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 Se ptember 30, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission Fi le Number: 000-51404
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
Federally chartered corporation (State or other jurisdiction of incorporation or organization) | 35-6001443 (I.R.S. employer identification number) | |
8250 Woodfield Crossing Boulevard, Indianapolis, IN (Address of principal executive offices) | 46240 (Zip code) |
(317) 465-0200
(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 for t he past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer, ” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer | o Accelerated filer |
x Non-accelerated filer (Do not check if a smaller reporting company) | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares outstanding as of October 31, 2010 | |||
Class B Stock, par value $100 | 25,171,171 |
Table of Contents | Page | |
Number | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 6. | ||
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 31.3 | ||
Exhibit 32 |
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts and shares in thousands, except par value)
September 30, 2010 | December 31, 2009 | ||||||
Assets: | |||||||
Cash and Due from Banks | $ | 11,848 | $ | 1,722,077 | |||
Interest-Bearing Deposits, members and non-members | 47 | 25 | |||||
Securities Purchased Under Agreements to Resell, members and non-members | 1,250,000 | — | |||||
Federal Funds Sold, members and non-members | 6,677,000 | 5,532,000 | |||||
Available-for-Sale Securities (a) (Note 3) | 2,226,340 | 1,760,714 | |||||
Held-to-Maturity Securities (b) (Note 4) | 9,140,605 | 7,701,151 | |||||
Advances (Note 6) | 18,914,117 | 22,442,904 | |||||
Mortgage Loans Held for Portfolio, net (Note 7) | 6,487,412 | 7,271,895 | |||||
Accrued Interest Receivable | 103,753 | 114,246 | |||||
Premises, Software, and Equipment, net | 10,283 | 10,786 | |||||
Derivative Assets, net (Note 8) | 2,725 | 1,714 | |||||
Other Assets | 37,633 | 41,554 | |||||
Total Assets | $ | 44,861,763 | $ | 46,599,066 | |||
Liabilities: | & nbsp; | ||||||
Deposits (Note 9): | |||||||
Interest-Bearing Deposits | $ | 583,580 | $ | 821,431 | |||
Non-Interest-Bearing Deposits | 6,470 | 3,420 | |||||
Total Deposits | 590,050 | 824,851 | |||||
Consolidated Obligations (Note 10): | |||||||
Discount Notes | 9,728,153 | 6,250,093 | |||||
Bonds | 30,547,991 | 35,907,789 | |||||
Total Consolidated Obligations, net | 40,276,144 | 42,157,882 | |||||
Accrued Interest Payable | 161,927 | 211,504 | |||||
Affordable Housing Progr am Payable | 35,193 | 37,329 | |||||
Payable to Resolution Funding Corporation | 10,553 | 6,533 | |||||
Derivative Liabilities, net (Note 8) | 882,799 | 712,716 | |||||
Mandatorily Redeemable Capital Stock (Note 11) | 782,052 | 755,660 | |||||
Other Liabi lities | 248,934 | 146,180 | |||||
Total Liabilities | 42,987,652 | 44,852,655 | |||||
Commitments and Contingencies (Note 14) | |||||||
Capital (Note 11): | |||||||
Capital Stock Putable ($100 par value): | |||||||
Class B-1 issued and outstanding shares: 17,297 and 17,260, respectively | 1,729,777 | 1,726,000 | |||||
Class B-2 issued and outstanding shares: 37 and 0, respectively | 3,664 | — | |||||
Total Capital Stock Putable | 1,733,441 | 1,726,000 | |||||
Retained Earnings | 395,509 | 349,013 | |||||
Accumulated Other Comprehensive Income (Loss): | |||||||
Net Unrealized Gains (Losses) on Available-for-Sale Securities, before Derivative and Hedging Adjustments (Note 3) | (7,351 | ) | 2,140 | ||||
Net Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities (Note 5) | (237,957 | ) | (324,041 | ) | |||
Pension and Postretirement Benefits | (9,531 | ) | (6,701 | ) | |||
Total Accumulated Other Comprehensive Income (Loss) | (254,839 | ) | (328,602 | ) | |||
Total Capital | 1,874,111 | 1,746,411 | |||||
Total Liabilities and Capital | $ | 44,861,763 | $ | 46,599,066 |
(a) Amortized cost: $1,990,950 and $1,672,918 at September 30, 2010, and December 31, 2009, respectively
(b) Estimated fair values: $9,421,087 and $7,690,482 at September 30, 2010, and December 31, 2009, respectively
The accompanying notes are an integral part of these financial statements.
1
Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest Income: | |||||||||||||||
Advances | $ | 52,146 | $ | 76,214 | $ | 152,106 | $ | 334,525 | |||||||
Prepayment Fees on Advances, net | 12,120 | 672 | 15,658 | 2,609 | |||||||||||
Interes t-Bearing Deposits, members and non-members | 99 | 54 | 194 | 237 | |||||||||||
Securities Purchased Under Agreements to Resell, members and non-members | 1,807 | 229 | 2,738 | 403 | |||||||||||
Federal Funds Sold, members and non-members | 2,874 | 3,485 | 9,897 | 21,067 | |||||||||||
Available-for-Sale Securities | 2,653 | 3,115 | 6,136 | 16,118 | |||||||||||
Held-to-Maturity Securities | 63,048 | 67,772 | 189,599 | 213,066 | |||||||||||
Mortgage Loans Held for Portfolio, net | 90,487 | 92,860 | 264,538 | 316,687 | |||||||||||
Other, net | 722 | 1 | 557 | 1 | |||||||||||
Total Interest Income | 225,956 | 244,402 | 641,423 | 904,713 | |||||||||||
Interest Expense: | |||||||||||||||
Discount Notes | 3,541 | 8,237 | 10,742 | 82,487 | |||||||||||
Consolidated Obligation Bonds | 138,085 | 167,836 | 421,285 | 605,108 | |||||||||||
Deposits | 72 | 154 | 233 | 705 | |||||||||||
Loans from other Federal Home Loan Banks | — | — | — | 2 | |||||||||||
Mandatorily Redeemable Capital Stock | 2,075 | 2,679 | 9,266 | 9,605 | |||||||||||
Total Interest Expense | 143,773 | 178,906 | 441,526 | 697,907 | |||||||||||
Net Interest Income | 82,183 | 65,496 | 199,897 | 206,806 | |||||||||||
Other Income (Loss): | |||||||||||||||
Total Other-Than-Temporary Impairment Losses | — | (72,950 | ) | (22,279 | ) | (255,803 | ) | ||||||||
Portion of Impairment Losses Recognized in Other Comprehensive Income (Loss), net | (618 | ) | 48,639 | (46,099 | ) | 210,898 | |||||||||
Net Other-Than-Temporary Impairment Losses | (618 | ) | (24,311 | ) | (68,378 | ) | (44,905 | ) | |||||||
Net Gains (Losses) on Derivatives and Hedging Activities | 2,547 | (2,238 | ) | 479 | 387 | ||||||||||
Service Fees | 205 | 298 | 820 | 880 | |||||||||||
Standby Letters of Credit Fees | 358 | 363 | 1,117 | 780 | |||||||||||
Loss on Extinguishment of Debt | (1,318 | ) | — | (1,318 | ) | — | |||||||||
Other, net | 184 | 266 | 566 | 638 | |||||||||||
Total Other Income (Loss) | 1,358 | (25,622 | ) | (66,714 | ) | (42,220 | ) | ||||||||
Other Expenses: | |||||||||||||||
Compensation and Benefits | 9,904 | 6,304 | 23,429 | 19,657 | |||||||||||
Other Operating Expenses | 2,979 | 2,831 | 9,359 | 9,184 | |||||||||||
Federal Housing Finance Agency | 535 | 411 | 1,667 | 1,274 | |||||||||||
Office of Finance | 446 | 406 | 1,356 | 1,295 | |||||||||||
Other | 245 | 295 | 807 | 888 | |||||||||||
Total Other Expenses | 14,109 | 10,247 | 36,618 | 32,298 | |||||||||||
Income Before Assessments | 69,432 | 29,627 | 96,565 | 132,288 | |||||||||||
Assessments: | |||||||||||||||
Affordable Housing Program | 5,879 | 2,692 | 8,828 | 11,779 | |||||||||||
Resolution Funding Corporation | 12,711 | 5,387 | 17,548 | 24,102 | |||||||||||
Total Assessments | 18,590 | 8,079 | 26,376 | 35,881 | |||||||||||
Net Income | $ | 50,842 | $ | 21,548 | $ | 70,189 | $ | 96,407 |
The accompanying notes are an integral part of these financial statements.
2
Federal Home Loan Bank of Indianapolis
Statements of Capital
(Unaudited, $ amounts and shares in thousands)
Capital Stock Class B-1 Putable | Capital Stock Class B-2 Putable | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Capital | ||||||||||||||||||||||
Shar es | Par Value | Shares | Par Value | |||||||||||||||||||||||
Balance, December 31, 2008 | 18,792 | $ | 1,879,179 | 2 | $ | 196 | $ | 282,731 | $ | (71,398 | ) | $ | 2,090,708 | |||||||||||||
Proceeds from Sale of Capital Stock | 673 | 67,304 | — | — | 67,304 | |||||||||||||||||||||
Repurchase/Redemption of Capital Stock | (51 | ) | (5,128 | ) | — | — | (5,128 | ) | ||||||||||||||||||
Transfers of Capital Stock | 2 | 196 | (2 | ) | (196 | ) | — | |||||||||||||||||||
Net Shares Reclassified to Mandatorily Redeemable Capital Stock | (664 | ) | (66,334 | ) | — | — | &nb sp; | (66,334 | ) | |||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||
Net Income | 96,407 | 96,407 | ||||||||||||||||||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Available-for-Sale Securities | 54,492 | 54,492 | ||||||||||||||||||||||||
Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | (227,145 | ) | (227,145 | ) | ||||||||||||||||||||||
Reclassification of Non-Credit Losses to Other Income (Loss) | 16,247 | 16,247 | ||||||||||||||||||||||||
Net Non-Credit Portion Before Accretion | (210,898 | ) | (210,898 | ) | ||||||||||||||||||||||
Accretion of Non-Credit Portion | 18,080 | 18,080 | ||||||||||||||||||||||||
Net Non-Credit Portion | (192,818 | ) | (192,818 | ) | ||||||||||||||||||||||
Pension and Postretirement Benefits | (464 | ) | (464 | ) | ||||||||||||||||||||||
Total Comprehensive Income (Loss) | 96,407 | (138,790 | ) | (42,383 | ) | |||||||||||||||||||||
Distributions on Mandatorily Redeemable Capital Stock | (230 | ) | (230 | ) | ||||||||||||||||||||||
Cash Dividends on Capital Stock (3.12% annualized) | ; | (44,468 | ) | (44,468 | ) | |||||||||||||||||||||
Balance, September 30, 2009 | 18,752 | $ | 1,875,217 | &nbs p; | — | $ | — | $ | 334,440 | $ | (210,188 | ) | $ | 1,999,469 | ||||||||||||
Balance, December 31, 2009 | 17,260 | $ | 1,726,000 | — | $ | — | $ | 349,013 | $ | (328,602 | ) | $ | 1,746,411 | |||||||||||||
Proceeds from Sale of Capital Stock | 371 | 37,165 | — | — | 37,165 | |||||||||||||||||||||
Transfers of Capital Stock | (37 | ) | (3,664 | ) | 37 | 3,664 | — | |||||||||||||||||||
Net Shares Reclassified to Mandatorily Redeemable Capital Stock | (297 | ) | (29,724 | ) | — | — | (29,724 | ) | ||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||
Net Income | 70,189 | 70,189 | ||||||||||||||||||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Available-for-Sale Securities | (9,491 | ) | (9,491 | ) | ||||||||||||||||||||||
Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | (21,288 | ) | (21,288 | ) | ||||||||||||||||||||||
Reclassification of Non-Credit Losses to Other Income (Loss) | 67,387 | 67,387 | ||||||||||||||||||||||||
Net Non-Credit Portion Before Accretion | 46,099 | 46,099 | ||||||||||||||||||||||||
Accretion of Non-Credit Portion | 39,985 | 39,985 | ||||||||||||||||||||||||
Net Non-Credit Portion | &nb sp; | 86,084 | 86,084 | |||||||||||||||||||||||
Pension and Postretirement Benefits | (2,830 | ) | (2,830 | ) | ||||||||||||||||||||||
Total Comprehensive Income (Loss) | 70,189 | 73,763 | 143,952 | |||||||||||||||||||||||
Distributions on Mandatorily Redeemable Capital Stock | (43 | ) | (43 | ) | ||||||||||||||||||||||
Cash Dividends on Capital Stock (1.83% annualized) | (23,650 | ) | (23,650 | ) | ||||||||||||||||||||||
Balance, September 30, 2010 | 17,297 | $ | 1,729,777 | 37 | $ | 3,664 | $ | 395,509 | $ | (254,839 | ) | $ | 1,874,111 |
The accompanying notes are an integral part of these financial statements.
3
Federal Home Loan Bank of Indianapolis
Statements of Capital, continued
(Unaudited, $ amounts and shares in thousands)
Capital Stock Class B-1 Putable | Capital Stock Class B-2 Putable | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Capital | ||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||
Balance, July 1, 2009 | 19,084 | $ | 1,908,392 | — | $ | 1 | $ | 328,455 | $ | (165,959 | ) | $ | 2,070,889 | |||||||||||||
Proceeds from Sale of Capital Stock | 154 | 15,426 | ; | — | — | 15,426 | ||||||||||||||||||||
Repurchase/Redemption of Capital Stock | (1 | ) | (128 | ) | — | — | (12 8 | ) | ||||||||||||||||||
Transfers of Capital Stock | — | 1 | &m dash; | (1 | ) | — | ||||||||||||||||||||
Net Shares Reclassified to Mandatorily Redeemable Capital Stock | ( 485 | ) | (48,474 | ) | — | — | (48,474 | ) | ||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||
Net Income | 21,548 | 21,548 | ||||||||||||||||||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Available-for-Sale Securities | (5,563 | ) | (5,563 | ) | ||||||||||||||||||||||
Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | (64,886 | ) | (64,886 | ) | ||||||||||||||||||||||
Reclassification of Non-Credit Losses to Other Income (Loss) | 16,247 | 16,247 | ||||||||||||||||||||||||
Net Non-Credit Portion Before Accretion | (48,639 | ) | (48,639 | ) | ||||||||||||||||||||||
Acc retion of Non-Credit Portion | 9,835 | 9,835 | ||||||||||||||||||||||||
Net Non-Credit Portion | &nb sp; | (38,804 | ) | (38,804 | ) | |||||||||||||||||||||
Pension and Postr etirement Benefits | 138 | 138 | ||||||||||||||||||||||||
Total Comprehensive Income (Loss) | 21,548 | (44,229 | ) | (22,681 | ) | |||||||||||||||||||||
Distributions on Mandatorily Redeemable Capital Stock | (132 | ) | (132 | ) | ||||||||||||||||||||||
Cash Dividends on Capital Stock (3.25% annualized) | (15,431 | ) | (15,431 | ) | ||||||||||||||||||||||
Balance, September 30, 2009 | 18,752 | $ | 1,875,217 | — | $ | — | $ | 334,440 | $ | (210,188 | ) | $ | 1,999,469 |
Balance, July 1, 2010 | 17,262 | $ | 1,726,254 | 46 | $ | 4,567 | $ | 351,100 | $ | (263,474 | ) | $ | 1,818,447 | |||||||||||||
Proceeds from Sale of Capital Stock | 32 | 3,283 | — | — | 3,283 | |||||||||||||||||||||
Transfers of Capital Stock | 9 | 903 | (9 | ) | (903 | ) | — | |||||||||||||||||||
Net Shares Reclassified to Mandatorily Redeemable Capital Stock | (6 | ) | (663 | ) | — | — | (663 | ) | ||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||
Net Income | 50,842 | 50,842 | ||||||||||||||||||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Available-for-Sale Securities | (68 | ) | (68 | ) | ||||||||||||||||||||||
Non-Credit Portion of Other-Than-Temporary Impairment Losses on Held-to-Maturity Securities | — | — | ||||||||||||||||||||||||
Reclassification of Non-Credit Losses to Other Income (Loss) | 618 | 618 | ||||||||||||||||||||||||
Net Non-Credit Portion Before Accretion | 618 | 618 | ||||||||||||||||||||||||
Accretion of Non-Credit Portion | 11,465 | 11,465 | ||||||||||||||||||||||||
Net Non-Credit Portion | 12,083 | 12,083 | &nbs p; | |||||||||||||||||||||||
Pension and Postretirement Benefits | (3,380 | ) | (3,380 | ) | ||||||||||||||||||||||
Total Comprehensive Income (Loss) | 50,842 | 8,635 | 59,477 | |||||||||||||||||||||||
Distributions on Mandatorily Redeemable Capital Stock, net | 10 | 10 | ||||||||||||||||||||||||
Cash Dividends on Capital Stock (1.50% annualized) | (6,443 | ) | (6,443 | ) | ||||||||||||||||||||||
Balance, September 30, 2010 | 17,297 | $ | 1,729,777 | 37 | $ | 3,664 | $ | 395,509 | $ | (254,839 | ) | $ | 1,874,111 |
The accompanying notes are an integral part of these financial statements.
4&nb sp;
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
For the Nine Months Ended | |||||||
September 30, | |||||||
2010 | 2009 | ||||||
Operating Activities: | |||||||
Net Income | $ | 70,189 | $ | 96,407 | |||
Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activi ties: | |||||||
Depreciation and Am ortization | (27,776 | ) | (69,264 | ) | |||
Net Other-Than-Temporary Impairment Losses | 68,378 | 44,905 | |||||
Loss on Extinguishment of Debt | 1,318 | — | |||||
(Gain) Loss on Derivative and Hedging Activities | (4,836 | ) | 10,917 | ||||
Net Change in: | |||||||
Accrued Interest Receivable | 10,470 | 36,526 | |||||
Net Accrued Interest on Derivatives | 129,723 | 148,826 | |||||
Other Assets | 3,303 | (7,245 | ) | ||||
Affordable Housing Program Liability, including Discount on Advances | (2,136 | ) | 3,185 | ||||
Accrued Interest Payable | (49,577 | ) | (80,889 | ) | |||
Payable to Resolution Funding Corporation | 4,020 | (12,040 | ) | ||||
Other Liabilities | 3,697 | 7,619 | |||||
Total Adjustments | 136,584 | 82,540 | |||||
Net Cash provided by (used in) Operating Activities | 206,773 | 178,947 | |||||
Investing Activities: | |||||||
Net Change in: | |||||||
Interest-Bearing Deposits, members and non-members | (149,747 | ) | 141,240 | ||||
Securities Purchased Under Agreements to Resell, members and non-members | (1,250,000 | ) | — | ||||
Federal Funds Sold, members and non-members | (1,145, 000 | ) | — | ||||
Premises, Software, and Equipment | (548 | ) | (841 | ) | |||
Available-for-Sale Securities: | |||||||
Purchases of Available-for-Sale Securities | (318,000 | ) | — | ||||
Held-to-Maturity Securities: | |||||||
Proceeds from Maturities of Long-Term Held-to-Maturity Securities | 1,346,697 | 1,863,631 | |||||
Purchases of Long-Term Held-to-Maturity Securities | (2,642,430 | ) | (2,764,429 | ) | |||
Advances: | |||||||
Principal Collected | 16,226,757 | 23,528,400 | |||||
Made to Members | (12,531,738 | ) | (17,059,088 | ) | |||
Mortgage Loans Held f or Portfolio: | |||||||
Principal Collected | 1,113,062 | 1,770,791 | |||||
Purchases | (329,909 | ) | (503,990 | ) | |||
Payments (Proceeds) from Sales of Foreclosed Properties | (271 | ) | (79 | ) | |||
Other Federal Home Loan Banks: | |||||||
Principal Collected on Loans | 236,735 | 150,000 | |||||
Loans Made | (236,735 | ) | (150,000 | ) | |||
Net Cash provided by (used in) Investing Activities | 318,873 | 6,975,635 |
The accompanying notes are an integral part of these financial statements.
5
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
For the Nine Months Ended | |||||||
September 30, | |||||||
2010 | 2009 | ||||||
Financing Activities: | |||||||
Net Change in: | |||||||
Deposits | (228,972 | ) | 231,216 | ||||
Net Proceeds (Payments) on Derivative Contracts with Financing Elements | (110,959 | ) | (106,548 | ) | |||
Net Proceeds from Issuance of Consolidated Obligations: | |||||||
Discount Notes | 520,523,671 | 346,709,200 | |||||
Consolidated Obligatio n Bonds | 25,459,202 | 22,525,779 | |||||
Payments for Maturing and Retiring Consolidated Obligations: | |||||||
Discount Notes | (517,045,610 | ) | (359,415,552 | ) | |||
Consolidated Obligation Bonds | (30,843,348 | ) | (17,924,000 | ) | |||
Borrowings from Other Federal Home Loan Banks | — | 236,000 | |||||
Payments for Maturities of Borrowings from Other Federal Home Loan Banks | — | (236,000 | ) | ||||
Proceeds from Sale of Capital Stock | 37,166 | 67,304 | |||||
Payments for Redemption of Mandatorily Redeemable Capital Stock | (3,375 | ) | (3,943 | ) | |||
Payments for Repurchase/Redemption of Capital Stock | — | (5,128 | ) | ||||
Cash Dividends Paid | (23,650 | ) | (44,468 | ) | |||
Net Cash provided by (used in) Financing Activities | (2,235,875 | ) | (7,966,140 | ) | |||
Net Increase (Decrease) in Cash and Cash Equivalents | (1,710,229 | ) | (811,558 | ) | |||
Cash and Cash Equivalents at Beginning of the Period | 1,722,077 | 870,810 | |||||
Cash and Cash Equivalents at End of the Period | $ | 11,848 | $ | 59,252 | |||
Supplemental Disclosures: | |||||||
Interest Paid | $ | 484,992 | $ | 768,829 | |||
Affordable Housing Program Payments | 10,963 | 8,594 | |||||
Resolution Funding Corporation Assessments Paid | 13,529 | 36,142 |
The accompanying notes are an integral part of these financial statements.
6
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements
($ amounts in thousands unless otherwise indicated)
Note 1 - Basis of Presentation
The accompanying interim financial statements of the Federal Home Loan Bank of Indianapolis (“Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements.
The interim financial statements presented herein should be read in conjunction with the Bank's audited financial statements and notes thereto, which are included in the Bank's Annual Report on Form 10-K as filed with the SEC under the Securities Exchange Act of 1934 on March 19, 2010 (“2009 Form 10-K”). The Bank's significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements in the 2009 Form 10-K. There have been no significant changes to these policies as of September 30, 2010.
The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the Bank's financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expec ted for the full fiscal year or any other interim period.
We have reclassified certain amounts from the prior periods to conform to the current period presentation. These reclassifications had no effect on Net Income or Total Capital.
As used in this Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “FHLBI,” and the “Bank” refer to the Federal Home Loan Bank of Indianapolis.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ significantly from these estimates.
Subsequent Events. We have evaluated events and transactions through the time of filing our third quarter 2010 Form 10-Q with the SEC.
Note 2 - Recently Issued Accounting Standards & I nterpretations
Accounting for Transfers of Financial Assets. On June 12, 2009, the Financial Accounting Standards Board (“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 includ ed: (i) the removal of the concept of qualifying special purpose entities; (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred; and (iii) 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 required enhanced disclosures about transfers of financial assets and a transferor's continuing involvement. This guidance became effective as of the beginning of each reporting entity's first annual reporting period that began after November 15, 2009 (January 1, 2010, for us), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We adopted this guidance as of January 1, 2010. Our adoption of this guidance did not have a material effect on our financial condition, results of operations or cash flow s.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Accounting for the Consolidation of Variable Interest Entities. On June 12, 2009, the FASB issued guidance intended to improve financial reporting by enterprises involved with variable interest entities (“VIEs”), by providing more relevant and reliable information to users of financial statements. This guidance am ended the manner in which entities evaluate whether consolidation is required for VIEs. An entity must first perform a qualitative analysis in determining whether it must consolidate a VIE, and if the qualitative analysis is not determinative, the entity must perform a quantitative analysis. The guidance also requires that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based upon the occurrence of triggering events. Additionally, the guidance requires enhanced disclosures about how an entity's involvement with a VIE affects its financial statements and its exposure to risks. This guidance became effective as of the beginning of each reporting entity's first annual reporting period that began after November 15, 2009 (January 1, 2010, for us), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We adopted this guidance as of January 1, 2010. Our adoption of this guidance did not have a mat erial effect on our 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 guidance 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 to describe the reasons for the transfers. Furthermore, this guidance requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3); clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amended 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. This guidance became effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010, for us), except for the disclosures about purchases, sales, issuances, and settlements in the reconciliation in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011, for us ), and for interim periods within those fiscal years. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. Though early adoption was permitted, we adopted this guidance as of January 1, 2010, with the exception of the required changes noted above related to the reconciliation of Level 3 fair values, which we plan to adopt on January 1, 2011. Our adoption resulted in increased annual and interim financial statement disclosures, but did not have a material effect on our 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 became effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010, for us). Though early adoption was permitted, we adopted this guidance as of July 1, 2010. Our adoption of this guidance did not have a material effect on our financial condition, results of operations or cash flows.
&n bsp;
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the FASB issued amended guidance to enhance disclosures about an entity's allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires all public and nonpublic entities 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 cla ss 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 us). 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 us). The adoption of this amended guidance will likely result in increased financial statement disclosures, but is not expected to have a material effect on our financial condition, results of operations or cash flows.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 3 - Available-for-Sale Securities
Major Security Types. Available-for-Sale (“AFS”) securities include AAA-rated agency debentures issued or guaranteed by Government Sponsored Enterprises (“GSEs”) but purchased from non-member counterparties as well as corporate debentures guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) and backed by the full faith and credit of the United States under the Temporary Liquidity Guarantee Program (“TLGP”). AFS securities were as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
September 30, 2010 | Cost | Gains | Losses | Fair Value | ||||||||||||
GSEs | $ | 1,665,909 | $ | 234,321 | $ | — | $ | 1,900,230 | ||||||||
TLGP | 325,041 | 1,069 | — | 326,110 | ||||||||||||
Total AFS | $ | 1,990,950 | $ | 235,390 | $ | — | $ | 2,226,340 | ||||||||
December 31, 2009 | ||||||||||||||||
GSEs | $ | 1,672,918 | $ | 87,796 | $ | — | $ | 1,760,714 | ||||||||
TLGP | — | — | — | — | ||||||||||||
Total AFS | $ | 1,672,918 | $ | 87,796 | $ | — | $ | 1,760,714 |
Gross unrealized gains as of September 30, 2010, include unrealized losses on AFS securities of $7,351 and a hedging gain of $242,7 41. Gross unrealized gains as of December 31, 2009, include unrealized gains on AFS securities of $2,140 and a hedging gain of $85,656.
Redemption Terms. The amortized cost and estimated fair value of AFS securities by contractual maturity are detailed below.
September 30, 2010 | December 31, 2009 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Year of Contractual Maturity | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due in one year or less | $ | — | &nbs p; | $ | — | $ | — | $ | — | |||||||
Due after one year through five years | 325,041 | 326,110 | — | — | ||||||||||||
Due after five years through ten years | 1,665,909 | 1,900,230 | 1,672,918 | 1,760,714 | ||||||||||||
Due after ten years | — | & mdash; | — | — | ||||||||||||
Total AFS | $ | 1,990,950 | $ | 2,226,340 | $ | 1,672,918 | $ | 1,760,714 |
Interest-Rate Payment Terms. All of the AFS securities pay a fixed rate of interest ranging from 1.88% to 5.50%.
Realized Gains and Losses. There were no sales of AFS securities during the three and nine months ended September 30, 2010, or 2009.
Note 4 - Held-to-Maturity Securities
Major Security Types. Held-to-Maturity (“HTM”) securities consist primarily of mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), and TLGP. Our MBS include residential MBS (“RMBS”) and our ABS include both manufactured housing and home equity loans. Our MBS and ABS include private-label RMBS and ABS (“Private-label MBS and ABS”). Our HTM securities also include state or local housing finance agency obligations, and corporate debentures issued by GSEs.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Our HTM securities, along with the impact of other-than-temporary-impairment (“OTTI”), of which a portion is reported in Accumulated Other Comprehensive Inco me (“AOCI”), were as follows. OTTI may also refer to “Other-than-Temporarily Impaired” as the context indicates.
Gross | Gross | |||||||||||||||||||||||
OTTI | Unrecognized | Unrecognized | Estimated | |||||||||||||||||||||
Amortized | Recognized | Carrying | Holding | Holding | Fair | |||||||||||||||||||
September 30, 2010 | Cost (1) | In AOCI | Value (2) | Gains (3) | Losses (3) | Value | ||||||||||||||||||
Non-MBS and ABS: | �� | |||||||||||||||||||||||
GSE debentures | $ | 294,315 | $ | — | $ | 294,315 | $ | 433 | $ | (261 | ) | $ | 294,487 | |||||||||||
State or local housing finance agency obligations | &mdas h; | — | — | — | — | — | ||||||||||||||||||
TLGP | 2,066,328 | — | 2,066,328 | 6,536 | — | 2,072,864 | ||||||||||||||||||
Total Non-MBS and ABS | 2,360,643 | — | 2,360,643 | 6,969 | (261 | ) | 2,367,351 | |||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. Obligations -guaranteed RMBS | 2,204,038 | — | 2,204,038 | 55,609 | (967 | ) | 2,258,680 | |||||||||||||||||
GSE RMBS | 2,761,487 | — | 2,761,487 | 107,514 | (205 | ) | 2,868,796 | |||||||||||||||||
Private-label RMBS | 2,029,630 | (237,957 | ) | 1,791,673 | 149,017 | (32,507 | ) | 1,908,183 | ||||||||||||||||
Private-label ABS | 22,764 | — | 22,764 | — | (4,687 | ) | 18,077 | |||||||||||||||||
Total Private-label | 2,052,394 | (237,957 | ) | 1,814,437 | 149,017 | (37,194 | ) | 1,926,260 | ||||||||||||||||
Total MBS and ABS | 7,017,919 | (237,957 | ) | 6,779,962 | 312,140 | (38,366 | ) | 7,053,736 | ||||||||||||||||
Total HTM securities | $ | 9,378,562 | $ | (237,957 | ) | $ | 9,140,605 | $ | 319,109 | $ | (38,627 | ) | $ | 9,421,087 | ||||||||||
Decem ber 31, 2009 | ||||||||||||||||||||||||
Non-MBS and ABS: | ||||||||||||||||||||||||
GSE debentures | $ | 125,893 | $ | — | $ | 125,893 | $ | 446 | $ | — | $ | 126,339 | ||||||||||||
State or local housing finance agency obligations | 260 | — | 260 | — | — | 260 | ||||||||||||||||||
TLGP | 2,067,311 | — | 2,067,311 | 8,407 | (26 | ) | 2,075,692 | |||||||||||||||||
Total Non-MBS and ABS | 2,193,464 | & nbsp; | — | 2,193,464 | 8,853 | (26 | ) | 2,202,291 | ||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. Obligations -guaranteed RMBS | 865,160 | — | 865,160 | 164 | (7,965 | ) | 857,359 | |||||||||||||||||
GSE RMBS | 2,136,381 | — | 2,136,381 | 58,880 | (2,985 | ) | 2,192,276 | |||||||||||||||||
Private-label RMBS | 2,805,348 | (324,041 | ) | 2,481,307 | 56,915 | (116,891 | ) | 2,421,331 | ||||||||||||||||
Private-label ABS | 24,839 | — | 24,839 | — | (7,614 | ) | 17,225 | |||||||||||||||||
Total Private-label | 2,830,187 | (324,041 | ) | 2,506,146 | 56,915 | (124,505 | ) | 2,438,556 | ||||||||||||||||
Total MBS and ABS | 5,831,728 | (324,041 | ) | 5,507,687 | 115,959 | (135,455 | ) | 5,488,191 | ||||||||||||||||
Total HTM securities | $ | 8,025,192 | $ | (324,041 | ) | $ | 7,701,151 | $ | 124,812 | $ | (135,481 | ) | $ | 7,690,482 |
(1) | Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and/or previous OTTI losses recognized in earnings. | |
(2)&nbs p; | Carrying value of HTM securities represents amortized cost after adjustment for non-credit related impairment recognized in AOCI. | |
(3) | Gross unrecognized holding gains (losses) represent the difference between estimated fair value and carrying value. |
Federal Home Loan Bank of Indianap olis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following tables detail impaired HTM securities, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2010 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Non-MBS and ABS: | ||||||||||||||||||||||||
GSE debentures | $ | 168,731 | $ | (261 | ) | $ | — | $ | — | $ | 168,731 | $ | (261 | ) | ||||||||||
TLGP | — | — | — | — | — | — | ||||||||||||||||||
Total Non-MBS and ABS | 168,731 | (261 | ) | — | — | 168,731 | (261 | ) | ||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. Obligations - guaranteed RMBS | 569,600 | (967 | ) | — | — | 569,600 | (967 | ) | ||||||||||||||||
GSE RMBS | 98,705 | (205 | ) | — | — | 98,705 | (205 | ) | ||||||||||||||||
Private-label RMBS | 36,260 | (132 | ) | 1,694,719 | (123,404 | ) | 1,730,979 | (123,536 | ) | |||||||||||||||
Private-label ABS | — | — | 18,076 | (4,687 | ) | 18,076 | (4,687 | ) | ||||||||||||||||
Total MBS and ABS | 704,565 | (1,304 | ) | 1,712,795 | (128,091 | ) | 2,417,360 | (129,395 | ) | |||||||||||||||
Total impaired HTM securities | $ | 873,296 | $ | (1,565 | ) | $ | 1,712,795 | $ | (128,091 | ) | $ | 2,586,091 | $ | (129,656 | ) | |||||||||
December 31, 2009 | ||||||||||||||||||||||||
Non-MBS and ABS: | ||||||||||||||||||||||||
GSE debentures | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
TLGP | 46,263 | (26 | ) | — | — | 46,263 | (26 | ) | ||||||||||||||||
Total Non-MBS and ABS | 46,263 | (26 | ) | — | — | 46,263 | (26 | ) | ||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. Obligations - guaranteed RMBS | 746,222 | (7,965 | ) | — | — | 746,222 | (7,965 | ) | ||||||||||||||||
GSE RMBS | 280,660 | (2,985 | ) | — | — | 280,660 | (2,985 | ) | ||||||||||||||||
Private-label RMBS | — | — | 2,421,331 | (384,017 | ) | 2,421,331 | (384,017 | ) | ||||||||||||||||
Private-label ABS | — | — | 17,225 | (7,614 | ) | 17,225 | (7,614 | ) | ||||||||||||||||
Total MBS and ABS | 1,026,882 | (10,950 | ) | 2,438,556 | (391,631 | ) | 3,465,438 | (402,581 | ) | |||||||||||||||
Total impaired HTM securities | $ | 1,073,145 | $ | (10,976 | ) | $ | 2,438,556 | $ | (391,631 | ) | $ | 3,511,701 | $ | (402,607 | ) |
The following table details a reconciliation of unrealized losses.
Reconciliation of Unrealized Losses | September 30, 2010 | December 31, 2009 | ||||||
OTTI losses recognized in AOCI | $ | (237,957 | ) | $ | (324,041 | ) | ||
Gross unrecognized holding losses | (38,627 | ) | (135,481 | ) | ||||
Gross unrecognized holding gains on OTTI securities | 148,381 | 56,915 | ||||||
Less: gross unrealized gains on OTTI securities | 1,453 | — | ||||||
Total Unrealized Losses | &nbs p; | $ | (129,656 | ) | $ | (402,607 | ) |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Redemption Terms. The amortized cost and estimated fair value of non-MBS and ABS by contractual maturity are detailed below. Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Estimated | Estimated | |||||||||||||||||||||||
Amortized | Carrying | Fair | Am ortized | Carrying | Fair | |||||||||||||||||||
Year of Contractual Maturity | Cost (1) | Value (1) | Value | Cost (1) | Value (1) | Value | ||||||||||||||||||
Non-MBS and ABS: | ||||||||||||||||||||||||
Due in one year or less | $ | 235,000 | $ | 235,000 | $ | 235,254 | $ | — | $ | — | $ | — | ||||||||||||
Due after one year through five years | 2,125,643 | 2,125,643 | 2,132,097 | 2,193,204 | 2,193,204 | 2,202,031 | ||||||||||||||||||
Due after five years through ten years | — | — | — | — | — | — | ||||||||||||||||||
Due after ten years | — | — | — | 260 | 260 | 260 | ||||||||||||||||||
Total Non-MBS and ABS | 2,360,643 | 2,360,643 | 2,367,351 | 2,193,464 | 2,193,464 | 2,202,291 | ||||||||||||||||||
Total MBS and ABS | 7,017,919 | 6,779,962 | 7,053,736 | 5,831,728 | 5,507,687 | 5,488,191 | ||||||||||||||||||
Total HTM securities | $ | 9,378,562 | $ | 9,140,605 | $ | 9,421,087 | $ | 8,025,192 | $ | 7,701,151 | $ | 7,690,482 |
(1) | Carrying value of HTM securities represents amortized cost after adjustment for non-credit related impairment recognized in AOCI. |
Interest-R ate Payment Terms. The following table details interest-rate payment terms for HTM securities, at amortized cost:
Interest-Rate Payment Terms | September 30, 2010 | December 31, 2009 | ||||||
Non-MBS and ABS: | ||||||||
Fixed-rate | $ | 25,323 | $ | 26,153 | ||||
Variable-rate | 2,335,320 | 2,167,311 | ||||||
Total Non-MBS and ABS | 2,360,643 | 2,193,464 | ||||||
MBS and ABS: | ||||||||
Pass-through securities: | ||||||||
Fixed-rate | 1,511,837 | 727,887 | ||||||
Variable-rate | 492,346 | 424,400 | ||||||
Collateralized mortgage obligations: | ||||||||
Fixed-rate | 3,143,153 | 3,333,691 | ||||||
Variable-rate | 1,870,583 | 1,345,750 | ||||||
Total MBS and ABS | 7,017,919 | 5,831,728 | ||||||
Total HTM securities, at amortized cost | $ | 9,378,562 | $ | 8,025,192 |
Variable-rate pass-through securities include hybrid adjustable mortgage securities of $239,810 and $424,400 at September 30, 2010, and December 31, 2009, respectively. Variable-rate collateralized mortgage obligations include hybrid adjustable mortgage securities of $782,320 and $1,009,130 at September 30, 2010, and December 31, 2009, respectively.
Federal Home Loan Bank of Indianapolis
Notes to In terim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table details the net (discounts) premiums included in the amortized cost of our HTM securities:
Net (Discounts) Premiums | September 30, 2010 | December 31, 2009 | ||||||
Non-MBS and ABS: | ||||||||
Net purchased (discounts) premiums | $ | 2,678 | $ | 4,239 | ||||
Total Non-MBS and ABS | 2,678 | 4,239 | ||||||
MBS and ABS: | ||||||||
Net purchased (discounts) premiums | 65,925 | 32,190 | ||||||
OTTI related credit losses | (128,670 | ) | (60,291 | ) | ||||
OTTI related accretion adjustments | (6,224 | ) | (1,533 | ) | ||||
Other - net discounts reclassified into credit losses | (5,988 | ) | (5,142 | ) | ||||
Total MBS and ABS | (74,957 | ) | (34,776 | ) | ||||
Total HTM securities, net (discounts) premiums included in amortized cost | $ | (72,279 | ) | $ | (30,537 | ) |
Realized Gains and Losses. There were no sales of HTM securities during the three and nine months ended September 30, 2010, or 2009.
Note 5 - Other-Than-Temporary Impairment Analysis
OTTI Evaluation Process. We evaluate our individual AFS and HTM securities that are in an unrealized loss position for OTTI on a quarterly basis as described in our 2009 Form 10-K.
Our evaluation includes an estimate of cash flows that we are likely to collect based on an assessment of each individual security, the structure of the security and certain assumptions as determined by the 12 Federal Home Loan Banks' ("FHLBs") OTTI Governance Committee, such as the prepayment speeds, default rates, loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics, housing price changes, and interest rates, to determine whether and to what extent any principal losses will occur.
A significant input is the forecast of future housing price changes for the relevant states and core-based statistical areas (“CBSA”), which are based on an assessment of the relevant housing markets. Our housing price forecast assumed CBSA level current-to-trough home price declines ranging from 0% to 10% over the three- to nine-month period beginning July 1, 2010. Thereafter, home prices are projected to remain flat in the first year, increase 1% in the second year, 3% in the third year, 4% in the fourth year, 5% in the fifth year, 6% in the sixth year, and 4% in each subsequent year.
The results of our cash-flow analysis can vary significantly with changes in assumptions and expectations.
Results of OTTI Evaluation Process. For our agency MBS and non-MBS, we determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect us from losses based on current expectations. As a result, we have determined that, as of September 30, 2010, all of the gross unrealized losses on our agency MBS and non-MBS are temporary. The declines in market value of these securities are not attributable to credit quality, we do not intend to sell these securities, and it is not more likely than not (i.e., not likely) that we will be required to sell these securities before recovery of each security's amortized cost. As a result, we do not consider any of these securities to be OTTI at September 30, 2010.
Based on our evaluations, for the three months ended September 30, 2010, we recognized OTTI credit losses of $618 for three private-label RMBS. We do not intend to sell these securities, and it is not more likely than not (i.e., not likely) that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost. However, we determined that we would not recover the entire amortized cost of these securities.
Certain estimates were refined and certain assumptions were adjusted this quarter, particularly related to prime loans, which resulted in lower projected principal losses relative to the second quarter of 2010 (but higher relative to prior quarters) due to our investment concentration in prime private-label RMBS.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
For these three securities, the following table details the significant inputs used to determine the amount of credit loss recognized in Other Income (Loss) during this period as well as the related current credit enhancement. Credit enhancement includes subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a shortfall of cash flows on the security. The calculated averages represent the dollar-weighted averages of all the private-label RMBS in each category shown. The classification (prime or Alt-A) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification at the time of origination.
Significant Inputs for OTTI private-label RMBS | Current Credit | |||||||||||||||
Prepayment Rates | Default Rates | Loss Severities | Enhancement | |||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||
Average | Range | Average | Range | Average | Range | Average | Range | |||||||||
Year of Securitization | % | % | % | % | % | % | % | % | ||||||||
Prime 2005 | 9.7 | 8.3 - 10.1 | 37.8 | 35.6 - 45.3 | 37.2 | 35.6 - 42.6 | 9.3 | 5.8 - 10.4 | ||||||||
Alt-A 2006 | 17.0 | 17.0 - 17.0 | 22.8 | 22.8 - 22.8 | 41.3 | 41.3 - 41.3 | 4.5 | 4.5 - 4.5 | ||||||||
Total OTTI private-label RMBS | 10.8 | 8.3 - 17.0 | 35.5 | 22.8 - 45.3 | 37.8 | 35.6 - 42.6 | 8.6 | 4.5 - 10.4 |
The following table details the classification of our three securities for which an OTTI loss was recognized during the three months ended September 30, 2010, based on our impairment analysis of our investment portfolio at September 30, 2010. The table also details the classification of our 25 securities for which an OTTI loss was recognized during the life of the securities, which represents securities impaired prior to 2010 as well as during the nine months ended September 30, 2010. Securities are classified based on the classification (prime or Alt-A) by the Nationally Recognized Statistical Rating Organizations (“NRSRO”) upon issuance.
Unpaid | Estimated | |||||||||||||||
Principal | Amortized | Carrying | Fair | |||||||||||||
For the Three Months Ended September 30, 2010 | Balance | Cost | Value | Value | ||||||||||||
Private-label RMBS - prime | $ | 220,605 | $ | 209,430 | $ | 166,722 | $ | 186,453 | ||||||||
Private-label RMBS - Alt-A | — | — | — | — | ||||||||||||
Total OTTI HTM securities | $ | 220,605 | $ | 209,430 | $ | 166,722 | $ | 186,453 | ||||||||
For the Life-to-Date Ended September 30, 2010 | ||||||||||||||||
Private-label RMBS - prime | $ | 1,299,169 | $ | 1,163,705 | $ | 933,330 | $ | 1,079,336 | ||||||||
Private-label RMBS - Alt-A | 58,797 | 53,380 | 45,798 | 48,173 | ||||||||||||
Total OTTI HTM securities | $ | 1,357,966 | $ | 1,217,085 | $ | 979,128 | $ | 1,127,509 | ||||||||
Total HTM MBS and ABS | $ | 7,092,875 | $ | 7,017,919 | $ | 6,779,962 | $ | 7,053,736 | ||||||||
Total HTM securities | $ | 9,450,840 | $ | 9,378,562 | $ | 9,140,605 | $ | 9,421,087 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The table below details the credit and non-credit OTTI losses on our securities. Securities are classified based on the classification by the NRSROs upon issuance.
Net | & nbsp; | Total | ||||||||||
Credit | Non-Credit | OTTI | ||||||||||
For the Three Months Ended September 30, 2010 | Losses | (Gains) Losses | Losses | |||||||||
Private-label RMBS - prime | $ | 618 | $ | (618 | ) | $ | — | |||||
Private-label RMBS - Alt-A | — | — | — | |||||||||
Total OTTI HTM securities | $ | 618 | $ | (618 | ) | $ | — | |||||
For the Nine Months Ended September 30, 2010 | ||||||||||||
Private-label RMBS - prime | $ | 66,585 | $ | (45,173 | ) | $ | 21,412 | |||||
Private-label RMBS - Alt-A | 1,793 | (926 | ) | 867 | ||||||||
Total OTTI HTM securities | $ | 68,378 | $ | (46,099 | ) | $ | 22,279 |
For previously impaired securities that were further impaired in the current quarter, and for which the current fair value is greater than the fair value at the time of the previous impairment, an amount equal to all or a portion of the current quarter credit loss is reclassified out of non-credit losses in AOCI and into Other Income (Loss). This amount totaled $618 and $67,387 for the three and nine months ende d September 30, 2010, respectively, and $16,247 for the three and nine months ended September 30, 2009.
For the three and nine months ended September 30, 2010, we accreted $11,465 and $39,985, respectively, of non-credit losses from AOCI to the carrying value of HTM securities, compared to $9,835 and $18,080 for the three and nine months ended September 30, 2009.
The following table details a rollforward by quarter of the cumulative credit losses recognized in Other Income (Loss). The rollforward excludes the portion of OTTI losses that were recognized in AOCI.
Rollfoward by Quarter | 2010 | 2009 | ||||||
Balance as of January 1, | $ | 60,291 | $ | — | ||||
Additions: | ||||||||
Credit losses for which OTTI was not previously recognized | 180 | 18,550 | ||||||
Additional credit losses for which OTTI was previously recognized | 5,886 | — | ||||||
Reductions | — | — | ||||||
Balance as of March 31, | 66,357 | 18,550 | ||||||
Additions: | ||||||||
Credit losses for which OTTI was not previously recognized | 514 | 1,129 | ||||||
Additional credit losses for which OTTI was previously recognized | 61,180 | 915 | ||||||
Reductions | &nbs p; | — | — | |||||
Balance as of June 30, | 128,051 | 20,594 | ||||||
Additions: | ||||||||
Credit losses for which OTTI was not previously recognized | — | 5,848 | ||||||
Additional credit losses for which OTTI was previously recognized | 618 | 18,463 | ||||||
Reductions | — | — | ||||||
Balance as of September 30, | $ | 128,669 | $ | 44,905 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The remaining unrealized losses in our HTM portfolio are due to illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets. However, the losses are considered temporary as we expect to recover the entire amortized cost on the remaining HTM securities in an unrealized loss position and we do not intend to sell these securities, and it is not more likely than not (i.e., not likely) that we will be required to sell these securities before our anticipated recovery of the remaining amortized cost.
Note 6 - Advances
Redemption Terms. We had Advances (secured loans) outstanding, including Affordable Housing Program (“AHP”) Advances, at interest rates ranging from 0.20% to 8.34%, as detailed below.
September 30, 2010 | December 31, 2009 | |||||||||||||
Yea r of Contractual Maturity | Amount | WAIR(1) % | Amount | WAIR(1) % | ||||||||||
Overdrawn demand and overnight deposit accounts | $ | 1,073 | 2.47 | $ | — | — | ||||||||
Due in 1 year or less | 3,431,586 | 3.63 | 5,045,723 | 3.65 | ||||||||||
Due after 1 year through 2 years | 3,818,589 | 3.92 | 2,842,987 | 4.13 | &nbs p; | |||||||||
Due after 2 years through 3 years | 2,987,265 | 3.56 | 4,152,585 | 4.01 | ||||||||||
Due after 3 years through 4 years | 979,157 | 3.05 | 2,495,969 | 3.70 | ||||||||||
Due after 4 years through 5 years | 1,406,611 | 3.83 | 1,003,680 | 3.57 | ||||||||||
Thereafter | 5,390,612 | 2.54 | 6,168,969 | 2.81 | ||||||||||
Total A dvances, par value | 18,014,893 | 3.34 | 21,709,913 | 3.55 | ||||||||||
Unamortized discount on AHP Advances | (117 | ) | (156 | ) | ||||||||||
Unamortized discount on Advances | (1,546 | ) | (243 | ) | ||||||||||
Hedging adjustments | 893,539 | 724,297 | ||||||||||||
Other adjustments (2) | 7,348 | 9,093 | ||||||||||||
Total Advances | $ | 18,914,117 | $ | 22,442,904 |
(1) | Weighted Average Interest Rate. | |
(2) | Other adjustments include deferred prepayment fees being recognized through the payments on new advances. |
In general, Advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to prepayments. We also offer Advances to members that contain call options that may be exercised with or without prepayment fees at the borrower's discretion on predetermined dates (call dates) before the stated maturities (callable Advances). Borrowers typically exercise their call options for fixed-rate Advances when interest rates decline or for adjustable-rate Advances when spreads change. At September 30, 2010, and December 31, 2009, we had callable Advances of $3,265,200 and $3,494,781, respectively.
The following table details Advances by the earlier of the year of contractual maturity or next call date:
Year of Contractual Maturity or Next Call Date | September 30, 2010 | December 31, 2009 | ||||||
Overdrawn demand and overnight deposit accounts | $ | 1,073 | $ | — | ||||
Due in 1 year or less | 4,907,937 | 6,478,573 | ||||||
Due after 1 year through 2 years | 4,393,589 | 2,732,487 | ||||||
Due after 2 years through 3 years | 3,247,264 | 5,027,585 | ||||||
Due after 3 years through 4 years | 932,157 | 2,495,969 | ||||||
Due after 4 years through 5 years | 1,321,611 | 976,680 | ||||||
Thereafter | 3,211,262 | 3,998,619 | ||||||
Total Advances, par value | $ | 18,014,893 | $ | 21,709,913 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
We also offer putable Advances to members. Putable Advances allow us to terminate the Advance at predetermined exercise dates, which we would typically exercise when interest rates increase. At September 30, 2010, and December 31, 2009, we had putable Advances outstanding totaling $4,387,750 and $5,240,500, respectively.
The following table details Advances by the earlier of the year of contractual maturity or next put date:
Year of Contractual Maturity or Next Put Date | September 30, 2010 | December 31, 2009 | ||||||
Overdrawn demand and overnight deposit accounts | $ | 1,073 | $ | — | ||||
Due in 1 year or less | 6,131,337 | 8,075,673 | ||||||
Due after 1 year through 2 years | 1,798,589 | 2,763,487 | ||||||
Due after 2 years through 3 years | 2,844,514 | 2,034,385 | ||||||
Due after 3 years through 4 years | 915,157 | 2,232,719 | ||||||
Due after 4 years through 5 years | 1,187,111 | 950,680 | ||||||
Thereafter | 5,137,112 | 5,652,969 | ||||||
Total Advances, par value | $ | 18,014,893 | $ | 21,709,913 |
Advance Concentrations. The following table details borrowers holding $1.0 billion or more of our total par value of Advances as of either September 30, 2010, or December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||||||||
Advances | Percent of | Advances | Percent of | |||||||||||
Borrower | Outstanding | Total | Outstanding | Total | ||||||||||
Flagstar Bank, FSB | $ | 3,400,000 | 19 | % | $ | 3,900,000 | 18 | % | ||||||
Jackson National Life Insurance Company | 1,750,000 | 10 | % | 1,750,000 | 8 | % | ||||||||
Bank of America, N.A. | 900,000 | 5 | % | 1,450,000 | 7 | % | ||||||||
Citizens Bank, Flint, Michigan | 954,889 | 5 | % | 1,279,917 | 6 | % | ||||||||
Total | $ | 7,004,889 | 39 | % | $ | 8,379,917 | 39 | % | ||||||
Total Advances, par value | $ | 18,014,893 | 100 | % | $ | 21,709,913 | 100 | % |
At September 30, 2010, and December 31, 2009, we held $14,523,5 49 and $17,178,561 unpaid principal balance of collateral, respectively, to cover the Advances to these four institutions, and therefore we do not expect to incur any credit losses on these Advances. (See Note 15 for more information on transactions with shareholders.)
Interest-Rate Payment Terms. The following table details interest-rate payment terms for Advances:
Interest-Rate Payment Terms | September 30, 2010 | December 31, 2009 | ||||||
Fixed-rate | $ | 14,515,553 | $ | 17,974,562 | ||||
Variable-rate | 3,499,340 | 3,735,351 | ||||||
Total Advances, par value | $ | 18,014,893 | $ | 21,709,913 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indica ted)
Note 7 - Mortgage Loans Held for Portfolio
Through the Mortgage Purchase Program (“MPP”), we hold mortgage loans that are purchased from Participating Financial Institutions (“PFIs”). These loans are primarily serviced by PFIs or an approve d mortgage servicer. These mortgage loans are credit-enhanced by PFIs and supplemental mortgage insurance (“SMI”) or guaranteed or insured by Federal agencies. The following tables detail information on Mortgage Loans Held for Portfolio:
Mortgage Loans Held for Portfolio by Term | September 30, 2010 | December 31, 2009 | ||||||
Fixed-rate medium-term(1) mortgages | $ | 933,742 | $ | 1,068,593 | ||||
Fixed-rate long-term(2) mortgages | 5,535,786 | 6,188,534 | ||||||
Total Mortgage Loans Held for Portfolio, par value | 6,469,528 | 7,257,127 | ||||||
Unamortized premiums | 34,063 | 39,907 | ||||||
Unamortized discounts | (25,081 | ) | (36,062 | ) | ||||
Hedging adjustments | 8,902 | 10,923 | ||||||
Total Mortgage Loans Held for Portfolio | $ | 6,487,412 | $ | 7,271,895 |
(1) | Medium-term is defined as an original term of 15 years or less. | |
(2) | Long-term is defined as an original term greater than 15 years. |
Mortgage Loans Held for Portfolio by Type | September 30, 2010 | December 31, 2009 | ||||||
Conventional loans | $ | 5,981,397 | $ | 6,667,919 | ||||
Federal Housing Administration ("FHA") | 488,131 | 589,208 | ||||||
Total Mortgage Loans Held for Portfolio, par value | $ | 6,469,528 | $ | 7,257,127 |
To manage the inherent credit risk in conventional MPP, a portion of the periodic interest payments on the loans is deposited into the lender risk account (“LRA”) and another portion is used to pay the premium on SMI. When a credit loss occurs on an MPP pool, the accumulated LRA for that pool is used to cover the credit loss in excess of homeowners' equity and private mortgage insurance (“PMI”) until the LRA is exhausted. After the LRA is exhausted, the SMI protects against credit losses down to approximately 50% of the property's original value subject to, in certain cases, an aggregate stop-loss provision in the SMI policy. LRA funds not used are returned to the member (or to the group of members participating in an aggregate MPP pool) over time.
The following table details the changes in the LRA:
Nine Months Ended | Year Ended | |||||||
LRA Activity | September 30, 2010 | December 31, 2009 | ||||||
Balance of LRA at beginning of period | $ | 23,754 | $ | 21,892 | ||||
Collected through periodic interest payments | 3,567 | 5,352 | ||||||
Disbursed for mortgage loan losses | (5,617 | ) | (2,193 | ) | ||||
Returned to members | (571 | ) | (1,297 | ) | ||||
Balance of LRA at end of period | $ | 21,133 | $ | 23,754 |
Mortgage loans are considered impaired when, by collectively evaluating groups of smaller balance homogeneous loans, and using current, historical and projected information and events, it is probable that we will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. At September 30, 2010, and December 31, 2009, we had no investments in mortgage loans that wer e considered impaired. Therefore, the allowance for credit losses was $0 at September 30, 2010, and December 31, 2009. The provision for credit losses was $0 for each of the three and nine months ended September 30, 2010, and 2009.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 8 - Derivative and Hedging Activities
Managing Credit Risk of Derivatives
At September 30, 2010, and December 31, 2009, our maximum credit risk of derivatives, as defined in the 2009 Form 10-K, was approximately $2,725 and $1,714, respectively, which include $1,771 and $689, respectively, of net accrued interest receivable. In determining maximum credit risk, we consider accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities by counterparty. We held no cash at September 30, 2010, and December 31, 2009, as collateral resulting in net uncollateralized balances of $2,725 and $1,714, respectively.
We have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by a major credit rating agency, we could be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest on cash collateral) at September 30, 2010, was $1,106,547 for which we have posted collateral, including accrued interest, of $224,388 in the normal course of business. In addition, we held other derivative instruments in a net liability position of $640 that are not subject to credit support agreements containing credit-risk related contingent features. If our credit rating had been lowered from its current rating to the next lower rating, we could have been required to deliver up to an additional $747,837 of collateral (at fair value) to our derivative counterparties at September 30, 2010. Our senior credit rating was not lowered during the previous 12 months.
We transact most of our derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations (“COs” or “Consolidated Obligations”), consisting of Consolidated Obligation Bonds (“CO Bonds”) and Discount Notes (“Discount Notes”). Note 14 discusses assets pledged by us to these counterparties. We are not a derivative dealer and thus do not trade derivatives for short-term profit.
Financial Statement Effect and Additional Financial Information
Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Fair Value Amounts. The following tables detail the notional amount an d fair value of derivative instruments. For purposes of these tables, the fair values include related accrued interest as reported on the Statements of Condition.
Notional | Fair Value | Fair Value | ||||||||||
Amount of | of Derivative | of Derivative | ||||||||||
September 30, 2010 | Derivatives | Assets | Liabilities | |||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 32,412,663 | $ | 175,446 | $ | 1,278,839 | ||||||
Interest-rate futures/forwards | 92,530 | 23 | 112 | |||||||||
Total derivatives designated as hedging instruments | 32,505,193 | 175,469 | 1,278,951 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 820,084 | 421 | 1,582 | |||||||||
Interest-rate caps/floors | 34,000 | 447 | — | |||||||||
Interest-rate futures/forwards | 132,200 | — | 386 | |||||||||
Mortgage delivery commitments | 204,582 | 261 | 141 | |||||||||
Total derivatives not designated as hedging instruments | 1,190,866 | 1,129 | 2,109 | |||||||||
Total derivatives before adjustments | $ | 33,696,059 | 176,598 | 1,281,060 | ||||||||
Netting adjustments | (173,873 | ) | (173,873 | ) | ||||||||
Cash collateral and related accrued interest | — | (224,388 | ) | |||||||||
Total adjustments (1) | (173,873 | ) | (398,261 | ) | ||||||||
Total derivatives, net | $ | 2,725 | $ | 882,799 | ||||||||
December 31, 2009 | ||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 36,317,525 | $ | 196,671 | $ | 988,424 | ||||||
Interest-rate futures/forwards | — | — | — | |||||||||
Total derivatives designated as hedging instruments | 36,317,5 25 | 196,671 | 988,424 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 36,227 | 615 | 485 | |||||||||
Interest-rate caps/floors | — | — | — | |||||||||
Interest-rate futures/forwards | 41,100 | 765 | — | |||||||||
Mortgage delivery commitments | 38,328 | 4 | 617 | |||||||||
Total derivatives not designated as hedging instruments | 115,655 | 1,384 | 1,102 | |||||||||
Total derivatives before adjustments | $ | 36,433,180 | 198,055 | 989,526 | ||||||||
Netting adjustments | (196,341 | ) | (196,341 | ) | ||||||||
Cash collateral and related accrued interest | — | (80,469 | ) | |||||||||
Total adjustments (1) | (196,341 | ) | (276,810 | ) | ||||||||
Total derivatives, net | $ | 1,714 | $ | 712,716 |
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and also cash collateral held or placed with the same counterparties. |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwis e indicated)
The following table details the components of Net Gains (Losses) on Derivatives and Hedging Activities reported in Other Income (Loss):
For the Three Months | For the Nine Months | ||||||||||||||
Ended September 30, | Ended September 30, | ||||||||||||||
Net Gains (Losses) on Derivatives and Hedging Activities by Type | 2010 | 2009 | 2010 | 2009 | |||||||||||
Net gain (loss) related to fair value hedge ineffectiveness: | |||||||||||||||
Interest-rate swaps | $ | 3,630 | $ | (2,362 | ) | $ | 2,229 | $ | (3,899 | ) | |||||
Interest-rate futures/forwards | 5 | — | 5 | — | ; | ||||||||||
Total net gain (loss) related to fair value hedge ineffectiveness | 3,635 | (2,362 | ) | 2,234 | (3,899 | ) | |||||||||
Net gain (loss) for derivatives not desi gnated as hedging instruments: | |||||||||||||||
Economic hedges: | |||||||||||||||
Interest-rate swaps | 27 | 684 | 60 | 6,319 | |||||||||||
Interest-rate caps/floors | 16 | — | 16 | — | |||||||||||
Interest-rate futures/forwards | (1,654 | ) | (717 | ) | (3,512 | ) | (74 | ) | |||||||
Mortgage delivery commitments | 523 | 157 | 1,681 | (1,959 | ) | ||||||||||
Total net gain (loss) for derivatives not designated as hedging instruments | (1,088 | ) | 124 | (1,755 | ) | 4,286 | |||||||||
Net Gains (Losses) on Derivatives and Hedging Activities | $ | 2,547 | $ | (2,238 | ) | &n bsp; | $ | 479 | $ | 387 |
The following tables detail, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedging relationships and the effect of those derivatives on Net Interest Income for the three and nine months ended September 30, 2010, and 2009:
Gain (Loss) | Gain (Loss) | Net Fair | Effect on | ||||||||||||||
on | on Hedged | Value Hedge | Net Interest | ||||||||||||||
For the Three Months Ended September 30, 2010 | Derivative | Item | Ineffectiveness | Income (1) | |||||||||||||
Advances | $ | (28,553 | ) | ; | $ | 34,483 | $ | 5,930 | $ | (110,282 | ) | ||||||
CO Bonds | 17,094 | (19,222 | ) | (2,128 | ) | 38,095 | |||||||||||
MPP (2) | (13 | ) | 18 | 5 | 1,484 | ||||||||||||
AFS | (54,232 | ) | 54,060 | (172 | ) | (16,252 | ) | ||||||||||
Total | $ | (65,704 | ) | $ | 69,339 | $ | 3,635 | $ | (86,955 | ) | |||||||
For the Three Months Ended September 30,&nb sp;2009 | |||||||||||||||||
Advances | $ | (58,692 | ) | $ | 55,031 | $ | (3,661 | ) | $ | (151,757 | ) | ||||||
CO Bonds | 77,132 | (75,202 | ) | 1,930 | 48,571 | ||||||||||||
MPP (2) | — | — | — | — | |||||||||||||
AFS | (35,293 | ) | 34,662 | (631 | ) | (15,572 | ) | ||||||||||
Total | $ | (16,853 | ) | $ | 14,491 | $ | (2,362 | ) | $ | (118,758 | ) | ||||||
For the Nine Months Ended September 30, 2010 | ; | ||||||||||||||||
Advances | $ | (106,850 | ) | $ | 110,775 | $ | 3,925 | $ | (372,920 | ) | |||||||
CO Bonds | 19,452 | (20,315 | ) | (863 | ) | 153,502 | |||||||||||
MPP (2) | (13 | ) | 18 | 5 | (2,985 | ) | |||||||||||
AFS | (157,920 | ) | 157,087 | (833 | ) | (50,068 | ) | ||||||||||
Total | $ | (245,331 | ) | $ | 247,565 | $ | 2,234 | $ | (272,471 | ) | |||||||
For the Nine Months Ended September 30, 2009 | |||||||||||||||||
Advances | $ | 184,425 | $ | (203,870 | ) | $ | (19,445 | ) | $ | (407,563 | ) | ||||||
CO Bonds | (5,503 | ) | 23,869 | 18,366 | 122,476 | ||||||||||||
MPP (2) | — | — | — | — | |||||||||||||
AFS | 93,229 | (96,049 | ) | (2,820 | ) | (40,061 | ) | ||||||||||
Total | $ | 272,151 | $ | (276,050 | ) | $ | (3,899 | ) | $ | (325,148 | ) |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
(1) | The net interest on derivatives in fair value hedging relationships is presented in the Interest Income / Interest Expense line item of the respective hedged item. | |
(2) | The effect of MPP hedges on Net Interest Income includes derivatives and the related hedged items in bot h fair-value and economic hedging relationships. |
Note 9 - Deposits
Demand, overnight, and other deposits pay interest based on a daily interest rate. Time deposits pay interest based on a fixed rate determined at the time of the deposit.
The following table details the w eighted average interest rates paid on average Interest-Bearing Deposits during the three and nine months ended September 30, 2010, and 2009:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||
WAIR | 0.05 | % | 0.07 | % | 0.04 | % | 0.09 | % |
The following table details Interest-Bearing Deposits and Non-Interest-Bearing Deposits:
Type of Deposits | September 30, 2010 | December 31, 2009 | ||||||
Interest-Bearing Deposits: | ||||||||
Demand and overnight | $ | 568,558 | $ | 806,185 | ||||
Time | 15,000 | 15,224 | ||||||
Other | 22 | 22 | ||||||
Total Interest-Bearing Deposits | 583,580 | 821,431 | ||||||
Non-Interest-Bearing Deposits (1): | ||||||||
Other | 6,470 | 3,420 | ||||||
Total Non-Interest Bearing Deposits | 6,470 | 3,420 | ||||||
Total Deposits | $ | 590,050 | $ | 824,851 |
(1) | Non-Interest-Bearing De posits includes pass-through deposit reserves from members. |
The aggregate amount of time deposits with a denomination of $100 thousand or more was $15,000 and $15,224 as of September 30, 2010, and December&nbs p;31, 2009, respectively.
Note 10 - Consolidated Obligations
Interest-Rate Payment Terms. The following table details CO Bonds by interest-rate payment term:
Interest-Rate Payment Terms | September 30, 2010 | December 31, 2009 | ||||||
Fixed-rate | $ | 28,663,070 | $ | 30,959,600 | ||||
Step-up | 890,000 | 1,690,000 | ||||||
Simple variable-rate | 645,000 | 2,916,000 | ||||||
Range bonds | 60,000 | — | ||||||
Conversion | 140,000 | 225,000 | ||||||
Total CO Bonds, par value | $ | 30,398,070 | $ | 35,790,600 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Redemption Terms. The following tables detail our participation in CO Bonds outstanding:
September 30, 2010 | December 31, 2009 | |||||||||||||
Year of Contractual Maturity | Amo unt | WAIR% | Amoun t | WAIR% | ||||||||||
Due in 1 year or less | $ | 14,950,420 | 0.91 | $ | 17,740,550 | 1.25 | ||||||||
Due after 1 year through 2 years | 2,492,050 | 2.44 | 4,353,650 | 1.92 | ||||||||||
Due after 2 years through 3 years | 2,213,000 | 2.59 | &n bsp; | 2,943,550 | 2.61 | |||||||||
Due after 3 years through 4 years | 1,537,000 | 2.82 | 1,998,750 | 2.98 | ||||||||||
Due after 4 years through 5 years | 1,967,250 | 2.79 | 1,981,900 | 3.26 | ||||||||||
Thereafter | 7,238,350 | 4.14 | 6,772,200 | 4.69 | ||||||||||
Total CO Bonds, par value | 30,398,070 | 2.14 | 35,790,600 | 2.30 | ||||||||||
Unamortized bond premiums | 47,614 | 35,729 | ||||||||||||
Unamortized bond discounts | (23,592 | ) | (24,947 | ) | ||||||||||
Hedging adjustments | 125,899 | 106,407 | ||||||||||||
Total CO Bonds | $ | 30,547,991 | $ | 35,907,789 |
Redemption Feature | September 30, 2010 | December 31, 2009 | ||||||
Non-callable or non-putable | $ | 22,386,070 | $ | 25,530,600 | ||||
Callable | 8,012,000 | 10,260,000 | ||||||
T otal CO Bonds, par value | $ | 30,398,070 | $ | 35,790,600 |
Year of Contractual Maturity or Next Call Date | September 30, 2010 | December 31, 2009 | ||||||
Due in 1 year or less | $ | 21,951,420 | $ | 26,744,550 | ||||
Due after 1 year through 2 years | 2,168,050 | 3,168,650 | ||||||
Due after 2 years through 3 years | 1,508,000 | 1,594,550 | ||||||
Due after 3 years through 4 years | 842,000 | 1,206,750 | ||||||
Due after 4 years through 5 years | 880,250 | 676,900 | ||||||
Thereafter | 3,048,350 | 2,399,200 | ||||||
Total CO Bonds, par value | $ | 30,398,070 | $ | 35,790,600 |
Our participation in Discount Notes, all of which are due within one year, was as follows:
Discount Notes | September 30, 2010 | December 31, 2009 | ||||||
Book value | $ | 9,728,153 | $ | 6,250,093 | ||||
Par value | 9,729,681 | 6,251,677 | ||||||
Weighted average effective interest rate | 0.14 | % | 0.12 | % |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 11 - Capital
We are subject to capital requirements under our capital plan and the Federal Housing Finance Agency (“Finance Agency” ) rules and regulations.
As detailed in the following table, we were in compliance with the Finance Agency's capital requirements at September 30, 2010, and December 31, 2009.
September 30, 2010 | December 31, 2009 | |||||||||||||||
Regulatory Capital Requirements | Required | Actual | Required | Actual | ||||||||||||
Risk-based capital | $ | 767,932 | $ | 2,911,002 | $ | 888,918 | $ | 2,830,673 | ||||||||
Regulatory permanent capital-to-asset ratio | 4.00 | % | 6.49 | % | 4.00 | % | 6.07 | % | ||||||||
Regulatory permanent capital | $ | 1,794,471 | $ | 2,911,002 | $ | 1,863 ,963 | $ | 2,830,673 | &nbs p; | |||||||
Leverage ratio | 5.00 | % | 9.73 | % | 5.00 | % | 9.11 | % | ||||||||
Leverage capital | $ | 2,243,088 | $ | 4,366,502 | $ | 2,329,953 | $ | 4,246,009 |
For regulatory purposes, AOCI is not considered capital; Mandatorily Redeemable Capital Stock ("MRCS"), however, is considered capital.
Mandatorily Redeemable Capital Stock. We reclassify capital stock subject to redemption from capital to a liability once a member withdraws from membership, or attains non-member status by merger or acquisition, charter termination, relocation, or involuntary termination from membership. Shares of capital stock meeting these definitions are reclassified to a liability at fair value, at which time a five-year redemption period commences. At September 30, 2010, and December 31, 2009, we had $782,052 and $755,660, respectively, in capital stock subject to mandatory redemption. These amounts have been classified as a liability in the Statements of Condition.
The following table details the activities in MRCS:
Nine Mo nths Ended | Year Ended | |||||||
Activity | September 30, 2010 | December 31, 2009 | ||||||
Balance at beginning of period | $ | 755,660 | $ | 539,111 | ||||
Due to mergers and acquisitions | 31,874 | 220,389 | ||||||
Due to change in status | (2, 150 | ) | — | |||||
Redemptions/repurchases during the period | (3,375 | ) | (4,160 | ) | ||||
Accrued dividends | 43 | 320 | ||||||
Balance at end of period | $ | 782,052 | $ | 755,660 |
The number of former members holding MRCS was 31 and 29 at September 30, 2010, and December 31, 2009, respectively, which includes eight and five institutions, respectively, acquired by the FDIC in its capacity as receiver.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table details the amount of MRCS by year of redemption. The year of redemptio n in the table is the later of the end of the five-year redemption period, or the maturity date of the activity to which the stock is related, if the stock represents the activity-based stock purchase requirement of a non-member (a former member that withdrew from membership, merged into a non-member or was otherwise acquired by a non-member). Consistent with the current capital plan, we are not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, we may redeem the excess stock at management's discretion, subject to the Statutory and Regulatory Restrictions on Capital Stock Redemption discussed in our 2009 Form 10-K.
Year of Redemption | September 30, 2010 | December 3 1, 2009 | ||||||
Year 1 (1) | $ | 93,935 | $ | 4,395 | ||||
Year 2 | 58,322 | 138,923 | ||||||
Year 3 | 42,977 | 14,422 | ||||||
Year 4 | 516,243 | 379,681 | ||||||
Year 5 | 70,575 | 218,239 | ||||||
Total MRCS | $ | 782,052 | $ | 755,660 |
(1) | Includes $500 of MRCS that has reached the end of the five-year redemption period but for which credit products remain outstanding. Accordingly, these shares of stock will not be redeemed until the credit products are no longer outstanding. |
Dividends declared on capital stock classified as a liability are accrued at the expected dividend rate and reported as Interest Expense in the Statements of Income, as follows, for the three and nine months ended September 30, 2010, and 2009:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Dividends on MRCS | $ | 2,075 | $ | 2,679 | $ | 9,266 | $ | 9,605 |
Excess Capital Stock. Excess stock is defined as the amount of stock held by a member or former member in excess of that institution's minimum stock requirement. Finance Agency rules limit the ability of an FHLB to create member excess stock under certain circumstances. We may not pay dividends in the form of capital stock or issue new excess stock to members if our excess stock exceeds 1% of our Total Assets or if the issuance of excess stock would cause our excess stock to exceed 1% of our Total Assets. Our excess stock exceeded 1% of our Total Assets at September 30, 2010, and December 31, 2009. Therefore, we are currently not permitted to distribute stock dividends.
Stock Redemption Requests. The following table details the amount of stock not considered MRCS that is subject to a redemption request by year of redemption:
Year of Redemption | September 30, 2010 | December 31, 2009 | ||||||
Year 1 | $ | 24,375 | $ | — | ||||
Year 2 | 5,450 | 29,825 | ||||||
Year 3 | 2,750 | 2,750 | ||||||
Year 4 | 98,500 | — | ||||||
Year 5 | 2,040 | 98,500 | ||||||
Total | $ | 133,115 | $ | 131,075 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 12 - Segment Information
We have identified two primary operating segments as defined in our 2009 Form 10-K:
• | Credit Services, Investments and Deposit Produc ts (“Traditional”), which includes credit services (such as Advances, letters of credit and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreement to Resell, AFS securities, HTM securities), and deposits; and |
• | MPP, which consists of mortgage loans purchased from our members. |
We have not symmetrically allocated assets to each segment based upon financial results as it is impracticable to measure the performance of our segments from a total assets perspective. As a result, there is asymmetrical information presented in the tables below including, among other items, the allocation of depreciation without an allocation of the depreciable assets, derivatives and hedging earnings adjustments with no corresponding allocation to derivative assets, if any, and the recording of interest income with no allocation to ac crued interest receivable.
The following tables detail our financial performance by operating segment:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, 2010 | Traditional | MPP | Total | Traditional | MPP | Total | ||||||||||||||||||
Net Interest Income | $ | 54,092 | $ | 28,091 | $ | 82,183 | $ | 133,849 | $ | 66,048 | $ | 199,897 | ||||||||||||
Other Income (Loss) | 2,484 | (1,126 | ) | 1,358 | (64,888 | ) | (1,826 | ) | (66,714 | ) | ||||||||||||||
Other Expenses | 13,342 | 767 | 14,109 | 34,631 | 1,987 | 36,618 | ||||||||||||||||||
Income Before Assessments | 43,234 | 26,198 | 69,432 | 34,330 | 62,235 | 96,565 | ||||||||||||||||||
Total Assessments | 11,640 | 6,950 | 18,590 | 9,865 | 16,511 | 26,376 | ||||||||||||||||||
Net Income | $ | 31,594 | $ | 19,248 | $ | 50,842 | $ | 24,465 | $ | 45,724 | $ | 70,189 | ||||||||||||
September 30, 2009 | ||||||||||||||||||||||||
Net Interest Income | $ | 45,040 | $ | 20,456 | $ | 65,496 | $ | 126,153 | $ | 80,653 | $ | 206,806 | ||||||||||||
Other Income (Loss) | (25,063 | ) | (559 | ) | (25,622 | ) | (40,188 | ) | (2,032 | ) | (42,22 0 | ) | ||||||||||||
Other Expenses | 9,636 | 611 | 10,247 | 30,529 | 1,769 | 32,298 | ||||||||||||||||||
Income Before Assessments | 10,341 | 19,286 | 29,627 | 55,436 | 76,852 | 132,288 | ||||||||||||||||||
Total Assessments | 2,963 | 5,116 | 8,079 | 15,492 | 20,389 | 35,881 | ||||||||||||||||||
Net Income | $ | 7,378 | $ | 14,170 | $ | 21,548 | $ | 39,944 | $ | 56,463 | $ | 96,407 |
The following table details asset balances by segment:
Asset Balances by Segment | September 30, 2010 | December 31, 2009 | ||||||
Traditional | $ | 38,374,351 | $ | 39,327,171 | ||||
MPP | 6,487,412 | 7,271,895 | ||||||
Total Assets | $ | 44,861,763 | $ | 46,599,066 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial State ments, continued
($ amounts in thousands unless otherwise indicated)
Note 13 - Estimated Fair Values
Estimated Fair Value Methodologies and Techniques. We estimated the fair values of financial instruments by using available market information and our best judgment of appr opriate valuation methods. These estimates are based on pertinent information available to us at the Statements of Condition dates. Although we use our best judgment in estimating the fair values, 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 our financial instruments, certain 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 our judgment of how a market participant would estimate the fair values. The fair value summary table included herein does not represent an estimate of our overall market value as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
A description of the fair value methodologies is disclosed in our 2009 Form 10-K, and no changes have been made in the current year.
Sensitivity of Estimates. Estimates of the fair values of our financial instruments, such as Advances with options, mortgage instruments, derivatives with embedded options and CO Bonds with options, using the methods described in our 2009 Form 10-K, 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. These estimates are susceptible to material near-term changes.
The carrying value a nd estimated fair values of our financial instruments were as follows:
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Est imated | |||||||||||||
Financial Instruments | Value | Fair Value | Value | Fair Value | ||||||||||||
Assets: | ||||||||||||||||
Cash and Due from Banks | $ | 11,848 | $ | 11,848 | $ | 1,722,077 | $ | 1,722,077 | ||||||||
Interest-Bearing Deposits | 47 | 47 | 25 | 25 | ||||||||||||
Securities Purchased Under Agreements to Resell | 1,250,000 | 1,249,999 | — | — | ||||||||||||
Federal Funds Sold | 6,677,000 | 6,677,020 | 5,532,000 | 5,532,253 | ||||||||||||
AFS securities | 2,226,340 | 2,226,340 | 1,760,714 | 1,760,714 | ||||||||||||
HTM securities | 9,140,605 | 9,421,087 | 7,701,151 | 7,690,482 | ||||||||||||
Advances | 18,914,117 | 19,069,408 | 22,442,904 | 22,537,027 | &nbs p; | |||||||||||
Mortgage Loans Held for Portfolio | 6,487,412 | 6,853,500 | 7,271,895 | 7,531,415 | ||||||||||||
Accrued Interest Receivable | 103,753 | 103,753 | 114,246 | 114,246 | ||||||||||||
Derivative Assets | 2,725 | 2,725 | 1,714 | 1,714 | ||||||||||||
Rabbi Trust assets (included in Other Assets) | 14,902 | 14,902 | 14,591 | 14,591 | ||||||||||||
Liabilities: | ||||||||||||||||
Deposits | 590,050 | 590,050 | 824,851 | 824,851 | ||||||||||||
Consolidated Obligations: | ||||||||||||||||
Discount Notes | &n bsp; | 9,728,153 | 9,728,304 | 6,250,093 | 6,250,558 | |||||||||||
CO Bonds | 3 0,547,991 | 31,257,336 | 35,907,789 | 36,054,510 | ||||||||||||
Accrued Interest Payable | 161,927 | 161,927 | 211,504 | 211,504 | ||||||||||||
Derivative Liabilities | 882,799 | 882,799 | 712,716 | 712,716 | ||||||||||||
MRCS | 782,052 | 782,052 | 755,660 | 755,660 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Fair Value Hierarchy. We record AFS securities, Derivative Assets, Rabbi Trust assets (publicly-traded mutual funds), and Derivative Liabilities at fair value. The fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value fo r assets and liabilities that are carried at fair value, both on a recurring and non-recurring basis, on the Statement of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability.
Outlined below is the application of the fair value hierarchy to our financial assets and financial liabilities that are carried at fair value.
Level 1 - defined as those instruments for which fair value is determined from quoted prices (unadjusted) for identical assets or liabilities in active markets. The types of assets and liabilities carried at Level 1 fair value generally include investments such as U.S. Treasury securities and publicly-traded mutual funds.
Level 2 - defined as those instruments for which fair value is determined from quoted prices for similar assets and liabilities in active markets, or, if a valuation methodology is utilized, inputs are selected that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the fin ancial instrument. The types of assets and liabilities carried at Level 2 fair value generally include AFS securities, including U.S. government and agency securities and TLGPs, 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. The types of assets and liabilities that are carried at Level 3 fair value on either a recurring or non-recurring basis generally include private-label RMBS.
We utilize 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 us as inputs to the models.
For instruments carried at fair value, we review 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. Such reclassificat ions are reported as transfers in/out of the current level at fair value in the quarter in which the changes occur, as applicable.
Significant Inputs for Recurring and Nonrecurring Fair Value Measurements. The following represents the significant inputs used to determine fair value of those instruments carried on the Statements of Condition 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.
Investment securities - non-MBS. The fair value of non-MBS investment securities that are carried on the Statements of Condition at fair value (AFS GSEs and TLGPs) is determined using a market-observable price quote from a third-party pricing service (Composite Bloomberg Bond Trade screen), thus falling under the market approach. This price represents executable prices for identical assets.
Investment securities - MBS. As of September 30, 2010, none of our MBS holdings are carried at fair value. Our 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. We establish a price for each of our MBS 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.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
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 instances in which only one price is received), are subject to further analysis including, but not limited to, a comparison to the prices for similar securities and/or to non-binding dealer estimates or use of an internal model that is deemed most appro priate after consideration of all relevant facts and circumstances that a market participant would consider.
Derivative assets/liabilities. The 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 uses an income approach based on market-observable inputs as its basis (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:
Interest-rate related:
• | London Interbank Offered Rate (“LIBOR”) swap curve; |
• | Volatility assumption. Market-based expectations of future interest-rate volatility implied from current market prices for similar options; and |
&b ull; | For interest-rate caps, fair value estimates are based upon dealer quotes (for each cap, one dealer estimate is received) and are corroborated by using a pricing model and observable market data (e.g., the interest-rate swap curve and cap volatility). |
Interest-rate futures/forwards and mortgage delivery commitments:
• | Fannie Mae to-be-announced (“TBA”) securities prices. Market-based prices of TBAs by coupon class and expected term until settlement. |
Fair Value on a Recurring Basis. Described below are our fair value measurement methodologies for assets and liabilities carried at fair value on a recurring basis:
• | Rabbi Trust assets (publicly-traded mutual funds) - The estimated fair values are based on quoted market prices (unadjusted) for identical assets in act ive markets. |
• | AFS securities - The estimated fair values are based on a Bloomberg composite of executable prices from participating dealers. The fair values of these assets fall within the Level 2 hierarchy as we consider the assets to trade in markets where there is not enough volume or depth to be considered active. |
• | Derivative Assets and Derivative Liabilities - The estimated fair values are based on the U.S. dollar swap curve, swaption values, dealer quotes, or TBA values. Derivative market values are compared each month to market values provided by the derivative counterparties, and significant differences are investigated, based on certain criteria, and analyzed. |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following tables detail, for each hierarchy level, our assets and liabilities that are carried at fair value on a recurring basis on our Statements of Condition:
Netting | ||||||||||||||||||||
September 30, 2010 | Total | Level 1 | Level 2 | Level 3 | Adjustment (1) | |||||||||||||||
AFS securities: | ||||||||||||||||||||
GSEs | $ | 1,900,230 | $ | — | $ | 1,900,230 | $ | — | $ | — | ||||||||||
TLGPs | 326,110 | — | 326,110 | — | — | |||||||||||||||
Total AFS securities | 2,226,340 | — | 2,226,340 | — | — | |||||||||||||||
Derivative Assets: | ||||||||||||||||||||
Interest-rate related | 2,441 | — | 176,314 | — | (173,873 | ) | ||||||||||||||
Interest-rate futures/forwards | 23 | — | 23 | — | — | |||||||||||||||
Mortgage delivery commitments | 261 | — | 261 | — | — | |||||||||||||||
Total Derivative Assets | 2,725 | — | 176,598 | — | (173,873 | ) | ||||||||||||||
Rabbi Trust (included in Other Assets) | 14,902 | 14,902 | — | — | — | |||||||||||||||
Total assets at fair value | $ | 2,243,967 | $ | 14,902 | $ | 2,402,938 | $ | — | $ | (173,873 | ) | |||||||||
Derivative Liabilities: | ||||||||||||||||||||
Interest-rate related | $ | 882,159 | $ | — | $ | 1,280,420 | $ | — | $ | (398,261 | ) | |||||||||
Interest-rate futures/forwards | 499 | — | 499 | — | — | |||||||||||||||
Mortgage delivery commitments | 141 | — | 141 | &mdash ; | — | |||||||||||||||
Total Derivative Liabilities | 882,799 | — | 1,281,060 | — | (398,261 | ) | ||||||||||||||
Total liabilities at fair value | $ | 882,799 | $ | — | $ | 1,281,060 | $ | — | $ | (398,261 | ) | |||||||||
December 31, 2009 | ||||||||||||||||||||
AFS securities: | ||||||||||||||||||||
GSEs | $ | 1,760,714 | $ | — | $ | 1,760,714 | $ | — | $ | — | ||||||||||
TLGPs | — | — | — | — | — | |||||||||||||||
Total AFS securities | 1,760,714 | — | 1,760,714 | — | — | |||||||||||||||
Derivative Assets | 1,714 | — | 198,055 | — | (196,341 | ) | ||||||||||||||
Rabbi Trust (included in Other Assets) | 14,591 | 14,591 | — | — | — | |||||||||||||||
Total assets at fair value | $ | 1,777,019 | $ | 14,591 | $ | 1,958,769 | $ | — | $ | (196,341 | ) | |||||||||
Derivative Liabilities | $ | 712,716 | $ | — | $ | 989,526 | $ | — | $ | (276,810 | ) | |||||||||
Total liabilities at fair value | $ | 712,716 | $ | — | $ | 989,526 | $ | — | $ | (276,810 | ) |
(1)&nb sp; | Amounts represent the effect of legally enforceable master netting agreements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same counterparties. |
Fair Value on a Nonrecurring Basis. We measure certain HTM securities at fair value on a nonrecurring basis. These assets are no t carried at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (e.g., when there is evidence of OTTI). These amounts fall under Level 3 in the fair value hierarchy.
As of September 30, 2010, none of our HTM securities are carried at fair value. However, we recorded certain HTM securities at fair value and recognized OTTI on those HTM securities during the three months ended September 30, 2009, and during the nine months ended September 30, 2010, and 2009, which were included in Other Income (Loss) on the Statements of Income.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
The following table details the values of the assets recorded at fair value on a nonrecurring basis:
Value on a Nonrecurring Basis | September 30, 2010 | June 30, 2010 | March 31, 2010 | December 31, 2009 | ||||||||||||
Carrying value prior to write-down | $ | — | $ | 117,044 | $ | 145,663 | $ | 670,162 | ||||||||
Fair value at period-end date | — | 109,219 | 131,210 | 513,234 |
Note 14 - Commitments and Contingencies
Consolidated Obligations. Consolidated Obligations are backed only by the financial resources of the FHLBs. The joint and several liability regulation of the Finance Agency authorizes it to require any FHLB to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLB is the primary obligor. No FHLB has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLB, and as of September 30, 2010, and through the filing date of this report, we do not believe that it is probable that we will be asked to do so.
We have determined that it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the Consolidated Obligations because the joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBs. The FHLBs have no control over the amount of the guaranty or the determination of how each FHLB would perform under the joint and several obligations. The par values of the outstanding Consolidated Obl igations for all 12 FHLBs totaled approximately $806.0 billion and $930.6 billion at September 30, 2010, and December 31, 2009, respectively.
C ommitments to Extend Advances. Commitments that legally bind us for additional Advances totaled approximately $1,663,893 and $37,681 at September 30, 2010, and December 31, 2009, respectively. Commitments generally are for periods up to six months and will be funded provided the member meets our collateral and underwriting requirements.&nbs p; Based on credit analyses performed by our management as well as collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.
Standby letters of credit. These short-term financing arrangements are executed for a fee between us and one of our members. If we are required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. Outstanding standby letters of credit were as follows:
Standby Letters of Credit | September 30, 2010 | December 31, 2009 | ||||||
Outstanding notional | $ | 533,807 | $ | 589,654 | ||||
Original terms | 3 months - 20 years | 3 months - 20 years | ||||||
Final expiration year | 2029 | 2029 |
The values of the guarantees related to standby letters of credit as reported in Other L iabilities were $5,638 and $4,969 at September 30, 2010, and December 31, 2009, respectively. Based on credit analyses performed by our management as well as collateral requirements, we have not deemed it necessary to record any additional liability on these commitments. Commitments are fully collateralized at the time of issuance. Outstanding commitments that unconditionally obligated us for addit ional letters of credit were $29,971 and $0 at September 30, 2010, and December 31, 2009, respectively.
We monitor the creditworthiness of our standby letters of credit based on an evaluation of our members. We have established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit.
Unused Lines of Credit. We had $705,633 and $170,580 of unused lines of credit available to members at Septembe r 30, 2010, and December 31, 2009, respectively.
Commitments to Purchase Mortgage Loans. Commitments that unconditionally obligate us to purchase mortgage loans totaled $204,582 and $38,328 at September 30, 2010, and December 31, 2009, respectively. Commitments are generally for periods not to exceed 91 days. Such commitments are reported as Derivative Assets or Derivative Liabilities at their fair value.
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Pledged Collateral. We generally execute derivatives with large banks and major broker-dealers and generally enter into bilateral pledge (collateral) agreements. We had pledged $230,183 and $80,457 of collateral, at par, at September 30, 2010, and December 31, 2009, respectively.
Unsettled Consolidated Obligations. As of September 30, 2010, we committed to issue $151,000 par value of CO Bonds, of which $100,000 were hedged with associated interest-rate swaps, and we had $300,000 par value of Discount Notes that had traded but not settled. This compares to $1,994,500 par value of CO Bonds, of which $1,650,000 were hedged with associated interest-rate swaps, and no Discount Notes that had traded but not settled, as of December 31, 2009.
Legal Proceedings. We are subject to 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 our financial condition or results of operations. We are not aware of any pending or threatened litigation against us at this time.
Notes 6, 7, 8, 10, 11, and 13 discuss other commitments and contingencies.
Note 15 - Transactions with Shareholders
Our activities with shareholders are summarized below and have been identified in the Statements of Condition, Statements of Income, and Statements of Cash Flows.
In the normal course of business, we have invested in Federal Funds Sold and other short-term investments with shareholders or their affiliates.
Transactions with Directors' Financial Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors (“Directors' Financial Institutions”). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. We had Advances, Mortgage Loans Held for Portfolio, and Capital Stock outstanding (including MRCS) to Directors' Financial Institutions as follows:
Activity with Directors' Financial Institutions | September 30, 2010 | December 31, 2009 | ||||||
Advances, par value | $ | 4,148,318 | $ | 4,889,358 | ||||
% of Total Advances | 23.0 | % | 22.5 | % | ||||
Mortgage Loans Held for Portfolio, par value | $ | 226,679 | $ | 216,217 | ||||
% of Total Mortgage Loans Held for Portfolio | 3.5 | % | 3.0 | % | ||||
Capital Stock, including MRCS, par value | $ | 449,579 | $ | 453,813 | ||||
% of Total Capital Stock, including MRCS | 17.9 | % | ; | 18.3 | % |
During the three and nine months ended September 30, 2010, and 2009, we acquired mortgage loans from Directors' Financial Institutions, presented as of the date of the directors' appointments and resignations, as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Mortgage Loans purchased from Directors' Financial Institutions | $ | 30,129 | $ | 24,352 | $ | 35,262 | $ | 37,998 |
Federal Home Loan Bank of Indianapolis
Notes to Interim Unaudited Financial Statements, continued
($ amounts in thousands unless otherwise indicated)
Note 16 - Subsequent Events
On October 28, 2010, we announced that we will repurchase up to $250,000 in par value of excess stock on a pro rata basis from all shareholders with excess stock (provided that no fractional shares will be repurchased). This is in accordance with Section VI.C. of our Capital Plan dated Sep tember 19, 2002 (as amended). Letters of repurchase were sent only to shareholders that held excess stock as of September 30, 2010. The repurchase will occur on November 18, 2010, provided that such repurchase meets all of the terms and conditions of our Capital Plan as of the date of the repurchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 2009 Form 10-K and the financial statements and related footnotes contained in this Quarterly Report on Form 10-Q.
As used in this Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “FHLBI,” and the “Bank” refer to the Federal Home Loan Bank of Indianapolis.
Unless otherwise stated, amounts disclosed in this report represent values rounded to the nearest million; therefore, amounts less than one million may not be reflected in this report and may not appear to agree to the Statement of Income due to rounding in previous quarters. Amounts used to calculate changes are based on numbers in the thousands. &nb sp;Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
Special Note Regarding Forward-looking Statements
Statements in this Quarterly Report on Form 10-Q, including statements describing our objectives, projections, estimates or future predictions, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “expects,” “will,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
• | economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants; |
• | volatility of market prices, rates, and indices that could affect the value of collateral we hold as security for the obligations of our members and counterparties; |
• | demand for our Advances and purchases of mortgage loans resulting from: |
◦ | changes in our members' deposit flows and credit demands; |
◦ | membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters; |
◦ | changes in the general level of housing activity in the United States, the level of refinancing activity and consumer product preferences; and |
◦ | competitive forces, including, without limitation, other sources of fundi ng available to our members; |
• | our ability to introduce new products and services and successfully manage the risks associated with our products and services, including new types of collateral securing Advances; |
• | changes in mortgage asset prepayment patterns, delinquency rates and housing values; |
• | political events, including legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members, counterparties, one or more of the FHLBs and/or investors in the Consolidated Obligations of the 12 FHLBs; |
• | changes in our ability to raise capital market funding, including changes in credit ratings and the level of government guarantees provided to other United States and international financial institutions; and competition from other entities borrowing funds in the capital markets; |
• | negative adjustments in the FHLBs' credit ratings that could adversely impact the marketability of our Consolidated Obligations, products, or services; |
• | risk of loss should one or more of the FHLBs be unable to repay its participation in the Consolidated Obligations, or otherwise be unable to meet its financial obligations; |
• | ability to attract and retain skilled individuals in order to fulfill an anticipated increase in staffing needs due to the evolving regulatory environment; |
• | ability to develop and support technology and information systems sufficient to effectively manage the risks of our business; |
• | changes in terms of interest-rate exchange agreements and similar agreements; |
• | risk of loss arising from natural disasters, acts of war or acts of terrorism; and |
• | changes in or differing interpretations of accounting guidance. |
Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through reports filed with the SEC in the future, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Executive Summary
Overview
We are a regional wholesale bank that makes Advances, purchases mortgages and other investments, and provides other financial services to our member financial institutions. These member financial institutions can consist of federally-insured depository institutions (including commercial banks, thrifts, and credit unions), community development financial institutions and insurance companies. All member financial institutions are required to purchase shares of our Class B Capital Stock as a condition of membership. Our public policy mission is to facilitate and expand the availability of financing for housing and community development. We seek to achieve this by providing services to our members in a safe, sound, and profitable manner, and by generating a competitive return on their capital investment.
We group our products and services within two business segme nts:
• | Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), and deposits; and |
;
• | MPP, which consists of mortgage loans purchased from our members. |
Our primary source of revenue is interest earned on:
• | Advances; |
• | long- and short-term investments; and |
• | mortgage loans purchased from our members. |
Our principal source of funding is the proceeds from the sale to the public of FHLB debt instruments, called Consolidated Obligations or COs, which are the joint and several obligation of all 12 FHLBs. We obtain additional funds from deposits, other borrowings, and the sale of capital stock to our members.
Our Net Interest Income is primarily determined by the interest-rate spread between the interest rate earned on our assets and the interest rate paid on our share of the Consolidated Obligations. We use funding and hedging strategies to mitigate the related interest-rate risk.
The Economy and the Financial Services Industry
Our financial condition and results of operations are influenced by the general state of the global and national economies, the local economies in our district states of Indiana and Michigan and their impact on our member financial institutions; the conditions in the financial, credit and mortgage markets; and the prevailing level of interest rates. The U.S. economy entered a recession in December 2007, which continued in 2008 and ended in June 2009. In addition, many of the effects of the world-wide financial crisis, including high levels of mortgage delinquencies and foreclosures, depressed housing prices, stock market fluctuations, higher borrowing costs for many financial institutions, serious pressures on earnings and capital at many financial institutions, and high unemployment rates continued during the first nine months of 2010.
According to a press release issued by the Federal Open Market Committee (“FOMC”) of the Federal Reserve Board (the "Federal Reserve") on November 3, 2010, there are signs that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year; h owever, investment in nonresidential structures continues to be weak, and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Longer-term inflation expectations have remained stable, but measures have trended lower in the recent quarter. The FOMC seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the FOMC judges to be consistent, over the longer run, with its dual mandate. Although the FOMC anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. The FOMC indicated that it will maintain the target range for the federal funds rate at 0.00-0.25%, as it continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are like ly to warrant exceptionally low levels of the federal funds rate for an extended period.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the FOMC decided to expand its holdings of securities. The FOMC will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the FOMC intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The FOMC will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
Economic data for Indiana and Michigan continue to generally compare unfavorably to national data. The Bureau of Labor Statistics reported that Michigan's unemployment rate declined to 13.0% for September 2010 but was the second highest in the nation, while Indiana's rate increased to 10.1%, exceeding the U.S. rate of 9.6%. Non-farm payrolls for both states were fairly stable during September and year-over-year. Lender Processing Services reported that Indiana had a non-current mortgage rate of 14.2% and Michigan had a non-current mortgage rate of 13.9% for September 2010, placing both states above the national rate of 13.0%. We believe the overall economic outlook for our district is showing some signs o f improvement, but will continue to trail the overall U.S. economy.
Financial Trends in the Capital Markets
The Office of Finance, our fiscal agent, issues debt in the global capital markets on behalf of the 12 FHLBs in the form of Consolidated Obligations, which include CO Bonds and Discount Notes. The 12 FHLBs and the Office of Finance are collectively known as the “FHLB System.” Our funding operations depend on debt issued by the Office of Finance, and the issuance of our debt is affected by events in the capital markets.
The par amount of our COs decreased by 5% to $40.1 billion at September 30, 2010, compared to $42.0 billion at December 31, 2009. The outstanding balance of CO Bonds, at par, was 76% of total COs, compared to 85% at December 31, 2009. CO Bonds as a percentage of total COs fell as Discount Notes were used to fund short-term investments, floating-rate securities in our HTM portfolio, and a portion of our swapped Advances. During the first nine months of 2010, the agency debt mar kets continued to function well. Although our swapped funding levels deteriorated during the first quarter of 2010, they improved during the second and third quarters of 2010.
On February 1, 2010, several lending programs administered by the Federal Reserve Bank of New York reached their scheduled expiration dates. These programs included the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. On February 10, 2010, Fannie Mae and Freddie Mac announced plans to purchase mortgage loans that are 120 days or more delinquent out of mortgage-backed securities. The initial purchases occurred through May 2010, with additional delinquency purchases as needed thereafter. The expiration of these programs and the delinquency purchases did not appear to have a major effect on the ag ency debt markets. In addition, the Federal Reserve Bank of New York's purchases of our COs, along with debt issued by Fannie Mae and Freddie Mac, ended during the first quarter of 2010.
On March 4, 2010, the SEC published in the Federal Register its final rule on money market fund reform, which included amendments to SEC Rule 2a-7. The rule became effective on May 5 , 2010, with certain aspects of the rule phased in over the remainder of 2010. In its final rule, the SEC included FHLB Discount Notes with remaining maturities of 60 days or less in its definition of weekly liquid assets, which should help maintain investor demand for shorter-term FHLB Discount Notes.
However, this new rule, combined with shrinking yields in the money market sector, has driven investors to seek riskier investment categories that offer a higher rate of return. Taxable money market fund assets declined during the first six months of 2010, then increased to $2.45 trillion during the third quarter of 20 10. As a subset of those assets, taxable money market fund investments allocated to the “U.S. Other Agency” category have also declined, dropping an additional $93 billion since year-end 2009.
During the third quarter of 2010, the capital markets were primarily affected by the sovereign debt crisis in Europe, the high unemployment levels in the U.S., the possibility of another recession, the timing of future actions by the FOMC and the passage of the Dodd-Frank Wall Street Reform and Consumers Protection Act ("Dodd-Frank Act" or "Act") on July 21, 2010.
On August 10, 2010, the Federal Reserve Bank of New York released a statement concerning the reinvestment of principal payments from agency debt and agency mortgage-backed securities into longer-term U.S. Treasury securities, with the goal of keeping the Federal Reserve's securities holdings at their then-current level.
Analysi s of Operating Results
Our overall results are dependent on the market environment, as well as our members' demand for wholesale funding and sales of mortgage loans. As part of their overall business strategy, our members typically use wholesale funding, in the form of Advances, along with other sources of funding, such as retail deposits and excess liquidity. In addition, certain members may also sell mortgage loans to us.
Periods of economic growth have led to significant use of wholesale funds by our members because businesses typically fund expansion by using either wholesale or retail borrowing. Conversely, slow economic growth has tended to decrease our members' wholesale borrowing activity. Member demand for Advances and the MPP is also influenced by the steepness of the yield curve, as well as the availability and cost of other sources of wholesale or government funding. Advances declined during the first nine months of 2010 due to decreased demand related to various economic factors such as growth in our members' deposits and low loan demand at our members' institutions. Mortgage Loans Held for Portfolio has also decreased. The decreases in Advances and Mortgage Loans Held for Portfolio contributed to lower Net Interest Income for the nine months ended September 30, 2010, compared to the same period in 2009, as described in "Results of Operations for the Three and Nine Months Ended September 30, 2010" herein. Going forward, we expect Net Interest Income to decline further as spreads on our interest-earning assets revert to normal levels.
Summary of Selected Financial Data
The following table presents a summary of certain financial information as of and for the periods indicated ($ amounts in millions):
Financial Highlights | ||||||||||||||||||||
As of and for the Three Months Ended | ||||||||||||||||||||
September 30, 2010 | June 30, 2010 | March 31, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||
Statement of Condition: | ||||||||||||||||||||
Investments (1) | $ | 19,294 | $ | 18,734 | $ | 16,825 | $ | 14,994 | $ | 16,381 | ||||||||||
Advances | 18,914 | 19,989 | 21,582 | 22,443 | 24,432 | |||||||||||||||
Mortgage Loans Held for Portfolio | 6,487 | 6,749 | 6,990 | 7,272 | 7,508 | |||||||||||||||
Total Assets | 44,862 | 45,639 | 47,072 | 46,599 | 48,553 | |||||||||||||||
Discount Notes | 9,728 | 7,434 | 11,537 | 6,250 | 10,687 | |||||||||||||||
CO Bonds | 30,548 | 33,616 | 31,267 | 35,908 | 33,280 | |||||||||||||||
Total Consolidated Obligations, net | 40,276 | 41,050 | 42,804 | 42,158 | 43,967 | |||||||||||||||
MRCS | 782 | 781 | 751 | ; | 756 | 602 | ||||||||||||||
Capital Stock, Class B Putable | 1,733 | 1,731 | 1,732 | 1,726 | 1,875 | |||||||||||||||
Retained Earnings | 396 | 351 | 373 | 349 | 334 | |||||||||||||||
AOCI | (255 | ) | (264 | ) | (344 | ) | (329 | ) | (210 | ) | ||||||||||
Total Capital | 1,874 | 1,818 | 1,761 | 1,746 | 1,999 | |||||||||||||||
Statement of Income: | ||||||||||||||||||||
Net Interest Income | 82 | 56 | 62 | 65 | 66 | |||||||||||||||
Net OTTI Credit Losses | — (2) | (62 | ) | (6 | ) | (15 | ) | (24 | ) | |||||||||||
Other Income (Loss), excluding Net OTTI Credit Losses | 1 | — | — | (1 | ) | (1 | ) | |||||||||||||
Other Expenses | 14 | 11 | 12 | 17 | 11 | |||||||||||||||
Total Assessments | 18 | (4 | ) | 12 | 9 | 8 | ||||||||||||||
Net Income (Loss) | 51 | (13 | ) | 32 | 23 | 22 | ||||||||||||||
Selected Financial Ratios: | ||||||||||||||||||||
Return on average equity (3) | 10.96 | % | (2.90 | )% | 7.42 | % | 5.11 | % | 4.09 | % | ||||||||||
Return on average assets | 0.45 | % | (0.11 | )% | 0.28 | % | 0.20 | % | 0.17 | % | ||||||||||
Dividend payout ratio (4) | 12.67 | % | NM (4) | 26.92 | % | 39.08 | % | 71.61 | % | |||||||||||
Net interest margin (5) | 0.73 | % | 0.47 | % | 0.53 | % | 0.55 | % | 0.52 | % | ||||||||||
Total Capital ratio (at period end) (6) | 4.18 | % | 3.98 | % | 3.74 | % | 3.75 | % | 4.12 | % | ||||||||||
Total regulatory capital ratio (at period end) (7) | 6.49 | % | 6.27 | % | 6.07 | % | 6.07 | % | 5.79 | % | ||||||||||
Average Equity to Average Assets | 4.09 | % | 3.77 | % | 3.74 | % | 3.90 | % | 4.18 | % | ||||||||||
Weighted average dividend rate, Class B stock (8) | 1.50 | % | 2.00 | % | 2.00 | % | 1.96 | % | 3.25 | % | ||||||||||
Par amount of outstanding Consolidated Obligations for all 12 FHLBs | $ | 806,006 | $ | 846,481 | $ | 870,928 | $ | 930,617 | $ | 973,579 |
(1) | Investments consist of HTM securities, AFS securities, Interest-Bearing Deposits, Federal Funds Sold, and Securities Purchased Under Agreements to Resell. | |
(2) | Due to the rounding of quarterly and year-to-date amounts, the actual amount of $0.6 million is shown as zero for the three months ended September 30, 2010. | |
(3) | Return on average equity is Net Income (Loss) expressed as a percentage of average total capital. |
(4) | The dividend payout ratio is calculated by dividing dividends paid in cash during the period by Net Income (Loss) for the period. This ratio is not meaningful for the three months ended June 30, 2010, due to our Net Loss for that period. | |
(5) | Net interest margin is Net Interest Income expressed as a percentage of average earning assets. | |
(6) | Total Capital ratio is Capital Stock plus Retained Earnings and AOCI as a percentage of period-end Total Assets. | |
(7) | Total regulatory capital ratio is Capital Stock plus Retained Earnings and MRCS as a percentage of period-end Total Assets. | |
(8) | Weighted average dividend rates are dividends paid in cash during the period divided by the average of Capital Stock eligible for dividends (i.e., excludes MRCS). |
Results of Operations for the Three and Nine Months Ended September 30, 2010, and 2009
The following table presents the comparative highlights of our results of operations ($ amounts in millions):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
$ | % | $ | % | |||||||||||||||||||||||||||
Comparative Highlights | 2010 | 2009 | change | change | 2010 | 2009 | change | change | ||||||||||||||||||||||
Net Interest Income | $ | 82 | $ | 66 | $ | 16 | 25 | % | $ | 200 | $ | 207 | $ | (7 | ) | (3 | )% | |||||||||||||
Other Income (Loss) | 1 | (25 | ) | 26 | 105 | % | (67 | ) | (42 | ) | (25 | ) | (58 | )% | ||||||||||||||||
Other Expenses | 14 | 11 | 3 | 38 | % | 37 | 32 | 5 | 13 | % | ||||||||||||||||||||
Income Before Assessments | 69 | 30 | 39 | 134 | % | 96 | 133 | (37 | ) | (27 | )% | |||||||||||||||||||
Total Assessments | 18 | 8 | 10 | 130 | % | 26 | 36 | (10 | ) | (26 | )% | |||||||||||||||||||
Net Income | $ | 51 | $ | 22 | $ | 29 | 136 | % | $ | 70 | $ | 97 | $ | (27 | ) | (27 | )% |
Net Income
The following factors contributed to the increase in Net Income for the three months ended September 30, 2010.
• | The increase in Other Income (Loss) was primarily due to lower OTTI credit losses on certain private-label RMBS as discussed in more detail in “Other Income” herein. |
• | The increase in Net Interest Income was primarily due to an incr ease in prepayment fees on Advances, a decrease in premium amortization expense, and wider spreads on certain interest-earning assets, partially offset by a decrease in interest-earning assets. The factors impacting Net Interest Income are further addressed below under “Net Interest Income.” |
The increases in Other Income (Loss) and Net Interest Income were partially offset by:
• | an increase in Total Assessments, which is directly attributable to the higher level of Income Before Assessments; and |
• | an increase in Other Expenses, primarily due to higher compensation and benefit expenses. |
The following factors contributed to the decrease in Net Income for the nine months ended September 30, 2010.
• | The decrease in Other Income (Loss) was primarily due to higher OTTI credit losses on certain private-label RMBS as discussed in more detail in "Other Income" herein. |
• | The decrease in Net Interest Income was primarily due to a decrease in interest-earning assets. The factors impacting Net Interest Income are further addressed below under "Net Interest Income." |
The decreases in Other Income (Loss) and Net Interest Income were partially offset by a decrease in Total Assessments, which is directly attributable to the lower level of Income Before Assessments.
Net Interest Income
Net Interest Income is our primary source of earnings. We generate Net Interest Income from two components: (i) the net interest-rate spread, and (ii) the amount earned on the excess of interest-earning assets over interest-bearing liabilities. The sum of these two components, when expressed as a percentage of the average balance of interest-earning assets, equals the net interest margin.
Items that increased Net Interest Income for the three months ended September 30, 2010 , compared to the same period in 2009, included:
• | an increase in prepayment fee income on Advances; |
• | higher average balance of HTM and AFS securities, as shown on the following tables; |
• | wider spreads on HTM securities, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment; and |
• | a decrease in premium amortization expense due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience. |
These increases were partially offset by lower average balances of Advances and Mortgage Loans Held for Portfolio, as shown on the following tables.
The decrease in Net Interest Income for the nine months ended September 30, 2010, compared to the same period in 2009, was primarily due to lower average balances of Advances and Mortgage Loans Held for Portfolio, as shown on the following tables.
This decrease was partially offset by:
• | an increase in prepayment fee income on Advances; |
• | higher average balances of HTM and AFS securities, as shown on the following tables; |
• | wider spreads on HTM securities, primarily due to the replacement of higher-costing debt with lower-costing debt reflecting the current low interest-rate environment; and |
• | a decrease in premium amortization expense due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience. |
The following tables present average balances, interest income and expense, and average yields of our major categories of interest-earning assets and the sources funding those interest-earning assets ($ amounts in millions):
For the Three months ended September 30, | |||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Avg. Yield | Average Balance | Interest Income/ Expense | Avg. Yield | ||||||||||||||||
Assets: | |||||||||||||||||||||
Securities Purchased Under Agreements to Resell | $ | 3,260 | $ | 2 | 0.22 | % | $ | 535 | $ | — | 0.17 | % | |||||||||
Federal Funds Sold | 4,109 | 3 | 0.28 | % | 6,690 | 4 | 0.21 | % | |||||||||||||
AFS securities (1)(2) | 1,844 | 3 | 0.57 | % | 1,676 | 3 | 0.74 | % | |||||||||||||
HTM securities (3) | 9,031 | 63 | 2.77 | % | 7,674 | 68 | 3.50 | % | |||||||||||||
Advances (1) | 19,757 | 64 | 1.29 | % | 25,412 | 77 | 1.20 | % | |||||||||||||
Mortgage Loans Held for Portfolio | 6,632 | 90 | 5.41 | % | 7,684 | 93 | 4.79 | % | |||||||||||||
Other Assets (interest-earning) (4) | 222 | 1 | 1.47 | % | 138 | — | 0.16 | % | |||||||||||||
Total interest-earning assets | 44,855 | 226 | 2.00 | % | 49,809 | 245 | 1.95 | % | |||||||||||||
Other Assets (non-interest earning) | 454 | 405 | |||||||||||||||||||
Fair value adjustment on HTM (3) | (247 | ) | (151 | ) | |||||||||||||||||
Total Assets | $ | 45,062 | $ | 50,063 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Interest-Bearing Deposits | $ | 618 | — | 0.05 | % | 864 | — | 0.07 | % | ||||||||||||
Discount Notes | 7,634 | 4 | 0.18 | % | 12,757 | 8 | 0.26 | % | |||||||||||||
CO Bonds (1) | 32,400 | 138 | 1.69 | % | 32,397 | 168 | 2.06 | % | |||||||||||||
MRCS | 782 | 2 | 1.05 | % | 560 | 3 | 1.90 | % | |||||||||||||
Other Borrowings | 1 | — | — | % | — | — | — | % | |||||||||||||
Total interest-bearing liabilities | 41,435 | 144 | 1.38 | % | 46,578 | 179 | 1.52 | % | |||||||||||||
Other Liabilities | 1,786 | 1,394 | |||||||||||||||||||
Total Capital | 1,841 | 2,091 | |||||||||||||||||||
Total Liabilities and Capital | $ | 45,062 | $ | 50,063 | |||||||||||||||||
Net Interest Income and net spread on interest-earning assets less interest-bearing liabilities | $ | 82 | 0.62 | % | $ | 66 | 0.43 | % | |||||||||||||
Net interest margin | 0.73 | % | 0.52 | % | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 1.08 | 1.07 |
&n bsp; | For the Nine Months Ended September 30, | ||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Avg. Yield | Average Balance | Interest Income/ Expense | Avg. Yield | ||||||||||||||||
Assets: | |||||||||||||||||||||
Securities Purchased Under Agreements to Resell | $ | 1,743 | $ | 3 | 0.21 | % | $ | 309 | $ | 1 | 0.17 | % | |||||||||
Federal Funds Sold | 6,465 | 10 | 0.20 | % | 8,282 | 21 | 0.34 | % | |||||||||||||
AFS Securities (1)(2) | 1,729 | 6 | 0.47 | % | 1,679 | 16 | 1.28 | % | |||||||||||||
HTM Securities (3) | 8,585 | 189 | 2.95 | % | 7,453 | 213 | 3.82 | % | |||||||||||||
Advances (1) | 20,902 | 168 | 1.07 | % | 27,466 | 337 | 1.64 | % | |||||||||||||
Mortgage Loans Held for Portfolio | 6,879 | 264 | 5.14 | % | 8,174 | 317 | 5.18 | % | |||||||||||||
Other Assets (interest-earning) (4) | 160 | 1 | 0.63 | % | 183 | — | 0.17 | % | |||||||||||||
Total interest-earning assets | 46,463 | 641 | 1.85 | % | 53,546 | 905 | 2.26 | % | |||||||||||||
Other Assets (non-interest earning) | 420 | &nb sp; | 454 | ||||||||||||||||||
Fair value adjustment on HTM (3) | (293 | ) | (93 | ) | |||||||||||||||||
Total Assets | $ | 46,590 | $ | 53,907 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Interest-Bearing Deposits | $ | 732 | — | 0.04 | % | $ | 1,092 | 1 | 0.09 | % | |||||||||||
Discount Notes | 8,975 | &nb sp; | 11 | 0.16 | % | 17,302 | 82 | 0.64 | % | ||||||||||||
CO Bonds (1) | 32,761 | 421 | 1.72 | % | 31,281 | 605 | 2.59 | % | |||||||||||||
MRCS | 769 | 9 | 1.61 | % | 552 | 1 0 | 2.33 | % | |||||||||||||
Other Borrowings | — | — | — | % | 1 | — | 0.24 | % | |||||||||||||
Total interest-bearing liabilities | 43,237 | 441 | 1.37 | % | 50,228 | 698 | 1.86 | % | |||||||||||||
Other Liabilities | 1,554 | 1,595 | |||||||||||||||||||
Total Capital | 1,799 | 2,084 | |||||||||||||||||||
Total Liabilities and Capital | $ | 46,590 | $ | 53,907 | |||||||||||||||||
Net Interest Income and net spread on interest-earning assets less interest-bearing liabilities | $ | 200 | 0.48 | % | $ | 207 | 0.40 | % | |||||||||||||
Net interest margin | 0.58 | % | 0.52 | % | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 1.07 | & nbsp; | &nbs p; | 1.07 |
(1) | Interest income/expense and average rates include the effect of associated interest-rate exchange agreements to the extent such agreements qualify as fair value hedges. | |
(2) | The average balances of AFS securities are reflected at amortized cost; therefore, the resulting yields do not reflect changes in fair value, if applicable. | |
(3) | Average balances of HTM securities are reflected at amortized cost; therefore, the resulting yields do not reflect changes in fair value, if applicable. | |
(4) | Other Assets (interest-earning) consists of Interest-Bearing Deposits, Loans to Other FHLBs, and Rabbi Trust assets. |
The following table summarizes changes in Interest Income and Interest Expense betwee n the three and nine months ended September 30, 2010, and 2009 ($ amounts in millions):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
2010 over 2009 | 2010 over 2009 | ||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Increase (Decrease) in Interest Income: | |||||||||||||||||||||||
Advances | $ | (18 | ) | $ | 5 | $ | (13 | ) | $ | (69 | ) | $ | (100 | ) | $ | (169 | ) | ||||||
Securities Purchased Under Agreements to Resell | 1 | 1 | 2 | 2 | — | 2 | |||||||||||||||||
Federal Funds Sold | (2 | ) | 1 | (1 | ) | (4 | ) | (7 | ) | (11 | ) | ||||||||||||
AFS Securities | — | — | — | — | (10 | ) | (10 | ) | |||||||||||||||
HTM Securities | 11 | (16 | ) | (5 | ) | 29 | (53 | ) | (24 | ) | |||||||||||||
Mortgage Loans Held for Portfolio | (14 | ) | 11 | (3 | ) | (50 | ) | (3 | ) | (53 | ) | ||||||||||||
Other Assets, net | — | 1 | 1 | — | 1 | 1 | |||||||||||||||||
Total | (22 | ) | 3 | (19 | ) | (92 | ) | (172 | ) | (264 | ) | ||||||||||||
Increase (Decrease) in Interest Expense: | |||||||||||||||||||||||
Deposits | — | — | — | — | (1 | ) | (1 | ) | |||||||||||||||
CO Bonds | — | (30 | ) | (30 | ) | 28 | (212 | ) | (184 | ) | |||||||||||||
Discount Notes | (3 | ) | (1 | ) | (4 | ) | (28 | ) | (43 | ) | (71 | ) | |||||||||||
MRCS | 1 | (2 | ) | (1 | ) | 3 | (4 | ) | (1 | ) | |||||||||||||
Total | (2 | ) | (33 | ) | (35 | ) | 3 | (260 | ) | (257 | ) | ||||||||||||
Increase (Decrease) in Net Interest Income | $ | (20 | ) | $ | 36 | $ | 16 | $ | (95 | ) | $ | 88 | $ | (7 | ) |
Changes in both volume and interest rates influence changes in Net Interest Income and net interest margin. Changes in Interest Income and Interest Expense that are not identifiable as either volume-related or rate-related, but are attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the volume and rate changes.
Other Income
The following table presents a breakdown of Other Income (Loss) for the three and nine months ended September 30, 2010, and 2009 ($ amounts in millions):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Components of Other Income (Loss) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Total OTTI Losses | $ | — | $ | (73 | ) | $ | (22 | ) | $ | (256 | ) | |||||
Non-credit Portion of Impairment Losses Recognized in (Reclassified from) Other Comprehensive Income, net (1) | — | 49 | (46 | ) | 211 | |||||||||||
Net OTTI Credit Losses (1) | — | (24 | ) | (68 | ) | (45 | ) | |||||||||
Net Gains (Losses) on Derivatives and Hedging Activities | 2 | (2 | ) | — | 1 | |||||||||||
Service Fees | — | — | — | 1 | ||||||||||||
Standby Letters of Credit Fees | — | — | 1 | 1 | ||||||||||||
Other, net | (1 | ) | 1 | — | — | |||||||||||
Total Other Income (Loss) | $ | 1 | $ | (25 | ) | $ | (67 | ) | $ | (42 | ) |
(1) | Due to the rounding of quarterly and year-to-date amounts, the actual amount of $0.6 million is shown as zero for the three months ended September 30, 2010. |
The favorable change in Other Income (Loss) for the three months ended September 30, 2010, compared to the same period in 2009, was primarily due to the lower credit losses on certain private-label RMBS described in "Results of OTTI Evaluation Process" below, and, to a lesser extent, the favorable changes in Net Gains (Losses) on Derivatives and Hedging Activities, as shown on the tables below. The unfavorable change in Other, net for the three months ended September 30, 2010, compared to the same period in 2009, was primarily due to a loss on extinguishment of debt resulting from Advance prepayments and, therefore, the loss is offset by the Prepayment Fees on Advances included in Net Interest Income.
The unfavorable change in Other Income (Loss) for the nine months ended September 30, 2010, compared to the same period in 2009, was primarily due to the higher credit losses on certain private-label RMBS described in "Results of OTTI Evaluation Process" below.
Results of OTTI Evaluation Process. Based on our evaluations, we recognized OTTI losses on three previously impaired securities for the three months ended September 30, 2010, compared to 12 securities for the same period in 2009. These securities had an aggregate unpaid principal balance in HTM private-label RMBS of $0.2 billion and $0.7 billion, respectively. We do not intend to sell these securities, and it is not more likely than not (i.e., not likely) that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost. However, we determined that we would not recover the entire amortized cost of these securities. Therefore, we recognized net OTTI credit losses as shown in the table below.
Certain estimates were refined and certain assumptions were adjusted this quarter, particularly related to prime loans, which resulted in lower projected principal losses relative to the second quarter (but higher relative to all prior qu arters) due to our investment concentration in prime private-label RMBS. See “Risk Management - Credit Risk Management-Investments - OTTI Evaluation Process” for more information on our OTTI Evaluation Process.
For the three and nine months ended September 30, 2010, we accreted $11.5 million and $40.0 million, respectively, of previous non-credit impairment losses from AOCI to the carrying value of HTM. We accreted $9.8 million and $18.1 million for each of the same periods in 2009.
We recorded OTTI as follows ($ amounts in millions):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
Impairment | Impairment | Impairment | Impairment | |||||||||||||||||||||
Related to | Related to All | Total | Related to | Related to All | Total | |||||||||||||||||||
September 30, 2010 | Credit Loss | Other Factors | Impairment | Credit Loss | Other Factors | Impairment | ||||||||||||||||||
Impairment on securities for which OTTI was not previously recognized | $ | — | $ | — | $ | — | $ | 4 | $ | 17 | $ | 21 | ||||||||||||
Additional impairment on securities for which OTTI was previously recognized (1) | — | — | — | 64 | (63 | ) | 1 | |||||||||||||||||
Accretion of impairment related to all other factors | — | (11 | ) | (11 | ) | — | (40 | ) | (40 | ) | ||||||||||||||
Total | $ | — | $ | (11 | ) | $ | (11 | ) | $ | 68 | $ | (86 | ) | $ | (18 | ) | ||||||||
September 30, 2009 | ||||||||||||||||||||||||
Impairment on securities for which OTTI was not previously recognized | $ | 6 | $ | 63 | $ | 69 | $ | 45 | $ | 211 | $ | 256 | ||||||||||||
Additional impairment on securities for which OTTI was previously recognized | 18 | (14 | ) | 4 | — | — | — | |||||||||||||||||
Accretion of impairment related to all other factors | — | (10 | ) | (10 | ) | — | (18 | ) | (18 | ) | ||||||||||||||
Total | $ | 24 | $ | 39 | $ | 63 | $ | 45 | $ | 193 | $ | 238 |
(1) | Due to the rounding of quarterly and year-to-date amounts, the actual amount of $0.6 million is shown as zero for the three months ended September 30, 2010. |
Net Gains (Losses) on Derivatives and Hedging Activities. The table below presents the components of Net Gains (Losses) on Derivatives and Hedging Activities by type of hedge and product ($ amount in millions).
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Net Gains (Losses) by Type and Product | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Fair Value Hedges: | ||||||||||||||||
Net Gain (Loss) Due to Ineffectiveness on: | ||||||||||||||||
Advances | $ | 5 | $ | (4 | ) | $ | 4 | $ | (20 | ) | ||||||
Investments | — | (1 | ) | (1 | ) | (3 | ) | |||||||||
CO Bonds | (2 | ) | 2 | (1 | ) | 18 | ||||||||||
Net Gain (Loss) on Fair Value Hedges | 3 | (3 | ) | 2 | (5 | ) | ||||||||||
Economic Hedges: (1) | ||||||||||||||||
Net Interest Receipt (Payment) Settlements: (2) | ||||||||||||||||
Advances | — | — | — | — | ||||||||||||
Investments | — | — | — | — | ||||||||||||
CO Bonds | — | — | 1 | 1 | ||||||||||||
Discount Notes | — | 2 | — | 11 | ||||||||||||
Net Settlements | — | 2 | 1 | 12 | ||||||||||||
Derivative Fair Value Gain (Loss) Adjustments: | ||||||||||||||||
Advances | — | — | — | — | ||||||||||||
Investments | — | — | — | — | ||||||||||||
CO Bonds | — | — | (1 | ) | — | |||||||||||
Discount Notes | — | (1 | ) | — | (5 | ) | ||||||||||
MPP | (1 | ) | — | (2 | ) | (2 | ) | |||||||||
Fair Value Adjustments | (1 | ) | (1 | ) | (3 | ) | (7 | ) | ||||||||
Net Gain (Loss) on Economic Hedges | (1 | ) | 1 | (2 | ) | 5 | ||||||||||
Net Gains (Losses) on Derivatives and Hedging Activities | $ | 2 | $ | (2 | ) | $ | — | $ | — |
(1) | Includes mortgage delivery commitments. | |
(2) | Net settlements represent the net interest payments or receipts on interest-rate exchange agreements for hedges not receiving fair value hedge accounting. |
Other Expenses
The increase in Other Expenses for the three and nine months ended September 30, 2010, was primarily due to increased compensation and benefit expenses, which were mainly attributable to an increase in our pension expense accru al resulting from an updated actuarial valuation, which indicated an increase in plan liabilities due to a decrease in the discount rate used to determine plan liabilities, and, to a lesser extent, an increase in our incentive compensation expense accrual.
AHP and REFCORP Assessments
AHP and Resolution Funding Corporation ("REFCORP") contributions are statutor ily required and are calculated simultaneously because of their interdependence on each other.
AHP. The FHLBs are required to set aside annually, in the aggregate, the greater of $100 million or 10% of their net earnings before Interest Expense on MRCS and after the REFCORP assessments, to fund the AHP. Each FHLB's required annual AHP contribution is limited to its annual net earnings. Our AHP expense for the three months ended September 30, 2010, was $5.9 million, compared to $2.7 million of AHP expense for the same period in 2009. Our AHP expense for the nine months ended September 30, 2010, was $8.8 million, compared to $11.8 million for the same period in 2009.
REFCORP. Each FHLB is required to pay to REFCORP 20% of net earnings after operating expenses and AHP expense. Our REFCORP expense for the three months ended September 30, 2010 , was $12.7 million, compared to $5.4 million for the same period in 2009. Our REFCORP expense for the nine months ended September 30, 2010, was $17.5 million, compared to $24.1 million for the same period in 2009.
The increases in both AHP and REFCORP expense for the quarter ended September 30, 2010, are directly attributable to the higher level of Income Before Assessments for the quarter ended September 30, 2010, compared to the same period in 2009.
The decreases in both AHP and REFCORP expense for the nine months ended September 30, 2010, are directly attributable to the lower level of Income Before Assessments for the nine months ended September 30, 2010, compared to the same periods in 2009.
Business Segments
Our products and services are grouped within two business segments: Traditional and MPP.
The Traditional business segment includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreement to Resell, AFS securities, and HTM securities) and deposits. The following table sets forth our financial performa nce for this operating segment ($ amounts in millions):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Traditional Segment | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net Interest Income | $ | 54 | $ | 45 | $ | 134 | $ | 126 | ||||||||
Other Income (Loss) | 2 | (25 | ) | & nbsp; | (65 | ) | (40 | ) | ||||||||
Other Expenses | 13 | &nbs p; | 10 | 35 | 30 | |||||||||||
Income Before Assessments | 43 | 10 | 34 | 56 | ||||||||||||
Total Assessments | 12 | 3 | 10 | 16 | ||||||||||||
Net Income | $ | 31 | $ | 7 | $ | 24 | $ | 40 |
The increase in Net Income for the Traditional segment for the three months ended September 30, 2010, compared to the same period in 2009, was primarily due to the following factors:
• | an increase in Other Income (Loss) substantially due to th e lower credit loss portion of the OTTI write-down of certain private-label RMBS that is described in more detail in “Results of Operations for the Three and Nine Months Ended September 30, 2010, and 2009 - Other Income - Results of OTTI Evaluation Process” herein ; and |
• | an increase in Net Interest Income primarily resulting from higher prepayment fees on Advances and higher average balances of HTM and AFS securities and short-term investments and wider spreads on our HTM securities, partially offset by lower average balances of Advances. |
These increases were partially offset by higher Total Assessments, which were directly attributable to the higher Income Before Assessments.
The decrease in Net Income for the Traditional segment for the nine months ended September 30, 2010, compared to the same period in 2009, was primarily due to a decrease in Other Income (Loss) substantially resulting from the higher credit loss portion of the OTT I write-down of certain private-label RMBS during the first two quarters of 2010 that is described in more detail in “Results of Operations for the Three and Nine Months Ended September 30, 2010, and 2009 - Other Income - Results of OTTI Evaluation Process.”
This decrease was partially offset by an increase in Net Interest Income primarily resulting from higher average balances of HTM and AFS securities and wider spreads on HTM securities and by lower Total Assessments, which are directly attributable to the lower Income Before Assessments.
The MPP business segment consists of mortgage loans purchased from our members. The following table sets forth our financial performance for this operating segment ($ amounts in millions):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
MPP Segment | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net Int erest Income | $ | 28 | $ | 21 | $ | 66 | &nb sp; | $ | 81 | |||||||
Other Income (Loss) | (1 | ) | — | (2 | ) | (2 | ) | |||||||||
Other Expenses | 1 | 1 | 2 | 2 | ||||||||||||
Income Before Assessments | 26 | 20 | 62 | 77 | ||||||||||||
Total Assessments | 6 | 5 | 16 | 20 | ||||||||||||
Net Income | $ | 20 | $ | 15 | $ | 46 | $ | 57 |
The increase in Net Income for the MPP segment for the three months ended September 30, 2010, compared to the same period in 2009, was primarily due to higher Net Interest Income resulting from a decrease in premium amortization expense due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience, partially offset by the lower average balance of MPP loans. The higher Net Interest Income was partially offset by an increase in Total Assessments, which was directly attributable to the higher Income Before Assessments.
The decrease in Net Income for the MPP segment for the nine months ended September 30, 2010, compared to the same period in 2009, was primarily due to lower Net Interest Income resulting from the lower average balance of MPP loans, partially offset by a decrease in premium amortization expense due to a retrospective adjustment to reduce our estimated MPP prepayment speeds to reflect our recent experience. The lower Net Interest Income was partially offset by a decrease in Total Assessments, which was directly attributable to the lower Income Before Assessments.
Analysis of Financial Condition
Total Assets decreased by 4% to $44.9 billion as of September 30, 2010, compared to $46.6 billion at December 31, 2009. This $1.7 billion decrease was primarily due to net decreases of $3.5 billion in Advances and $0.8 billion in Mortgage Loans Held for Portfolio, par tially offset by increases of $0.7 billion in cash and short-term investments, $1.4 billion in HTM securities and $0.5 billion in AFS securities.
Consolidated Obligations, which typically fluctuate in relation to our Total Assets, decreased by 4% to $40.3 billion at September 30, 2010, compared to $42.2 billion at December 31, 2009.
Advances
Advances decreased by $3.5 billion or 16% to equal $18.9 billion at September 30, 2010, compared to $22.4 billion at December 31, 2009. This decrease was primarily caused by decreased demand related to various economic factors such as growth in deposits and low loan demand at many of our member institutions. &nb sp;In general, Advances fluctuate in accordance with our members' funding needs related to their deposit levels, mortgage pipelines, investment opportunities, other balance sheet strategies, and the cost of alternative funding opportunities.
A breakdown of Advances, at par value, by primary product line is provided below ($ amounts in millions):
September 30, 2010 | December 31, 2009 | |||||||||||||
% of | % of | |||||||||||||
Advances by Primary Product Line | Amount | Total | Amount | Total | ||||||||||
Fixed-rate bullet | $ | 8,018 | 45 | % | $ | 10,149 | 47 | % | ||||||
Putable | 4,388 | 24 | % | 5,241 | 24 | % | ||||||||
Adjustable-rate | 3,340 | 19 | % | 3,205 | 15 | % | ||||||||
Fixed-rate amortizing | 2,070 | 11 | % | &nbs p; | 2,545 | 12 | % | |||||||
Other | 199 | 1 | % | 570 | 2 | % | ||||||||
Total Advances, par value | 18,015 | 100 | % | 21,710 | 100 | % | ||||||||
Total Adjustments (unamortized discounts, hedging and other) | 899 | 733 | ||||||||||||
Total Advances | $ | 18,914 | $ | 22,443 |
Cash and Investments
The following table provides balances, at carrying value, for our cash and investments ($ amounts in millions):
September 30, 2010 | December& nbsp;31, 2009 | |||||||||||||
Percent of | Percent of | |||||||||||||
Components of Cash and Investments | Amount | Total | Amount | Total | ||||||||||
Cash and short-term investments: | ||||||||||||||
Cash | $ | 11 | — | % | $ | 1,722 | 10 | % | ||||||
Interest-Bearing Deposits | — | — | % | — | — | % | ||||||||
Securities Purchased Under Agreements to Resell | 1,250 | 6 | % | — | — | % | ||||||||
Federal Funds Sold | 6,677 | 35 | % | 5,532 | 33 | % | ||||||||
Total cash and short-term investments | 7,938 | 41 | % | 7,254 | 43 | % | ||||||||
AFS securities: | ||||||||||||||
GSE debentures | 1,900 | 10 | % | 1,761 | 11 | % | ||||||||
TLGP | 326 | 2 | % | — | — | % | ||||||||
Total AFS securities | 2,226 | 12 | % | 1,761 | 11 | % | ||||||||
HTM securities: | ||||||||||||||
GSE debentures | 295 | 2 | % | 126 | 1 | % | ||||||||
TLGP | 2,066 | 11 | % | 2,067 | 12 | % | ||||||||
Other U.S. Obligations - guaranteed RMBS | 2,204 | 11 | % | 865 | 5 | % | ||||||||
GSE RMBS | 2,761 | 14 | % | 2,137 | 13 | % | ||||||||
Private-label MBS | 1,792 | 9 | % | 2,481 | 15 | % | ||||||||
Private-label ABS | 23 | — | % | 25 | — | % | ||||||||
Total HTM securities | 9,141 | 47 | % | 7,701 | 46 | % | ||||||||
Total cash and investments, carrying value | $ | 19,305 | 100 | % | $ | 16,716 | 100 | % |
Cash and Short-Term Investments
As of September 30, 2010, cash and short-term investments totaled $7.9 billion, an increase of 9% compared to December 31, 2009. This increase was primarily due to increases of $1.1 billion in Federal Funds Sold and $1.3 billion in Securities Purchased Under Agreements to Resell, partially offset by a decrease of $1.7 billion in Cash. The maturities of the short-term investments provide cash flows to support our ongoing liquidity needs.
Available-for-Sale Securities
AFS Securities were $2.2 billion at September 30, 2010, an increase of 26% compared to December 31, 2009. We purchased corporate debentures guaranteed by the FDIC and backed by the TLGP during 2010.
Held-to-Maturity Securities
HTM securities increased by 19% to $9.1 billion at September 30, 2010, compared to December 31, 2009. This increase was primarily due to purchases of agency MBS, partially offset by mortgage paydowns.
The Finance Agency's regulations provide that the total book value of our investments in MBS and ABS on the day we purchase the securities must not exceed 300% of our total regulatory capital, consisting of Retained Earnings, Class B Capital Stock, and MRCS, as of the previous month end. These investments, as a percentage of total regulatory capital, were 233% at September 30, 2010, and 195% at December 31, 2009. Generally, our goal is to maintain these investments near the 300% limit. However, these investments as a percentage of total regulatory capital were less than 300% at September 30, 2010, and December 31, 2009, because of the lack of favorable opportunities for the purchase of MBS and ABS.
Gross unrealized losses in our private-label MBS and ABS were $128.2 million at September 30, 2010, and $391.6 million at December 31, 2009, of which $238.0 million and $324.0 million, respectively, have been recognized in AOCI. See Note 4 in our Notes to Financial Statements for detailed information about the unrealized losses.
We performed an OTTI analysis and determined that we had three private-label RMBS that were OTTI for the three months ended September 30, 2010. See “Investments-OTTI Evaluation Process” in the Risk Management section herein for more information on our OTTI analysis process.
Mortgage Loans Held for Portfolio
We purchase mortgage loans from our members through our MPP. At September 30, 2010, we held $6.5 billion of MPP loans, a decrease of 11%, compared to December 31, 2009. The decrease was primarily due to prepayments of outstanding mortgage loans exceeding the purchases of new loans. Some ot her factors that impact the volume of mortgage loans purchased through the MPP include the general level of housing activity in the U.S., the level of refinancing activity, and consumer product preferences. See “Item 1A. Risk Factors” in our 2009 Form 10-K and “Risk Management-Credit Risk Management-MPP” herein for more information.
Deposits (Liabilities)
Total Deposits were $0.6 billion at September 30, 2010, a decrease of 28% compared to December 31, 2009. These deposits represent a relatively small portion of our funding, and they vary depending upon market factors, such as the attractiveness of our deposit pricing relative to the rates available on alternative money market instruments, members' investment preferences with respect to the maturity of their investments, and member liquidity.
Consolidated Obligations
At September 30, 2010, the carrying values of our Discount Notes and CO Bonds totaled $9.7 billion and $30.5 billion, respectively, compared to $6.3 billion and $35.9 billion, respectively, at December 31, 2009. The overall balance of our COs fluctuates in relation to our Total Assets. See “Executive Summary - Financial Trends in the Capital Markets” herein for more information on the issuance of COs.
Derivatives
As of September 30, 2010, and December 31, 2009, we had Derivative Assets, net of collateral held or posted including accrued interest, with market values of $2.7 million and $1.7 million, respectively, and Derivative Liabilities, net of collateral held or posted including accrued interest, with market values of $88 2.8 million and $712.7 million, respectively. These market values reflect the impact of interest-rate changes. See Note 8 - Derivative and Hedging Activities in our Notes to Interim Unaudited Financial Statements and "Risk Management - Credit Risk Management - Derivatives" for more information.
50
Table of Contents& nbsp;
Capital
Total Capital was $1.9 billion at September 30, 2010, compared to $1.7 billion at December 31, 2009. This increase was substantially due to an increase of $73.8 million in AOCI (i.e., a decrease in Accumulated Other Comprehensive Losses), an increase of $7.4 million in Capital Stock, and a net increase of $46.5 million in Retained Earnings.
Capital Stock. Capital Stock increased by $7.4 million during the nine months ended September 30, 2010, due to proceeds of $37.2 million from the sale of Capital Stock, offset by the transfer of $29.7 million of Capital Stock to MRCS. See "Excess Stock" herein for information about a repurchase of excess stock that will occur on November 18, 2010.
Retained Earnings. Retained Earnings increased by $46.5 million during the nine month s ended September 30, 2010. The increase was due to Net Income of $70.2 million, offset by dividends paid of $23.7 million.
Accumulated Other Comprehensive Income (Loss). AOCI increased by $73.8 million due to Total Comprehensive Income for the nine months ended September 30, 2010, which included $86.0 million of net non-credit portion of OTTI losses on our HTM securities, partially offset by the $9.5 million decrease in the fair value of our AFS securities before derivative and hedging adjustments.
Liquidity and Capital Resources
Our cas h and short-term investments portfolio, which included Federal Funds Sold and Securities Purchased Under Agreements to Resell, totaled $7.9 billion at September 30, 2010, compared to $7.3 billion at December 31, 2009. The maturities of the short-term investments provide cash flows to support our ongoing liquidity needs.
Changes in Cash Flow. Net cash provided by operating activities was $206.8 million for the nine months ended September 30, 2010, compared to $178.9 million for the nine months ended September 30, 2009. The increase of $27.9 million included a decrea se in average yields paid and lower average balances of COs.
Capital Resources
Total Regulatory Capital. Our total regulatory capital consists of Retained Earnings and total regulatory capital stock, which includes Class B Capital Stock and MRCS. MRCS is classified as a liability on our Statements of Condition.
Capital Adequacy. We are required by Finance Agency regulations to maintain sufficient permanent capital (defined as Class B Stock, MRCS, and Retained Earnings) to meet the combined credit risk, market risk and operational risk components of the risk-based capital requirement. The Finance Agency may mandate us to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. As of September 30, 2010, our risk-based capital requirement was $0.8 billion, compared to permanent capital of $2.9 billion. As of December 31, 2009, our risk-based capital requirement was $0.9 billion, compared to permanent capital of $2.8 billion.
In addition, the Gramm-Leach-Bliley Act of 1999 and Finance Agency regulations require us to maintain at all times a regulatory capital ratio of at least 4.00% and a leverage ratio o f at least 5.00%. At September 30, 2010, our regulatory capital ratio was 6.49%, and our leverage ratio was 9.73%.
Capital Distributions. Cash dividends were paid on Capital Stock Putable-Class B-1 at an annualized rate of 1.50% and on Capital Stock Putable-Class B-2 at an annualized rate of 1.20% during the third quarter of 2010. Cash dividends were paid on Capital Stock Putable-Class B-1 at an annualized rate of 3.25% and on Capital Stock Putable-Class B-2 at an annualized rate of 2.60% during the third quarter of 2009. Dividends are based on a number of factors, which may include our quarterly financial results, as well as our Retained Earnings Policy and capital management considerations.
On October 22, 2010, our board of directors declared a cash dividend of 2.00% (annualized) on our Capital Stock Putable-Class B-1 and of 1.60% (annualized) on our Capital Stock Putable-Class B-2. On October 20, 2009, our board of directors declared a cash dividend of 2.00% (annualized) on our Capital Stock Putable-Class B-1 and of 1.60% (annualized) on our Capital Stock Putable-Class B-2.
Mandatorily Redeemable Capital Stock. At September 30, 2010, we had $782.1 million in capital stock subject to mandatory redemption, compared to $755.7 million at December 31, 2009. This increase was primarily due to a reclassification of $31.2 million from capital stock because of two members that became non-members due to regulatory actions. This increase was partially offset by $2.2 million of MRCS that was reclassified to Capital Stock when a non-member stockholder that had acquired stock by purchasing one of our members became a member of our Bank, and the redemption of $3.4 m illion of MRCS at the end of its five-year redemption period. See Note 11 in our Notes to Financial Statements for additional information on the redemption requests for member capital stock.
Excess Stock. Excess stock is capital stock that is not required as a condition of membership or to support services to members or former members. In general, the level of excess stock fluctuates with our members' demand for Advances. Finance Agency regulations prohibit an FHLB from issuing new excess stock if the amount of excess stock outstanding exceeds 1% of the Bank's Total Assets. At September 30, 2010, our outstanding excess stock of $1.4 billion was equal to 3% of our Total Assets. Therefore, we are currently not permitted to distribute stock dividends. The following table presents the composition of our excess stock ($ amounts in millions):
Excess Stock | September 30, 2010 | December 31, 2009 | ||||||
Member capital stock not subject to redemption requests | $ | 569 | $ | 465 | ||||
Member capital stock subject to redemption requests (1) | 130 | 131 | ||||||
MRCS subject to redemption (1) | 678 | 608 | ||||||
Total excess capital stock | $ | 1,377 | $ | 1,204 |
(1) | This amount does not include capital stock or MRCS that is still supporting outstanding credit products. |
On October 28, 2010, we announc ed that we will repurchase up to $250 million in par value of excess stock on a pro rata basis from all shareholders with excess stock, provided that no fractional shares will be repurchased. This is in accordance with Section VI.C. of our Capital Plan dated September 19, 2002 (as amended). Letters of repurchase were sent only to shareholders that held excess stock as of September 30, 2010. The repurchase will occur on November 18, 2010, provided that such repurchase meets all of the terms and conditions of our Capital Plan as of the date of the repurchase.
Off-Balance Sheet Arrangements
Commitments that legally bind us for additional Advances totaled $1.7 billion at September 30, 2010, compared to $37.7 million at December 31, 2009. The increase was primarily due to the restructuring of Advances by one of our members that settled on October 1, 2010, and did not have an impact on our outstanding balance of Advances.
Unused lines of credit totaled $705.6 million at September 30, 2010, compared to $170.6 million at December 31, 2009. The increase is primarily due to modifications that we made to the fees and terms of our Overdraft Line of Credit product in order to make it more attractive to all of our members.
See Note 14 in our Notes to Financial Statements for additional information on our off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reporting period. We review these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors we believe to be reasonable under the circumstances. Changes in estimates and assumptions have the potential to significantly affect our financial position and results of operations. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our financial statements.
We have identified five accounting policies that we believe are critical because they require management to make subjective 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 policies are:
• | Accounting for Derivatives and Hedging Activities; |
• | Accounting for Premiums and Discounts and Other Costs Associated with Originating or Acquiring Mortgage Loans, MBS and ABS; |
• | Provision for Credit Losses; |
• | Fair Value Estimates; and |
• | OTTI Analysis. |
A discussion of these critical accounting policies and estimates can be found in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section under the caption “Critical Accounting Policies and Estimates” of our 2009 Form 10-K. See below for additional information regarding certain of these policies.
Accounting for Premiums and Discounts and Other Costs Associated with Originating or Acquiring Mortgage Loans, MBS and ABS
The estimated prepayment projections may have a material impact on the calculation of the amortization of certain premiums and discounts. The periodic retrospective adjustments, especially in an uncertain interest-rate market, can be the sour ce of considerable income volatility in the MPP and MBS/ABS portfolios.
Projected prepayment speeds for mortgage assets are based on monthly implied forward interest rates. We use implied forward interest rates because they are the market's consensus of future interest rates; they are the default set of interest rates used to price and value financial instruments; and they are the interest rates that can be hedged with various instruments. We use a nationally-recognized prepayment model to determine prepayment speeds.
The following table shows the impact to income for the three months ended September 30, 2010, for both MPP and MBS/ABS assuming a 25% and 50% increase in prepayment speeds and a 25% and 50% decrease in prepayment speeds ($ amounts in millions):
25% | 50% | 25% | 50% | ||||||||||||
Portfolio | Increase | Increase | Decrease | Decrease | |||||||||||
MPP | $ | (2 | ) | $ | (3 | ) | $ | 2 | $ | 5 | |||||
MBS/ABS | — | (1 | ) | — | (1 | ) |
Provision for Credit Losses
Advances. At September 30, 2010, based on the collateral held as security for Advances, management's credit analyses and prior repayment history, no allowance for losses on Advances is deemed necessary by management.
Mortgage Loans Acquired under MPP. Based on our analysis, using an estimated liquidation value at September 30, 2010, of 55% of the original appraised value, further reduced by estimated liquidation costs, and after consideration of LRA, SMI, and other credit enhancements as well as year-to-date net losses of only $0.3 million, we recorded no allowanc e for credit losses on mortgage loans at September 30, 2010. We have also performed our loan loss reserve analysis under multiple scenarios whereby we changed various assumptions and have concluded that a worsening of those assumptions would not change our conclusion that an allowance for credit losses is not necessary at September 30, 2010.
Other-Than-Temporary Impairment Analysis
In addition to evaluating our Private-label MBS and ABS under a base case (or best estimate) scenario, we also performed a cash-flow analysis for each of these securities under a more adverse housing price scenario.
This more stressful scenario was based on a housing price forecast that was 5 percentage points lower at the trough than the base case scenario, followed by a flatter recovery path. Under this scenario, current-to-trough home price declines were projected to range from 5% to 15% over the three- to nine-month period beg inning July 1, 2010. Thereafter, home prices were projected to remain unchanged from trough levels in each of the first and second years, increase 1% in the third year, 2% in each of the fourth and fifth years and 3% in each subsequent year. The following table shows the base case scenario and what the impact on OTTI would have been under the more adverse home price scenario for the quarter ended September 30, 2010 ($ amounts in millions):
For the Quarter Ended September 30, 2010 | |||||||||||||||||||||||
Number of | |||||||||||||||||||||||
Impairment | Securities | Estimated | |||||||||||||||||||||
Related to | Impaired | Credit Loss | |||||||||||||||||||||
Credit Loss | Using | Using | |||||||||||||||||||||
Number of | Unpaid | Included in | Adverse | Unpaid | Adverse | ||||||||||||||||||
Securities | Principal | Statement | Housing Price | Principal | Housing Price | ||||||||||||||||||
NRSRO Classification | Impaired | Balance | of Income (1) | Scenario | Balance | Scenario | |||||||||||||||||
Prime | 3 | $ | 221 | $ | — | 6 | $ | 410 | $ | 13 | |||||||||||||
Alt-A | — | — | — | 2 | 59 | 1 | |||||||||||||||||
Total | 3 | $ | 221 | $ | — | 8 | $ | 469 | $ | 14 |
(1) | Due to the rounding of quarterly and year-to-date amounts, the actual amount of $0.6 million is shown as zero for the three months ended September 30, 2010. |
Additional information about OTTI of our Private-label MBS and ABS is provided in “Risk Management-Credit Risk Management-Investments” herein, and in Note 5 in our Notes to Financial Statements.
Recent Accounting and Regulatory Developments
Accounting Developments
See Note 2 in our Notes to Financial Statements for a description of how recent accounting developments may impact our results of operations or financial condition.
Legislative and Regulatory Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Act was enacted into law. Among other things, the Act: (i) creates the Financial Stability Oversight Council (“Oversight Council”), an inter-agency council that will identify and regulate "systemically significant" financial institutions; (ii) creates the Bureau of Consumer Financial Protection; (iii) regulates the over-the-counter ("OTC") derivatives market; (iv) imposes new executive compensation proxy and disclosure requirements; (v) establishes new requirements, including a risk-retention requirement, for mortgage-backed securities; (vi) amends legislation affecting the NRSROs; and (vii) makes a number of changes to the federal deposit insurance system. Various provisions of the Act may cause the FHLBs to be subject to future regulatory oversight by the Federal Reserve, the Commodity Futures Trading Commission (“CFTC”), and the Oversight Council, in addition to the Finance Agency and the SEC.
The Bank's business operations, operating expenses relating to regulatory compliance, funding costs, rights and obligations, as well as the environment in which the Bank carries out its housing finance mission, may be negatively affected by the Dodd-Frank Act. Regulations on the OTC derivatives market that may be issued under the Act could materially affect an FHLB's ability to hedge interest-rate-risk exposure from Advances, achieve risk management objectives and act as an intermediary between members and counterparties, and may also require registration with the CFTC, resulting in additional compliance requirements.
The Dodd-Frank Act contains numerous rulemaking initiatives to be undertaken by several federal agencies to implement various provisions. We continue to monitor the progress of these initiatives and assess how they may affect our Bank. At this time, we cannot predict how the Act, or regulations promulgated thereunder, will impact our day-to-day operations and financial performance.
Regulatory Activity Pursuant to the Dodd - Frank Act
Oversight Council Authority to Supervise and Regulate Certain Nonbank Finan cial Companies. On October 6, 2010, the Oversight Council published (1) an advance notice of proposed rulemaking seeking comment on the criteria that it should use to determine whether a financial institution should be deemed systemically important and thus subject to an additional layer of prudential regulation by the Board of Governors of the Federal Reserve, and (2) a notice and request for public input on a study required by the Dodd-Frank Act concerning implementation of the Dodd-Frank Act prohibitions against banking entities from engaging in proprietary trading and from maintaining certain relationships with hedge funds and private equity funds (commonly known as the “Volcker Rule”). Comments on both notices were due by November 5, 2010.
Proposed Rule on Unlimited Deposit Insurance for Non-interest Bearing Transaction Accounts. The Dodd-Frank Act requires the FDIC and the National Credit Union Administration ("NCUA") to provide unlimited deposit insurance for non-interest bearing transaction accounts. This requirement is in effect for FDIC-insured institutions from December 31, 2010 until December 31, 2012 and for insured credit unions from the effective date of the Dodd-Frank Act until January 1, 2013. On September 30, 2010, the FDIC published a proposed rule to revise its deposit insurance regulations to include this new temporary deposit insurance account category. Deposits are a source of liquidity fo r our members, and a rise in deposits, which may occur during the FDIC's unlimited support of non-interest bearing transaction accounts, may weaken member demand for Bank Advances.
FDIC Proposed Rule on Dodd-Frank Resolution Authority. On October 19, 2010, the FDIC published a proposed rule concerning FDIC treatment of certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Act provides for the appointment of the FDIC as receiver for a financial company in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States (defined as a “covered financial company”). Among other things, the proposed rule provides:
• | all unsecured and under-secured creditors must expect to absorb losses in any liquidation, and secured creditors will only be protected to the extent of the fair value of their collateral; |
• | to the exten t that any portion of a secured creditor's claim is unsecured, it will absorb losses along with other unsecured creditors; and |
• | secured obligations that are direct obligations of, or that are fully guaranteed by, the United States or any agency of the United States will be valued at par. |
Comments on the proposed rule are due by November 18, 2010. The FDIC also posed additional questions in relation to orderly liquidation authority with a response deadline of January 18, 2011. Until this proposed rule is finalized, we are unable to predict the impact of the rule in the event of a covered financial company's liquidation.
Other Legislative and Regulatory Developments
Nontraditional and Subprime Residential Mortgage Loans. Since 2007, the Finance Agency (or its predecessor regulator, the Finance Board) has issued three Advisory Bulletins (collectively, the “Nontraditional Mortgage Guidance”) concerning the FHLBs' involvement with nontraditional and subprime residential mortgage loans. The Nontraditional Mortgage Guidance relies in part on standards imposed by the Federal banking agencies with respect to nontraditional and subprime mortgages (the “Interagency Guidance”). The Finance Agency's Nontraditional Mortgage Guidance generally requires compliance with the Interagency Guidance in circumstances when an FHLB acquires mortgages under its AMA program, invests in private-label MBS, or accepts mortgages as collateral for Advances.
On October 13 and 14, 2010, the Finance Agency provided additional information concerning the application of the Nontraditional Mortgage Guidance to the FHLBs' business. The Finance Agency indicated that:
• | Nontraditional and subprime mortgages and private-label MBS backed by such mortgages originated, issued or acquired by a member before July 10, 2007 may be pledged to secure FHLB Advances, subject to appropriate collateral management practices and underwriting criteria. The Finance Agency suggested, however, that FHLBs should consider additional limitations to their collateral policies by disallowing (i) subprime and nontraditional whole mortgage loans that are 30 days or more delinquent and (ii) private-label MBS tranches backed by nontraditional and subprime collateral if those tranches have sustained an interruption of actual cash flows. |
• | Nontraditional and subprime mortgages and private-label MBS backed by such mortgages acquired by a member or affiliate of a member through a merger with, or a purchase and assumption of all or substantially all of, another financial institution may continue to be pledged to secure Advances as if they continued to be owned by the acquired institution, irrespective of the date of the merger or purchase and assumption. If the nontraditional and subprime mortgages and private-label MBS backed by such mortgages owned by the acquired institutions are otherwise eligible to be pledged according to the Nontraditional Mortgage Guidance, the FHLB is no longer required to consult with the Finance Agency with respect to mergers and purchase and assumption agreements. |
• | The FHLBs may accept as collateral for Advances FDIC- or NCUA-guaranteed resecuritizations of private-label MBS backed by nontraditional and subprime mortgages (collectively, “Notes”), irrespective of when the private-label MBS underlying the Notes were issued or acquired, if the Notes are backed by the full faith and credit of the United States. The FHLBs may accept such Notes as collateral without first submitting a new business activity notice to the Finance Agency, which had previously been required by the Finance Agency. |
• | The FHLBs may invest in Notes without first submitting a new business activity notice. |
• | The Nontraditional Mortgage Guidance applies to “simultaneous second-lien” loans, which are expressly within the scope of the Interagency Guidance, but does not otherwise apply to home equity lines of credit or ho me equity loans. |
We continue to develop policies and procedures to ensure we are in compliance with Finance Agency pronouncements concerning nontraditional and subprime mortgage loans. After these policies are fully phased-in, they may ultimately require some of our members to reduce their borrowings or provide substitute collateral for currently pledged collateral that may not comply with Finance Agency guidance. We continue to assess what, if any, impact the Finance Agency's pronouncements will have on our MPP, private-label MBS, and Advances.
Regulatory Waiver of SMI Rating Requirement for MPP Purchases. Section 955.3(b)(1)(ii)(A) of the Finance Agency's Acquired Member Asset ("AMA") regulation requires FHLB members that sell loans to FHLBs through an AMA program (such as our MPP) to be legally obligated at all times to maintain SMI, when required, with an insurer rated not lower than the second highest rating category when SMI is used as a form of credit enhancement in the AMA program. With prolonged deteriorations in the mortgage markets, it remains difficult for us to meet this requirement because no mortgage insurers that currently underwrite SMI are currently rated in the second highest rating category or better by any NRSRO. On August 6, 2009, the Director of the Finance Agency granted a temporary waiver of this NRSRO rating requirement for SMI providers, subject to certain limitations and conditions. In addition, the AMA regulation generally requires us to obtain NRSRO confirmation that (i) we determine for each pool the required credit enhancement using a methodology that is comparable to one used by an NR SRO in similar circumstances, and (ii) to establish a level of credit enhancement that is sufficient to enhance the asset or pool of assets to a credit quality equivalent to that of an instrument having at least the fourth highest credit rating from an NRSRO (collectively, “NRSRO confirmations”). While we continue to determine required credit enhancements in accordance with the AMA regulation, given housing and financial market conditions over the past several quarters and their impact on credit ratings and the mortgage insurance market, we are currently unable to obtain the NRSRO confirmations.
On April 6, 2010, in accordance with the Finance Agency's August 6, 2009, waiver, we filed a notice of new business activity ("NBA") with the Finance Agency relating to new MPP business. This NBA plan will utilize a supplemental fixed LRA account for additional credit enhancement for new MPP business consistent with Finance Agency regulations, in lieu of utilizing coverage from an SMI provider. On June 4, 2010, the Finance Agency approved our NBA filing, subject to certain conditions that require us to:
• | monitor and report to the Finance Agency losses offset by the LRA on pools acquired through the NBA and remaining LRA balances for such pools; |
• | obtain a third-party vendor's comprehensive valid ation of our use of an NRSRO Model (a credit risk model we use to estimate the level of credit enhancement necessary for an implied credit rating), under the standards set forth in Finance Agency Advisory Bulletin 2009-AB-03, the scope and results of such validation to be to the satisfaction of the Finance Agency; |
• | obtain a letter from the Bank's accounting firm on the appropriate applica tion of GAAP to the elements of the NBA; and |
• | after one year, assess the relative credit risk to the Bank of the loans structured under the NBA approach (compared to the prior approach), and assess the opportunity to restore an overall pool rating of AA using either approach. |
&nb sp;
The Finance Agency has waived the NRSRO confirmations requirements of the AMA regulation with respect to the Bank's new MPP business, subject to our use of a third-party vendor's validation model in the manner described above. On September 14, 2010, we submitted to the Finance Agency the third-party vendor's comprehensive validation of our use of the NRSRO Model. We continue the process of fulfilling the remaining Finance Agency conditions and implementing our modified MPP.
On October 28, 2010, the Finance Agency granted our July 30, 2010, request to extend the existing waiver period for new MPP business utilizing SMI for credit enhancement to December 31, 2010, provided that any new MPP bus iness that relies on SMI for credit enhancement is subject to the existing coverage ceiling. Because our recent volume of MPP business caused us to approach the current coverage ceiling more rapidly than we had anticipated, on October 29, 2010, we requested permission from the Finance Agency to increase the amount of new MPP business under the existing SMI policy during the remainder of the extended waiver period, subject to certain proposed limitations.
For additional information, please refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments” in our 2009 Form 10-K.
Energ y Retrofit Programs. On July 6, 2010, the Finance Agency issued a statement concerning certain energy retrofit loan programs denominated as Property Assessed Clean Energy (“PACE”) programs. In general, PACE programs seek to foster loans for the purpose of purchasing and installing energy-saving retrofits on residential or commercial properties through a public taxing district with repayment facilitated through a county or city's tax assessment regime. Several states have enacted legislation enabling local governments to establish PACE programs, and other states are considering such legislation, including the State of Michigan in our district. Under most PACE programs, the loans are assigned priority lien status over all existing mortgages and other potential liens. The Finance Agency's July 6 statement indica tes that (i) first priority liens established by PACE loans are unlike routine tax assessment liens and pose risk management challenges for lenders, servicers and mortgage security investors, (ii) the size and duration of PACE loans exceed typical local tax programs and lack the traditional community benefits associated with tax initiatives, and (iii) priority lien status for such loans represents a key alteration of traditional mortgage lending practice, and may alter valuations for mortgage-backed securities and mortgage loans. The Finance Agency therefore directed the FHLBs to review their Advances collateral policies in order to assure that pledged collateral is not adversely affected by energy retrofit programs that include first liens. We are reviewing our collateral policies in light of the Finance Agency's directive, and we continue to assess the possible impacts of PACE programs on our collateral valuations, MPP operations and private-label MBS portfolio. Among other things, PACE programs that prov ide priority lien status over existing mortgages could cause reductions in collateral valuations in our Advances portfolio and valuations of mortgages underlying our private-label MBS, and could cause otherwise eligible residential mortgages to be ineligible for sale into our MPP.
Tax-Exempt Bonds Supported by FHLB Letters of Credit. Legislation has been introduced that would allow an FHLB on behalf of one or more members to issue letters of credit to support non-housing related tax-exempt state and local bonds issued after December 31, 2010. If enacted, this would be an extension of the Bank's autho rity to issue such letters of credit,which was first granted to the FHLBs by the Housing and Economic Recovery Act of 2008. This authority is currently set to expire December 31, 2010.
Basel Committee on Banking Supervision Capital Framework. The Basel Committee on Banking Supervision (the "Basel Committee") has developed a new capital regime for internationally-active banks. Banks subject to the new regime will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses. While it is uncertain how the new capital regime or other standards being developed by the Basel Committee, such as liquidity standards, will be implemented by the U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the more stringent capital requirements, thereby tending to decrease their need for Advances. Likewise, any new liquidity requirements may also adversely impact member demand for Advances and/or investor demand for COs.
Risk Management
Active risk management is an integral part of our operations because risk is an inherent part of our business activities. We have exposure to a number of risks in pursuing our business objectives. These risks may be broadly classified as market, credit, liquidity, operations, and business. Market risk is not discussed in this section because it is discussed in detail in “Item 3. Quantitative and Qualitative Disclosures about Market Risk.” Although we are unable to eliminate these risks, we are able to manage them effectively by setting appropriate limits and developing internal processes to ensure an appropriate risk profile. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management” in our 2009 Form 10-K for more detailed information.
Credit Risk Management
Credit risk is the risk that members or other counterparties may be unable to meet their contractual obligations to us, or that the values of those obligations will decline as a result of deterioration in the members' or other counterparties' creditworthiness. Credit risk arises when our funds are extended, committed, invested or otherwise exposed through actual or implied contractual agreements. We face credit risk on Advances and o ther credit products, investments, mortgage loans, derivative financial instruments, and AHP grants.
The most important step in the management of credit risk is the initial decision to extend credit. We also manage credit risk by following established policies, evaluating the creditworthiness of our members and counterparties, and utilizing collateral agreements and settlement netting. Periodic monitoring of members and other counterparties is performed for all areas where we are exposed to credit risk.
Advances. We manage our exposure to credit risk on Advances through a combination of our security interest in assets pledged by the borrowing member and ongoing reviews of our borrowers' financial condition. However, our credit risk is magnified due to the concentration of Advances in a few borrowers. As of September 30, 2010, our top three borrowers held 34% of total Advances outstanding, at par. Because of this concentration in Advances, we perform frequent credit and collateral reviews on our largest bo rrowers. In addition, we analyze the implications to our financial management and profitability if we were to lose the business of one or more of these borrowers.
Investments. We are also exposed to credit risk through our investment portfolios. The Risk Management Policy (“RMP”) approved by our bo ard of directors restricts the acquisition of investments to high-quality, short-term money market instruments and highly-rated long-term securities.
Short-Term Investments. We place funds with large, high-quality financial institutions with investment-grade long-term credit ratings on an unsecured basis for terms of up to 275 days; most such placements typically mature within 90 days. At September 30, 2010, our unsecured credit exposure, including accrued interest related to short-term investment securities and money- market instruments, was $6.7 billion to 17 counterparties and issuers, of which $5.1 billion was for Federal Funds Sold that mature overnight. We actively monitor counterparty creditworthiness, ratings, performance, and capital adequacy in an effort to mitigate unsecured credit risk on the short-term investments, with emphasis on the potential impacts from global economic conditions. Unsecured transactions can only be conducted with counterparties that are domiciled in countries that maintain a long-term sovereign rating from Standard & Poor's (“S&P”) of AA or higher.
Long-Term Investments. Our long-term investments primarily include Private-label MBS and ABS, RMBS issued by the GSEs and GNMA, and corporate debentures guaranteed by the FDIC and backed by the full faith and credit of the U.S. under the TLGP. Long-term investments also include corporate debentures issued by the GSEs.
The deterioration of the mortgage market has resulted in a higher risk of loss on investments, particularly on our Private-label MBS and ABS. Our Private-label MBS and ABS are backed by collateral primarily in the state of California (50%). The next four largest states include New York (6%), Florida (5%), Virginia (4%), a nd New Jersey (3%). Although certain states are more at risk for delinquencies and foreclosures than others, this risk measure becomes less meaningful as the portfolio matures. Each of the securities also contains one or more forms of credit protection, including subordination, excess spread, over-collateralization and/or an insurance wrap.
Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's Investor Service (“Moody's”) and Fitch Rat ings (“Fitch”). Rating modifiers are ignored when determining the applicable rating level for a given counterparty.
The following tables present the carrying value by credit ratings of our investments, grouped by category ($ amounts in millions):
Below | ||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||
September 30, 2010 | AAA | AA | A | BBB | Grade | Total | ||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||
Interest-Bearing Deposits | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Securities Purchased Under Agreements to Resell | 1,250 | — | — | — | — | 1,250 | ||||||||||||||||||
Federal Funds Sold | — | 5,401 | 1,276 | — | — | 6,677 | ||||||||||||||||||
Total Short-term investments | 1,250 | 5,401 | 1,276 | — | — | 7,927 | &nbs p; | |||||||||||||||||
AFS securities: | ||||||||||||||||||||||||
GSE debentures | 1,900 | — | — | — | — | 1,900 | ||||||||||||||||||
TLGP | 326 | — | — | — | — | 326 | ||||||||||||||||||
Total AFS securities | 2,226 | — | — | — | — | 2,226 | ||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||
GSE debentures | 269 | 26 | — | — | — | 295 | ||||||||||||||||||
State or local housing finance agency obligations | — | — | — | — | — | — | ||||||||||||||||||
TLGP | 2,066 | — | — | — | — | 2,066 | ||||||||||||||||||
Other U.S. Obligations - guaranteed RMBS | 2,204 | — | — | — | — | 2,204 | ||||||||||||||||||
GSE RMBS | 2,761 | — | — | — | — | 2,761 | ||||||||||||||||||
Private-label MBS | 563 | 108 | 38 | 21 | 1,062 | 1,792 | ||||||||||||||||||
Private-label ABS | — | 20 | — | — | 3 | 23 | ||||||||||||||||||
Total HTM securities | 7,863 | 154 | 38 | 21 | 1,065 | 9,141 | ||||||||||||||||||
Total investments, carrying value | $ | 11,339 | $ | 5,555 | $ | 1,314 | $ | 21 | $ | 1,065 | $ | 19,294 | ||||||||||||
Percentage of total | 59 | % | 29 | % | 7 | % | 0 | % | 5 | % | 100 | % | ||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||
Interest-Bearing Deposits | $ | &mdash ; | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Securities Purchased Under Agreements to Resell | — | — | — | — | — | — | ||||||||||||||||||
Federal Funds Sold | — | 4,226 | 1,306 | — | — | 5,532 | ||||||||||||||||||
Total Short-term investments | — | 4,226 | 1,306 | — | — | 5,532 | ||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||
GSE debentures | 1,761 | — | — | — | — | 1,761 | ||||||||||||||||||
TLGP | ; | — | — | — | — | — | — | |||||||||||||||||
Total AFS securities | 1,761 | — | — | — | — | 1,761 | ||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||
GSE debentures | 100 | 26 | — | — | — | 126 | ||||||||||||||||||
State or local housing finance agency obligations | — | — | — | — | &nb sp; | — | — | |||||||||||||||||
TLGP | 2,067 | — | — | — | — | 2,067 | ||||||||||||||||||
Other U.S. Obligations - guaranteed RMBS | 865 | — | — | — | — | 865 | ||||||||||||||||||
GSE RMBS | 2,137 | — | — | — | — | 2,137 | ||||||||||||||||||
Private-label MBS | 841 | 153 | 107 | 274 | 1,106 | 2,481 | ||||||||||||||||||
Private-label ABS | — | 21 | — | — | 4 | 25 | ||||||||||||||||||
Total HTM securities | 6,010 | 200 | 107 | 274 | 1,110 | 7,701 | ||||||||||||||||||
Total investments, carrying value | $ | 7,771 | $ | 4,426 | $ | 1,413 | $ | 274 | $ | 1,110 | $ | 14,994 | ||||||||||||
Percentage of total | 52 | % | 30 | % | 9 | % | 2 | % | 7 | % | 100 | % |
Private-Label MBS and ABS. While there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, MBS and ABS are classified as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance. We do not hold any collateralized debt obligations. All MBS and ABS were rated AAA at the date of purchase.
The table below presents the carrying value of our Private-label MBS and ABS by credit ratings as of September 30, 2010, based on the lowest of Moody's, S&P, or comparable Fitch ratings ($ amounts in millions):
Below | ||||||||||||||||||||||||
Investment | ||||||||||||||||||||||||
Classification and Year of Securitization | AAA | AA | A | BBB | Grade (1) | Total | ||||||||||||||||||
Prime RMBS: | & nbsp; | &nbs p; | ||||||||||||||||||||||
2007 | $ | — | $ | — | $ | — | $ | — | $ | 390 | $ | 390 | ||||||||||||
2006 | — | — | — | — | 216 | 216 | ||||||||||||||||||
2005 | 31 | 85 | — | 21 | 394 | 531 | ||||||||||||||||||
2004 and prior | 496 | 11 | 29 | &m dash; | — | 536 | ||||||||||||||||||
Sub-total Prime RMBS | 527 | 96 | 29 | 21 | 1,000 | 1,673 | ||||||||||||||||||
Alt-A RMBS: | ||||||||||||||||||||||||
2005 | — | — | — | — | 62 | 62 | ||||||||||||||||||
2004 and prior | 36 | 12 | 9 | — | — | 57 | ||||||||||||||||||
Sub-total Alt-A RMBS | 36 | 12 | 9 | — | 62 | 119 | ||||||||||||||||||
Subprime RMBS: | ||||||||||||||||||||||||
2004 and prior | — | — | — | — | — | — | ||||||||||||||||||
Sub-total Subprime RMBS | — | — | — | — | — | — | ||||||||||||||||||
Subprime Home Equity ABS: | ||||||||||||||||||||||||
2004 and prior | — | — | — | — | 3 | 3 | ||||||||||||||||||
Sub-total Home Equity ABS | — | — | — | — | 3 | 3 | ||||||||||||||||||
Subprime Ma nufactured Housing ABS: | ||||||||||||||||||||||||
2004 and prior | — | 20 | — | — | — | 20 | ||||||||||||||||||
Sub-total Manufactured Housing ABS | — | 20 | — | — | — | 20 | ||||||||||||||||||
Total Private-label MBS and ABS, carrying value | $ | 563 | $ | 128 | $ | 38 | $ | 21 | $ | 1,065 | $ | 1,815 |
(1) | Below investment grade includes $33 million of BB-rated securities, $317 million of B-rated securities, $356 million of CCC-rated securities, $170 million of CC-rated securities, and $189 million of C-rated securities |
There were no subsequent downgrades of our Private-label MBS and ABS from October 1, 2010, to November 5, 2010.
The following table presents the weighted-average delinquency of the collateral underlying our Private-label MBS and ABS by collateral type and credit rating at September 30, 2010 ($ amounts in millions):
Weighted- | |||||||||||||||||||
Unpaid | Gross | Average | |||||||||||||||||
Principal | Amortized | Carrying | Unrealized | Collateral | |||||||||||||||
Collateral Type/Credit Rating | Balance | Cost | Value | Losses (1) | Delinquency (2) | ||||||||||||||
Prime RMBS: | ; | ||||||||||||||||||
Investment grade: | |||||||||||||||||||
AAA-rated | $ | 527 | $ | 527 | $ | 527 | $ | (20 | ) | 3.9 | % | ||||||||
AA-rated | 96 | 96 | 96 | (2 | ) | 7.6 | % | ||||||||||||
A-rated | 29 | 29 | 29 | (2 | ) | 9.5 | % | ||||||||||||
BBB-rated | 21 | 21 | 21 | — | 5.4 | % | |||||||||||||
Sub-total Prime RMBS investment grade | 673 | 673 | 673 | (24 | ) | 4.7 | % | ||||||||||||
Below investment grade: | |||||||||||||||||||
BB-rated | 17 | 17 | 17 | — | 7.4 | % | |||||||||||||
B-rated | 385 | 371 | 314 | (32 | ) | 12.6 | % | ||||||||||||
CCC-rated | 401 | 370 | 310 | (35 | ) | 15.1 | % | ||||||||||||
CC-rated | 233 | 210 | 170 | (13 | ) | 15.7 | % | ||||||||||||
C-rated | 331 | 262 | 189 | (9 | ) | 21.0 | % | ||||||||||||
Sub-total Prime RMBS below investment grade | 1,367 | 1,230 | 1,000 | (89 | ) | 15.8 | % | ||||||||||||
Total Prime RMBS | 2,040 | 1,903 | 1,673 | (113 | ) | 12.1 | % | ||||||||||||
Alt-A RMBS: | |||||||||||||||||||
Investment grade: | |||||||||||||||||||
AAA-rated | 36 | 36 | 36 | (3 | ) | 5.0 | % | ||||||||||||
AA-rated | 12 | 12 | 12 | (1 | ) | 8.6 | % | ||||||||||||
A-rated | 9 | 9 | &nb sp; | 9 | — | 8.6 | % | ||||||||||||
Sub-total Alt-A RMBS investment grade | 57 | 57 | 57 | (4 | ) | 6.3 | % | ||||||||||||
Below investment grade: | |||||||||||||||||||
BB-rated | 17 | 17 | 16 | (1 | ) | 8.2 | % | ||||||||||||
CCC-rated | 59 | 53 | 46 | (5 | ) | 17.6 | % | ||||||||||||
Sub-total Alt-A RMBS below investment grade | 76 | 70 | 62 | (6 | ) | 15.6 | % | ||||||||||||
Total Alt-A RMBS | 133 | 127 | 119 | (10 | ) | 11.6 | % | ||||||||||||
Subprime RMBS: (3) | &nbs p; | ||||||||||||||||||
Investment grade: | |||||||||||||||||||
AAA-rated | — | — | — | — | 24.4 | % | |||||||||||||
Total Subprime RMBS | &mdas h; | — | — | — | 24.4 | % | |||||||||||||
Subprime Home Equity ABS: (4) | |||||||||||||||||||
Below investment grade: | |||||||||||||||||||
B-rated | 3 | 3 | 3 | (1 | ) | 33.5 | % | ||||||||||||
Total Home Equity ABS | 3 | 3 | 3 | (1 | ) | 33.5 | % | ||||||||||||
Subprime Manufactured Housing ABS: (3) | |||||||||||||||||||
Investment grade: | |||||||||||||||||||
AA-rated | 20 | 20 | 20 | (4 | ) | 1.8 | % | ||||||||||||
Total Manufactured Housing ABS | 20 | 20 | 20 | (4 | ) | 1.8 | % | ||||||||||||
Total Private-label MBS and ABS | $ | 2,196 | $ | 2,053 | $ | 1,815 | $ | (128 | ) | 12.0 | % |
(1) | Gross unrealized losses represent the difference between estimated fair value (not presented) and amortized cost. The difference between amortized cost and carrying value represents OTTI recognized in AOCI. | |
(2) | Includes delinquencies of 60 days and more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balance based on loan groups for certain bonds. | |
(3) | We held no securities in this classification rated below investment grade at September 30, 2010. | |
(4) | Our Home Equity ABS are all supported by second lien subprime loans. |
The following table presents the unpaid principal balance of the underlying collateral of our Private-label MBS and ABS by collateral type ($ amounts in millions):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Fixed | Variable | Fixed | Variable | |||||||||||||||||||||
Collateral Type | Rate | Rate (1)(2) | Total | Rate | Rate (1)(2) | Total | ||||||||||||||||||
RMBS: | ||||||||||||||||||||||||
Prime loans | $ | 1,154 | $ | 886 | $ | 2,040 | $ | 1,650 | $ | 1,060 | $ | 2,710 | ||||||||||||
Alt-A loans | 133 | — | 133 | 170 | — | 170 | ||||||||||||||||||
Subprime loans | — | — | — | — | — | — | ||||||||||||||||||
Total RMBS | 1,287 | 886 | 2,173 | 1,820 | 1,060 | 2,880 | &nb sp; | |||||||||||||||||
Home Equity Loans ABS: | ||||||||||||||||||||||||
Subprime loans | — | 3 | 3 | — | 4 | 4 | ||||||||||||||||||
Total Home Equity Loans ABS | — | 3 | 3 | — | 4 | 4 | ||||||||||||||||||
Manufactured Housing ABS: | ||||||||||||||||||||||||
Subprime Loans | 20 | — | 20 | 21 | — | 21 | ||||||||||||||||||
Total Manufactured Housing ABS | 20 | — | 20 | 21 | — | 21 | ||||||||||||||||||
Total Private-label MBS and ABS, at unpaid principal balance | $ | 1,307 | $ | 889 | $ | 2,196 | $ | 1,841 | $ | 1,064 | $ | 2,905 |
(1) | Variable-rate Private-label MBS and ABS include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change. | |
(2) | All variable-rate RMBS prime loans are Hybrid Adjustable-Rate Mortgage securities. |
Estimated Fair Value. The following table reflects the fair value as a percent of unpaid principal balance by year of securitization on our Private-label MBS and ABS:
Year of Securitization | September 30, 2010 | December 31, 2009 | ||||
Prime RMBS: | ||||||
2007 | 81 | % | 75 | % | ||
2006 | 90 | % | 84 | % | ||
2005 | 86 | % | 82 | % | ||
2004 and prior | 96 | % | 93 | % | ||
Weighted-average of all prime RMBS | 88 | % | 84 | % | ||
Alt-A RMBS: | ||||||
2005 | 86 | % | 88 | % | ||
2004 and prior | 91 | % | 87 | % | ||
Weighted-a verage of all Alt-A RMBS | 88 | % | 87 | % | ||
Subprime RMBS: | &nbs p; | |||||
2004 and prior | 99 | % | 96 | % | ||
Weighted-average of all subprime RMBS | 99 | % | 96 | % | ||
Subprime Home Equity ABS: | ||||||
2004 and prior | 54 | % | 56 | % | ||
Weighted-average of all Home Equity ABS | 54 | % | 56 | % | ||
Subprime Manufactured Housing ABS: | ||||||
2004 and prior | 83 | % | 71 | % | ||
Weighted-average of all Manufactured Housing ABS | 83 | % | 71 | % | ||
Weighted-average of all Private-label MBS and ABS | 88 | % | 84 | % |
OTTI Evaluation Process. We evaluate our individual AFS and HTM securities that are in an unrealized loss position for OTTI on a quarterly basis as described in Note 6 in our Notes to Financial Statements contained in our 2009 Form 10-K.
As of September 30, 2010, our investments in MBS a nd ABS classified as HTM had gross unrealized losses totaling $129.4 million, of which $128.2 million were related to Private-label MBS and ABS. These gross unrealized losses were primarily due to significant uncertainty about the future condition of the mortgage market and the economy, and the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their acquisition cost.
As discussed in our 2009 Form 10-K, the FHLB System OTTI Governance Committee, which is comprised of representatives from each FHLB, determines the methodologies and assumptions used to project losses on the loans underlying our Private-label MBS and ABS. Consistent with prior quarters, we updated our OTTI analysis to reflect the underlying loan performance and the current housing market and other assumptions as determined by the FHLB System OTTI Governance Committee.
Certain estimates were refined and certain assumptions were adjusted this quarter, particularly related to prime loans. These changes included: (i) modeling based on the entire population versus a sample of collateral supporting the FHLB System securities; (ii) adjusting default coefficients for prime collateral by vintage; (iii) downward adjustments to loss severity assumptions; and (iv) updating housing price assumptions and adjusting to a more conservative recovery path. These changes were based on current and forecasted economic trends affecting the underlying loans. Such trends include continued high unemployment, ongoing downward pressure on housing prices, and limited refinancing opportunities f or many borrowers whose houses are now worth less than the balance of their mortgages.
These changes resulted in lower projected principal losses relative to the second quarter of 2010 (but higher relative to all prior quarters) due to our investment concentration in prime private-label RMBS. However, in spite of such reduction in projected principal losses, a small additional credit loss was recorded this quarter because the OTTI calculations are performed on an individual security basis where the projected losses of each security vary according to the changes in assumptions. In addition, the carrying values of HTM securities, once impaired, are not increased except for accretion.
We continue to actively monitor the credit quality of our Private-label MBS and ABS. It is not possible to predict the magnitude of additional OTTI charges in future periods because such predictions would depend on the actual performance of the underlying loan collateral as well as our future modeling assumptions. Many factors could influence our future modeling assumptions including economic, financial market and housing market conditions. If performance of the underlying loan collateral deteriorates and/or our modeling assumptions become more pessimistic, we could record additional losses on our portfolio.
We have per formed our OTTI analysis using the key modeling assumptions approved by the FHLB OTTI Governance Committee for 75 of our 80 RMBS. For the quarter ended September 30, 2010, we contracted with the FHLB of Chicago to perform cash-flow analysis for two of our subprime private-label RMBS with a total unpaid principal balance of $3.4 million. We also contracted with the FHLB of San Francisco to perform cash-flow analysis for one security with an unpaid principal balance of $5.3 million that we held in common with another FHLB.
For one private-label RMBS and one manufactured housing investment for which underlying collateral data is not available, we used alternative procedures, as determined by our Bank, to evaluate for OTTI . These securities, representing an unpaid principal balance of $19.6 million as of September 30, 2010, were outside the scope of the FHLB OTTI Governance Committee's analyses. However, we were able to perform the necessary cash-flow analysis using a different third-party model and determined that the securities were not OTTI at September 30, 2010.
The primary form of credit enhancement for our Private-label MBS and ABS is subordination, where lower-rated tranches of an issue are the first to absorb any losses generated by loans in the asset pool. As a result, the higher-rated tranches suffer no loss until the subordinated tranches are fully exhausted.
The following table shows the credit characteristics of our Private-label MBS and ABS ($ amounts in millions). The calculated average credit enhancement percentages represent the dollar-weighted averages of all the Private-label MBS and ABS in each category shown.
Underlying Collateral | |||||||||||||||||||||||||||||||||
&nbs p; | &nbs p; | Performance and Credit | |||||||||||||||||||||||||||||||
Enhancement Statistics | |||||||||||||||||||||||||||||||||
&nbs p; | Impairment | Weighted- | Weighted- | ||||||||||||||||||||||||||||||
As of and for the Nine | Gross | Impairment | Related to | Average | Average | ||||||||||||||||||||||||||||
Months Ended | Avg. | Amortized | Carrying | Unrealized | Related to | All Other | Total | Credit | Collateral | ||||||||||||||||||||||||
September 30, 2010 | Price | Cost (1) | Value (1) | Losses (2) | Credit Loss | Factors | OTTI | Support | Delinquency (3) | ||||||||||||||||||||||||
Prime RMBS: | &nbs p; | ||||||||||||||||||||||||||||||||
2007 | 80.8 | $ | 498 | $ | 390 | $ | (16 | ) | $ | (44 | ) | $ | 41 | $ | (3 | ) | 5.5 | % | 17.8 | % | |||||||||||||
2 006 | 90.2 | 254 | 216 | (17 | ) | (3 | ) | (4 | ) | (7 | ) | 5.0 | % | 13.5 | % | ||||||||||||||||||
2005 | 86.4 | 616 | 531 | (60 | ) | (19 | ) | 8 | (11 | ) | 8.3 | % | 13.1 | % | |||||||||||||||||||
2004 and prior | 96.2 | 535 | 536 | (20 | ) | — | — | — | 8.4 | % | 3.9 | % | |||||||||||||||||||||
Sub-total Prime RMBS | 87.8 | 1,903 | 1,673 | (113 | ) | (66 | ) | 45 | (21 | ) | 7.1 | % | 12.1 | % | |||||||||||||||||||
Alt-A RMBS: | |||||||||||||||||||||||||||||||||
2005 | 85.5 | 70 | 62 | (6 | ) | (2 | ) | 1 | (1 | ) | 5.0 | % | 15.6 | % | |||||||||||||||||||
2004 and prior | 91.4 | 57 | 57 | (4 | ) | — | — | — | 9.4 | % | 6.3 | % | |||||||||||||||||||||
Sub-total Alt-A RMBS | 88.0 | 127 | 119 | (10 | ) | (2 | ) | 1 | (1 | ) | 6.9 | % | 11.6 | % | |||||||||||||||||||
Subprime RMBS: | |||||||||||||||||||||||||||||||||
2004 and prior | 99.0 | — | — | — | — | — | — | 95.8 | % | 24.4 | % | ||||||||||||||||||||||
Sub-total Subprime RMBS | 99.0 | — | — | — | — | — | — | 95.8 | % | 24.4 | % | ||||||||||||||||||||||
Subprime Home Equity ABS: (4) | |||||||||||||||||||||||||||||||||
2004 and pri or | 53.8 | 3 | 3 | (2 | ) | — | — | — | 100.0 | % | 33.5 | % | |||||||||||||||||||||
Sub-total Home Equity ABS | 53.8 | 3 | 3 | (2 | ) | — | — | — | 100.0 | % | 33.5 | % | |||||||||||||||||||||
Subprime Manufactured Housing ABS: | |||||||||||||||||||||||||||||||||
2004 and prior | 83.4 | 20 | 20 | (3 | ) | — | — | — | 28.0 | % | 1.8 | % | |||||||||||||||||||||
Sub-total Housing ABS | 83.4 | 20 | 20 | (3 | ) | — | — | — | 28.0 | % | 1.8 | % | |||||||||||||||||||||
Total Private-label MBS and ABS | 87.7 | $ | 2,053 | $ | 1,815 | $ | (128 | ) | $ | (68 | ) | $ | 46 | $ | (22 | ) | 7.4 | % | 12.0 | % |
(1) | The difference between Amortized Cost and Carrying Value represents OTTI recognized in AOCI. | |
(2) | Gross unrealized losses represent the difference between estimated fair value (not presented) and amortized cost. | |
(3) | Includes delinquencies of 60 days and more, foreclosures, real estate owned and bankruptcies, weighted by unpaid principal balance based on loan groups for certain bonds. | |
(4) | The credit support for the home equity bonds is provided by MBIA Insurance Corporation. |
For our Private-label MBS and ABS that were not OTTI as of September 30, 2010, we do not intend to sell these securities; it is not more likely than not ( i.e., not likely) that we will be required to sell these securities before our anticipated recovery of the remaining amortized cost basis; and we expect to recover the remaining amortized cost basis of these securities. As a result, we have determined that, as of September 30, 2010, the unrealized losses on the remaining Private-label MBS and ABS are temporary.
MPP. We are exposed to credit risk on loans purchased from members through the MPP. Each loan we purchase must meet guidelines for our MPP or be specifically approved as an exception based on compensating factors. For example, the maximum loan-to-value (“LTV”) for any mortgage loan purchased is 95%, and the borrowers must meet certain minimum credit scores depending upon the type of property or loan.
Credit Enhancements. FHA loans comprise 8% of our outstanding MPP loans. These loans are backed by insurance provided by the FHA; therefore, we do not require either LRA or SMI coverage for these loans.
Credit enhancements for conventional loans include (in order of priority):
• | PMI (when applicable for the purchase of mortgages with an initial LTV ratio of over 80% at the time of purchase); |
• | LRA; and |
• | SMI (as applicable) purchased by the seller from a third-party provider naming us as the beneficiary. |
Primary Mortgage Insurance. For a conventional loan, PMI, if applicable, covers losses or exposure down to approximately an LTV ratio of between 65% and 80% based upon the original appraisal, original LTV ratio, term, amount of PMI coverage, and characteristics of the loan. We are exposed to credit risk if a PMI provider fails to fulfill its claims payment obligations to us. As of September 30, 2010, we were the beneficiary of PMI coverage on $0.7 billion or 12% of conventional mortgage loans. We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses due to the lower mortgage insurance company ratings. This expectation is based on the credit-enhancement features of our master commitments (exclusive of primary mortgage in surance), the underwriting characteristics of the loans that back our master commitments, the seasoning of the loans that back these master commitments, and the strong performance of the loans to date. We closely monitor the financial conditions of these mortgage insurance companies.
The following table shows the mortgage insurance companies and related PMI coverage amount on loans held in our portfolio as of September 30, 2010, and the mortgage insurance company ratings as of November 5, 2010 ($ amounts in millions):
Credit | Balance of | |||||||||||
Credit | Rating | Loans with | PMI | |||||||||
Mortgage Insurance Company | Rating (1) | Outlook (1) | PMI | Coverage | ||||||||
Mortgage Guaranty Insurance Corporation | B | Negative | $ | 233 | $ | 62 | ||||||
Republic Mortgage Insurance Corporation | BB | Negative | 121 | 33 | ||||||||
Radian Guaranty, Inc. | B | Negative | 99 | 27 | ||||||||
Genworth Mortgage Insurance Corporation | BBB | Negative | 91 | 24 | ||||||||
United Guaranty Residential Insurance Corporation | BBB | Stable | 70 | 19 | ||||||||
All Others | NR, B, BBB | N/A | 100 | 26 | ||||||||
Total | $ | 714 | $ | 191 |
(1) | Represents the lowest credit rating and outlook of S&P, Moody's or Fitch stated in terms of the S&P equivalent as of November 5, 2010. |
Lender Risk Account. In the MPP, we establish an LRA for each conventional pool of loans purchased that is funded over time from the monthly interest payments on the mortgages in that pool. The LRA is recorded in Other Liabilities in the Statements of Condition and totaled $21.1 million and $23.8 million at September 30, 2010, and December 31, 2009, respectively. These funds are available to cover losses in excess of the borrower's equity and PMI, if any, on the conventional loans we have purchased. See Note 7 in our Notes to Financial Statements for more information.
Supplemental Mortgage Insurance. We have credit protection from loss on each loan, where eligible, through SMI. Together, the LRA and the SMI provide credit enhancement on the pools of loans we purchase.
Credit Risk Exposure to Supplemental Mortgage Insurance Providers. As of September 30, 2010, we were the beneficiary of SMI coverage on mortgage pools with a total unpaid principal balance of $6.0 billion. Two mortgage insurance companies provide all of the coverage under these policies.
Finance Agency credit-risk-sharing regulations require us to use SMI providers that are rated at least AA- at the time the loans are purchased. The loans purchased are credit-enhanced to achieve an implied rating at an investment grade level based upon an NRSRO model approved by the Finance Agency. If there is evidence of a decline in the credit quality of a mortgage pool, the regulations require us to re-evaluate the mortgage pool for deterioration in credit quality and to allocate risk-based capital to cover any potential credit quality issues. We are holding the required amount of risk-based capital allocated to the MPP.
With the deterioration in the mortgage markets, it is difficult for us to meet the Finance Agency regulation's rating requirement because no mortgage insurers that underwrite SMI are currently rated in the second highest rating category or better by any NRSRO. None of the mortgage insurance companies providing SMI coverage to us at this time are rated higher than BBB as of November 5, 2010. On June 4, 2010, the Finance Agency approved our notice of NBA plan that will utilize a supplemental fixed LRA account for additional credit enhancement for new MPP business consistent with Finance Agency Regulations, instead of utilizing coverage from an SMI provider. Additional information is provided in “Recent Accounting and Regulatory Developments-Leg islative and Regulatory Developments - Other Legislative and Regulatory Developments.”
Loan Characteristics. The MPP mortgage loans held for portfolio are currently dispersed across 50 states and the District of Columbia. As of September 30, 2010, 43% of our outstanding MPP mortgage loans were concentrated in the Midwest, compared to 40% at December 31, 2009. No single zip code represented more than 1% of MPP loans outstanding at September 30, 2010, or December 31, 2009. It is likely that the concentration of MPP loans in our district states of Indiana and Michigan will increase in the future, due to the loss of our three largest sellers that were our greatest sources of nationwide mortgages. The med ian outstanding balance of our MPP loans was approximately $133 thousand and $135 thousand at September 30, 2010, and December 31, 2009, respectively.
Credit Performance. Our conventional and FHA non-accrual loans and loans 90 days or more past due and accruing interest are presented in the table below ($ amounts in millions):
September 30, 2010 | December 31, 2009 | |||||||
Total unpaid principal balance past due 90 days or more and still accruing interest (1) | $ | 127 | $ | 183 | ||||
Non-accrual loans, unpaid principal balance | — | — | ||||||
Troubled debt restructurings | — | — | ||||||
Allowance for credit losses | — | — |
(1) | Includes foreclosures which include loans past due 180 days or more and still accruing interest. |
The delinquency rate is generally higher for FHA mortgages than for the conventio nal mortgages held in our portfolio. We rely on insurance provided by the FHA, which generally provides coverage for 100% of the principal balance of the underlying mortgage loan and defaulted interest at the debenture rate. However, we would receive defaulted interest at the contractual rate from the servicer.
A summary of conventional real estate mortgages past due is presented below ($ amounts in millions):
September 30, 201 0 | December 31, 2009 | |||||||
30 to 59 days delinquent and not in foreclosure | $ | 78 | $ | 79 | ||||
60 to 89 days delinquent and not in foreclosure | 27 | 28 | ||||||
90 days or more delinquent and not in foreclosure | 35 | 44 | ||||||
In foreclosure (1) | 91 | 77 | ||||||
Real estate owned | — | — | ||||||
Serious delinquency rate (2) | 2.1 | % | 1.8 | % |
(1) | Includes loans past due 180 days or more that may be in foreclosure and are still accruing interest. | |
(2) | 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. |
The serious delinquency rate in the above table is below the national average for conforming, fixed-rate mortgages as reported by the Mortgage Bankers Association. A decline in the general economic conditions in the U.S., particularly in Indiana and Michigan, could result in increased delinquencies in our portfolio.
Derivatives. A primary credit risk posed by derivative transactions is the risk that a counterparty will fail to meet its contractual obligations on a transaction, forcing us to replace the derivative at market prices. The notional amount of interest-rate exchange agreements does not measure our true credit risk exposure. Rather, when the net fair value of our interest-rate exchange agreements with a counterparty is positive, this generally indicates that the counterparty owes us. When the net fair value of the interest-rate exchange agreements is negative, we owe the counterparty. If a counterparty fails to perform, credit risk is approximately equal to the aggregate fair value gain, if any, on the interest-rate exchange agreements.
The following tables sum marize key information on derivative counterparties. They provide information on a settlement date basis using credit ratings based on the lower of S&P or Moody's ($ amounts in millions).
Notional | Percentage of | Credit Exposure | Credit Exposure | ||||||||||||
September 30, 2010 | Principal | Notional Principal | Before Collateral | Net of Collateral | |||||||||||
AAA | $ | — | — | % | $ | — | $ | — | |||||||
AA | 15,592 | 46 | % | 2 | 2 | ||||||||||
A | 17,675 | 53 | % | — | — | ||||||||||
Sub-Total | 33,267 | 99 | % | 2 | 2 | ||||||||||
Others (1) | 429 | 1 | % | — | — | ||||||||||
Total | $ | 33,696 | 100 | % | $ | 2 | $ | 2 | |||||||
December 31, 2009 | |||||||||||||||
AAA | $ | — | — | % | $ | — | $ | — | |||||||
AA | 15,234 | 42 | % | 1 | 1 | ||||||||||
A | 21,120 | 58 | % | — | — | ||||||||||
Sub-Total | 36,354 | 100 | % | 1 | 1 | ||||||||||
Others (1) | 79 | — | % | 1 | 1 | ||||||||||
Total | $ | 36,433 | 100 | % | $ | 2 | $ | 2 |
(1) | Includes the total notional and fair value exposure rela ted to delivery commitments. |
AHP. Our AHP requires members and project sponsors to make commitments with respect to the usage of the AHP grants to assist very low-, low-, and moderate-income families, as defined by regulation. If these commitments are not met, we may have an obligation to recapture these funds from the member or project sponsor to replenish the AHP fund. This credit exposure is addressed in part by evaluating project feasibility at the time of an award and the member’s ongoing monitoring of AHP projects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that the market value or estimated fair value of our overall portfolio of assets, liabilities, and derivatives will decline as a result of changes in interest rates or financial market volatility, or that net earnings will be significantly reduced by interest-rate changes. The goal of market risk management is to preserve our financial strength at all times, including during periods of significant market volatility and across a wide range of possible interest-rate changes. We regularly assess our exposure to changes in interest rates using a diverse set of analyses and measures. As appropriate, we may rebalance our portfolio to help attain risk management objectives.
Measuring Market Risks
We utilize multiple risk measurement methodologies to calculate potential market exposure that include measuring duration, duration gaps, convexity, value at risk (“VaR”), market risk (one-month VaR), earnings at risk, and changes in market value of equity. Periodically, stress tests are conducted to measure and analyze the effects that extreme movements in the level of interest rates and the shape of the yiel d curve would have on our risk position.
Duration of Equity
Duration of equity is a measure of interest-rate risk and a primary metric used to manage our market risk exposure. It is an estimate of the percentage change (expressed in years) in our market value of equity that could be caused by a 100 basis point (“bp”) paral lel upward or downward shift in the interest-rate curves. We value our portfolios using two main interest-rate curves, the LIBOR curve and the CO curve. The market value and interest-rate sensitivity of each asset, liability, and off balance sheet position is computed to determine our duration of equity. We calculate duration of equity using the interest-rate curves as of the date of calculation and for scenarios where interest-rate curves are 200 bps higher or lower than the initial level. Our board of directors determines acceptable ranges for duration of equity. A negative duration of equity suggests adverse exposure to falling rates and a favorable response to rising rates, while a positive duration suggests adverse exposure to rising rates and a favorable response to falling rates.
The following table summarizes the effective duration of equity levels for our total position which are subject to internal policy guidelines:
-200 bps* | 0 bps | +200 bps | ||||
September 30, 2010 | (5.2) years | 0.1 years | 1.8 years | |||
December 31, 2009 | (4.1) years | (1.2) years | 0.8 years |
* Our internal policy guidelines provide for the calculation of the duration of equity in a low-rate enviro nment to be based on Advisory Bulletin 03-09, as modified by the Finance Agency's September 3, 2008 guidance. Under these guidelines, our duration of equity was 0.1 years at September 30, 2010, and (1.2) years at December 31, 2009.
We were in compliance with the duration of equity limits established at both dates.
Duration Gap
The duration gap is the difference between the effective duration of total assets and the effective duration of total liabilities, adjusted for the effect of derivatives. A positive duration gap signals an exposure to rising interest rates because it indicates that the duration of assets exceeds the duration of liabilities. A negative duration gap signals an exposure to declining interest rates because the duration of assets is less than the duration of liabilities. The duration gap was (0.9) months at Se ptember 30, 2010, compared to (1.8) months at December 31, 2009.
Convexity
Convexity measures how fast duration changes as a function of interest-rate changes. Measurement of convexity is important because of the optionality embedded in the mortgage and callable debt portfolios. The mortgage portfolios exhibit negative convexity due to the embedded prepayment options. Management routinely reviews convexity and considers it when developing funding and hedg ing strategies for the acquisition of mortgage-based assets. A primary strategy for managing convexity risk arising from our mortgage portfolio is the issuance of callable debt. At September 30, 2010, callable debt funding mortgage assets as a percentage of the net mortgage portfolio equaled 37%, compared to 45% at the end of 2009. The negative convexity on the mortgage assets is mitigated by the negative convexity of underlying callable debt.
Market Risk-Based Capital Requirement
We are subject to the Finance Agency's risk-based capital regulations. This regulatory framework requires the maintenance of sufficient permanent capital to meet the combined credit risk, market risk, and operations risk components. Our permanent capital is defined by the Finance Agency as Class B Stock (including MRCS) and Retained Earnings. The market risk-based capital component is the sum of two factors. The first factor is the market value of the portfolio at risk from movements in interest rates that could occur during times of market stress. This estimation is accomplished through an internal VaR-based modeling approach that was approved by the Federal Housing Finance Board (predecessor to the Finance Agency) before the implementation of our Capital Plan. The second factor is the amount, if any, by which the current market value of total regulatory capital is less than 85% of the book value of total regulatory capital.
The VaR approach used for calculating the first factor is primarily based upon historical simulation methodology. The estimation incorporates scenarios that reflect interest-rate shifts, interest-rate volatility, and changes in the shape of the yield curve. These observations are based on historical information from 1978 to the present. When calculating the risk-based capital requirement, the VaR comprising the first factor of the market risk component is defined as the potential dollar loss from adverse market movements, for a holding period of 120 business days, with a 99% confidence interval, based on these historical prices and market rates. Market risk-based capital estimates were $180 million as of September 30, 2010, compared to $283 million as of December 31, 2009.
Changes in the Ratio of Market Value to Book Value of Equity between Base Rates and Shift Scenarios
We measure potential changes in the market value to book value of equity based on the current month-end level of rates versus the ratio of market value to book value of equity under large parallel rate shifts. This measurement provides information related to the sensitivity of our interest-rate position. The table below provides changes in the ratio of market value to book value of equity from the base rates:
-200 bps | +200 bps | ||||
September 30, 2010 | (3.1 | )% | (2.2 | )% | |
December 31, 2009 | (5.0 | )% | — | % |
Use of Derivative Hedges
We use derivatives to hedge our market risk exposures. The primary type of derivative used is interest-rate exchange agreements or swaps and caps. Interest-rate swaps and caps increase the flexibility of our funding alternatives by providing specific cash flows or characteristics that might not be as readily available or cost effective if obtained in the cash debt market. We also use TBAs to temporarily hedge mortgage positions. We do not speculate using derivatives and do not engage in derivatives trading.
The volume of derivative hedges is often expressed in terms of notional principal, which is the amount upon which interest payments are calculated. The following table highlights the notional amounts by type of derivative agreement ($ amounts in millions):
Derivative Agreement Type | September 30, 2010 | December 31, 2009 | ||||||
Debt swaps: | ||||||||
Bullet | $ | 15,132 | $ | 14,792 | ||||
Callable | 1,890 | 4,155 | ||||||
Complex | 1,235 | 2,075 | ||||||
Advances swaps: | ||||||||
Bullet | 8,619 | 8,450 | ||||||
Putable | 4,387 | 5,241 | ||||||
Callable | 40 | 40 | ||||||
Complex | 10 | — | ||||||
Interest-rate caps | 34 | — | ||||||
GSE investment swaps | 1,918 | 1,600 | ||||||
MBS swaps | 1 | 1 | ||||||
TBA MPP hedges | 225 | 41 | ||||||
Mandatory delivery commitments | 205 | 38 | ||||||
Total | $ | 33,696 | $ | 36,433 |
The above table includes interest-rate swaps and caps, TBA MPP hedges, and mandatory delivery commitments. Complex swaps include, but are not limited to, step-up and range bonds. The level of different types of derivatives is contingent upon and tends to vary with balance sheet size, Advances demand, MPP purchase activity, and Consolidated Obligation issuance levels.
The table below presents derivative instruments (excluding accrued interest) by hedged instrument ($ amounts in millions).
September 30, 2010 | December 31, 2009 | |||||||||||||||
Total | Estimated | Total | Estimated | |||||||||||||
Hedged Instrument | Notional | Fair Value | Notional | Fair Value | ||||||||||||
CO Bonds: | ||||||||||||||||
Fair Value hedges | $ | 17,458 | $ | 124 | $ | 20,997 | $ | 101 | ||||||||
Economic hedges | — | — | 25 | — | ||||||||||||
Total | 17,458 | 124 | 21,022 | 101 | ||||||||||||
Advances: | ||||||||||||||||
Fair value hedges | 13,036 | (885 | ) | 13,721 | (719 | ) | ||||||||||
Economic hedges | 20 | (1 | ) | 10 | — | |||||||||||
Total | 13,056 | (886 | ) | 13,731 | (719 | ) | ||||||||||
Investments: | ||||||||||||||||
Fair value hedges | 1,918 | (316 | ) | 1,600 | (158 | ) | ||||||||||
Economic hedges | 35 | — | 1 | — | ||||||||||||
Total | 1,953 | (316 | ) | &n bsp; | 1,601 | (158 | ) | |||||||||
MPP loans: | ||||||||||||||||
Fair value hedges | 93 | — | — | — | ||||||||||||
Economic hedges | 132 | — | 41 | 1 | ||||||||||||
Economic (stand-alone delivery commitments) | 205 | — | 38 | (1 | ) | |||||||||||
Total | 430 | — | 79 | — | ||||||||||||
Discount Notes: | ||||||||||||||||
Economic hedges | 799 | — | — | — | ||||||||||||
Total | 799 | — | — | — | ||||||||||||
Total derivatives | $ | 33,696 | $ | (1,078 | ) | $ | 36,433 | $ | (776 | ) | ||||||
Total derivatives excluding accrued interest | $ | (1,078 | ) | $ | (776 | ) | ||||||||||
Accrued interest, net | (26 | ) | (15 | ) | ||||||||||||
Cash collateral held by/(from) counterparty, net | 224 | 80 | ||||||||||||||
Net derivative balance | &n bsp; | $ | (880 | ) | $ | (711 | ) | |||||||||
Derivative Asset | $ | 3 | $ | 2 | ||||||||||||
Derivative Liability | (883 | ) | (713 | ) | ||||||||||||
Net derivative balance | $ | (880 | ) | $ | (711 | ) |
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (b) accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, to allow timely decisions regarding required disclosures. In designin g and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives, and that our management's duties require it to make its best judgment regarding the design of our DCP. As of September 30, 2010, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer (the principal executive officer), Chief Operating Officer-Chief Financial Officer (the principal financial officer) and Chief Accounting Officer (the principal accounting officer), of the effectiveness of the design and operation of our DCP pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Operating Officer-Chief Financial Officer and Chief Accounting Officer concluded that our DCP were effective as of September 30, 2010.
Internal Control Over Financial Reporting
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (“ICFR”), as defined in rules 13a-15(f) and 15(d)-15(f) of the Exchange Act that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our ICFR.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 15, 2010, the Bank fil ed a complaint in the Superior Court of Marion County, Indiana, relating to 32 private-label MBS purchased by the Bank in the aggregate original principal amount of approximately $2.96 billion. The Bank's complaint is an action for rescission and damages and asserts claims for negligent misrepresentation and violations of state and federal securities laws.
The table below provides additional information concerning the private-label MBS at issue, the original principal amount of each security, the defendants named in the complaint, and their alleged respective capacities with respect to each security.
Number | Original Face Amount | Defendants | Capacities | |||
1 | $ | 70,000,000 | Banc of America Mortgage Securities, Inc. | Depositor | ||
Bank of America Securities LLC | Underwriter / Seller | |||||
Bank of America Corporation | Controlling Person | |||||
2 | 96,221,210 | Bank of America Securities LLC | Seller | |||
Bank of America Corporation | Controlling Person | |||||
Structured Asset Mortgage Investments II Inc. | Depositor | |||||
The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person | |||||
Bear, Stearns & Co. Inc. | Underwriter | |||||
3 | 100,306,000 | Countrywide Financial Corporation | Controlling Person | |||
CWMBS, Inc. | Depositor | |||||
Credit Suisse (USA), Inc. | Controlling Person | |||||
Credit Suisse First Boston LLC | Underwriter / Seller | |||||
Credit Suisse Holdings (USA), Inc. | Controlling Person | |||||
4 | 100,000,000 | Countrywide Financial Corporation | Controlling Person | |||
CWMBS, Inc. | Depositor | |||||
Goldman, Sachs & Co. | Underwriter / Seller | |||||
The Goldman Sachs Group Inc. | Controlling Person | |||||
5 | 42,330,700 | Chase Mortgage Finance Corporation | Depositor | |||
J.P. Morgan Securities Inc. | Underwriter / Seller | |||||
JPMorgan Chase & Co. | Controlling Person | |||||
JPMorgan Securities Holdings LLC | Controlling Person | |||||
6 | 54,755,000 | Bear, Stearns & Co. Inc. | Underwriter / Seller | |||
Countrywide Financial Corporation | Controlling Person | |||||
CWMBS, Inc. | Depositor | |||||
The Bear Stearns Companies, Inc. n/k/a The Bear Stearns Companies, LLC | Controlling Person | |||||
7 | 64,454,000 | Credit Suisse (USA), Inc. | Controlling Person | |||
Credit Suisse First Boston LLC | Underwriter / Seller | |||||
Credit Suisse First Boston Mortgage Securities Corp. | Depositor | |||||
Credit Suisse Holdings (USA), Inc. | Controlling Person | |||||
8 | 90,961,270 | Citigroup Global Markets Inc. | Underwriter | |||
First Horizon Asset Securities, Inc. | Depositor | |||||
First Tennessee Bank National Association | Controlling Person | |||||
UBS Securities LLC | Seller | |||||
9 | 86,000,000 | The Goldman Sachs Group Inc. | Controlling Person | |||
GS Mortgage Securities Corp. | Depositor | |||||
&nbs p; | Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person |
Number | Original Face Amount | Defendants | Capacities | ||
10 | 56,658,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
11 | 100,000,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
12 | 105,000,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
13 | 53,899,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
14 | 143,000,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
15 | 105,000,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Gol dman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
16 | 103,000,000 | The Goldman Sachs Group Inc. | Controlling Person | ||
GS Mortgage Securities Corp. | Depositor | ||||
Goldman, Sachs & Co. | Underwriter / Seller | ||||
Goldman Sachs Mortgage Company | Controlling Person | ||||
17 | 82,019,000 | IndyMac MBS, Inc. | Depositor | ||
UBS Securities LLC | Underwriter / Seller | ||||
18 | 54,125,700 | J.P. Morgan Acceptance Corporation I | Depositor | ||
J.P. Morgan Securities Inc. | Underwriter / Seller | ||||
JPMorgan Chase & Co. | Controlling Person | ||||
JPMorgan Securities Holdings LLC | Controlling Person | ||||
19 | 90,360,000 | GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person | ||
GMAC Mortgage Group, Inc. | Controlling Person | ||||
Greenwich Capital Markets, Inc. | Underwriter / Seller | ||||
Residential Funding Mortgage Securities I, Inc. | Depositor | ||||
20 | 99,160,206 | Credit Suisse (USA), Inc. | Controlling Person | ||
Credit Suisse First Boston LLC | Seller | ||||
Credit Suisse Holdings (USA), Inc. | Controlling Person | ||||
GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person | ||||
GMAC Mortgage Group, Inc. | Controlling Person | ||||
Residential Funding Mortgage Securities I, Inc. | Depositor | ||||
Residential Funding Securities, LLC | Underwriter | ||||
21 | 94,464,000 | GMAC, Inc. n/k/a Ally Financial, Inc. | Controlling Person | ||
GMAC Mortgage Group, Inc. | Controlling Person | ||||
Greenwich Capital Markets, Inc. | Underwriter / Seller | ||||
Residential Funding Mortgage Securities I, Inc. | Depositor | ||||
22 | 95,418,000 | First Savings Mortgage Corporation | Depositor | ||
Goldman, Sachs & Co. | Unde rwriter / Seller | ||||
The Goldman Sachs Group Inc. | Controlling Person | ||||
23 | 143,860,000 | WaMu Asset Acceptance Corp. | Depositor | ||
WaMu Capital Corp. | Underwritter |
Number | Original Face Amount | Defendants | Capacities | |||
24 | 93,831,000 | J.P. Morgan Securities Inc. | Underwriter / Seller | |||
JPMorgan Chase & Co. | Controlling Person | |||||
JPMorgan Securities Holdings LLC | Controlling Person | |||||
WaMu Asset Acceptance Corp. | Depositor | |||||
WaMu Capital Corp. | Underwritter | |||||
25 | 106,000,000 | Goldman, Sachs & Co. | Underwriter / Seller | |||
The Goldman Sachs Group Inc. | Controlling Person | |||||
WaMu Asset Acceptance Corp. | Depositor | |||||
WaMu Capital Corp. | Underwritter | |||||
26 | 59,874,246 | Credit Suisse (USA), Inc. | Controlling Person | |||
Credit Suisse Holdings (USA), Inc. | Controlling Person | |||||
Credit Suisse First B oston LLC | Seller | |||||
WaMu Asset Acceptance Corp. | Depositor | |||||
WaMu Capital Corp. | Underwritter | |||||
27 | 112,889,185 | Banc of America Securities LLC | Seller | |||
Bank of America Corporation | Controlling Person | |||||
WaMu Asset Acceptance Corp. | Depositor | |||||
WaMu Capital Corp. | Underwritter | |||||
28 | 100,000,000 | UBS Securities LLC | Underwriter / Seller | |||
Wells Fargo & Company | Controlling Person | |||||
Wells Fargo Asset Securities Corporation | Depositor | |||||
Wells Fargo Bank, National Association | Controlling Person | |||||
29 | 127,000,000 | Wells Fargo & Company | Controlling P erson | |||
Wells Fargo Asset Securities Corporation | Depositor | |||||
Wells Fargo Bank, National Association | Controlling Person | |||||
30 | 165,000,000 | Wells Fargo & Company | Controlling Person | |||
Wells Fargo Asset Securities Corporation | Depositor | |||||
Wells Fargo Bank, National Association | Controlling Person | |||||
Credit Suisse First Boston LLC | Underwriter / Seller | |||||
Credit Suisse (USA), Inc. | Controlling Person | |||||
Credit Suisse Holdings (USA), Inc. | Controlling Person | |||||
31 | 59,618,990 | Wells Fargo & Company | Controlling Person | |||
Wells Fargo Asset Securities Corporation | Depositor | |||||
Wells Fargo Bank, National Association | Controlling Person | |||||
Greenwich Capital Markets, Inc. | Underwriter / Seller | |||||
32 | 100,000,000 | Wells Fargo & Company | Controlling Person | |||
Wells Fargo Asset Securities Corporation | Depositor | |||||
Wells Fargo Bank, National Association | Controlling Person | |||||
Goldman, Sachs & Co. | Underwriter / Seller | |||||
The Goldman Sachs Group Inc. | Controlling Person | |||||
$ | 2,955,205,507 |
We have no other material pending legal proceedings, and we are unaware of any potential claims that are material.
Item 1A. RISK FACTORS
Except for updates to the following Risk Factors, there have been no material changes in the risk factors described in Item 1A of our 2009 Form 10-K.
Changes in the Legal and Regulatory Environment May Adversely Affect Our Business, Demand for Advances, the Cost of Debt Issuance, and the Value of FHLB Membership
On July 21, 2010, the Dodd-Frank Act was signed into law. Various provisions of the Act may cause us to be subject to future regulatory oversight by the Federal Reserve, the CFTC and the Oversight Council, in addition to the Finance Agency and the SEC. Further, this legislation, together with related or concurrent regulatory changes, may impact our members, their demand for Advances, and the cost and effectiveness of our derivatives transactions. The full impact of this Act, however, may not be known for several years as implementing regulations are written and adopted. For additional information concer ning this legislation, please refer to “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments.”
Our Credit Rating Could be Lowered, Which Could Adversely Impact Our Cost of Funds or Ability to Enter Into Derivative Instrument Transactions on Acceptable Terms
As discussed in our 2009 Form 10-K, our cost of issuing debt could be adversely affected if the credit rati ngs of one or more other FHLBs are lowered. On July 2, 2010, S&P affirmed the long-term credit rating for the FHLB of Seattle of AA+ and revised its outlook from stable to negative.
A Significant or Prolonged Delay in the Initiation or Completion of Foreclosure Proceedings on Mortgage Loans may Have a Materially Adverse Effect on Our Business, Financial Condition and Results of Operations.
There have recently been widely publicized allegations that employees of certain financial institutions have s igned off on thousands of foreclosures attesting to the accuracy of the documents without having personal knowledge of the contents of such documents. As a result, there have been regulatory initiatives proposed by federal and state agencies to delay the initiation or completion of foreclosure proceedings on specified types of mortgage loans. In addition, certain mortgage lenders have voluntarily suspended foreclosures while they review their foreclosure documentation and procedures.
As a regional wholesale bank, a significant portion of our revenue is derived from interest earned on Advances, long-and short-term investments (inc luding MBS), and mortgage loans purchased from our members. Although we have taken measures that are intended to protect us from losses, including obtaining credit enhancements and representations and warranties from our transaction counterparties, we are unable to determine at this time the extent to which we will be affected by a delay in the initiation or completion of mortgage foreclosure proceedings. A significant or prolonged delay may have a materially adverse effect on our business, financial condition and results of operations.
ITEM 6. EXHIBITS
EXHIBIT INDEX
Exhibit Number | Description | |
3.1* | Organization Certificate of the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 filed on February 14, 2006 | |
3.2* | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on May 21, 2010 | |
4* | Capital Plan of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on June 1, 2009 | |
10.1*+ | Federal Home Loan Bank of Indianapolis 2009 Executive Incentive Compensation Plan, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 13, 2009 | |
10.2*+ | Federal Home Loan Bank of Indianapolis Supplemental Executive Thrift Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on September 29, 2006 | |
10.3*+ | Second Amendment of Federal Home Loan Bank of Indianapolis Supplemental Executive Thrift Plan (terminating such plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.3 of our Annual Report on Form 10-K filed on March 19, 2010 | |
10.4*+ | Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on November 13, 2007 | |
10.5*+ | First Amendment of Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Thrift Plan (as previously amended and restated) (terminating such amended and restated plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.5 of our Annual Report on Form 10-K filed on March 19, 2010 | |
10.6*+ | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to our Current Report on Form 8-K, filed on November 20, 2007 | |
10.7*+ | Federal Home Loan Bank of Indianapolis Directors' Deferred Compensation Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on September 29, 2006 | |
10.8*+ | Second Amendment of Federal Home Loan Bank of Indianapolis Directors' Deferred Compensation Plan (terminating such plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.8 of our Annual Report on Form 10-K filed on March 19, 2010 |
10.9*+ | Federal Home Loan Bank of Indianapolis 2005 Directors' Deferred Compensation Plan (with trust), as amended, incorporated by reference to our Quarterly Report on Form 10-Q filed on November 13, 2007 | |
10.10*+ | First Amendment of Federal Home Loan Bank of Indianapolis 2005 Directors' Deferred Compensation Plan (as previously amended and restated) (termi nating such amended and restated plan effective as of December 23, 2009), incorporated by reference to Exhibit 10.10 of our Annual Report on form 10-K filed on March 19, 2010 | |
10.11*+ | Directors' Compensation and Travel Expense Reimbursement Policy effective January 1, 2010, incorporated by reference to our Current Report on Form 8-K filed on December 15, 2009 | |
10.12*+ | Federal Home Loa n Bank of Indianapolis 2010 Long Term Incentive Plan, effective January 1, 2010, incorporated by reference to Exhibit 10.12 of our Annual Report on Form 10-K filed on March 19, 2010 | |
10.13*+ | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 27, 2006 | |
10.14*+ | Feder al Home Loan Bank 2009 Long Term Incentive Plan, incorporated by reference to our Annual Report on Form 10-K filed on March 16, 2009 | |
10.15*+ | Federal Home Loan Bank of Indianapolis 2010 Executive Incentive Compensation Plan (STI), effective January 1, 2010, incorporated by reference to our Annual Report on Form 10-K filed on March 19, 2010 | |
10.16*+ | Form of Key Em ployee Severance Agreement for Principal Executive Officer, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on May 24, 2010 | |
10.17*+ | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on October 28, 2010 | |
31.1 | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Executive Vice President - Chief Operating Officer - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.3 | Certification of the Senior Vice President - Chief Accounting Officer pur suant to Section 302 of the Sarbanes - Oxley Act of 2002 | |
32 | Certification of the President - Chief Executive Officer, Executive Vice President - Chief Operating Officer - Chief Financial Officer, and Senior Vice President - Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS | ||
November 10, 2010 | By: | /s/ MILTON J. MILLER II |
Name: | Milton J. Miller II | |
Title: | President - Chief Executive Officer | |
November 10, 2010 | By: | /s/ CINDY L. KONICH |
Name: | Cindy L. Konich | |
Title: | Executive Vice President - Chief Operating Officer - Chief Financial Officer | |
November 10, 2010 | By: | /s/ K. LOWELL SHORT, JR. |
Name: | K. Lowell Short, Jr. | |
Title: | Senior Vice President - Chief Accounting Officer |