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EX-32.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Federal Home Loan Bank of Des Moinesexhibit321march312011.htm
EX-31.2 - CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER - Federal Home Loan Bank of Des Moinesexhibit312march312011.htm
EX-32.2 - CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER - Federal Home Loan Bank of Des Moinesexhibit322march312011.htm
EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Federal Home Loan Bank of Des Moinesexhibit311march312011.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: 000-51999
 
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
 
 
 
50309
(Zip code)
 
Registrant's telephone number, including area code: (515) 281-1000
 
 
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 (section 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, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
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 B Stock, par value $100
 
21,628,030
 
 
 
 
 
 
 
 
 

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except capital stock par value)
(Unaudited)
 
March 31,
2011
 
December 31,
2010
ASSETS
 
 
 
Cash and due from banks
$
149,665
 
 
$
105,741
 
Interest-bearing deposits
8,012
 
 
8,919
 
Securities purchased under agreements to resell (Note 3)
1,600,000
 
 
1,550,000
 
Federal funds sold
2,152,000
 
 
2,025,000
 
Investment securities
 
 
 
Trading securities (Note 4)
1,269,214
 
 
1,472,542
 
Available-for-sale securities (Note 5)
5,883,516
 
 
6,356,903
 
Held-to-maturity securities (estimated fair value of $6,622,799 and $7,395,340 at March 31, 2011 and December 31, 2010) (Note 6)
6,467,861
 
 
7,226,116
 
Total investment securities
13,620,591
 
 
15,055,561
 
Advances (Note 8)
27,962,783
 
 
29,252,529
 
Mortgage loans held for portfolio (Note 9)
7,220,002
 
 
7,434,446
 
Less allowance for credit losses on mortgage loans (Note 10)
(18,000
)
 
(13,000
)
Mortgage loans held for portfolio, net
7,202,002
 
 
7,421,446
 
Accrued interest receivable
85,321
 
 
79,314
 
Premises, software, and equipment, net
10,101
 
 
9,196
 
Derivative assets (Note 11)
4,928
 
 
11,927
 
Other assets
45,913
 
 
49,251
 
TOTAL ASSETS
$
52,841,316
 
 
$
55,568,884
 
LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
1,174,324
 
 
$
1,069,986
 
Non-interest-bearing
66,667
 
 
110,667
 
Total deposits
1,240,991
 
 
1,180,653
 
Consolidated obligations (Note 12)
 
 
 
Discount notes (includes $242,604 at fair value under the fair value option at March 31, 2011)
3,928,128
 
 
7,208,276
 
Bonds (includes $2,607,685 and $2,816,850 at fair value under the fair value option at March 31, 2011 and December 31, 2010)
44,288,601
 
 
43,790,568
 
Total consolidated obligations
48,216,729
 
 
50,998,844
 
Mandatorily redeemable capital stock (Note 13)
6,547
 
 
6,835
 
Accrued interest payable
232,157
 
 
187,091
 
Affordable Housing Program (AHP) Payable
44,320
 
 
44,508
 
Payable to REFCORP
6,489
 
 
12,467
 
Derivative liabilities (Note 11)
318,044
 
 
278,447
 
Other liabilities
29,059
 
 
30,467
 
TOTAL LIABILITIES
50,094,336
 
 
52,739,312
 
Commitments and contingencies (Note 15)
 
 
 
CAPITAL (Note 13)
 
 
 
Capital stock - Class B putable ($100 par value) authorized, issued, and outstanding 21,178 and 21,830 shares at March 31, 2011 and December 31, 2010
2,117,770
 
 
2,183,028
 
Retained earnings
565,137
 
 
556,013
 
Accumulated other comprehensive income
 
 
 
Net unrealized gain on available-for-sale securities (Note 5)
65,712
 
 
92,222
 
Pension and postretirement benefits
(1,639
)
 
(1,691
)
Total accumulated other comprehensive income
64,073
 
 
90,531
 
TOTAL CAPITAL
2,746,980
 
 
2,829,572
 
TOTAL LIABILITIES AND CAPITAL
$
52,841,316
 
 
$
55,568,884
 
The accompanying notes are an integral part of these financial statements.

3


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2011
 
2010
INTEREST INCOME
 
 
 
Advances
$
69,989
 
 
$
107,516
 
Prepayment fees on advances, net
3,140
 
 
1,671
 
Interest-bearing deposits
71
 
 
60
 
Securities purchased under agreements to resell
575
 
 
120
 
Federal funds sold
971
 
 
1,516
 
Investment securities
 
 
 
Trading securities
6,464
 
 
15,525
 
Available-for-sale securities
35,979
 
 
24,941
 
Held-to-maturity securities
51,115
 
 
41,762
 
Mortgage loans held for portfolio
82,985
 
 
92,334
 
Total interest income
251,289
 
 
285,445
 
INTEREST EXPENSE
 
 
 
Consolidated obligations
 
 
 
Discount notes
1,660
 
 
2,655
 
Bonds
187,236
 
 
230,115
 
Deposits
186
 
 
229
 
Mandatorily redeemable capital stock
63
 
 
40
 
Total interest expense
189,145
 
 
233,039
 
NET INTEREST INCOME
62,144
 
 
52,406
 
Provision for credit losses on mortgage loans held for portfolio
5,596
 
 
125
 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
56,548
 
 
52,281
 
OTHER (LOSS) INCOME
 
 
 
Service fees
286
 
 
420
 
Net (loss) gain on trading securities
(3,328
)
 
21,199
 
Net (loss) gain on consolidated obligations held at fair value
(997
)
 
6,095
 
Net gain (loss) on derivatives and hedging activities
1,984
 
 
(24,454
)
Net loss on extinguishment of debt
(4,602
)
 
(4,027
)
Other, net
136
 
 
3,260
 
Total other (loss) income
(6,521
)
 
2,493
 
OTHER EXPENSE
 
 
 
Compensation and benefits
8,371
 
 
7,750
 
Other operating expenses
4,061
 
 
4,405
 
Federal Housing Finance Agency
1,362
 
 
720
 
Office of Finance
834
 
 
608
 
Total other expense
14,628
 
 
13,483
 
INCOME BEFORE ASSESSMENTS
35,399
 
 
41,291
 
AHP
2,896
 
 
3,375
 
REFCORP
6,501
 
 
7,583
 
Total assessments
9,397
 
 
10,958
 
NET INCOME
$
26,002
 
 
$
30,333
 
 
The accompanying notes are an integral part of these financial statements.

4


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
 
Capital Stock
Class B (putable)
 
 
 
Accumulated
Other
 
 
 
Shares
 
Par Value
 
Retained Earnings
 
Comprehensive
Income
 
Total
Capital
BALANCE DECEMBER 31, 2009
24,604
 
 
$
2,460,419
 
 
$
484,071
 
 
$
(33,935
)
 
$
2,910,555
 
Proceeds from issuance of capital stock
859
 
 
85,890
 
 
 
 
 
 
85,890
 
Repurchase/redemption of capital stock
(2,150
)
 
(215,015
)
 
 
 
 
 
(215,015
)
Net shares reclassified to mandatorily redeemable capital stock
(6
)
 
(589
)
 
 
 
 
 
(589
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
30,333
 
 
 
 
30,333
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Net unrealized gain on available-for-sale securities
 
 
 
 
 
 
57,121
 
 
57,121
 
Pension and postretirement benefits
 
 
 
 
 
 
48
 
 
48
 
Total comprehensive income
 
 
 
 
 
 
 
 
87,502
 
Cash dividends on capital stock
 
 
 
 
(14,581
)
 
 
 
(14,581
)
BALANCE MARCH 31, 2010
23,307
 
 
$
2,330,705
 
 
$
499,823
 
 
$
23,234
 
 
$
2,853,762
 
 
 
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2010
21,830
 
 
$
2,183,028
 
 
$
556,013
 
 
$
90,531
 
 
$
2,829,572
 
Proceeds from issuance of capital stock
776
 
 
77,585
 
 
 
 
 
 
77,585
 
Repurchase/redemption of capital stock
(1,428
)
 
(142,833
)
 
 
 
 
 
(142,833
)
Net shares reclassified to mandatorily redeemable capital stock
 
 
(10
)
 
 
 
 
 
(10
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
26,002
 
 
 
 
26,002
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net unrealized gain on available-for-sale securities
 
 
 
 
 
 
(26,510
)
 
(26,510
)
Pension and postretirement benefits
 
 
 
 
 
 
52
 
 
52
 
Total comprehensive income
 
 
 
 
 
 
 
 
(456
)
Cash dividends on capital stock
 
 
 
 
(16,878
)
 
 
 
(16,878
)
BALANCE MARCH 31, 2011
21,178
 
 
$
2,117,770
 
 
$
565,137
 
 
$
64,073
 
 
$
2,746,980
 
 
The accompanying notes are an integral part of these financial statements.
 

5


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2011
 
2010
OPERATING ACTIVITIES
 
 
 
Net income
$
26,002
 
 
$
30,333
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
2,981
 
 
(2,343
)
Net loss (gain) on trading securities
3,328
 
 
(21,199
)
Net loss (gain) on consolidated obligations held at fair value
997
 
 
(6,095
)
Net change in derivatives and hedging activities
17,328
 
 
13,560
 
Net loss on extinguishment of debt
4,602
 
 
4,027
 
Other adjustments
3,676
 
 
41
 
Net change in:
 
 
 
Accrued interest receivable
(5,999
)
 
(13,695
)
Other assets
5,927
 
 
(1,646
)
Accrued interest payable
44,735
 
 
38,922
 
Other liabilities
(7,522
)
 
(1,960
)
Total adjustments
70,053
 
 
9,612
 
Net cash provided by operating activities
96,055
 
 
39,945
 
INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
19,307
 
 
(5,613
)
Securities purchased under agreements to resell
(50,000
)
 
 
Federal funds sold
(127,000
)
 
(422,000
)
Premises, software, and equipment
(1,416
)
 
(549
)
Trading securities
 
 
 
Proceeds from sales and maturities
200,000
 
 
1,006,586
 
Available-for-sale securities
 
 
 
Proceeds from maturities
441,013
 
 
572,676
 
Purchases
 
 
(122,968
)
Held-to-maturity securities
 
 
 
Net decrease (increase) in short-term
235,000
 
 
(340,000
)
Proceeds from maturities
524,138
 
 
343,956
 
Purchases
 
 
(2,475,764
)
Advances
 
 
 
Principal collected
8,279,436
 
 
8,117,346
 
Originated
(7,099,283
)
 
(5,385,506
)
Mortgage loans held for portfolio
 
 
 
Principal collected
463,840
 
 
287,325
 
Originated or purchased
(261,630
)
 
(134,352
)
Proceeds from sales of foreclosed assets
8,612
 
 
3,582
 
Net cash provided by investing activities
2,632,017
 
 
1,444,719
 
 
The accompanying notes are an integral part of these financial statements.

6


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2011
 
2010
FINANCING ACTIVITIES
 
 
 
Net change in deposits
69,337
 
 
108,730
 
Net payments on derivative contracts with financing elements
(2,440
)
 
(3,072
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
120,666,000
 
 
115,515,538
 
Bonds
6,947,773
 
 
12,087,494
 
Payments for maturing, transferring, and retiring consolidated obligations
 
 
 
Discount notes
(123,944,722
)
 
(120,221,795
)
Bonds
(6,337,672
)
 
(8,975,076
)
Proceeds from issuance of capital stock
77,585
 
 
85,890
 
Payments for repurchase of mandatorily redeemable capital stock
(298
)
 
(1,667
)
Payments for repurchase/redemption of capital stock
(142,833
)
 
(215,015
)
Cash dividends paid
(16,878
)
 
(14,581
)
Net cash used in financing activities
(2,684,148
)
 
(1,633,554
)
 
 
 
 
Net increase (decrease) in cash and due from banks
43,924
 
 
(148,890
)
Cash and due from banks at beginning of the period
105,741
 
 
298,841
 
Cash and due from banks at end of the period
$
149,665
 
 
$
149,951
 
 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
316,593
 
 
$
424,349
 
AHP
$
3,084
 
 
$
4,011
 
REFCORP
$
12,479
 
 
$
10,072
 
Unpaid principal balance transferred from mortgage loans held for portfolio to real estate owned
$
8,024
 
 
$
5,064
 
 
The accompanying notes are an integral part of these financial statements.

7


FEDERAL HOME LOAN BANK OF DES MOINES
 
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
 
Background Information
 
The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation except real property taxes and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBank's Office of Finance, effective July 30, 2008. The Finance Agency's mission is to provide effective supervision, regulation, and housing mission oversight of the Enterprises and FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.
 
The FHLBanks serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available, low cost source of funds to its member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Commercial banks, thrifts, credit unions, insurance companies, and community development financial institutions may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.
 
The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank.
 
The Bank's current members own nearly all of the outstanding capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on our Statement of Condition. All stockholders, including current members and former members, may receive dividends on their capital stock investment to the extent declared by the Bank's Board of Directors.
 
Note 1 — Basis of Presentation
 
The accompanying unaudited financial statements of the Bank for the three months ended March 31, 2011 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 required by GAAP for full year information and should be read in conjunction with the audited financial statements for the year ended December 31, 2010, which are contained in the Bank's 2010 annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2011 (2010 Form 10-K).
 
In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods. 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 full year ending December 31, 2011.
 
Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2010 Form 10-K, with the exception of one policy change noted below.
 
Office of Finance Expenses
 
The Bank is assessed for the costs of operating the Office of Finance. Effective January 1, 2011, the Office of Finance allocates its operating and capital expenditures to the FHLBanks as follows: (i) two-thirds based on each FHLBank's share of consolidated obligations outstanding and (ii) one-third based on equal pro-rata share (1/12th).

8


Note 2 — Recently Adopted and Issued Accounting Guidance
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
On July 21, 2010, the Financial Accounting Standards Board (FASB) issued amended guidance to enhance financial statement disclosures about an entity's allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires all public and nonpublic entities with financing receivables, including loans, lease receivables, and other long-term receivables, to provide disclosures that facilitate a financial statement user's evaluation of the following: (i) the nature of credit risk inherent in the entity's portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in its allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Short-term accounts receivable, receivables measured at fair value or at the lower of cost or fair value, and debt securities are exempt from this amended guidance. The required disclosures as of the end of a reporting period were effective December 31, 2010. The required disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on January 1, 2011. The Bank's adoption of this amended guidance resulted in increased financial statement disclosures, but did not impact the Bank's financial condition, results of operations, or cash flows.
Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements
On January 21, 2010, the FASB issued amended guidance for fair value measurements and disclosures. The update requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Furthermore, the update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance was effective on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. Those disclosures were effective for fiscal years beginning on January 1, 2011, and for interim periods within those fiscal years. The Bank's adoption of this amended guidance resulted in increased financial statement disclosures at January 1, 2010 but not at January 1, 2011. The amended guidance did not impact the Bank's financial condition, results of operations, or cash flows.
 
Note 3 — Securities Purchased Under Agreements to Resell
The Bank periodically holds securities purchased under agreements to resell those securities. These amounts represent short-term secured investments and are classified as assets in the Statement of Condition. These securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty must either place an equivalent amount of additional securities in safekeeping in the name of the Bank or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will be decreased accordingly.
 
Note 4 — Trading Securities
 
Major Security Types
 
Trading securities were as follows (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
TLGP1
$
1,011,539
 
 
$
1,213,481
 
Taxable municipal bonds2
257,675
 
 
259,061
 
Total
$
1,269,214
 
 
$
1,472,542
 
1
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government.
2
Represents investments in U.S. Government subsidized Build America Bonds.
 
At March 31, 2011 and December 31, 2010, 44 and 52 percent of the Bank's trading securities were fixed rate and all of these fixed rate securities were swapped to a variable rate index through the use of an interest rate swap accounted for as an economic derivative.

9


The following table summarizes the net (loss) gain on trading securities (dollars in thousands):
 
Three Months Ended March 31,
 
2011
 
2010
Realized gain on sale of trading securities
$
 
 
$
11,665
 
Holding (loss) gain on trading securities
(3,328
)
 
9,534
 
Net (loss) gain on trading securities
$
(3,328
)
 
$
21,199
 
 
Sales. During the three months ended March 31, 2011, the Bank did not sell any trading securities. During the three months ended March 31, 2010, the Bank sold trading securities with a par value of $1.0 billion and realized a net gain of $11.7 million.
 
Note 5 — Available-for-Sale Securities
 
Major Security Types
 
Available-for-sale (AFS) securities at March 31, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
1
 
Gross
Unrealized
Losses
2
 
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP3
$
563,688
 
 
$
1,626
 
 
$
 
 
$
565,314
 
Taxable municipal bonds4
173,421
 
 
180
 
 
8,874
 
 
164,727
 
Other U.S. obligations5
175,040
 
 
 
 
4,151
 
 
170,889
 
Government-sponsored enterprise obligations6
488,267
 
 
31,177
 
 
 
 
519,444
 
Total non-mortgage-backed securities
1,400,416
 
 
32,983
 
 
13,025
 
 
1,420,374
 
Mortgage-backed securities7
 
 
 
 
 
 
 
Government-sponsored enterprise8
4,421,096
 
 
46,101
 
 
4,055
 
 
4,463,142
 
Total
$
5,821,512
 
 
$
79,084
 
 
$
17,080
 
 
$
5,883,516
 
    
AFS securities at December 31, 2010 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
1
 
Gross
Unrealized
Losses
2
 
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
TLGP3
$
563,688
 
 
$
2,006
 
 
$
 
 
$
565,694
 
Taxable municipal bonds4
173,421
 
 
277
 
 
9,093
 
 
164,605
 
Other U.S. obligations5
178,325
 
 
323
 
 
2,168
 
 
176,480
 
Government-sponsored enterprise obligations6
488,853
 
 
34,386
 
 
 
 
523,239
 
Total non-mortgage-backed securities
1,404,287
 
 
36,992
 
 
11,261
 
 
1,430,018
 
Mortgage-backed securities7
 
 
 
 
 
 
 
Government-sponsored enterprise8
4,859,274
 
 
70,293
 
 
2,682
 
 
4,926,885
 
Total
$
6,263,561
 
 
$
107,285
 
 
$
13,943
 
 
$
6,356,903
 
1
Gross unrealized gains include $7.8 million and $10.1 million of fair value hedging adjustments at March 31, 2011 and December 31, 2010.
2
Gross unrealized losses include $11.5 million and $9.0 million of fair value hedging adjustments at March 31, 2011 and December 31, 2010.
3
Represents corporate debentures of the issuing party that are backed by the full faith and credit of the U.S. Government.
4
Represents investments in U.S. Government subsidized Build America Bonds and State of Iowa IJOBS Program Special Obligations.
5
Represents Export-Import Bank bonds.
6
Represents Tennessee Valley Authority (TVA) and Federal Farm Credit Bank (FFCB) bonds.
7
The amortized cost of the Bank's AFS MBS includes net discounts $1.0 million and $0.6 million at March 31, 2011 and December 31, 2010.
8
Represents Fannie Mae and Freddie Mac securities.
    
At March 31, 2011 and December 31, 2010, 23 and 24 percent of the Bank's AFS securities were fixed rate and 30 and 28 percent of these fixed rate securities were swapped to a variable rate index.
 
 

10


The following table summarizes the AFS securities with unrealized losses at March 31, 2011. The unrealized losses are aggregated by major security type and the 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
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal bonds
$
149,547
 
 
$
8,874
 
 
$
 
 
$
 
 
$
149,547
 
 
$
8,874
 
Other U.S. obligations
170,889
 
 
4,151
 
 
 
 
 
 
170,889
 
 
4,151
 
Total non-mortgage-backed securities
320,436
 
 
13,025
 
 
 
 
 
 
320,436
 
 
13,025
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise
290,541
 
 
294
 
 
462,320
 
 
3,761
 
 
752,861
 
 
4,055
 
Total
$
610,977
 
 
$
13,319
 
 
$
462,320
 
 
$
3,761
 
 
$
1,073,297
 
 
$
17,080
 
 
The following table summarizes the AFS securities with unrealized losses at December 31, 2010. The unrealized losses are aggregated by major security type and the 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
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal bonds
$
149,328
 
 
$
9,093
 
 
$
 
 
$
 
 
$
149,328
 
 
$
9,093
 
Other U.S. obligations
146,090
 
 
2,168
 
 
 
 
 
 
146,090
 
 
2,168
 
Total non-mortgage-backed securities
295,418
 
 
11,261
 
 
 
 
 
 
295,418
 
 
11,261
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise
 
 
 
 
505,769
 
 
2,682
 
 
505,769
 
 
2,682
 
Total
$
295,418
 
 
$
11,261
 
 
$
505,769
 
 
$
2,682
 
 
$
801,187
 
 
$
13,943
 
 
Redemption Terms
 
The following table summarizes the amortized cost and fair value of AFS securities categorized by contractual maturity (dollars in thousands). Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due after one year through five years
 
$
640,702
 
 
$
647,172
 
 
$
640,825
 
 
$
648,106
 
Due after five years through ten years
 
390,357
 
 
414,712
 
 
390,812
 
 
417,558
 
Due after ten years
 
369,357
 
 
358,490
 
 
372,650
 
 
364,354
 
Total non-mortgage-backed securities
 
1,400,416
 
 
1,420,374
 
 
1,404,287
 
 
1,430,018
 
Mortgage-backed securities
 
4,421,096
 
 
4,463,142
 
 
4,859,274
 
 
4,926,885
 
Total
 
$
5,821,512
 
 
$
5,883,516
 
 
$
6,263,561
 
 
$
6,356,903
 
    
Prepayment Fees
 
During the three months ended March 31, 2011, an AFS MBS with an outstanding par value of $119.0 million prepaid and the Bank received a $14.6 million prepayment fee. The prepayment fee was recorded as interest income on AFS securities in the Statement of Income. During the three months ended March 31, 2010, the Bank did not receive any prepayment fees on AFS securities.

11


Note 6 — Held-to-Maturity Securities
 
Major Security Types
 
Held-to-maturity (HTM) securities at March 31, 2011 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Commericial paper
$
100,000
 
 
$
 
 
$
 
 
$
100,000
 
Government-sponsored enterprise obligations1
311,178
 
 
21,456
 
 
 
 
332,634
 
State or local housing agency obligations2
101,122
 
 
1,466
 
 
303
 
 
102,285
 
TLGP3
1,250
 
 
19
 
 
 
 
1,269
 
Other4
3,758
 
 
 
 
 
 
3,758
 
Total non-mortgage-backed securities
517,308
 
 
22,941
 
 
303
 
 
539,946
 
Mortgage-backed securities5
 
 
 
 
 
 
 
Government-sponsored enterprise6
5,861,458
 
 
138,708
 
 
2,656
 
 
5,997,510
 
Other U.S. obligation7
32,688
 
 
65
 
 
7
 
 
32,746
 
Private-label8
56,407
 
 
222
 
 
4,032
 
 
52,597
 
Total mortgage-backed securities
5,950,553
 
 
138,995
 
 
6,695
 
 
6,082,853
 
Total
$
6,467,861
 
 
$
161,936
 
 
$
6,998
 
 
$
6,622,799
 
    
HTM securities at December 31, 2010 were as follows (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
335,000
 
 
$
 
 
$
34
 
 
$
334,966
 
Government-sponsored enterprise obligations1
311,547
 
 
26,642
 
 
 
 
338,189
 
State or local housing agency obligations2
107,242
 
 
1,495
 
 
1,321
 
 
107,416
 
TLGP3
1,250
 
 
32
 
 
 
 
1,282
 
Other4
3,705
 
 
 
 
 
 
3,705
 
Total non-mortgage-backed securities
758,744
 
 
28,169
 
 
1,355
 
 
785,558
 
Mortgage-backed securities5
 
 
 
 
 
 
 
Government-sponsored enterprise6
6,374,093
 
 
148,914
 
 
2,056
 
 
6,520,951
 
Other U.S. obligation7
34,387
 
 
149
 
 
1
 
 
34,535
 
Private-label8
58,892
 
 
 
 
4,596
 
 
54,296
 
Total mortgage-backed securities
6,467,372
 
 
149,063
 
 
6,653
 
 
6,609,782
 
Total
$
7,226,116
 
 
$
177,232
 
 
$
8,008
 
 
$
7,395,340
 
1
Represents TVA and FFCB bonds.
2
Represents Housing Finance Authority (HFA) bonds that were purchased by the Bank from housing associates in the Bank's district.
3
Represents corporate debentures issued by the Bank's members that are backed by the full faith and credit of the U.S. Government.
4
Represents an investment in a Small Business Investment Company.
5
The amortized cost of the Bank's HTM MBS includes net discounts of $6.7 million and $7.9 million at March 31, 2011 and December 31, 2010.
6
Represents Fannie Mae and Freddie Mac securities.
7
Represents Government National Mortgage Association securities and Small Business Administration (SBA) Pool Certificates. SBA Pool Certificates represent undivided interests in pools of the guaranteed portions of SBA loans. The SBA's guarantee of the Pool Certificates is backed by the full faith and credit of the U.S. Government.
8
Includes $23.7 million and $25.8 million of MPF shared funding certificates at March 31, 2011 and December 31, 2010.
 

12


The following table summarizes the HTM securities with unrealized losses at March 31, 2011. The unrealized losses are aggregated by major security type and the 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
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency obligations
$
60,832
 
 
$
303
 
 
$
 
 
$
 
 
$
60,832
 
 
$
303
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise
7,334
 
 
8
 
 
380,947
 
 
2,648
 
 
388,281
 
 
2,656
 
Other U.S. obligation
4,509
 
 
5
 
 
727
 
 
2
 
 
5,236
 
 
7
 
Private-label
 
 
 
 
30,289
 
 
4,032
 
 
30,289
 
 
4,032
 
Total mortgage-backed securities
11,843
 
 
13
 
 
411,963
 
 
6,682
 
 
423,806
 
 
6,695
 
Total
$
72,675
 
 
$
316
 
 
$
411,963
 
 
$
6,682
 
 
$
484,638
 
 
$
6,998
 
 
The following table summarizes the HTM securities with unrealized losses at December 31, 2010. The unrealized losses are aggregated by major security type and the 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
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Negotiable certificates of deposit
$
334,966
 
 
$
34
 
 
$
 
 
$
 
 
$
334,966
 
 
$
34
 
State or local housing agency obligations
62,549
 
 
1,321
 
 
 
 
 
 
62,549
 
 
1,321
 
Total non-mortgage-backed securities
397,515
 
 
1,355
 
 
 
 
 
 
397,515
 
 
1,355
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprise
217
 
 
 
 
403,347
 
 
2,056
 
 
403,564
 
 
2,056
 
Other U.S. obligation
322
 
 
 
 
799
 
 
1
 
 
1,121
 
 
1
 
Private-label
24,039
 
 
53
 
 
30,257
 
 
4,543
 
 
54,296
 
 
4,596
 
Total mortgage-backed securities
24,578
 
 
53
 
 
434,403
 
 
6,600
 
 
458,981
 
 
6,653
 
Total
$
422,093
 
 
$
1,408
 
 
$
434,403
 
 
$
6,600
 
 
$
856,496
 
 
$
8,008
 
 
Redemption Terms
 
The following table summarizes the amortized cost and fair value of HTM securities by contractual maturity (dollars in thousands). Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
101,250
 
 
$
101,269
 
 
$
335,000
 
 
$
334,966
 
Due after one year through five years
 
 
 
 
 
1,250
 
 
1,282
 
Due after five years through ten years
 
1,775
 
 
1,777
 
 
1,920
 
 
1,923
 
Due after ten years
 
414,283
 
 
436,900
 
 
420,574
 
 
447,387
 
Total non-mortgage-backed securities
 
517,308
 
 
539,946
 
 
758,744
 
 
785,558
 
Mortgage-backed securities
 
5,950,553
 
 
6,082,853
 
 
6,467,372
 
 
6,609,782
 
Total
 
$
6,467,861
 
 
$
6,622,799
 
 
$
7,226,116
 
 
$
7,395,340
 
 

13


Note 7 — Other-Than-Temporary Impairment
 
The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on at least a quarterly basis. As part of its OTTI evaluation, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired.
 
Private-Label MBS
 
For its private-label MBS, the Bank performs cash flow analyses to determine whether the entire amortized cost bases of these securities are expected to be recovered. The FHLBanks formed an OTTI Governance Committee, comprised of representation from all 12 FHLBanks, which is responsible for reviewing and approving the key modeling assumptions, inputs, and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS. In accordance with this methodology, the Bank may engage another designated FHLBank to perform the cash flow analyses underlying its OTTI determination. In order to promote consistency in the application of the assumptions, inputs, and implementation of the OTTI methodology, the FHLBanks established control procedures whereby the FHLBanks performing the cash flow analyses select a sample group of private-label MBS and each perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve consistency among their respective cash flow models.
 
Utilizing this methodology, the Bank is responsible for making its own determination of impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies used. At March 31, 2011, the Bank obtained cash flow analyses from its designated FHLBanks for all of its private-label MBS. The cash flow 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 assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which is based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The Bank's housing price forecast as of March 31, 2011 assumed current-to-trough home price declines ranging from 0 to 10 percent over the 3 to 9 month period beginning January 1, 2011. Thereafter, home prices are projected to recover using one of five different recovery paths that vary by housing market. Under these recovery paths, home prices are projected to increase within a range of 0 to 2.8 percent in the first year, 0 to 3 percent in the second year, 1.5 to 4 percent in the third year, 2 to 5 percent in the fourth year, 2 to 6 percent in each of the fifth and sixth years, and 2.3 to 5.6 percent in each subsequent year.
 
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects an estimated scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described in the prior paragraph.
 

14


The Bank compares the present value of the cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss exists. At March 31, 2011, the Bank's cash flow analyses for private-label MBS did not project any credit losses. Even under an adverse scenario that delays recovery of the housing price index, no credit losses were projected. The Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before recovery of their amortized cost bases. As a result, the Bank did not consider any of these securities to be other-than-temporarily impaired at March 31, 2011 and December 31, 2010.
 
All Other Investment Securities
 
The remainder of the Bank's investment securities have experienced unrealized losses due to interest rate volatility and credit deterioration in the U.S. mortgage markets. However, the declines are considered temporary as the Bank expects to recover the amortized cost bases on its remaining investment securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. As a result, the Bank did not consider any of its other investment securities to be other-than-temporarily impaired at March 31, 2011 and December 31, 2010.
 
In addition, the Bank determined the following for its other investment securities:
 
Other U.S. obligations and GSE MBS. The strength of the issuers' guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations.
 
Taxable municipal bonds and state or local housing agency obligations. The creditworthiness of the issuers was sufficient to protect the Bank from losses based on current expectations.
 

Note 8 — Advances
 
Redemption Terms
 
The following table summarizes the Bank's advances outstanding by year of contractual maturity (dollars in thousands):
 
 
March 31, 2011
 
December 31, 2010
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate %
 
Amount
 
Weighted
Average
Interest
Rate %
Overdrawn demand deposit accounts
 
$
170
 
 
 
$
208
 
 
Due in one year or less
 
5,826,904
 
 
1.73
 
6,782,825
 
 
1.76
Due after one year through two years
 
5,115,965
 
 
1.82
 
3,923,100
 
 
2.20
Due after two years through three years
 
4,330,758
 
 
1.79
 
5,647,503
 
 
1.75
Due after three years through four years
 
986,434
 
 
2.60
 
908,824
 
 
2.81
Due after four years through five years
 
1,875,195
 
 
2.69
 
1,640,803
 
 
2.23
Thereafter
 
9,186,862
 
 
2.89
 
9,599,178
 
 
2.96
Total par value
 
27,322,288
 
 
2.24
 
28,502,441
 
 
2.29
Premiums
 
221
 
 
 
 
237
 
 
 
Discounts
 
(2
)
 
 
 
(2
)
 
 
Fair value hedging adjustments
 
 
 
 
 
 
 
 
Cumulative fair value gain on existing hedges
 
560,803
 
 
 
 
663,079
 
 
 
Basis adjustments from terminated hedges
 
79,473
 
 
 
 
86,774
 
 
 
Total
 
$
27,962,783
 
 
 
 
$
29,252,529
 
 
 
 
The Bank offers advances to members that may be prepaid on pertinent dates (call dates) without incurring prepayment fees (callable advances). At March 31, 2011 and December 31, 2010, the Bank had callable advances outstanding totaling $5.8 billion and $5.9 billion. The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance at predetermined exercise dates, which the Bank typically would exercise when interest rates increase, and the borrower may then apply for a new advance at the prevailing market rate. At March 31, 2011 and December 31, 2010, the Bank had putable advances outstanding totaling $4.2 billion and $4.8 billion.
 

15


Interest Rate Payment Terms
 
The following table summarizes the Bank's advances by interest rate payment type (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
Fixed rate
$
18,842,063
 
 
$
19,932,279
 
Variable rate
8,480,225
 
 
8,570,162
 
Total par value
$
27,322,288
 
 
$
28,502,441
 
 
At March 31, 2011 and December 31, 2010, 63 and 59 percent of the Bank's fixed rate advances were swapped to a variable rate index and two percent of the Bank's variable rate advances were swapped to another variable rate index at each period end.
 
Prepayment Fees
 
The Bank charges a prepayment fee for advances that terminate prior to their stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank economically indifferent to the prepayment of the advance. These prepayment fees are presented net of fair value hedging adjustments and deferrals on advance modifications in the Statement of Income as "Prepayment fees on advances, net." The following table summarizes the Bank's prepayment fee on advances, net (dollars in thousands):
 
Three Months Ended March 31,
 
2011
 
2010
Gross prepayment fees
$
7,965
 
 
$
1,801
 
Fair value hedging adjustments
(4,981
)
 
(166
)
Deferrals on advance modifications
156
 
 
36
 
Prepayment fees on advances, net
$
3,140
 
 
$
1,671
 
 
For additional information related to the Bank's credit risk and security terms on advances, refer to "Note 10 — Allowance for Credit Losses."
 
Note 9 — Mortgage Loans Held for Portfolio
 
The Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) involves investment by the Bank in mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank's PFIs originate, service, and credit enhance mortgage loans that are sold to the Bank. PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the PFI to a designated mortgage service provider.
 
Mortgage loans with a contractual maturity of 15 years or less are classified as medium-term, and all other mortgage loans are classified as long-term. The following table presents information on the Bank's mortgage loans held for portfolio (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
Real Estate:
 
 
 
Fixed rate, medium-term single family mortgages
$
1,839,724
 
 
$
1,874,606
 
Fixed rate, long-term single family mortgages
5,348,770
 
 
5,528,714
 
Total unpaid principal balance
7,188,494
 
 
7,403,320
 
Premiums
62,561
 
 
63,975
 
Discounts
(37,368
)
 
(40,474
)
Basis adjustments from mortgage loan commitments
6,315
 
 
7,625
 
Allowance for credit losses
(18,000
)
 
(13,000
)
Total mortgage loans held for portfolio, net
$
7,202,002
 
 
$
7,421,446
 
 

16


The following table details the unpaid principal balance of the Bank's mortgage loans held for portfolio (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
Conventional loans
$
6,818,423
 
 
$
7,033,089
 
Government-insured loans
370,071
 
 
370,231
 
Total unpaid principal balance
$
7,188,494
 
 
$
7,403,320
 
    

Note 10 — Allowance for Credit Losses
 
The Bank has an allowance methodology for each of its portfolio segments of financing receivables: advances, letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, conventional mortgage loans held for portfolio, and term Federal funds sold.
 
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 collateral/lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends to its borrowers in accordance with federal statutes and Finance Agency regulations.
 
Specifically, the Bank complies with the FHLBank Act, which requires it to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential property or securities representing a whole interest in such mortgages, (ii) securities issued, insured, or guaranteed by the U.S. Government or any of the government-sponsored housing enterprises, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, (iii) cash deposited with the Bank, (iv) Federal Family Education Loan Program guaranteed student loans, and (v) other real estate-related collateral acceptable to the Bank provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank have a lien on each borrower's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures. 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 that these policies effectively manage the Bank's respective credit risk from credit products.
 
Based upon the financial condition of the borrower, the Bank will either allow a borrower to retain physical possession of the collateral assigned to it, or require the borrower to specifically assign or place physical possession of the collateral with the Bank or its safekeeping agent. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a borrower priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
 
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 tool for managing its credit exposure to credit products. At March 31, 2011 and December 31, 2010, 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 Bank periodically evaluates and may make changes to its collateral guidelines. At March 31, 2011 and December 31, 2010, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, there have been no troubled debt restructurings related to credit products at the Bank during the three months ended March 31, 2011.
 
Based upon the collateral held as security, its credit extension and collateral policies, management's credit analyses, and the repayment history on credit products, management has determined that there are no probable credit losses on its credit products as of March 31, 2011 and December 31, 2010. Accordingly, the Bank has not recorded any allowance for credit losses.
 

17


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. For additional information on the Bank's off-balance sheet credit exposure, see "Note 15 — Commitments and Contingencies."
 
Government-Insured Mortgage Loans
 
The Bank invests in government-insured fixed rate mortgage loans secured by one-to-four family residential properties. Government-insured mortgage loans are insured by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. 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 mortgage loans. Any losses incurred on such mortgage loans that are not recovered from the issuer or guarantor are absorbed by the servicers. As a result, the Bank did not establish an allowance for credit losses for government-insured mortgage loans at March 31, 2011 and December 31, 2010. Furthermore, due to the government guarantee or insurance, these mortgage loans are not placed on non-accrual status.
 
Conventional Mortgage Loans
 
The Bank's management of credit risk in the MPF Program involves several layers of legal loss protection that are defined in agreements among the Bank and its participating PFIs. For the Bank's conventional MPF loans, the availability of loss protection may differ slightly among MPF products. The Bank's loss protection consists of the following loss layers, in order of priority:
 
Homeowner Equity.
 
Primary Mortgage Insurance (PMI). PMI is on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.
 
First Loss Account. The first loss account (FLA) is a memo account used to track the Bank's potential loss exposure under each master commitment prior to the PFI's credit enhancement obligation. If the Bank experiences losses in a master commitment, these losses will either be (i) recovered through the recapture of performance-based credit enhancement fees from the PFI or (ii) absorbed by the Bank. The first loss account balance for all master commitments is a memorandum account and was $123.1 million and $124.8 million at March 31, 2011 and December 31, 2010.
 
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation to absorb losses in excess of the first loss account in order to limit the Bank's loss exposure to that of an investor in an MBS that is rated the equivalent of AA by an NRSRO. PFIs are required to either collateralize their credit enhancement obligation with the Bank or purchase SMI from mortgage insurers. All of the Bank's SMI providers have had their external ratings for claims-paying ability or insurer financial strength downgraded below AA. Ratings downgrades imply an increased risk that these SMI providers will be unable to fulfill their obligations to reimburse the Bank for claims under insurance policies.
 
The Bank utilizes an allowance for credit losses to reserve for estimated losses after considering the recapture of performance based credit enhancement fees from the PFI. Credit enhancement fees available to recapture losses consist of accrued credit enhancement fees to be paid to the PFIs and projected credit enhancement fees to be paid to the PFIs over the next twelve months less any losses incurred or expected to be incurred. These estimated credit enhancement fees are calculated at a master commitment level and are only available to the specified master commitment. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage loan interest income. Credit enhancement fees paid (including performance based credit enhancement fees available to recapture under specified master commitments) totaled $2.6 million and $3.0 million during the three months ended March 31, 2011 and 2010.
 

18


Specifically Identified Conventional Mortgage Loans. The Bank does not currently evaluate any individual conventional mortgage loans for impairment. Therefore, there is no allowance for credit losses on specifically identified conventional mortgage loans at March 31, 2011 and December 31, 2010.
 
Collectively Evaluated Conventional Mortgage Loans. The Bank collectively evaluates its conventional mortgage loan portfolio and estimates an allowance for credit losses based upon both quantitative and qualitative factors that may vary based upon the MPF product. Quantitative factors include, but are not limited to, a rolling twelve-month average of (i) loan delinquencies, (ii) loans migrating to real estate owned (REO), and (iii) actual historical loss severities, as well as credit enhancement fees available to recapture estimated losses assuming a declining portfolio balance adjusted for prepayments. Qualitative factors include, but are not limited to, changes in national and local economic trends.
 
Estimating Additional Credit Loss in the Conventional Mortgage Loan Portfolio. The Bank may include a margin for certain limitations in the allowance for credit losses model utilized to estimate credit losses. This margin recognizes the imprecise nature of the measurement process and represents a subjective management judgment that is intended to cover other inherent losses that may not be captured in the methodology described above at the balance sheet date.
 
Rollforward of the Allowance for Credit Losses on Conventional Mortgage Loans. As of March 31, 2011 and December 31, 2010, the Bank established an allowance for credit losses on its conventional mortgage loan portfolio. The following table presents a rollforward of the allowance for credit losses on the Bank's conventional mortgage loans, all of which are collectively evaluated for impairment, as well as the recorded investment in conventional mortgage loans (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
Balance, beginning of year
$
13,000
 
 
$
1,887
 
Charge-offs
(596
)
 
(1,005
)
Provision for credit losses
5,596
 
 
12,118
 
Balance, end of period
$
18,000
 
 
$
13,000
 
Recorded investment of mortgage loans collectively evaluated for impairment1
$
6,818,423
 
 
$
7,033,089
 
1
Recorded investment approximates the unpaid principal balance of mortgage loans.
 
During the three months ended March 31, 2011, the Bank recorded a provision for credit losses of $5.6 million, bringing its allowance for credit losses to $18.0 million at March 31, 2011. The provision recorded was driven by an increase in estimated losses resulting from increased loss severities, management's expectation that loans migrating to REO and loss severities will likely increase in the future, and certain refinements made to the Bank's allowance for credit losses model.
 
The Bank is able to allocate available credit enhancement fees to recapture estimated losses in its conventional mortgage loan portfolio. Estimated available credit enhancement fees decreased to $3.3 million at March 31, 2011 from $3.7 million at December 31, 2010 primarily due to an increase in charge-off activity.
 

19


Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure. The tables below summarize the Bank's key credit quality indicators for mortgage loans (dollar amounts in thousands):
 
March 31, 2011
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
100,923
 
 
$
13,962
 
 
$
114,885
 
Past due 60 - 89 days
28,749
 
 
6,690
 
 
35,439
 
Past due 90 days or more
110,616
 
 
4,810
 
 
115,426
 
Total past due loans
240,288
 
 
25,462
 
 
265,750
 
Total current loans
6,578,135
 
 
344,609
 
 
6,922,744
 
Total recorded investment of mortgage loans1
$
6,818,423
 
 
$
370,071
 
 
$
7,188,494
 
 
 
 
 
 
 
In process of foreclosure (included above)2
$
78,184
 
 
$
128
 
 
$
78,312
 
 
 
 
 
 
 
Serious delinquency rate3
1.7
%
 
1.3
%
 
1.6
%
 
 
 
 
 
 
Past due 90 days or more and still accruing interest
$
 
 
$
4,810
 
 
$
4,810
 
 
 
 
 
 
 
Non-accrual mortgage loans4
$
110,616
 
 
$
 
 
$
110,616
 
 
December 31, 2010
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
86,679
 
 
$
17,235
 
 
$
103,914
 
Past due 60 - 89 days
33,063
 
 
5,288
 
 
38,351
 
Past due 90 days or more
111,064
 
 
4,675
 
 
115,739
 
Total past due loans
230,806
 
 
27,198
 
 
258,004
 
Total current loans
6,802,283
 
 
343,033
 
 
7,145,316
 
Total recorded investment of mortgage loans1
$
7,033,089
 
 
$
370,231
 
 
$
7,403,320
 
 
 
 
 
 
 
In process of foreclosure (included above)2
$
78,981
 
 
$
258
 
 
$
79,239
 
 
 
 
 
 
 
Serious delinquency rate3
1.6
%
 
1.3
%
 
1.6
%
 
 
 
 
 
 
Past due 90 days or more and still accruing interest
$
 
 
$
4,675
 
 
$
4,675
 
 
 
 
 
 
 
Non-accrual mortgage loans4
$
111,064
 
 
$
 
 
$
111,064
 
1
Recorded investment approximates the unpaid principal balance of mortgage loans.
2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.
3
Represents mortgage loans that are 90 days or more delinquent expressed as a percentage of the total recorded investment.
4
Represents conventional mortgage loans that are 90 days or more delinquent.
 
Real Estate Owned. At March 31, 2011 and December 31, 2010, the Bank had $19.5 million and $19.1 million of REO recorded as a component of "Other assets" in the Statement of Condition.
 
Term Federal Funds Sold
 
The Bank invests in term Federal funds sold with highly rated counterparties. These investments are generally short-term (less than three months to maturity) and their carrying value approximates fair value. If the investments are not paid when due, the Bank will evaluate these investments for purposes of an allowance for credit losses. As of March 31, 2011 and December 31, 2010, all investments in term Federal funds sold were repaid according to the contractual terms.
 

20


Note 11 — Derivatives and Hedging Activities
 
Nature of Business Activity
 
The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank's interest rate risk management strategies is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its net interest income, net interest spread, and average maturity of interest-earning assets and related funding sources.
 
Consistent with Finance Agency regulation, the Bank enters into derivatives to (i) manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions and (ii) achieve its risk management objectives. Finance Agency regulation and the Bank's Enterprise Risk Management Policy prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments.
 
The most common ways in which the Bank uses derivatives are to:
 
reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;
 
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;
 
preserve a favorable interest rate spread between the yield of an asset (e.g. advance) and the cost of the related liability (e.g. consolidated obligation). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;
 
mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g. advances or mortgage assets) and liabilities;
 
manage embedded options in assets and liabilities; and
 
manage risk in its balance sheet profile.
 
Application of Derivatives
 
Derivative financial instruments are applied by the Bank in two ways:
 
as a fair value hedge of an associated financial instrument or firm commitment; or
 
as an economic hedge to manage certain defined risks in its Statement of Condition. These hedges are primarily used to manage interest rate risk exposure and offset prepayment risk in certain assets. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements, which are also treated as economic hedges.
 
Derivative financial instruments are used by the Bank when they are considered to be a cost-effective alternative to achieve the Bank's financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
 

21


Types of Derivatives
 
The Bank may use the following derivative instruments:
 
interest rate swaps;
 
swaptions;
 
interest rate caps and floors;
 
options; and
 
future/forward contracts.
 
Types of Hedged Items
 
The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to (i) assets and liabilities in the Statement of Condition or (ii) firm commitments. The Bank also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives it uses in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess hedge effectiveness prospectively and retrospectively.
 
The types of hedged items are:
 
advances;
 
investment securities;
 
mortgage loans; and
 
consolidated obligations.
 
Managing Credit Risk on Derivatives
 
The Bank is subject to credit risk due to nonperformance by counterparties to the derivative contracts. The degree of counterparty credit risk depends on the extent to which collateral agreements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policies and Finance Agency regulations. The Bank requires collateral agreements on all derivative contracts that establish collateral delivery thresholds. Based on credit analyses and collateral requirements, the Bank does not anticipate any credit losses on its derivatives at March 31, 2011. See "Note 14 — Fair Value" for a discussion on the Bank's fair value methodology for derivatives.
 
The following table presents the Bank's credit risk exposure to derivative instruments (dollars in thousands):
 
March 31,
2011
 
December 31,
2010
Credit risk exposure1
$
22,430
 
 
$
20,230
 
Less: Cash collateral held and related accrued interest
(17,502
)
 
(8,303
)
Exposure net of cash collateral
$
4,928
 
 
$
11,927
 
1
Includes net accrued interest receivable of $5.8 million and $7.8 million at March 31, 2011 and December 31, 2010.
 

22


Some of the Bank's derivative contracts 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 may be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2011 was $411.8 million, for which the Bank has posted cash collateral (including accrued interest) of $94.0 million in the normal course of business. If the Bank's credit rating were lowered from its current rating to the next lower rating, the Bank would be required to deliver up to an additional $237.8 million of collateral to its derivative counterparties at March 31, 2011. The Bank's credit rating did not change during the three months ended March 31, 2011.
 
Financial Statement Effect and Additional Financial Information
 
The following tables summarizes the Bank's fair value of derivative instruments (dollars in thousands). For purposes of this disclosure, the derivative values include fair value of derivatives and related accrued interest.
 
 
March 31, 2011
Fair Value of Derivative Instruments
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments
 
 
 
 
 
 
Interest rate swaps
 
$
29,907,275