UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
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 |
| 04-6002575 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. employer identification number) |
|
|
|
111 Huntington Avenue |
| 02199 |
(Address of principal executive offices) |
| (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 |
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Non-accelerated filer x |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 |
|
Class B Stock, par value $100 |
| 37,465,542 |
|
Federal Home Loan Bank of Boston
Form 10-Q
2 | ||
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| 6 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 | |
| 41 | |
| 43 | |
| 44 | |
| 51 | |
| 61 | |
| 64 | |
| 66 | |
| 66 | |
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68 | ||
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86 | ||
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86 | ||
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86 | ||
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| 87 |
FEDERAL HOME LOAN BANK OF BOSTON
(dollars and shares in thousands, except par value)
(unaudited)
|
| June 30, |
| December 31, |
| ||
|
| 2010 |
| 2009 |
| ||
ASSETS |
|
|
|
|
| ||
Cash and due from banks |
| $ | 25,701 |
| $ | 191,143 |
|
Interest-bearing deposits |
| 69 |
| 81 |
| ||
Securities purchased under agreements to resell |
| 3,750,000 |
| 1,250,000 |
| ||
Federal funds sold |
| 4,545,000 |
| 5,676,000 |
| ||
Investments: |
|
|
|
|
| ||
Trading securities |
| 1,881,032 |
| 107,338 |
| ||
Available-for-sale securities - includes $83,492 and $82,148 pledged as collateral at June 30, 2010, and December 31, 2009, respectively that may be repledged |
| 8,202,879 |
| 6,486,632 |
| ||
Held-to-maturity securities - includes $122,828 and $118,211 pledged as collateral at June 30, 2010, and December 31, 2009, respectively that may be repledged (a) |
| 6,715,678 |
| 7,427,413 |
| ||
Advances |
| 36,015,723 |
| 37,591,461 |
| ||
Mortgage loans held for portfolio, net of allowance for credit losses of $2,500 and $2,100 at June 30, 2010, and December 31, 2009, respectively |
| 3,316,901 |
| 3,505,975 |
| ||
Accrued interest receivable |
| 149,651 |
| 147,689 |
| ||
Resolution Funding Corporation (REFCorp) prepaid assessment |
| 29,830 |
| 40,236 |
| ||
Premises, software, and equipment, net |
| 5,067 |
| 5,840 |
| ||
Derivative assets |
| 22,387 |
| 16,803 |
| ||
Other assets |
| 46,870 |
| 40,389 |
| ||
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| ||
Total Assets |
| $ | 64,706,788 |
| $ | 62,487,000 |
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LIABILITIES |
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Deposits: |
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| ||
Interest-bearing |
| $ | 763,979 |
| $ | 754,976 |
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Non-interest-bearing |
| 16,317 |
| 17,481 |
| ||
Total deposits |
| 780,296 |
| 772,457 |
| ||
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Consolidated obligations: |
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|
| ||
Bonds |
| 38,129,830 |
| 35,409,147 |
| ||
Discount notes |
| 21,635,424 |
| 22,277,685 |
| ||
Total consolidated obligations, net |
| 59,765,254 |
| 57,686,832 |
| ||
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Mandatorily redeemable capital stock |
| 86,618 |
| 90,896 |
| ||
Accrued interest payable |
| 147,116 |
| 178,121 |
| ||
Affordable Housing Program (AHP) payable |
| 22,104 |
| 23,994 |
| ||
Derivative liabilities |
| 849,918 |
| 768,309 |
| ||
Other liabilities |
| 18,529 |
| 202,333 |
| ||
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Total liabilities |
| 61,669,835 |
| 59,722,942 |
| ||
Commitments and contingencies (Note 16) |
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CAPITAL |
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Capital stock — Class B — putable ($100 par value), 36,589 shares and 36,431 shares issued and outstanding at June 30, 2010, and December 31, 2009, respectively |
| 3,658,866 |
| 3,643,101 |
| ||
Retained earnings |
| 184,231 |
| 142,606 |
| ||
Accumulated other comprehensive loss: |
|
|
|
|
| ||
Net unrealized loss on available-for-sale securities |
| (39,396 | ) | (90,060 | ) | ||
Net unrealized loss relating to hedging activities |
| (349 | ) | (356 | ) | ||
Net noncredit portion of other-than-temporary impairment losses on investment securities |
| (765,258 | ) | (929,508 | ) | ||
Pension and postretirement benefits |
| (1,141 | ) | (1,725 | ) | ||
Total accumulated other comprehensive loss |
| (806,144 | ) | (1,021,649 | ) | ||
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Total capital |
| 3,036,953 |
| 2,764,058 |
| ||
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Total Liabilities and Capital |
| $ | 64,706,788 |
| $ | 62,487,000 |
|
(a) Fair values of held-to-maturity securities were $6,811,173 and $7,422,681 at June 30, 2010, and December 31, 2009, respectively.
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
(dollars in thousands)
(unaudited)
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
INTEREST INCOME |
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| ||||
Advances |
| $ | 105,162 |
| $ | 167,366 |
| $ | 208,092 |
| $ | 418,611 |
|
Prepayment fees on advances, net |
| 1,615 |
| 6,671 |
| 2,187 |
| 7,610 |
| ||||
Interest-bearing deposits |
| — |
| 9,286 |
| — |
| 10,775 |
| ||||
Securities purchased under agreements to resell |
| 1,118 |
| 298 |
| 1,402 |
| 3,290 |
| ||||
Federal funds sold |
| 4,061 |
| 1,119 |
| 6,726 |
| 3,527 |
| ||||
Investments: |
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|
|
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| ||||
Trading securities |
| 2,777 |
| 710 |
| 4,629 |
| 1,473 |
| ||||
Available-for-sale securities |
| 19,248 |
| 2,215 |
| 32,685 |
| 5,537 |
| ||||
Held-to-maturity securities |
| 44,554 |
| 56,063 |
| 90,938 |
| 117,480 |
| ||||
Prepayment fees on investments |
| 31 |
| 141 |
| 31 |
| 148 |
| ||||
Mortgage loans held for portfolio |
| 42,246 |
| 49,289 |
| 85,572 |
| 102,004 |
| ||||
Other |
| — |
| 1 |
| — |
| 1 |
| ||||
Total interest income |
| 220,812 |
| 293,159 |
| 432,262 |
| 670,456 |
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INTEREST EXPENSE |
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Consolidated obligations: |
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Bonds |
| 137,220 |
| 176,945 |
| 274,479 |
| 396,489 |
| ||||
Discount notes |
| 9,004 |
| 31,096 |
| 14,731 |
| 131,494 |
| ||||
Deposits |
| 178 |
| 212 |
| 269 |
| 455 |
| ||||
Other borrowings |
| 1 |
| 66 |
| 3 |
| 101 |
| ||||
Total interest expense |
| 146,403 |
| 208,319 |
| 289,482 |
| 528,539 |
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NET INTEREST INCOME |
| 74,409 |
| 84,840 |
| 142,780 |
| 141,917 |
| ||||
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Provision for credit losses |
| 4 |
| 800 |
| 435 |
| 900 |
| ||||
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |
| 74,405 |
| 84,040 |
| 142,345 |
| 141,017 |
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OTHER INCOME (LOSS) |
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Total other-than-temporary impairment losses on investment securities |
| (18,166 | ) | (211,092 | ) | (38,713 | ) | (1,105,657 | ) | ||||
Net amount of impairment losses reclassified (from) to accumulated other comprehensive loss |
| (12,277 | ) | 140,566 |
| (14,553 | ) | 908,219 |
| ||||
Net impairment losses on investment securities recognized in income |
| (30,443 | ) | (70,526 | ) | (53,266 | ) | (197,438 | ) | ||||
|
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Service fees |
| 1,702 |
| 889 |
| 3,146 |
| 1,825 |
| ||||
Net unrealized gains on trading securities |
| 8,595 |
| 292 |
| 10,441 |
| 1,388 |
| ||||
Net losses on derivatives and hedging activities |
| (14,457 | ) | (2,017 | ) | (17,289 | ) | (1,993 | ) | ||||
Other |
| 72 |
| 144 |
| 138 |
| 137 |
| ||||
Total other loss |
| (34,531 | ) | (71,218 | ) | (56,830 | ) | (196,081 | ) | ||||
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OTHER EXPENSE |
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Operating |
| 12,586 |
| 15,309 |
| 24,961 |
| 29,039 |
| ||||
Finance Agency and Office of Finance |
| 1,525 |
| 1,384 |
| 3,328 |
| 2,883 |
| ||||
Other |
| 278 |
| 334 |
| 570 |
| 657 |
| ||||
Total other expense |
| 14,389 |
| 17,027 |
| 28,859 |
| 32,579 |
| ||||
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INCOME (LOSS) BEFORE ASSESSMENTS |
| 25,485 |
| (4,205 | ) | 56,656 |
| (87,643 | ) | ||||
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AHP |
| 2,080 |
| — |
| 4,625 |
| — |
| ||||
REFCorp |
| 4,681 |
| — |
| 10,406 |
| — |
| ||||
Total assessments |
| 6,761 |
| — |
| 15,031 |
| — |
| ||||
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|
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|
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| ||||
NET INCOME (LOSS) |
| $ | 18,724 |
| $ | (4,205 | ) | $ | 41,625 |
| $ | (87,643 | ) |
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
THREE MONTHS ENDED JUNE 30, 2010 and 2009
(dollars and shares in thousands)
(unaudited)
|
| Capital Stock |
| Retained |
| Accumulated |
| Total |
| ||||||
|
| Shares |
| Par Value |
| Earnings |
| Loss |
| Capital |
| ||||
|
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| ||||
BALANCE, MARCH 31, 2009 |
| 36,045 |
| $ | 3,604,513 |
| $ | 245,919 |
| $ | (1,258,202 | ) | $ | 2,592,230 |
|
|
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|
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|
|
|
|
| ||||
Proceeds from sale of capital stock |
| 110 |
| 10,953 |
|
|
|
|
| 10,953 |
| ||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
|
|
|
|
| (4,205 | ) |
|
| (4,205 | ) | ||||
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
| 49,709 |
| 49,709 |
| ||||
Noncredit portion of other-than-temporary impairment losses on investment securities |
|
|
|
|
|
|
| (183,663 | ) | (183,663 | ) | ||||
Reclassification adjustment of noncredit component of impairment losses included in net loss relating to investment securities |
|
|
|
|
|
|
| 43,097 |
| 43,097 |
| ||||
Accretion of noncredit portion of impairment losses on investment securities |
|
|
|
|
|
|
| 89,140 |
| 89,140 |
| ||||
Reclassification adjustment for previously deferred hedging gains and losses included in income |
|
|
|
|
|
|
| 45 |
| 45 |
| ||||
Pension and postretirement benefits |
|
|
|
|
|
|
| 2,281 |
| 2,281 |
| ||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
| (3,596 | ) | ||||
|
|
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|
|
|
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|
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|
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| ||||
BALANCE, JUNE 30, 2009 |
| 36,155 |
| $ | 3,615,466 |
| $ | 241,714 |
| $ | (1,257,593 | ) | $ | 2,599,587 |
|
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| ||||
BALANCE, MARCH 31, 2010 |
| 36,462 |
| $ | 3,646,201 |
| $ | 165,507 |
| $ | (926,733 | ) | $ | 2,884,975 |
|
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|
|
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|
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| ||||
Proceeds from sale of capital stock |
| 127 |
| 12,665 |
|
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|
|
| 12,665 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
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| ||||
Net income |
|
|
|
|
| 18,724 |
|
|
| 18,724 |
| ||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
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| ||||
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
| 35,605 |
| 35,605 |
| ||||
Noncredit portion of other-than-temporary impairment losses on investment securities |
|
|
|
|
|
|
| (13,596 | ) | (13,596 | ) | ||||
Reclassification adjustment of noncredit component of impairment losses included in net income relating to investment securities |
|
|
|
|
|
|
| 25,873 |
| 25,873 |
| ||||
Accretion of noncredit portion of impairment losses on investment securities |
|
|
|
|
|
|
| 72,165 |
| 72,165 |
| ||||
Reclassification adjustment for previously deferred hedging gains and losses included in income |
|
|
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|
| 3 |
| 3 |
| ||||
Pension and postretirement benefits |
|
|
|
|
|
|
| 539 |
| 539 |
| ||||
Total comprehensive income |
|
|
|
|
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|
|
|
| 139,313 |
| ||||
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|
|
|
| ||||
BALANCE, JUNE 30, 2010 |
| 36,589 |
| $ | 3,658,866 |
| $ | 184,231 |
| $ | (806,144 | ) | $ | 3,036,953 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
SIX MONTHS ENDED JUNE 30, 2010 and 2009
(dollars and shares in thousands)
(unaudited)
|
| Capital Stock |
| (Accumulated Deficit) Retained |
| Accumulated |
| Total |
| ||||||
|
| Shares |
| Par Value |
| Earnings |
| Loss |
| Capital |
| ||||
|
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|
|
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|
|
|
| ||||
BALANCE, DECEMBER 31, 2008 |
| 35,847 |
| $ | 3,584,720 |
| $ | (19,749 | ) | $ | (134,746 | ) | $ | 3,430,225 |
|
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|
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| ||||
Cumulative effect of adjustments to opening balance |
|
|
|
|
| 349,106 |
| (349,106 | ) | — |
| ||||
Proceeds from sale of capital stock |
| 298 |
| 29,774 |
|
|
|
|
| 29,774 |
| ||||
Repurchase/redemption of capital stock |
| (15 | ) | (1,548 | ) |
|
|
|
| (1,548 | ) | ||||
Reclassification of net shares from mandatorily redeemable capital stock |
| 25 |
| 2,520 |
|
|
|
|
| 2,520 |
| ||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
|
|
|
|
| (87,643 | ) |
|
| (87,643 | ) | ||||
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
| 4,085 |
| 4,085 |
| ||||
Noncredit portion of other-than-temporary impairment losses on investment securities |
|
|
|
|
|
|
| (960,398 | ) | (960,398 | ) | ||||
Reclassification adjustment of noncredit component of impairment losses included in net loss relating to investment securities |
|
|
|
|
|
|
| 52,179 |
| 52,179 |
| ||||
Accretion of noncredit portion of impairment losses on investment securities |
|
|
|
|
|
|
| 127,972 |
| 127,972 |
| ||||
Reclassification adjustment for previously deferred hedging gains and losses included in income |
|
|
|
|
|
|
| 16 |
| 16 |
| ||||
Pension and postretirement benefits |
|
|
|
|
|
|
| 2,405 |
| 2,405 |
| ||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
| (861,384 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
BALANCE, JUNE 30, 2009 |
| 36,155 |
| $ | 3,615,466 |
| $ | 241,714 |
| $ | (1,257,593 | ) | $ | 2,599,587 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
BALANCE, DECEMBER 31, 2009 |
| 36,431 |
| $ | 3,643,101 |
| $ | 142,606 |
| $ | (1,021,649 | ) | $ | 2,764,058 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from sale of capital stock |
| 158 |
| 15,765 |
|
|
|
|
| 15,765 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
|
|
| 41,625 |
|
|
| 41,625 |
| ||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
| 50,664 |
| 50,664 |
| ||||
Noncredit portion of other-than-temporary impairment losses on investment securities |
|
|
|
|
|
|
| (30,540 | ) | (30,540 | ) | ||||
Reclassification adjustment of noncredit component of impairment losses included in net income relating to investment securities |
|
|
|
|
|
|
| 45,093 |
| 45,093 |
| ||||
Accretion of noncredit portion of impairment losses on investment securities |
|
|
|
|
|
|
| 149,697 |
| 149,697 |
| ||||
Reclassification adjustment for previously deferred hedging gains and losses included in income |
|
|
|
|
|
|
| 7 |
| 7 |
| ||||
Pension and postretirement benefits |
|
|
|
|
|
|
| 584 |
| 584 |
| ||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 257,130 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
BALANCE, JUNE 30, 2010 |
| 36,589 |
| $ | 3,658,866 |
| $ | 184,231 |
| $ | (806,144 | ) | $ | 3,036,953 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
(dollars in thousands)
(unaudited)
|
| For the Six Months Ended June 30, |
| ||||
|
| 2010 |
| 2009 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income (loss) |
| $ | 41,625 |
| $ | (87,643 | ) |
|
|
|
|
|
| ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 2,809 |
| (233,741 | ) | ||
Provision for credit losses on mortgage loans |
| 435 |
| 900 |
| ||
Change in net fair-value adjustments on derivatives and hedging activities |
| 19,605 |
| 11,172 |
| ||
Net impairment losses on investment securities recognized in income |
| 53,266 |
| 197,438 |
| ||
Other adjustments |
| (143 | ) | (128 | ) | ||
Net change in: |
|
|
|
|
| ||
Market value of trading securities |
| (10,441 | ) | (1,388 | ) | ||
Accrued interest receivable |
| (1,962 | ) | 118,859 |
| ||
Other assets |
| 1,938 |
| 7,316 |
| ||
Net derivative accrued interest |
| 21,331 |
| 135,054 |
| ||
Accrued interest payable |
| (31,005 | ) | (86,511 | ) | ||
Other liabilities |
| 5,577 |
| (13,561 | ) | ||
|
|
|
|
|
| ||
Total adjustments |
| 61,410 |
| 135,410 |
| ||
Net cash provided by operating activities |
| 103,035 |
| 47,767 |
| ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net change in: |
|
|
|
|
| ||
Interest-bearing deposits |
| 12 |
| (15,607,454 | ) | ||
Securities purchased under agreements to resell |
| (2,500,000 | ) | 500,000 |
| ||
Federal funds sold |
| 1,131,000 |
| 1,140,000 |
| ||
Premises, software, and equipment |
| (194 | ) | (307 | ) | ||
Trading securities: |
|
|
|
|
| ||
Net increase in short-term |
| (1,615,000 | ) | — |
| ||
Proceeds |
| 2,490 |
| 4,759 |
| ||
Purchases |
| (150,744 | ) | — |
| ||
Available-for-sale securities: |
|
|
|
|
| ||
Net decrease (increase) in short-term |
| 805,000 |
| (500,000 | ) | ||
Proceeds from maturities |
| 238,715 |
| 25,000 |
| ||
Proceeds from sales |
| — |
| 21,685 |
| ||
Purchases |
| (2,631,785 | ) | (63,325 | ) | ||
Held-to-maturity securities: |
|
|
|
|
| ||
Net decrease in short-term |
| — |
| 215,000 |
| ||
Proceeds from maturities |
| 1,265,730 |
| 945,899 |
| ||
Purchases |
| (628,505 | ) | (177,046 | ) | ||
Advances to members: |
|
|
|
|
| ||
Proceeds |
| 80,658,596 |
| 212,417,733 |
| ||
Disbursements |
| (79,002,608 | ) | (197,682,522 | ) | ||
Mortgage loans held for investment: |
|
|
|
|
| ||
Proceeds |
| 308,629 |
| 542,134 |
| ||
Purchases |
| (126,799 | ) | (239,310 | ) | ||
Proceeds from sale of foreclosed assets |
| 4,737 |
| 3,475 |
| ||
|
|
|
|
|
| ||
Net cash (used in) provided by investing activities |
| (2,240,726 | ) | 1,545,721 |
| ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net change in deposits |
| 6,931 |
| 313,951 |
| ||
Net payments on derivative contracts with a financing element |
| (20,126 | ) | (11,643 | ) | ||
Net proceeds from issuance of consolidated obligations: |
|
|
|
|
| ||
Discount notes |
| 617,934,449 |
| 691,152,074 |
| ||
Bonds |
| 18,470,535 |
| 14,069,788 |
| ||
Payments for maturing and retiring consolidated obligations: |
|
|
|
|
| ||
Discount notes |
| (618,572,896 | ) | (691,653,463 | ) | ||
Bonds |
| (15,858,131 | ) | (15,492,429 | ) | ||
Proceeds from issuance of capital stock |
| 15,765 |
| 29,774 |
| ||
Payments for redemption of mandatorily redeemable capital stock |
| (4,278 | ) | — |
| ||
Payments for repurchase/redemption of capital stock |
| — |
| (1,548 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
| 1,972,249 |
| (1,593,496 | ) | ||
|
|
|
|
|
| ||
Net decrease in cash and due from banks |
| (165,442 | ) | (8 | ) | ||
|
|
|
|
|
| ||
Cash and due from banks at beginning of the year |
| 191,143 |
| 5,735 |
| ||
|
|
|
|
|
| ||
Cash and due from banks at period end |
| $ | 25,701 |
| $ | 5,727 |
|
|
|
|
|
|
| ||
Supplemental disclosures: |
|
|
|
|
| ||
Interest paid |
| $ | 299,734 |
| $ | 757,634 |
|
AHP payments |
| $ | 5,347 |
| $ | 3,682 |
|
Noncash transfers of mortgage loans held for investment to real estate owned (REO) |
| $ | 5,500 |
| $ | 3,447 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
(unaudited)
Background Information
The Federal Home Loan Bank of Boston (the Bank), a federally chartered corporation, is one of 12 district Federal Home Loan Banks (the FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. Each FHLBank operates in a specifically defined geographic territory, or district. The Bank provides a readily available, competitively priced source of funds to its member institutions and housing associates located within the six New England states, which are Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Certain financial institutions, including community development financial institutions (CDFIs), and insurance companies with their principal places of business in New England and engaged in residential housing finance may apply for membership. State and local housing authorities (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 allowed to hold capital stock. The Bank is a cooperative; current and former members own all of the outstanding capital stock of the Bank and may receive dividends on their investment. The Bank does not have any wholly or partially owned subsidiaries, and the Bank does not have an equity position in any partnerships, corporations, or off-balance-sheet special-purpose entities.
The Federal Housing Finance Agency (the Finance Agency), an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks and the FHLBanks’ Office of Finance (Office of Finance).
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 for a fair statement 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, 2010. The unaudited financial statements should be read in conjunction with 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, 2009, filed with the Securities and Exchange Commission (the SEC) on March 22, 2010 (the 2009 Annual Report on Form 10-K).
Note 2 — Recently Issued Accounting Standards and Interpretations
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 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 disclosure of the following: (i) the nature of credit risk inherent in financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. Both new and existing disclosures must be 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. For public entities, the required disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Bank). The required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 (January 1, 2011 for the Bank). The adoption of this amended guidance will likely result in increased financial statement disclosures, but is not expected to have a material effect on the Bank’s financial condition, results of operations or cash flows.
Scope Exception Related to Embedded Credit Derivatives. On March 5, 2010, the FASB issued amended guidance to clarify that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This guidance is effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010, for the Bank). Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. Adoption of this guidance will not have a material impact on 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 describes the reasons for the transfers. Furthermore, this update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair-value measurements using significant unobservable inputs; 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 new guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010, for the Bank), except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair-value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011, for the Bank), and for interim periods within those fiscal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Early adoption is permitted. The Bank’s adoption of this amended guidance will result in increased annual and interim financial statement disclosures but will not affect the Bank’s results of operations, financial condition, or cash flows.
Accounting for the Consolidation of Variable Interest Entities. On June 12, 2009, the FASB issued guidance which is intended to improve financial reporting by enterprises involved with variable interest entities by providing more relevant and reliable information to users of financial statements. This guidance amends the manner in which entities evaluate whether consolidation is required for variable interest entities. An entity must first perform a qualitative analysis in determining whether it must consolidate a variable interest entity, and if the qualitative analysis is not determinative, the entity must perform a quantitative analysis. This guidance also requires that an entity continually evaluate variable interest entities for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity’s involvement with a variable interest entity affects its financial statements and its exposure to risks. The Bank adopted this guidance as of January 1, 2010. Its adoption did not have a material effect on the Bank’s financial condition, results of operations, or cash flows.
Accounting for Transfers of Financial Assets. On June 12, 2009, the FASB issued guidance intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Key provisions of the guidance include (1) the removal of the concept of qualifying special purpose entities, (2) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred, and (3) the requirement that to qualify for sale accounting, the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. The guidance also requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. The guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (January 1, 2010, for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Bank adopted this guidance as of January 1, 2010. Its adoption did not have a material impact on the Bank’s financial condition, results of operations, and cash flows.
Note 3 — Trading Securities
Major Security Types. Trading securities as of June 30, 2010, and December 31, 2009, were as follows (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Certificates of deposit |
| $ | 1,615,000 |
| $ | — |
|
|
|
|
|
|
| ||
Mortgage-backed securities |
|
|
|
|
| ||
U.S. government-guaranteed - residential |
| 22,705 |
| 23,972 |
| ||
Government-sponsored enterprises - residential |
| 9,496 |
| 10,458 |
| ||
Government-sponsored enterprises - commercial |
| 233,831 |
| 72,908 |
| ||
|
| 266,032 |
| 107,338 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 1,881,032 |
| $ | 107,338 |
|
Net unrealized gains on trading securities for the six months ended June 30, 2010 and 2009, amounted to $10.4 million and $1.4 million for securities held on June 30, 2010 and 2009, 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 June 30, 2010, were as follows (dollars in thousands):
|
|
|
| Amounts Recorded in |
|
|
| ||||||
|
|
|
| Accumulated Other |
|
|
| ||||||
|
|
|
| Comprehensive Loss |
|
|
| ||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Certificates of deposit |
| $ | 1,795,000 |
| $ | — |
| $ | — |
| $ | 1,795,000 |
|
Supranational banks |
| 458,420 |
| — |
| (41,196 | ) | 417,224 |
| ||||
Corporate bonds (1) |
| 804,040 |
| 6,347 |
| — |
| 810,387 |
| ||||
U.S. government corporations |
| 286,984 |
| — |
| (39,969 | ) | 247,015 |
| ||||
Government-sponsored enterprises |
| 3,035,312 |
| 46,076 |
| (15,949 | ) | 3,065,439 |
| ||||
|
| 6,379,756 |
| 52,423 |
| (97,114 | ) | 6,335,065 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
| ||||
U.S. government guaranteed - residential |
| 77,415 |
| 348 |
| — |
| 77,763 |
| ||||
Government-sponsored enterprises - residential |
| 1,473,352 |
| 6,731 |
| — |
| 1,480,083 |
| ||||
Government-sponsored enterprises - commercial |
| 311,752 |
| 31 |
| (1,815 | ) | 309,968 |
| ||||
|
| 1,862,519 |
| 7,110 |
| (1,815 | ) | 1,867,814 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 8,242,275 |
| $ | 59,533 |
| $ | (98,929 | ) | $ | 8,202,879 |
|
(1) Consists of corporate debentures guaranteed by the Federal Deposit Insurance Corporation (the FDIC) under the 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, 2009, were as follows (dollars in thousands):
|
|
|
| Amounts Recorded in |
|
|
| ||||||
|
|
|
| Accumulated Other |
|
|
| ||||||
|
|
|
| Comprehensive Loss |
|
|
| ||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Certificates of deposit |
| $ | 2,600,000 |
| $ | — |
| $ | — |
| $ | 2,600,000 |
|
Supranational banks |
| 415,744 |
| — |
| (34,733 | ) | 381,011 |
| ||||
Corporate bonds (1) |
| 702,754 |
| 1,022 |
| (1,997 | ) | 701,779 |
| ||||
U.S. government corporations |
| 253,009 |
| — |
| (31,507 | ) | 221,502 |
| ||||
Government-sponsored enterprises |
| 1,772,115 |
| — |
| (19,796 | ) | 1,752,319 |
| ||||
|
| 5,743,622 |
| 1,022 |
| (88,033 | ) | 5,656,611 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
| ||||
U.S. government guaranteed - residential |
| 16,551 |
| 153 |
| — |
| 16,704 |
| ||||
Government-sponsored enterprises - residential |
| 503,047 |
| 1,600 |
| (1,105 | ) | 503,542 |
| ||||
Government-sponsored enterprises - commercial |
| 313,472 |
| 90 |
| (3,787 | ) | 309,775 |
| ||||
|
| 833,070 |
| 1,843 |
| (4,892 | ) | 830,021 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 6,576,692 |
| $ | 2,865 |
| $ | (92,925 | ) | $ | 6,486,632 |
|
(1) Consists of corporate debentures guaranteed by the FDIC under the 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 June 30, 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 |
| ||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
| ||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Supranational banks |
| $ | — |
| $ | — |
| $ | 417,224 |
| $ | (41,196 | ) | $ | 417,224 |
| $ | (41,196 | ) |
U.S. government corporations |
| — |
| — |
| 247,015 |
| (39,969 | ) | 247,015 |
| (39,969 | ) | ||||||
Government-sponsored enterprises |
| — |
| — |
| 105,661 |
| (15,949 | ) | 105,661 |
| (15,949 | ) | ||||||
|
| — |
| — |
| 769,900 |
| (97,114 | ) | 769,900 |
| (97,114 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Government-sponsored enterprises - commercial |
| — |
| — |
| 229,869 |
| (1,815 | ) | 229,869 |
| (1,815 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total temporarily impaired |
| $ | — |
| $ | — |
| $ | 999,769 |
| $ | (98,929 | ) | $ | 999,769 |
| $ | (98,929 | ) |
The Bank evaluates individual available-for-sale investment securities for other-than-temporary impairment on at least a quarterly basis. As part of this process, the Bank considers whether it intends to sell each debt security or whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery. 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, the Bank performs an analysis to determine if any of these securities are at risk for other-than-temporary impairment.
As a result of these evaluations, the Bank determined that none of its available-for-sale securities were other-than-temporarily impaired at June 30, 2010. The Bank’s available-for-sale securities portfolio has experienced unrealized losses and a decrease in hedged fair value due to interest-rate volatility and reduced liquidity in the marketplace. However, the decline is considered temporary as the Bank expects to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intends to sell these securities nor is it 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 June 30, 2010:
· Debentures issued by a supranational entity that were in an unrealized loss position as of June 30, 2010, are viewed as being likely to return contractual principal and interest since 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.
· Corporate bonds issued under the Temporary Liquidity Guarantee Program are guaranteed by the FDIC.
· The Bank has concluded that the probability of default on issued debt for 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, mortgage-backed securities (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.
The following table summarizes available-for-sale securities with unrealized losses as of December 31, 2009, 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 |
| ||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
| ||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Supranational banks |
| $ | — |
| $ | — |
| $ | 381,011 |
| $ | (34,733 | ) | $ | 381,011 |
| $ | (34,733 | ) |
U.S. government corporations |
| — |
| — |
| 221,502 |
| (31,507 | ) | 221,502 |
| (31,507 | ) | ||||||
Corporate bonds |
| 301,204 |
| (1,997 | ) | — |
| — |
| 301,204 |
| (1,997 | ) | ||||||
Government-sponsored enterprises |
| 1,654,798 |
| (9,369 | ) | 97,521 |
| (10,427 | ) | 1,752,319 |
| (19,796 | ) | ||||||
|
| 1,956,002 |
| (11,366 | ) | 700,034 |
| (76,667 | ) | 2,656,036 |
| (88,033 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Government-sponsored enterprises - residential |
| 265,102 |
| (1,105 | ) | — |
| — |
| 265,102 |
| (1,105 | ) | ||||||
Government-sponsored enterprises - commercial |
| — |
| — |
| 254,336 |
| (3,787 | ) | 254,336 |
| (3,787 | ) | ||||||
|
| 265,102 |
| (1,105 | ) | 254,336 |
| (3,787 | ) | 519,438 |
| (4,892 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total temporarily impaired |
| $ | 2,221,104 |
| $ | (12,471 | ) | $ | 954,370 |
| $ | (80,454 | ) | $ | 3,175,474 |
| $ | (92,925 | ) |
Redemption Terms. The amortized cost and fair value of available-for-sale securities by contractual maturity at June 30, 2010, and December 31, 2009, 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.
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||
Year of Maturity |
| Cost |
| Value |
| Cost |
| Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 1,795,000 |
| $ | 1,795,000 |
| $ | 2,600,000 |
| $ | 2,600,000 |
|
Due after one year through five years |
| 3,717,742 |
| 3,770,165 |
| 2,366,921 |
| 2,356,577 |
| ||||
Due after five years through 10 years |
| — |
| — |
| — |
| — |
| ||||
Due after 10 years |
| 867,014 |
| 769,900 |
| 776,701 |
| 700,034 |
| ||||
|
| 6,379,756 |
| 6,335,065 |
| 5,743,622 |
| 5,656,611 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
| 1,862,519 |
| 1,867,814 |
| 833,070 |
| 830,021 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 8,242,275 |
| $ | 8,202,879 |
| $ | 6,576,692 |
| $ | 6,486,632 |
|
As of June 30, 2010, the amortized cost of the Bank’s available-for-sale securities included net premiums of $109.4 million. Of that amount, $113.0 million of net premiums related to non-MBS and $3.6 million of net discounts related to MBS. As of December 31, 2009, the amortized cost of the Bank’s available-for-sale securities included net premiums of $80.8 million. Of that amount, $82.7 million of net premiums relate to non-MBS and $1.9 million of net discounts relate to MBS.
Note 5 — Held-to-Maturity Securities
Major Security Types. Held-to-maturity securities as of June 30, 2010, were as follows (dollars in thousands):
|
| Amortized Cost |
| Other-Than- |
| Carrying |
| Gross |
| Gross |
| Fair Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. agency obligations |
| $ | 27,853 |
| $ | — |
| $ | 27,853 |
| $ | 2,410 |
| $ | — |
| $ | 30,263 |
|
State or local housing-finance-agency obligations |
| 238,635 |
| — |
| 238,635 |
| 252 |
| (47,139 | ) | 191,748 |
| ||||||
Government-sponsored enterprises |
| 73,437 |
| — |
| 73,437 |
| 1,731 |
| — |
| 75,168 |
| ||||||
|
| 339,925 |
| — |
| 339,925 |
| 4,393 |
| (47,139 | ) | 297,179 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government guaranteed —residential |
| 80,041 |
| — |
| 80,041 |
| 1,157 |
| — |
| 81,198 |
| ||||||
Government-sponsored enterprises - residential |
| 3,118,021 |
| — |
| 3,118,021 |
| 90,665 |
| (2,167 | ) | 3,206,519 |
| ||||||
Government-sponsored enterprises - commercial |
| 1,178,011 |
| — |
| 1,178,011 |
| 89,382 |
| — |
| 1,267,393 |
| ||||||
Private-label - residential |
| 2,615,922 |
| (764,437 | ) | 1,851,485 |
| 103,694 |
| (135,160 | ) | 1,820,019 |
| ||||||
Private-label - commercial |
| 119,046 |
| — |
| 119,046 |
| 724 |
| (1,906 | ) | 117,864 |
| ||||||
Asset-backed securities (ABS) backed by home equity loans |
| 29,970 |
| (821 | ) | 29,149 |
| 84 |
| (8,232 | ) | 21,001 |
| ||||||
|
| 7,141,011 |
| (765,258 | ) | 6,375,753 |
| 285,706 |
| (147,465 | ) | 6,513,994 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 7,480,936 |
| $ | (765,258 | ) | $ | 6,715,678 |
| $ | 290,099 |
| $ | (194,604 | ) | $ | 6,811,173 |
|
Held-to-maturity securities as of December 31, 2009, were as follows (dollars in thousands):
|
| Amortized Cost |
| Other-Than- |
| Carrying |
| Gross |
| Gross |
| Fair Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. agency obligations |
| $ | 30,801 |
| $ | — |
| $ | 30,801 |
| $ | 2,260 |
| $ | — |
| $ | 33,061 |
|
State or local housing-finance-agency obligations |
| 246,257 |
| — |
| 246,257 |
| 749 |
| (31,876 | ) | 215,130 |
| ||||||
Government-sponsored enterprises |
| 18,897 |
| — |
| 18,897 |
| — |
| (300 | ) | 18,597 |
| ||||||
|
| 295,955 |
| — |
| 295,955 |
| 3,009 |
| (32,176 | ) | 266,788 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government guaranteed -residential |
| 98,610 |
| — |
| 98,610 |
| 154 |
| (367 | ) | 98,397 |
| ||||||
Government-sponsored enterprises - residential |
| 3,766,047 |
| — |
| 3,766,047 |
| 64,456 |
| (14,545 | ) | 3,815,958 |
| ||||||
Government-sponsored enterprises - commercial |
| 1,106,319 |
| — |
| 1,106,319 |
| 65,646 |
| — |
| 1,171,965 |
| ||||||
Private-label - residential |
| 2,926,608 |
| (928,532 | ) | 1,998,076 |
| 134,435 |
| (212,175 | ) | 1,920,336 |
| ||||||
Private-label - commercial |
| 132,405 |
| — |
| 132,405 |
| 37 |
| (4,507 | ) | 127,935 |
| ||||||
ABS backed by home equity loans |
| 30,977 |
| (976 | ) | 30,001 |
| 136 |
| (8,835 | ) | 21,302 |
| ||||||
|
| 8,060,966 |
| (929,508 | ) | 7,131,458 |
| 264,864 |
| (240,429 | ) | 7,155,893 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 8,356,921 |
| $ | (929,508 | ) | $ | 7,427,413 |
| $ | 267,873 |
| $ | (272,605 | ) | $ | 7,422,681 |
|
The following table summarizes the held-to-maturity securities with unrealized losses as of June 30, 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 |
| ||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
| ||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State or local housing-finance-agency obligations |
| $ | 24,247 |
| $ | (449 | ) | $ | 150,480 |
| $ | (46,690 | ) | $ | 174,727 |
| $ | (47,139 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Government-sponsored enterprises - residential |
| 119,604 |
| (622 | ) | 146,305 |
| (1,545 | ) | 265,909 |
| (2,167 | ) | ||||||
Private-label - residential |
| 11,617 |
| (5,484 | ) | 1,801,129 |
| (791,281 | ) | 1,812,746 |
| (796,765 | ) | ||||||
Private-label - commercial |
| — |
| — |
| 106,619 |
| (1,906 | ) | 106,619 |
| (1,906 | ) | ||||||
ABS backed by home equity loans |
| — |
| — |
| 21,001 |
| (8,969 | ) | 21,001 |
| (8,969 | ) | ||||||
|
| 131,221 |
| (6,106 | ) | 2,075,054 |
| (803,701 | ) | 2,206,275 |
| (809,807 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 155,468 |
| $ | (6,555 | ) | $ | 2,225,534 |
| $ | (850,391 | ) | $ | 2,381,002 |
| $ | (856,946 | ) |
The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2009, 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 |
| ||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
| ||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State or local housing-finance-agency obligations |
| $ | 165 |
| $ | — |
| $ | 167,264 |
| $ | (31,876 | ) | $ | 167,429 |
| $ | (31,876 | ) |
Government-sponsored enterprises |
| 18,597 |
| (300 | ) | — |
| — |
| 18,597 |
| (300 | ) | ||||||
|
| 18,762 |
| (300 | ) | 167,264 |
| (31,876 | ) | 186,026 |
| (32,176 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government guaranteed - residential |
| 95,317 |
| (358 | ) | 1,155 |
| (9 | ) | 96,472 |
| (367 | ) | ||||||
Government-sponsored enterprises - residential |
| 818,526 |
| (4,082 | ) | 334,118 |
| (10,463 | ) | 1,152,644 |
| (14,545 | ) | ||||||
Private-label - residential | �� | 32,592 |
| (26,319 | ) | 1,882,499 |
| (981,115 | ) | 1,915,091 |
| (1,007,434 | ) | ||||||
Private-label - commercial |
| — |
| — |
| 117,383 |
| (4,507 | ) | 117,383 |
| (4,507 | ) | ||||||
ABS backed by home equity loans |
| 2,534 |
| (1,278 | ) | 18,768 |
| (8,397 | ) | 21,302 |
| (9,675 | ) | ||||||
|
| 948,969 |
| (32,037 | ) | 2,353,923 |
| (1,004,491 | ) | 3,302,892 |
| (1,036,528 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 967,731 |
| $ | (32,337 | ) | $ | 2,521,187 |
| $ | (1,036,367 | ) | $ | 3,488,918 |
| $ | (1,068,704 | ) |
Redemption Terms. The amortized cost and fair value of held-to-maturity securities by contractual maturity at June 30, 2010, and December 31, 2009, 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.
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||||||||
|
| Amortized |
| Carrying |
| Fair |
| Amortized |
| Carrying |
| Fair |
| ||||||
Year of Maturity |
| Cost |
| Value (1) |
| Value |
| Cost |
| Value (1) |
| Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Due in one year or less |
| $ | 100 |
| $ | 100 |
| $ | 100 |
| $ | 355 |
| $ | 355 |
| $ | 355 |
|
Due after one year through five years |
| 76,065 |
| 76,065 |
| 77,844 |
| 24,030 |
| 24,030 |
| 23,811 |
| ||||||
Due after five years through 10 years |
| 57,767 |
| 57,767 |
| 59,860 |
| 62,522 |
| 62,522 |
| 65,190 |
| ||||||
Due after 10 years |
| 205,993 |
| 205,993 |
| 159,375 |
| 209,048 |
| 209,048 |
| 177,432 |
| ||||||
|
| 339,925 |
| 339,925 |
| 297,179 |
| 295,955 |
| 295,955 |
| 266,788 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities |
| 7,141,011 |
| 6,375,753 |
| 6,513,994 |
| 8,060,966 |
| 7,131,458 |
| 7,155,893 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 7,480,936 |
| $ | 6,715,678 |
| $ | 6,811,173 |
| $ | 8,356,921 |
| $ | 7,427,413 |
| $ | 7,422,681 |
|
(1) Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related impairment recognized in accumulated other comprehensive loss.
As of June 30, 2010, the amortized cost of the Bank’s held-to-maturity securities includes net discounts of $518.5 million. Of that amount, net premiums of $6.1 million relate to non-MBS and net discounts of $524.6 million relate to MBS. As of December 31, 2009, the amortized cost of the Bank’s held-to-maturity securities includes net discounts of $482.3 million. Of that amount, net premiums of $1.5 million relate to non-MBS and net discounts of $483.8 million relate to MBS.
Other-Than-Temporary Impairment Analysis of Held-to-Maturity Securities.
The Bank evaluates individual held-to-maturity securities for other-than-temporary impairment on a quarterly basis. As part of this process, the Bank considers whether it intends to sell each debt security or whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery. 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 of its residential private-label MBS, the Bank performs an analysis to determine if any of these securities are at risk for credit loss impairment.
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 attendant with security markets. The Bank has determined that all unrealized losses reflected above are temporary given the creditworthiness of the issuers and the underlying collateral. As of June 30, 2010, 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 deterioration in the fundamental credit quality of these obligations, the Bank does not intend to sell the investments, and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis, the Bank does not consider these investments to be other-than-temporarily impaired at June 30, 2010.
Mortgage-Backed Securities. For its 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 June 30, 2010, all of the gross unrealized losses on such MBS are temporary. Additionally, based upon the Bank’s assessment of the creditworthiness of the issuers of its private-label commercial MBS, the credit ratings assigned by the NRSROs, and 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, 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, and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost basis. As a result, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2010.
The FHLBanks’ OTTI Governance Committee, which is comprised of representatives from all 12 FHLBanks, has reviewed and approved the key modeling assumptions, inputs, and methodologies used by the FHLBanks to generate cash-flow projections for analyzing credit losses and determining other-than-temporary impairment for all of their private-label residential MBS and home equity loan investments (including home equity ABS) to support consistency among the FHLBanks in these assessments. Certain private-label MBS backed by multifamily and commercial real estate loans, home equity lines of credit, and manufactured housing loans were outside of the scope of the FHLBanks’ OTTI Governance Committee and were analyzed for other-than-temporary impairment by each individual FHLBank owning securities backed by such collateral. 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 projected cash flows that the Bank is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions as determined by the FHLBanks’ OTTI Governance Committee, 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, to determine whether the Bank will recover the entire amortized cost basis of the security. 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.
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 instances. In the event that neither the FHLBank of San Francisco nor 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 the FHLBank of Chicago to perform cash-flow analyses for its subprime private-label MBS. The following table summarizes the FHLBanks contracted to perform cash-flow analysis for the Bank.
|
| For the quarter ended June 30, 2010 |
| ||||||||||||
|
| Number of |
| Par |
| Amortized |
| Carrying |
| Fair |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLBank of San Francisco |
| 175 |
| $ | 3,015,519 |
| $ | 2,525,869 |
| $ | 1,782,452 |
| $ | 1,761,775 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLBank of Chicago |
| 16 |
| $ | 25,601 |
| $ | 25,029 |
| $ | 24,424 |
| $ | 17,798 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Bank’s own cash-flow projections |
| 14 |
| $ | 107,008 |
| $ | 91,312 |
| $ | 70,076 |
| $ | 57,712 |
|
To assess whether the entire amortized cost basis of its 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 assumptions about future changes in home prices and interest rates, and 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 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 June 30, 2010, assumed current-to-trough home-price declines ranging from 0 percent to 12 percent over the 3- to 9- month period beginning April 1, 2010, for the respective states and CBSAs. Thereafter, home prices are projected to increase 0 percent in the first six months after the trough, 0.5 percent in the next six months, 3 percent in the second year, and 4 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.
Certain private-label MBS owned by the Bank are insured by third-party bond insurers (referred to as monoline insurers). The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. The cash-flow analysis of the MBS protected by such third-party insurance looks first to the performance of the underlying security, considering its embedded credit enhancement(s), which may be in the form of excess spread, overcollateralization, and/or credit subordination to determine the collectability of all amounts due. If these protections are determined to be insufficient to make timely payment of all amounts due, then the Bank considers the capacity of the third-party bond insurer to cover any shortfalls. Certain of the monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. Therefore, based on each insurer’s financial strength, the Bank has established an expected time horizon in which each monoline insurer can continue to provide credit support. The projected time horizon of credit protection provided by an insurer is a function of claim-paying resources and anticipated claims in the future. This projection is referred to as the burn-out period and is expressed in months. The burn-out period for each monoline insurer has been incorporated in the third-party cash-flow model, as a key input. Any cash-flow shortfalls that occurred beyond the end of the burn-out period were considered not recoverable and the insured security was then deemed to be credit impaired.
There are five monoline insurers that insure certain private-label residential MBS and home equity investments held by the Bank:
· Assured Guaranty Municipal Corp. — 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.
· Syncora Guarantee Inc. (Syncora) and Financial Guarantee Insurance Co. (FGIC) — The Bank places no reliance on the financial guarantee from Syncora and from FGIC, as these entities were ordered by the New York State Insurance Department to suspend all claims payments during 2009. Accordingly, the burnout period is considered to be zero months for Syncora and FGIC.
· Ambac — Beginning with the second quarter of 2010, the Bank places no reliance on the financial guarantee from Ambac, as Ambac, with the consent of the Commissioner of Insurance for the State of Wisconsin, suspended payments to bond holders. Accordingly, the burnout period is considered to be zero months for Ambac.
· MBIA Insurance Corp (MBIA) — For the second quarter of 2010 the burnout period for MBIA is 12 months, ending in June 2011. No securities guaranteed by MBIA were determined to have an other-than-temporary impairment credit loss at June 30, 2010.
At each quarter-end, 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 basis of the security to determine whether a credit loss exists. For the Bank’s variable-rate private-label MBS, the Bank uses a forward interest-rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis. The Bank recorded an other-than-temporary impairment credit loss of $30.4 million for the quarter ended June 30, 2010.
For held-to-maturity securities, the portion of an other-than-temporary impairment charge that is recognized in other comprehensive income (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 would result in a reclassification adjustment and the establishment of a new amount to be accreted. For the quarter ended June 30, 2010, the Bank accreted $72.2 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-related losses during the quarter ended June 30, 2010, the additional credit-related 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 $25.9 million for the quarter ended June 30, 2010.
For those securities for which an other-than-temporary impairment was determined to have occurred as of June 30, 2010 (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 of the significant inputs used to measure the amount of the credit loss recognized in earnings during the quarter ended June 30, 2010, 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. All of the securities determined to have incurred an other-than-temporary impairment as of June 30, 2010, were Alt-A securities, and therefore the only category presented by this table, based on the current performance characteristics of the underlying pool.
|
| Significant Inputs |
|
|
|
|
| ||||||||||
|
| Projected |
| Projected |
| Projected |
| Current |
| ||||||||
Private-label MBS by |
| Weighted |
| Range |
| Weighted |
| Range |
| Weighted |
| Range |
| Weighted |
| Range |
|
Alt-A (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
| 6.9 | % | 4.3 – 13.8 | % | 79.8 | % | 39.3 – 89.1 | % | 52.1 | % | 45.4 – 57.2 | % | 19.1 | % | 0.0 – 47.7 | % |
2006 |
| 7.2 |
| 3.8 – 10.3 |
| 77.4 |
| 55.6 – 90.2 |
| 53.3 |
| 45.9 – 58.3 |
| 18.6 |
| 0.0 – 47.4 |
|
2005 |
| 10.6 |
| 7.7 – 12.5 |
| 53.9 |
| 30.4 – 76.0 |
| 49.3 |
| 37.0 – 59.4 |
| 17.8 |
| 3.3 – 48.5 |
|
2004 and prior |
| 9.5 |
| 9.5 – 9.6 |
| 63.3 |
| 61.1 – 65.9 |
| 49.1 |
| 47.0 – 50.9 |
| 34.8 |
| 30.2 – 40.0 |
|
Total |
| 7.8 | % | 3.8 – 13.8 | % | 73.2 | % | 30.4 – 90.2 | % | 52.0 | % | 37.0 – 59.4 | % | 18.7 | % | 0.0 – 48.5 | % |
(1) 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 following table displays the Bank’s securities for which other-than-temporary impairment credit losses were recognized in the quarter ending June 30, 2010, based on the Bank’s impairment analysis of its investment portfolio (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
|
| At June 30, 2010 |
| ||||||||||
Other-Than-Temporarily Impaired Investment: |
| Par |
| Amortized |
| Carrying |
| Fair |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Private-label residential MBS — Prime |
| $ | 69,403 |
| $ | 65,435 |
| $ | 42,808 |
| $ | 46,367 |
|
|
|
|
|
|
|
|
|
|
| ||||
Private-label residential MBS — Alt-A |
| 1,823,831 |
| 1,426,359 |
| 855,495 |
| 926,681 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total other-than-temporarily impaired securities |
| $ | 1,893,234 |
| $ | 1,491,794 |
| $ | 898,303 |
| $ | 973,048 |
|
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 June 30, 2010, based on the Bank’s impairment analysis of its investment portfolio (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
|
| At June 30, 2010 |
| ||||||||||
Other-Than-Temporarily Impaired Investment: |
| Par |
| Amortized |
| Carrying |
| Fair |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Private-label residential MBS — Prime |
| $ | 92,418 |
| $ | 85,092 |
| $ | 57,217 |
| $ | 64,594 |
|
|
|
|
|
|
|
|
|
|
| ||||
Private-label residential MBS — Alt-A |
| 2,355,794 |
| 1,858,914 |
| 1,122,353 |
| 1,216,204 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
ABS backed by home equity loans — Subprime |
| 2,944 |
| 2,382 |
| 1,560 |
| 1,573 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total other-than-temporarily impaired securities |
| $ | 2,451,156 |
| $ | 1,946,388 |
| $ | 1,181,130 |
| $ | 1,282,371 |
|
The following table displays the Bank’s securities for which other-than-temporary impairment credit losses were recognized for the three months and six months ended June 30, 2010, based on the Bank’s impairment analysis of its investment portfolio (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
|
| For the Three Months Ended June 30, 2010 |
| For the Six Months Ended June 30, 2010 |
| |||||||||||||||
Other-Than- |
| Total Other- |
| Net Amount of |
| Net |
| Total Other- |
| Net Amount of |
| Net Impairment |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Private-label residential MBS — Prime |
| $ | (195 | ) | $ | (978 | ) | $ | (1,173 | ) | $ | (222 | ) | $ | (1,390 | ) | $ | (1,612 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Private-label residential MBS — Alt-A |
| (17,971 | ) | (11,299 | ) | (29,270 | ) | (38,491 | ) | (13,163 | ) | (51,654 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total other-than-temporarily impaired securities |
| $ | (18,166 | ) | $ | (12,277 | ) | $ | (30,443 | ) | $ | (38,713 | ) | $ | (14,553 | ) | $ | (53,266 | ) | |
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 an other-than-temporary impairment charge was recognized into accumulated other comprehensive loss (dollars in thousands).
|
| For the Three |
| For the Six |
| ||
|
| June 30, 2010 |
| June 30, 2010 |
| ||
|
|
|
|
|
| ||
Balance at beginning of period |
| $ | 491,743 |
| $ | 471,094 |
|
|
|
|
|
|
| ||
Additions: |
|
|
|
|
| ||
Credit losses for which other-than-temporary impairment was not previously recognized |
| 32 |
| 141 |
| ||
|
|
|
|
|
| ||
Additional credit losses for which an other-than-temporary impairment charge was previously recognized |
| 30,411 |
| 53,125 |
| ||
|
|
|
|
|
| ||
Reductions: |
|
|
|
|
| ||
Securities sold or matured during the period |
| (7,041 | ) | (9,215 | ) | ||
|
|
|
|
|
| ||
Increase in cash flows expected to be collected which are recognized over the remaining life of the security |
| (208 | ) | (208 | ) | ||
|
|
|
|
|
| ||
Balance as of June 30, 2010 |
| $ | 514,937 |
| $ | 514,937 |
|
The following tables present 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).
|
| For the Three Months Ended |
| ||||
|
| June 30, 2010 |
| June 30, 2009 |
| ||
|
|
|
|
|
| ||
Balance, beginning of period |
| $ | (849,700 | ) | $ | (1,077,927 | ) |
|
|
|
|
|
| ||
Amounts reclassified from (to) accumulated other comprehensive loss |
|
|
|
|
| ||
|
|
|
|
|
| ||
Noncredit portion of other-than-temporary impairment losses on held-to-maturity securities |
| (13,596 | ) | (183,663 | ) | ||
|
|
|
|
|
| ||
Reclassification adjustment of noncredit component of impairment losses included in net income (loss) relating to held-to-maturity securities |
| 25,873 |
| 43,097 |
| ||
|
|
|
|
|
| ||
Net amount of impairment losses reclassified from (to) accumulated other comprehensive loss |
| 12,277 |
| (140,566 | ) | ||
|
|
|
|
|
| ||
Accretion of noncredit portion of impairment losses on held-to-maturity securities |
| 72,165 |
| 89,140 |
| ||
|
|
|
|
|
| ||
Balance, end of period |
| $ | (765,258 | ) | $ | (1,129,353 | ) |
|
| For the Six Months Ended |
| ||||
|
| June 30, 2010 |
| June 30, 2009 |
| ||
|
|
|
|
|
| ||
Balance, beginning of period |
| $ | (929,508 | ) | $ | — |
|
|
|
|
|
|
| ||
Cumulative effect of adjustments to opening balance |
| — |
| (349,106 | ) | ||
|
|
|
|
|
| ||
Amounts reclassified from (to) accumulated other comprehensive loss |
|
|
|
|
| ||
|
|
|
|
|
| ||
Noncredit portion of other-than-temporary impairment losses on held-to-maturity securities |
| (30,540 | ) | (960,398 | ) | ||
|
|
|
|
|
| ||
Reclassification adjustment of noncredit component of impairment losses included in net income (loss) relating to held-to-maturity securities |
| 45,093 |
| 52,179 |
| ||
|
|
|
|
|
| ||
Net amount of impairment losses reclassified from (to) accumulated other comprehensive loss |
| 14,553 |
| (908,219 | ) | ||
|
|
|
|
|
| ||
Accretion of noncredit portion of impairment losses on held-to-maturity securities |
| 149,697 |
| 127,972 |
| ||
|
|
|
|
|
| ||
Balance, end of period |
| $ | (765,258 | ) | $ | (1,129,353 | ) |
Note 6 — Advances
Redemption Terms. At June 30, 2010, and December 31, 2009, the Bank had advances outstanding, including AHP advances at interest rates ranging from 0 percent to 8.37 percent and 0 percent to 8.44 percent, respectively, as summarized below (dollars in thousands).
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Year of Contractual Maturity |
| Amount |
| Weighted |
| Amount |
| Weighted |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overdrawn demand-deposit accounts |
| $ | 12,566 |
| 0.48 | % | $ | 10,316 |
| 0.43 | % |
Due in one year or less |
| 15,409,141 |
| 1.29 |
| 17,014,988 |
| 1.34 |
| ||
Due after one year through two years |
| 4,599,533 |
| 2.55 |
| 4,802,734 |
| 3.04 |
| ||
Due after two years through three years |
| 5,888,713 |
| 2.27 |
| 2,916,158 |
| 3.87 |
| ||
Due after three years through four years |
| 2,784,543 |
| 3.74 |
| 5,518,784 |
| 2.32 |
| ||
Due after four years through five years |
| 2,146,938 |
| 3.37 |
| 1,868,762 |
| 3.64 |
| ||
Thereafter |
| 4,429,583 |
| 4.07 |
| 4,791,566 |
| 3.99 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| 35,271,017 |
| 2.29 | % | 36,923,308 |
| 2.37 | % | ||
|
|
|
|
|
|
|
|
|
| ||
Premiums |
| 30,061 |
|
|
| 20,632 |
|
|
| ||
Discounts |
| (25,914 | ) |
|
| (25,586 | ) |
|
| ||
Hedging adjustments |
| 740,559 |
|
|
| 673,107 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Total |
| $ | 36,015,723 |
|
|
| $ | 37,591,461 |
|
|
|
The Bank offers advances to members that may be prepaid on pertinent dates (call dates) 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 both June 30, 2010, and December 31, 2009, the Bank had callable
advances outstanding totaling $11.5 million.
The following table summarizes advances outstanding by year of contractual maturity or next call date for callable advances (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Year of Contractual Maturity or Next Call Date |
| Par Value |
| Percentage |
| Par Value |
| Percentage |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overdrawn demand-deposit accounts |
| $ | 12,566 |
| — | % | $ | 10,316 |
| — | % |
Due in one year or less |
| 15,409,141 |
| 43.7 |
| 17,014,988 |
| 46.1 |
| ||
Due after one year through two years |
| 4,610,533 |
| 13.1 |
| 4,802,734 |
| 13.0 |
| ||
Due after two years through three years |
| 5,889,213 |
| 16.7 |
| 2,927,658 |
| 7.9 |
| ||
Due after three years through four years |
| 2,778,543 |
| 7.9 |
| 5,518,784 |
| 15.0 |
| ||
Due after four years through five years |
| 2,146,438 |
| 6.1 |
| 1,862,262 |
| 5.0 |
| ||
Thereafter |
| 4,424,583 |
| 12.5 |
| 4,786,566 |
| 13.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| $ | 35,271,017 |
| 100.0 | % | $ | 36,923,308 |
| 100.0 | % |
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. At June 30, 2010, and December 31, 2009, the Bank had putable advances outstanding totaling $7.8 billion and $8.4 billion, respectively.
The following table summarizes advances outstanding by year of contractual maturity or next put date for putable advances (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Year of Contractual Maturity or Next Put Date |
| Par Value |
| Percentage |
| Par Value |
| Percentage |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overdrawn demand-deposit accounts |
| $ | 12,566 |
| — | % | $ | 10,316 |
| — | % |
Due in one year or less |
| 20,987,016 |
| 59.5 |
| 22,710,413 |
| 61.5 |
| ||
Due after one year through two years |
| 4,380,733 |
| 12.4 |
| 4,810,434 |
| 13.0 |
| ||
Due after two years through three years |
| 4,902,263 |
| 13.9 |
| 2,042,108 |
| 5.5 |
| ||
Due after three years through four years |
| 2,250,193 |
| 6.4 |
| 4,707,984 |
| 12.8 |
| ||
Due after four years through five years |
| 1,552,688 |
| 4.4 |
| 1,314,762 |
| 3.6 |
| ||
Thereafter |
| 1,185,558 |
| 3.4 |
| 1,327,291 |
| 3.6 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| $ | 35,271,017 |
| 100.0 | % | $ | 36,923,308 |
| 100.0 | % |
Security Terms. The Bank lends to its members and housing associates chartered within the six New England states in accordance with federal statutes, including the Federal Home Loan Bank Act of 1932 (FHLBank Act). The FHLBank Act generally requires the Bank to obtain eligible collateral on advances sufficient to protect against losses and permits the Bank to accept the following as eligible collateral on such advances: residential mortgage loans; certain U.S. government or government-agency securities; cash or deposits; and other eligible real-estate-related assets. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member’s indebtedness to the Bank. Notwithstanding the FHLBank Act’s general requirements regarding the eligibility of collateral, Community Financial Institutions (CFIs) are eligible, under expanded statutory collateral rules, to pledge as collateral for advances small-business, small-farm, and small-agriculture loans fully secured by collateral other than real estate, or securities representing a whole interest in such secured loans. CFIs are institutions that have, as of the date of the transaction at issue, less than $1.0 billion in average total assets over the three years preceding that date. At June 30, 2010, and December 31, 2009, the Bank had rights to collateral, on a borrower-by-borrower basis, with an estimated value greater than outstanding advances.
Credit Risk. While the Bank has never experienced a credit loss on an advance to a member or borrower, weakening economic conditions, severe credit market conditions, along with the expanded statutory collateral rules for CFIs and the incremental risk inherent in lending to housing associates, insurance companies, and CDFIs provide the potential for additional credit risk for the Bank. Management of 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 member’s financial condition. Based on these policies and procedures, the Bank does not expect any losses on advances. Therefore, the Bank has not provided any allowance for losses on advances. The Bank’s credit risk from advances is concentrated in commercial banks, savings institutions, and credit unions.
Related-Party Activities. The Bank defines related parties as those members whose ownership of the Bank’s capital stock is in excess of 10 percent of the Bank’s total capital stock outstanding. The following table presents advances outstanding to related parties and total accrued interest receivable from those advances as of June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| Par |
| Percent |
| Total Accrued |
| Percent of Total Accrued Interest |
| ||
|
|
|
|
|
|
|
|
|
| ||
As of June 30, 2010 |
|
|
|
|
|
|
|
|
| ||
RBS Citizens N.A., Providence, RI |
| $ | 8,888,585 |
| 25.2 | % | $ | 2,109 |
| 3.0 | % |
Bank of America Rhode Island, N.A., Providence, RI |
| 4,897,389 |
| 13.9 |
| 7,310 |
| 10.3 |
| ||
|
|
|
|
|
|
|
|
|
| ||
As of December 31, 2009 |
|
|
|
|
|
|
|
|
| ||
RBS Citizens N.A., Providence, RI |
| $ | 10,712,640 |
| 29.0 | % | $ | 1,808 |
| 2.3 | % |
Bank of America Rhode Island, N.A., Providence, RI |
| 3,059,312 |
| 8.3 |
| 5,315 |
| 6.8 |
|
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 with the above members during the three and six months ended June 30, 2010 and 2009, as follows (dollars in thousands):
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
Name |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
RBS Citizens N.A., Providence, RI |
| $ | 8,577 |
| $ | 11,764 |
| $ | 15,802 |
| $ | 33,215 |
|
Bank of America Rhode Island, N.A., Providence, RI |
| 7,340 |
| 21,410 |
| 12,496 |
| 80,107 |
| ||||
The following table presents an analysis of advances activity with related parties for the six months ended June 30, 2010 (dollars in thousands):
|
| Balance at |
| For the Six Months Ended |
|
|
| ||||||
|
| December 31, |
| Disbursements to |
| Payments from |
| Balance at |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
RBS Citizens N.A., Providence, RI |
| $ | 10,712,640 |
| $ | 16,426,250 |
| $ | (18,250,305 | ) | $ | 8,888,585 |
|
Bank of America Rhode Island, N.A., Providence, RI |
| 3,059,312 |
| 3,500,554 |
| (1,662,477 | ) | 4,897,389 |
| ||||
Interest-Rate-Payment Terms. The following table details interest-rate-payment terms for outstanding advances (dollars in thousands):
|
| June 30, |
| December 31, |
| ||
Par amount of advances |
|
|
|
|
| ||
Fixed-rate |
| $ | 30,900,451 |
| $ | 33,318,472 |
|
Variable-rate |
| 4,370,566 |
| 3,604,836 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 35,271,017 |
| $ | 36,923,308 |
|
Note 7 — Mortgage Loans Held for Portfolio
Under the Bank’s Mortgage Partnership FinanceÒ(MPFÒ) program, the Bank invests in fixed-rate single-family mortgages that are purchased from participating members. All mortgages purchased by the Bank are held-for-investment. Under the MPF program, the Bank’s members originate, service, and credit-enhance residential real estate mortgages that are purchased by the Bank.
The following table presents mortgage loans held for investment (dollars in thousands):
Ò “MPF Xtra” is a trademark and “Mortgage Partnership Finance,” “MPF,” are registered trademarks of the FHLBank of Chicago.
|
| June 30, |
| December 31, |
| ||
Real estate |
|
|
|
|
| ||
Fixed-rate 15-year single-family mortgages |
| $ | 736,480 |
| $ | 821,978 |
|
Fixed-rate 20- and 30-year single-family mortgages |
| 2,567,649 |
| 2,671,482 |
| ||
Premiums |
| 24,840 |
| 25,802 |
| ||
Discounts |
| (8,513 | ) | (9,444 | ) | ||
Deferred derivative gains and losses, net |
| (1,055 | ) | (1,743 | ) | ||
|
|
|
|
|
| ||
Total mortgage loans held for portfolio |
| 3,319,401 |
| 3,508,075 |
| ||
|
|
|
|
|
| ||
Less: allowance for credit losses |
| (2,500 | ) | (2,100 | ) | ||
|
|
|
|
|
| ||
Total mortgage loans, net of allowance for credit losses |
| $ | 3,316,901 |
| $ | 3,505,975 |
|
The following table details the par value of mortgage loans held for portfolio at June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| June 30, |
| December 31, |
| ||
|
|
|
|
|
| ||
Conventional loans |
| $ | 2,973,958 |
| $ | 3,157,564 |
|
Government-insured or guaranteed loans |
| 330,171 |
| 335,896 |
| ||
|
|
|
|
|
| ||
Total par value |
| $ | 3,304,129 |
| $ | 3,493,460 |
|
An analysis of the allowance for credit losses for the three and six months ended June 30, 2010 and 2009, follows (dollars in thousands):
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| $ | 2,500 |
| $ | 450 |
| $ | 2,100 |
| $ | 350 |
|
Charge-offs |
| (4 | ) | — |
| (35 | ) | — |
| ||||
Provision for credit losses |
| 4 |
| 800 |
| 435 |
| 900 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance at end of period |
| $ | 2,500 |
| $ | 1,250 |
| $ | 2,500 |
| $ | 1,250 |
|
Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage-loan agreement. At June 30, 2010, and December 31, 2009, the Bank had no recorded investments in impaired mortgage loans. Mortgage loans on nonaccrual status at June 30, 2010, and December 31, 2009, totaled $52.6 million and $45.0 million, respectively. REO at June 30, 2010, and December 31, 2009, totaled $5.3 million and $4.4 million, respectively. REO is recorded on the statement of condition in other assets at the lower of cost or fair value less estimated selling costs.
Sale of REO Assets. During the six months ended June 30, 2010 and 2009, the Bank sold REO assets with a recorded carrying value of $4.2 million and $3.3 million, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains totaling $143,000 and $190,000 on the sale of REO assets during the six months ended June 30, 2010 and 2009, respectively. Gains and losses on the sale of REO assets are recorded in other income.
Note 8 — 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 hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair-value hedge);
(2) a 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.
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 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 forecasted transaction) is recorded in other income as net gains (losses) on derivatives and hedging activities.
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 value of the economically hedged assets, liabilities, or firm commitments. As a result, the Bank recognizes the net interest and the change in fair value of these derivatives in other income 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.
The derivatives used in intermediation activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank. These amounts are recorded in other income as net gains (losses) on derivatives and hedging activities.
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 interest income or interest expense of the designated hedged investment securities, advances, consolidated obligations (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, along with changes in fair value of these derivatives, as net gains (losses) on derivatives and hedging activities.
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 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 June 30, 2010, are clearly and closely related to the host contracts, and therefore no embedded derivatives have been bifurcated from the host contract.
If hedging relationships meet certain criteria, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis, and to calculate the changes in fair value of the
derivatives and related hedged items independently. This is known as the long-haul method of hedge accounting. Transactions that meet more stringent criteria qualify for the shortcut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in fair value of the related derivative.
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 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 shortcut method, provided all other shortcut criteria are also met. The Bank then records changes in fair value of the derivative and the hedged item beginning on the trade date.
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 after that, 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.
The components of net losses on derivatives and hedging activities for the three and six months ended June 30, 2010 and 2009, were as follows (dollars in thousands):
|
| For the Three Months Ended June 30, |
| ||||
|
| 2010 |
| 2009 |
| ||
Derivatives and hedged items in fair-value hedging relationships: |
|
|
|
|
| ||
Interest-rate swaps |
| $ | 452 |
| $ | (1,689 | ) |
|
|
|
|
|
| ||
Derivatives not designated as hedging instruments: |
|
|
|
|
| ||
Economic hedges: |
|
|
|
|
| ||
Interest-rate swaps |
| (15,618 | ) | 119 |
| ||
Interest-rate caps and floors |
| (4 | ) | 24 |
| ||
Mortgage-delivery commitments |
| 713 |
| (471 | ) | ||
Total net losses related to derivatives not designated as hedging instruments |
| (14,909 | ) | (328 | ) | ||
|
|
|
|
|
| ||
Net losses on derivatives and hedging activities |
| $ | (14,457 | ) | $ | (2,017 | ) |
|
| For the Six Months Ended June 30, |
| ||||
|
| 2010 |
| 2009 |
| ||
Derivatives and hedged items in fair-value hedging relationships: |
|
|
|
|
| ||
Interest-rate swaps |
| $ | 1,374 |
| $ | (1,224 | ) |
Derivatives not designated as hedging instruments: |
|
|
|
|
| ||
Economic hedges: |
|
|
|
|
| ||
Interest-rate swaps |
| (19,509 | ) | (289 | ) | ||
Interest-rate caps and floors |
| (17 | ) | (16 | ) | ||
Mortgage-delivery commitments |
| 863 |
| (464 | ) | ||
Total net losses related to derivatives not designated as hedging instruments |
| (18,663 | ) | (769 | ) | ||
|
|
|
|
|
| ||
Net losses on derivatives and hedging activities |
| $ | (17,289 | ) | $ | (1,993 | ) |
The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
|
| For the Three Months Ended June 30, 2010 |
| ||||||||||
|
| Gain/(Loss) on |
| Gain/(Loss) on |
| Net Fair Value |
| Effect of |
| ||||
Hedged Item Type: |
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | (81,584 | ) | $ | 81,554 |
| $ | (30 | ) | $ | (100,240 | ) |
Investments |
| (85,523 | ) | 85,248 |
| (275 | ) | (12,811 | ) | ||||
Deposits |
| 366 |
| (366 | ) | — |
| 394 |
| ||||
Consolidated obligations - bonds |
| 90,638 |
| (89,881 | ) | 757 |
| 55,992 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | (76,103 | ) | $ | 76,555 |
| $ | 452 |
| $ | (56,665 | ) |
(1) The net interest on derivatives in fair-value hedge relationships is presented in the interest income/expense line item of the respective hedged item in the statement of operations.
|
| For the Three Months Ended June 30, 2009 |
| ||||||||||
|
| Gain/(Loss) on |
| Gain/(Loss) on |
| Net Fair Value |
| Effect of |
| ||||
Hedged Item Type: |
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | 206,460 |
| $ | (205,454 | ) | $ | 1,006 |
| $ | (106,657 | ) |
Investments |
| 111,575 |
| (110,362 | ) | 1,213 |
| (11,506 | ) | ||||
Deposits |
| (1,037 | ) | 1,037 |
| — |
| 350 |
| ||||
Consolidated obligations - bonds |
| (106,000 | ) | 105,105 |
| (895 | ) | 43,087 |
| ||||
Consolidated obligations - discount notes |
| 3,169 |
| (6,182 | ) | (3,013 | ) | 2,749 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 214,167 |
| $ | (215,856 | ) | $ | (1,689 | ) | $ | (71,977 | ) |
(1) The net interest on derivatives in fair-value hedge relationships is presented in the interest income/expense line item of the respective hedged item in the statement of operations.
|
| For the Six Months Ended June 30, 2010 |
| ||||||||||
|
| Gain/(Loss) on |
| Gain/(Loss) on |
| Net Fair Value |
| Effect of |
| ||||
Hedged Item Type: |
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | (67,262 | ) | $ | 67,452 |
| $ | 190 |
| $ | (210,399 | ) |
Investments |
| (88,967 | ) | 88,961 |
| (6 | ) | (25,749 | ) | ||||
Deposits |
| 478 |
| (478 | ) | — |
| 790 |
| ||||
Consolidated obligations - bonds |
| 123,401 |
| (122,292 | ) | 1,109 |
| 116,647 |
| ||||
Consolidated obligations - discount notes |
| (67 | ) | 148 |
| 81 |
| 75 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | (32,417 | ) | $ | 33,791 |
| $ | 1,374 |
| $ | (118,636 | ) |
(1) The net interest on derivatives in fair-value hedge relationships is presented in the interest income/expense line item of the respective hedged item in the statement of operations.
|
| For the Six Months Ended June 30, 2009 |
| ||||||||||
|
| Gain/(Loss) on |
| Gain/(Loss) on |
| Net Fair Value |
| Effect of |
| ||||
Hedged Item Type: |
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | 320,731 |
| $ | (321,370 | ) | $ | (639 | ) | $ | (194,171 | ) |
Investments |
| 169,711 |
| (168,820 | ) | 891 |
| (22,098 | ) | ||||
Deposits |
| (1,378 | ) | 1,378 |
| — |
| 684 |
| ||||
Consolidated obligations - bonds |
| (157,322 | ) | 158,562 |
| 1,240 |
| 90,095 |
| ||||
Consolidated obligations - discount notes |
| 2,257 |
| (4,973 | ) | (2,716 | ) | 3,727 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 333,999 |
| $ | (335,223 | ) | $ | (1,224 | ) | $ | (121,763 | ) |
(1) The net interest on derivatives in fair-value hedge relationships is presented in the interest income/expense line item of the respective hedged item in the statement of operations.
The following table presents the fair value of derivative instruments as of June 30, 2010 (dollars in thousands):
|
| Notional |
| Derivative |
| Derivative |
| |||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
| |||
Interest-rate swaps |
| $ | 26,405,208 |
| $ | 299,417 |
| $ | (1,099,411 | ) |
|
|
|
|
|
|
|
| |||
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
| |||
Interest-rate swaps |
| 305,250 |
| — |
| (18,665 | ) | |||
Interest-rate caps and floors |
| 16,500 |
| 302 |
| (228 | ) | |||
Mortgage-delivery commitments (1) |
| 19,765 |
| 255 |
| — |
| |||
Total derivatives not designated as hedging instruments |
| 341,515 |
| 557 |
| (18,893 | ) | |||
|
|
|
|
|
|
|
| |||
Total notional amount of derivatives |
| $ | 26,746,723 |
|
|
|
|
| ||
|
|
|
|
|
|
|
| |||
Total derivatives before netting and collateral adjustments |
|
|
| 299,974 |
| (1,118,304 | ) | |||
|
|
|
|
|
|
|
| |||
Netting adjustments |
|
|
| (268,386 | ) | 268,386 |
| |||
Cash collateral and related accrued interest |
|
|
| (9,201 | ) | — |
| |||
Total collateral and netting adjustments (2) |
|
|
| (277,587 | ) | 268,386 |
| |||
|
|
|
|
|
|
|
| |||
Derivative assets and derivative liabilities |
|
|
| $ | 22,387 |
| $ | (849,918 | ) |
(1) Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2) Amounts represent the effect of legally enforceable master-netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with counterparties.
The following table presents the fair value of derivative instruments as of December 31, 2009 (dollars in thousands):
|
| Notional |
| Derivative |
| Derivative |
| |||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
| |||
Interest-rate swaps |
| $ | 27,476,915 |
| $ | 240,495 |
| $ | (978,860 | ) |
|
|
|
|
|
|
|
| |||
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
| |||
Interest-rate swaps |
| 178,250 |
| 2,417 |
| (6,007 | ) | |||
Interest-rate caps and floors |
| 16,500 |
| 390 |
| (279 | ) | |||
Mortgage-delivery commitments (1) |
| 3,706 |
| — |
| (31 | ) | |||
Total derivatives not designated as hedging instruments |
| 198,456 |
| 2,807 |
| (6,317 | ) | |||
|
|
|
|
|
|
|
| |||
Total notional amount of derivatives |
| $ | 27,675,371 |
|
|
|
|
| ||
|
|
|
|
|
|
|
| |||
Total derivatives before netting and collateral adjustments |
|
|
| 243,302 |
| (985,177 | ) | |||
|
|
|
|
|
|
|
| |||
Netting adjustments |
|
|
| (216,868 | ) | 216,868 |
| |||
Cash collateral and related accrued interest |
|
|
| (9,631 | ) | — |
| |||
Total collateral and netting adjustments (2) |
|
|
| (226,499 | ) | 216,868 |
| |||
|
|
|
|
|
|
|
| |||
Derivative assets and derivative liabilities |
|
|
| $ | 16,803 |
| $ | (768,309 | ) |
(1) Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2) Amounts represent the effect of legally enforceable master-netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with counterparties.
Credit Risk. At June 30, 2010, and December 31, 2009, the Bank’s credit risk on derivatives as measured by current replacement cost net of cash collateral received and accrued interest was approximately $22.4 million and $16.8 million, respectively. These totals include $11.6 million and $9.4 million of net accrued interest receivable, respectively. In determining current replacement cost, the Bank considers accrued interest receivable and payable, and the legal right to offset derivative assets and liabilities by counterparty. The Bank held cash of $9.2 million and $9.6 million as collateral as of June 30, 2010, and December 31, 2009, respectively.
All of the Bank’s active derivative master agreements 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, we 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 at June 30, 2010, was $849.9 million for which the Bank has posted collateral with a post-haircut value of $503.5 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 $286.4 million of post-haircut-valued collateral to our derivatives counterparties at June 30, 2010. 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 Service (Moody’s) at the time of the transaction. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 10 — Consolidated Obligations for additional information. Note 16 — 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.
Related-Party Activities. The following table presents an analysis of outstanding derivative contracts with affiliates of related parties at June 30, 2010, and December 31, 2009 (dollars in thousands):
|
|
|
|
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Derivatives Counterparty |
| Affiliate Member |
| Primary |
| Notional |
| Percent of |
| Notional |
| Percent of |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Bank of America, N.A. |
| Bank of America Rhode Island, N.A. |
| Dealer |
| $ | 1,440,555 |
| 5.39 | % | $ | 3,068,404 |
| 11.09 | % |
Royal Bank of Scotland, PLC |
| RBS Citizens, N.A. |
| Dealer |
| 899,300 |
| 3.36 |
| 985,260 |
| 3.56 |
| ||
(1) The percent of total derivatives outstanding is based on the stated notional amount of all derivative contracts outstanding.
Note 9 — 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.
The following table details interest-bearing and non-interest-bearing deposits as of June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| June 30, |
| December 31, |
| ||
Interest bearing |
|
|
|
|
| ||
Demand and overnight |
| $ | 730,095 |
| $ | 720,893 |
|
Term |
| 29,527 |
| 30,191 |
| ||
Other |
| 4,357 |
| 3,892 |
| ||
Non-interest bearing |
|
|
|
|
| ||
Other |
| 16,317 |
| 17,481 |
| ||
|
|
|
|
|
| ||
Total deposits |
| $ | 780,296 |
| $ | 772,457 |
|
Note 10 — Consolidated Obligations
COs consist of CO bonds and CO discount notes. The FHLBanks issue COs through the Office of Finance, which serves as their fiscal agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of COs for which it is the primary obligor.
The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. 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 upon maturity.
Interest-Rate-Payment Terms. The following table details CO bonds by interest-rate-payment type at June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| June 30, |
| December 31, |
| ||
Par value of CO bonds |
|
|
|
|
| ||
Fixed-rate |
| $ | 28,405,180 |
| $ | 28,515,040 |
|
Simple variable-rate |
| 8,015,000 |
| 5,537,000 |
| ||
Step-up |
| 1,376,000 |
| 1,115,250 |
| ||
Zero-coupon |
| 200,000 |
| 450,000 |
| ||
|
|
|
|
|
| ||
Total par value |
| $ | 37,996,180 |
| $ | 35,617,290 |
|
Redemption Terms. The following is a summary of the Bank’s participation in CO bonds outstanding at June 30, 2010, and December 31, 2009, by year of contractual maturity (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
|
|
| Weighted |
|
|
| Weighted |
| ||
|
|
|
| Average |
|
|
| Average |
| ||
Year of Contractual Maturity |
| Amount |
| Rate |
| Amount |
| Rate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Due in one year or less |
| $ | 13,446,500 |
| 1.32 | % | $ | 15,707,110 |
| 1.45 | % |
Due after one year through two years |
| 9,350,750 |
| 1.13 |
| 6,901,350 |
| 1.84 |
| ||
Due after two years through three years |
| 6,317,180 |
| 2.44 |
| 4,230,580 |
| 2.61 |
| ||
Due after three years through four years |
| 2,396,050 |
| 3.07 |
| 2,971,750 |
| 3.36 |
| ||
Due after four years through five years |
| 2,643,000 |
| 2.99 |
| 1,801,800 |
| 3.17 |
| ||
Thereafter |
| 3,842,700 |
| 4.60 |
| 4,004,700 |
| 5.04 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| 37,996,180 |
| 2.02 | % | 35,617,290 |
| 2.31 | % | ||
|
|
|
|
|
|
|
|
|
| ||
Premiums |
| 97,925 |
|
|
| 85,316 |
|
|
| ||
Discounts |
| (212,152 | ) |
|
| (426,464 | ) |
|
| ||
Hedging adjustments |
| 247,877 |
|
|
| 133,005 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Total |
| $ | 38,129,830 |
|
|
| $ | 35,409,147 |
|
|
|
The Bank’s CO bonds outstanding at June 30, 2010, and December 31, 2009, included (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||
Par value of CO bonds |
|
|
|
|
| ||
Noncallable or non-putable |
| $ | 30,794,180 |
| $ | 30,266,040 |
|
Callable |
| 7,202,000 |
| 5,351,250 |
| ||
|
|
|
|
|
| ||
Total par value |
| $ | 37,996,180 |
| $ | 35,617,290 |
|
The following table summarizes CO bonds outstanding at June 30, 2010, and December 31, 2009, by year of contractual maturity or next call date (dollars in thousands):
Year of Contractual Maturity or Next Call Date |
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Due in one year or less |
| $ | 18,203,500 |
| $ | 20,768,360 |
|
Due after one year through two years |
| 8,900,750 |
| 6,156,350 |
| ||
Due after two years through three years |
| 5,596,180 |
| 3,330,580 |
| ||
Due after three years through four years |
| 1,631,050 |
| 2,390,500 |
| ||
Due after four years through five years |
| 1,617,000 |
| 751,800 |
| ||
Thereafter |
| 2,047,700 |
| 2,219,700 |
| ||
|
|
|
|
|
| ||
Total par value |
| $ | 37,996,180 |
| $ | 35,617,290 |
|
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):
|
|
|
|
|
| Weighted |
| ||
|
|
|
|
|
| Average |
| ||
|
| Book Value |
| Par Value |
| Rate (1) |
| ||
|
|
|
|
|
|
|
| ||
June 30, 2010 |
| $ | 21,635,424 |
| $ | 21,640,016 |
| 0.14 | % |
|
|
|
|
|
|
|
| ||
December 31, 2009 |
| $ | 22,277,685 |
| $ | 22,281,433 |
| 0.10 | % |
(1) The CO discount notes’ weighted-average rate represents a yield to maturity.
Note 11— 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 $92.6 million and $90.4 million at June 30, 2010, and December 31, 2009, respectively.
The following table is an analysis of the AHP liability for the six months ended June 30, 2010, and the year ended December 31, 2009, (dollars in thousands):
Roll-forward of the AHP Liability |
| For the Six Months Ended |
| For the |
| ||
|
|
|
|
|
| ||
Balance at beginning of year |
| $ | 23,994 |
| $ | 34,815 |
|
AHP expense for the period |
| 4,625 |
| — |
| ||
AHP direct grant disbursements |
| (5,347 | ) | (8,919 | ) | ||
AHP subsidy for below-market-rate advance disbursements |
| (1,229 | ) | (2,232 | ) | ||
Return of previously disbursed grants and subsidies |
| 61 |
| 113 |
| ||
Transfers from other programs |
| — |
| 217 |
| ||
|
|
|
|
|
| ||
Balance at end of the period |
| $ | 22,104 |
| $ | 23,994 |
|
Note 12 — Capital
The Bank is subject to three capital requirements under its capital structure plan and Finance Agency rules and regulations. The Bank must maintain at all times:
1. Permanent capital 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, defined as Class B stock and retained earnings, 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. At least a 4 percent total capital-to-assets ratio. Total 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. At least a 5 percent leverage capital-to-assets ratio. 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 June 30, 2010, and December 31, 2009.
Risk-Based Capital Requirements
(dollars in thousands)
|
| June 30, |
| December 31, |
| ||
Permanent capital |
|
|
|
|
| ||
Class B capital stock |
| $ | 3,658,866 |
| $ | 3,643,101 |
|
Mandatorily redeemable capital stock |
| 86,618 |
| 90,896 |
| ||
Retained earnings |
| 184,231 |
| 142,606 |
| ||
|
|
|
|
|
| ||
Total permanent capital |
| $ | 3,929,715 |
| $ | 3,876,603 |
|
|
|
|
|
|
| ||
Risk-based capital requirement |
|
|
|
|
| ||
Credit-risk capital (1) |
| $ | 625,737 |
| $ | 570,260 |
|
Market-risk capital (2) |
| 177,631 |
| 603,446 |
| ||
Operations-risk capital |
| 241,010 |
| 352,112 |
| ||
|
|
|
|
|
| ||
Total risk-based capital requirement |
| $ | 1,044,378 |
| $ | 1,525,818 |
|
|
|
|
|
|
| ||
Excess of risk-based capital requirement |
| $ | 2,885,337 |
| $ | 2,350,785 |
|
(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 non-mortgage assets, tenor or final maturity of the asset, increased by $55.5 million due to downgrades of the credit ratings of private-label MBS from December 31, 2009, to June 30, 2010.
(2) The ratio of the Bank’s market value of permanent capital to its book value of permanent capital increased from 74.8 percent at December 31, 2009, to 82.8 percent at June 30, 2010. Under Finance Agency regulations, the dollar amount by which the Bank’s market value of permanent capital is less than 85 percent of its book value of permanent capital must be added to the market-risk component of its risk-based capital requirement. This incremental risk-based capital requirement was $87.7 million and $396.0 million as of June 30, 2010, and December 31, 2009, respectively.
Capital and Leverage Ratio Requirements
(dollars in thousands)
|
| June 30, |
| December 31, |
| ||
Capital ratio |
|
|
|
|
| ||
Minimum capital (4% of total assets) |
| $ | 2,588,272 |
| $ | 2,499,480 |
|
Actual capital (capital stock plus retained earnings) |
| 3,929,715 |
| 3,876,603 |
| ||
Total assets |
| 64,706,788 |
| 62,487,000 |
| ||
Capital ratio (permanent capital as a percentage of total assets) |
| 6.1 | % | 6.2 | % | ||
|
|
|
|
|
| ||
Leverage ratio |
|
|
|
|
| ||
Minimum leverage capital (5% of total assets) |
| $ | 3,235,339 |
| $ | 3,124,350 |
|
Leverage capital (permanent capital multiplied by a 1.5 weighting factor) |
| 5,894,572 |
| 5,814,905 |
| ||
Leverage ratio (leverage capital as a percentage of total assets) |
| 9.1 | % | 9.3 | % |
Related-Party Capital Stock Holdings. The following table presents the Bank’s related party capital stock holdings (10 percent or more of the Bank’s total capital stock outstanding) at June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Name |
| Capital Stock |
| Percent |
| Capital Stock |
| Percent |
| ||
|
|
|
|
|
|
|
|
|
| ||
Bank of America Rhode Island, N.A., Providence, RI (1) |
| $ | 1,084,710 |
| 29.0 | % | $ | 1,084,710 |
| 29.0 | % |
RBS Citizens N.A., Providence, RI |
| 515,748 |
| 13.8 |
| 515,748 |
| 13.8 |
| ||
(1) Capital stock outstanding at both June 30, 2010, and December 31, 2009, includes $2.2 million held by CW Reinsurance Company, a subsidiary of Bank of America Corporation.
Note 13 — Employee Retirement Plans
Employee Retirement Plans. 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 plan covers substantially all officers and employees of the Bank. Funding and administrative costs of the Pentegra Defined Benefit Plan charged to operating expenses were $1.2 million and $777,000 for the three months ended June 30, 2010 and 2009, respectively. Funding and administrative costs of the Pentegra Defined Benefit Plan charged to operating expenses were $2.3 million and $1.5 million for the six months ended June 30, 2010 and 2009, respectively. 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.
Supplemental Retirement Benefits. The Bank also maintains a nonqualified, unfunded defined-benefit plan covering certain senior officers, as defined in the plan.
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.
In connection with the supplemental retirement and postretirement benefit plans, the Bank recorded the following amounts as of June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| Supplemental Retirement Plan |
| Postretirement Benefit Plan |
| ||||||||
|
| June 30, |
| December 31, |
| June 30, |
| December 31, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Change in benefit obligation (1) |
|
|
|
|
|
|
|
|
| ||||
Benefit obligation at beginning of year |
| $ | 5,090 |
| $ | 12,818 |
| $ | 458 |
| $ | 411 |
|
Service cost |
| 124 |
| 294 |
| 12 |
| 34 |
| ||||
Interest cost |
| 133 |
| 414 |
| 13 |
| 24 |
| ||||
Actuarial (gain) loss |
| (209 | ) | (138 | ) | (16 | ) | 4 |
| ||||
Benefits paid |
| (1,328 | ) | (8,298 | ) | (9 | ) | (15 | ) | ||||
Benefit obligation at end of period |
| 3,810 |
| 5,090 |
| 458 |
| 458 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Change in plan assets |
|
|
|
|
|
|
|
|
| ||||
Fair value of plan assets at beginning of year |
| — |
| — |
| — |
| — |
| ||||
Employer contribution |
| 1,328 |
| 8,298 |
| 9 |
| 15 |
| ||||
Benefits paid |
| (1,328 | ) | (8,298 | ) | (9 | ) | (15 | ) | ||||
Fair value of plan assets at end of period |
| — |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Funded status at end of period |
| $ | (3,810 | ) | $ | (5,090 | ) | $ | (458 | ) | $ | (458 | ) |
(1) Represents projected benefit obligation for the supplemental retirement plan and accumulated postretirement benefit obligation for the postretirement benefit plan.
The following tables present the components of net periodic benefit cost for the Bank’s supplemental retirement and postretirement benefit plans for the three and six months ended June 30, 2010 and 2009 (dollars in thousands).
|
| Supplemental Retirement Plan |
| Postretirement Benefit Plan |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 56 |
| $ | 82 |
| $ | 3 |
| $ | 17 |
|
Interest cost |
| 61 |
| 113 |
| 6 |
| 10 |
| ||||
Amortization of prior service cost |
| (5 | ) | (5 | ) | — |
| — |
| ||||
Amortization of net actuarial (gain) loss |
| (15 | ) | (88 | ) | — |
| 1 |
| ||||
Loss due to settlement of pension obligation |
| 333 |
| 1,897 |
| — |
| — |
| ||||
Net periodic benefit cost |
| $ | 430 |
| $ | 1,999 |
| $ | 9 |
| $ | 28 |
|
|
| Supplemental Retirement Plan |
| Postretirement Benefit Plan |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 124 |
| $ | 222 |
| $ | 12 |
| $ | 23 |
|
Interest cost |
| 133 |
| 313 |
| 13 |
| 16 |
| ||||
Amortization of prior service cost |
| (9 | ) | (9 | ) | — |
| — |
| ||||
Amortization of net actuarial loss |
| 33 |
| 40 |
| — |
| 2 |
| ||||
Loss due to settlement of pension obligation |
| 333 |
| 1,897 |
| — |
| — |
| ||||
Net periodic benefit cost |
| $ | 614 |
| $ | 2,463 |
| $ | 25 |
| $ | 41 |
|
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’s contributions are equal to a percentage of participants’ compensation and a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank’s matching contributions were $207,000 and $218,000 for the three months ended June 30, 2010 and 2009, respectively. The Bank’s matching contributions were $416,000 and $440,000 for the six months ended June 30, 2010 and 2009, respectively.
The Bank also maintains the Thrift Benefit Equalization Plan, a 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 contribution to these plans totaled $9,000 and $2,000 for the three months ended June 30, 2010 and 2009, respectively. The Bank’s contribution to these plans totaled $17,000 and $37,000 for the six months ended June 30, 2010 and 2009, respectively. The Bank’s obligation from this plan was $2.5 million and $2.6 million at June 30, 2010, and December 31, 2009, respectively.
Note 14 — Segment Information
As part of its method of internal reporting, the Bank analyzes its financial performance based on the net interest income of two operating segments: mortgage-loan finance and all other business activities. The products and services provided reflect the manner in which financial information is evaluated by management. The mortgage-loan-finance segment includes mortgage loans acquired through the MPF program and the related funding of those mortgage loans. Income from the mortgage-loan-finance segment is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing and hedging costs related to those assets. The remaining business segment includes products such as advances and investments and their related funding and hedging costs. Income from this segment is derived primarily from the difference, or spread, between the yield on advances and investments and the borrowing and hedging costs related to those assets. Regulatory capital is allocated to the segments based upon asset size.
The following tables present net interest income after provision for credit losses by business segment, other loss, other expense, and income (loss) before assessments for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
|
| Net Interest Income after Provision for Credit |
|
|
|
|
|
|
| ||||||||||
For the Three |
| Mortgage |
| Other |
| Total |
| Other Loss |
| Other |
| Income (Loss) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2010 |
| $ | 14,114 |
| $ | 60,291 |
| $ | 74,405 |
| $ | (34,531 | ) | $ | 14,389 |
| $ | 25,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2009 |
| $ | 18,167 |
| $ | 65,873 |
| $ | 84,040 |
| $ | (71,218 | ) | $ | 17,027 |
| $ | (4,205 | ) |
|
| Net Interest Income after Provision for Credit |
|
|
|
|
|
|
| ||||||||||
For the Six |
| Mortgage |
| Other |
| Total |
| Other Loss |
| Other |
| Income (Loss) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2010 |
| $ | 28,810 |
| $ | 113,535 |
| $ | 142,345 |
| $ | (56,830 | ) | $ | 28,859 |
| $ | 56,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2009 |
| $ | 35,292 |
| $ | 105,725 |
| $ | 141,017 |
| $ | (196,081 | ) | $ | 32,579 |
| $ | (87,643 | ) |
The following table presents total assets by business segment as of June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| Total Assets by Segment |
| |||||||
|
| Mortgage |
| Other |
| Total |
| |||
|
|
|
|
|
|
|
| |||
June 30, 2010 |
| $ | 3,336,276 |
| $ | 61,370,512 |
| $ | 64,706,788 |
|
|
|
|
|
|
|
|
| |||
December 31, 2009 |
| $ | 3,526,527 |
| $ | 58,960,473 |
| $ | 62,487,000 |
|
The following tables present average-earning assets by business segment for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
|
| Total Average-Earning Assets by Segment |
| |||||||
For the Three Months Ended June 30, |
| Mortgage |
| Other |
| Total |
| |||
|
|
|
|
|
|
|
| |||
2010 |
| $ | 3,350,600 |
| $ | 61,483,648 |
| $ | 64,834,248 |
|
|
|
|
|
|
|
|
| |||
2009 |
| $ | 3,968,246 |
| $ | 71,605,826 |
| $ | 75,574,072 |
|
|
| Total Average-Earning Assets by Segment |
| |||||||
For the Six Months Ended June 30, |
| Mortgage |
| Other |
| Total |
| |||
|
|
|
|
|
|
|
| |||
2010 |
| $ | 3,398,695 |
| $ | 61,095,762 |
| $ | 64,494,457 |
|
|
|
|
|
|
|
|
| |||
2009 |
| $ | 4,052,259 |
| $ | 73,063,769 |
| $ | 77,116,028 |
|
Note 15 — Fair Values
The carrying values and fair values of the Bank’s financial instruments at June 30, 2010, and December 31, 2009, were as follows (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
Financial instruments |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and due from banks |
| $ | 25,701 |
| $ | 25,701 |
| $ | 191,143 |
| $ | 191,143 |
|
Interest-bearing deposits |
| 69 |
| 69 |
| 81 |
| 81 |
| ||||
Securities purchased under agreements to resell |
| 3,750,000 |
| 3,749,800 |
| 1,250,000 |
| 1,249,948 |
| ||||
Federal funds sold |
| 4,545,000 |
| 4,544,958 |
| 5,676,000 |
| 5,675,885 |
| ||||
Trading securities |
| 1,881,032 |
| 1,881,032 |
| 107,338 |
| 107,338 |
| ||||
Available-for-sale securities |
| 8,202,879 |
| 8,202,879 |
| 6,486,632 |
| 6,486,632 |
| ||||
Held-to-maturity securities |
| 6,715,678 |
| 6,811,173 |
| 7,427,413 |
| 7,422,681 |
| ||||
Advances |
| 36,015,723 |
| 36,468,977 |
| 37,591,461 |
| 37,821,543 |
| ||||
Mortgage loans, net |
| 3,316,901 |
| 3,524,942 |
| 3,505,975 |
| 3,627,426 |
| ||||
Accrued interest receivable |
| 149,651 |
| 149,651 |
| 147,689 |
| 147,689 |
| ||||
Derivative assets |
| 22,387 |
| 22,387 |
| 16,803 |
| 16,803 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| (780,296 | ) | (780,122 | ) | (772,457 | ) | (772,331 | ) | ||||
Consolidated obligations: |
|
|
|
|
|
|
|
|
| ||||
Bonds |
| (38,129,830 | ) | (38,758,214 | ) | (35,409,147 | ) | (35,725,554 | ) | ||||
Discount notes |
| (21,635,424 | ) | (21,635,643 | ) | (22,277,685 | ) | (22,278,168 | ) | ||||
Mandatorily redeemable capital stock |
| (86,618 | ) | (86,618 | ) | (90,896 | ) | (90,896 | ) | ||||
Accrued interest payable |
| (147,116 | ) | (147,116 | ) | (178,121 | ) | (178,121 | ) | ||||
Derivative liabilities |
| (849,918 | ) | (849,918 | ) | (768,309 | ) | (768,309 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other: |
|
|
|
|
|
|
|
|
| ||||
Commitments to extend credit for advances |
| — |
| (171 | ) | — |
| (2,492 | ) | ||||
Standby bond-purchase agreements |
| — |
| 5,091 |
| — |
| 3,008 |
| ||||
Standby letters of credit |
| (518 | ) | (518 | ) | (845 | ) | (845 | ) | ||||
Fair-Value Methodologies and Techniques
The fair-value amounts 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 June 30, 2010, and December 31, 2009. 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.
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. During the quarter ended March 31, 2010, the Bank changed the methodology used to estimate the fair value of agency MBS and other non-MBS investment securities, except HFA obligations and certificates of deposit. This change is consistent with the change that the Bank adopted in 2009 for estimating the fair value of private-label MBS. Under the new methodology, the Bank requests prices for these investment securities 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. Prior to the quarter ended March 31, 2010, the Bank had used either a single third-party vendor, dealer quotes, or calculated the present value of expected future cash flows for estimating the fair value of these securities. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of these investment securities.
Investment Securities - Housing-Finance-Agency Obligations and Certificates of Deposit. The fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable. 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 the 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, except in cases where advances are funded by callable debt or otherwise hedged so as to be financially indifferent to prepayments, 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. Credit risk related to advances does not have an impact on the fair value of the Bank’s advances. Collateral requirements for advances provide a measure of additional credit enhancement to make credit losses remote. The Bank enjoys certain unique advantages as a creditor to its members. The Bank has the ability to establish a blanket lien on assets of members, and in the case of FDIC-insured institutions, the ability to establish priority above 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. The modeled prices start with prices for new and seasoned MBS issued by GSEs. Prices are then adjusted for 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.
Accrued Interest Receivable and Payable. The fair value is the recorded carrying value.
Derivative Assets/Liabilities — Interest-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 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 or delivered from or to the counterparty, where such legal right of offset 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 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-issued securities or cash. All of these factors serve to mitigate credit and nonperformance risk to the Bank.
Derivative Assets/Liabilities — Mortgage-Loan-Purchase Commitments. Mortgage-loan-purchase commitments are recorded as derivatives in the statement of condition. The fair values of mortgage-loan-purchase commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago, which are derived from MBS 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 non-interest selling costs. Fair values of CO bonds and CO discount notes 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). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level 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 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. 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 and HFA obligations.
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 on a Recurring Basis.
The following table presents the Bank’s assets and liabilities that are measured at fair value on the statement of condition at June 30, 2010 (dollars in thousands), by fair-value hierarchy level:
|
|
|
|
|
|
|
| Netting |
|
|
| |||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Adjustment (1) |
| Total |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Trading securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Certificates of deposit |
| $ | — |
| $ | 1,615,000 |
| $ | — |
| $ | — |
| $ | 1,615,000 |
|
U.S. government-guaranteed - residential MBS |
| — |
| 22,705 |
| — |
| — |
| 22,705 |
| |||||
Government-sponsored enterprises - residential MBS |
| — |
| 9,496 |
| — |
| — |
| 9,496 |
| |||||
Government-sponsored enterprises - commercial MBS |
| — |
| 233,831 |
| — |
| — |
| 233,831 |
| |||||
Total trading securities |
| — |
| 1,881,032 |
| — |
|
|
| 1,881,032 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Certificates of deposit |
| — |
| 1,795,000 |
| — |
| — |
| 1,795,000 |
| |||||
Supranational banks |
| — |
| 417,224 |
| — |
| — |
| 417,224 |
| |||||
Corporate bonds |
| — |
| 810,387 |
| — |
| — |
| 810,387 |
| |||||
U.S. government corporations |
| — |
| 247,015 |
| — |
| — |
| 247,015 |
| |||||
Government-sponsored enterprises |
| — |
| 3,065,439 |
| — |
| — |
| 3,065,439 |
| |||||
U.S. government guaranteed - residential MBS |
| — |
| 77,763 |
| — |
| — |
| 77,763 |
| |||||
Government-sponsored enterprises - residential MBS |
| — |
| 1,480,083 |
| — |
| — |
| 1,480,083 |
| |||||
Government-sponsored enterprises - commercial MBS |
| — |
| 309,968 |
| — |
| — |
| 309,968 |
| |||||
Total available-for-sale securities |
| — |
| 8,202,879 |
|
|
|
|
| 8,202,879 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-rate related |
| — |
| 299,719 |
| — |
| (277,587 | ) | 22,132 |
| |||||
Mortgage delivery commitments |
| — |
| 255 |
| — |
| — |
| 255 |
| |||||
Total derivative assets |
| — |
| 299,974 |
| — |
| (277,587 | ) | 22,387 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets at fair value |
| $ | — |
| $ | 10,383,885 |
| $ | — |
| $ | (277,587 | ) | $ | 10,106,298 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-rate related |
| $ | — |
| $ | (1,118,304 | ) | $ | — |
| $ | 268,386 |
| $ | (849,918 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities at fair value |
| $ | — |
| $ | (1,118,304 | ) | $ | — |
| $ | 268,386 |
| $ | (849,918 | ) |
(1) Amounts represent the effect of legally enforceable master-netting agreements that 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 June 30, 2010, totaled $9.2 million.
The following table presents the Bank’s assets and liabilities that are measured at fair value on the statement of condition at December 31, 2009 (dollars in thousands), by fair-value hierarchy level:
|
|
|
|
|
|
|
| Netting |
|
|
| |||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Adjustment (1) |
| Total |
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Trading securities |
| $ | — |
| $ | 107,338 |
| $ | — |
| $ | — |
| $ | 107,338 |
|
Available-for-sale securities |
| — |
| 6,486,632 |
| — |
| — |
| 6,486,632 |
| |||||
Derivative assets |
| — |
| 243,302 |
| — |
| (226,499 | ) | 16,803 |
| |||||
Total assets at fair value |
| $ | — |
| $ | 6,837,272 |
| $ | — |
| $ | (226,499 | ) | $ | 6,610,773 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Derivative liabilities |
| $ | — |
| $ | (985,177 | ) | $ | — |
| $ | 216,868 |
| $ | (768,309 | ) |
Total liabilities at fair value |
| $ | — |
| $ | (985,177 | ) | $ | — |
| $ | 216,868 |
| $ | (768,309 | ) |
(1) Amounts represent the effect of legally enforceable master-netting agreements that 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, 2009, totaled $9.6 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 for the quarter ended June 30, 2010.
Fair Value on a Nonrecurring Basis
Certain held-to-maturity investment securities are measured 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, when there is evidence of other-than-temporary impairment).
The following table presents the Bank’s other-than-temporarily impaired securities that were written down to fair value, for which a nonrecurring change in fair value has been recorded for the quarter ended June 30, 2010. Also displayed are investment securities that incurred an other-than-temporary impairment credit loss at June 30, 2010, but which were not adjusted to fair value because the carrying value of these securities is below fair value as of June 30, 2010 (dollars in thousands).
|
| Securities Adjusted to Fair Value |
| Securities Not Adjusted to Fair Value |
| |||||||||||||||||
|
| Carrying |
| Level 3 |
| Credit Loss |
| Carrying |
| Fair Value |
| Unrecognized |
| Credit Loss |
| |||||||
Impaired held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Private-label residential MBS |
| $ | 228,543 |
| $ | 210,377 |
| $ | (6,841 | ) | $ | 687,926 |
| $ | 762,671 |
| $ | 74,745 |
| $ | (23,602 | ) |
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. These disclosures 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 below.
Investment Securities. For the Bank’s investments carried at fair value, other than certificates of deposit, the Bank’s valuation technique incorporates prices from up to four designated third-party pricing vendors when available. 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.
· If four prices are received, the average of the middle two prices is used;
· if three prices are received, the middle price is used;
· if two prices are received, the average of the two prices is used; and
· if one price is received, it is used subject to validation as described below.
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 June 30, 2010, vendor prices were received for substantially all of the FHLBanks’ investment securities and substantially 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 June 30, 2010, fell within Level 3 of the fair-value hierarchy.
Investment Securities — Certificates of Deposit. Fair value is determined by calculating the present value of expected future cash flows, less accrued interest. The significant inputs associated with these present value calculations are a LIBOR swap curve with no spread. The fair value of certificates of deposit depends on the investment’s effective interest rate and term to maturity.
Derivative Assets/Liabilities. Fair value of derivatives is generally determined using discounted cash-flow analysis (the income approach) and comparisons to 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-related derivatives:
· LIBOR swap curve, and
· Market-based expectations of future interest-rate volatility implied from current market prices for similar options for agreements containing options, and
Mortgage delivery commitments:
· To be announced (TBA) price. Market-based prices of TBAs 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 16 — Commitments and Contingencies
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 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 June 30, 2010, 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 June 30, 2010, and December 31, 2009. The par amounts of other FHLBanks’ outstanding COs for which the Bank is jointly and severally liable aggregated to approximately $786.8 billion and $872.7 billion at June 30, 2010, and December 31, 2009, respectively. See Note 10 — Consolidated Obligations for additional information on COs.
Commitments to Extend Credit. Commitments that legally bind the Bank for additional advances totaled approximately $64.7 million and $546.6 million at June 30, 2010, and December 31, 2009, respectively.
Commitments for unused line-of-credit advances totaled approximately $1.3 billion and $1.4 billion at June 30, 2010, and December 31, 2009, respectively. Commitments 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 liquidity requirements.
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 association 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. Outstanding standby letters of credit were as follows (dollars in thousands):
|
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Outstanding notional |
| $ | 1,363,659 |
| $ | 1,093,793 |
|
Original terms |
| 1 day to 20 years |
| 29 days to 20 years |
| ||
Final expiration year |
| 2024 |
| 2024 |
| ||
Unearned fees for the value of the guarantees related to standby letters of credit entered into after 2002 are recorded in other liabilities and totaled $518,000 and $845,000 at June 30, 2010, and December 31, 2009, 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. See Note 6 — Advances for additional information.
Mortgage Loans. Commitments that obligate the Bank to purchase mortgage loans totaled $19.8 million and $3.7 million at June 30, 2010, and December 31, 2009, respectively. Commitments 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.
Standby Bond-Purchase Agreements. The Bank has entered into standby bond-purchase agreements with state-housing authorities whereby the Bank, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority’s bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bond. The standby
bond-purchase commitments entered into by the Bank expire after three years, currently no later than 2013. Total commitments for bond purchases were $560.8 million and $442.4 million at June 30, 2010, and December 31, 2009, respectively with two state-housing authorities. The fair value of standby bond-purchase agreements as of June 30, 2010, and December 31, 2009, is reported in Note 15 — Fair Values. During the six months ended June 30, 2010 and 2009, the Bank was not required to purchase any bonds under these agreements.
Counterparty Credit Exposure. 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 June 30, 2010, and December 31, 2009, the Bank had pledged as collateral securities with a carrying value, including accrued interest, of $490.8 million and $445.1 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.
Unsettled Consolidated Obligations. The Bank had $1.0 billion and $205.0 million par value of CO bonds that had traded but not settled as of June 30, 2010, and December 31, 2009, respectively. Additionally, there were no unsettled CO discount notes as of June 30, 2010. The Bank had $1.0 billion par value of CO discount notes that had been traded but not settled as of December 31, 2009.
Legal Proceedings. The Bank is subject to various 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 17 — Transactions with Related Parties and Other FHLBanks
Transactions with Related Parties. The Bank defines related parties as those members whose capital stock outstanding was in excess of 10 percent of the Bank’s total capital stock outstanding. As discussed in Note 12 — Capital, Bank of America Rhode Island, N.A. and RBS Citizens N.A. held more than 10 percent of the Bank’s total capital stock outstanding as of June 30, 2010. Advances, derivative contracts, and capital stock activity with Bank of America Rhode Island, N.A. and RBS Citizens N.A. are discussed in Notes 6 — Advances, Note 8 — Derivatives and Hedging Activities, and Note 12 — Capital.
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, if any, are included within other interest income and interest expense from other borrowings in the statements of operations.
Interest expense on borrowings from other FHLBanks for the three and six months ended June 30, 2010 and 2009, is shown in the following table, by FHLBank (dollars in thousands):
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
Interest Expense to Other FHLBanks |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
FHLBank of Cincinnati |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
|
FHLBank of San Francisco |
| 1 |
| 65 |
| 2 |
| 100 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 1 |
| $ | 65 |
| $ | 3 |
| $ | 100 |
|
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 purchased after January 1, 2004, and which remain outstanding on the Bank’s statement of condition. The Bank recorded $260,000 and $293,000 in MPF transaction-services fee expense to the FHLBank of Chicago during the three months ended June 30, 2010 and 2009, respectively, which has been recorded in the statements of operations as other expense. The Bank recorded $524,000 and $592,000 in MPF transaction-services fee expense to the FHLBank of Chicago during the six months ended June 30, 2010 and 2009, respectively.
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 meet the goals of its revised operating plan and/or 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,” “could,” “estimates,” “may,” “should,” “will,” “likely,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors of the 2009 Annual Report on Form 10-K 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 annual report include, among others, the following:
· the Bank’s projections regarding income, retained earnings, and dividend payouts;
· the Bank’s projections regarding credit losses on advances, purchased whole mortgages, and mortgage-related securities;
· the Bank’s expectations relating to future balance-sheet growth;
· the Bank’s targets under the Bank’s retained earnings plan; 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 and volatility of the residential mortgage market;
· changes in demand for Bank advances and other products resulting from changes in members’ deposit flows and credit demands or otherwise;
· the willingness of the Bank’s members to do business with the Bank despite the absence of dividend payments since fiscal year 2008 and the continuing moratorium on the repurchase of excess capital stock;
· changes in the financial health of the Bank’s members;
· insolvencies of the Bank’s members;
· increases in borrower defaults on mortgage loans and fluctuations in the housing market;
· deterioration in the loan credit performance of the Bank’s private-label MBS portfolio beyond forecasted assumptions concerning loan default rates, loss severities, and prepayment speeds resulting in the realization of additional other-than-temporary impairment charges;
· an increase in advance prepayments as a result of changes in interest rates or other factors;
· the volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security for obligations of Bank members and counterparties to interest-rate-exchange agreements and similar agreements;
· political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members, counterparties, and/or investors in the COs of the FHLBanks;
· competitive forces including, without limitation, other sources of funding available to Bank members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled employees;
· the pace of technological change and the ability of the Bank to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively;
· the loss of large members through mergers and similar activities;
· changes in investor demand for COs and/or the terms of interest-rate-exchange-agreements and similar agreements;
· the timing and volume of market activity;
· the volatility of reported results due to changes in the fair value of certain assets and liabilities, including, but not limited to, private-label MBS;
· the ability to introduce 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.
Risks and other factors could cause actual results of the Bank to differ materially from those implied by any forward-looking statements. Our risk factors are not exhaustive. The Bank operates in a changing economic and regulatory environment, and new risk factors will emerge from time to time. Management cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on the business of the Bank or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.
This 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 1, and the 2009 Annual Report on Form 10-K.
PRINCIPAL BUSINESS RELATED DEVELOPMENTS
The Bank recognized net income of $18.7 million for the three months ended June 30, 2010, versus a net loss of $4.2 million for the same period in 2009. The primary challenge for the Bank continues to be losses due to the other-than-temporary impairment of many of its investments in private-label MBS resulting in a credit loss of $30.4 million for the three months ended June 30, 2010, compared with a credit loss of $70.5 million for the comparable period of 2009. The Bank remains in compliance with all regulatory capital ratios as of June 30, 2010.
The net income increased the Bank’s retained earnings to $184.2 million at June 30, 2010. Additionally, 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 $929.5 million at December 31, 2009, to an accumulated deficit of $765.3 million at June 30, 2010. This improvement is due to accretion of the noncredit portion of impairment losses totaling $149.7 million during the six months ended June 30, 2010, and also due to a net $45.1 million reclassification of previous noncredit losses out of accumulated other comprehensive loss into credit losses during the six months ended June 30, 2010.
The credit quality of the loans underlying the Bank’s portfolio of private-label MBS continues to present the chief challenge to the Bank’s performance, as credit losses on those investments reduce net income. The portfolio remains vulnerable to the housing and capital markets, both of which have been slow to recover, and could sustain additional credit losses. Accordingly, the Bank continues to follow steps in an effort to protect its capital base and build retained earnings:
· The Bank has not declared any dividends since the fourth quarter of 2008, and the Bank’s board of directors has announced that it does not expect to declare any dividends until the Bank demonstrates a consistent pattern of positive net income as the Bank continues to focus on building retained earnings.
· The Bank’s retained earnings target is $925.0 million and the moratorium on excess stock repurchases that commenced December 8, 2008 remains in effect, each of which is discussed in — Liquidity and Capital Resources—Retained Earnings Target and Dividends.
· The Bank has implemented a revised operating plan that includes goals as to certain revenue-enhancement and expense-reduction initiatives as well as a capital use limitation, as described in greater detail in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Executive Summary — Principal Business Developments of the 2009 Annual Report on Form 10-K. Over time, the revised operating plan is expected to help restore the Bank to a position where it can once again repurchase stock, pay members a dividend, and more fully fund the AHP.
Additional information on the Bank’s principal business-related developments for the quarter ending June 30, 2010, follows:
· Investments in Private-Label MBS. Management has determined that 79 of its private-label MBS, representing an aggregated par value of $1.9 billion, incurred initial or additional other-than-temporary impairment credit losses of $30.4 million for the three months ended June 30, 2010. 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 house 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. Accordingly, the Bank has increased its projections of default rates and loss severities for the loans underlying these securities, as is described under Item 1 — Notes to the Financial Statements — Note 5 — Held-to-Maturity Securities and Critical Accounting Estimates — Other-Than-Temporary-Impairment of Securities.
· Decline in Advances Balances. The outstanding par balance of advances to members declined from $36.9 billion at December 31, 2009, to $35.3 billion at June 30, 2010. The reduction is primarily attributable to the high levels of deposits that members continue to experience relative to historical norms. Based on ongoing member feedback, the Bank expects membership demand for advances to continue to decline in the near term, particularly so long as members continue to experience high levels of deposits, which may adversely impact the Bank’s net income. Because the Bank’s expectations of advances demand are based on continuing feedback from its members, whose needs are highly variable, however, the Bank is unable to quantify its expectations for advances balances. This trend in advances balances is illustrated by the following graph of quarter-end total advances balances (dollars in billions):
· Decline in Net Interest Income. Net interest income was $74.4 million for the quarter ended June 30, 2010, compared with $84.8 million for the same period in 2009. The decrease was primarily attributable to a $10.4 billion reduction in average assets from $75.1 billion during the second quarter of 2009 to $64.7 billion during the second quarter of 2010, and reflects members’ declining needs for wholesale funding based on the high deposit levels that members continue to experience. Nonetheless, the Bank continues to achieve favorable net interest margin which mitigates to some extent the lower demand for advances. Net interest margin for the quarter ended June 30, 2010 was 0.46 percent, a one basis point increase from net interest margin for the quarter ended June 30, 2009. The essentially stable net interest spread was achieved despite the historically low-interest rate environment due in part to a steeper interest rate yield curve and continued favorable pricing of the FHLBank System’s CO debt. The steepness of the yield curve enabled the Bank to earn a higher spread on assets whose average terms to repricing were longer than those of corresponding liabilities. As described in Item 3 — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk — Income Simulation and Repricing Gaps, the Bank held $3.9 billion of assets that were deliberately funded by debt with an approximate term to maturity one year shorter than that of the asset. 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. However, in contrast to typical periods of extraordinarily low interest rates, prepayments of fixed-rate mortgages have remained relatively muted due to the inability of many homeowners to refinance mortgages because of diminished house prices and tightening credit standards.
· MPF Loan Participations with the FHLBank of Chicago. On July 31, 2010, the Bank committed until July 30, 2011 (or such later date as the Bank and the FHLBank of Chicago may agree), to purchase up to $1.5 billion of 100 percent participation interests in MPF loans purchased by the FHLBank of Chicago as part of the Bank’s revised operating plan to pursue prudent investment opportunities for the Bank. The Bank cannot predict to what extent it will satisfy the extent of its commitment
because the FHLBank of Chicago’s ability to purchase the loans to be participated is subject to market demand for MPF loans in its district.
· Financial Regulatory Reform. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was enacted, which may affect the Bank’s business operations, funding costs, obligations and/or the environment in which the Bank carries out its housing-finance mission. For additional information on the Dodd-Frank Act’s possible impact on the Bank, see —Recent Legislative and Regulatory Developments.
The following financial highlights for the statement of condition for December 31, 2009, 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.
SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
(dollars in thousands)
|
| June 30, |
| March 31, |
| December 31, 2009 |
| September 30, |
| June 30, |
| |||||
Statement of Condition Data at Quarter End |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| $ | 64,706,788 |
| $ | 61,568,720 |
| $ | 62,487,000 |
| $ | 60,448,352 |
| $ | 78,087,479 |
|
Investments (1) |
| 25,094,658 |
| 22,299,907 |
| 20,947,464 |
| 18,603,117 |
| 32,106,198 |
| |||||
Advances |
| 36,015,723 |
| 35,174,620 |
| 37,591,461 |
| 37,936,243 |
| 41,854,344 |
| |||||
Mortgage loans held for portfolio (2) |
| 3,316,901 |
| 3,392,872 |
| 3,505,975 |
| 3,644,544 |
| 3,842,604 |
| |||||
Deposits |
| 780,296 |
| 664,505 |
| 772,457 |
| 677,748 |
| 963,508 |
| |||||
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
| |||||
Bonds |
| 38,129,830 |
| 37,840,458 |
| 35,409,147 |
| 32,083,200 |
| 30,582,754 |
| |||||
Discount notes |
| 21,635,424 |
| 19,077,842 |
| 22,277,685 |
| 23,644,585 |
| 41,826,763 |
| |||||
Total consolidated obligations |
| 59,765,254 |
| 56,918,300 |
| 57,686,832 |
| 55,727,785 |
| 72,409,517 |
| |||||
Mandatorily redeemable capital stock |
| 86,618 |
| 90,803 |
| 90,896 |
| 90,886 |
| 90,886 |
| |||||
Class B capital stock outstanding — putable (3) |
| 3,658,866 |
| 3,646,201 |
| 3,643,101 |
| 3,628,894 |
| 3,615,466 |
| |||||
Retained earnings |
| 184,231 |
| 165,507 |
| 142,606 |
| 136,294 |
| 241,714 |
| |||||
Accumulated other comprehensive loss |
| (806,144 | ) | (926,733 | ) | (1,021,649 | ) | (1,142,107 | ) | (1,257,593 | ) | |||||
Total capital |
| 3,036,953 |
| 2,884,975 |
| 2,764,058 |
| 2,623,081 |
| 2,599,587 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other Information |
|
|
|
|
|
|
|
|
|
|
| |||||
Total regulatory capital ratio (4) |
| 6.1 | % | 6.3 | % | 6.2 | % | 6.4 | % | 5.1 | % | |||||
(1) Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold.
(2) The allowance for credit losses amounted to $2.5 million, $2.5 million, $2.1 million, $1.7 million, and $1.3 million, as of June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, and June 30, 2009, 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 Financial Condition — Capital regarding the Bank’s regulatory capital ratios.
SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
(dollars in thousands)
|
| For the Three Months Ended |
| |||||||||||||
|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| |||||
Results of Operations |
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income |
| $ | 74,409 |
| $ | 68,371 |
| $ | 87,978 |
| $ | 81,819 |
| $ | 84,840 |
|
Provision for credit losses |
| 4 |
| 431 |
| 450 |
| 400 |
| 800 |
| |||||
Net impairment losses on investment securities recognized in income |
| (30,443 | ) | (22,823 | ) | (72,440 | ) | (174,190 | ) | (70,526 | ) | |||||
Other (loss) income |
| (4,088 | ) | 524 |
| 5,011 |
| 1,053 |
| (692 | ) | |||||
Other expense |
| 14,389 |
| 14,470 |
| 13,787 |
| 13,702 |
| 17,027 |
| |||||
AHP and REFCorp assessments |
| 6,761 |
| 8,270 |
| — |
| — |
| — |
| |||||
Net income (loss) |
| 18,724 |
| 22,901 |
| 6,312 |
| (105,420 | ) | (4,205 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other Information |
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends declared |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Dividend payout ratio |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |||||
Return on average equity (1) |
| 2.54 | % | 3.28 | % | 0.93 | % | (15.55 | )% | (0.63 | )% | |||||
Return on average assets |
| 0.12 |
| 0.15 |
| 0.04 |
| (0.67 | ) | (0.02 | ) | |||||
Net interest margin (2) |
| 0.46 |
| 0.43 |
| 0.54 |
| 0.51 |
| 0.45 |
| |||||
Average equity to average assets |
| 4.56 |
| 4.43 |
| 4.19 |
| 4.28 |
| 3.56 |
|
(1) Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive (loss) income, and retained earnings.
(2) Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.
Second Quarter of 2010 Compared with Second Quarter of 2009. For the quarters ended June 30, 2010 and 2009, the Bank recognized net income of $18.7 million and a net loss of $4.2 million, respectively. This $22.9 million increase in net income was primarily driven by a $40.1 million decrease in other-than-temporary impairment losses of certain private-label MBS. See Primary Business Developments for additional information on the Bank’s other-than-temporary losses on these securities. In addition, net unrealized gains on trading activities increased by $8.3 million and operating expenses decreased by $2.7 million. These increases to net income were partially offset by a decrease of $10.4 million in net interest income, a $12.4 million in additional net losses on derivatives and hedging activities, and a $6.8 million increase in AHP and REFCorp assessments. AHP and REFCorp assessments are based on net income and there were no such assessments for the quarter ended June 30, 2009 due to the net loss for the quarter. For additional information on these assessments, see Liquidity and Capital Resources — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations.
Six Months Ended June 30, 2010, Compared with Six Months Ended June 30, 2009. For the six months ended June 30, 2010 and 2009, the Bank recognized net income of $41.6 million and a net loss of $87.6 million, respectively. This $129.3 million increase in net income was primarily driven by a decrease of $144.2 million in other-than-temporary impairment losses of certain private-label MBS, a $9.1 million increase in net unrealized gains on trading securities, a decrease of $4.1 million in operating expenses, and an increase of $863,000 in net interest income. These increases to net income were partially offset by an additional $15.3 million in net losses on derivatives and hedging activities and a $15.0 million increase in AHP and REFCorp assessments.
Net Interest Income
Second Quarter of 2010 Compared with Second Quarter of 2009. Net interest income for the quarter ended June 30, 2010, was $74.4 million, compared with $84.8 million for the same period in 2009, a decrease discussed under Principal Business Related Developments. Net interest margin for the quarter ended June 30, 2010 was 0.46 percent, a one basis point increase from net interest margin for the quarter ended June 30, 2009, which is discussed under —Principal Business Developments. Net interest spread for the quarter ended June 30, 2010 was 0.40 percent an increase of two basis points for the same period in 2009.
Six Months Ended June 30, 2010, Compared with Six Months Ended June 30, 2009. Net interest income for the six months ended June 30, 2010, was $142.8 million, compared with $141.9 million for the same period in 2009. This increase was primarily attributable to a decrease of 50 basis points in the average cost on interest-bearing liabilities to 0.97 percent, partially offset by a decrease of 40 basis points in the yield on interest-earning assets to 1.35 percent. Prepayment-fee income recognized during the six months ended June 30, 2010, compared with the same period in 2009, decreased by $5.5 million. Net interest margin for the six months ended June 30, 2010 in comparison with the same period in 2009 increased to 45 basis points from 37 basis points, and net interest spread increased to 38 basis points from 28 basis points for the same period in 2009.
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.
Net Interest Spread and Margin
(dollars in thousands)
|
| For the Three Months Ended June 30, |
| ||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||
|
| Average |
| Interest |
| Average |
| Average |
| Interest |
| Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | 35,640,413 |
| $ | 106,777 |
| 1.20 | % | $ | 44,610,189 |
| $ | 174,037 |
| 1.56 | % |
Interest-bearing deposits |
| 94 |
| — |
| — |
| 14,001,858 |
| 9,286 |
| 0.27 |
| ||||
Securities purchased under agreements to resell |
| 2,226,374 |
| 1,118 |
| 0.20 |
| 467,033 |
| 298 |
| 0.26 |
| ||||
Federal funds sold |
| 7,590,209 |
| 4,061 |
| 0.21 |
| 1,836,176 |
| 1,119 |
| 0.24 |
| ||||
Investment securities (2) |
| 16,026,558 |
| 66,610 |
| 1.67 |
| 10,688,449 |
| 59,129 |
| 2.22 |
| ||||
Mortgage loans |
| 3,350,600 |
| 42,246 |
| 5.06 |
| 3,968,246 |
| 49,289 |
| 4.98 |
| ||||
Other interest-earning assets |
| — |
| — |
| — |
| 2,121 |
| 1 |
| 0.19 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 64,834,248 |
| 220,812 |
| 1.37 | % | 75,574,072 |
| 293,159 |
| 1.56 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other non-interest-earning assets |
| 560,437 |
|
|
|
|
| 497,197 |
|
|
|
|
| ||||
Fair-value adjustment on investment securities |
| (716,762 | ) |
|
|
|
| (962,750 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 64,677,923 |
| $ | 220,812 |
| 1.37 | % | $ | 75,108,519 |
| $ | 293,159 |
| 1.57 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and capital |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Discount notes |
| $ | 21,528,258 |
| $ | 9,004 |
| 0.17 | % | $ | 38,899,661 |
| $ | 31,096 |
| 0.32 | % |
Bonds |
| 38,242,488 |
| 137,220 |
| 1.44 |
| 30,898,947 |
| 176,945 |
| 2.30 |
| ||||
Deposits |
| 749,150 |
| 178 |
| 0.10 |
| 841,353 |
| 212 |
| 0.10 |
| ||||
Mandatorily redeemable capital stock |
| 89,699 |
| — |
| — |
| 90,886 |
| — |
| — |
| ||||
Other borrowings |
| 1,374 |
| 1 |
| 0.29 |
| 211,198 |
| 66 |
| 0.13 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| 60,610,969 |
| 146,403 |
| 0.97 | % | 70,942,045 |
| 208,319 |
| 1.18 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other non-interest-bearing liabilities |
| 1,115,175 |
|
|
|
|
| 1,489,101 |
|
|
|
|
| ||||
Total capital |
| 2,951,779 |
|
|
|
|
| 2,677,373 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and capital |
| $ | 64,677,923 |
| $ | 146,403 |
| 0.91 | % | $ | 75,108,519 |
| $ | 208,319 |
| 1.11 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
| $ | 74,409 |
|
|
|
|
| $ | 84,840 |
|
|
| ||
Net interest spread |
|
|
|
|
| 0.40 | % |
|
|
|
| 0.38 | % | ||||
Net interest margin |
|
|
|
|
| 0.46 | % |
|
|
|
| 0.45 | % |
(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.
|
| For the Six Months Ended June 30, |
| ||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||
|
| Average |
| Interest |
| Average |
| Average |
| Interest |
| Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Advances |
| $ | 35,950,713 |
| $ | 210,279 |
| 1.18 | % | $ | 48,085,726 |
| $ | 426,221 |
| 1.79 | % |
Interest-bearing deposits |
| 96 |
| — |
| — |
| 8,518,681 |
| 10,775 |
| 0.26 |
| ||||
Securities purchased under agreements to resell |
| 1,541,989 |
| 1,402 |
| 0.18 |
| 2,574,033 |
| 3,290 |
| 0.26 |
| ||||
Federal funds sold |
| 7,581,972 |
| 6,726 |
| 0.18 |
| 3,179,983 |
| 3,527 |
| 0.22 |
| ||||
Investment securities (2) |
| 16,020,992 |
| 128,283 |
| 1.61 |
| 10,704,280 |
| 124,638 |
| 2.35 |
| ||||
Mortgage loans |
| 3,398,695 |
| 85,572 |
| 5.08 |
| 4,052,259 |
| 102,004 |
| 5.08 |
| ||||
Other interest-earning assets |
| — |
| — |
| — |
| 1,066 |
| 1 |
| 0.19 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 64,494,457 |
| 432,262 |
| 1.35 | % | 77,116,028 |
| 670,456 |
| 1.75 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other non-interest-earning assets |
| 576,773 |
|
|
|
|
| 598,088 |
|
|
|
|
| ||||
Fair-value adjustment on investment securities |
| (768,923 | ) |
|
|
|
| (576,978 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 64,302,307 |
| $ | 432,262 |
| 1.36 | % | $ | 77,137,138 |
| $ | 670,456 |
| 1.75 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and capital |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Discount notes |
| $ | 21,894,508 |
| $ | 14,731 |
| 0.14 | % | $ | 39,717,360 |
| $ | 131,494 |
| 0.67 | % |
Bonds |
| 37,568,419 |
| 274,479 |
| 1.47 |
| 31,746,019 |
| 396,489 |
| 2.52 |
| ||||
Deposits |
| 703,489 |
| 269 |
| 0.08 |
| 783,093 |
| 455 |
| 0.12 |
| ||||
Mandatorily redeemable capital stock |
| 90,254 |
| — |
| — |
| 91,387 |
| — |
| — |
| ||||
Other borrowings |
| 6,425 |
| 3 |
| 0.09 |
| 170,425 |
| 101 |
| 0.12 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| 60,263,095 |
| 289,482 |
| 0.97 | % | 72,508,284 |
| 528,539 |
| 1.47 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other non-interest-bearing liabilities |
| 1,148,187 |
|
|
|
|
| 1,565,312 |
|
|
|
|
| ||||
Total capital |
| 2,891,025 |
|
|
|
|
| 3,063,542 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and capital |
| $ | 64,302,307 |
| $ | 289,482 |
| 0.91 | % | $ | 77,137,138 |
| $ | 528,539 |
| 1.38 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
| $ | 142,780 |
|
|
|
|
| $ | 141,917 |
|
|
| ||
Net interest spread |
|
|
|
|
| 0.38 | % |
|
|
|
| 0.28 | % | ||||
Net interest margin |
|
|
|
|
| 0.45 | % |
|
|
|
| 0.37 | % |
(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 increase in net interest income is discussed in Principal Business Related Developments in this Item. The following table summarizes changes in interest income and interest expense for the three and six months ended June 30, 2010 and 2009. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
Rate and Volume Analysis
(dollars in thousands)
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||||||||
|
| Increase (decrease) due to |
| Increase (decrease) due to |
| ||||||||||||||
|
| Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total |
| ||||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Advances |
| $ | (31,224 | ) | $ | (36,036 | ) | $ | (67,260 | ) | $ | (91,980 | ) | $ | (123,962 | ) | $ | (215,942 | ) |
Interest-bearing deposits |
| (4,643 | ) | (4,643 | ) | (9,286 | ) | (5,387 | ) | (5,388 | ) | (10,775 | ) | ||||||
Securities purchased under agreements to resell |
| 896 |
| (76 | ) | 820 |
| (1,098 | ) | (790 | ) | (1,888 | ) | ||||||
Federal funds sold |
| 3,095 |
| (153 | ) | 2,942 |
| 4,028 |
| (829 | ) | 3,199 |
| ||||||
Investment securities |
| 24,628 |
| (17,147 | ) | 7,481 |
| 50,036 |
| (46,391 | ) | 3,645 |
| ||||||
Mortgage loans |
| (7,777 | ) | 734 |
| (7,043 | ) | (16,455 | ) | 23 |
| (16,432 | ) | ||||||
Other earning assets |
| (1 | ) | — |
| (1 | ) | (1 | ) | — |
| (1 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest income |
| (15,026 | ) | (57,321 | ) | (72,347 | ) | (60,857 | ) | (177,337 | ) | (238,194 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discount notes |
| (10,684 | ) | (11,408 | ) | (22,092 | ) | (42,068 | ) | (74,695 | ) | (116,763 | ) | ||||||
Bonds |
| 35,946 |
| (75,671 | ) | (39,725 | ) | 63,469 |
| (185,479 | ) | (122,010 | ) | ||||||
Deposits |
| (22 | ) | (12 | ) | (34 | ) | (43 | ) | (143 | ) | (186 | ) | ||||||
Other borrowings |
| (103 | ) | 38 |
| (65 | ) | (80 | ) | (18 | ) | (98 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest expense |
| 25,137 |
| (87,053 | ) | (61,916 | ) | 21,278 |
| (260,335 | ) | (239,057 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in net interest income |
| $ | (40,163 | ) | $ | 29,732 |
| $ | (10,431 | ) | $ | (82,135 | ) | $ | 82,998 |
| $ | 863 |
|
The average balance of total advances decreased $12.1 billion, or 25.2 percent, for the six months ended June 30, 2010, compared with the same period in 2009. The trend of decreasing member demand for advances is discussed under Principal Business Related Developments. The following table summarizes average balances of advances outstanding during the six months ending June 30, 2010 and 2009, by product type.
Average Balances of Advances Outstanding
By Product Type
(dollars in thousands)
|
| For the Six Months Ending June 30, |
| ||||
|
| 2010 |
| 2009 |
| ||
|
|
|
|
|
| ||
Overnight advances — par value |
| $ | 430,011 |
| $ | 1,161,762 |
|
|
|
|
|
|
| ||
Fixed-rate advances — par value |
|
|
|
|
| ||
Short-term |
| 9,627,994 |
| 17,655,769 |
| ||
Long-term |
| 10,869,332 |
| 12,047,783 |
| ||
Amortizing |
| 2,030,277 |
| 2,489,212 |
| ||
Putable |
| 8,095,554 |
| 9,016,596 |
| ||
Callable |
| 11,500 |
| 8,859 |
| ||
|
| 30,634,657 |
| 41,218,219 |
| ||
|
|
|
|
|
| ||
Variable-rate indexed advances — par value |
|
|
|
|
| ||
Simple variable |
| 4,196,265 |
| 4,774,652 |
| ||
LIBOR-indexed with declining-rate participation |
| 5,500 |
| 15,500 |
| ||
|
| 4,201,765 |
| 4,790,152 |
| ||
|
|
|
|
|
| ||
Total average par value |
| 35,266,433 |
| 47,170,133 |
| ||
|
|
|
|
|
| ||
Premiums and discounts |
| (345 | ) | (12,520 | ) | ||
Hedging adjustments |
| 684,625 |
| 928,113 |
| ||
|
|
|
|
|
| ||
Total average advances |
| $ | 35,950,713 |
| $ | 48,085,726 |
|
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 35.0 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 $26.2 billion for the six months ended June 30, 2010, representing 74.2 percent of the total average balance of advances outstanding during the six months ended June 30, 2010. The average balance of these advances totaled $34.2 billion for the six months ended June 30, 2009, representing 72.4 percent of the total average balance of advances outstanding during the six months ended June 30, 2009.
Included in net interest income are prepayment fees related to advances and investment securities. Prepayment fees make the Bank financially indifferent to the prepayment of advances or investments and are net of any hedging fair-value adjustments. For the six months ended June 30, 2010 and 2009, net prepayment fees on advances were $2.2 million and $7.6 million, respectively. For the six months ended June 30, 2010 and 2009, prepayment fees on investments were $31,000 and $148,000, respectively. 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 $5.1 billion, or 36.1 percent, for the six months ended June 30, 2010, from the average balances for the six months ended June 30, 2009. The lower average balances for the six months ended June 30, 2010, resulted from the decline in interest-bearing deposits with the Federal Reserve Bank of Boston of $8.5 billion. The interest-bearing deposits with the Federal Reserve Bank of Boston were substantially withdrawn after July 2, 2009, at which time the Federal Reserve Banks stopped paying interest on excess balances held by nonmember institutions in accordance with an amendment to the Federal Reserve’s Regulation D. 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. The remaining change in average short-term money-market investments resulted from a decrease of $1.0 billion in securities purchased under agreements to resell offset by a $4.4 billion increase in federal funds sold.
Average investment-securities balances increased $5.3 billion or 49.7 percent for the six months ended June 30, 2010, compared with the six months ended June 30, 2009. This increase was partially due to a $6.7 billion increase in average available-for-sale securities due to purchases of certificates of deposit, GSE debt, corporate bonds and GSE MBS. These increases were partially offset by a $1.6 billion decrease in held-to-maturity securities mainly due to a reduction in certificates of deposit.
Average mortgage-loan balances for the six months ended June 30, 2010, were $653.6 million lower than the average balance for the six months ended June 30, 2009, representing a decrease of 16.1 percent.
Overall, the yield on the mortgage-loan portfolio increased eight basis points for the quarter ended June 30, 2010, compared with the quarter ended June 30, 2009, which was attributable to a decrease in premium/discount amortization expense of $950,000, or 50.3 percent. This decrease is due to reduced prepayments in the mortgage loan portfolio.
Overall, the yield on the mortgage-loan portfolio remained consistent at 5.08 percent for the six months ended June 30, 2010 and 2009.
Composition of the Yields of Mortgage Loans
(dollars in thousands)
|
| For the Three Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| ||||||
|
| Interest |
| Average |
| Interest |
| Average |
| ||
|
|
|
|
|
|
|
|
|
| ||
Coupon accrual |
| $ | 44,044 |
| 5.27 | % | $ | 52,167 |
| 5.27 | % |
Premium/discount amortization |
| (937 | ) | (0.11 | ) | (1,887 | ) | (0.19 | ) | ||
Credit-enhancement fees |
| (861 | ) | (0.10 | ) | (991 | ) | (0.10 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
Total interest income |
| $ | 42,246 |
| 5.06 | % | $ | 49,289 |
| 4.98 | % |
|
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| ||||||
|
| Interest |
| Average |
| Interest |
| Average |
| ||
|
|
|
|
|
|
|
|
|
| ||
Coupon accrual |
| $ | 89,151 |
| 5.29 | % | $ | 107,371 |
| 5.34 | % |
Premium/discount amortization |
| (1,841 | ) | (0.11 | ) | (3,277 | ) | (0.16 | ) | ||
Credit-enhancement fees |
| (1,738 | ) | (0.10 | ) | (2,090 | ) | (0.10 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
Total interest income |
| $ | 85,572 |
| 5.08 | % | $ | 102,004 |
| 5.08 | % |
(1) Yields are annualized.
Average CO balances decreased $12.0 billion, or 16.8 percent, from the six months ended June 30, 2009, to the same period in 2010, based on the Bank’s reduced funding needs due to the decline in member demand for advances, as discussed under Principal Business Related Developments in this Item. This overall decline consisted of a decrease of $17.8 billion in CO discount notes and an increase of $5.8 billion in CO bonds.
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. The Bank generally utilizes derivative instruments that qualify for hedge accounting as an interest-rate-risk-management tool. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of the Bank’s risk-management strategy. The following table provides a summary of the impact of derivative instruments on interest income and interest expense.
Impact of Derivatives on Gross Interest Income and Gross Interest Expense
(dollars in thousands)
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross interest income before effect of derivatives |
| $ | 333,863 |
| $ | 411,322 |
| $ | 668,410 |
| $ | 886,725 |
|
Net interest adjustment for derivatives |
| (113,051 | ) | (118,163 | ) | (236,148 | ) | (216,269 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest income reported |
| $ | 220,812 |
| $ | 293,159 |
| $ | 432,262 |
| $ | 670,456 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross interest expense before effect of derivatives |
| $ | 202,788 |
| $ | 254,505 |
| $ | 406,994 |
| $ | 623,045 |
|
Net interest adjustment for derivatives |
| (56,385 | ) | (46,186 | ) | (117,512 | ) | (94,506 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest expense reported |
| $ | 146,403 |
| $ | 208,319 |
| $ | 289,482 |
| $ | 528,539 |
|
Net interest margin for the quarters ended June 30, 2010 and 2009, was 0.46 percent and 0.45 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 0.81 percent and 0.83 percent, respectively.
Net interest margin for the six months ended June 30, 2010 and 2009, was 0.45 percent and 0.37 percent, respectively. If derivative instruments had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.82 percent and 0.69 percent, respectively.
Interest paid and received on interest-rate-exchange agreements that are used by the Bank in its asset and liability management, but which do not meet hedge-accounting requirements (economic hedges), are classified as net gain (loss) on derivatives and hedging activities in other income. As shown in the Other Income (Loss) and Operating Expenses section below, interest accruals on derivatives classified as economic hedges totaled a net expense of $2.6 million and $992,000 for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, interest accruals on derivatives classified as economic hedges totaled a net expense of $4.5 million and $1.8 million, respectively.
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 and six months ended June 30, 2010 and 2009. Additionally, detail on the components of net gain (loss) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
Other Income (Loss)
(dollars in thousands)
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
(Losses) gains on derivatives and hedging activities: |
|
|
|
|
|
|
|
|
| ||||
Net gains (losses) related to fair-value hedge ineffectiveness |
| $ | 452 |
| $ | (1,689 | ) | $ | 1,374 |
| $ | (1,224 | ) |
Net unrealized (losses) gains related to derivatives not receiving hedge accounting associated with: |
|
|
|
|
|
|
|
|
| ||||
Advances |
| 494 |
| 626 |
| 619 |
| 768 |
| ||||
Trading securities |
| (13,565 | ) | 509 |
| (15,617 | ) | 729 |
| ||||
Mortgage delivery commitments |
| 712 |
| (471 | ) | 863 |
| (464 | ) | ||||
Net interest accruals related to derivatives not receiving hedge accounting |
| (2,550 | ) | (992 | ) | (4,528 | ) | (1,802 | ) | ||||
Net losses on derivatives and hedging activities |
| (14,457 | ) | (2,017 | ) | (17,289 | ) | (1,993 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net impairment losses on investment securities recognized in income |
| (30,443 | ) | (70,526 | ) | (53,266 | ) | (197,438 | ) | ||||
Service-fee income |
| 1,702 |
| 889 |
| 3,146 |
| 1,825 |
| ||||
Net unrealized gains on trading securities |
| 8,595 |
| 292 |
| 10,441 |
| 1,388 |
| ||||
Other |
| 72 |
| 144 |
| 138 |
| 137 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total other loss |
| $ | (34,531 | ) | $ | (71,218 | ) | $ | (56,830 | ) | $ | (196,081 | ) |
As noted in the Other Income (Loss) table above, accounting for derivatives and hedged items introduces the potential for
considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.
During the quarter ended June 30, 2010, it was determined that 79 of the Bank’s 213 held-to-maturity private-label MBS, representing an aggregated par value of $1.9 billion as of June 30, 2010, incurred an other-than-temporary impairment credit loss, as compared to 84 securities with an aggregate par value of $2.3 billion as of June 30, 2009.
The following table displays the Bank’s held-to-maturity securities for which other-than-temporary impairment was recognized in the quarter ending June 30, 2010, based on the Bank’s impairment analysis of its investment portfolio (dollars in thousands). Securities are classified in the table below based on the classification at the time of issuance.
|
| At June 30, 2010 |
| For the Three Months |
| |||||||||||
Other-Than-Temporarily Impaired Investment: |
| Par Value |
| Amortized |
| Carrying |
| Fair Value |
| Other-than-Temporary |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Private-label residential MBS — Prime |
| $ | 69,403 |
| $ | 65,435 |
| $ | 42,808 |
| $ | 46,367 |
| $ | (1,173 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Private-label residential MBS — Alt-A |
| 1,823,831 |
| 1,426,359 |
| 855,495 |
| 926,681 |
| (29,270 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total other-than-temporarily impaired securities |
| $ | 1,893,234 |
| $ | 1,491,794 |
| $ | 898,303 |
| $ | 973,048 |
| $ | (30,443 | ) |
See Item 1 —Financial Notes—Note 5 — Held to Maturity Investments and Item 3 — Quantitative and Qualitative Disclosures about Market Risk — Credit Risk — Investments 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 loss. For the quarters ended June 30, 2010 and 2009, the Bank recorded net unrealized gains on trading securities of $8.6 million and $292,000, respectively. The majority of the unrealized gains recorded in the three months ended June 30, 2010 are attributable to fixed rate agency commercial MBS that were purchased in late 2009 and early 2010. These securities are economically hedged with interest-rate-exchange agreements that do not qualify for hedge accounting, but are documented hedging strategies under the Bank’s risk-management program. Changes in the fair value of these economic hedges are recorded in current-period earnings and amounted to a net loss of $13.6 million and a net gain of $509,000 for the quarters ended June 30, 2010 and 2009, respectively. Long-term interest yields generally declined during the quarter ended June 30, 2010, but different sectors of the market experienced different magnitudes of decline during the quarter. Specifically, during the quarter ended June 30, 2010, the yields used to value the fixed-rate commercial MBS declined approximately 30 basis points less than the yields used to value the interest rate swaps that were economically designated as hedges for these securities. The disparity in yield behavior resulted in unrealized losses on the interest-rate-exchange agreements that exceeded the unrealized gains on the agency securities. This relative widening of spreads between the two interest-rate curves was caused by an increase in the supply of agency MBS securities during the quarter, as well as concerns that the Greek debt crisis could spread to other countries which in turn caused investors to sell long maturity assets. Also included in other loss are interest accruals on these economic hedges, for which the combined, net result for this portfolio is an overall net expense of $1.9 million and $296,000 for the quarters ended June 30, 2010 and 2009, respectively.
For the six months ended June 30, 2010 and 2009, the Bank recorded net unrealized gains on trading securities of $10.4 million and $1.4 million, respectively. Changes in the fair value of the associated economic hedges amounted to a net loss of $15.6 million and a net gain of $729,000 for the six months ended June 30, 2010 and 2009, respectively. This increase in net loss is due to the activity in the second quarter of 2010, as described in the previous paragraph. Also included in other income (loss) are interest accruals on these economic hedges, which resulted in a net expense of $3.2 million and $587,000 for the six months ended June 30, 2010 and 2009, respectively.
Operating expenses for the three months and six months ended June 30, 2010 and 2009, are summarized in the following table:
Operating Expenses
(dollars in thousands)
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Compensation and benefits |
| $ | 7,923 |
| $ | 9,784 |
| $ | 15,973 |
| $ | 18,599 |
|
Occupancy costs |
| 1,007 |
| 1,101 |
| 2,092 |
| 2,185 |
| ||||
Other operating expenses |
| 3,656 |
| 4,424 |
| 6,896 |
| 8,255 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total operating expenses |
| $ | 12,586 |
| $ | 15,309 |
| $ | 24,961 |
| $ | 29,039 |
|
|
|
|
|
|
|
|
|
|
| ||||
Annualized ratio of operating expenses to average assets |
| 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % |
Second Quarter of 2010 Compared with Second Quarter of 2009. For the quarter ended June 30, 2010, total operating expenses decreased $2.7 million from the same period in 2009. This decrease was mainly due to a $1.9 million decrease in compensation and benefits and a $768,000 decrease in other operating expenses. The $1.9 million decrease in compensation and benefits is due primarily to decreases of $920,000 in compensation expenses and $1.2 million in employee benefits which are mainly attributable to the April 2009 retirement of the Bank’s former chief executive officer and approximately a 10 percent reduction in staff positions in 2009.
The $768,000 decrease in other operating expenses was primarily due to a decline of $414,000 in professional service fees, a $142,000 decrease in contractual services, and a $115,000 decline in director fees.
The Bank, together with the other FHLBanks, is charged for the cost of operating the Finance Agency and the Office of Finance. The Finance Agency’s operating costs are also shared by Fannie Mae and Freddie Mac, and the Housing and Economic Recovery Act of 2008 prohibits assessments on the FHLBanks for such costs in excess of the costs and expenses related to the FHLBanks. These expenses totaled $1.5 million and $1.4 million for the quarters ended June 30, 2010 and 2009, respectively, and are included in other expense.
Six Months Ended June 30, 2010, Compared with Six Months Ended June 30, 2009. For the six months ended June 30, 2010, total operating expenses decreased $4.1 million from the same period in 2009. This decrease was mainly due to a $2.6 million decrease in compensation and benefits and a $1.4 million decrease in other operating expenses. The $2.6 million decrease in compensation and benefits is due primarily to decreases of $1.5 million in compensation expenses and $1.1 million in employee benefits, which are mainly attributable to the April 2009 retirement of the Bank’s former chief executive officer and approximately a 10 percent reduction in staff positions in 2009.
The $1.4 million decrease in other operating expenses was primarily due to a decline $612,000 in professional service fees, a decrease of $194,000 in employee search fees as the Bank was in the process of hiring a chief executive officer during the first half of 2009, and a $179,000 decrease in contractual services.
The Finance Agency’s operating costs allocated to the Bank totaled $3.3 million and $2.9 million for the six months ended June 30, 2010 and 2009, respectively.
Advances
At June 30, 2010, the advances portfolio totaled $36.0 billion, a decrease of $1.6 billion compared with a total of $37.6 billion at December 31, 2009. This overall decrease consisted of a $2.3 billion decline in fixed-rate advances, and a $139.4 million decrease in overnight advances, offset somewhat by a $771.5 million increase in variable-rate advances. See the Principal Business Related Developments section in this Item for additional information regarding the decline in advances.
The following table summarizes advances outstanding by product type at June 30, 2010, and December 31, 2009.
Advances Outstanding by Product Type
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
|
|
| Percent of |
|
|
| Percent of |
| ||
|
| Par Value |
| Total |
| Par Value |
| Total |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overnight advances |
| $ | 443,840 |
| 1.3 | % | $ | 583,224 |
| 1.6 | % |
|
|
|
|
|
|
|
|
|
| ||
Fixed-rate advances |
|
|
|
|
|
|
|
|
| ||
Long-term |
| 11,153,735 |
| 31.6 |
| 10,734,687 |
| 29.1 |
| ||
Short-term |
| 9,553,233 |
| 27.1 |
| 11,392,788 |
| 30.8 |
| ||
Putable |
| 7,788,825 |
| 22.1 |
| 8,445,575 |
| 22.9 |
| ||
Amortizing |
| 1,961,884 |
| 5.6 |
| 2,169,034 |
| 5.9 |
| ||
Callable |
| 11,500 |
| — |
| 11,500 |
| — |
| ||
|
| 30,469,177 |
| 86.4 |
| 32,753,584 |
| 88.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Variable-rate advances |
|
|
|
|
|
|
|
|
| ||
Simple variable |
| 4,352,500 |
| 12.3 |
| 3,581,000 |
| 9.7 |
| ||
LIBOR-indexed with declining-rate participation |
| 5,500 |
| — |
| 5,500 |
| — |
| ||
|
| 4,358,000 |
| 12.3 |
| 3,586,500 |
| 9.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| $ | 35,271,017 |
| 100.0 | % | $ | 36,923,308 |
| 100.0 | % |
See Item 1 — Notes to the Financial Statements — Note 6 — Advances for disclosures relating to redemption terms of the portfolio.
The Bank lends to member financial institutions chartered within the six New England states. Advances are diversified across the Bank’s member institutions. At June 30, 2010, the Bank had advances outstanding to 340, or 73.9 percent, of its 460 members. At December 31, 2009, the Bank had advances outstanding to 351, or 76.0 percent, of its 462 members.
Top Five Advance-Holding Members
(dollars in thousands)
|
|
|
|
|
| As of June 30, 2010 |
| Advances Interest Income for the |
| |||||||||
|
|
|
|
|
| Par Value of |
| Percent of |
| Weighted- |
| Three |
| Six |
| |||
Name |
| City |
| State |
| Advances |
| Advances |
| Rate (1) |
| June 30, 2010 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
RBS Citizens, N.A. |
| Providence |
| RI |
| $ | 8,888,585 |
| 25.2 | % | 0.37 | % | $ | 8,577 |
| $ | 15,802 |
|
Bank of America Rhode Island, N.A |
| Providence |
| RI |
| 4,897,389 |
| 13.9 |
| 0.71 |
| 7,339 |
| 12,496 |
| |||
NewAlliance Bank |
| New Haven |
| CT |
| 1,898,178 |
| 5.4 |
| 3.35 |
| 16,606 |
| 34,417 |
| |||
Webster Bank, N.A. |
| Waterbury |
| CT |
| 626,852 |
| 1.8 |
| 2.83 |
| 4,443 |
| 8,948 |
| |||
Salem Five Cents Savings Bank |
| Salem |
| MA |
| 623,120 |
| 1.8 |
| 4.13 |
| 6,754 |
| 13,498 |
| |||
(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.
Investments
At June 30, 2010, investment securities and short-term money-market instruments totaled $25.1 billion, compared with $20.9 billion at December 31, 2009. Under the Bank’s pre-existing authority to purchase MBS, additional investments in MBS and certain securities issued by the Small Business Administration (SBA) are prohibited if the Bank’s investments in such securities exceed 300 percent of capital as measured at the previous month-end. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. At June 30, 2010, and December 31, 2009, the Bank’s MBS and SBA holdings represented 217 percent and 207 percent of capital, respectively.
Investment securities totaled $16.8 billion at June 30, 2010, compared with $14.0 billion at December 31, 2009. This $2.8 billion increase primarily consisted of the following:
· An increase of $1.8 billion in trading securities, principally resulting from a $1.6 billion increase in certificates of deposit; and
· An increase of $1.7 billion in available-for-sale securities, resulting primarily from a $1.3 billion increase in GSE debt and a $976.7 million increase in GSE MBS, slightly offset by an $805.0 million decrease in certificates of deposit.
Short-term money-market investments totaled $8.3 billion compared to $6.9 billion at December 31, 2009. This $1.4 billion increase resulted from a $2.5 billion increase in securities purchased under agreements to resell and a $1.1 billion decrease in federal funds sold.
The following tables provide a summary of the Bank’s held-to-maturity securities, available for sale securities, and trading securities.
Investment Securities Classified as Held-to-Maturity
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||||||||
|
| Amortized |
| Carrying |
| Fair |
| Amortized |
| Carrying |
| Fair |
| ||||||
|
| Cost |
| Value |
| Value |
| Cost |
| Value |
| Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. agency obligations |
| $ | 27,853 |
| $ | 27,853 |
| $ | 30,263 |
| $ | 30,801 |
| $ | 30,801 |
| $ | 33,061 |
|
State or local housing-finance-agency obligations |
| 238,635 |
| 238,635 |
| 191,748 |
| 246,257 |
| 246,257 |
| 215,130 |
| ||||||
Government-sponsored enterprises |
| 73,437 |
| 73,437 |
| 75,168 |
| 18,897 |
| 18,897 |
| 18,597 |
| ||||||
|
| 339,925 |
| 339,925 |
| 297,179 |
| 295,955 |
| 295,955 |
| 266,788 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government guaranteed - residential |
| 80,041 |
| 80,041 |
| 81,198 |
| 98,610 |
| 98,610 |
| 98,397 |
| ||||||
Government-sponsored enterprises - residential |
| 3,118,021 |
| 3,118,021 |
| 3,206,519 |
| 3,766,047 |
| 3,766,047 |
| 3,815,958 |
| ||||||
Government-sponsored enterprises - commercial |
| 1,178,011 |
| 1,178,011 |
| 1,267,393 |
| 1,106,319 |
| 1,106,319 |
| 1,171,965 |
| ||||||
Private-label - residential |
| 2,615,922 |
| 1,851,485 |
| 1,820,019 |
| 2,926,608 |
| 1,998,076 |
| 1,920,336 |
| ||||||
Private-label - commercial |
| 119,046 |
| 119,046 |
| 117,864 |
| 132,405 |
| 132,405 |
| 127,935 |
| ||||||
ABS backed by home equity loans |
| 29,970 |
| 29,149 |
| 21,001 |
| 30,977 |
| 30,001 |
| 21,302 |
| ||||||
|
| 7,141,011 |
| 6,375,753 |
| 6,513,994 |
| 8,060,966 |
| 7,131,458 |
| 7,155,893 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 7,480,936 |
| $ | 6,715,678 |
| $ | 6,811,173 |
| $ | 8,356,921 |
| $ | 7,427,413 |
| $ | 7,422,681 |
|
Investment Securities Classified as Available-for-Sale
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| ||||
|
| Cost |
| Value |
| Cost |
| Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Certificates of deposit |
| $ | 1,795,000 |
| $ | 1,795,000 |
| $ | 2,600,000 |
| $ | 2,600,000 |
|
Supranational banks |
| 458,420 |
| 417,224 |
| 415,744 |
| 381,011 |
| ||||
Corporate bonds |
| 804,040 |
| 810,387 |
| 702,754 |
| 701,779 |
| ||||
U.S. government corporations |
| 286,984 |
| 247,015 |
| 253,009 |
| 221,502 |
| ||||
Government-sponsored enterprises |
| 3,035,312 |
| 3,065,439 |
| 1,772,115 |
| 1,752,319 |
| ||||
|
| 6,379,756 |
| 6,335,065 |
| 5,743,622 |
| 5,656,611 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
| ||||
U.S. government guaranteed - residential |
| 77,415 |
| 77,763 |
| 16,551 |
| 16,704 |
| ||||
Government-sponsored enterprises - residential |
| 1,473,352 |
| 1,480,083 |
| 503,047 |
| 503,542 |
| ||||
Government-sponsored enterprises - commercial |
| 311,752 |
| 309,968 |
| 313,472 |
| 309,775 |
| ||||
|
| 1,862,519 |
| 1,867,814 |
| 833,070 |
| 830,021 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 8,242,275 |
| $ | 8,202,879 |
| $ | 6,576,692 |
| $ | 6,486,632 |
|
Trading Securities
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||
|
|
|
|
|
| ||
Certificates of deposit |
| $ | 1,615,000 |
| $ | — |
|
|
|
|
|
|
| ||
Mortgage-backed securities |
|
|
|
|
| ||
U.S. government-guaranteed - residential |
| 22,705 |
| 23,972 |
| ||
Government-sponsored enterprises - residential |
| 9,496 |
| 10,458 |
| ||
Government-sponsored enterprises - commercial |
| 233,831 |
| 72,908 |
| ||
|
| 266,032 |
| 107,338 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 1,881,032 |
| $ | 107,338 |
|
The Bank’s MBS investment portfolio consists of the following categories of securities as of June 30, 2010, and December 31, 2009. The percentages in the table below are based on carrying value.
Mortgage-Backed Securities
|
| June 30, |
| December 31, |
|
U.S. government-guaranteed and GSE residential mortgage-backed securities |
| 56.3 | % | 54.8 | % |
GSE commercial mortgage-backed securities |
| 20.2 |
| 18.4 |
|
Private-label residential mortgage-backed securities |
| 21.8 |
| 24.8 |
|
Private-label commercial mortgage-backed securities |
| 1.4 |
| 1.6 |
|
Home-equity loans |
| 0.3 |
| 0.4 |
|
|
|
|
|
|
|
Total mortgage-backed securities |
| 100.0 | % | 100.0 | % |
Mortgage Loans
Mortgage loans as of June 30, 2010, totaled $3.3 billion, a decrease of $189.1 million from the December 31, 2009, balance of $3.5 billion. This decrease is partially the result of the competitive impact of a Federal Reserve Board agency MBS purchase program contributing to the ability of Fannie Mae and Freddie Mac to offer low mortgage rates. Comparative MPF mortgage rates, which are a function of the FHLBank debt issuance costs, were not as competitive from time to time during the period covered by this report. In addition, increased deposits at Bank members have contributed to members holding more mortgages in their portfolios rather than selling them to the Bank under the MPF program.
The FHLBank of Chicago, which acts as the MPF Provider and provides operational support to the FHLBanks participating in the MPF program (MPF Banks) and their participating financial institution members (PFIs), calculates and publishes daily prices, rates, and fees associated with the various MPF products. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans in the 2009 Annual Report on Form 10-K for additional information regarding the Bank’s relationship with the FHLBank of Chicago as MPF Provider.
The following table presents purchases of mortgage loans during the six months ended June 30, 2010 and 2009 (dollars in thousands):
|
| For the Six Months Ended |
| ||||
|
| 2010 |
| 2009 |
| ||
|
|
|
|
|
| ||
Conventional loans |
|
|
|
|
| ||
Original MPF |
| $ | 105,109 |
| $ | 224,730 |
|
MPF 125 |
| 245 |
| 3,723 |
| ||
Total conventional loans |
| 105,354 |
| 228,453 |
| ||
|
|
|
|
|
| ||
Government-insured or guaranteed loans |
|
|
|
|
| ||
MPF Government |
| 19,415 |
| 10,014 |
| ||
|
|
|
|
|
| ||
Total par value |
| $ | 124,769 |
| $ | 238,467 |
|
Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $2.5 million and $2.1 million at June 30, 2010, and December 31, 2009, respectively. This increase in allowance is due to the continued deterioration in general economic and labor market conditions and the ongoing decline in house prices nationwide, which has resulted in a trend of increasing delinquencies in the mortgage portfolio. See Item 7 — Critical Accounting Estimates — Allowance for Loan Losses in the 2009 Annual Report on Form 10-K 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).
|
| June 30, |
| December 31, |
| ||
|
|
|
|
|
| ||
Total par value past due 90 days or more and still accruing interest |
| $ | 18,260 |
| $ | 19,822 |
|
|
|
|
|
|
| ||
Nonaccrual loans, par value |
| $ | 52,606 |
| $ | 44,969 |
|
|
| For the Six Months Ended June 30, |
| ||||
|
| 2010 |
| 2009 |
| ||
|
|
|
|
|
| ||
Nonaccrual loans: |
|
|
|
|
| ||
Gross amount of interest that would have been recorded based on original terms |
| $ | 1,436 |
| $ | 827 |
|
Interest actually recognized in income during the period |
| 1,355 |
| 756 |
| ||
Shortfall |
| $ | 81 |
| $ | 71 |
|
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Allowance for credit losses on mortgage loans, balance at beginning of period |
| $ | 2,500 |
| $ | 450 |
| $ | 2,100 |
| $ | 350 |
|
Charge-offs |
| (4 | ) | — |
| (35 | ) | — |
| ||||
Provision for credit losses |
| 4 |
| 800 |
| 435 |
| 900 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Allowance for credit losses on mortgage loans, balance at end of period |
| $ | 2,500 |
| $ | 1,250 |
| $ | 2,500 |
| $ | 1,250 |
|
The Bank places conventional mortgage loans on nonaccrual when the collection of the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. The Bank monitors the delinquency levels of the mortgage-loan portfolio on a monthly basis. A summary of conventional mortgage-loan delinquencies at June 30, 2010, and December 31, 2009, is provided in the following tables.
Summary of Delinquent Mortgage Loans
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
| Par Value |
| Percent of |
| Par Value |
| Percent of |
| ||
|
|
|
|
|
|
|
|
|
| ||
30 to 59 days delinquent and not in foreclosure |
| $ | 47,720 |
| 1.6 | % | $ | 49,968 |
| 1.6 | % |
60 to 89 days delinquent and not in foreclosure |
| 13,675 |
| 0.5 |
| 17,308 |
| 0.5 |
| ||
90 days or more delinquent and not in foreclosure |
| 27,347 |
| 0.9 |
| 22,861 |
| 0.7 |
| ||
In process of foreclosure |
| 25,970 |
| 0.9 |
| 22,115 |
| 0.7 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Real estate owned |
| 5,257 |
|
|
| 4,359 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Serious delinquency rate (1) |
| 1.8 | % |
|
| 1.4 | % |
|
| ||
(1) Conventional loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance.
Although the Bank’s mortgage-loan portfolio includes loans throughout the U.S., the top five states by outstanding principal balance of the conventional mortgage-loan portfolio are shown in the following table:
State Concentration by Outstanding Principal Balance
|
| June 30, |
| December 31, |
|
|
| 2010 |
| 2009 |
|
|
|
|
|
|
|
State concentration |
|
|
|
|
|
Massachusetts |
| 32 | % | 30 | % |
California |
| 15 |
| 16 |
|
Connecticut |
| 10 |
| 10 |
|
Maine |
| 5 |
| 4 |
|
New Hampshire |
| 3 |
| 3 |
|
Although delinquent loans in the Bank’s portfolio are spread throughout the U.S., the top five states by outstanding principal balance of the Bank’s holdings of conventional mortgage loans delinquent by more than 30 days are shown in the following table:
State Concentration of Delinquent Conventional Mortgage Loans
|
| June 30, |
| December 31, |
|
|
| 2010 |
| 2009 |
|
|
|
|
|
|
|
State concentration |
|
|
|
|
|
California |
| 25 | % | 25 | % |
Massachusetts |
| 21 |
| 22 |
|
Connecticut |
| 7 |
| 6 |
|
Arizona |
| 4 |
| 3 |
|
Nevada |
| 4 |
| 3 |
|
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 (9.0 percent by outstanding principal balance), but a disproportionately higher portion of the conventional portfolio delinquencies (36.7 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 June 30, 2010.
Summary of Higher-Risk Conventional Mortgage Loans
As of June 30, 2010
(dollars in thousands)
High-Risk Loan Type |
| Total Par Value |
| Percent |
| Percent |
| Percent |
| |
|
|
|
|
|
|
|
|
|
| |
Subprime loans (1) |
| $ | 238,175 |
| 6.96 | % | 2.23 | % | 6.44 | % |
High loan-to-value loans (2) |
| 27,298 |
| 3.70 |
| — |
| 12.14 |
| |
Subprime and high loan-to-value loans (3) |
| 2,992 |
| 9.08 |
| — |
| 9.62 |
| |
|
|
|
|
|
|
|
|
|
| |
Total high-risk loans |
| $ | 268,465 |
| 6.65 | % | 1.97 | % | 7.05 | % |
(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 CBSAs where the property securing the loan is located.
(3) These loans are subprime and also have a current estimated loan-to-value ratio greater than 100 percent.
The Bank’s portfolio consists solely of fixed-rate conventionally amortizing first-lien mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates.
Sale of REO Assets. During the six months ended June 30, 2010 and 2009, the Bank sold REO assets with a recorded carrying value of $4.2 million and $3.3 million, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains totaling $143,000 and $190,000 on the sale of REO assets during the six months ended June 30, 2010 and 2009, respectively. Gains and losses on the sale of REO assets are recorded in other income.
Debt Financing — Consolidated Obligations
At June 30, 2010, and December 31, 2009, outstanding COs, including both CO bonds and CO discount notes, totaled $59.8 billion and $57.7 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. In addition, to meet the needs of the Bank and of certain investors in COs, fixed-rate bonds and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, the Bank either enters into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond, or uses the bond to fund assets with characteristics similar to those of the bond.
See Item 1 — Notes to the Financial Statements — Note 10 — Consolidated Obligations for a summary of CO bonds by contractual maturity dates and call dates as of June 30, 2010, and December 31, 2009. CO bonds outstanding at June 30, 2010, and December 31,
2009, include issued callable bonds totaling $7.2 billion and $5.4 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 36.2 percent and 38.6 percent of outstanding COs at June 30, 2010, and December 31, 2009, respectively, but accounted for 97.1 percent and 98.0 percent of the proceeds from the issuance of COs during the six months ended June 30, 2010 and 2009, respectively, due, in particular, to the Bank’s frequent overnight CO discount note issuances.
See Item 1 — Notes to the Financial Statements — Note 10 — Consolidated Obligations for the book value, par value, and weighted average rate of the Bank’s participation in CO discount notes as of June 30, 2010, and December 31, 2009.
Average Consolidated Obligations Outstanding
(dollars in thousands)
|
| For the Three Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| ||||||
|
| Average |
| Yield (1) |
| Average |
| Yield (1) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overnight discount notes |
| $ | 4,279,519 |
| 0.14 | % | $ | 4,534,499 |
| 0.12 | % |
Term discount notes |
| 17,248,739 |
| 0.18 |
| 34,365,162 |
| 0.35 |
| ||
Total discount notes |
| 21,528,258 |
| 0.17 |
| 38,899,661 |
| 0.32 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Bonds |
| 38,242,488 |
| 1.44 |
| 30,898,947 |
| 2.30 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total consolidated obligations |
| $ | 59,770,746 |
| 0.98 | % | $ | 69,798,608 |
| 1.20 | % |
|
| For the Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| ||||||
|
| Average |
| Yield (1) |
| Average |
| Yield (1) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Overnight discount notes |
| $ | 4,221,154 |
| 0.11 | % | $ | 4,532,075 |
| 0.11 | % |
Term discount notes |
| 17,673,354 |
| 0.14 |
| 35,185,285 |
| 0.74 |
| ||
Total discount notes |
| 21,894,508 |
| 0.14 |
| 39,717,360 |
| 0.67 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Bonds |
| 37,568,419 |
| 1.47 |
| 31,746,019 |
| 2.52 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total consolidated obligations |
| $ | 59,462,927 |
| 0.98 | % | $ | 71,463,379 |
| 1.49 | % |
(1) Yields are annualized.
The average balances of COs for the six months ended June 30, 2010, were lower than the average balances for the same period in 2009, which is consistent with the decrease in total average assets. The average balance of term CO discount notes decreased $17.5 billion and overnight CO discount notes decreased $310.9 million for the six months ended June 30, 2010. Average balances of CO bonds increased $5.8 billion from the prior period. The average balance of CO discount notes represented approximately 36.8 percent of total average COs during the six months ended June 30, 2010, as compared with 55.6 percent of total average COs during the six months ended June 30, 2009. The average balance of bonds represented 63.2 percent and 44.4 percent of total average COs outstanding during the six months ended June 30, 2010 and 2009, respectively.
Deposits
As of June 30, 2010, deposits totaled $780.3 million compared with $772.5 million at December 31, 2009, an increase of $7.8 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 June 30, 2010, and December 31, 2009.
Term Deposits Greater than $100,000
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
|
|
|
| Weighted |
|
|
| Weighted |
| ||
|
|
|
| Average |
|
|
| Average |
| ||
Term Deposits by Maturity |
| Amount |
| Rate |
| Amount |
| Rate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Three months or less |
| $ | 500 |
| 0.30 | % | $ | 990 |
| 0.72 | % |
Over three months through six months |
| — |
| — |
| 450 |
| 0.09 |
| ||
Over six months through 12 months |
| — |
| — |
| 500 |
| 0.30 |
| ||
Greater than 12 months (1) |
| 26,250 |
| 4.19 |
| 26,250 |
| 4.19 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| $ | 26,750 |
| 4.11 | % | $ | 28,190 |
| 3.93 | % |
(1) Represents eight term deposit accounts totaling $6.3 million with maturity dates in 2011, and one term deposit totaling $20.0 million with a maturity date in 2014.
Capital
The Bank’s total GAAP capital increased $272.9 million to $3.0 billion at June 30, 2010, from $2.8 billion at December 31, 2009. The increase was attributable to the net reduction of $215.5 million to accumulated other comprehensive loss, a $41.6 million increase in retained earnings, and the purchase of $15.8 million of capital stock by members during the six months ended June 30, 2010. The reduction of accumulated other comprehensive loss was primarily attributable to the accretion of $149.7 million of non-credit losses recognized in prior periods with respect to private-label MBS deemed to be other-than-temporarily impaired, as well as net fair value gains of $50.7 million attributable to available-for-sale securities.
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 12 — 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 also described in this section.
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 the Finance Agency to determine on no less than a quarterly basis the capital classification of each FHLBank. On June 28, 2010, the Bank received notification that the Director of the Finance Agency had determined that the Bank was adequately capitalized for the quarter ended March 31, 2010. The Director of the Finance Agency has not yet notified the Bank of its capital classification for the quarter ended June 30, 2010. For more information on the Capital Rule, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislation and Regulatory Developments of the 2009 Annual Report on Form 10-K.
Internal Minimum Capital Requirements in Excess of Regulatory Requirements
In January 2010, to provide further protection for the Bank’s capital base, the Bank’s board of directors adopted a new minimum capital requirement whereby the amount of paid-in capital stock and retained earnings must exceed the sum of the Bank’s regulatory capital requirement plus its retained earnings target. As of June 30, 2010, this requirement equaled $3.5 billion, which was satisfied by the Bank’s actual regulatory capital of $3.9 billion.
Derivative Instruments
All derivative instruments are recorded on the statement of condition at fair value, and are classified as assets or liabilities according to the net fair value of derivatives aggregated by counterparty. Derivative assets’ net fair value, net of cash collateral and accrued interest, totaled $22.4 million and $16.8 million as of June 30, 2010, and December 31, 2009, respectively. Derivative liabilities’ net fair value, net of cash collateral and accrued interest, totaled $849.9 million and $768.3 million as of June 30, 2010, and December 31, 2009, 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 June 30, 2010, and December 31, 2009. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and are hedged with the benchmark interest rate. The hedge designation “economic” represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under the Bank’s risk-management policy.
Hedged Item and Hedge-Accounting Treatment
As of June 30, 2010, and December 31, 2009
(dollars in thousands)
|
|
|
|
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
|
|
|
| Hedge |
| Notional |
| Estimated |
| Notional |
| Estimated |
| ||||
Hedged Item |
| Derivative |
| Designation |
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Advances |
| Swaps |
| Fair value |
| $ | 12,015,865 |
| $ | (745,828 | ) | $ | 11,952,709 |
| $ | (678,566 | ) |
|
| Swaps |
| Economic |
| 80,250 |
| (2,539 | ) | 83,250 |
| (3,247 | ) | ||||
|
| Caps and floors |
| Economic |
| 16,500 |
| 67 |
| 16,500 |
| 103 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total associated with advances |
|
|
|
|
| 12,112,615 |
| (748,300 | ) | 12,052,459 |
| (681,710 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Available-for-sale securities |
| Swaps |
| Fair value |
| 907,131 |
| (275,516 | ) | 907,131 |
| (186,240 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trading securities |
| Swaps |
| Economic |
| 225,000 |
| (14,650 | ) | 95,000 |
| 967 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidated obligations |
| Swaps |
| Fair value |
| 13,462,212 |
| 246,309 |
| 14,597,075 |
| 130,716 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
| Swaps |
| Fair value |
| 20,000 |
| 5,224 |
| 20,000 |
| 4,745 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
| 26,726,958 |
| (786,933 | ) | 27,671,665 |
| (731,522 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage delivery commitments |
|
|
|
|
| 19,765 |
| 255 |
| 3,706 |
| (31 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivatives |
|
|
|
|
| $ | 26,746,723 |
| (786,678 | ) | $ | 27,675,371 |
| (731,553 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accrued interest |
|
|
|
|
|
|
| (31,652 | ) |
|
| (10,322 | ) | ||||
Cash collateral |
|
|
|
|
|
|
| (9,201 | ) |
|
| (9,631 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net derivatives |
|
|
|
|
|
|
| $ | (827,531 | ) |
|
| $ | (751,506 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative asset |
|
|
|
|
|
|
| $ | 22,387 |
|
|
| $ | 16,803 |
| ||
Derivative liability |
|
|
|
|
|
|
| (849,918 | ) |
|
| (768,309 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net derivatives |
|
|
|
|
|
|
| $ | (827,531 | ) |
|
| $ | (751,506 | ) |
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 $25.5 billion, representing 95.3 percent of all derivatives outstanding as of June 30, 2010. Economic hedges are not included within the four tables below.
Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of June 30, 2010
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| Weighted-Average Yield (2) |
| ||||||||||
|
| Derivatives |
| Advances |
|
|
| Derivatives |
|
|
| ||||||||||
Maturity |
| Notional |
| Fair Value |
| Hedged |
| Fair-Value |
| Advances |
| Receive |
| Pay |
| Net Receive |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 3,234,175 |
| $ | (42,682 | ) | $ | 3,234,175 |
| $ | 42,432 |
| 3.45 | % | 0.44 | % | 3.36 | % | 0.53 | % |
Due after one year through two years |
| 1,880,800 |
| (62,476 | ) | 1,880,800 |
| 62,208 |
| 3.09 |
| 0.39 |
| 3.00 |
| 0.48 |
| ||||
Due after two years through three years |
| 1,822,700 |
| (108,634 | ) | 1,822,700 |
| 108,276 |
| 3.67 |
| 0.41 |
| 3.55 |
| 0.53 |
| ||||
Due after three years through four years |
| 885,860 |
| (83,529 | ) | 885,860 |
| 83,200 |
| 4.47 |
| 0.43 |
| 4.25 |
| 0.65 |
| ||||
Due after four years through five years |
| 819,615 |
| (60,472 | ) | 819,615 |
| 60,226 |
| 3.68 |
| 0.41 |
| 3.43 |
| 0.66 |
| ||||
Thereafter |
| 3,372,715 |
| (388,035 | ) | 3,372,715 |
| 384,217 |
| 4.01 |
| 0.43 |
| 3.86 |
| 0.58 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 12,015,865 |
| $ | (745,828 | ) | $ | 12,015,865 |
| $ | 740,559 |
| 3.67 | % | 0.42 | % | 3.54 | % | 0.55 | % |
(1) The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(2) The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of June 30, 2010.
Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity or Next Put Date for Putable Advances
As of June 30, 2010
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| Weighted-Average Yield (2) |
| ||||||||||
|
| Derivatives |
| Advances |
|
|
| Derivatives |
|
|
| ||||||||||
Maturity or Next Put |
| Notional |
| Fair Value |
| Hedged Amount |
| Fair-Value |
| Advances |
| Receive |
| Pay |
| Net Receive |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 8,801,300 |
| $ | (562,182 | ) | $ | 8,801,300 |
| $ | 557,215 |
| 3.81 | % | 0.43 | % | 3.68 | % | 0.56 | % |
Due after one year through two years |
| 1,662,000 |
| (67,705 | ) | 1,662,000 |
| 67,553 |
| 2.77 |
| 0.37 |
| 2.69 |
| 0.45 |
| ||||
Due after two years through three years |
| 847,000 |
| (59,201 | ) | 847,000 |
| 59,163 |
| 3.71 |
| 0.41 |
| 3.58 |
| 0.54 |
| ||||
Due after three years through four years |
| 351,510 |
| (31,795 | ) | 351,510 |
| 31,754 |
| 4.24 |
| 0.40 |
| 4.03 |
| 0.61 |
| ||||
Due after four years through five years |
| 225,365 |
| (9,837 | ) | 225,365 |
| 9,853 |
| 3.44 |
| 0.44 |
| 2.93 |
| 0.95 |
| ||||
Thereafter |
| 128,690 |
| (15,108 | ) | 128,690 |
| 15,021 |
| 4.58 |
| 0.46 |
| 4.47 |
| 0.57 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 12,015,865 |
| $ | (745,828 | ) | $ | 12,015,865 |
| $ | 740,559 |
| 3.67 | % | 0.42 | % | 3.54 | % | 0.55 | % |
(1) The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(2) The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of June 30, 2010.
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of June 30, 2010
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| Weighted-Average Yield (2) |
| ||||||||||
|
| Derivatives |
| CO Bonds |
|
|
| Derivatives |
|
|
| ||||||||||
Year of Maturity |
| Notional |
| Fair Value |
| Hedged Amount |
| Fair-Value |
| CO Bonds |
| Receive |
| Pay |
| Net Pay |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 4,431,000 |
| $ | 8,388 |
| $ | 4,431,000 |
| $ | (8,610 | ) | 1.04 | % | 1.05 | % | 0.30 | % | 0.29 | % |
Due after one year through two years |
| 3,277,700 |
| 22,284 |
| 3,277,700 |
| (22,397 | ) | 1.23 |
| 1.25 |
| 0.35 |
| 0.33 |
| ||||
Due after two years through three years |
| 2,422,350 |
| 59,396 |
| 2,422,350 |
| (59,483 | ) | 2.05 |
| 2.09 |
| 0.32 |
| 0.28 |
| ||||
Due after three years through four years |
| 1,172,500 |
| 40,864 |
| 1,172,500 |
| (40,795 | ) | 2.63 |
| 2.66 |
| 0.47 |
| 0.44 |
| ||||
Due after four years through five years |
| 786,000 |
| 10,724 |
| 786,000 |
| (10,833 | ) | 2.15 |
| 2.15 |
| 0.27 |
| 0.27 |
| ||||
Thereafter |
| 1,372,662 |
| 104,653 |
| 1,372,662 |
| (105,759 | ) | 4.12 |
| 4.12 |
| 0.79 |
| 0.79 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 13,462,212 |
| $ | 246,309 |
| $ | 13,462,212 |
| $ | (247,877 | ) | 1.79 | % | 1.80 | % | 0.38 | % | 0.37 | % |
(1) The fair-value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(2) The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of June 30, 2010. For zero coupon bonds, the yield represents the yield to maturity.
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity or Next Call Date for Callable Consolidated Obligations
As of June 30, 2010
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| Weighted-Average Yield (2) |
| ||||||||||
|
| Derivatives |
| CO Bonds |
|
|
| Derivatives |
|
|
| ||||||||||
Maturity or Next Call |
| Notional |
| Fair Value |
| Hedged Amount |
| Fair-Value |
| CO Bonds |
| Receive |
| Pay |
| Net Pay |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 6,884,662 |
| $ | 15,558 |
| $ | 6,884,662 |
| $ | (16,109 | ) | 1.29 | % | 1.29 | % | 0.27 | % | 0.27 | % |
Due after one year through two years |
| 2,882,700 |
| 23,232 |
| 2,882,700 |
| (23,411 | ) | 1.31 |
| 1.34 |
| 0.38 |
| 0.35 |
| ||||
Due after two years through three years |
| 1,957,350 |
| 59,423 |
| 1,957,350 |
| (59,496 | ) | 2.19 |
| 2.24 |
| 0.35 |
| 0.30 |
| ||||
Due after three years through four years |
| 702,500 |
| 38,845 |
| 702,500 |
| (38,605 | ) | 3.34 |
| 3.39 |
| 0.62 |
| 0.57 |
| ||||
Due after four years through five years |
| 200,000 |
| 7,734 |
| 200,000 |
| (7,734 | ) | 2.73 |
| 2.75 |
| 0.46 |
| 0.44 |
| ||||
Thereafter |
| 835,000 |
| 101,517 |
| 835,000 |
| (102,522 | ) | 5.05 |
| 5.05 |
| 1.16 |
| 1.16 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 13,462,212 |
| $ | 246,309 |
| $ | 13,462,212 |
| $ | (247,877 | ) | 1.79 | % | 1.80 | % | 0.38 | % | 0.37 | % |
(1) The fair-value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(2) The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of June 30, 2010. 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 8 — Derivatives and Hedging Activities for outstanding derivative contracts with members and affiliates of members.
LIQUIDITY AND CAPITAL RESOURCES
The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank’s liquidity and capital resources are designed to support these financial strategies. The Bank’s primary source of liquidity is its access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations of the 2009 Annual Report on Form 10-K. 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
For the quarter ended June 30, 2010, the Bank has maintained a liquidity position in accordance with its risk-management policy, policies established by its Asset-Liability Committee, and certain Finance Agency regulations. For information on these policies and regulations, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Liquidity in the 2009 Annual Report on Form 10-K.
The Bank maintains structural liquidity in order to ensure that it meets its day-to-day business needs as well as 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, non-contractual obligations or behavioral assumptions (cumulative contingent obligations). Such cumulative contingent obligations include the assumption that 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, or 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, senior management will be 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 June 30, 2010.
Structural Liquidity
(dollars in thousands)
|
| 1 Month |
| 2 Months |
| 3 Months |
| |||
|
|
|
|
|
|
|
| |||
Projected net cash flow (1) |
| $ | (925,960 | ) | $ | (2,794,878 | ) | $ | (3,393,296 | ) |
Less: Cumulative contingent obligations |
| (3,961,282 | ) | (4,887,621 | ) | (5,842,589 | ) | |||
Equals: Net structural liquidity need |
| (4,887,242 | ) | (7,682,499 | ) | (9,235,885 | ) | |||
|
|
|
|
|
|
|
| |||
Available borrowing capacity |
| $ | 25,372,720 |
| $ | 27,762,407 |
| $ | 30,709,145 |
|
|
|
|
|
|
|
|
| |||
Ratio of available borrowing capacity to net structural liquidity need |
| 5.19 |
| 3.61 |
| 3.32 |
| |||
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.
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 other event that precludes issuance of consolidated obligations. The Bank maintains highly liquid assets at all times in an amount equal to or greater than the aggregate amount of all of its anticipated maturing advances over the following five days. As of June 30, 2010, and December 31, 2009, the Bank held a surplus of $12.6 billion and $4.9 billion, respectively, of contingency liquidity for the following five days, exclusive of access to the proceeds of CO debt issuance, as demonstrated by the following table.
Contingency Liquidity
(dollars in thousands)
|
| Cumulative |
| |
|
|
|
| |
Projected net cash flow (1) |
| $ | (4,632,268 | ) |
Contingency borrowing capacity (exclusive of CO debt issuance) |
| 17,257,142 |
| |
|
|
|
| |
Net contingency borrowing capacity |
| $ | 12,624,874 |
|
(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 compliance with these liquidity requirements as of June 30, 2010.
The Bank also measures longer-term imbalances between the expected maturities of assets and liabilities for purposes of managing bond-refunding risk. We have developed a policy limit that requires that the difference between the volume of liabilities projected to expire within one year and the volume of assets projected to expire within one year be no more than 20 percent of total assets. We have established a management action trigger for this measurement at 10 percent of total assets, at which the Asset-Liability Committee is required to consider whether immediate corrective action is required. At June 30, 2010, this funding requirement had declined to 6.4 percent of total assets from its December 31, 2009, level of 11.3 percent. The primary drivers behind the decline at
June 30, 2010, were projected increases in MBS prepayments resultant from GSE purchases of seriously delinquent loans and the extension of debt refundings during the quarter.
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 in funding to the extent that any of the other FHLBanks have a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. The Bank would then be required to repay the funding FHLBanks. Neither the Bank nor any of the other FHLBanks have ever drawn upon this agreement.
Financial Conditions for FHLBank Debt
The Bank has experienced favorable debt issuance costs during the period covered by this report. Demand for GSE debt, including FHLBank debt, during this period was generally robust as investors continue to seek both safety and liquidity in the GSE debt market, particularly in light of the sovereign debt crisis impacting certain European economies during the second quarter of 2010. Throughout most of the quarter ended June 30, 2010, FHLBank debt was issued at spreads similar to such spreads in the fourth quarter of 2009 relative to U.S. Treasury-issued debt of similar maturities, but at spreads 5 to 10 basis points greater than in the fourth quarter of 2009 relative to the LIBOR swap curve. The change relative to the LIBOR swap curve was due in part to elevated issuances of U.S. Treasury and corporate debt and certain sovereign debt concerns during the period covered by this report. Towards the end of the quarter, debt spreads relative to LIBOR improved due in part to the European sovereign debt crisis.
Capital
The Bank’s capital stock purchase requirements by its members and ability to expand and contract the amount of outstanding capital stock based on members’ needs are described in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Capital in the 2009 Annual Report on Form 10-K. 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. Accordingly, during the six months ended June 30, 2010, the Bank did not repurchase excess capital stock.
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 a five-year stock-redemption period. Capital stock subject to the five-year stock-redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $86.6 million and $90.9 million at June 30, 2010, and December 31, 2009, respectively. The following table summarizes the anticipated stock-redemption period for these shares of capital stock as of June 30, 2010, and December 31, 2009 (dollars in thousands):
Contractual Year of Redemption |
| June 30, |
| December 31, |
| ||
|
|
|
|
|
| ||
Past redemption date (1) |
| $ | — |
| $ | 4,185 |
|
Due in one year or less |
| 10 |
| 103 |
| ||
Due after one year through two years |
| — |
| — |
| ||
Due after two years through three years |
| 86,367 |
| — |
| ||
Due after three years through four years |
| 231 |
| 86,598 |
| ||
Due after four years through five years |
| 10 |
| 10 |
| ||
|
|
|
|
|
| ||
Total |
| $ | 86,618 |
| $ | 90,896 |
|
(1) Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption period but member-related activity remains outstanding. Such shares of stock will not be redeemed until the activity is no longer outstanding.
The Bank continues its moratorium on excess stock repurchases. During the six months ended June 30, 2010, the Bank did not repurchase excess capital stock.
At June 30, 2010, and December 31, 2009, members and nonmembers with capital stock outstanding held $1.6 billion and $1.5 billion, respectively, in excess capital stock. The following table summarizes member capital stock requirements as of June 30, 2010, and December 31, 2009 (dollars in thousands):
|
| Membership Stock |
| Activity-Based |
| Total Stock |
| Outstanding Class B |
| Excess Class B |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
June 30, 2010 |
| $ | 576,210 |
| $ | 1,598,614 |
| $ | 2,174,848 |
| $ | 3,745,484 |
| $ | 1,570,636 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
December 31, 2009 |
| 586,599 |
| 1,655,784 |
| 2,242,406 |
| 3,733,997 |
| 1,491,591 |
| |||||
(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.
Retained Earnings Target and Dividends. The Bank’s retained earnings target is $925.0 million, a target adopted to preserve capital in light of the various challenges to the Bank, including the potential for additional losses from its investments in private-label MBS, as discussed in —Principal Business Developments. At June 30, 2010, the Bank had retained earnings of $184.2 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 2009 Annual Report on Form 10-K.
The Bank has previously adopted a dividend payout restriction under which the Bank may only pay up to 50 percent of the prior quarter’s net income while the Bank’s retained earnings are less than its targeted retained earnings level. However, the Bank’s board of directors has announced that it does not expect to declare any dividends until the Bank demonstrates a consistent pattern of positive net income as the Bank continues to focus on building retained earnings.
The Bank may not pay dividends in the form of capital stock or issue new excess stock to members if the Bank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the Bank’s excess stock to exceed one percent of its total assets. At June 30, 2010, the Bank had excess capital stock outstanding totaling $1.6 billion or 2.4 percent of its total assets.
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
The Bank’s significant off-balance-sheet arrangements consist of the following:
· commitments that legally bind and obligate the Bank for additional advances;
· standby letters of credit;
· commitments for unused lines-of-credit advances;
· standby bond-purchase agreements with state housing authorities; and
· unsettled COs.
Off-balance-sheet arrangements are more fully discussed in Note 19 — Commitments and Contingencies to the Bank’s 2009 financial statements in the 2009 Annual Report on Form 10-K.
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 $41.6 million for the six months ended June 30, 2010, the Bank’s AHP assessment was $4.6 million and the REFCorp assessment was $10.4 million for the six months ended June 30, 2010. See Item 1 — Business — Assessments of the 2009 Annual Report on Form 10-K for additional information regarding REFCorp and AHP.
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 2009 Annual Report on Form 10-K.
As of June 30, 2010, 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 except as described below under Fair-Value Estimates. Also described below are the results of the sensitivity analysis for private-label MBS.
Fair-Value Estimates
During the quarter ended March 31, 2010, the Bank changed the methodology used to estimate the fair value of agency MBS and other non-MBS investment securities, except HFA obligations and certificates of deposit. This change is consistent with the change that the Bank adopted in 2009 for estimating the fair value of private-label MBS. Under the new methodology, the Bank requests prices for these investment securities 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. Prior to the quarter ended March 31, 2010, the Bank had used either a single third-party vendor, dealer quotes, or calculated the present value of expected future cash flows for estimating the fair value of these securities. This change in pricing methodology did not have a significant impact on the Bank’s estimated fair values of these investment securities.
Other-Than-Temporary Impairment of Investment Securities
See Item 1 —Notes to the Financial Statements — Note 5 — Held-to-Maturity Securities and Results of Operations 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. Under the base-case scenario, the housing price forecast as of June 30, 2010, assumed current-to-trough home price declines ranging from 0.0 percent to 12 percent over the next three to nine month period beginning April 1, 2010, per the respective states’ CBSAs, which are based upon an assessment of the individual housing markets. Thereafter, home prices are projected to increase 0.0 percent in the first six months after the trough, 0.5 percent in the next six months, 3 percent in the second year, and 4 percent in each subsequent year. Under the more stressful scenario, current-to-trough home price declines were projected to worsen from the base-case scenario by an incremental 5 percent, resulting in a current-to-trough price decline range of 5 percent to 17 percent over the three to nine month period beginning April 1, 2010. Thereafter, home prices were projected to increase 0.0 percent in the first year, 1 percent in the second year, 2 percent in the third and fourth years, and 3 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 June 30, 2010 (dollars in thousands):
|
| Credit Losses as Reported |
| Sensitivity Analysis - Adverse HPI Scenario |
| ||||||||||||
For the Quarter Ended June 30, 2010 |
| Number of |
| Par Value |
| Credit- |
| Number of |
| Par Value |
| Credit - |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Prime |
| 4 |
| $ | 69,403 |
| $ | (1,173 | ) | 6 |
| $ | 109,420 |
| $ | (4,475 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Alt-A |
| 75 |
| 1,823,831 |
| (29,270 | ) | 108 |
| 2,410,124 |
| (143,124 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Subprime |
| — |
| — |
| — |
| 3 |
| 2,801 |
| (30 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total private-label MBS |
| 79 |
| $ | 1,893,234 |
| $ | (30,443 | ) | 117 |
| $ | 2,522,345 |
| $ | (147,629 | ) |
RECENT ACCOUNTING DEVELOPMENTS
See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued Accounting Standards and Interpretations for a discussion on the Bank’s recent accounting developments.
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
Financial Regulatory Reform—the Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act, among other things: (1) creates an interagency oversight council that will identify and regulate systemically important financial institutions; (2) regulates the over-the-counter derivatives market; (3) imposes new executive compensation proxy and disclosure requirements; (4) establishes new requirements, including a risk-retention requirement, for MBS; (5) reforms the credit rating agencies; and (6) makes a number of changes to the federal deposit insurance system.
The FHLBanks’ business operations, funding costs, rights, obligations, and/or the environment in which FHLBanks carry out their housing-finance mission may be affected by the Dodd-Frank Act. The change in the federal deposit insurance assessment methodology may result in reductions in advance demand. Regulations on the over-the-counter derivatives market that may be issued under the Dodd-Frank Act could materially affect an FHLBank’s ability to offer advances products that have embedded derivatives’ features, hedge its interest-rate risk exposure from advances, achieve the FHLBank’s risk-management objectives, and act as an intermediary between its members and counterparties.
Additionally, if the FHLBanks are identified as being systemically important financial institutions under the Dodd-Frank Act, they would be subject to heightened prudential standards established by the Federal Reserve Board. These standards include, at minimum, risk-based capital requirements, liquidity requirements, and risk management. Other standards could encompass such matters as a requirement to issue contingent capital instruments, additional public disclosures, and limits on short-term debt. The Dodd-Frank Act also requires systemically important financial institutions to report to the Federal Reserve on the nature and extent of their credit exposures to other significant companies and undergo semi-annual stress tests and may subject FHLBanks to higher capital requirements and quantitative limits with regard to their proprietary trading.
In addition, the U.S. Treasury and the Housing and Urban Development Department are developing recommendations regarding the future of the housing GSEs, including the FHLBanks. At the end of this calendar year, the Obama administration is expected to unveil its plan for GSE reform that will likely impact FHLBanks.
Extension of Transaction Account Guarantee (TAG) Program
On June 28, 2010, the FDIC published in the Federal Register a final rule extending the TAG program to December 31, 2010 for banks currently participating in the program. The TAG program provides FDIC insurance for all funds held at participating banks in qualifying non-interest bearing transaction accounts. The final rule also allows the FDIC to further extend the TAG program without further rulemaking, for a period of time not to exceed December 31, 2011, upon a determination by the FDIC that continuing economic difficulties warrant the extension.
In addition, the Dodd-Frank Act requires the FDIC and the National Credit Union Administration to provide unlimited deposit insurance for non-interest bearing transaction accounts. This Dodd-Frank Act requirement is effective for FDIC-insured institutions from December 31, 2010, until January 1, 2013, and for insured credit unions from the effective date of the Dodd-Frank Act until January 1, 2013. These TAG programs provide an alternative source of funds for many of our members that compete with our advance business.
Final Regulation Regarding Restructuring the Office of Finance.
On May 3, 2010, the Finance Agency issued a final regulation restructuring the Office of Finance’s board of directors, which became effective on June 2, 2010. Among other things, the regulation: (1) increases the size of the board such that it will be comprised of the 12 FHLBank presidents and five independent directors; (2) creates an audit committee; (3) provides for the creation of other
committees; (4) sets a method for electing independent directors along with setting qualifications for these directors; and (5) provides that the method of funding the Office of Finance and allocating its expenses among the FHLBanks shall be as determined by policies adopted by the board of directors. The newly created audit committee is required to be comprised solely of the five independent directors and has been charged with oversight of greater consistency in accounting policies and procedures among the FHLBanks.
Final Regulation on FHLBank Directors’ Eligibility, Elections, Compensation, and Expenses
On April 5, 2010, the Finance Agency issued a final regulation on FHLBank director elections, compensation, and expenses. Regarding elections, the final regulation changes the process by which FHLBank directors are chosen after a directorship is re-designated to a new state prior to the end of the term as a result of the annual designation of FHLBank directorships. Specifically, the re-designation causes the original directorship to terminate at the end of the calendar year and creates a new directorship that will be filled by an election of the members. Regarding compensation, the final regulation, among other things: allows FHLBanks to pay directors reasonable compensation and reimburse necessary expenses; requires FHLBanks to adopt a written compensation and reimbursement of expenses plan; prescribes certain related reporting requirements; and prohibits payments to FHLBank directors who regularly fail to attend board or committee meetings.
Proposed Regulation on Finance Agency Enforcement Powers and Procedures
On August 4, 2010, the Finance Agency issued a notice of a proposed regulation that would amend existing regulations implementing stronger Finance Agency enforcement powers and procedures if adopted as proposed. The comment deadline will be 60 days following the publication of the proposed rule in the Federal Register. The Bank cannot predict when a final regulation will be issued.
Proposed Regulation on Conservatorship and Receivership
On July 9, 2010, the Finance Agency issued a proposed regulation that would set forth the basic authorities of the Finance Agency when acting as conservator or receiver for any of the entities it regulates. The Finance Agency regulates Fannie Mae, Freddie Mac, the 12 FHLBanks, and the Office of Finance, and was appointed as conservator of Fannie Mae and Freddie Mac in September 2008. The basic authorities set forth in the proposed regulation include the authority to enforce and repudiate contracts; establish procedures for conservators and receivers and priorities of claims for contract parties and other claimants; and address whether and to what extent claims by current and former holders of equity interests in the regulated entities will be paid. The Bank cannot predict when a final regulation will be issued.
Proposed Regulation on FHLBank Housing Goals
On May 28, 2010, the Finance Agency issued a proposed regulation with a comment deadline of July 12, 2010, that would establish certain housing acquisition goals and related counting and reporting rules for FHLBanks that purchase in excess of $2.5 billion in unpaid principal balance of Acquired Member Assets (AMA) program (such as MPF) eligible mortgage loans per year. FHLBanks that exceed the $2.5 billion threshold would be assigned market-based, low-income families, low-income housing, very low-income families, and refinancing mortgage-purchase goals. Participations in mortgage loans do not count toward satisfaction of mortgage purchase goals; the actual acquiring FHLBank receives the credit. FHLBanks that do not satisfy their housing goals are subject to Finance Agency enforcement. The Bank cannot predict when a final regulation will be issued but does not currently purchase AMA eligible mortgage loans in an amount that would be sufficient to subject the Bank to the proposed regulation’s threshold of applicability.
Proposed Regulation on FHLBank Investments.
On May 4, 2010, the Finance Agency issued a proposed regulation with a comment deadline of July 6, 2010, that, among other things, requests comment on whether additional limitations on an FHLBank’s MBS investments, including its private-label MBS investments, should be adopted as part of a final regulation and whether, for private-label MBS investments, such limitations should be based on an FHLBank’s level of retained earnings. The Bank cannot predict when a final regulation will be issued.
Proposed Regulation on FDIC Assessments
On May 3, 2010, the FDIC issued a proposed regulation with a comment deadline of July 2, 2010, to revise the assessment system applicable to financial institutions that would, among other things, revise the initial base assessment rates for all insured depository institutions. The FDIC’s proposed regulation would not change the assessment rates for FHLBank advances unless an institution’s secured liabilities exceed 25 percent of its domestic deposits. Accordingly, increases in the assessment rates for impacted members may have a negative impact on their demand for the FHLBanks’ advances. The Bank cannot predict when a final regulation will be issued.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
Credit Risk — Advances. The Bank endeavors to minimize credit risk on advances by monitoring the financial condition of its borrowing entities and by holding sufficient collateral to protect itself from losses. The Bank is prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. The Bank has never experienced a credit loss on an advance.
The Bank closely monitors the financial condition of all members and housing associates by reviewing available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, the Bank has access to most members’ regulatory examination reports. The Bank analyzes this information on a regular basis.
For the first six months of 2010, the overall performance of the Bank’s membership generally improved from December 31, 2009, due to reduced losses from investments and lower loan-loss provisions. However, the Bank’s membership continues to be challenged by high unemployment and resultant loan delinquencies. Average nonperforming assets for depository institution members increased slightly from 1.72 percent of total assets as of December 31, 2009, to 1.79 percent of assets as of March 31, 2010. The average ratio of tangible capital to assets among the membership increased from 9.56 percent as of December 31, 2009, to 9.73 percent as of March 31, 2010. March 31, 2010, is the most recent date of the Bank’s data on its membership for purposes of this report. Through the seven-month period ending July 31, 2010, there has been one bank member failure but no defaults in member obligations to the Bank. 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 borrowers to blanket-lien status, listing-collateral status, and delivery-collateral status based on the Bank’s assessment of the financial condition of the borrower. The method by which a borrower pledges collateral is dependent upon the collateral status to which it is assigned based on its financial condition and on the type of collateral that the borrower pledges. For example, securities collateral pledged by a borrower that is in blanket-lien status based on its financial condition appears in the table below as being in collateral delivered to the Bank, since all securities collateral must be delivered to the Bank or to a Bank-approved third-party custodian. Based upon the method by which borrowers pledge collateral to the Bank, the following table shows the total potential lending value of the collateral that borrowers have pledged to the Bank, net of the Bank’s collateral valuation discounts. For additional information on the Bank’s collateral policies and practices, see Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Credit Risk — Advances in the 2009 Annual Report on Form 10-K.
Advances outstanding to borrowers in blanket-lien status at June 30, 2010, totaled $19.1 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 $45.1 billion as of June 30, 2010. Of this total, $6.3 billion of securities have been delivered to the Bank or to a third-party custodian, an additional $2.1 billion of securities are held by borrowers’ securities corporations, and $15.8 billion of residential mortgage loans have been pledged by borrowers’ real-estate-investment trusts.
The following table provides information regarding advances outstanding with members and nonmember borrowers in listing- and delivery-collateral status at June 30, 2010, along with their corresponding collateral balances.
Advances Outstanding by Borrower Collateral Status
As of June 30, 2010
(dollars in thousands)
|
| Number of |
| Advances |
| Discounted |
| Ratio of Discounted |
| ||
|
|
|
|
|
|
|
|
|
| ||
Listing-collateral status |
| 30 |
| $ | 15,069,535 |
| $ | 21,421,682 |
| 142.2 | % |
Delivery-collateral status |
| 28 |
| 723,361 |
| 1,138,755 |
| 157.4 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total par value |
| 58 |
| $ | 15,792,896 |
| $ | 22,560,437 |
| 142.9 | % |
Collateral by Pledge Type
As of June 30, 2010
(dollars in thousands)
|
| Discounted |
| |
|
|
|
| |
Collateral pledged under blanket lien |
| $ | 39,148,436 |
|
Collateral specifically listed and identified |
| 17,341,624 |
| |
Collateral delivered to the Bank |
| 16,028,215 |
| |
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. This is 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 $261.6 million at June 30, 2010.
Based upon the collateral held as security on advances, 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.
Credit Risk — Investments. The Bank is subject to credit risk on unsecured investments consisting primarily of money-market instruments issued by high-quality counterparties and debentures issued by U.S. agencies and instrumentalities. The Bank places money-market funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or its equivalent rating) on an unsecured basis for terms of up to 275 days; most such placements expire within 35 days. Management actively monitors the credit quality of these counterparties. At June 30, 2010, the Bank’s unsecured credit exposure, including accrued interest related to money-market instruments and debentures, was $12.7 billion to 28 counterparties and issuers, of which $3.4 billion was for certificates of deposit, $4.6 billion was for federal funds sold, and $4.7 billion was for debentures. As of June 30, 2010, one counterparty individually accounted for 15.5 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 may be purchased as long as the balance of outstanding MBS/ABS is equal to or less than 300 percent of the Bank’s total capital, and must be rated the highest long-term debt rating at the time of purchase. 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 as of June 30, 2010, are provided in the following table.
Credit Ratings of Investments at Carrying Value
As of June 30, 2010
(dollars in thousands)
|
| Long-Term Credit Rating (1) |
| ||||||||||||||||
Investment Category |
| Triple-A |
| Double-A |
| Single-A |
| Triple-B |
| Below |
| Unrated |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Money-market instruments (2): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing deposits |
| $ | — |
| $ | 69 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Certificates of deposit |
| — |
| 2,035,000 |
| 1,375,000 |
| — |
| — |
| — |
| ||||||
Federal funds sold |
| — |
| 1,070,000 |
| 3,475,000 |
| — |
| — |
| — |
| ||||||
Securities purchased under agreements to resell |
| — |
| — |
| 2,500,000 |
| — |
| — |
| 1,250,000 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. agency obligations |
| 27,853 |
| — |
| — |
| — |
| — |
| — |
| ||||||
U.S. government corporations |
| 247,015 |
| — |
| — |
| — |
| — |
| — |
| ||||||
Government-sponsored enterprises |
| 3,138,876 |
| — |
| — |
| — |
| — |
| — |
| ||||||
Supranational banks |
| 417,224 |
| — |
| — |
| — |
| — |
| — |
| ||||||
Corporate bonds |
| 810,387 |
| — |
| — |
| — |
| — |
| — |
| ||||||
HFA obligations |
| 25,360 |
| 157,827 |
| 2,648 |
| 50,780 |
| — |
| 2,020 |
| ||||||
GSE MBS |
| 6,509,919 |
| — |
| — |
| — |
| — |
| — |
| ||||||
Private-label MBS |
| 296,807 |
| 98,298 |
| 140,401 |
| 144,044 |
| 1,290,981 |
| — |
| ||||||
ABS backed by home-equity loans |
| 19,140 |
| 2,890 |
| — |
| — |
| 7,119 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total investments |
| $ | 11,492,581 |
| $ | 3,364,084 |
| $ | 7,493,049 |
| $ | 194,824 |
| $ | 1,298,100 |
| $ | 1,252,020 |
|
(1) Ratings are obtained from Moody’s, Fitch, Inc. (Fitch), and S&P. If there is a split rating, the lowest rating is used.
(2) The issuer rating is used, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.
The following table details the Bank’s investment securities with a long-term credit rating below investment grade as of June 30, 2010 (dollars in thousands).
Credit Ratings of Investments Below Investment Grade at Carrying Value
As of June 30, 2010
(dollars in thousands)
Investment Category |
| Double-B |
| Single-B |
| Triple-C |
| Double-C |
| Single-D |
| Total Below |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private-label MBS |
| $ | 54,502 |
| $ | 194,231 |
| $ | 656,405 |
| $ | 287,548 |
| $ | 98,295 |
| $ | 1,290,981 |
|
ABS backed by home-equity loans |
| 387 |
| 4,630 |
| 1,607 |
| 495 |
| — |
| 7,119 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 54,889 |
| $ | 198,861 |
| $ | 658,012 |
| $ | 288,043 |
| $ | 98,295 |
| $ | 1,298,100 |
|
Of the Bank’s $9.8 billion in par value of MBS and ABS investments at June 30, 2010, $3.3 billion in par value are private-label MBS. Of this amount, $2.7 billion in par value are securities backed primarily by Alt-A loans, while $552.8 million in par value are backed primarily by prime loans. Only $30.5 million in par value of these investments are backed primarily by subprime mortgages. While there is no universally accepted definition for prime and Alt-A underwriting standards, in general, prime underwriting implies a borrower without a history of delinquent payments as well as documented income and a loan amount that is at or less than 80 percent of the market value of the house, while Alt-A underwriting implies a prime borrower with limited income documentation and/or a loan-to-value ratio of higher than 80 percent. While the Bank generally follows the collateral type definitions provided by S&P, it does review the credit performance of the underlying collateral, and revises the classification where appropriate, an approach that is likewise incorporated into the modeling assumptions provided by the FHLBanks’ OTTI Governance Committee in accordance with the related Finance Agency guidance. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Legislative and Regulatory Developments of the 2009 Annual Report on Form 10-K for additional information on the FHLBanks’ OTTI Governance Committee and related Finance Agency guidance. The third-party collateral loan performance platform used by the FHLBank of San Francisco, with whom the Bank has contracted to perform these analyses, assesses eight bonds owned by the Bank to have collateral that is Alt-A in nature, while that same collateral is classified as prime by S&P. Accordingly, these bonds, too, have been modeled using the same credit assumptions applied to Alt-A collateral. Four of these bonds, with a total par value of $69.4 million as of June 30, 2010, were deemed to be other-than-temporarily impaired as of June 30, 2010. These bonds are reported as prime in the various tables in this section. In addition, one bond classified as Alt-A collateral by S&P, of which the Bank held $5.1 million in par value as of June 30, 2010, is classified and modeled as prime by the third-party modeling software. However this bond is reported as Alt-A in the various tables in this section in accordance with S&P’s classification. The Bank does not hold any collateralized debt obligations. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2009 Annual Report on Form 10-K for information on the Bank’s key inputs, assumptions, and modeling employed by the Bank in its other-than-temporary impairment assessments.
The following table stratifies the Bank’s private-label MBS by credit rating.
Credit Ratings of Private-Label MBS at Amortized Cost
As of June 30, 2010
(dollars in thousands)
Collateral Type and Credit Rating |
| Amortized |
| Gross |
| Weighted Average |
| ||
ABS backed by home equity loans: |
|
|
|
|
|
|
| ||
Subprime AAA |
| $ | 19,140 |
| $ | (5,424 | ) | 26.33 | % |
Subprime AA |
| 2,890 |
| (902 | ) | 22.89 |
| ||
Subprime BB |
| 387 |
| (58 | ) | 13.99 |
| ||
Subprime B |
| 4,630 |
| (1,501 | ) | 20.81 |
| ||
Subprime CCC |
| 2,054 |
| (783 | ) | 28.37 |
| ||
Subprime CC |
| 869 |
| (301 | ) | 30.70 |
| ||
|
|
|
|
|
|
|
| ||
Total ABS backed by home equity loans |
| 29,970 |
| (8,969 | ) | 25.33 |
| ||
|
|
|
|
|
|
|
| ||
Private-label residential MBS: |
|
|
|
|
|
|
| ||
Prime AAA |
| 128,853 |
| (17,026 | ) | 8.63 |
| ||
Prime AA |
| 45,601 |
| (6,553 | ) | 8.21 |
| ||
Prime A |
| 4,823 |
| (1,279 | ) | 13.20 |
| ||
Prime BBB |
| 29,230 |
| (7,039 | ) | 4.75 |
| ||
Prime BB |
| 16,241 |
| (6,889 | ) | 33.39 |
| ||
Prime B |
| 56,917 |
| (3,589 | ) | 9.98 |
| ||
Prime CCC |
| 143,628 |
| (17,400 | ) | 16.26 |
| ||
Alt-A AAA |
| 48,910 |
| (5,682 | ) | 23.72 |
| ||
Alt-A AA |
| 54,769 |
| (13,905 | ) | 19.01 |
| ||
Alt-A A |
| 146,000 |
| (47,947 | ) | 25.79 |
| ||
Alt-A BBB |
| 135,820 |
| (48,944 | ) | 32.61 |
| ||
Alt-A BB |
| 59,067 |
| (21,987 | ) | 37.68 |
| ||
Alt-A B |
| 227,851 |
| (81,870 | ) | 46.90 |
| ||
Alt-A CCC |
| 881,138 |
| (304,356 | ) | 43.51 |
| ||
Alt-A CC |
| 481,380 |
| (161,484 | ) | 46.15 |
| ||
Alt-A D |
| 155,694 |
| (50,815 | ) | 44.82 |
| ||
|
|
|
|
|
|
|
| ||
Total private-label residential MBS |
| 2,615,922 |
| (796,765 | ) | 37.97 |
| ||
|
|
|
|
|
|
|
| ||
Private-label commercial MBS: |
|
|
|
|
|
|
| ||
Prime AAA |
| 119,046 |
| (1,906 | ) | 5.02 |
| ||
|
|
|
|
|
|
|
| ||
Total private-label MBS |
| $ | 2,764,938 |
| $ | (807,640 | ) | 36.66 | % |
(1) Represents loans that are 60 days or more delinquent.
The following table provides a summary of credit ratings downgrades that have occurred during the period from July 1, 2010, through July 31, 2010, for the Bank’s private-label MBS.
Private-Label MBS
Downgraded and/or Placed on Negative Watch
from July 1, 2010 through July 31, 2010
(dollars in thousands)
|
| Based on Carrying Value as of June 30, 2010 |
| |||||||
|
| Downgraded and |
| Downgraded and |
| Not Downgraded but |
| |||
|
|
|
|
|
|
|
| |||
Private-label residential MBS: |
|
|
|
|
|
|
| |||
Amount of private-label residential MBS rated below investment grade |
| $ | 85,276 |
| $ | — |
| $ | — |
|
Percentage of total private-label residential MBS |
| 4.6 | % | — | % | — | % | |||
|
|
|
|
|
|
|
| |||
Total private-label MBS |
|
|
|
|
|
|
| |||
Amount of private-label MBS rated below investment grade |
| $ | 85,276 |
| $ | — |
| $ | — |
|
Percentage of total private-label MBS |
| 4.3 | % | — | % | — | % |
The Bank classifies private-label residential and commercial MBS and 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.
Unpaid Principal Balance of Private-Label MBS and Home Equity Loans by Fixed Rate or Variable Rate
as of June 30, 2010, and December 31, 2009
(dollars in thousands)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||||||||
|
| Fixed |
| Variable |
| Total |
| Fixed |
| Variable |
| Total |
| ||||||
Private-label residential MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Prime |
| $ | 28,578 |
| $ | 405,079 |
| $ | 433,657 |
| $ | 31,276 |
| $ | 436,655 |
| $ | 467,931 |
|
Alt-A |
| 54,049 |
| 2,633,476 |
| 2,687,525 |
| 60,393 |
| 2,858,928 |
| 2,919,321 |
| ||||||
Total private-label residential MBS |
| 82,627 |
| 3,038,555 |
| 3,121,182 |
| 91,669 |
| 3,295,583 |
| 3,387,252 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private-label commercial MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Prime |
| 10,586 |
| 108,525 |
| 119,111 |
| 10,586 |
| 121,891 |
| 132,477 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABS backed by home equity loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subprime |
| — |
| 30,542 |
| 30,542 |
| — |
| 31,542 |
| 31,542 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total par value of private-label MBS |
| $ | 93,213 |
| $ | 3,177,622 |
| $ | 3,270,835 |
| $ | 102,255 |
| $ | 3,449,016 |
| $ | 3,551,271 |
|
The following table provides additional information related to the Bank’s MBS issued by private trusts and ABS backed by home-equity loans, indicating whether the underlying mortgage collateral is considered to be prime, Alt-A, or subprime at the time of issuance. Additionally, the amounts outstanding as of June 30, 2010, are stratified by year of issuance of the security.
Par Value of Private-Label MBS and
Home Equity Loan Investments by Year of Securitization
At June 30, 2010
(dollars in thousands)
|
| Triple-A |
| Double-A |
| Single-A |
| Triple-B |
| Below |
| Total |
| ||||||
Private-label residential MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2007 |
| $ | — |
| $ | — |
| $ | — |
| $ | 25,781 |
| $ | 92,739 |
| $ | 118,520 |
|
2006 |
| — |
| — |
| — |
| — |
| 58,578 |
| 58,578 |
| ||||||
2005 |
| 15,082 |
| — |
| — |
| — |
| 57,336 |
| 72,418 |
| ||||||
2004 and prior |
| 113,853 |
| 45,592 |
| 4,824 |
| 3,449 |
| 16,423 |
| 184,141 |
| ||||||
Total residential MBS prime |
| 128,935 |
| 45,592 |
| 4,824 |
| 29,230 |
| 225,076 |
| 433,657 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2007 |
| 17,862 |
| — |
| — |
| — |
| 737,710 |
| 755,572 |
| ||||||
2006 |
| — |
| — |
| 111 |
| 8,450 |
| 1,137,123 |
| 1,145,684 |
| ||||||
2005 |
| 16,948 |
| 23,728 |
| 124,156 |
| 120,142 |
| 426,726 |
| 711,700 |
| ||||||
2004 and prior |
| 14,100 |
| 31,057 |
| 21,764 |
| 7,648 |
| — |
| 74,569 |
| ||||||
Total residential MBS Alt-A |
| 48,910 |
| 54,785 |
| 146,031 |
| 136,240 |
| 2,301,559 |
| 2,687,525 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total private-label residential MBS |
| 177,845 |
| 100,377 |
| 150,855 |
| 165,470 |
| 2,526,635 |
| 3,121,182 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Home equity loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2004 and prior |
| 19,149 |
| 2,891 |
| — |
| — |
| 8,502 |
| 30,542 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private-label commercial MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2004 and prior |
| 119,111 |
| — |
| — |
| — |
| — |
| 119,111 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total prime |
| 248,046 |
| 45,592 |
| 4,824 |
| 29,230 |
| 225,076 |
| 552,768 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Alt-A |
| 48,910 |
| 54,785 |
| 146,031 |
| 136,240 |
| 2,301,559 |
| 2,687,525 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total subprime |
| 19,149 |
| 2,891 |
| — |
| — |
| 8,502 |
| 30,542 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total private-label MBS |
| $ | 316,105 |
| $ | 103,268 |
| $ | 150,855 |
| $ | 165,470 |
| $ | 2,535,137 |
| $ | 3,270,835 |
|
The following table provides additional information related to the Bank’s private-label MBS and ABS with a long-term credit rating below investment grade.
Par Value of Private-Label MBS and
ABS Backed by Home Equity Loan Investments by Year of Securitization
For Securities Rated Below Investment Grade
At June 30, 2010
(dollars in thousands)
|
| Double-B |
| Single-B |
| Triple-C |
| Double-C |
| Single-D |
| Total Below |
| ||||||
Private-label residential MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2007 |
| $ | — |
| $ | 17,002 |
| $ | 75,737 |
| $ | — |
| $ | — |
| $ | 92,739 |
|
2006 |
| — |
| 35,563 |
| 23,015 |
| — |
| — |
| 58,578 |
| ||||||
2005 |
| — |
| 4,335 |
| 53,002 |
| — |
| — |
| 57,337 |
| ||||||
2004 and prior |
| 16,401 |
| 21 |
| — |
| — |
| — |
| 16,422 |
| ||||||
Total residential MBS prime |
| 16,401 |
| 56,921 |
| 151,754 |
| — |
| — |
| 225,076 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2007 |
| — |
| 43,816 |
| 274,804 |
| 327,985 |
| 91,105 |
| 737,710 |
| ||||||
2006 |
| 9,741 |
| 183,814 |
| 514,268 |
| 290,905 |
| 138,395 |
| 1,137,123 |
| ||||||
2005 |
| 49,464 |
| 36,249 |
| 258,749 |
| 82,264 |
| — |
| 426,726 |
| ||||||
Total residential MBS Alt-A |
| 59,205 |
| 263,879 |
| 1,047,821 |
| 701,154 |
| 229,500 |
| 2,301,559 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total private-label residential MBS |
| 75,606 |
| 320,800 |
| 1,199,575 |
| 701,154 |
| 229,500 |
| 2,526,635 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABS backed by home equity loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2004 and prior |
| 388 |
| 4,629 |
| 2,321 |
| 1,164 |
| — |
| 8,502 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total private-label MBS |
| $ | 75,994 |
| $ | 325,429 |
| $ | 1,201,896 |
| $ | 702,318 |
| $ | 229,500 |
| $ | 2,535,137 |
|
The following table provides the Bank’s private-label MBS by fair value as a percent of par value through June 30, 2010.
Fair Value as a Percent of Par Value by Year of Securitization
|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
|
|
| 2010 |
| 2010 |
| 2009 |
| 2009 |
| 2009 |
|
Private-label residential MBS |
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
2007 |
| 90 | % | 87 | % | 86 | % | 85 | % | 82 | % |
2006 |
| 90 |
| 88 |
| 88 |
| 86 |
| 81 |
|
2005 |
| 72 |
| 72 |
| 66 |
| 64 |
| 58 |
|
2004 and prior |
| 84 |
| 82 |
| 80 |
| 80 |
| 75 |
|
Total prime |
| 84 |
| 83 |
| 80 |
| 80 |
| 75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
2007 |
| 50 |
| 51 |
| 51 |
| 50 |
| 46 |
|
2006 |
| 49 |
| 49 |
| 48 |
| 47 |
| 43 |
|
2005 |
| 64 |
| 62 |
| 60 |
| 58 |
| 52 |
|
2004 and prior |
| 76 |
| 72 |
| 69 |
| 67 |
| 60 |
|
Total Alt-A |
| 54 |
| 54 |
| 53 |
| 51 |
| 47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private-label residential MBS |
| 58 | % | 58 | % | 57 | % | 55 | % | 51 | % |
|
|
|
|
|
|
|
|
|
|
|
|
ABS backed by home equity loans |
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
2004 and prior |
| 69 | % | 68 | % | 68 | % | 66 | % | 56 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Private-label commercial MBS |
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
2004 and prior |
| 99 | % | 98 | % | 97 | % | 96 | % | 90 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Total prime |
| 87 | % | 86 | % | 84 | % | 83 | % | 78 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A |
| 54 | % | 54 | % | 53 | % | 51 | % | 47 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Total subprime |
| 69 | % | 68 | % | 68 | % | 66 | % | 56 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Total private-label MBS |
| 60 | % | 59 | % | 58 | % | 57 | % | 52 | % |
The following table shows the 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 June 30, 2010, reflect the percentage of subordinated class outstanding balances as of June 30, 2010, to the Bank’s senior class holding outstanding balances as of June 30, 2010, 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 June 30, 2010, 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.
Private-Label Mortgage- and Asset-Backed Securities
Summary Credit Enhancements
As of June 30, 2010
(dollars in thousands)
|
| Par |
| Amortized |
| Fair |
| Original |
| Current |
| Weighted |
| |||
Private-label residential MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2007 |
| $ | 118,519 |
| $ | 117,559 |
| $ | 106,103 |
| 10.37 | % | 11.80 | % | 9.83 | % |
2006 |
| 58,578 |
| 55,221 |
| 52,680 |
| 11.09 |
| 11.48 |
| 12.09 |
| |||
2005 |
| 72,419 |
| 68,606 |
| 52,204 |
| 20.88 |
| 20.95 |
| 21.94 |
| |||
2004 and prior |
| 184,141 |
| 183,907 |
| 154,587 |
| 7.11 |
| 15.31 |
| 9.84 |
| |||
Total prime |
| 433,657 |
| 425,293 |
| 365,574 |
| 10.84 |
| 14.78 |
| 12.16 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2007 |
| 755,572 |
| 566,420 |
| 381,408 |
| 26.41 |
| 16.99 |
| 48.31 |
| |||
2006 |
| 1,145,684 |
| 892,584 |
| 562,797 |
| 27.75 |
| 20.19 |
| 47.43 |
| |||
2005 |
| 711,700 |
| 657,056 |
| 453,899 |
| 27.04 |
| 27.29 |
| 29.47 |
| |||
2004 and prior |
| 74,569 |
| 74,569 |
| 56,341 |
| 12.34 |
| 23.29 |
| 19.30 |
| |||
Total Alt-A |
| 2,687,525 |
| 2,190,629 |
| 1,454,445 |
| 26.76 |
| 21.26 |
| 42.14 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total private-label residential MBS |
| 3,121,182 |
| 2,615,922 |
| 1,820,019 |
| 24.54 |
| 20.36 |
| 37.97 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
ABS backed by home equity loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2004 and prior |
| 30,542 |
| 29,970 |
| 21,001 |
| 9.52 |
| 39.44 |
| 25.33 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Private-label commercial MBS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2004 and prior |
| 119,111 |
| 119,046 |
| 117,864 |
| 21.22 |
| 28.70 |
| 5.02 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total prime |
| 552,768 |
| 544,339 |
| 483,438 |
| 13.07 |
| 17.78 |
| 10.62 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Alt-A |
| 2,687,525 |
| 2,190,629 |
| 1,454,445 |
| 26.76 |
| 21.26 |
| 42.14 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total subprime |
| 30,542 |
| 29,970 |
| 21,001 |
| 9.52 |
| 39.44 |
| 25.33 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total private-label MBS |
| $ | 3,270,835 |
| $ | 2,764,938 |
| $ | 1,958,884 |
| 24.28 | % | 20.84 | % | 36.66 | % |
(1) Represents loans that are 60 days or more delinquent.
Characteristics of Private-label MBS in a Gross Unrealized Loss Position
As of June 30, 2010
(dollars in thousands)
|
| Par Value |
| Amortized |
| Gross |
| Weighted |
| June 30, |
| July 31, |
| July 31, |
| July 31, |
| July 31, 2010 |
| |||
Private-label residential MBS backed by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prime first lien |
| $ | 430,081 |
| $ | 421,632 |
| $ | (59,773 | ) | 12.02 | % | 29.2 | % | 29.2 | % | 47.7 | % | 52.3 | % | 29.2 | % |
Alt-A option ARM |
| 992,792 |
| 880,755 |
| (347,334 | ) | 45.74 |
| 0.2 |
| 0.2 |
| 15.5 |
| 84.5 |
| 60.4 |
| |||
Alt-A other |
| 1,681,799 |
| 1,307,123 |
| (389,658 | ) | 39.98 |
| 2.8 |
| 2.8 |
| 13.8 |
| 86.2 |
| 22.9 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total private-label residential MBS |
| 3,104,672 |
| 2,609,510 |
| (796,765 | ) | 37.95 |
| 5.6 |
| 5.6 |
| 19.0 |
| 81.0 |
| 35.8 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Private-label commercial MBS backed by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prime first lien |
| 108,525 |
| 108,525 |
| (1,906 | ) | 5.32 |
| 100.0 |
| 100.0 |
| 100.0 |
| — |
| — |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
ABS backed by home equity loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Subprime first lien |
| 30,542 |
| 29,970 |
| (8,969 | ) | 25.33 |
| 62.7 |
| 62.7 |
| 72.2 |
| 27.8 |
| 8.7 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total private-label MBS |
| $ | 3,243,739 |
| $ | 2,748,005 |
| $ | (807,640 | ) | 36.74 | % | 9.3 | % | 9.3 | % | 22.2 | % | 77.8 | % | 34.3 | % |
The following table provides the credit ratings of the third-party insurers.
Monoline Insurance and GSE Guarantees of Mortgage-Backed Securities and
ABS Backed by Home Equity Loan Investments
Credit Ratings and Outlook
As of July 31, 2010
|
| Moody’s |
| S&P |
| Fitch |
| ||||||
|
| Credit Rating |
| Outlook |
| Credit Rating |
| Outlook |
| Credit Rating |
| Outlook |
|
Ambac Assurance Corporation |
| Caa2 |
| Possible Upgrade |
| Removed |
|
|
| Not Rated |
| Not Rated |
|
Assured Guaranty Municipal Corp. |
| Aa3 |
| Negative |
| AAA |
| Negative |
| Not Rated |
| Not Rated |
|
MBIA Insurance Corporation |
| B3 |
| Negative |
| BB+ |
| Negative |
| Not Rated |
| Not Rated |
|
Syncora Guarantee Inc. |
| Ca |
| Developing |
| Removed |
|
|
| Not Rated |
| Not Rated |
|
Financial Guaranty Insurance Company (FGIC) |
| Not Rated |
| Not Rated |
| Not Rated |
| Not Rated |
| Not Rated |
| Not Rated |
|
Fannie Mae |
| Aaa |
| Stable |
| AAA |
| Stable |
| AAA |
| Stable |
|
Freddie Mac |
| Aaa |
| Stable |
| AAA |
| Stable |
| AAA |
| Stable |
|
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 June 30, 2010.
Geographic Concentration of Private-Label Mortgage-and Asset-Backed Securities
|
| June 30, 2010 |
|
|
|
|
|
State concentration |
|
|
|
California |
| 39.4 | % |
Florida |
| 12.9 |
|
New York |
| 4.6 |
|
Virginia |
| 3.7 |
|
Arizona |
| 3.6 |
|
All Others |
| 35.8 |
|
|
|
|
|
|
| 100.0 | % |
|
|
|
|
Metropolitan Statistical Area |
|
|
|
Los Angeles — Long Beach, CA |
| 9.9 | % |
Washington, D.C.-MD-VA-WV |
| 5.6 |
|
Riverside — San Bernardino, CA |
| 4.1 |
|
Orange County, CA |
| 4.1 |
|
San Diego, CA |
| 4.0 |
|
All Others |
| 72.3 |
|
|
|
|
|
|
| 100.0 | % |
The top five geographic areas represented in each of the two tables above have experienced mortgage loan default rates and home price depreciation rates that are significantly higher than national averages over the last two years.
Since 2008, actual and projected delinquency and foreclosure rates for prime, subprime, and Alt-A mortgages have increased significantly nationwide and while some of the rates of increase in some of these factors have recently slowed, 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 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 in recent months as renewed leverage and limited supply have combined to tighten mortgage yield spreads to treasuries.
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 June 30, 2010:
Certain private-label MBS owned by the Bank are insured by monoline insurers, which insurance guarantees 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. The cash-flow analysis of the MBS protected by such third-party insurance is described in Item 1 — Notes to the Financial Statements — Note 5 — Held-to-Maturity Securities.
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 Mortgage-Backed Securities and
ABS Backed by Home Equity Loan Investments by Year of Securitization
At June 30, 2010
(dollars in thousands)
|
| Ambac |
| Assured Guaranty |
| MBIA |
| Syncora |
| Financial Guaranty |
| ||||||||||||||||||||
|
| Monoline |
| Unrealized |
| Monoline |
| Unrealized |
| Monoline |
| Unrealized |
| Monoline |
| Unrealized |
| Monoline |
| Unrealized |
| ||||||||||
Private-label MBS by Year of Securitization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
2007 |
| $ | 80,493 |
| $ | (18,424 | ) | $ | 17,862 |
| $ | (1,446 | ) | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
2006 |
| 16,756 |
| (7,744 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||
2005 |
| 34,994 |
| (13,490 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||
2004 and prior |
| 1,695 |
| (306 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||
Total Alt-A |
| 133,938 |
| (39,964 | ) | 17,862 |
| (1,446 | ) | — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
2004 and prior |
| 2,374 |
| (521 | ) | 7,193 |
| (1,996 | ) | 15,234 |
| (4,387 | ) | 4,630 |
| (1,501 | ) | 1,111 |
| (564 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total private-label MBS |
| $ | 136,312 |
| $ | (40,485 | ) | $ | 25,055 |
| $ | (3,442 | ) | $ | 15,234 |
| $ | (4,387 | ) | $ | 4,630 |
| $ | (1,501 | ) | $ | 1,111 |
| $ | (564 | ) |
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 June 30, 2010.
HFA Investments Insured by Financial Guarantors
Amortized Cost as of June 30, 2010
(dollars in thousands)
Financial Guarantors |
| Insurer Financial Strength |
| HFA Bonds |
| |
|
|
|
|
|
| |
Ambac Assurance Corp. |
| Not Rated/Caa2/Removed |
| $ | 29,133 |
|
Assured Guaranty Municipal Corp. |
| Not Rated/Aa3/AAA |
| 121,452 |
| |
National Public Finance Guarantee |
| Not Rated/Baa1/A |
| 51,315 |
| |
|
|
|
|
|
| |
Total |
|
|
| $ | 201,900 |
|
The following table provides the geographic concentration by state of the Bank’s HFA investments as of June 30, 2010.
State Concentration of HFAs
|
| June 30, 2010 |
|
|
|
|
|
State concentration |
|
|
|
Massachusetts |
| 50.6 | % |
Rhode Island |
| 12.9 |
|
Connecticut |
| 10.5 |
|
North Carolina |
| 10.3 |
|
Maine |
| 6.3 |
|
All Others |
| 9.4 |
|
|
|
|
|
|
| 100.0 | % |
Credit Risk — Mortgage Loans. The Bank is subject to credit risk on purchased mortgage loans acquired through the MPF program. All mortgage loans acquired under the MPF program are fixed-rate, fully amortizing mortgage loans. While Bank management believes that credit risk on this portfolio is appropriately managed through underwriting standards (the MPF program requires full documentation to conform to standards established by Fannie Mae and Freddie Mac) and member credit-enhancement obligations, the Bank also maintains an allowance for credit losses. The Bank’s allowance for credit losses pertaining to mortgage loans was $2.5 million and $2.1 million at June 30, 2010, and December 31, 2009, respectively. As of June 30, 2010, nonaccrual loans amounted to $52.6 million and consisted of 484 loans out of a total of approximately 31,000 loans. See Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans for additional information regarding the Bank’s delinquent loans. The Bank had charge-offs totaling $35,000 related to mortgage loans foreclosed upon during the six months ending June 30, 2010.
The Bank is exposed to credit risk from mortgage-insurance (MI) companies that provide credit enhancement in place of the PFI and for primary MI coverage on individual loans. As of June 30, 2010, the Bank was the beneficiary of primary MI coverage on $220.4 million of conventional mortgage loans, and the Bank was the beneficiary of supplemental MI coverage on mortgage pools with a total unpaid principal balance of $44.3 million. Eight MI companies provide all of the coverage under these policies.
As of July 31, 2010, all of these MI companies have a credit rating lower than A3 (or its equivalent) by at least one NRSRO. The table below shows the ratings of these companies as of July 31, 2010.
The Bank has analyzed its potential loss exposure to all of the MI 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 commitments (exclusive of MI), 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 conditions of these MI companies. The Bank requires that all new primary MI policies be with companies rated BBB- or higher by S&P. Only four of the eight MI companies previously approved by the Bank currently have ratings from S&P of BBB- or higher and remain eligible to write new primary MI policies for loans sold to the Bank. Further, the Bank requires that all new supplemental MI policies be with companies rated AA- or higher by S&P. Accordingly, none of the eight MI companies previously approved by the Bank are currently eligible to write new supplemental MI policies for loan pools sold to the Bank. The Bank has established limits on exposure to individual MI companies to ensure that the insurance coverage is sufficiently diversified.
Mortgage-Insurance Companies That Provide MI Coverage
(dollars in thousands)
|
| Mortgage-Insurance |
| As of June 30, 2010 |
| ||||||||||||
Mortgage-Insurance |
| Company Ratings |
| Balance of |
| Primary MI |
| Supplementary |
| MI Coverage |
| Percent of |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mortgage Guaranty Insurance Corporation |
| NR/Ba3/B+ |
| $ | 61,490 |
| $ | 13,219 |
| $ | — |
| $ | 13,219 |
| 27.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Genworth Mortgage Insurance Corporation |
| NR/Baa2/BBB- |
| 61,303 |
| 14,330 |
| — |
| 14,330 |
| 29.4 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CMG Mortgage Insurance Company |
| BBB/NR/BBB |
| 23,251 |
| 5,482 |
| — |
| 5,482 |
| 11.3 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
PMI Mortgage Insurance Company |
| NR/B2/B+ |
| 21,178 |
| 4,407 |
| — |
| 4,407 |
| 9.0 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
United Guaranty Residential Insurance Corporation |
| NR/A3/BBB |
| 20,243 |
| 4,507 |
| — |
| 4,507 |
| 9.2 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Radian Guaranty Incorporated |
| NR/Ba3/B+ |
| 14,455 |
| 2,656 |
| — |
| 2,656 |
| 5.5 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Republic Mortgage Insurance Company |
| BBB-/Ba1/BBB- |
| 13,551 |
| 2,722 |
| 505 |
| 3,227 |
| 6.6 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Triad Guaranty Insurance Corporation |
| NR/NR/NR |
| 4,944 |
| 912 |
| — |
| 912 |
| 1.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
| $ | 220,415 |
| $ | 48,235 |
| $ | 505 |
| $ | 48,740 |
| 100.0 | % |
For additional information on the Bank’s credit risks from the Bank’s purchases of mortgage loans, see Item 7A —Quantitative and Qualitative Disclosures About Market Risks — Credit Risk — Credit Risk —Mortgage Loans in the 2009 Annual Report on Form 10-K.
Credit Risk — Derivative Instruments. 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 or pledged out 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 8— 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, mortgage-loan-purchase commitments are reflected in the following table as derivative instruments. The Bank does not collateralize mortgage-loan-purchase commitments. However, should the PFI fail to deliver the mortgage loans as agreed, the member institution is charged a fee to compensate the Bank for nonperformance of the agreement.
Derivative Instruments
(dollars in thousands)
|
| Notional |
| Number of |
| Total Net |
| ||
As of June 30, 2010 |
|
|
|
|
|
|
| ||
Interest-rate-exchange agreements: (1) |
|
|
|
|
|
|
| ||
Double-A |
| $ | 8,486,337 |
| 6 |
| $ | 21,822 |
|
Single-A |
| 18,240,621 |
| 8 |
| 310 |
| ||
Total interest-rate-exchange agreements |
| 26,726,958 |
| 14 |
| 22,132 |
| ||
Mortgage-loan-purchase commitments (2) |
| 19,765 |
| — |
| 255 |
| ||
|
|
|
|
|
|
|
| ||
Total derivatives |
| $ | 26,746,723 |
| 14 |
| $ | 22,387 |
|
|
|
|
|
|
|
|
| ||
As of December 31, 2009 |
|
|
|
|
|
|
| ||
Interest-rate-exchange agreements: (1) |
|
|
|
|
|
|
| ||
Double-A |
| $ | 7,922,108 |
| 6 |
| $ | 16,677 |
|
Single-A |
| 19,749,557 |
| 8 |
| 126 |
| ||
Total interest-rate-exchange agreements |
| 27,671,665 |
| 14 |
| 16,803 |
| ||
Mortgage-loan-purchase commitments (2) |
| 3,706 |
| — |
| — |
| ||
|
|
|
|
|
|
|
| ||
Total derivatives |
| $ | 27,675,371 |
| 14 |
| $ | 16,803 |
|
(1) Ratings are obtained from Moody’s, Fitch, and S&P. If there is a split rating, the lowest rating is used.
(2) Total fair-value exposures related to mortgage-loan-purchase commitments are offset by pair-off fees from the Bank’s members.
(3) Total net exposure at fair value has been netted with cash collateral received from derivative counterparties.
As of June 30, 2010, and December 31, 2009, the following counterparties accounted for more than 10 percent of the total notional amount of interest-rate-exchange agreements outstanding (dollars in thousands):
|
| June 30, 2010 |
| ||||||
Counterparty |
| Notional Amount |
| Percent of Total |
| Fair Value |
| ||
|
|
|
|
|
|
|
| ||
Barclays Bank PLC |
| $ | 4,009,225 |
| 15.0 | % | $ | (62,689 | ) |
Deutsche Bank AG |
| 3,756,815 |
| 14.1 |
| (300,590 | ) | ||
UBS AG |
| 3,151,725 |
| 11.8 |
| (12,716 | ) | ||
Citigroup Financial Products, Inc |
| 3,071,690 |
| 11.5 |
| (71,074 | ) | ||
JP Morgan Chase Bank |
| 3,033,400 |
| 11.4 |
| (79,351 | ) | ||
Goldman Sachs Capital Markets, L.P. |
| 2,826,775 |
| 10.6 |
| (92,754 | ) | ||
|
| December 31, 2009 |
| ||||||
Counterparty |
| Notional Amount |
| Percent of Total |
| Fair Value |
| ||
|
|
|
|
|
|
|
| ||
Deutsche Bank AG |
| $ | 4,139,597 |
| 15.0 | % | $ | (225,107 | ) |
Barclays Bank PLC |
| 3,746,575 |
| 13.5 |
| (64,929 | ) | ||
Bank of America, N.A |
| 3,068,404 |
| 11.1 |
| (53,198 | ) | ||
JP Morgan Chase Bank |
| 3,021,200 |
| 10.9 |
| (85,009 | ) | ||
UBS AG |
| 2,950,975 |
| 10.7 |
| (17,368 | ) | ||
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 overnight to 275 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 and discount notes.
Contingent Credit Risk — 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 housing 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 $560.8 million at June 30, 2010, of which $556.2 million were to one HFA. All of the bonds underlying the $556.2 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. The bond underlying the $4.6 million to the other HFA is split-rated AAA/Aa3, which reflects the ratings of the bond’s financial guarantor, Assured Guaranty Municipal Corp.
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 — Market and Interest-Rate Risk in the 2009 Annual Report on Form 10-K.
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.
These bonds may be issued to fund specific assets or to manage the overall exposure of a portfolio or the balance sheet. At June 30, 2010, fixed-rate noncallable debt, not hedged by interest-rate-exchange agreements, amounted to $14.3 billion, compared with $13.3 billion at December 31, 2009. Fixed-rate callable debt, not hedged by interest-rate-exchange agreements, amounted to $2.4 billion and $2.9 billion at June 30, 2010, and December 31, 2009, respectively.
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 in order 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 in order to create synthetic floating-rate assets. At June 30, 2010, and December 31, 2009, this portfolio of investments had an amortized cost of $1.2 billion and $1.1 billion, respectively.
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 uses interest-rate swaps, caps, and floors 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 mortgages 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 in order to reprice debt when mortgages prepay faster or slower than expected. The Bank’s debt-repricing capacity depends on market 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 our mortgage assets and debt will be affected by changes in interest rates. As such, the Bank has enacted a more comprehensive strategy incorporating the use of derivatives. Derivatives provide a flexible, liquid, efficient, and cost-effective method to hedge interest-rate and prepayment risks.
To hedge the interest-rate-sensitivity risk due to potentially high prepayment speeds in the event of a drop in interest rates, the Bank has periodically purchased options to receive fixed rates on interest-rate swaps exercisable on specific future dates (receiver swaptions). These derivatives are structured to increase in value as interest rates decline, and provide an offset to the loss of market value that might result from rapid prepayments in the event of a downturn in interest rates. With the addition of these option-based derivatives, the market value of the portfolio becomes more stable because a greater portion of prepayment risk is covered. At June 30, 2010, the Bank had no receiver swaptions.
Interest-rate-risk management activities can significantly affect the level and timing of net income due to a variety of factors. As receiver swaptions are accounted for on a standalone basis and not as part of a hedge relationship, changes in their fair values are recorded through net income each month. This may increase net income volatility if the offsetting periodic change in the MPF prepayment activity is markedly different from the fair-value change in the receiver swaptions.
When the Bank executes transactions to purchase mortgage loans, in some cases the Bank may be exposed to significant market risk until permanent hedging and funding can be obtained in the market. In these cases, the Bank may enter into a forward sale of MBS to be announced (TBA) or other derivatives for forward settlement. As of June 30, 2010, the Bank did not have any outstanding TBA hedges.
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 offset any optionality embedded in the bond, thereby effectively creating a floating-rate liability. The Bank employs this strategy to achieve a lower cost of funds than may be available from the issuance of short-term consolidated discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $13.4 billion, or 35.2 percent of the Bank’s total outstanding CO bonds at June 30, 2010, down from $13.9 billion, or 39.0 percent of total outstanding CO bonds, at December 31, 2009. There was no discount note debt used in conjunction with interest-rate-exchange agreements at June 30, 2010. Total CO discount note debt used in conjunction with interest-rate-exchange agreements was $935.0 million, or 4.2 percent of the Bank’s total outstanding CO discount notes, at December 31, 2009. 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, but that is not reflected in hedge ineffectiveness, because these interest-rate swaps are designed to 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, spreads, and market prices. The Bank also measures the duration gap of its mortgage-loan portfolio, including all assigned funding and hedging transactions.
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 2009 Annual Report on Form 10-K.
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), can be an indicator of future net income to the extent that it demonstrates the impact of prior interest-rate movements on the capacity of the current balance sheet to generate net interest income. However, MVE does not always provide an accurate indication of future net income. Even a bank with perfectly matched asset and liability repricing characteristics might experience fluctuations in its MVE if the discount rates used to evaluate assets and liabilities change differentially due to basis risk. For example, if yields used to discount assets increase more rapidly than yields used to discount liabilities, MVE will decline, despite the fact that the change in interest rates does not affect yields on current balance-sheet items. As another example, an entity whose debt securities decline in value due to credit concerns about the entity will show an increase in MVE if asset values do not fall by as much. Therefore, care must be taken to properly interpret the results of the MVE analysis.
The ratio of MVE to BVE is one of the metrics used to track the Bank’s potential future exposure to losses or reduced net income. 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. Therefore, BVE excludes accumulated other comprehensive loss. At June 30, 2010, the Bank’s MVE was $3.3 billion and its BVE was $3.9 billion. At December 31, 2009, the Bank’s MVE was $2.9 billion and its BVE was $3.9 billion. The Bank’s ratio of MVE to BVE was 82.8 percent at June 30, 2010, up from 74.8 percent at December 31, 2009. The primary drivers for the improvement in the Bank’s MVE to BVE ratio since December 31, 2009, were:
· appreciation in the prices associated with the Bank’s private-label MBS. As liquidity began to return to the market for this investment class, driven by U.S. government responses to the continuing economic recession, such as the establishment of the Public-Private Investment Program, certain terms of which are described in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Legislative and Regulatory Developments of the 2009 Annual Report on Form 10-K, prices on the Bank’s private-label MBS holdings increased, improving the MVE to BVE ratio from the December 31, 2009, level; and
· the broad-based decline in market yields experienced over the course of the first two quarters of 2010.
The following chart indicates the improvement in the Bank’s MVE/BVE and MVE/Par Stock ratios over the preceding quarters, reflecting the factors listed previously. Also presented within the chart is the Bank’s MVE as a percentage of par stock, defined as member stock inclusive of mandatorily redeemable capital stock.
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.
VaR is defined, consistent with Finance Agency regulations, to be equal to the ninety-ninth percentile potential reduction in MVE 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. The Bank’s risk-management policy requires that VaR not exceed $275.0 million.
The table below presents the historical simulation VaR estimate as of June 30, 2010, and December 31, 2009, 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 risk exposures are expressed as a percentage of then current MVE and are based on historical behavior of interest rates and other market factors over a 120-business-day time horizon.
|
| Value-at-Risk |
| ||||||||
|
| (Gain) Loss Exposure |
| ||||||||
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||
Confidence Level |
| % of |
| $ million |
| % of |
| $ million |
| ||
|
|
|
|
|
|
|
|
|
| ||
50% |
| (0.12 | )% | $ | (3.8 | ) | (0.21 | )% | $ | (6.1 | ) |
75% |
| 0.63 |
| 20.4 |
| 1.61 |
| 46.8 |
| ||
95% |
| 2.03 |
| 66.1 |
| 4.67 |
| 135.5 |
| ||
99% |
| 2.77 |
| 90.0 |
| 7.16 |
| 207.4 |
| ||
(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 declined to $90.0 million as of June 30, 2010, from $207.4 million as of December 31, 2009.
The primary drivers of the decrease in VaR at June 30, 2010, were:
· The broad-based decline in market yields experienced over the course of the first two quarters of 2010, which improved the valuation of longer-term assets; and
· the extension of the Bank’s liabilities over the course of the first half of 2010 to reduce refunding concentrations and to take advantage of periodic flattening of longer-term rates.
A further measure of market risk employed by the Bank is its duration of equity. Duration of equity, as measured by the Bank, represents the net percentage change in value between the Bank’s assets and liabilities for parallel +/- 50 basis-point shifts in interest rates. A positive duration of equity indicates that the Bank’s MVE depreciates in increasing-rate scenarios, and the converse holds true for declining-rate environments. As of June 30, 2010, the Bank’s duration of equity was +2.1 years, compared with +4.7 years at December 31, 2009, indicating that the Bank depreciates in value in those VaR scenarios that incorporate increasing-rate environments. As noted above, the decline in market yields experienced to date in 2010 and the actions by the Bank to extend its funding liabilities at such times of lower rates both served to reduce the Bank’s duration of equity from its December 31, 2009, level.
The Bank uses alternative measures of VaR and duration of equity for its private-label MBS, specifically isolating the impact of 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 2008 and 2009. 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 June 30, 2010, management VaR stood at $80.9 million and management duration of equity was +1.8 years.
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-temporarily impaired 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 June 30, 2010, showed that in the worst-case scenario, the Bank’s return on equity falls to 120 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.
Over the second half of 2009 and the first half of 2010, the Bank sought to reduce its net interest income exposure to a prolonged period of U.S. Federal Reserve accommodative policy and its attendant maintenance of lower market yields. The Bank has deliberately mismatched by one year the maturity of some of its investments in GSE-issued securities, advances, debt issued under the FDIC’s Temporary Liquidity Guarantee Program, and other similar investments with the associated liabilities. This strategy is intended to prevent a significant reduction in the Bank’s net interest spread in the event that interest rates remain at current low levels for an extended period. The Bank’s net interest income sensitivity profile is traditionally asset sensitive so that increases in market
rates tend to benefit income but reduce net interest income when yields are low. Therefore, the determination to add longer term assets without closely matched funding terms is expected to mitigate the detrimental impact of a low interest rate environment on net interest income. As of June 30, 2010, the Bank had $3.9 billion in assets purchased as a means to deliberately extend its duration of equity.
Liquidity Risk
Information regarding liquidity risk is provided in Part 1 — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
Leverage Risk
The Bank has controls in place in an effort to ensure that capital is maintained within regulatory limitations. Accordingly, the Bank maintains at all times unweighted total regulatory capital in an amount equal to at least 4.0 percent of total assets and weighted regulatory capital, wherein permanent capital is weighted at 1.5 times its face amount, in an amount equal to at least 5.0 percent of total assets. Because all of the Bank’s regulatory capital is permanent capital, compliance with the unweighted total capital ratio requirement ensures compliance with the weighted regulatory capital ratio requirement. Under Finance Agency regulations, the Bank’s board of directors is also required to adopt an operating capital ratio range, which defines the minimum and maximum capital ratio under which the Bank will operate. In 2009, prior to July 24, the Bank’s operating capital ratio range had been set at a minimum capital ratio of 4.0 percent and a maximum capital ratio of 5.5 percent. On July 24, 2009, the Bank’s board of directors increased the upper bound of this range to 7.5 percent in light of the recent decline in advances, the Federal Reserve Board’s implementation of certain amendments to Regulation D that prohibit earnings on the Bank’s deposits with the Federal Reserve Banks, and the Bank’s continuing moratorium on the repurchase of excess capital stock shares. Further, the Bank has adopted a minimum capital level in excess of regulatory requirements. This adopted minimum capital level requires the Bank to maintain a minimum regulatory capital level equal to 4 percent of its total assets plus its retained earnings target, an amount equal to $3.5 billion at June 30, 2010. The Bank’s actual regulatory capital level was $3.9 billion at June 30, 2010, so the Bank was in excess of the adopted minimum capital level by $416.4 million on that date. Leverage limits are included in the Bank’s board-approved risk-management policy and ratios are reported to the board of directors monthly.
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 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
There were no changes in the Bank’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting during the period covered by this report.
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.
In addition to the risk factor provided below and other risks described herein, readers should carefully consider the risk factors set forth in the Bank’s 2009 Annual Report on Form 10-K, which could materially affect the Bank’s business, financial condition, or future results. The risks described below, elsewhere in this report, and in the 2009 Annual Report on Form 10-K 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 affect the Bank.
The Bank is subject to credit risk exposures related to the mortgage loans that back its MBS investments. Increased delinquency rates and credit losses beyond those currently expected may adversely impact the yield on or value of those investments.
The Bank has invested in private-label MBS, which are backed by prime, subprime, and/or Alt-A 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 NRSRO’s. See Item 3 —Quantitative and Qualitative Disclosures About Market Risk — Credit Risk — Investments for a description of the Bank’s portfolio of investments in these securities.
As described in Item 2 — 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. Increasing delinquency and loss severity trends experienced on the loans underlying the MBS, 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 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 recognized credit losses of $30.4 million for private-label MBS that management determined were other-than-temporarily impaired for the quarter ended June 30, 2010. If macroeconomic trends or collateral credit performance within the Bank’s private-label MBS portfolio deteriorate further than currently anticipated, 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 may be substantial. For example, a cash-flow analysis was also performed for each of these securities under a more stressful housing price scenario. The more stressful scenario was based on a housing price forecast that was five percentage points lower at the trough than the base-case scenario followed by a flatter recovery path. Under this more stressful scenario, the Bank would be projected to realize an additional $117.2 million in credit losses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
None
10.1 |
| Second Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan |
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31.1 |
| Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
| Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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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 |
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32.2 |
| Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the |
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| Sarbanes-Oxley Act of 2002 |
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 |
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| FEDERAL HOME LOAN BANK OF BOSTON |
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| (Registrant) |
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August 12, 2010 |
| By: | /s/ Edward A. Hjerpe III |
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| Edward A. Hjerpe III |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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August 12, 2010 |
| By: | /s/ Frank Nitkiewicz |
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| Frank Nitkiewicz |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer) |