Provide Mortgage Insurance Coverage
(dollars in thousands)
 
 
 
As of April 30, 2011
 
As of March 31, 2011
Mortgage Insurance
Company
 
Mortgage Insurance Company Ratings
(S&P/ Moody's/Fitch
 
Credit Rating Outlook
 
Balance of
Loans with
Primary Mortgage Insurance
 
Primary Mortgage Insurance
 
Supplemental
Mortgage Insurance
 
Mortgage Insurance Coverage
 
Percent of Total Mortgage Insurance Coverage
Genworth Mortgage Insurance Corporation
 
BB+/Baa2/NR
 
Negative
 
$
62,652
 
 
$
14,528
 
 
$
 
 
$
14,528
 
 
30.2
%
Mortgage Guaranty Insurance Corporation
 
B+/Ba3/NR
 
Negative
 
57,748
 
 
12,459
 
 
 
 
12,459
 
 
25.9
 
United Guaranty Residential Insurance Corporation
 
BBB/Baa1/NR
 
Stable
 
27,342
 
 
6,407
 
 
 
 
6,407
 
 
13.3
 
CMG Mortgage Insurance Company
 
BBB/NR/BBB
 
Negative
 
19,653
 
 
4,657
 
 
 
 
4,657
 
 
9.7
 
PMI Mortgage Insurance Company
 
B+/B2/NR
 
Negative
 
18,422
 
 
3,897
 
 
 
 
3,897
 
 
8.1
 
Radian Guaranty Incorporated
 
B+/Ba3/NR
 
Negative
 
12,646
 
 
2,371
 
 
 
 
2,371
 
 
5.0
 
Republic Mortgage Insurance Company
 
BBB-/Ba1/BBB-
 
Negative
 
11,882
 
 
2,327
 
 
649
 
 
2,976
 
 
6.2
 
Triad Guaranty Insurance Corporation
 
NR/NR/NR
 
N/A
 
4,179
 
 
766
 
 
 
 
766
 
 
1.6
 
 
 
 
 
 
 
$
214,524
 
 
$
47,412
 
 
$
649
 
 
$
48,061
 
 
100.0
%
 
Debt Financing Consolidated Obligations
 
At March 31, 2011 and December 31, 2010, outstanding COs, including both CO bonds and CO discount notes, totaled $50.5 billion and $53.6 billion, respectively. 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. Some of the fixed-rate bonds issued by the Bank are callable bonds that may be redeemed at par on one or more dates prior to their maturity date. 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 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.
 
See Item 1 — Notes to the Financial Statements — Note 12 — Consolidated Obligations for a summary of CO bonds by contractual maturity dates and call dates as of March 31, 2011, and December 31, 2010. CO bonds outstanding at March 31, 2011, and December 31, 2010, include issued callable bonds totaling $5.0 billion and $5.2 billion, respectively.
 
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 32.7 percent and 34.5 percent of outstanding COs at March 31, 2011, and December 31, 2010, respectively, but accounted for 99.2 percent and 97.1 percent of the proceeds from the issuance of COs during the three months ended March 31, 2011 and 2010, respectively, due, in particular, to the Bank's frequent overnight CO discount note issuances.
 
Deposits

79


 
As of March 31, 2011, deposits totaled $810.5 million compared with $745.5 million at December 31, 2010, an increase of $65.0 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.
 
The following table presents term deposits issued in amounts of $100,000 or greater at March 31, 2011, and December 31, 2010.
 
Term Deposits Greater than $100,000
(dollars in thousands)
 
 
March 31, 2011
 
December 31, 2010
Term Deposits by Maturity
Amount
 
Weighted Average
Rate
 
Amount
 
Weighted Average
Rate
Three months or less
$
 
 
%
 
$
 
 
%
Over three months through six months
6,250
 
 
2.51
 
 
 
 
 
Over six months through 12 months
 
 
 
 
6,250
 
 
2.51
 
Greater than 12 months (1)
20,000
 
 
4.71
 
 
20,000
 
 
4.71
 
Total par value
$
26,250
 
 
4.19
%
 
$
26,250
 
 
4.19
%
_______________________
(1)         Represents one term deposit account with a maturity date in 2014.
 
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 $12.4 million and $14.8 million as of March 31, 2011, and December 31, 2010, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $624.9 million and $729.2 million as of March 31, 2011, and December 31, 2010, respectively.
 
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 March 31, 2011, and December 31, 2010. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and are hedging changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. 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.
 

80


Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
March 31, 2011
 
December 31, 2010
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances
 
Swaps
 
Fair value
 
$
9,659,302
 
 
$
(543,010
)
 
$
10,505,040
 
 
$
(635,275
)
 
 
Swaps
 
Economic
 
72,250
 
 
(946
)
 
73,250
 
 
(1,538
)
 
 
Caps and floors
 
Economic
 
16,500
 
 
14
 
 
16,500
 
 
25
 
Total associated with advances
 
 
 
 
 
9,748,052
 
 
(543,942
)
 
10,594,790
 
 
(636,788
)
Available-for-sale securities
 
Swaps
 
Fair value
 
853,935
 
 
(202,398
)
 
853,935
 
 
(224,907
)
Trading securities
 
Swaps
 
Economic
 
225,000
 
 
(7,219
)
 
225,000
 
 
(10,181
)
Consolidated obligations
 
Swaps
 
Fair value
 
11,002,650
 
 
150,160
 
 
11,989,650
 
 
191,324
 
Deposits
 
Swaps
 
Fair value
 
20,000
 
 
4,360
 
 
20,000
 
 
4,767
 
Total
 
 
 
 
 
21,849,637
 
 
(599,039
)
 
23,683,375
 
 
(675,785
)
Mortgage delivery commitments
 
 
 
 
 
11,610
 
 
40
 
 
28,217
 
 
(187
)
Total derivatives
 
 
 
 
 
$
21,861,247
 
 
(598,999
)
 
$
23,711,592
 
 
(675,972
)
Accrued interest
 
 
 
 
 
 
 
 
(6,871
)
 
 
 
 
(31,709
)
Cash collateral
 
 
 
 
 
 
 
 
(6,631
)
 
 
 
 
(6,721
)
Net derivatives
 
 
 
 
 
 
 
 
$
(612,501
)
 
 
 
 
$
(714,402
)
Derivative asset
 
 
 
 
 
 
 
 
$
12,370
 
 
 
 
 
$
14,818
 
Derivative liability
 
 
 
 
 
 
 
 
(624,871
)
 
 
 
 
(729,220
)
Net derivatives
 
 
 
 
 
 
 
 
$
(612,501
)
 
 
 
 
$
(714,402
)
 
The following four tables provide a summary of the Bank's hedging relationships for fair-value hedges of advances and COs that 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 $20.7 billion, representing 94.5 percent of all derivatives outstanding as of March 31, 2011. Economic hedges are not included within the four tables below.
 
Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (2)
 
Derivatives
 
Advances
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value
 
Hedged
Amount
 
Fair-Value
Adjustment(1)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
2,222,050
 
 
$
(22,812
)
 
$
2,222,050
 
 
$
22,750
 
 
2.41
%
 
0.31
%
 
2.34
%
 
0.38
%
Due after one year through two years
1,735,650
 
 
(76,682
)
 
1,735,650
 
 
76,446
 
 
3.72
 
 
0.31
 
 
3.61
 
 
0.42
 
Due after two years through three years
1,081,710
 
 
(65,098
)
 
1,081,710
 
 
64,883
 
 
3.93
 
 
0.31
 
 
3.70
 
 
0.54
 
Due after three years through four years
758,550
 
 
(54,370
)
 
758,550
 
 
54,165
 
 
3.93
 
 
0.31
 
 
3.71
 
 
0.53
 
Due after four years through five years
734,527
 
 
(31,698
)
 
734,527
 
 
31,643
 
 
3.33
 
 
0.31
 
 
3.07
 
 
0.57
 
Thereafter
3,126,815
 
 
(292,350
)
 
3,126,815
 
 
289,185
 
 
3.97
 
 
0.31
 
 
3.82
 
 
0.46
 
Total
$
9,659,302
 
 
$
(543,010
)
 
$
9,659,302
 
 
$
539,072
 
 
3.51
%
 
0.31
%
 
3.36
%
 
0.46
%
_______________________
(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-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2011.
 

81


Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity or Next Put Date for Putable Advances
As of March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (2)
 
Derivatives
 
Advances
 
 
 
Derivatives
 
 
 
Maturity or Next Put Date
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(1)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
7,512,625
 
 
$
(446,950
)
 
$
7,512,625
 
 
$
443,098
 
 
3.51
%
 
0.31
%
 
3.39
%
 
0.43
%
Due after one year through two years
783,600
 
 
(43,857
)
 
783,600
 
 
43,857
 
 
3.77
 
 
0.31
 
 
3.67
 
 
0.41
 
Due after two years through three years
641,460
 
 
(30,665
)
 
641,460
 
 
30,646
 
 
3.38
 
 
0.31
 
 
3.14
 
 
0.55
 
Due after three years through four years
230,300
 
 
(9,673
)
 
230,300
 
 
9,676
 
 
3.41
 
 
0.31
 
 
3.02
 
 
0.70
 
Due after four years through five years
405,027
 
 
(7,927
)
 
405,027
 
 
7,931
 
 
3.01
 
 
0.31
 
 
2.70
 
 
0.62
 
Thereafter
86,290
 
 
(3,938
)
 
86,290
 
 
3,864
 
 
4.03
 
 
0.31
 
 
3.76
 
 
0.58
 
Total
$
9,659,302
 
 
$
(543,010
)
 
$
9,659,302
 
 
$
539,072
 
 
3.51
%
 
0.31
%
 
3.36
%
 
0.46
%
_______________________
(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-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2011.
 
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (2)
 
Derivatives
 
CO Bonds
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(1)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
2,450,700
 
 
$
11,928
 
 
$
2,450,700
 
 
$
(11,983
)
 
1.24
%
 
1.27
%
 
0.25
%
 
0.22
%
Due after one year through two years
3,308,350
 
 
32,696
 
 
3,308,350
 
 
(32,739
)
 
1.22
 
 
1.23
 
 
0.21
 
 
0.20
 
Due after two years through three years
2,923,600
 
 
44,992
 
 
2,923,600
 
 
(44,796
)
 
1.83
 
 
1.87
 
 
0.28
 
 
0.24
 
Due after three years through four years
625,000
 
 
4,641
 
 
625,000
 
 
(4,866
)
 
1.86
 
 
1.88
 
 
0.23
 
 
0.21
 
Due after four years through five years
605,000
 
 
11,657
 
 
605,000
 
 
(11,882
)
 
2.26
 
 
2.26
 
 
0.14
 
 
0.14
 
Thereafter
1,090,000
 
 
44,246
 
 
1,090,000
 
 
(45,402
)
 
4.05
 
 
4.05
 
 
0.79
 
 
0.79
 
Total
$
11,002,650
 
 
$
150,160
 
 
$
11,002,650
 
 
$
(151,668
)
 
1.76
%
 
1.78
%
 
0.29
%
 
0.27
%
_______________________
(1)     The fair-value adjustment of hedged CO bonds 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-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2011. For zero coupon bonds, the yield represents the yield to maturity.
 

82


Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity or Next Call Date for Consolidated Obligations
As of March 31, 2011
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (2)
 
Derivatives
 
CO Bonds
 
 
 
Derivatives
 
 
Maturity or Next Call Date
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(1)
 
CO Bonds
 
Receive
 Fixed Rate
 
Pay
Floating
Rate
 
Net Pay
Result
Due in one year or less
$
4,550,700
 
 
$
(4,515
)
 
$
4,550,700
 
 
$
4,133
 
 
1.20
%
 
1.21
%
 
0.19
%
 
0.18
%
Due after one year through two years
2,793,350
 
 
32,790
 
 
2,793,350
 
 
(32,963
)
 
1.43
 
 
1.44
 
 
0.22
 
 
0.21
 
Due after two years through three years
2,458,600
 
 
47,603
 
 
2,458,600
 
 
(47,367
)
 
2.00
 
 
2.04
 
 
0.30
 
 
0.26
 
Due after three years through four years
325,000
 
 
4,006
 
 
325,000
 
 
(4,073
)
 
2.15
 
 
2.19
 
 
0.32
 
 
0.28
 
Due after four years through five years
165,000
 
 
13,512
 
 
165,000
 
 
(13,625
)
 
4.38
 
 
4.36
 
 
0.25
 
 
0.27
 
Thereafter
710,000
 
 
56,764
 
 
710,000
 
 
(57,773
)
 
5.06
 
 
5.07
 
 
1.16
 
 
1.15
 
Total
$
11,002,650
 
 
$
150,160
 
 
$
11,002,650
 
 
$
(151,668
)
 
1.76
%
 
1.78
%
 
0.29
%
 
0.27
%
_______________________
(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-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2011. For zero coupon bonds, the yield represents the yield to maturity.
 
The Bank 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. See Item 1 — Notes to the Financial Statements — Note 19 — Transactions with Related Parties and Other FHLBanks for outstanding derivative contracts with affiliates of members.
 
Impact of Lehman Bankruptcy
 
In connection with the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, on October 29, 2010, the Bank received an ADR Notice from LBSF making a demand on the Bank for approximately $10.1 million including approximately $2.6 million in interest at a default rate based on LBSF's view of how the settlement amount should have been calculated. A protocol issued by the bankruptcy court with jurisdiction over LBSF's insolvency provides that parties receiving such a Derivatives ADR Notice are subject to mandatory, nonbinding mediation. The Bank intends to vigorously defend its position in this matter. See Item 1 — Notes to the Financial Statements — Note 19 — Commitments and Contingencies for additional information.
 
Derivative Instruments Credit Risks. The Bank is subject to credit risk on derivative instruments. This risk arises from the risk of counterparty default on the derivative contract. The amount of loss created by default is the replacement cost, or current positive fair value, of the defaulted contract, net of any collateral held by the Bank or pledged to counterparties by the Bank. The credit risk to the Bank arising from unsecured credit exposure on derivatives is mitigated by the credit quality of the counterparties and by the early termination ratings triggers contained in all master derivatives agreements. The Bank enters into derivatives only with nonmember institutions that have long-term senior unsecured credit ratings that are at or above single-A (or its equivalent) by S&P and Moody's. Also, the Bank uses master-netting agreements to reduce its credit exposure from counterparty defaults. The master agreements contain bilateral-collateral-exchange provisions that require credit exposures beyond a defined amount to be secured by U.S. federal government or GSE-issued securities or cash. Exposures are measured daily, and adjustments to collateral positions are made as necessary to minimize the Bank's exposure to credit risk. The master agreements generally provide for smaller amounts of unsecured exposure to lower-rated counterparties. The Bank does not enter into interest-rate-exchange agreements with other FHLBanks.
 
See Item 1 — Notes to the Financial Statements — Note 10 — Derivatives and Hedging Activities for additional information on the Bank's credit risks from its derivative instruments.
 
As illustrated in the following table, the Bank's maximum credit exposure on interest-rate-exchange agreements is much less than the notional amount of the agreements. Additionally, commitments to invest in mortgage loans are reflected in the following table as derivative instruments. The Bank does not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the member institution is charged a fee to

83


compensate the Bank for nonperformance of the agreement. 
 
Derivative Instruments
(dollars in thousands)
 
Notional
Amount
 
Number of
Counterparties
 
Total Net
Exposure at
Fair Value (3)
As of March 31, 2011
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements: (1)
 
 
 
 
 
 
 
 
Double-A
$
6,802,195
 
 
6
 
 
$
12,159
 
Single-A
15,047,442
 
 
8
 
 
161
 
Total interest-rate-exchange agreements
21,849,637
 
 
14
 
 
12,320
 
Commitments to invest in mortgage loans (2)
11,610
 
 
 
 
50
 
Total derivatives
$
21,861,247
 
 
14
 
 
$
12,370
 
 
 
 
 
 
 
 
 
 
As of December 31, 2010
 
 
 
 
 
 
 
 
Interest-rate-exchange agreements: (1)
 
 
 
 
 
 
 
 
Double-A
$
7,621,250
 
 
6
 
 
$
14,763
 
Single-A
16,062,125
 
 
8
 
 
 
Total interest-rate-exchange agreements
23,683,375
 
 
14
 
 
14,763
 
Commitments to invest in mortgage loans (2)
28,217
 
 
 
 
55
 
Total derivatives
$
23,711,592
 
 
14
 
 
$
14,818
 
_______________________
(1)    Ratings are obtained from Moody's, Fitch, and S&P. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)    Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees.
(3)    Total net exposure at fair value has been netted with cash collateral received from derivative counterparties.
 
The following counterparties accounted for more than 10 percent of the total notional amount of interest-rate-exchange agreements outstanding (dollars in thousands):
 
 
March 31, 2011
Counterparty
 
Notional Amount
Outstanding
 
Percent of Total
Notional
Outstanding
 
Fair Value
Barclays Bank PLC
 
$
3,841,295
 
 
17.6
%
 
$
(46,278
)
Citigroup Financial Products, Inc.
 
3,597,790
 
 
16.5
 
 
(48,373
)
Deutsche Bank AG
 
2,920,965
 
 
13.4
 
 
(215,219
)
Goldman Sachs Capital Markets, LP
 
2,253,025
 
 
10.3
 
 
(66,495
)
 
 
 
December 31, 2010
Counterparty
 
Notional Amount
Outstanding
 
Percent of Total
Notional
Outstanding
 
Fair Value
Barclays Bank PLC
 
$
4,304,100
 
 
18.2
%
 
$
(54,202
)
Citigroup Financial Products, Inc.
 
3,723,290
 
 
15.7
 
 
(57,841
)
Deutsche Bank AG
 
2,986,965
 
 
12.6
 
 
(248,485
)
UBS AG
 
2,413,225
 
 
10.2
 
 
(6,428
)
 
The Bank may deposit funds with these counterparties and their affiliates for short-term money-market investments, including overnight federal funds, term federal funds, and interest-bearing certificates of deposit. Terms for such investments are currently overnight to 95 days. The Bank also engages in short-term secured reverse-repurchase agreements with affiliates of these counterparties. All of these counterparties and/or their affiliates buy, sell, and distribute the Bank's COs.
 
LIQUIDITY AND CAPITAL RESOURCES

84


 
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 primary source of liquidity is its access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations of the 2010 Annual Report. The Bank's equity capital resources are governed by the Bank's capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.
 
Liquidity
 
Internal Sources of Liquidity
 
The Bank maintains structural liquidity to ensure that it meets its day-to-day business needs and its contractual obligations with normal sources of funding. The Bank defines structural liquidity as the difference between projected sources and uses of funds (projected net cash flow) adjusted to include certain assumed contingent, noncontractual obligations or behavioral assumptions (cumulative contingent obligations). Cumulative contingent obligations include the assumption that all maturing advances are renewed except for those from large, highly rated members; member overnight deposits are withdrawn at a rate of 50 percent per day; and commitments (MPF and other commitments) are taken down at a conservatively projected pace. The Bank defines available liquidity as the sources of funds available to the Bank through its normal access to the capital markets, subject to leverage, credit line capacity, and collateral constraints. The risk-management policy requires the Bank to maintain structural liquidity each day so that any excess of uses over sources is covered by available liquidity for a four-week forecast period and 50 percent of the excess of uses over sources is covered by available liquidity over eight- and 12-week forecast periods. In addition to these minimum requirements, management measures structural liquidity over a three-month forecast period. If the Bank's excess of uses over sources is not fully covered by available liquidity over a two-month or three-month forecast period, a management action trigger is breached and senior management is immediately notified so that a decision can be made as to whether immediate remedial action is necessary. The following table shows the Bank's structural liquidity as of March 31, 2011.
 
Structural Liquidity
As of March 31, 2011
(dollars in thousands)
 
 
1 Month
 
2 Month
 
3 Months
Projected net cash flow (1)
$
(182,620
)
 
$
(1,057,211
)
 
$
(1,368,600
)
Less: Cumulative contingent obligations
(4,201,027
)
 
(5,258,244
)
 
(6,081,870
)
Equals: Net structural liquidity need
(4,383,647
)
 
(6,315,455
)
 
(7,450,470
)
Available borrowing capacity (2)
$
33,971,733
 
 
$
37,421,934
 
 
$
38,620,225
 
Ratio of available borrowing capacity to net structural liquidity need
7.75
 
 
5.93
 
 
5.18
 
Required ratio
1.00
 
 
0.50
 
 
0.50
 
Management action trigger
 
 
1.00
 
 
1.00
 
_______________________
(1)     Projected net cash flow equals projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, as applicable.
(2)    Available borrowing capacity is the CO issuance capacity based on achieving leverage up to the Bank's internal minimum capital requirement. For information on this internal minimum capital requirement, see — Capital Plan — Internal Minimum Capital Plan Requirements in Excess of Regulatory Requirements.
 
In accordance with Finance Agency regulations, the Bank also maintains contingency liquidity plans designed to enable it to meet its obligations in the event of operational disruption at the Bank, the Office of Finance, the capital markets, or any other event that precludes issuance of COs. These regulations require the Bank to maintain highly liquid assets at all times in an amount equal to or greater than the aggregate amount of all anticipated maturing advances over the following five days. The Bank maintained material compliance with this requirement at all times during the quarter ended March 31, 2011. As of March 31, 2011, and December 31, 2010, the Bank held a surplus of $12.7 billion and $13.8 billion, respectively, of contingency liquidity for the following five days, exclusive of access to the proceeds of CO debt issuance. The following table demonstrates the Bank's contingency liquidity as of March 31, 2011.
 

85


Contingency Liquidity
As of March 31, 2011
(dollars in thousands)
 
Cumulative
Fifth
Business Day
Projected net cash flow (1)
$
(6,838,660
)
Contingency borrowing capacity (exclusive of CO debt issuance)
19,544,451
 
Net contingency borrowing capacity
$
12,705,791
 
_______________________
(1)    Projected net cash flow equals projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, as applicable.
 
In addition, certain Finance Agency guidance requires the Bank to maintain sufficient liquidity, through short-term investments, in an amount at least equal to the Bank's anticipated cash outflows under two different scenarios. One scenario assumes that the Bank cannot borrow funds from the capital markets for a period of 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario assumes that the Bank cannot borrow funds from the capital markets for five days and that during that period the Bank will renew maturing and called advances for all members except very large, highly rated members. The Bank was in material compliance with these liquidity requirements at all times during the three months ended March 31, 2011, and year ended December 31, 2010.
 
Further, the Bank is sensitive to maintaining an appropriate funding balance between its assets and liabilities and has an established policy that limits the potential gap between assets with maturities inclusive of projected prepayments greater than one year funded by liabilities maturing inclusive of projected calls in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets with a management action trigger should this gap exceed 10 percent of total assets. The Bank maintained material compliance with this requirement at all times during the three months ended March 31, 2011. During the quarter ended March 31, 2011, this gap averaged 4.3 percent (maximum level 4.6 percent and minimum level 3.9 percent). As of March 31, 2011, this gap was 3.9 percent, compared with 3.8 percent at December 31, 2010.
 
External Source of Liquidity
 
The Bank has a source of emergency external liquidity through the Federal Home Loan Banks P&I Funding Contingency Plan Agreement. Under the terms of that 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 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. Neither the Bank nor any of the other FHLBanks have ever drawn upon this agreement.
 
Financial Conditions for FHLBank Debt
 
The Bank has experienced CO issuance costs that were consistent with more recent quarters during the period covered by this report. Demand for COs has remained stable. Throughout the period covered by this report, CO bonds were issued at yields that were generally at or below equivalent-maturity LIBOR swap yields for debt maturing in less than three years, while longer term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. The Bank continues to experience similar pricing into the second quarter of 2011.
As discussed under Credit Rating Agency Developments, S&P downgraded the outlook for FHLBank debt to negative on April 20, 2011. Notwithstanding that development, the Bank continues to experience favorable pricing into the second quarter of 2011, although this development could adversely impact the Bank's funding costs or market access if investors' demand for FHLBank debt ultimately weakens as a result of this development.
Capital
 
The Bank's total GAAP capital increased $69.0 million to $3.3 billion at March 31, 2011, from $3.3 billion at December 31, 2010. The increase was attributable to the net reduction of $67.1 million in accumulated other comprehensive loss, a $20.4 million increase in retained earnings, and the purchase of $1.6 million of capital stock by members during the quarter ended March 31, 2011. These increases to capital were offset with the transfer of $20.0 million of capital stock to mandatorily redeemable capital stock. The reduction of accumulated other comprehensive loss was primarily attributable to the accretion

86


of $48.0 million of non-credit losses recognized in prior periods with respect to private-label MBS deemed to be other-than-temporarily impaired and due to $28.8 million in non-credit losses that were reclassified from accumulated other comprehensive loss and charged to earnings. This reclassification was for securities that were previously other-than-temporarily impaired that incurred additional credit losses during the quarter ended March 31, 2011.
 
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 Bank as their outstanding advances increase, as described in Item 1 — Business — Capital Resources of the 2010 Annual Report. As discussed in that Item, the Bank may either repurchase or redeem excess capital stock (stock in excess of what members are required to hold) in its sole discretion, however, the Bank continues its moratorium on excess stock repurchases, except in limited instances of former member insolvency. During the three months ended March 31, 2011, the Bank did not repurchase excess capital stock.
 
Subject to applicable law, the Bank redeems capital stock for any 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 following the expiry of the stock redemption period. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $106.6 million and $90.1 million at March 31, 2011, and December 31, 2010, respectively. The following table summarizes the anticipated stock-redemption period for these shares of capital stock as of March 31, 2011, and December 31, 2010 (dollars in thousands):
Contractual Year of Redemption
 
March 31, 2011
 
December 31, 2010
Due in one year or less
 
$
 
 
$
 
Due after one year through two years
 
 
 
 
Due after two years through three years
 
86,598
 
 
86,598
 
Due after three years through four years
 
10
 
 
10
 
Due after four years through five years
 
20,000
 
 
3,469
 
Total
 
$
106,608
 
 
$
90,077
 
 
At March 31, 2011, and December 31, 2010, members and nonmembers with capital stock outstanding held $2.0 billion and $1.9 billion, respectively, in excess capital stock. The following table summarizes member capital stock requirements as of March 31, 2011, and December 31, 2010 (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
March 31, 2011
$
574,950
 
 
$
1,148,534
 
 
$
1,723,506
 
 
$
3,752,617
 
 
$
2,029,111
 
December 31, 2010
576,529
 
 
1,269,151
 
 
1,845,703
 
 
3,754,502
 
 
1,908,799
 
_______________________
(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.
 
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital requirements. The Bank is in compliance with these requirements as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital. Additionally, the Bank is subject to a capital rule under Finance Agency regulations (the Capital Rule) and has adopted additional minimum capital requirements, each of which is described under — Capital Rule and — Internal Minimum Capital Requirement in Excess of Regulation Requirements, respectively.
 
Internal Capital Practices and Policies
 
The Bank targets an operating range of 4.0 percent to 7.5 percent for its capital ratio, a range adopted in conjunction with the Bank's capital preservation measures. The Bank's capital ratio was 7.2 percent at March 31, 2011.
Capital Rule
 
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

87


the Finance Agency to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated March 28, 2011, the Director of the Finance Agency notified the Bank that, based on December 31, 2010, financial information, the Bank met the definition of adequately capitalized under the Capital Rule. The Acting Director of the Finance Agency has not yet notified the Bank of its capital classification based on March 31, 2011, financial information.
Internal Minimum Capital Requirements in Excess of Regulatory Requirements. To provide further protection for the Bank's capital base, the Bank maintains an internal 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 March 31, 2011, this requirement equaled $3.1 billion, which was satisfied by the Bank's actual regulatory capital of $4.0 billion.
 
Retained Earnings Target and Dividends. The Bank's retained earnings target remains at $925.0 million reflecting continuing uncertainty about the economy and housing recovery. Unemployment remains persistently high and home prices and sales are stagnant, with significant amounts of inventory yet to be cleared. At March 31, 2011, the Bank had retained earnings of $269.5 million. For information on how the Bank adjusts its retained earnings target, including in response to Finance Agency regulations, orders, or guidance, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Retained Earnings Target and Dividends in the 2010 Annual Report.
 
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 reduction in the retained earnings target. Management has analyzed the likelihood of the Bank meeting the retained earnings target as it evolves over the Bank's five-year forecast 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.
 
On April 21, 2011, the Bank's board of directors declared a cash dividend that was equivalent to an annual yield of 0.31 percent on average daily balances of Class B shares outstanding during the quarter ending March 31, 2011.
Use of Stock from the Available Excess Stock Pool for Eligible Advances
 
As discussed in the 2010 Annual Report under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Capital Plan Amendments, the Bank has the ability to allow members to satisfy the activity-based stock investment requirements for eligible advances using stock from the excess stock pool.
The Bank currently allows members to use Class B stock from the excess stock pool to satisfy the activity-based stock investment requirements for eligible advances in an amount up to the lower of (1) $250.0 million and (2) 25 percent of the excess stock pool (the lower amount being the available excess stock pool). As of March 31, 2011, the pro forma excess stock pool was $2.0 billion resulting in an available pro forma excess stock pool of $250.0 million of which, $1.4 million was being used.
 
As of the date of this report, the Bank expects to consider providing notice of the discontinuance of the use of the excess stock pool on or about June 30, 2011, with a required stock purchase date to occur on or about six months following the date of the notice of discontinuance.
 
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
 
The Bank's significant off-balance-sheet arrangements consist of the following:
 
    commitments that obligate the Bank for additional advances;
 
•    standby letters of credit;
 
•    commitments for unused lines-of-credit advances;
 
    standby bond-purchase agreements with state housing authorities; and
 
•    unsettled COs.
 

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Off-balance-sheet arrangements are more fully discussed in Item 1 — Notes to the Financial Statements — Note 18 — Commitments 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 supports 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). Based on the Bank's net income of $23.1 million for the three months ended March 31, 2011, the Bank's AHP assessment was $2.6 million and the REFCorp assessment was $5.8 million for the three months ended March 31, 2011. See Item 1 — Business — Assessments of the 2010 Annual Report for additional information regarding REFCorp and AHP.
 
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. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2010 Annual Report.
 
As of March 31, 2011, the Bank had not made any significant changes to the estimates and assumptions used in applying its critical accounting policies and estimates from those used to prepare its audited financial statements. Also described below are the results of the sensitivity analysis for private-label MBS.
 
Other-Than-Temporary Impairment of Investment Securities
 
See Item 1 — Notes to the Financial Statements — Note 6 — Other-Than-Temporary Impairment for additional information related to management's other-than-temporary impairment analysis for the current period.
 
In addition to evaluating 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. The Bank's base-case housing price forecast as of March 31, 2011, assumed current-to-trough home price declines ranging from 0.0 percent (for those housing markets that are believed to have reached their trough) to 10.0 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the three- to nine-month period beginning January 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of 0.0 percent to 2.8 percent in the first year, 0.0 percent to 3.0 percent in the second year, 1.5 percent to 4.0 percent in the third year, 2.0 percent to 5.0 percent in the fourth year, 2.0 percent to 6.0 percent in each of the fifth and sixth years, and 2.3 percent to 5.6 percent in each subsequent year. Under the more stressful scenario, current-to-trough home price declines were projected to range from 5.0 percent to 15.0 percent over the 3- to 9-month period beginning January 1, 2011. Thereafter, home prices were projected to increase within a range of 0.0 percent to 1.9 percent in the first year, 0.0 percent to 2.0 percent in the second year, 1.0 percent to 2.7 percent in the third year, 1.3 percent to 3.4 percent in the fourth year, 1.3 percent to 4.0 percent in each of the fifth and sixth years, and 1.5 percent to 3.8 percent in each subsequent year.
The following table represents the impact on 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 March 31, 2011 (dollars in thousands):

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Credit Losses as Reported
 
Sensitivity Analysis - Adverse HPI Scenario
For the Quarter Ended March 31, 2011
 
Number of
Securities
 
Par Value
 
Other-Than-Temporary Impairment Credit Loss
 
Number of
Securities
 
Par Value
 
Other-Than-Temporary Impairment Credit Loss
Prime
 
3
 
 
$
68,811
 
 
$
(515
)
 
5
 
 
$
84,096
 
 
$
(2,829
)
Alt-A
 
82
 
 
1,632,106
 
 
(30,004
)
 
114
 
 
2,149,451
 
 
(123,490
)
Subprime
 
1
 
 
1,075
 
 
(65
)
 
3
 
 
6,371
 
 
(205
)
Total private-label MBS
 
86
 
 
$
1,701,992
 
 
$
(30,584
)
 
122
 
 
$
2,239,918
 
 
$
(126,524
)
 
RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued Accounting Standards and Interpretations for a discussion on recent accounting developments.
 
LEGISLATIVE AND REGULATORY DEVELOPMENTS
 
The legislative and regulatory environment for the Bank continues to undergo significant change as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Act and Congress begins to debate proposals for housing finance and GSE reform.
 
Dodd-Frank Act
 
The Dodd-Frank Act will likely impact the FHLBanks' business operations, funding costs, rights, obligations, and/or the environment in which the FHLBanks carry out their housing finance mission. Certain regulatory actions during the period covered by this report resulting from the Dodd-Frank Act that may have an important impact on the Bank are summarized below, although the full effect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized.
 
New Requirements for the Bank's Derivatives Transactions from the Dodd-Frank Act
 
The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest-rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Such cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps is intended to reduce counterparty credit risk, the margin requirements for cleared trades have the potential of making derivative transactions more costly.
The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to continue to enter into uncleared trades on a bilateral basis, such trades are expected to be subject to new regulatory requirements, including new mandatory reporting requirements, new documentation requirements, and new minimum margin and capital requirements imposed by regulators. Under the proposed margin rules, the Bank will have to post both initial margin and variation margin to the Bank's swap dealer counterparties, but may be eligible in both instances for modest unsecured thresholds as “low-risk financial end users.” Pursuant to additional Finance Agency provisions, the Bank would be required to collect both initial margin and variation margin from the Bank's swap dealer counterparties, without any thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by the Bank and thus also make uncleared trades more costly.
The CFTC has issued a proposed rule requiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer basis. However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of the clearing member. Such commingling would put the Bank's collateral at risk in the event of a default by another customer of the Bank's clearing member. To the extent that the CFTC's final rule places the Bank's posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, the Bank may be adversely impacted.
The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or

90


“major swap participants,” as the case may be, with the CFTC and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, it does not appear likely that the Bank will be required to register as a “major swap participant,” although this remains a possibility. Also, based on the definitions in the proposed rules, it does not appear likely that the Bank will be required to register as a “swap dealer” as a result of the derivative transactions that the Bank enters into with dealer counterparties for the purpose of hedging and managing the Bank's interest-rate risk, which constitute the great majority of the Bank's derivative transactions. However, based on the proposed rules, it is possible that the Bank could be required to register with the CFTC as a swap dealer if it resumed entering into intermediated “swaps” with members.
It is also unclear how the final rule will treat caps, floors and other derivatives embedded in the Bank's advances products. The CFTC and SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance clarify that certain products will or will not be regulated as “swaps.” However, at this time it remains unclear whether certain transactions between the Bank and the Bank's members will be treated as “swaps". Depending on how the terms “swap” and “swap dealer” are defined in the final regulations, the Bank may be faced with the business decision of whether to continue to offer “swaps” to member customers if those transactions would require the Bank to register as a swap dealer. Designation as a swap dealer would subject the Bank to significant additional regulation and cost including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements and additional swap-based capital and margin requirements. Even if the Bank is designated as a swap dealer, the proposed regulation would permit the Bank to apply to the CFTC to limit such designation to those specified activities for which the Bank is acting as a swap dealer. Upon such designation, the hedging activities of the Bank would not be subject to the full requirements that will generally be imposed on traditional swap dealers.
The Bank is actively participating in the development of the regulations under the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. It is not expected that final rules implementing the Dodd-Frank Act will become effective until the latter half of 2011, and delays beyond that time are possible.
 
Regulation of Certain Nonbank Financial Companies
 
Federal Reserve Board Proposed Rule on Regulatory Oversight of Nonbank Financial Companies. On February 11, 2011, the Federal Reserve Board issued a proposed rule with a comment deadline of March 30, 2011, that would define certain key terms to determine which nonbank financial companies will be subject to the Federal Reserve's regulatory oversight. The proposed rule provides that a company is “predominantly engaged in financial activities” if:
 
the annual gross financial revenue of the company represents 85 percent or more of the company's gross revenue in either of its two most recent completed fiscal years; or
the company's total financial assets represent 85 percent or more of the company's total assets as of the end of either of its two most recently completed fiscal years.
 
The Bank would be predominantly engaged in financial activities under either prong of the proposed test. In addition, the proposed rule also defines “significant nonbank financial company” to mean a nonbank financial company that had $50 billion or more in total assets as of the end of its most recently completed fiscal year. If the Bank is determined to be a nonbank financial company subject to the Federal Reserve's regulatory oversight, then the Bank's operations and business may be adversely impacted by such oversight.
 
Oversight Council Notice of Proposed Rulemaking on Authority to Supervise and Regulate Certain Nonbank Financial Companies. On January 26, 2011, an interagency oversight council created by the Dodd-Frank Act (the Oversight Council) issued a proposed rule with a comment deadline of February 25, 2011, that would implement the Oversight Council's authority to subject nonbank financial companies to the supervision of the Federal Reserve Board and certain prudential standards. The proposed rule defines “nonbank financial company” broadly enough to likely cover the Bank. Also, under the proposed rule, the Oversight Council will consider certain factors in determining whether to subject a nonbank financial company to supervision and prudential standards. Some factors identified include the availability of substitutes for the financial services and products the entity provides as well as the entity's size; interconnectedness with other significant financial firms; leverage and liquidity risk; and maturity mismatch and existing regulatory scrutiny. If the Bank is determined to be a nonbank financial company subject to the Oversight Council's regulatory requirements, then the Bank's operations and business are likely to be affected.
 
Oversight Council Recommendations on Implementing the Volcker Rule. In January 2011, the Oversight Council issued recommendations for implementing certain prohibitions on proprietary trading, commonly referred to as the Volcker Rule. Institutions subject to the Volcker Rule may be subject to various limits with regard to their proprietary trading and various regulatory requirements to ensure compliance with the Volcker Rule. If the Bank is made subject to the Volcker Rule, then the

91


Bank may be subject to additional limitations on the composition of the Bank's investment portfolio beyond Finance Agency regulations. These limitations may potentially result in less profitable investment alternatives. Further, complying with related regulatory requirements would be likely to increase the Bank's regulatory requirements and incremental costs. COs are generally exempt from the operation of this rule, subject to certain limitations, including the absence of conflicts of interest and certain financial risks.
 
FDIC Regulatory Actions
 
FDIC Interim Final Rule on Dodd-Frank Orderly Liquidation Resolution Authority. On January 25, 2011, the FDIC issued an interim final rule with a comment deadline of March 28, 2011, on how the FDIC would treat certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company, not including FDIC-insured depository institutions, in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States. The interim final rule provides, among other things:
 
a valuation standard for collateral on secured claims;
that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral;
a clarification of the treatment for contingent claims; and
that secured obligations collateralized with U.S. government obligations will be valued at fair market value. 
 
FDIC Final Rule on Assessment System. On February 25, 2011, the FDIC issued a final rule that became effective on April 1, 2011, to revise the assessment system applicable to FDIC-insured financial institutions. The rule, among other things, implements a provision in the Dodd-Frank Act to redefine the assessment base used for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Accordingly, FHLBank advances are now included in the Bank's members' assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank advances, in excess of 25 percent of an institution's domestic deposits since these are now part of the assessment base. To the extent that increased assessments increase the cost of advances for some members, it could adversely impact their demand for advances.
 
Joint Regulatory Actions
 
Proposed Rule on Incentive-Based Compensation Arrangements. On April 14, 2011, certain federal financial regulators, including the Finance Agency, published a proposed rule with a comment deadline of May 31, 2011, that would prohibit “covered financial institutions” from entering into incentive-based compensation arrangements that encourage inappropriate risks. The Bank would be a covered financial institution under the proposed rule. The rule would require the Bank, among other things, to:
 
prohibit incentive-based compensation arrangements that provide excessive compensation;
prohibit incentive compensation that could lead to material financial loss;
provide an annual report to the Finance Agency disclosing the structure of its incentive-compensation arrangements for covered persons;
require policies and procedures effecting the compensation standard set forth in the rule; and
require mandatory deferrals of 50 percent of annual incentive based compensation over no less than three years for executive officers.
 
Covered persons under the rule would include senior management responsible for the oversight of firm wide activities or material business lines and nonexecutive employees or groups of those employees whose activities may expose the institution to a material loss.
 
Under the proposed rule, covered financial institutions would be required to comply with three key risk-management principles related to the design and governance of incentive-based compensation: balanced design, independent risk-management controls, and strong governance.
 
The proposed rule identifies four methods to balance compensation design and make it more sensitive to risk: risk adjustment of awards, deferral of payment, longer performance periods, and reduced sensitivity to short-term performance. Larger covered financial institutions, like the Bank, would also be subject to a mandatory 50 percent deferral of annual incentive-based compensation for executive officers and board oversight of incentive-based compensation for certain risk-taking employees

92


who are not executive officers. The proposed rule could impact the design of the Bank's compensation policies and practices, including its incentive-compensation policies and practices, if adopted as proposed.
 
Proposed Rule on Credit-Risk Retention for Asset-Backed Securities. On April 29, 2011, the federal banking agencies, the Finance Agency, the U.S. Department of Housing and Urban Development, and the SEC jointly issued a proposed rule with a comment deadline of June 10, 2011, which proposes requiring sponsors of asset-backed securities to retain a minimum of five percent economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy specified qualifications. The proposed rule specifies criteria for qualified residential mortgage, commercial real estate, auto and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rule-making as those underwriting and product features which, based on historical data, are associated with low risk even in periods of decline of housing prices and high unemployment.
 
Key issues in the proposed rule include: (1) the appropriate terms for treatment as a qualified residential mortgage; (2) the extent to which Fannie Mae- and Freddie Mac-related securitizations will be exempt from the risk retention rules; and (3) the possibility of creating a category of high-quality nonqualified residential mortgage loans that would have less than a five percent risk-retention requirement.
 
If adopted as proposed, the rule could reduce the number of loans originated by the Bank's members, which could adversely impact member demand for Bank products.
 
Housing GSE Reform
 
In the wake of the financial crisis and related housing problems, both Congress and the Obama Administration are considering changes to the U.S. housing finance structure, specifically reforming or eliminating Fannie Mae and Freddie Mac. These efforts could have implications for the FHLBanks.
 
On February 11, 2011, the U.S. Treasury and the U.S. Department of Housing and Urban Development issued a report to Congress entitled Reforming America's Housing Finance Market. The report's primary focus is to provide options for Congressional consideration regarding the long-term structure of housing finance, including reforms specific to Fannie Mae and Freddie Mac. In addition, the Obama Administration noted it would work, in consultation with the Finance Agency and Congress, to restrict the areas of mortgage finance in which Fannie Mae, Freddie Mac, and the FHLBanks operate so that overall government support of the mortgage market will be substantially reduced over time.
 
Although the FHLBanks are not the primary focus of this report, they are recognized as playing a vital role in helping smaller financial institutions access liquidity and capital to compete in an increasingly competitive marketplace. The report suggests that the U.S. Treasury would support the following possible reforms for the FHLBank System:  
 
focus the FHLBanks on small- and medium-sized financial institutions;
restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLBank;
limit the level of outstanding advances to larger members; and
reduce FHLBank investment portfolios and their composition, focusing FHLBanks on providing liquidity for insured depository institutions.  
 
The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market.
 
In response, several bills have been introduced in Congress. While none propose specific changes to the FHLBanks, the Bank could nonetheless be affected in numerous ways by changes to the U.S. housing finance structure and to Fannie Mae and Freddie Mac. For example, the FHLBanks traditionally have allocated a significant portion of their investment portfolio to investments in Fannie Mae and Freddie Mac debt securities. Accordingly, the FHLBanks' investment strategies would likely be affected by winding down those entities. Winding down these two GSEs, or limiting the amount of mortgages they purchase, also could increase demand for FHLBank advances if FHLBank members responded by retaining more of their mortgage loans in portfolio, using advances to fund the loans.
 
It is also possible that Congress will consider any or all of the specific changes to the FHLBanks suggested by the Administration's proposal. If legislation is enacted incorporating these changes, the FHLBanks could be significantly limited in their ability to make advances to their members and subject to additional limitations on their investment authority. Additionally, if Congress enacts legislation encouraging the development of a covered bond market, FHLBank advances could be reduced in

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time as larger members use covered bonds as an alternative form of wholesale mortgage financing.
 
The potential effect of housing finance and GSE reform on the FHLBanks is unknown at this time and will depend on the legislation, if any, that is ultimately enacted.
 
Finance Agency Regulatory Actions
 
Final Rule on Temporary Increases in Minimum Capital Levels. On March 3, 2011, the Finance Agency issued a final rule effective April 4, 2011, authorizing the Director of the Finance Agency to increase the minimum capital level for an FHLBank if the Director of the Finance Agency determines that the current level is insufficient to address such FHLBank's risks. The rule provides the factors that the Director may consider in making this determination including the FHLBank's:
               
current or anticipated declines in the value of its assets;
ability to access liquidity and funding;
credit, market, operational, and other risks;
current or projected declines in its capital;
material compliance with regulations, written orders, or agreements;
housing finance market conditions;
level of retained earnings;
initiatives, operations, products, or practices that entail heightened risk;
ratio of market value of equity to the par value of capital stock; and/or
other conditions as notified by the Director of the Finance Agency.
 
The rule provides that the Director of the Finance Agency shall consider the need to maintain, modify, or rescind any such increase no less than every 12 months. If the Bank is required to increase its minimum capital level, the Bank could need to lower or suspend dividend payments to increase retained earnings to satisfy such increase. Alternatively, the Bank could satisfy an increased capital requirement by disposing of assets to decrease the size of the Bank's balance sheet relative to total outstanding stock, which could adversely impact the Bank's results of operations and financial condition and ability to satisfy its mission.  
 
Regulatory Policy Guidance on Reporting of Fraudulent Financial Instruments. On January 27, 2010, the Finance Agency issued a regulation requiring the FHLBanks to report to the Finance Agency upon the discovery of any fraud or possible fraud related to the purchase or sale of financial instruments or loans. On March 29, 2011, the Finance Agency issued immediately effective final guidance which sets forth fraud reporting requirements for the FHLBanks under the regulation. The guidance, among other things, provides examples of fraud that should be reported to the Finance Agency and the Finance Agency's Office of Inspector General. In addition, the guidance requires FHLBanks to establish and maintain effective internal controls, policies, procedures, and operational training to discover and report fraud or possible fraud. Although complying with the guidance will increase the Bank's regulatory requirements, the Bank does not expect any material incremental costs or adverse impact to its business.
 
Proposed Rule on Private Transfer Fee Covenants. On February 8, 2011, the Finance Agency issued a proposed rule with a comment deadline of April 11, 2011, that would restrict the Bank from purchasing, investing in, or taking security interests in mortgage loans on properties encumbered by private transfer fee covenants, securities backed by such mortgage loans, and securities backed by the income stream from such covenants, except for certain transfer fee covenants. Excepted transfer fee covenants would include covenants to pay private transfer fee to covered associations (including organizations comprising owners of homes, condominiums, or cooperatives or certain other tax-exempt organizations) that use the private transfer fees exclusively for the direct benefit of the property. The foregoing restrictions would apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, and to such securities backed by such mortgages, and to securities issued after that date and backed by revenue from private transfer fees regardless of when the covenants were created. The Bank would be required to comply with the regulation within 120 days of the publication of the final rule. To the extent that a final rule limits the types of investments in mortgage loans that the Bank makes or the types of collateral that the Bank accepts for advances, the Bank's business could be adversely impacted.
 
Advance Notice of Proposed Rulemaking on Use of NRSRO Credit Ratings. On January 31, 2011, the Finance Agency issued an advanced notice of proposed rulemaking with a comment deadline of March 17, 2011, that would implement a provision in Dodd-Frank Act that requires all federal agencies to remove regulations that require use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific Finance Agency regulations applicable to FHLBanks including risk-based capital requirements, prudential requirements, investments and COs.
 

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CREDIT RATING AGENCY DEVELOPMENTS
  
On April 18, 2011, S&P affirmed its AAA rating on long-term U.S. debt, although S&P revised its outlook to negative from stable based on the overall U.S. debt burden and related fiscal challenges in reducing the deficit. Based on that revision in outlook, on April 20, 2011, S&P:
 
affirmed the AAA rating on FHLBank COs but revised its outlook on COs to negative from stable based on the revised outlook for long-term U.S. debt; and
affirmed the AAA-long-term counterparty credit ratings of each of the 10 FHLBanks with such AAA-ratings but revised the outlook to negative from stable for each of those FHLBanks.
 
To the extent that the Bank's market access or debt costs rise in turn, the Bank's financial condition and results of operations may be adversely impacted.
 
The following table sets forth the credit ratings of each of the FHLBanks as of April 20, 2011, from S&P and Moody's.
 
Federal Home Loan Banks
Long-Term and Short-Term Credit Ratings
As of April 20, 2011
 
 
 
 
 
 
 
S&P
 
Moody's
 
 
Long-Term/
Short-Term
Rating
 
Outlook
 
Long-Term/
Short-Term
Rating
 
Outlook
FHLBank of Atlanta
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Boston
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Chicago
 
AA+/A-1+
 
Stable
 
Aaa/P-1
 
Stable
FHLBank of Cincinnati
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Dallas
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Des Moines
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Indianapolis
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of New York
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Pittsburgh
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of San Francisco
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Seattle
 
AA+/A-1+
 
Negative
 
Aaa/P-1
 
Stable
FHLBank of Topeka
 
AAA/A-1+
 
Negative
 
Aaa/P-1
 
Stable
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market and Interest-Rate Risk
 
Sources and Types of Market and Interest-Rate Risk
 
The Bank's balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risks in the 2010 Annual Report.
 
Strategies to Manage Market and Interest-Rate Risk
 
General
 
The Bank uses various strategies and techniques to manage its market and interest-rate risk. Principal among its tools for interest-rate-risk management is the issuance of debt that is used to match interest-rate-risk exposures of the Bank's assets. The Bank can issue COs with maturities of up to 30 years (although there is no statutory or regulatory limit on maturities). The debt may be noncallable until maturity or callable on and/or after a certain date.

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These bonds may be issued to fund specific assets or to manage the overall exposure of a portfolio or the balance sheet. At March 31, 2011, fixed-rate noncallable debt, not hedged by interest-rate-exchange agreements, amounted to $13.5 billion, compared with $13.6 billion at December 31, 2010. Fixed-rate callable debt, not hedged by interest-rate-exchange agreements, amounted to $2.7 billion at both March 31, 2011, and December 31, 2010.
 
To achieve certain risk-management objectives, the Bank also uses interest-rate derivatives that alter the effective maturities, repricing frequencies, or option-related characteristics of financial instruments. These may include swaps, swaptions, caps, collars, and floors; futures and forward contracts; and exchange-traded options. For example, as an alternative to issuing a fixed-rate bond to fund a fixed-rate advance, the Bank might enter into an interest-rate swap that receives a floating-rate coupon and pays a fixed-rate coupon, thereby effectively converting the fixed-rate advance to a floating-rate advance.
 
Advances
 
In addition to the general strategies described above, one tool that the Bank uses to reduce the interest-rate risk associated with advances is a contractual provision that requires members to pay prepayment fees for advances that, if prepaid prior to maturity, might expose the Bank to a loss of income under certain interest-rate environments. In accordance with applicable regulations, the Bank has an established policy to charge fees sufficient to make the Bank financially indifferent to a member's decision to repay an advance prior to its maturity. Prepayment fees are recorded as income for the period in which they are received.
 
Prepayment-fee income can be used to offset the cost of purchasing and retiring high-cost debt to maintain the Bank's asset-liability sensitivity profile. In cases where derivatives are used to hedge prepaid advances, prepayment-fee income can be used to offset the cost of terminating the associated hedge.
 
Investments
 
The Bank holds certain long-term bonds issued by U.S. federal agencies, U.S. federal government corporations and instrumentalities, HFAs, and supranational banks as available-for-sale. To hedge the market and interest-rate risk associated with these assets, the Bank may enter into interest-rate swaps with matching terms to those of the bonds to create synthetic floating-rate assets. At both March 31, 2011, and December 31, 2010, this portfolio of investments had an amortized cost of $1.1 billion.
 
The Bank also manages the market and interest-rate risk in its MBS portfolio in several ways. For MBS classified as held-to-maturity, the Bank uses debt that matches the characteristics of the portfolio assets. For example, for floating-rate ABS, the Bank uses debt that reprices on a short-term basis, such as CO discount notes or CO bonds that are swapped to a LIBOR-based floating-rate. For commercial MBS that are nonprepayable or prepayable for a fee for an initial period, the Bank may use fixed-rate debt.
 
The Bank also manages its interest rate risk through the selective use of security investments chosen to effect a particular risk mitigation tactic, principally through the use of the purchase of fixed rate bullet maturity agency debentures that are funded by issuing debt with a duration generally one year less than the associated security. Deployment of this approach with its initial fixed spread serves as a hedge for the Bank's net interest income against the impact of low interest rates.
 
The Bank also uses interest-rate swaps to manage the fair-value sensitivity of the portion of its MBS portfolio that is classified as trading securities. These interest-rate-exchange agreements provide an economic offset to the duration and convexity risks arising from these assets.
 
Mortgage Loans
 
The Bank manages the interest-rate and prepayment risk associated with mortgage loans through a combination of debt issuance and derivatives. The Bank issues both callable and noncallable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans.
 
The Bank mitigates much of its exposure to changes in interest rates by funding a significant portion of its mortgage portfolio with callable debt. When interest rates change, the Bank's option to redeem this debt offsets a large portion of the fair-value change driven by the mortgage-prepayment option. These bonds are effective in managing prepayment risk by allowing the Bank to respond in kind to prepayment activity. Conversely, if interest rates increase, the debt may remain outstanding until maturity. The Bank uses various cash instruments including shorter-term debt, callable, and noncallable long-term debt to reprice debt when mortgages prepay faster or slower than expected. The Bank's debt-repricing capacity depends on market

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demand for callable and noncallable debt, which fluctuates from time to time. Additionally, because the mortgage-prepayment option is not fully hedged by callable debt, the combined market value of the Bank's mortgage assets and debt will be affected by changes in interest rates. The Bank may incorporate the use of derivatives if the correlation with mortgage assets is higher than cash instruments. Derivatives provide a flexible, liquid, efficient, and cost-effective method to hedge interest-rate and prepayment risks.
 
Swapped Consolidated Obligation Debt
 
The Bank may also issue bonds in conjunction with interest-rate swaps that receive a coupon that offsets the bond coupon, and that offsets any optionality embedded in the bond, thereby effectively creating a floating-rate liability. The Bank employs this strategy to secure long-term debt that meets funding needs versus relying on short-term CO discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $11.0 billion, or 32.5 percent of the Bank's total outstanding CO bonds at March 31, 2011, down from $12.0 billion, or 34.5 percent of total outstanding CO bonds, at December 31, 2010. Because the interest-rate swaps and hedged CO bonds trade in different markets, they are subject to basis risk that is reflected in the Bank's Value at Risk (VaR) calculations and fair-value disclosures, but that is not reflected in hedge ineffectiveness, because these interest-rate swaps are designed to only hedge changes in fair values of the CO bonds, that are attributable to changes in the benchmark LIBOR interest rate.
 
Measurement of Market and Interest-Rate Risk
 
The Bank measures its exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest rate volatility, spreads, and market prices. The Bank also measures the duration gap of its assets and liabilities.
 
For a description of the information systems the Bank uses to evaluate its market- and interest-rate risks, see Item 7A —Quantitative and Qualitative Disclosures About Market Risks — Measurement of Market and Interest-Rate Risk in the 2010 Annual Report.
 
Market Value of Equity Estimation and Market Risk Limit. MVE is the net economic value (or net present value) of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the theoretical market value of assets and the theoretical market value of liabilities. MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is therefore a theoretical measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, care must be taken to properly interpret the results of the MVE analysis as the theoretical basis for these valuations may not be fully representative of future realized prices. Further, valuations are based on market curves and prices respective of individual assets, liabilities, and derivatives, and therefore are not representative of future net income to be earned by the Bank through the spread between asset market curves and the market curves for funding costs.
 
For purposes of measuring this ratio, the BVE is equal to the Bank's permanent capital, which consists of the par value of capital stock including mandatorily redeemable capital stock, plus retained earnings. BVE excludes accumulated other comprehensive loss. At March 31, 2011, the Bank's MVE was $3.6 billion and its BVE was $4.0 billion. At December 31, 2010, the Bank's MVE was $3.5 billion and its BVE was $4.0 billion. The Bank's ratio of MVE to BVE was 89.7 percent at March 31, 2011, up from 87.8 percent at December 31, 2010.
 
The primary drivers for the improvement in the Bank's MVE to BVE ratio since December 31, 2010, were:
improvement in prices for the Bank's private-label MBS holdings reflecting a continuing (but slow) return of liquidity to this market sector;
 
swap yields rising more than the Bank's debt costs resulting in the Bank's pay-fixed swaps appreciating in value more than the depreciation in the related hedged assets; and
 
a reduction to the Bank's total assets without a proportional reduction to the Bank's capital base.
 
The Bank targets a 100 percent ratio between its MVE to the par value of its Class B stock (referred to here as Par Stock), reflecting the Bank's intent to preserve the value of its members' capital investment in the Bank. As of March 31, 2011, that ratio was 96.2 percent, with the shortfall primarily reflecting the ongoing discounted value of the Bank's private-label MBS

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holdings. The Bank isolates the long-term impact of the depressed prices of its private-label MBS portfolio on its MVE, and has established a limit of 100 percent on the ratio of MVE to par stock when the impact of market illiquidity on MVE is removed, referred to as adjusted MVE. Under this measurement, the portion of the discounted price not attributable to credit losses is added back to market value. As of March 31, 2011, the ratio of adjusted MVE to Par Stock was 108.3 percent.
 
The following chart indicates the improvement in the Bank's MVE to BVE and MVE to Par Stock ratios over the preceding quarters, based on the factors described above.
 
 
Interest-rate-risk analysis using MVE involves evaluating the potential changes in fair values of assets and liabilities and off-balance-sheet items under different potential future interest-rate scenarios and determining the potential impact on MVE according to each scenario and the scenario's likelihood. The following table presents the Bank's MVE to BVE and MVE to Par Stock ratios in different interest-rate scenarios.
 
 
 
March 31, 2011
 
December 31, 2010
 
 
Down(1)
 
Base
 
Up(2)
 
Down(1)
 
Base
 
Up(2)
MVE/BVE
 
94.4%
 
89.7%
 
84.4%
 
92.5%
 
87.8%
 
82.8%
MVE/Par Stock
 
101.2%
 
96.2%
 
90.5%
 
98.6%
 
93.6%
 
88.3%
____________________________
(1) Down equals 200 basis points; however, an applicable regulation restricts the down rate from assuming a negative interest rate. Therefore the Bank adjusts the down rate accordingly in periods of very low levels of interest rates.
 
(2) Up equals 200 basis points.
 
Value at Risk. VaR measures the change in the Bank's MVE to a ninety-ninth percent confidence interval, based on a set of stress scenarios based on historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to the beginning of 1978, consistent with Finance Agency regulations.
 
The table below presents the historical simulation VaR estimate as of March 31, 2011, and December 31, 2010, which represents the estimates of potential reduction to the Bank's MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on historical behavior of interest rates and other market factors over a 120-business-day time horizon.
 

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Value-at-Risk
(Gain) Loss Exposure
 
March 31, 2011
 
December 31, 2010
Confidence Level
% of
MVE (1)
 
$ million
 
% of
MVE (1)
 
$ million
50%
(0.13
)%
 
$
(4.6
)
 
(0.15
)%
 
$
(5.4
)
75%
0.78
 
 
28.2
 
 
0.63
 
 
22.2
 
95%
2.78
 
 
100.4
 
 
2.27
 
 
79.9
 
99%
7.20
 
 
259.7
 
 
3.22
 
 
113.2
 
_______________________
(1)          Loss exposure is expressed as a percentage of base MVE.
 
As measured by VaR, the Bank's potential losses to MVE due to changes in interest rates and other market factors increased to $259.7 million as of March 31, 2011, from $113.2 million as of December 31, 2010.
 
The increase in VaR since December 31, 2010, resulted from certain factors experienced during the quarter ended March 31, 2011, including:
 
significant increases in intermediate and long-term swap yields; and
 
significant increases in intermediate and long-term yields in the Bank's funding curve.
 
The Bank believes that the increases causing the increase in VaR are a result of changing market expectations regarding interest rates over intermediate and long-term horizons due to inflation concerns.
 
The Bank's risk-management policy requires that VaR not exceed $275.0 million. Should the limit be exceeded, the policy requires management to notify the board of directors' risk committee of such breach and to take steps to reduce the risk exposure. The Bank complied with this limit at all times during the quarter ended March 31, 2011. Although VaR was nearing the internal limit at March 31, 2011, the Bank expects to take steps intended to stay within the limit.
 
Duration of Equity. A further measure of market risk employed by the Bank is its duration of equity. Duration of equity measures the percentage change to shareholder value due to movements in market conditions including but not limited to prices, interest rates, and volatility. A positive duration of equity generally indicates an appreciation in shareholder value in times of falling rates and the converse holds true for increasing rate environments. The Bank has established a limit of 5.0 years for duration of equity based on a balanced consideration of market value sensitivity and net interest income sensitivity. The Bank did not exceed its 5.0 year limit in 2011.
 
Throughout 2010, the Bank took steps to reduce its net interest income exposure to a prolonged period of low market yields, including its deliberate maintenance of positive duration of equity, as described in the 2010 Annual Report under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk. However, during the period covered by this report, the Bank has taken actions in the first quarter of 2011 to maintain a lower duration of equity (consistent with the Bank's duration of equity at December 31, 2010) in anticipation of a rising interest-rate environment and expects to continue this approach into the second quarter of 2011. As of March 31, 2011, the Bank's duration of equity was +1.8 years, compared with +1.6 years at December 31, 2010.
 
The following table presents the Bank's duration of equity (in years) in different interest-rate scenarios:
 
 
March 31, 2011
 
December 31, 2010
 
 
Down(1)
 
Base
 
Up(2)
 
Down(1)
 
Base
 
Up(2)
Duration of Equity
 
2.6
 
1.8
 
4.6
 
2.6
 
1.6
 
4.8
____________________________
(1) Down equals 200 basis points; however, an applicable regulation restricts the down rate from assuming a negative interest rate. Therefore the Bank adjusts the down rate accordingly in periods of very low levels of interest rates.
 
(2) Up equals 200 basis points.
 
The Bank uses alternative measures of VaR and duration of equity for its private-label MBS, specifically isolating the impact of

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private-label MBS credit spreads and market illiquidity on the respective metrics. To gauge the impact of potential shifts in interest rates and volatility on the Bank's interest-rate risk exposure, the Bank removes noninterest-rate factors such as the price dislocation and resultant spread-widening attributable to the market illiquidity experienced in 2009 and 2010. These VaR (management VaR) and duration of equity (management duration of equity) measurements are viewed by management as being more representative of the Bank's interest-rate risk profile than those inclusive of current spreads. As of March 31, 2011, management VaR stood at $193.2 million and management duration of equity was +1.8 years. As of December 31, 2010, management VaR stood at $78.4 million and management duration of equity was +1.6 years.
 
MPF Portfolio Management Action Trigger of 25 Percent of Bank VaR Limit. The Bank has established a management action trigger for VaR exposure from its investments in mortgage loans through the MPF program such that the VaR from these investments shall not exceed 25 percent of the Bank's overall VaR limit. While the Bank seeks to limit interest-rate risk through matching asset maturity and optionality with its corresponding funding, mortgage loans cannot be perfectly match funded due to factors including, but not limited to, borrower prepayment behavior and basis risk between the swap and Bank's funding curves. Accordingly, the Bank maintains this management action trigger, which was $68.8 million at March 31, 2011, based on the Bank's overall VaR limit of $275.0 million. The Bank's actual MPF portfolio's VaR exposure at March 31, 2011, was $61.6 million, compared with $54.5 million as of December 31, 2010.
 
Duration Gap. The Bank measures the duration gap of its assets and liabilities, including all related hedging transactions. Duration gap is the difference between the estimated durations (percentage change in market value for a 100-basis-point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including but not limited to maturity and repricing cash flows, for assets and liabilities are matched. Higher numbers, whether positive or negative, indicate greater sensitivity in the market value of equity in response to changing interest rates. A positive duration gap means that the Bank's total assets have an aggregate duration, or sensitivity to interest rate changes greater than its liabilities, and a negative duration gap means that the Bank's total assets have an aggregate duration shorter than its liabilities. The Bank's duration gap was +1.4 months at March 31, 2011, compared with +1.1 months at December 31, 2010.
 
Income Simulation and Repricing Gaps. To provide an additional perspective on market and interest-rate risks, the Bank has an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to the Bank's funding curve and LIBOR. The Bank measures simulated 12-month net income and return on equity under these scenarios; the simulations are solely based on simulated movements in the swap and FHLBank funding curves, and do not reflect potential impacts of credit events, including but not limited to, future other-than-temporary impairment charges. Management has put in place escalation-action triggers whereby senior management is explicitly informed of instances where the Bank's projected return on equity would fall below three-month LIBOR in any of the assumed interest-rate scenarios. The results of this analysis for March 31, 2011, showed that in the worst-case scenario, the Bank's return on equity falls to 115 basis points above the average yield on three-month LIBOR under a yield curve scenario wherein interest rates instantaneously rise by 300 basis points in a parallel fashion across all yield curves; this projected decline in the Bank's return on equity does not reflect the potential impact of future credit losses.
 
Economic Capital Ratio Limit. The Bank has established a limit of 4.0 percent for the ratio of the MVE to the market value of assets, referred to as the economic capital ratio. Finance Agency regulations require the Bank to maintain a regulatory capital ratio of book capital to book assets limit of no less than 4.0 percent, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital. The Bank seeks to ensure that the regulatory capital ratio will not fall below the 4.0 percent threshold at a future time by establishing the economic capital ratio limit at 4.0 percent. The economic capital ratio serves as a proxy for benchmarking future capital adequacy by discounting the Bank's balance sheet and derivatives at current market expectations of future values. The Bank's economic capital ratio was 6.4 percent as of March 31, 2011, compared with 5.9 percent as of December 31, 2010.
The Bank's economic capital ratio was not below 4.0 percent at any time during the quarter ended March 31, 2011.
 
ITEM 4.        CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
The Bank's senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. The Bank's disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Securities

100


Exchange Act of 1934 is accumulated and communicated to the Bank's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank's disclosure controls and procedures, the Bank's management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank's management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
 
Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures, with the participation of the president and chief executive officer, and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, the Bank's president and chief executive officer and chief financial officer have concluded that the Bank's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.
 
Changes in Internal Control over Financial Reporting
 
During the quarter ended March 31, 2011, there were no changes in the Bank's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS
 
On April 20, 2011, the Bank filed a complaint in the Superior Court Department of the Commonwealth of Massachusetts in Suffolk County, against various securities dealers, underwriters, control persons, issuers/depositors, and credit rating agencies based on the Bank's investments in certain private-label MBS issued by 115 securitization trusts for which the Bank originally paid approximately $5.8 billion. The complaint asserts claims based on untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations and omissions, negligent misrepresentation, unfair or deceptive trade practices, fraud by the rating agencies, and controlling person liability. The Bank is seeking various forms of relief including rescission, recovery of damages, recovery of purchase consideration plus interest (less income received to date) and recovery of reasonable attorneys' fees and costs of suit.
 
The complaint names the following defendants and their affiliates and subsidiaries and defendants under their control or controlled by affiliates or subsidiaries thereof: Bank of America Corporation; Barclays Capital Inc.; The Bear Stearns Companies LLC; Capital One Financial Corporation; Citigroup, Inc.; Countrywide Financial Corporation; Credit Suisse (USA), Inc.; DB Structured Products, Inc.; DB U.S. Financial Market Holding Corporation; EMC Mortgage Corporation; GMAC LLC; Fitch, Inc.; Impac Mortgage Holdings, Inc.; JPMorgan Chase & Co.; The McGraw-Hill Companies, Inc.; Moody's Corporation; Morgan Stanley; Nomura Holding America, Inc.; RBS Holdings USA Inc.; Sandler, O'Neill & Partners, L.P.; UBS Americas Inc.; WaMu Capital, Corp.; and Wells Fargo & Company. The complaint also names various individuals due to their association and control over Lehman Brothers Holdings Inc. and its affiliates and subsidiaries and entities controlled by Lehman Brothers Holdings Inc.'s affiliates and subsidiaries in connection with certain of the investments that are the subject of the complaint.
 
Bank of America Rhode Island, N.A., which is affiliated with Bank of America Corporation but is not a defendant in the complaint, held approximately 28.8 percent of the Bank's capital stock as of March 31, 2011. RBS Citizens N.A., which is affiliated with RBS Holdings USA Inc., but is not a defendant in the complaint, held approximately 13.7 percent of the Bank's capital stock as of March 31, 2011. 
 
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. See Part I — Financial Information — Item 1 — Financial Statements — Notes to the Financial Statements — Note 18 — Commitments and Contingencies for additional information.
 
Item 1A.    RISK FACTORS
 
In addition to the risk factors below and other risks described herein, readers should carefully consider the risk factors set forth in the 2010 Annual Report, which could materially impact the Bank's business, financial condition, or future results. The risks described below, elsewhere in this report, and in the 2010 Annual Report are not the only risks facing the Bank. Additional risks and uncertainties not currently known to the Bank or that the Bank currently deems immaterial may also materially impact

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the Bank.
 
The Bank is subject to credit-risk exposures related to the loans that back its investments. Increased delinquency rates and credit losses beyond those currently expected could adversely impact the yield on or value of those investments.
 
The Bank has invested in HFA securities with an amortized cost of $232.8 million as of March 31, 2011. Generally, these securities' cash flows are based on the performance of the underlying loans, although these securities do include credit enhancements as well. Although the Bank's policies require that HFA bonds must carry a credit rating of double-A (or its equivalent rating) or higher as of the date of purchase, some have since been downgraded and the fair values of some of these securities have also fallen and the Bank's gross unrealized losses on them totaled $41.2 million at March 31, 2011. As described in the 2010 Annual Report under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates, other-than-temporary-impairment assessment is a subjective and complex determination by management. Although the Bank has determined that none of these securities is other-than-temporarily impaired at March 31, 2011, should the underlying loans underperform the Bank's projections, the Bank could realize credit losses from these securities.
 
The Bank has also invested in private-label MBS, which are backed by prime, subprime, and/or Alt-A hybrid and pay-option adjustable-rate 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 NRSROs. See Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Investments for a description of the Bank's portfolio of investments in these securities.
 
Increasing delinquency and loss severity trends experienced on some of the loans underlying the MBS in the Bank's portfolio, as well as challenging macroeconomic factors, such as current unemployment levels and the number of troubled residential mortgage loans, have caused the Bank to use relatively more stressful 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 incurred credit losses of $30.6 million for private-label MBS that management determined were other-than-temporarily impaired for the three months ended March 31, 2011. If macroeconomic trends or collateral credit performance within the Bank's private-label MBS portfolio deteriorate further than currently anticipated, or if recent foreclosure moratoriums by several major mortgage servicers appear likely to negatively impact expected cash flows from impacted securities, even more stressful assumptions, including but not limited to lower house prices, higher loan-default rates, and higher loan-loss severities, may be used by the Bank in future other-than-temporary impairment assessments. As a possible outcome, the Bank may recognize additional other-than-temporary impairment charges, which could 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 is projected to realize an additional $95.9 million in credit losses.
 
The Bank's access to the capital markets could be adversely impacted by any market disruptions that could result if the U.S. Congress does not increase the statutory debt limit.
 
The U.S. Treasury has projected that the statutory limit on the total amount of U.S. debt will be reached in May 2011. Although the U.S. Treasury could take measures to temporarily postpone the date the debt limit is actually reached, the U.S. Treasury currently projects that such measures would be exhausted in a relatively short period. If Congress does not increase the debt limit prior to such time, the U.S. Treasury would lose its borrowing authority at such time and a broad range of government payments could not be satisfied. Such an occurrence is likely to cause disruptions in the capital markets and could result in higher interest rates and borrowing costs for the FHLBanks. To the extent that the Bank cannot access funding when needed on acceptable terms to effectively manage its cost of funds, the Bank's financial condition and results of operations could be negatively impacted.
 
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
Not applicable.
 
Item 3. Defaults Upon Senior Securities
 
None.
 

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Item 4. [Removed and Reserved]
 
Item 5. Other Information
 
None.
 
ITEM 6.  Exhibits
 
10.1
 
Joint Capital Enhancement Agreement, among the Federal Home Loan Banks (incorporated by reference to Exhibit 99.1 of the Bank's Form 8-K filed with the SEC on March 1, 2011).
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date
 
 
 
FEDERAL HOME LOAN BANK OF BOSTON
 
 
 
 
(Registrant)
 
 
 
 
May 12, 2011
 
By:
/s/
EDWARD A. HJERPE III
 
 
 
 
Edward A. Hjerpe III
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
May 12, 2011
 
By:
/s/
FRANK NITKIEWICZ
 
 
 
 
Frank Nitkiewicz
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 
 

104