10-Q 1 c73306e10vq.htm 10-Q Filed by Bowne Pure Compliance
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-51999
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
     
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
  42-6000149
(I.R.S. employer identification number)
     
Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA

(Address of principal executive offices)
  50309
(Zip code)
Registrant’s telephone number, including area code: (515) 281-1000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes               o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ
         
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes               þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
    Shares outstanding
as of April 30, 2008
     
Class B Stock, par value $100   31,478,501
 
 

 

 


 

Table of Contents
         
       
 
       
    2  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    6  
 
       
    8  
 
       
    35  
 
       
    38  
 
       
    40  
 
       
    46  
 
       
    55  
 
       
    61  
 
       
    63  
 
       
    76  
 
       
    76  
 
       
    77  
 
       
       
 
       
    77  
 
       
    77  
 
       
    78  
 
       
    78  
 
       
    78  
 
       
    78  
 
       
    79  
 
       
    80  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

 


Table of Contents

PART 1—FINANCIAL INFORMATION
Item 1. Financial Statements
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except shares)
(Unaudited)
                 
    March 31,     December 31,  
    2008     2007  
ASSETS
               
Cash and due from banks
  $ 21,705     $ 58,675  
Interest-bearing deposits
    126       100,136  
Federal funds sold
    3,615,000       1,805,000  
Investments
               
Available-for-sale securities include $0 and $208,892 pledged as collateral at March 31, 2008 and December 31, 2007 that may be repledged (Note 3)
    4,460,954       3,433,640  
Held-to-maturity securities include $0 pledged as collateral at March 31, 2008 and December 31, 2007 that may be repledged (estimated fair value of $4,002,721 and $3,900,715 at March 31, 2008 and December 31, 2007) (Note 4)
    4,000,853       3,905,017  
Advances (Note 5)
    47,092,228       40,411,688  
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $232 at March 31, 2008 and $300 at December 31, 2007 (Note 6)
    10,706,516       10,801,695  
Accrued interest receivable
    111,319       129,758  
Premises and equipment, net
    6,793       6,966  
Derivative assets (Note 7)
    43,849       60,468  
Other assets
    22,540       22,563  
 
           
Total assets
  $ 70,081,883     $ 60,735,606  
 
           
 
               
LIABILITIES AND CAPITAL
               
LIABILITIES
               
Deposits
               
Interest-bearing
  $ 1,177,283     $ 841,762  
Noninterest-bearing demand
    40,697       20,751  
 
           
Total deposits
    1,217,980       862,513  
 
           
Securities sold under agreements to repurchase
          200,000  
Consolidated obligations, net (Note 8)
               
Discount notes
    32,365,251       21,500,946  
Bonds
    32,165,475       34,564,226  
 
           
Total consolidated obligations, net
    64,530,726       56,065,172  
 
           
Mandatorily redeemable capital stock
    42,752       46,039  
Accrued interest payable
    309,948       300,907  
Affordable Housing Program
    41,785       42,622  
Payable to REFCORP
    7,870       6,280  
Derivative liabilities (Note 7)
    280,834       138,252  
Other liabilities
    393,338       21,598  
 
           
Total liabilities
    66,825,233       57,683,383  
 
           
 
               
Commitments and contingencies (Note 12)
               
 
               
CAPITAL (Note 9)
               
Capital stock — Class B putable ($100 par value) authorized, issued, and outstanding 30,117,487 and 27,172,465 shares at March 31, 2008 and December 31, 2007
    3,011,749       2,717,247  
Retained earnings
    366,987       361,347  
Accumulated other comprehensive loss
               
Net unrealized loss on available-for-sale securities
    (121,236 )     (25,467 )
Employee retirement plans
    (850 )     (904 )
 
           
Total capital
    3,256,650       3,052,223  
 
           
Total liabilities and capital
  $ 70,081,883     $ 60,735,606  
 
           
The accompanying notes are an integral part of these financial statements

 

2


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
                 
    Three Months Ended March 31,  
    2008     2007  
INTEREST INCOME
               
Advances
  $ 387,340     $ 290,488  
Advance prepayment fees, net
    605       71  
Interest-bearing deposits
    624       121  
Securities purchased under agreements to resell
          4,029  
Federal funds sold
    22,123       39,249  
Investments
               
Available-for-sale securities
    35,480       7,511  
Held-to-maturity securities
    46,323       75,640  
Mortgage loans held for portfolio
    134,303       145,160  
 
           
Total interest income
    626,798       562,269  
 
           
 
               
INTEREST EXPENSE
               
Consolidated obligations
               
Discount notes
    161,174       67,955  
Bonds
    389,769       434,030  
Deposits
    8,804       14,016  
Borrowings from other FHLBanks
    6        
Securities sold under agreements to repurchase
    1,960       7,371  
Mandatorily redeemable capital stock
    388       654  
 
           
Total interest expense
    562,101       524,026  
 
           
 
               
NET INTEREST INCOME
    64,697       38,243  
Provision for credit losses on mortgage loans
           
 
           
 
               
NET INTEREST INCOME AFTER MORTGAGE LOAN CREDIT LOSS PROVISION
    64,697       38,243  
 
           
 
               
OTHER (LOSS) INCOME
               
Service fees
    577       580  
Net realized gain on held-to-maturity securities
          545  
Net loss on derivatives and hedging activities
    (12,730 )     (1,388 )
Other, net
    577       475  
 
           
Total other (loss) income
    (11,576 )     212  
 
           
 
               
OTHER EXPENSE
               
Salaries and Benefits
    6,229       5,922  
Operating
    3,351       3,405  
Finance Board
    420       408  
Office of Finance
    437       344  
 
           
Total other expense
    10,437       10,079  
 
           
 
               
INCOME BEFORE ASSESSMENTS
    42,684       28,376  
 
           
 
               
Affordable Housing Program
    3,500       2,876  
REFCORP
    7,832       5,199  
 
           
Total assessments
    11,332       8,075  
 
           
 
               
NET INCOME
  $ 31,352     $ 20,301  
 
           
The accompanying notes are an integral part of these financial statements

 

3


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
                                         
                            Accumulated        
    Capital Stock             Other        
    Class B (putable)     Retained     Comprehensive     Total  
    Shares     Par Value     Earnings     Loss     Capital  
 
                                       
BALANCE DECEMBER 31, 2007
    27,173     $ 2,717,247     $ 361,347     $ (26,371 )   $ 3,052,223  
 
                             
 
                                       
Proceeds from issuance of capital stock
    13,330       1,332,955                   1,332,955  
 
                                       
Repurchase/redemption of capital stock
    (10,376 )     (1,037,608 )                 (1,037,608 )
 
                                       
Net shares reclassified to mandatorily redeemable capital stock
    (9 )     (845 )                 (845 )
 
                                       
Comprehensive income (loss)
                                       
 
                                       
Net income
                31,352             31,352  
 
                                       
Other comprehensive income
                                       
 
                                       
Net unrealized loss on available-for-sale securities
                      (95,769 )     (95,769 )
 
                                       
Net unrealized gain on employee retirement plans
                      54       54  
 
                             
 
                                       
Total comprehensive income (loss)
                31,352       (95,715 )     (64,363 )
 
                                       
Cash dividends on capital stock (4.50% annualized)
                (25,712 )           (25,712 )
 
                             
 
                                       
BALANCE MARCH 31, 2008
    30,118     $ 3,011,749     $ 366,987     $ (122,086 )   $ 3,256,650  
 
                             
The accompanying notes are an integral part of these financial statements

 

4


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
                                         
                            Accumulated        
    Capital Stock             Other        
    Class B (putable)     Retained     Comprehensive     Total  
    Shares     Par Value     Earnings     Loss     Capital  
 
                                       
BALANCE DECEMBER 31, 2006
    19,059     $ 1,905,878     $ 344,246     $ (1,153 )   $ 2,248,971  
 
                             
 
                                       
Proceeds from issuance of capital stock
    1,532       153,232                   153,232  
 
                                       
Repurchase/redemption of capital stock
    (1,747 )     (174,660 )                 (174,660 )
 
                                       
Net shares reclassified to mandatorily redeemable capital stock
    (1 )     (122 )                 (122 )
 
                                       
Comprehensive income (loss)
                                       
 
                                       
Net income
                20,301             20,301  
 
                                       
Other comprehensive (loss) income
                                       
 
                                       
Net unrealized loss on available-for-sale securities
                      (302 )     (302 )
 
                                       
Other
                      39       39  
 
                             
 
                                       
Total comprehensive income (loss)
                20,301       (263 )     20,038  
 
                                       
Cash dividends on capital stock (4.25% annualized)
                (20,072 )           (20,072 )
 
                             
 
                                       
BALANCE MARCH 31, 2007
    18,843     $ 1,884,328     $ 344,475     $ (1,416 )   $ 2,227,387  
 
                             
The accompanying notes are an integral part of these financial statements

 

5


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Three Months Ended March 31,  
    2008     2007  
OPERATING ACTIVITIES
               
Net income
  $ 31,352     $ 20,301  
 
               
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
               
Net premiums, discounts, and basis adjustments on investments, advances, mortgage loans, and consolidated obligations
    (11,418 )     (4,030 )
Concessions on consolidated obligation bonds
    3,722       1,073  
Premises and equipment
    247       228  
Other
    (354 )      
Net realized gain from sale of held-to-maturity securities
          (545 )
Net change in fair value adjustment on derivatives and hedging activities
    19,961       (94 )
Net realized loss on disposal of premises and equipment
    4       77  
Net change in:
               
Accrued interest receivable
    18,896       (1,693 )
Accrued interest on derivatives
    9,675       2,011  
Other assets
    (1,364 )     (449 )
Accrued interest payable
    9,095       17,461  
Affordable Housing Program (AHP) liability and discount on AHP advances
    (845 )     1,165  
Payable to REFCORP
    1,590       (629 )
Other liabilities
    (2,269 )     (1,273 )
 
           
 
               
Total adjustments
    46,940       13,302  
 
           
 
               
Net cash provided by operating activities
    78,292       33,603  
 
           
The accompanying notes are an integral part of these financial statements

 

6


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
(Unaudited)
                 
    Three Months Ended March 31,  
    2008     2007  
INVESTING ACTIVITIES
               
Net change in:
               
Interest-bearing deposits
    84,610       9,420  
Federal funds sold
    (1,810,000 )     (1,584,000 )
Short-term held-to-maturity securities
    (230,007 )     (186,396 )
Available-for-sale securities:
               
Proceeds from maturities
    778,273       562,825  
Purchases
    (1,528,929 )     (520,214 )
Held-to-maturity securities:
               
Proceeds from sales and maturities
    135,386       245,500  
Advances to members:
               
Principal collected
    71,832,327       20,136,529  
Originated
    (78,094,756 )     (19,573,035 )
Mortgage loans held for portfolio:
               
Principal collected
    334,129       334,340  
Originated or purchased
    (241,574 )     (74,889 )
Additions to premises and equipment
    (87 )     (991 )
Proceeds from sale of premises and equipment
    9       131  
 
           
 
               
Net cash used in investing activities
    (8,740,619 )     (650,780 )
 
           
 
               
FINANCING ACTIVITIES
               
Net change in deposits
    416,866       217,571  
Securities sold under agreement to repurchase
    (200,000 )      
Net proceeds from issuance of consolidated obligations
               
Discount notes
    336,097,371       141,311,028  
Bonds
    4,876,195       2,704,362  
Payments for maturing and retiring consolidated obligations
               
Discount notes
    (325,222,698 )     (141,449,773 )
Bonds
    (7,607,880 )     (2,126,662 )
Proceeds from issuance of capital stock
    1,332,955       153,232  
Payments for issuance/repurchase/redemption of mandatorily redeemable capital stock
    (4,132 )     (5,928 )
Payments for repurchase/redemption of capital stock
    (1,037,608 )     (174,660 )
Cash dividends paid
    (25,712 )     (20,072 )
 
           
 
               
Net cash provided by financing activities
    8,625,357       609,098  
 
           
 
               
Net decrease in cash and due from banks
    (36,970 )     (8,079 )
Cash and due from banks at beginning of the period
    58,675       30,181  
 
           
 
               
Cash and due from banks at end of the period
  $ 21,705     $ 22,102  
 
           
 
               
Supplemental disclosures
               
Cash paid during the period for
               
Interest
  $ 573,132     $ 508,701  
AHP
  $ 4,337     $ 1,703  
REFCORP
  $ 6,242     $ 5,828  
Transfer of MPF loans to real estate owned
  $ 1,130     $ 2,330  
The accompanying notes are an integral part of these financial statements

 

7


Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
Background Information
The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation that is exempt from all federal, state, and local taxation except real property taxes and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act). The FHLBanks are supervised and regulated by the Federal Housing Finance Board (Finance Board). The FHLBanks serve the public by enhancing the availability of funds (advances and mortgage loans) for residential mortgages and targeted community development. The Bank provides a readily available, low cost source of funds to its member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. State and local housing authorities that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock.
Note 1—Basis of Presentation
The accompanying unaudited financial statements of the Bank for the three months ended March 31, 2008, have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) of America (GAAP) for interim financial information. Accordingly, they do not include all of the information required by GAAP for full year information and should be read in conjunction with the audited financial statements for the year ended December 31, 2007, which are contained in the Bank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2008.
Descriptions of the Bank’s significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) of the Bank’s 2007 audited financial statements in the annual report on Form 10-K.

 

8


Table of Contents

Reclassifications. Certain amounts in the 2007 financial statements have been reclassified to conform to the first quarter 2008 presentation. In particular, in accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 39-1, Amendment of FIN No. 39 (FIN 39-1), the Bank recognized the effects of applying FIN 39-1 as a change in accounting principle through retrospective application for all financial statement periods presented. Previously, the cash collateral amounts arising from the same master netting arrangement as the derivative instruments were reported as interest-bearing deposits and the related accrued interest amounts were reported as accrued interest receivable and/or accrued interest payable, as applicable. These amounts are now components of “Derivative assets” and/or “Derivative liabilities.” For more information related to FIN 39-1, see “Note 2 — Recently Issued and Adopted Accounting Standards and Interpretations.”
Note 2—Recently Issued and Adopted Accounting Standards & Interpretations
SFAS 161. On March 19, 2008, the FASB issued Statement of Financial Account Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 is intended to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures that enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for the Bank), with early application allowed. The Bank has not yet determined the effect that the adoption of SFAS 161 will have on our financial statement disclosures.
SFAS 157 and 159. Effective January 1, 2008, the Bank adopted SFAS No. 157, Fair Value Measurements (SFAS 157), and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes hierarchy based on the inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. SFAS 159 allows an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. For additional information on the fair value of certain financial assets and liabilities, see Note 11, Estimated Fair Values, to the financial statements. The effect of adopting SFAS 157 and 159 did not have a material impact to the Bank’s results of operations or financial condition.

 

9


Table of Contents

FIN 39-1. Effective January 1, 2008, the Bank adopted FIN 39-1. FIN 39-1 permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. An entity should recognize the effects of applying FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Bank elected to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for cash collateral. The adoption of FIN 39-1 did not have a material impact to the Bank’s financial condition.
Note 3—Available-for-Sale Securities
Major Security Types. Available-for-sale securities at March 31, 2008 were as follows (dollars in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
    Cost     Gains     Losses     Value  
 
                               
Non-mortgage-backed securities
                               
Government-sponsored enterprise obligations
  $ 248,806     $ 19     $     $ 248,825  
 
                       
 
                               
Mortgage-backed securities
                               
Government-sponsored enterprises
    4,333,384       76       121,331       4,212,129  
 
                       
 
                               
Total
  $ 4,582,190     $ 95     $ 121,331     $ 4,460,954  
 
                       

 

10


Table of Contents

Available-for-sale securities at December 31, 2007 were as follows (dollars in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
    Cost     Gains     Losses     Value  
 
                               
Non-mortgage-backed securities
                               
Government-sponsored enterprise obligations
  $ 219,014     $ 62     $     $ 219,076  
 
                       
 
                               
Mortgage-backed securities
                               
Government-sponsored enterprises
    3,240,093       529       26,058       3,214,564  
 
                       
 
                               
Total
  $ 3,459,107     $ 591     $ 26,058     $ 3,433,640  
 
                       
Government-sponsored enterprise obligations represented Federal National Mortgage Association (Fannie Mae) and/or Federal Home Loan Mortgage Corporation (Freddie Mac) debt securities. Government-sponsored enterprise mortgage-backed securities (MBS) represented Fannie Mae and Freddie Mac securities.
Available-for-sale securities with unrealized losses had fair values of $3.8 billion at March 31, 2008. These securities have been in a loss position for less than twelve months. The Bank believes that the unrealized losses are the result of the current interest rate environment and are temporary given the creditworthiness of the issuers, the underlying collateral, and the Bank’s intent to hold the investments until a recovery of fair value, which may be at maturity.

 

11


Table of Contents

Note 4—Held-to-Maturity Securities
Major Security Types. Held-to-maturity securities at March 31, 2008 were as follows (dollars in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
 
                               
Non-mortgage-backed securities
                               
Commercial paper
  $ 430,000     $     $     $ 430,000  
State or local housing agency obligations
    73,530       4,507             78,037  
Other
    8,791       201             8,992  
 
                       
Total non-mortgage-backed securities
    512,321       4,708             517,029  
 
                               
Mortgage-backed securities
                               
Government-sponsored enterprises
    3,331,667       36,456       34,711       3,333,412  
U.S. government agency-guaranteed
    60,717       57       701       60,073  
MPF shared funding
    51,786             801       50,985  
Other
    44,362             3,140       41,222  
 
                       
Total mortgage-backed securities
    3,488,532       36,513       39,353       3,485,692  
 
                       
 
                               
Total
  $ 4,000,853     $ 41,221     $ 39,353     $ 4,002,721  
 
                       

 

12


Table of Contents

Held-to-maturity securities at December 31, 2007 were as follows (dollars in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
 
                               
Non-mortgage-backed securities
                               
Commercial paper
  $ 199,979     $     $     $ 199,979  
State or local housing agency obligations
    73,960       2,888             76,848  
Other
    8,436       190             8,626  
 
                       
Total non-mortgage-backed securities
    282,375       3,078             285,453  
 
                               
Mortgage-backed securities
                               
Government-sponsored enterprises
    3,457,801       14,393       20,302       3,451,892  
U.S. government agency-guaranteed
    64,099       303       65       64,337  
MPF shared funding
    53,142             1,136       52,006  
Other
    47,600             573       47,027  
 
                       
Total mortgage-backed securities
    3,622,642       14,696       22,076       3,615,262  
 
                       
 
                               
Total
  $ 3,905,017     $ 17,774     $ 22,076     $ 3,900,715  
 
                       
Government-sponsored enterprise investments represented Fannie Mae or Freddie Mac securities. U.S. government agency-guaranteed MBS represented Government National Mortgage Association (Ginnie Mae) securities and Small Business Administration (SBA) Pool Certificates. SBA Pool Certificates represent undivided interests in pools of the guaranteed portions of SBA loans. The SBA’s guarantee of the Pool Certificate is backed by the full faith and credit of the U.S. government.
Other investments represented investments in municipal bonds, Small Business Investment Company (SBIC), and other non-Federal agency MBS.
At March 31, 2008 held-to-maturity securities totaling $1.3 billion have been in a loss position for less than twelve months and $73.6 million have been in a loss position for greater than twelve months. All of the held-to-maturity securities with unrealized losses greater than twelve months have a fair market value that is within 98 percent of their respective amortized cost basis. The Bank believes that the unrealized losses on the Bank’s held-to-maturity securities are primarily the result of the current interest rate environment and are temporary given the creditworthiness of the issuers, the underlying collateral, and the Bank’s intent to hold the investments to maturity.

 

13


Table of Contents

Note 5—Advances
Redemption Terms. The following table shows the Bank’s advances outstanding at March 31, 2008 and December 31, 2007 (dollars in thousands):
                                 
    March 31, 2008     December 31, 2007  
            Weighted             Weighted  
            Average             Average  
            Interest             Interest  
Year of Maturity   Amount     Rate %     Amount     Rate %  
 
                               
Overdrawn demand deposit accounts
  $ 1,908           $ 414        
Due in one year or less
    22,337,060       2.67       19,817,080       4.50  
Due after one year through two years
    4,182,813       4.44       3,498,660       4.88  
Due after two years through three years
    3,309,540       4.79       2,907,585       5.13  
Due after three years through four years
    2,004,478       4.26       2,225,344       5.04  
Due after four years through five years
    3,529,257       3.34       2,965,609       4.78  
Thereafter
    10,919,309       4.01       8,607,244       4.71  
 
                           
 
                               
Total par value
    46,284,365       3.42       40,021,936       4.68  
 
                               
Commitment fees
    (2 )             (2 )        
Discounts on AHP advances
    (82 )             (90 )        
Premiums
    432               449          
Discounts
    (22 )             (37 )        
Hedging fair value adjustments
                               
Cumulative fair value gain
    801,346               382,899          
Basis adjustments from terminated hedges
    6,191               6,533          
 
                           
 
                               
Total
  $ 47,092,228             $ 40,411,688          
 
                           
The Bank offers members advances that may be prepaid on pertinent dates (call dates) without incurring prepayment or termination fees (callable advances). Other advances may be prepaid only by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At March 31, 2008 and December 31, 2007, the Bank had callable advances of $2,794.4 million and $1,329.1 million.

 

14


Table of Contents

Interest Rate Payment Terms. The following table details additional interest rate payment terms for advances at March 31, 2008 and December 31, 2007 (dollars in thousands):
                 
    March 31,     December 31,  
    2008     2007  
Par amount of advances
               
Fixed rate
  $ 40,027,361     $ 35,303,332  
Variable rate
    6,257,004       4,718,604  
 
           
 
               
Total
  $ 46,284,365     $ 40,021,936  
 
           
Note 6—Mortgage Loans Held for Portfolio
The Mortgage Partnership Finance (register mark) (MPF (register mark)) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) involves investment by the Bank in mortgage loans that are held for portfolio which are either funded by the Bank through, or purchased from, participating members. The Bank’s members originate, service, and credit enhance home mortgage loans that are sold to the Bank. Members participating in the servicing released program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the member to a designated mortgage servicer.
Mortgage loans with an original contractual maturity of 15 years or less are classified as medium term, and all other mortgage loans are classified as long-term. The following table presents information at March 31, 2008 and December 31, 2007 on mortgage loans held for portfolio (dollars in thousands):
                 
    March 31,     December 31,  
    2008     2007  
Real Estate:
               
Fixed rate medium-term single family mortgages
  $ 2,539,991     $ 2,569,808  
Fixed rate long-term single family mortgages
    8,157,265       8,220,921  
 
           
 
               
Total par value
    10,697,256       10,790,729  
 
               
Premiums
    93,550       96,513  
Discounts
    (90,077 )     (93,094 )
Basis adjustments from mortgage loan commitments
    6,019       7,847  
Allowance for credit losses
    (232 )     (300 )
 
           
 
               
Total mortgage loans held for portfolio
  $ 10,706,516     $ 10,801,695  
 
           
The par value of mortgage loans held for portfolio outstanding at March 31, 2008 and December 31, 2007 consisted of government-insured loans totaling $448.1 million and $461.1 million and conventional loans totaling $10.2 billion and $10.3 billion, respectively.

 

15


Table of Contents

The allowance for credit losses was $0.2 million and $0.3 million at March 31, 2008 and December 31, 2007. The Bank recorded charge-offs of $68,000 during the three months ended March 31, 2008. The Bank did not have any charge-offs or recoveries during the three months ended March 31, 2007. At March 31, 2008 and December 31, 2007, the Bank had $31.6 million and $27.3 million of nonaccrual loans. Interest income that was contractually owed to the Bank but not received on nonaccrual loans was $0.3 million for the three months ended March 31, 2008 and 2007. At March 31, 2008 and December 31, 2007, the Bank’s other assets included $6.3 million and $5.6 million of real estate owned.
The Bank’s management of credit risk in the MPF program involves several layers of legal loss protection that are defined in agreements among the Bank and its participating members. Though the nature of these layers of loss protection differs slightly among the MPF products we offer, each product contains similar credit risk structures. For conventional loans, the credit risk structure contains the following layers of loss protections in order of priority:
    Homeowner equity.
 
    Primary Mortgage Insurance for all loans with home owner equity of less than 20 percent of the original purchase price or appraised value.
 
    First Loss Account (FLA) established by the Bank. FLA is a memorandum account for tracking losses and such losses are either recoverable from future payments of performance based credit enhancement fees to the member or absorbed by the Bank. The Bank records credit enhancement fees paid to members as a reduction to mortgage loan interest income. Credit enhancement fees totaled $4.9 million and $5.3 million for the three months ended March 31, 2008 and 2007.
 
    Credit enhancements provided by participating members.
 
    Losses greater than credit enhancements provided by members are the responsibility of the Bank.

 

16


Table of Contents

Note 7—Derivatives and Hedging Activities
The Bank may enter into interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, and futures and forward contracts (collectively, derivatives) to manage its exposure to changes in interest rates. See the Bank’s annual report on Form 10-K for additional information regarding the Bank’s derivative and hedging activities.
The Bank recorded the following net gain (loss) on derivatives and hedging activities in other income for the three month period ended March 31, 2008 and 2007 (dollars in thousands):
                 
    Three Months Ended  
    March 31,  
    2008     2007  
 
               
Net loss related to fair value hedge ineffectiveness
  $ (2,691 )   $ (1,174 )
Net loss related to economic hedges and embedded derivatives
    (10,039 )     (214 )
 
           
 
               
Net loss on derivatives and hedging activities
  $ (12,730 )   $ (1,388 )
 
           
The following table categorizes the notional amount and the estimated fair value of derivatives, excluding accrued interest, by derivative instrument and type of accounting treatment at March 31, 2008 and December 31, 2007 (dollars in thousands):
                                 
    March 31, 2008     December 31, 2007  
            Estimated             Estimated  
    Notional     Fair Value     Notional     Fair Value  
Interest rate swaps
                               
Fair value
  $ 31,221,186     $ (285,499 )   $ 31,225,432     $ (183,819 )
Economic
    1,287,779       (1,972 )     1,410,000       (2,015 )
Interest rate swaptions
                               
Economic
    2,850,000       206       6,500,000       973  
Interest rate caps and floors
                               
Economic
    6,700,000       252       1,700,000       679  
Forward settlement agreements
                               
Economic
    101,500       (933 )     22,500       (28 )
Mortgage delivery commitments
                               
Economic
    103,384       320       23,425       68  
 
                       
Total notional and fair value
  $ 42,263,849     $ (287,626 )   $ 40,881,357     $ (184,142 )
 
                       
 
                               
Total derivatives, excluding accrued interest
            (287,626 )             (184,142 )
Accrued interest
            128,116               137,791  
Net cash collateral
            (77,475 )             (31,433 )
 
                           
Net derivative balance
          $ (236,985 )           $ (77,784 )
 
                           
 
Net derivative assets
            43,849               60,468  
Net derivative liabilities
            (280,834 )             (138,252 )
 
                           
Net derivative balance
          $ (236,985 )           $ (77,784 )
 
                           

 

17


Table of Contents

At March 31, 2008 and December 31, 2007 the Bank did not have any embedded derivatives that required bifurcation.
At March 31, 2008 and December 31, 2007, the Bank’s maximum credit risk related to derivative counterparties, as defined above, was $136.7 million and $91.9 million. These totals include $74.8 million and $76.4 million of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by counterparty. The Bank held cash of $92.9 million and $31.4 million as collateral at March 31, 2008 and December 31, 2007.
Note 8—Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Bonds are issued to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Discount notes are issued to raise short-term funds of one year or less. These discount notes sell at less than their face amount and are redeemed at par value when they mature. See the Bank’s annual report on Form 10-K for additional information regarding consolidated obligations.
The par amounts of the outstanding consolidated obligations of the 12 FHLBanks were approximately $1,220.4 billion and $1,189.6 billion at March 31, 2008 and December 31, 2007.

 

18


Table of Contents

Bonds. The following table shows the Bank’s participation in bonds outstanding at March 31, 2008 and December 31, 2007 by year of contractual maturity (dollars in thousands):
                                 
    March 31, 2008     December 31, 2007  
            Weighted             Weighted  
            Average             Average  
            Interest             Interest  
Year of Maturity   Amount     Rate %     Amount     Rate %  
 
                               
Due in one year or less
  $ 4,836,900       4.04     $ 6,437,800       4.19  
Due after one year through two years
    5,770,500       4.44       5,628,300       4.66  
Due after two years through three years
    3,726,550       4.21       4,328,950       4.71  
Due after three years through four years
    2,727,800       4.88       2,754,300       4.99  
Due after four years through five years
    2,418,750       4.39       2,017,950       4.74  
Thereafter
    9,599,400       5.13       10,587,200       5.17  
Index amortizing notes
    2,607,642       5.12       2,667,322       5.12  
 
                           
 
                               
Total par value
    31,687,542       4.65       34,421,822       4.80  
 
                               
Premiums
    54,951               48,398          
Discounts
    (41,641 )             (37,650 )        
Hedging fair value adjustments
                               
Cumulative fair value loss
    536,880               226,071          
Basis adjustments from terminated hedges
    (72,257 )             (94,415 )        
 
                           
 
                               
Total
  $ 32,165,475             $ 34,564,226          
 
                           
The following table shows the Bank’s total bonds outstanding at March 31, 2008 and December 31, 2007 (dollars in thousands):
                 
    March 31,     December 31,  
    2008     2007  
Par amount of consolidated bonds
               
Noncallable or nonputable
  $ 27,521,242     $ 26,044,522  
Callable
    4,166,300       8,377,300  
 
           
 
               
Total par value
  $ 31,687,542     $ 34,421,822  
 
           

 

19


Table of Contents

Interest Rate Payment Terms. The following table shows bonds by interest rate payment type at March 31, 2008 and December 31, 2007 (dollars in thousands):
                 
    March 31,     December 31,  
    2008     2007  
Par amount of consolidated bonds:
               
Fixed rate
  $ 30,142,542     $ 33,967,822  
Simple variable rate
    1,500,000       265,000  
Step-up
          50,000  
Range bonds
    45,000       139,000  
 
           
 
               
Total par value
  $ 31,687,542     $ 34,421,822  
 
           
Discount Notes. Discount notes are issued to raise short-term funds and have original maturities up to 365/366 days. These notes are issued at less than their face amount and redeemed at par value when they mature.
The Bank’s participation in discount notes was as follows at March 31, 2008 and December 31, 2007 (dollars in thousands):
                                 
    March 31, 2008     December 31, 2007  
            Weighted             Weighted  
            Average             Average  
            Interest             Interest  
    Amount     Rate %     Amount     Rate %  
Par value
  $ 32,421,126       2.01     $ 21,544,125       4.10  
Discounts
    (56,758 )             (43,179 )        
Hedging Fair Value Adjustments cumulative fair value loss
    883                        
 
                           
 
                               
Total
  $ 32,365,251             $ 21,500,946          
 
                           
Note 9—Capital
The Bank must maintain at all times permanent capital in an amount at least equal to the sum of its credit, market, and operations risk capital requirements, calculated in accordance with Bank policy and rules and regulations of the Finance Board. Only permanent capital, defined by the Finance Board as Class B stock and retained earnings, satisfies this risk based capital requirement. Regulatory capital, as defined by the Finance Board, includes mandatorily redeemable capital stock and excludes accumulated other comprehensive income. The Bank is also required to maintain at least a four percent total capital-to-asset ratio.

 

20


Table of Contents

The following table shows the Bank’s compliance with the Finance Board’s capital requirements at March 31, 2008 and December 31, 2007 (dollars in thousands):
                                 
    March 31, 2008     December 31, 2007  
    Required     Actual     Required     Actual  
Regulatory capital requirements:
                               
Total capital-to-asset ratio
    4.00 %     4.88 %     4.00 %     5.14 %
Total regulatory capital
  $ 2,803,275     $ 3,421,488     $ 2,429,424     $ 3,124,633  
Mandatorily Redeemable Capital Stock. At March 31, 2008 and December 31, 2007 the Bank had $42.8 million and $46.0 million in capital stock subject to mandatory redemption with payment subject to a five year waiting period from the date of transfer. These amounts have been classified as “mandatorily redeemable capital stock” in the Statements of Condition.
The following table summarizes the Bank’s activity related to mandatorily redeemable capital stock for the three months ended March 31, 2008 and for the year ended December 31, 2007 (dollars in thousands).
                 
    March 31,     December 31,  
    2008     2007  
Balance, beginning of year
  $ 46,039     $ 64,852  
Mandatorily redeemable stock issued
    45       13,468  
Capital stock subject to mandatory redemption reclassified from equity
    845       6,326  
Capital stock previously subject to mandatory redemption reclassified to equity
          (24,112 )
Redemption of mandatorily redeemable capital stock
    (4,177 )     (14,495 )
 
           
 
               
Balance, end of period
  $ 42,752     $ 46,039  
 
           
Note 10—Segment Information
The Bank has identified two primary operating segments based on its method of internal reporting: Member Finance and Mortgage Finance. The products and services provided reflect the manner in which financial information is evaluated by management.
The Member Finance segment includes products such as advances, investments, which includes certain Housing Finance Authority (HFA) investments, and their related funding. Income from the Member Finance segment is derived primarily from the difference, or spread, between the yield on advances and investments and the borrowing and hedging costs related to those assets.
The Mortgage Finance segment includes mortgage loans acquired through the MPF program, MBS, certain HFA investments, and their related funding. Income from the Mortgage Finance segment is derived primarily from the difference, or spread, between the yield on mortgage loans, MBS, and HFA investments and the borrowing and hedging costs related to those assets.

 

21


Table of Contents

Capital is allocated to the Mortgage Finance segment based on a percentage of the average balance of business segment assets; the remaining capital is then allocated to Member Finance.
The Bank evaluates performance of the segments based on adjusted net interest income after mortgage loan credit loss provision and therefore does not allocate other income, other expenses, or assessments to the operating segments, except for economic hedging costs included in other income.
The following shows the Bank’s financial performance by operating segment for the three months ended March 31, 2008 and 2007 (dollars in thousands):
                         
    Member     Mortgage        
    Finance     Finance     Total  
Three months ended March 31, 2008
                       
Adjusted net interest income
  $ 46,685     $ 17,670     $ 64,355  
Provision for credit losses on mortgage loans
                 
 
                 
Adjusted net interest income after mortgage loan credit loss provision
  $ 46,685     $ 17,670     $ 64,355  
 
                 
 
                       
Average assets for the period
  $ 42,967,574     $ 17,625,230     $ 60,592,804  
Total assets at period end
  $ 51,612,105     $ 18,469,778     $ 70,081,883  
 
                       
Three months ended March 31, 2007
                       
Adjusted net interest income
  $ 32,006     $ 6,228     $ 38,234  
Reversal of provision for credit losses on mortgage loans
                 
 
                 
Adjusted net interest income after mortgage loan credit loss provision
  $ 32,006     $ 6,228     $ 38,234  
 
                 
 
                       
Average assets for the period
  $ 27,470,461     $ 15,857,199     $ 43,327,660  
Total assets at period end
  $ 27,078,394     $ 15,640,195     $ 42,718,589  

 

22


Table of Contents

The Bank includes interest income and interest expense associated with economic hedges in its evaluation of financial performance for its two operating segments. Net interest income does not include these amounts in the statements of income for financial reporting purposes. Interest income and interest expense associated with economic hedges are recorded in other income in “Net gain on derivatives and hedging activities” on the statements of income. The following table reconciles the Bank’s financial performance by operating segment to the Bank’s total income before assessments for the three months ended March 31, 2008 and 2007 (dollars in thousands):
                 
    Three Months Ended  
    March 31,  
    2008     2007  
 
               
Adjusted net interest income after mortgage loan credit loss provision
  $ 64,355     $ 38,234  
Adjustments for net interest expense on economic hedges
    342       9  
 
           
Net interest income after mortgage loan credit loss provision
    64,697       38,243  
 
               
Other (loss) income
    (11,576 )     212  
Other expenses
    10,437       10,079  
 
           
 
               
Income before assessments
  $ 42,684     $ 28,376  
 
           
Note 11—Estimated Fair Values
Estimated fair values are determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at March 31, 2008 and December 31, 2007. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The fair value summary tables on pages 25 and 26 do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

 

23


Table of Contents

As discussed in Note 2, “Recently Issued Accounting Standards and Interpretations,” the Bank adopted SFAS 157 and SFAS 159 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances.
The Bank records available-for-sale investments, derivative assets, and derivative liabilities at fair value in the statement of condition in accordance with SFAS 157. Fair value is a market-based measurement and defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the asset or liability, the principal or most advantageous market for the assets or liability, and market participants with whom the entity would transact in that market.
Effective January 1, 2008, with the adoption of SFAS 157, the Bank was required to change its valuation methodology for interest-bearing deposits and term Federal funds sold. The estimated fair value is determined by calculating the present value of the expected future cash flows for instruments with more than three months to maturity. Interest-bearing deposit’s estimated fair value is determined based on each security’s quoted price excluding accrued interest as of the last business day of the quarter. Term Federal funds sold are discounted at comparable current market rates. The estimated fair value approximates the recorded book balance of interest-bearing deposits and term Federal funds sold with three months or less to maturity. For further details on the Bank’s valuation techniques see “Note 19 — Estimated Fair Values” in the Bank’s annual report on Form 10-K filed on March 14, 2008.
SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. In addition, unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. Under SFAS 159, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities, and commitments, with the changes in fair value recognized in net income. Upon adoption and at March 31, 2008, the Bank made no elections, under SFAS 159, to record specific financial assets and liabilities at fair value.

 

24


Table of Contents

The carrying values and estimated fair values of the Bank’s financial instruments at March 31, 2008 were as follows (dollars in thousands):
FAIR VALUE SUMMARY TABLE
                         
            Net        
    Carrying     Unrealized     Estimated  
Financial Instruments   Value     Gains (Losses)     Fair Value  
Assets
                       
Cash and due from banks
  $ 21,705     $     $ 21,705  
Interest-bearing deposits
    126             126  
Federal funds sold
    3,615,000             3,615,000  
Available-for-sale securities
    4,460,954             4,460,954  
Held-to-maturity securities
    4,000,853       1,868       4,002,721  
Advances
    47,092,228       152,813       47,245,041  
Mortgage loans held for portfolio, net
    10,706,516       52,433       10,758,949  
Accrued interest receivable
    111,319             111,319  
Derivative assets
    43,849             43,849  
 
                       
Liabilities
                       
Deposits
    (1,217,980 )     80       (1,217,900 )
 
                       
Consolidated obligations
                       
Discount notes
    (32,365,251 )     (1,795 )     (32,367,046 )
Bonds
    (32,165,475 )     (724,820 )     (32,890,295 )
 
                 
Consolidated obligations, net
    (64,530,726 )     (726,615 )     (65,257,341 )
 
                 
 
                       
Mandatorily redeemable capital stock
    (42,752 )           (42,752 )
Accrued interest payable
    (309,948 )           (309,948 )
Derivative liabilities
    (280,834 )           (280,834 )
 
                       
Other
                       
Standby letters of credit
    (896 )           (896 )
Commitments to extend credit for mortgage loans
    (775 )     (8 )     (783 )

 

25


Table of Contents

The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2007 were as follows (dollars in thousands):
FAIR VALUE SUMMARY TABLE
                         
            Net        
    Carrying     Unrealized     Estimated  
Financial Instruments   Value     Gains (Losses)     Fair Value  
Assets
                       
Cash and due from banks
  $ 58,675     $     $ 58,675  
Interest-bearing deposits
    100,136             100,136  
Federal funds sold
    1,805,000             1,805,000  
Available-for-sale securities
    3,433,640             3,433,640  
Held-to-maturity securities
    3,905,017       (4,302 )     3,900,715  
Advances
    40,411,688       121,866       40,533,554  
Mortgage loans held for portfolio, net
    10,801,695       (130,595 )     10,671,100  
Accrued interest receivable
    129,758             129,758  
Derivative assets
    60,468             60,468  
 
                       
Liabilities
                       
Deposits
    (862,513 )     4       (862,509 )
Securities sold under agreements to repurchase
    (200,000 )     (347 )     (200,347 )
 
                       
Consolidated obligations
                       
Discount notes
    (21,500,946 )     767       (21,500,179 )
Bonds
    (34,564,226 )     (450,582 )     (35,014,808 )
 
                 
Consolidated obligations, net
    (56,065,172 )     (449,815 )     (56,514,987 )
 
                 
 
                       
Mandatorily redeemable capital stock
    (46,039 )           (46,039 )
Accrued interest payable
    (300,907 )           (300,907 )
Derivative liabilities
    (138,252 )           (138,252 )
 
                       
Other
                       
Standby letters of credit
    (765 )           (765 )

 

26


Table of Contents

SFAS 157 established a fair value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is and defines the level of disclosure. The following outlines the application of the fair value hierarchy established by SFAS 157 to the Banks’ financial assets and financial liabilities that are carried at fair value in the statement of condition.
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The types of assets and liabilities carried at Level 1 fair value include certain derivative contracts such as forward settlement agreements that are highly liquid and actively traded in over-the-counter markets.
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The types of assets and liabilities carried at Level 2 fair value include the Bank’s investment securities such as commercial paper, state or local housing agency obligations, and MBS, including U.S. government agency and private-label MBS, and certain derivative contracts.
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs supported by little or no market activity or by the entity’s own assumptions. The Bank does not currently have any assets and liabilities carried at Level 3 fair value.
The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is first determined based on quoted market prices or market-based prices, where available. If quoted market prices or market-based prices are not available, fair value is determined based on valuation models that use market-based information available to the Bank as inputs to the models. Described below is the Banks’ fair value measurement methodologies for assets and liabilities carried in the statements of condition at fair value.
Available-for-Sale Investment Securities. The estimated fair value is determined based on each security’s quoted price excluding accrued interest as of the last business day of the period. When quoted prices are not available, the estimated fair value is determined by calculating the present value of expected future cash flows and reducing the amount for accrued interest receivable.
Derivative Assets and Liabilities. The Bank bases the estimated fair values of derivatives with similar terms on available market prices including accrued interest receivable and payable. The estimated fair value is based on the LIBOR swap curve and forward rates at period end and, for agreements containing options, the market’s expectations of future interest rate volatility implied from current market prices of similar options. The estimated fair values use standard valuation techniques for derivatives, such as discounted cash-flow analysis and comparisons to similar instruments. The fair values are netted with cash collateral by counterparty where such legal right of offset exists. If these amounts are positive, they are classified as an asset and if negative, a liability.

 

27


Table of Contents

The following tables present for each SFAS 157 hierarchy level, the FHLBanks’ assets and liabilities that are measured at fair value on its Statements of Condition at March 31, 2008 (in thousands):
                                         
    Fair Value Measurements at March 31, 2008 Using:  
                                    Netting  
    Total     Level 1     Level 2     Level 3     Adjustment1  
Assets
                                       
Available-for-sale investments
  $ 4,460,954     $     $ 4,460,954     $     $  
Derivative assets
    43,849       179       639,218             (595,548 )
 
                             
 
                                       
Total assets at fair value
  $ 4,504,803     $ 179     $ 5,100,172     $     $ (595,548 )
 
                             
 
                                       
Liabilities
                                       
Derivative liabilities
  $ (280,834 )   $ (1,112 )   $ (797,795 )   $     $ 518,073  
 
                             
 
                                       
Total liabilities at fair value
  $ (280,834 )   $ (1,112 )   $ (797,795 )   $     $ 518,073  
 
                             
     
1   Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Net cash collateral plus accrued interest totaled $77,475 at March 31, 2008.
For instruments carried at fair value in the statement of condition, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities.
Note 12—Commitments and Contingencies
As described in Note 8, the 12 FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, should one or more of the FHLBanks be unable to repay its participation in the consolidated obligations, each of the other FHLBanks could be called upon by the Finance Board to repay all or part of such obligations, as determined or approved by the Finance Board. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank. The par amounts of the outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable were approximately $1,156.3 billion and $1,133.7 billion at March 31, 2008 and December 31, 2007.

 

28


Table of Contents

Advances that had traded but not settled at March 31, 2008 and December 31, 2007 were $24.0 million and $0.0 million. Advance commitments are fully collateralized throughout the life of the agreements. Standby letters of credit are executed with members for a fee. A standby letter of credit is a short-term financing arrangement between the Bank and a member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. Outstanding standby letters of credit were approximately $1.8 billion at March 31, 2008, and had original terms between five days and thirteen years with a final expiration in 2020. Outstanding standby letters of credit were $1.8 billion at December 31, 2007, and had original terms between nine days and thirteen years with a final expiration in 2020. Unearned fees are recorded in other liabilities and amount to $0.9 million and $0.8 million at March 31, 2008 and December 31, 2007. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on standby letters of credit.
Commitments that unconditionally obligate the Bank to fund/purchase mortgage loans from members in the MPF program totaled $103.4 million and $23.4 million at March 31, 2008 and December 31, 2007. Commitments are generally for periods not to exceed forty-five business days. Commitments that obligate the Bank to purchase closed mortgage loans from its members are considered derivatives under SFAS 149, and their estimated fair value at March 31, 2008 and December 31, 2007 is reported in Note 7 as mortgage delivery commitments.
For managing the inherent credit risk in the MPF program, participating members receive base and performance based credit enhancement fees from the Bank. When the Bank incurs losses for certain MPF products, it reduces available credit enhancement fee payments until the amount of the loss is recovered up to the limit of the first loss account (FLA). The FLA is an indicator of the potential losses for which the Bank may be liable (before the member’s credit enhancement is used to cover losses). The FLA amounted to $98.8 million and $96.8 million at March 31, 2008 and December 31, 2007.
The par value of discount notes that had traded but not settled at March 31, 2008 and December 31, 2007 were $89.2 million and $0.0 million. The Bank entered into $394.0 and $49.8 million par value traded but not settled bonds at March 31. 2008 and December 31, 2007.
The Bank entered into derivatives with a notional value of $2.2 billion and $0.5 billion that had traded but not settled at March 31, 2008 and December 31, 2007. The Bank generally executes derivatives with large highly rated banks and broker-dealers and enters into bilateral collateral agreements. The Bank had cash pledged as collateral to broker-dealers of $15.4 million and $0.0 million at March 31, 2008 and December 31, 2007 for derivatives. Cash pledged as collateral is netted with the derivative fair value and presented with derivative assets or liabilities in the statements of condition.
The Bank may be subject to legal proceedings that arise in the normal course of business. The Bank presently is not aware of any pending or threatened legal proceedings.
Notes 5, 6, 7, 8, and 10 discuss other commitments and contingencies.

 

29


Table of Contents

Note 13—Activities with Stockholders and Housing Associates
Under the Bank’s capital plan, the only voting rights conferred upon the Bank’s members are for the election of directors. In accordance with the FHLBank Act and Finance Board regulations, members elect a majority of the Bank’s Board of Directors. The remaining directors are appointed by the Finance Board. Under statute and regulations, each elective directorship is designated to one of the five states in the Bank’s district and a member is entitled to vote for candidates for the state in which the member’s principal place of business is located. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the Bank’s capital stock that were required to be held by all members in that state as of the record date for voting. Non-member stockholders are not entitled to cast votes for the election of directors. At March 31, 2008 and December 31, 2007, no member owned more than 10 percent of the voting interests of the Bank due to statutory limits on members’ voting rights as discussed above.
Transactions with Stockholders. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank and may receive dividends on their investment. Former members own the remaining capital stock to support business transactions still carried on the Bank’s statements of condition. All advances are issued to members and former members, and all mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. The Bank may not invest in any equity securities issued by its stockholders. The Bank extends credit to members in the ordinary course of business on substantially the same terms, including interest rates and collateral that must be pledged to us, as those prevailing at the time for comparable transactions with other members unless otherwise discussed. These extensions of credit do not involve more than the normal risk of collectibility and do not present other unfavorable features.
In addition, the Bank has investments in Federal funds sold, interest-bearing deposits, commercial paper, and MBS that were issued by affiliates of the Bank’s members. All investments are transacted at market prices and MBS are purchased through securities brokers or dealers.

 

30


Table of Contents

The following table shows transactions with members and their affiliates, former members and their affiliates, and housing associates at March 31, 2008 and December 31, 2007 (dollars in thousands):
                 
    March 31,     December 31,  
    2008     2007  
 
Assets:
               
Federal funds sold
  $ 890,000     $ 135,000  
Investments
           
Advances
    47,092,228       40,411,688  
Accrued interest receivable
    42,214       48,622  
Derivative assets
    384       9,608  
Other assets
    157       77  
 
           
 
               
Total
  $ 48,024,983     $ 40,604,995  
 
           
 
               
Liabilities:
               
Deposits
  $ 1,182,694     $ 845,127  
Mandatorily redeemable capital stock
    42,752       46,039  
Accrued interest payable
    706       779  
Derivative liabilities
    52,286       27,698  
Other liabilities
    896       765  
 
           
 
               
Total
  $ 1,279,334     $ 920,408  
 
           
 
               
Notional amount of derivatives
  $ 2,073,950     $ 2,912,091  
Standby letters of credit
    1,841,678       1,760,006  
Transactions with Directors’ Financial Institutions. In the normal course of business, the Bank extends credit to its members whose directors and officers serve as its directors (Directors’ Financial Institutions). Finance Board regulations require that transactions with Directors’ Financial Institutions be subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. At March 31, 2008 and December 31, 2007, advances outstanding to the Bank Directors’ Financial Institutions aggregated $476.2 million and $207.1 million, representing 1.0 percent and 0.5 percent of the Bank’s total outstanding advances. There were $0.4 million and $0.5 million in mortgage loans originated by the Bank’s Directors’ Financial Institutions during the three months ended March 31, 2008 and 2007. At March 31, 2008 and December 31, 2007, capital stock outstanding to the Bank Directors’ Financial Institutions aggregated $27.1 million and $21.4 million, representing 0.9 percent and 0.8 percent of the Bank’s total outstanding capital stock. The Bank did not have any investment or derivative transactions with Directors’ Financial Institutions during the three months ended March 31, 2008 and 2007.

 

31


Table of Contents

Business Concentrations. The Bank has business concentrations with stockholders whose capital stock outstanding was in excess of 10 percent of the Bank’s total capital stock outstanding.
Capital Stock — The following tables present members and their affiliates holding 10 percent or more of outstanding capital stock (including stock classified as mandatorily redeemable) at March 31, 2008 and December 31, 2007 (shares in thousands):
                         
            Shares at     Percent of  
            March 31,     Total Capital  
Name   City   State   2008     Stock  
Wells Fargo Bank, N.A.
  Sioux Falls   SD     6,875       22.5 %
Superior Guaranty Insurance Company
  Minneapolis   MN     4,369       14.3  
 
                   
 
                       
 
            11,244       36.8 %
 
                   
                         
            Shares at     Percent of  
            December 31,     Total Capital  
Name   City   State   2007     Stock  
Wells Fargo Bank, N.A.
  Sioux Falls   SD     5,129       18.6 %
Superior Guaranty Insurance Company
  Minneapolis   MN     4,474       16.2  
 
                   
 
                       
 
            9,603       34.8 %
 
                   
In the normal course of business, the Bank invested in overnight Federal funds from Wells Fargo Bank, N.A. (Wells Fargo) during the three months ended March 31, 2008 and 2007.
Advances — The Bank had advances with Wells Fargo of $15.2 billion and $11.3 billion at March 31, 2008 and December 31, 2007 and advances with Superior Guaranty Insurance Company (Superior), an affiliate of Wells Fargo, of $1.3 billion at March 31, 2008 and December 31, 2007. The Bank made $46.2 billion and $0.0 billion of advances with Wells Fargo during the three months ended March 31, 2008 and 2007. The Bank made no advances to Superior during the three months ended March 31, 2008 and 2007.
Total interest income from Wells Fargo amounted to $70.7 million and $2.6 million for the three months ended March 31, 2008 and 2007. Total interest income from Superior amounted to $11.1 million and $6.7 million for the three months ended March 31, 2008 and 2007. The Bank held sufficient collateral to cover the members’ advances and expected to incur no credit losses as a result of them. The Bank did not receive any prepayment fees from Wells Fargo or Superior during the three months ended March 31, 2008 or year ended December 31, 2007.
Mortgage Loans — The Bank did not purchase mortgage loans from Superior during the three months ended March 31, 2008 and 2007. At March 31, 2008 and December 31, 2007, 81 and 83 percent of the Bank’s mortgage loans outstanding were purchased from Superior.

 

32


Table of Contents

Other — The Bank has executed a lease for 20 years with an affiliate of Wells Fargo to acquire space in a building for the Bank’s headquarters that commenced on January 2, 2007. Future minimum rentals to the Wells Fargo affiliate are as follows (dollars in thousands).
         
Year   Amount  
 
Due in one year or less
  $ 869  
Due after one year through two years
    869  
Due after two years through three years
    869  
Due after three years through four years
    869  
Due after four years through five years
    869  
Thereafter
    12,819  
 
     
 
       
Total
  $ 17,164  
 
     
Note 14—Activities with Other FHLBanks
The Bank purchased MPF Shared Funding Certificates from the FHLBank of Chicago. See Note 4 - Held to Maturity Securities at page 12 for balances at March 31, 2008 and 2007.
In addition, the Bank recorded service fee expense as an offset to other income due to its relationship with the FHLBank of Chicago in the MPF program. The Bank recorded $0.2 million in service fee expense to the FHLBank of Chicago for each of the three months ended March 31, 2008 and 2007 as a reduction of other income.

 

33


Table of Contents

The FHLBank of Chicago pays the Bank a monthly participation fee based on the aggregate amount of outstanding loans purchased under the MPF program. The Bank recorded other income of $0.1 million for each of the three months ended March 31, 2008 and 2007.
The FHLBank of Chicago coordinates shared expenses for the twelve FHLBanks. Beginning with the first quarter of 2008, the Bank recorded a $10,000 processing fee for the shared expenses.
The Bank may sell or purchase unsecured overnight and term Federal funds at market interest rates to and from other FHLBanks. The Bank did not make any loans to other FHLBanks during the three months ended March 31, 2008 and 2007. The following table shows the borrowing activity from other FHLBanks during the three months ended March 31, 2008 and 2007 (dollars in thousands):
                                 
    Beginning             Principal     Ending  
Other FHLBank   Balance     Borrowings     Payment     Balance  
 
                               
March 31, 2008 
                               
Cincinnati
  $     $ 50,000     $ (50,000 )   $  
 
                       
 
                               
March 31, 2007 
                               
San Francisco
  $     $ 270,000     $ (270,000 )   $  
 
                       

 

34


Table of Contents

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our Management’s Discussion and Analysis and annual report on Form 10-K. The Bank’s Management’s Discussion and Analysis is designed to provide information that will help the reader develop a better understanding of the Bank’s financial statements, key financial statement changes from quarter to quarter, and the primary factors driving those changes, as well as how recently issued accounting principles affect the Bank’s financial statements. The Bank’s Management’s Discussion and Analysis is organized as follows:
Contents
         
Forward-Looking Information
    36  
Executive Overview
    36  
Conditions in Financial Markets
    37  
Selected Financial Data
    38  
Results of Operations
    40  
Net Income
    40  
Net Interest Income
    40  
Other Income
    44  
Hedging Activities
    44  
Statements of Condition
    46  
Financial Highlights
    46  
Advances
    46  
Mortgage Loans
    49  
Investments
    50  
Consolidated Obligations
    51  
Deposits
    52  
Capital
    52  
Derivatives
    53  
Liquidity and Capital Resources
    55  
Critical Accounting Policies and Estimates
    61  
Legislative and Regulatory Developments
    62  
Risk Management
    63  

 

35


Table of Contents

Forward-looking Information
Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized.
There can be no assurance that unanticipated risks will not materially and adversely affect our results of operations. For a description of some of the risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements see “Risk Factors” in the annual report on Form 10-K. You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made as of the date of this report. We undertake no obligation to update or revise any forward-looking statement.
Executive Overview
The Bank is a cooperatively owned government-sponsored enterprise (GSE) serving shareholder members in a five-state region (Iowa, Minnesota, Missouri, North Dakota, and South Dakota). The Bank’s mission is to serve as a reliable and stable source of liquidity for our members to support housing finance, including affordable housing and economic development. Our member institutions include commercial banks, savings institutions, credit unions, and insurance companies. We fulfill our mission by providing liquidity to our members in the form of advances and by purchasing mortgage loans from them.
The credit and liquidity crisis that began in the latter half of 2007 continued to drive advances to record levels at March 31, 2008. Advances increased $6.7 billion from $40.4 billion at December 31, 2007 to $47.1 billion at March 31, 2008. Funding for the increased advances was made primarily through the issuance of short-term discount notes, which resulted in an increase to our consolidated obligations of $8.4 billion from $56.1 billion at December 31, 2007 to $64.5 billion at March 31, 2008. The Bank also continued to take advantage of mortgage-backed securities (MBS) pricing and purchased $1.2 billion MBS during the first three months of 2008. These activities contributed to the Bank’s increased net income of $31.4 million for the three months ended March 31, 2008 over the same period in 2007. See additional discussion in “Results of Operations for the Three Months Ended March 31, 2008 and 2007” at page 40.

 

36


Table of Contents

Conditions in the Financial Markets
Three Months Ended March 31, 2008 and 2007 and December 31, 2007
Financial Market Conditions
During the three months ended March 31, 2008, average short-term rates declined over 100 basis points while longer-term rates declined less causing a steepening of the yield curve. The following table shows information on key average market interest rates for the three months ended March 31, 2008 and 2007 and key market interest rates at December 31, 2007:
                         
    First Quarter     First Quarter        
    2008     2007     December 31,  
    3-Month     3-Month     2007  
    Average     Average     Ending Rate  
 
                       
Fed effective1
    3.17 %     5.26 %     3.06 %
Three-month LIBOR1
    3.29       5.36       4.70  
10-year U.S. Treasury1
    3.65       4.68       4.03  
30-year residential mortgage note 2
    5.87       6.21       6.17  
     
1   Source is Bloomberg.
 
2   Average calculated using The Mortgage Bankers Association Weekly Application Survey; December 31, 2007 ending rates are from the last week in 2007.
During the three months ended March 31, 2008 general economic and financial market volatility had a positive impact on the Bank’s net interest income through their influence on (1) our advance, investment, and MPF originations; (2) the Bank’s short-term funding costs and spreads; and (3) earnings on invested capital from March 31, 2007.
Significant credit and financial market volatility during the first quarter of 2008 led to an increase in advance volumes and net interest spreads. The subprime mortgage loan market concerns led to a significant liquidity crisis for many lenders, including certain members of the Bank. Because of market turbulence, the Bank’s advance prices were more attractive to members and the Bank experienced a large increase in its advances balance as a result. The market’s “flight-to-quality” caused the Bank’s cost of short-term debt (discount notes) to remain at historic levels relative to the London Interbank Offered Rate (LIBOR) during the three months ended March 31, 2008.

 

37


Table of Contents

Agency Spreads
Developments in the market environment increased the Bank’s longer-term cost of funds during the three months ended March 31, 2008. Although agency spreads to LIBOR increased on the shorter maturities during the first quarter of 2008 in comparison to the first quarter of 2007, they decreased on longer maturities during the quarter due to overall market credit and liquidity concerns and resulting market volatility. This resulted in cheaper short-term funding and more expensive long-term funding for the Bank.
                         
    First Quarter     First Quarter        
    2008     2007     December 31,  
    3-Month     3-Month     2007  
    Average     Average     Ending Rate  
FHLB spreads to LIBOR
                       
(basis points)1
                       
3-month
    (44.2 )     (14.8 )     (47.8 )
2-year
    (7.3 )     (13.7 )     (14.5 )
5-year
    5.1       (14.2 )     (9.0 )
10-year
    14.9       (13.7 )     2.2  
     
1   Source is Office of Finance.
Mortgage Market Conditions
Agency MBS became extremely attractive during the first quarter of 2008 as measured by LIBOR option-adjusted spread (LOAS). Liquidations of high quality non-subprime investments coupled with investor balance sheet constraints related to credit and liquidity concerns caused spreads and thus the earnings potential on these MBS investments to increase.
Selected Financial Data
The following selected financial data should be read in conjunction with the financial statements and condensed notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report, and our annual report on Form 10-K filed on March 14, 2008. The financial position data at March 31, 2008 and results of operations data for the three months ended March 31, 2008 were derived from the unaudited financial statements and condensed notes thereto included in this report. The financial position data at December 31, 2007 was derived from the audited financial statements and notes not included in this report.

 

38


Table of Contents

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods and is in conformity with accounting principles generally accepted in the United States (U.S.) of America (GAAP). The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be achieved for the full year.
                 
    March 31,     December 31,  
Statements of Condition   2008     2007  
(Dollars in millions)            
Short-term investments1
  $ 4,300     $ 2,330  
Mortgage-backed securities
    7,701       6,837  
Other investments
    76       77  
Advances
    47,092       40,412  
Mortgage loans, net
    10,707       10,802  
Total assets
    70,082       60,736  
Securities sold under agreements to repurchase
          200  
Consolidated obligations2
    64,531       56,065  
Mandatorily redeemable capital stock
    43       46  
Affordable Housing Program
    42       43  
Payable to REFCORP
    8       6  
Total liabilities
    66,825       57,683  
Capital stock — Class B putable
    3,012       2,717  
Retained earnings
    367       361  
Capital-to-asset ratio3
    4.65 %     5.03 %
                 
    Three months ended March 31,  
Operating Results and Performance Ratios   2008     2007  
(Dollars in millions)            
Interest income
  $ 626.8     $ 562.3  
Interest expense
    562.1       524.1  
Net interest income
    64.7       38.2  
Provision for credit losses on mortgage loans
           
Net interest income after mortgage loan credit loss provision
    64.7       38.2  
Other (loss) income4
    (11.6 )     0.2  
Other expense
    10.4       10.0  
Total assessments5
    11.3       8.1  
Net income
    31.4       20.3  
 
Return on average assets
    0.21 %     0.19 %
Return on average capital stock
    4.72       4.31 %
Return on average total capital
    4.19       3.64  
Net interest margin
    0.43       0.36  
Operating expenses to average assets6
    0.06       0.09  
Annualized dividend rate
    4.50       4.25  
Cash dividends declared and paid
  $ 25.7     $ 20.1  
 
     
1   Short-term investments include: interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, commercial paper, and GSE obligations. Short-term investments have terms less than one year.
 
2   The par amount of the outstanding consolidated obligations for all 12 Federal Home Loan Banks (FHLBanks) was $1,220.4 billion and $1,189.6 billion at March 31, 2008 and December 31, 2007.
 
3   Capital-to-asset ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets at the end of the period.
 
4   Other income includes change in fair value of derivatives.
 
5   Total assessments include: Affordable Housing Program and Resolution Funding Corporation (REFCORP).
 
6   Operating expenses to average assets ratio is salaries and benefits plus operating expenses as a percentage of average total assets.

 

39


Table of Contents

Results of Operations for the Three Months Ended March 31, 2008 and 2007
Net Income
Net income increased $11.1 million or 55 percent to $31.4 million during the three months ended March 31, 2008 when compared to the same period in 2007. Net income increased due to increased net interest income, which was partially offset by increased losses on derivatives and hedging activities. See further discussion of changes in net interest income in the “net interest income” section following. For additional discussion of changes in net losses on derivatives and hedging activities see the “hedging activities” section at page 44.
Net Interest Income
Net interest income is the primary performance measure of the Bank’s ongoing operations. Fluctuations in average asset, liability, and capital balances, and the related yields and costs are the primary causes of changes in our net interest income. Net interest income is managed within the context of tradeoff between market risk and return. Due to our cooperative business model and modest risk profile our profitability tends to be relatively low compared to other financial institutions and more consistent with short-term market interest rates.

 

40


Table of Contents

The following tables present average balances and rates of major interest rate sensitive asset and liability categories for the three months ended March 31, 2008 and 2007. The tables also present the net interest spread between yield on total interest-earning assets and cost of total interest-bearing liabilities and the net interest margin between yield on total assets and the cost of total liabilities and capital (dollars in millions).
                                                 
    For the Three Months Ended March 31, 2008     For the Three Months Ended March 31, 2007  
                    Interest                     Interest  
    Average             Income/     Average             Income/  
    Balance 1     Yield/Cost     Expense     Balance 1     Yield/Cost     Expense  
Interest-earning assets
                                               
Interest-bearing deposits
  $ 55       4.61 %   $ 0.6     $ 9       5.33 %   $ 0.1  
Securities purchased under agreements to resell
          %           305       5.36 %     4.0  
Federal funds sold
    2,648       3.36 %     22.1       2,994       5.32 %     39.2  
Short-term investments2
    489       3.31 %     4.0       2,042       5.37 %     27.1  
Mortgage-backed securities2
    6,831       4.51 %     76.6       4,225       5.37 %     56.0  
Other investments2
    80       6.05 %     1.2       13       4.39 %     0.1  
Advances3
    39,447       3.96 %     388.0       21,845       5.39 %     290.6  
Mortgage loans4
    10,758       5.02 %     134.3       11,642       5.06 %     145.2  
 
                                   
Total interest-earning assets
    60,308       4.18 %     626.8       43,075       5.29 %     562.3  
Noninterest-earning assets
    285                   253              
 
                                   
Total assets
  $ 60,593       4.16 %   $ 626.8     $ 43,328       5.26 %   $ 562.3  
 
                                   
 
                                               
Interest-bearing liabilities
                                               
Deposits
  $ 1,308       2.71 %   $ 8.8     $ 1,116       5.10 %   $ 14.0  
Consolidated obligations
                                               
Discount notes
    21,267       3.05 %     161.2       5,259       5.24 %     68.0  
Bonds
    34,189       4.59 %     389.8       33,552       5.25 %     434.1  
Other interest-bearing liabilities
    184       5.16 %     2.3       562       5.79 %     8.0  
 
                                   
Total interest-bearing liabilities
    56,948       3.97 %     562.1       40,489       5.25 %     524.1  
Noninterest-bearing liabilities
    632                   577              
 
                                   
Total liabilities
    57,580       3.93 %     562.1       41,066       5.18 %     524.1  
Capital
    3,013                   2,262              
 
                                   
Total liabilities and capital
  $ 60,593       3.73 %   $ 562.1     $ 43,328       4.90 %   $ 524.1  
 
                                   
 
                                               
Net interest income and spread
            0.21 %   $ 64.7               0.04 %   $ 38.2  
 
                                       
 
                                               
Net interest margin
            0.43 %                     0.36 %        
 
                                           
 
                                               
Average interest-earning assets to interest-bearing liabilities
            105.90 %                     106.39 %        
 
                                           
 
                                               
Composition of net interest income
                                               
Asset-liability spread
            0.23 %   $ 35.3               0.08 %   $ 9.3  
Earnings on capital
            3.93 %     29.4               5.18 %     28.9  
 
                                           
Net interest income
                  $ 64.7                     $ 38.2  
 
                                           
     
1   Average balances do not reflect the affect of reclassifications due to FIN 39-1.
 
2   The average balances of available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.
 
3   Advance interest income includes advance prepayment fee income of $0.6 million and $0.1 million for the three months ended March 31, 2008 and 2007.
 
4   Nonperforming loans are included in average balances used to determine average rate.

 

41


Table of Contents

Average assets increased to $60.6 billion during the three months ended March 31, 2008 compared with $43.3 billion for the same period in 2007. The increase was primarily attributable to increased average short-term advances and investments, partially offset by decreased average mortgage loans and Federal funds sold. The continuing liquidity crisis that began in 2007 has led to higher levels of short-term advances to our members. Additionally, the Bank continued to take advantage of MBS pricing by purchasing $1.2 billion MBS during the first three months of 2008.
Average liabilities increased to $57.6 billion for the three months ended March 31, 2008 from $41.1 billion for the same period in 2007. The increase was due to increased average consolidated obligation discount notes. Average consolidated obligations fluctuate depending on the Bank’s asset balances and funding needs.
Average capital increased $750.5 million for the three months ended March 31, 2008 compared to the same period in 2007. The increase was primarily due to an increase in capital stock requirements to support member activities related to increased advances.
Our net interest income is affected by changes in the dollar volumes of our interest-earning assets and interest-bearing liabilities and changes in the average rates of those assets and liabilities. The following table presents the changes in interest income and interest expense between the three months ended March 31, 2008 and 2007. Changes that cannot be attributed to either rate or volume have been allocated to the rate and volume variances based on relative size (dollars in millions).
                         
    Variance For the Three Months Ended  
    March 31, 2008 vs. March 31, 2007  
          Total  
    Total Increase     Increase  
    (Decrease) Due to     (Decrease)  
    Volume     Rate        
Interest income
                       
Interest-bearing deposits
  $ 0.5     $     $ 0.5  
Securities purchased under agreements to resell
    (4.0 )           (4.0 )
Federal funds sold
    (4.1 )     (13.0 )     (17.1 )
Short-term investments
    (15.3 )     (7.8 )     (23.1 )
Mortgage-backed securities
    30.7       (10.1 )     20.6  
Other investments
    1.0       0.1       1.1  
Advances
    190.2       (92.8 )     97.4  
Mortgage loans
    (9.9 )     (1.0 )     (10.9 )
 
                 
Total interest income
    189.1       (124.6 )     64.5  
 
                       
Interest expense
                       
Deposits
    2.2       (7.4 )     (5.2 )
Consolidated obligations
                       
Discount notes
    132.3       (39.1 )     93.2  
Bonds
    8.6       (52.9 )     (44.3 )
Other interest-bearing liabilities
    (4.9 )     (0.8 )     (5.7 )
 
                 
Total interest expense
    138.2       (100.2 )     38.0  
 
                 
 
                       
Net interest income
  $ 50.9     $ (24.4 )   $ 26.5  
 
                 
The two components of the Bank’s net interest income are earnings from our asset-liability spread and earnings on capital. See further discussion in “Asset-liability Spread” below and “Earnings on Capital” at page 43.

 

42


Table of Contents

The yield on total interest-earning assets and cost of interest-bearing liabilities are impacted by our use of derivatives to adjust the interest rate sensitivity of assets and liabilities. For the net effect of the Bank’s hedging activities by product to net income see “Hedging Activities” at page 44.
Asset-liability Spread
This spread equals the yield on total assets minus the cost of total liabilities. Asset-liability spread income increased $26.0 million for the three months ended March 31, 2008 compared with the same period in 2007. The increase was due to the following reasons:
    The bank continued to experience record levels of advance borrowings from our members in response to the market liquidity crisis that began in the latter half of 2007.
 
    Decreased costs on the Bank’s liabilities primarily driven by favorable discount note pricing.
 
    The decreasing interest rate environment during the first quarter of 2008 led the Bank to exercise its option to call higher costing debt that was replaced by lower costing discount notes.
 
    During the first quarter of 2008, the Bank purchased high quality agency MBS at attractive spreads to LIBOR thereby increasing the earnings potential from these MBS investments.
Earnings on Capital
We invest our capital to generate earnings, generally for the same repricing maturity as the assets being supported. Earnings on capital increased $0.5 million during the three months ended March 31, 2008 compared with the same period in 2007 primarily due to increased average capital balances. Average capital increased $750.5 million during the three months ended March 31, 2008 compared with the same period in 2007 primarily due to an increase in capital stock requirements to support member activities related to advances as well as an increase in retained earnings.

 

43


Table of Contents

Other Income
The following table presents the components of other income for the three months ended March 31, 2008 and 2007 (dollars in millions):
                 
    Three Months Ended  
    March 31,  
    2008     2007  
 
               
Service fees
  $ 0.6     $ 0.6  
Net realized gain on held-to-maturity securities
          0.5  
Net loss on derivatives and hedging activities
    (12.7 )     (1.4 )
Other, net
    0.5       0.5  
 
           
 
               
Total other (loss) income
  $ (11.6 )   $ 0.2  
 
           
Other income can be volatile from period to period depending on the type of financial activity reported. Net loss on derivatives and hedging activities was the main driver of the increased loss included in other (loss) income. This amount is highly dependent on changes in interest rates as well as volume of activities. See further discussion below.
Hedging Activities
If a hedging activity qualifies for hedge accounting treatment, the Bank includes the periodic cash flow components of the hedging instrument related to interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. In addition, the Bank reports as a component of other income in net gain (loss) on derivatives and hedging activities, the fair value changes of both the hedging instrument and the hedged item. The Bank records the amortization of upfront fees paid or received on interest rate swaps and cumulative fair value adjustments from terminated hedges in interest income or expense.
If a hedging activity does not qualify for hedge accounting treatment, the Bank reports the hedging instrument’s components of interest income and expense, together with the effect of changes in fair value in other income; however, there is no corresponding fair value adjustment for the hedged asset or liability.
As a result, accounting for derivatives and hedging activities affects the timing of income recognition and the effect of certain hedging transactions are spread throughout the income statement in net interest income and other income.

 

44


Table of Contents

The following tables categorize the net effect of hedging activities on net income by product for the three months ended March 31, 2008 and 2007 (dollars in millions). The table excludes the interest component on derivatives as this amount will be offset by the interest component on the hedged item. Because the purpose of the hedging activity is to protect net interest income against changes in interest rates, the absolute increase or decrease of interest income from interest-earning assets or interest expense from interest-bearing liabilities is not as important as the relationship of the hedging activities to overall net income.
                                         
    Three Months Ended March 31, 2008  
Net effect of           Mortgage     Consolidated     Balance        
Hedging Activities   Advances     Assets     Obligations     Sheet     Total  
 
                                       
Amortization/accretion
  $ (0.3 )   $ (0.5 )   $ (1.0 )   $     $ (1.8 )
 
                             
 
                                       
Net realized and unrealized gains (losses) on derivatives and hedging activities
    0.4             (3.1 )           (2.7 )
Losses — Economic Hedges
    (2.3 )           (0.4 )     (7.3 )     (10.0 )
 
                             
Reported in Other Income
    (1.9 )           (3.5 )     (7.3 )     (12.7 )
 
                             
Total
  $ (2.2 )   $ (0.5 )   $ (4.5 )   $ (7.3 )   $ (14.5 )
 
                             
                                         
    Three Months Ended March 31, 2007  
Net effect of           Mortgage     Consolidated     Balance        
Hedging Activities   Advances     Assets     Obligations     Sheet     Total  
 
                                       
Amortization/accretion
  $ 0.1     $ (0.5 )   $ (8.6 )   $     $ (9.0 )
 
                             
 
                                       
Net realized and unrealized gains (losses) on derivatives and hedging activities
    0.2             (1.4 )           (1.2 )
Losses — Economic Hedges
                      (0.2 )     (0.2 )
 
                             
Reported in Other Income
    0.2             (1.4 )     (0.2 )     (1.4 )
 
                             
Total
  $ 0.3     $ (0.5 )   $ (10.0 )   $ (0.2 )   $ (10.4 )
 
                             
Amortization/accretion. The effect of hedging on amortization and accretion varies from period to period depending on the Bank’s activities, such as terminating certain advance and consolidated obligation hedge relationships to manage our risk profile and the amount of upfront fees received or paid on derivative transactions. Consolidated obligation amortization/accretion expense decreased for the three months ended March 31, 2008 compared with the same period in 2007 primarily due to increased consolidated obligation terminations resulting in increased income from swap fee amortization, partially offset by increased expense from basis adjustment amortization.

 

45


Table of Contents

Net realized and unrealized gains (losses) on derivatives and hedging activities. Hedge ineffectiveness occurs when changes in fair value of the derivative and the related hedged item do not perfectly offset each other. Hedge ineffectiveness losses during the three months ended March 31, 2008 and 2007 were primarily due to consolidated obligation hedge relationships. Hedge ineffectiveness is driven by changes in the benchmark interest rate and volatility. As the benchmark interest rate changes and the magnitude of that change intensifies, so will the impact on the Bank’s net realized and unrealized gains and losses on derivatives and hedging activities. Additionally, volatility in the marketplace may intensify this impact.
Gains (losses) — Economic Hedges. During the three months ended March 31, 2008, economic hedges were primarily used to manage interest rate and prepayment risks in our balance sheet. Economic hedges do not qualify for hedge accounting and as a result the Bank records a gain or loss on the derivative instrument without recording the corresponding loss or gain on the hedged item. In addition, the interest accruals on the hedging instrument are recorded as a component of other income instead of a component of net interest income. Losses on economic hedges increased $9.8 million during the three months ended March 31, 2008 when compared with the same period in 2007 primarily due to the following:
    Losses on balance sheet economic hedges due to the Bank’s increased usage of caps and swaptions and increased volatility in the market.
 
    Losses on economic hedges of the Bank’s advances due to decreased interest rates.
 
    Losses on economic hedges of the Bank’s consolidated obligations due to the loss of hedge accounting on certain hedges of discount notes in the first quarter of 2008.
Statements of Condition at March 31, 2008 and December 31, 2007
Financial Highlights
The Bank’s total assets increased to $70.1 billion at March 31, 2008 from $60.7 billion at December 31, 2007. Total liabilities increased to $66.8 billion at March 31, 2008 from $57.7 billion at December 31, 2007. Total capital increased to $3.3 billion at March 31, 2008 from $3.1 billion at December 31, 2007. See further discussion of changes in the Bank’s financial condition in the respective sections that follow.
Advances
At March 31, 2008, advances totaled $47.1 billion or a 17 percent increase from $40.4 billion at December 31, 2007. The Bank continued to experience record levels of advance borrowings from our members in response to the market liquidity crisis that began in the latter half of 2007. Of the increase, $3.8 billion was in shorter-term maturities and $2.5 billion in longer-term advances. During the first three months of 2008, our advances continued to be a competitive alternative for our members and our efficient access to the capital markets allowed us to provide our membership with a stable, low cost source of funding. See additional discussion regarding our collateral requirements in the “Advances” section on page 67.

 

46


Table of Contents

Members are required to purchase and maintain activity-based capital stock to support outstanding advances. Changes in advances are accompanied by changes in capital stock, unless the member already owns excess activity-based stock. At December 31, 2007 and March 31, 2008, advance activity-based stock as a percentage of the advance portfolio was 4.45 percent.
The composition of our advances based on remaining term to scheduled maturity at March 31, 2008 and December 31, 2007 was as follows (dollars in millions):
                                 
    March 31, 2008     December 31, 2007  
            Percent of             Percent of  
    Amount     Total     Amount     Total  
Simple fixed rate advances
                               
Overdrawn demand deposit accounts
  $ 2       %   $       %
One month or less
    17,993       38.9       14,737       36.8  
Over one month through one year
    3,154       6.8       3,793       9.5  
Greater than one year
    9,132       19.7       7,907       19.8  
 
                       
 
    30,281       65.4       26,437       66.1  
Simple variable rate advances
                               
One month or less
    52       0.1       23       0.0  
Over one month through one year
    170       0.4       126       0.3  
Greater than one year
    3,434       7.4       3,433       8.6  
 
                       
 
    3,656       7.9       3,582       8.9  
 
                               
Callable advances
                               
Fixed rate
    242       0.5       235       0.6  
Variable rate
    2,497       5.4       1,033       2.6  
Putable advances
                               
Fixed rate
    8,076       17.5       7,249       18.1  
Community investment advances
                               
Fixed rate
    1,037       2.3       1,021       2.5  
Variable rate
    104       0.2       104       0.2  
Callable — fixed rate
    55       0.1       61       0.2  
Putable — fixed rate
    336       0.7       300       0.8  
 
                       
Total par value
    46,284       100.0 %     40,022       100.0 %
 
                               
Hedging fair value adjustments
                               
Cumulative fair value gain
    802               383          
Basis adjustments from terminated hedges
    6               7          
 
                           
 
                               
Total advances
  $ 47,092             $ 40,412          
 
                           
Cumulative fair value gains increased $419 million at March 31, 2008 when compared to December 31, 2007. Substantially all of the cumulative fair value gains on advances are offset by the net estimated fair value losses on the related derivative contracts. See additional discussion regarding our derivative contracts in the “Derivatives” section on page 53.

 

47


Table of Contents

The following tables show advance balances for our five largest member advance borrowers at March 31, 2008 and December 31, 2007 (dollars in millions):
                         
            March 31,     Percent of  
            2008     Total  
Name   City   State   Advances1     Advances  
 
                       
Wells Fargo Bank, N.A.
  Sioux Falls   SD   $ 15,225       32.9 %
ING USA Annuity and Life Insurance Company
  Des Moines   IA     3,035       6.6  
TCF National Bank
  Wayzata   MN     2,275       4.9  
Aviva Life and Annuity Company
  Des Moines   IA     2,201       4.8  
Transamerica Occidental Life Insurance Company
  Cedar Rapids   IA     1,800       3.9  
 
                   
 
            24,536       53.1  
 
                       
Housing associates
            3        
All others
            21,745       46.9  
 
                   
 
                       
Total advances (at par value)
          $ 46,284       100.0 %
 
                   
                         
            December 31,        
            2007     Percent of Total  
Name   City   State   Advances1     Advances  
 
                       
Wells Fargo Bank, N.A.
  Sioux Falls   SD   $ 11,300       28.2 %
ING USA Annuity and Life Insurance Company
  Des Moines   IA     2,884       7.2  
TCF National Bank
  Wayzata   MN     2,375       5.9  
Transamerica Occidental Life Insurance Company
  Cedar Rapids   IA     2,225       5.6  
Aviva Life and Annuity Company
  Des Moines   IA     1,863       4.7  
 
                   
 
            20,647       51.6  
 
                       
Housing associates
            3        
All others
            19,372       48.4  
 
                   
 
                       
Total advances (at par value)
          $ 40,022       100.0 %
 
                   
     
1   Amounts represent par value before considering unamortized commitment fees, premiums and discounts, and hedging fair value adjustments.

 

48


Table of Contents

Mortgage Loans
The following table shows information at March 31, 2008 and December 31, 2007 on mortgage loans held for portfolio (dollars in millions):
                 
    March 31,     December 31,  
    2008     2007  
Single family mortgages
               
Fixed rate conventional loans
               
Contractual maturity less than or equal to 15 years
  $ 2,538     $ 2,567  
Contractual maturity greater than 15 years
    7,711       7,762  
 
           
Subtotal
    10,249       10,329  
 
               
Fixed rate government-insured loans
               
Contractual maturity less than or equal to 15 years
    2       3  
Contractual maturity greater than 15 years
    446       458  
 
           
Subtotal
    448       461  
 
           
 
               
Total par value
    10,697       10,790  
 
               
Premiums
    94       97  
Discounts
    (90 )     (93 )
Basis adjustments from mortgage loan commitments
    6       8  
Allowance for credit losses
           
 
           
 
               
Total mortgage loans held for portfolio, net
  $ 10,707     $ 10,802  
 
           
Mortgage loans decreased approximately $0.1 billion during the first quarter of 2008 as we purchased $0.2 billion of loans through the MPF program and received principal repayments of $0.3 billion for the three months ended March 31, 2008. While mortgage loans have continued to decrease, the rate of decline has lessened compared to the first quarter of 2007, as origination volume has increased. The annualized weighted average pay-down rate for mortgage loans for the three months ended March 31, 2008 was approximately 12 percent compared with 11 percent for same period in 2007. Decreasing interest rates have led borrowers to refinance. Additionally, Community Financial Institutions (CFIs), which represent the majority of our participating financial instituitions (PFIs), have become a primary source for home financing due to the exit of a large number of mortgage brokers as well as the increasingly limited options available for financing in the second market.
Mortgage loans acquired from members were historically concentrated with Superior Guaranty Insurance Corporation (Superior), a Wells Fargo Bank, N.A. (Wells Fargo) affiliate. At March 31, 2008 and December 31, 2007 we held mortgage loans acquired from Superior amounting to $8.7 billion and $8.9 billion, respectively. At March 31, 2008 and December 31, 2007 these loans represented 81 and 83 percent of total mortgage loans at par value. The Bank did not purchase any mortgage loans from Superior during the three months ended March 31, 2008 and 2007.

 

49


Table of Contents

Investments
The following table shows the book value of investments at March 31, 2008 and December 31, 2007 (dollars in millions):
                                 
    March 31, 2008     December 31, 2007  
            Percent of             Percent of  
    Amount     Total     Amount     Total  
Short-term investments
                               
Interest-bearing deposits
  $       %   $ 100       1.0 %
Federal funds sold
    3,615       29.9       1,805       19.5  
Commercial paper
    430       3.6       200       2.2  
Government-sponsored enterprise obligations
    249       2.1       219       2.4  
Other
    6             6       0.1  
 
                       
 
    4,300       35.6       2,330       25.2  
Mortgage-backed securities
                               
Government-sponsored enterprises
    7,544       62.5       6,672       72.2  
U.S. government agency-guaranteed
    61       0.5       64       0.7  
MPF shared funding
    52       0.4       53       0.6  
Other
    44       0.4       48       0.5  
 
                       
 
    7,701       63.8       6,837       74.0  
 
                               
State or local housing agency obligations
    73       0.6       74       0.8  
Other
    3             3        
 
                       
 
                               
Total investments
  $ 12,077       100.0 %   $ 9,244       100.0 %
 
                       
 
                               
Investments as a percent of total assets
            17.2 %             15.2 %
 
                           
Investment balances increased $2.8 billion or 30.6 percent at March 31, 2008 compared with December 31, 2007. The increase was primarily due to additional purchases of high quality GSE MBS as interest spreads on GSE MBS were attractive due to market conditions.
The Bank has reviewed its available-for-sale and held-to-maturity investments and has determined that all unrealized losses are due to the current market environment. The Bank determined all unrealized losses are the result of the current interest rate environment and are temporary, based in part on the creditworthiness of the issuers as well as the underlying collateral, if applicable. The Bank has the ability and the intent to hold such securities through to recovery of the unrealized losses and does not consider the investments to be other-than-temporarily impaired at March 31, 2008. For further discussion of our credit risks associated with MBS securities see “Mortgage Assets” on page 68.

 

50


Table of Contents

Consolidated Obligations
Consolidated obligations, which include discount notes and bonds, are the primary source of funds to support our advances, mortgage loans, and investments. We make significant use of derivatives to restructure interest rates on consolidated obligations to better match our funding needs and reduce funding costs. This generally means converting fixed rates to variable rates. At March 31, 2008, the book value of the consolidated obligations issued on the Bank’s behalf totaled $64.5 billion compared with $56.1 billion at December 31, 2007.
Discount Notes-The following table shows the Bank’s participation in discount notes, all of which are due within one year, at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
    2008     2007  
 
               
Par value
  $ 32,421     $ 21,544  
Discounts
    (57 )     (43 )
Hedging fair value adjustments
               
Cumulative fair value loss
    1        
 
           
 
               
Total discount notes
  $ 32,365     $ 21,501  
 
           
The increase in discount notes was due to increased funding needs resulting from short-term advance activity and MBS purchases.
Bonds—The following table shows the Bank’s participation in bonds based on remaining term to maturity at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
Year of Maturity   2008     2007  
Due in one year or less
  $ 4,837       6,438  
Due after one year through two years
    5,770       5,628  
Due after two years through three years
    3,726       4,329  
Due after three years through four years
    2,728       2,754  
Due after four years through five years
    2,419       2,018  
Thereafter
    9,599       10,588  
Index amortizing notes
    2,608       2,667  
 
           
Total par value
    31,687       34,422  
 
               
Premiums
    55       48  
Discounts
    (42 )     (38 )
Hedging fair value adjustments
               
Cumulative fair value loss
    537       226  
Basis adjustments from terminated hedges
    (72 )     (94 )
 
           
 
               
Total bonds
  $ 32,165     $ 34,564  
 
           

 

51


Table of Contents

The decrease in total bonds was a result of the Bank calling higher costing bonds and replacing those bonds with lower costing discount notes.
Deposits
The following table shows our deposits by product type at March 31, 2008 and December 31, 2007 (dollars in millions):
                                 
    March 31, 2008     December 31, 2007  
            Percent of             Percent of  
    Amount     Total     Amount     Total  
Interest-bearing
                               
Overnight
  $ 742       60.9 %   $ 649       75.2 %
Demand
    197       16.2       153       17.7  
Term
    238       19.5       40       4.7  
 
                       
Total interest-bearing
    1,177       96.6       842       97.6  
 
                               
Noninterest-bearing
    41       3.4       21       2.4  
 
                       
 
                               
Total deposits
  $ 1,218       100.0 %   $ 863       100.0 %
 
                       
The level of deposits will vary based on member alternatives for short-term investments.
Capital
At March 31, 2008 and December 31, 2007, total capital (including capital stock, retained earnings, and accumulated other comprehensive income) was $3.3 billion and $3.1 billion, respectively. The increase was primarily due to an increase in capital stock requirements to support member activities related to advances as well as an increase in retained earnings.

 

52


Table of Contents

Derivatives
The notional amount of derivatives reflects the volume of our hedges, but it does not measure the credit exposure of the Bank because there is no principal at risk. The following table categorizes the notional amount of our derivatives at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
    2008     2007  
Notional amount of derivatives
               
Interest rate swaps
               
Noncancelable
  $ 19,953     $ 18,555  
Cancelable by counterparty
    12,526       14,070  
Cancelable by the Bank
    30       10  
 
           
 
    32,509       32,635  
 
               
Interest rate swaptions
    2,850       6,500  
Interest rate caps
    6,700       1,700  
Forward settlement agreements
    102       23  
Mortgage delivery commitments
    103       23  
 
           
 
               
Total notional amount
  $ 42,264     $ 40,881  
 
           
The Bank purchased additional MBS with caps and thereby increased interest rate risk in the balance sheet profile. Therefore, the Bank hedged this risk through the purchase of interest rate caps, which increased by $5.0 billion from December 31, 2007. Additionally, due to changes in the Bank’s balance sheet risk profile and the level of interest rates, interest rate swaptions decreased $3.7 billion at March 31, 2008 when compared with December 31, 2007.
We record derivatives on the Statement of Condition at fair value. Under a master netting arrangement, we net the fair market values and accrued interest of the derivative instruments with cash collateral and related accrued interest by counterparty. We classify positive counterparty balances as derivative assets and negative counterparty balances as derivative liabilities. Derivative assets represent our maximum credit risk to counterparties, and derivative liabilities represent the exposures of counterparties to us. Except for economic hedging relationships, all of the net estimated fair value gains and losses on our derivative contracts are offset by net hedging fair value adjustment losses and gains or other book value adjustments on the related hedged items.

 

53


Table of Contents

The following table categorizes the notional amount and the estimated fair value of derivative financial instruments, excluding accrued interest, by product and type of accounting treatment. The category fair value represents hedges that qualify for fair value hedge accounting. The category economic represents hedge strategies that do not qualify for hedge accounting. Amounts at March 31, 2008 and December 31, 2007 were as follows (dollars in millions):
                                 
    March 31, 2008     December 31, 2007  
            Estimated             Estimated  
    Notional     Fair Value     Notional     Fair Value  
Advances
                               
Fair value
  $ 16,332     $ (809 )   $ 14,611     $ (391 )
Economic
    500       (3 )     500        
Mortgage Assets
                               
Forward settlement agreements
                               
Economic
    102       (1 )     23        
Mortgage delivery commitments
                               
Economic
    103             23        
Consolidated obligations
                               
Bonds
                               
Fair value
    14,325       523       17,524       206  
Economic
    25                    
Discount Notes
                               
Fair value
    564       1              
Economic
    763       1              
Balance Sheet
                               
Economic
    9,550             8,200       1  
 
                       
 
                               
Total notional and fair value
  $ 42,264     $ (288 )   $ 40,881     $ (184 )
 
                       
Total derivatives, excluding accrued interest
            (288 )             (184 )
Accrued interest
            128               138  
Net cash collateral
            (77 )             (32 )
 
                           
Net derivative balance
          $ (237 )           $ (78 )
 
                           
 
                               
Net derivative assets
            44               60  
Net derivative liabilities
            (281 )             (138 )
 
                           
Net derivative balance
          $ (237 )           $ (78 )
 
                           
The change in notional and fair value of the Bank’s derivative instruments was primarily driven by the increase in fair value hedges on advances and balance sheet economic hedges. The increase in fair value hedges on advances is related to the growth in advances from our members. The increase in balance sheet economic hedges is due to an increase in interest rate caps partially offset by a decrease in interest rate swaptions previously discussed.

 

54


Table of Contents

Liquidity and Capital Resources
Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of cash to meet current and future operating financial commitments, regulatory liquidity and capital requirements, and the possibility of an unforeseen liquidity event. To achieve these objectives, we establish liquidity and capital management requirements and maintain liquidity and capital in accordance with Finance Board regulations and our own policies. We are not aware of any conditions that will result in unplanned uses of liquidity or capital in the future. Accordingly, we believe our sources of liquidity and capital will cover future liquidity and capital resource needs.
Liquidity
The Bank’s primary source of liquidity is proceeds from the issuance of consolidated obligations in the capital markets. Because of the FHLBanks’ credit quality, efficiency, and standing in the markets, the FHLBanks have historically had ready access to funding.
During the three months ended March 31, 2008, we received proceeds from the issuance of discount notes of $336.1 billion and bonds of $4.9 billion. During the three months ended March 31, 2007, we received proceeds from the issuance of discount notes of $141.3 billion and bonds of $2.7 billion. Discount note issuances increased $194.8 billion during the first quarter of 2008 when compared to the same period in 2007 due to record levels of advance borrowings, primarily short-term, from our members in response to the market liquidity crisis that began in the second half of 2007. Additionally, due to the declining interest rate environment during the first quarter of 2008, the Bank exercised its right to redeem callable bonds with higher interest rates. The Bank funded the increased advance volume and replaced the debt redemptions through the issuance of discount notes. Finally, during the first quarter of 2008, the Bank increased its leverage through the purchase of MBS, which were primarily funded with discount note issuances.
Although we are primarily liable for our portion of consolidated obligations (i.e. those issued on our behalf), we are also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The par amounts of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable were approximately $1,156.3 billion and $1,133.7 billion at March 31, 2008 and December 31, 2007.
Consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AAA/A-1+ by Standard & Poor’s (S&P). These ratings measure the likelihood of timely payment of principal and interest on the consolidated obligations. Our ability to raise funds in the capital markets as well as our cost of borrowing can be affected by these credit ratings. In April 2008, S&P revised its outlook on the Bank’s individual rating to AAA/Stable/A-1+ from AAA/negative/A-1+ and Moody’s released a credit opinion confirming our current Aaa/P-1 rating, which reflects the performance of the Bank.

 

55


Table of Contents

Other sources of liquidity include cash, earnings on investments and Federal funds purchased, payments collected on advances and mortgage loans, proceeds from the issuance of capital stock, member deposits, securities sold under agreements to repurchase, and current period earnings. Additionally, in the event of significant market disruptions or local disasters, the Bank President or his designee is authorized to establish interim borrowing relationships with other FHLBanks and the Federal Reserve if funds are made available to the FHLBanks during a time of crisis. To provide further access to funding, the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act) authorizes the Secretary of the Treasury to purchase consolidated obligations from all FHLBanks up to an aggregate principal amount of $4.0 billion. This type of funding was not accessed during the three months ended March 31, 2008 or all of 2007.
We had cash and short-term investments with a book value of $4.3 billion at March 31, 2008 compared with $2.4 billion at December 31, 2007. We manage the level of cash and short-term investments according to changes in other asset classes and levels of capital. Additionally, we adjust cash and short-term investments to maintain our target asset-to-capital (leverage) ratio and to manage excess funds.
Our primary use of liquidity is the repayment of consolidated obligations. Other uses of liquidity include issuance of advances, purchase of mortgage loans and investments, repayment of member deposits, redemption or repurchase of capital stock, and payment of dividends.
Liquidity Requirements
Regulatory Requirements-Finance Board regulations mandate three liquidity requirements. First, contingent liquidity sufficient to meet our liquidity needs which shall, at a minimum, cover five business days of inability to access the consolidated obligation debt markets. The following table shows our sources of contingent liquidity to support operations for five business days compared to our liquidity needs at March 31, 2008 and December 31, 2007 (dollars in billions):
                 
    March 31,     December 31,  
    2008     2007  
 
               
Unencumbered marketable assets maturing within one year
  $ 4.3     $ 2.2  
Advances maturing in seven days or less
    8.5       7.5  
Unencumbered assets available for repurchase agreement borrowings
    7.7       6.8  
 
           
 
               
Total
  $ 20.5     $ 16.5  
 
           
 
               
Liquidity needs for five business days
  $ 13.8     $ 10.5  
 
           

 

56


Table of Contents

Second, Finance Board regulations require us to have available at all times an amount greater than or equal to members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The following table shows our compliance with this regulation at March 31, 2008 and December 31, 2007 (dollars in billions):
                 
    March 31,     December 31,  
    2008     2007  
Advances with maturities not exceeding five years
  $ 35.4     $ 31.4  
Deposits in banks or trust companies
          0.1  
 
           
 
               
Total
  $ 35.4     $ 31.5  
 
           
 
               
Deposits1
  $ 1.3     $ 0.9  
 
           
     
1   Amount does not reflect the effect of reclassifications due to FIN 39-1.
Third, Finance Board regulations require us to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in the total consolidated obligations outstanding. The following table shows our compliance with this regulation at March 31, 2008 and December 31, 2007 (dollars in billions):
                 
    March 31,     December 31,  
    2008     2007  
 
               
Total qualifying assets
  $ 70.0     $ 60.6  
Less: pledged assets
          0.2  
 
           
 
               
Total qualifying assets free of lien or pledge
  $ 70.0     $ 60.4  
 
           
 
               
Consolidated obligations outstanding
  $ 64.5     $ 56.1  
 
           

 

57


Table of Contents

Operational and Contingent Liquidity-Bank policy requires that we maintain additional liquidity for day-to-day operational and contingency needs. Contingent liquidity should not be greater than available assets which include cash, money market, agency, and MBS securities. The Bank will maintain contingent liquidity to meet average overnight and one-week advances, meet the largest projected net cash outflow on any day over a projected 90-day period, and maintain repurchase agreement eligible assets of at least twice the largest projected net cash outflow on any day over a projected 90 day period.
The following table shows our contingent liquidity requirement at March 31, 2008 and December 31, 2007 (dollars in billions):
                 
    March 31,     December 31,  
    2008     2007  
 
               
Contingent liquidity requirement
  $ (6.0 )   $ (3.7 )
Available assets
    7.3       5.9  
 
           
 
               
Excess contingent liquidity
  $ 1.3     $ 2.2  
 
           
The Bank was in compliance with its contingent liquidity policy at March 31, 2008.
Capital
Capital Requirements
The FHLBank Act requires that the Bank maintain at all times permanent capital greater than or equal to the sum of its credit, market, and operations risk capital requirements, all calculated in accordance with the Finance Board’s regulations. Only permanent capital, defined as Class B stock and retained earnings, can satisfy this risk based capital requirement. The FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total capital divided by total assets. The FHLBank Act also imposes a five percent minimum leverage ratio based on total capital, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times divided by total assets.

 

58


Table of Contents

For purposes of compliance with the regulatory minimum capital-to-asset and leverage ratios, capital includes all capital stock plus retained earnings and excludes accumulated other comprehensive income. The following table shows the Bank’s compliance with the Finance Board’s capital requirements at March 31, 2008 and December 31, 2007 (dollars in millions):
                                 
    March 31, 2008     December 31, 2007  
    Required     Actual     Required     Actual  
Regulatory capital requirements:
                               
Risk based capital
  $ 574     $ 3,421     $ 578     $ 3,124  
Total capital-to-asset ratio
    4.00 %     4.88 %     4.00 %     5.14 %
Total regulatory capital
  $ 2,803     $ 3,421     $ 2,429     $ 3,124  
Leverage ratio
    5.00 %     7.32 %     5.00 %     7.71 %
Leverage capital
  $ 3,504     $ 5,132     $ 3,036     $ 4,687  
The decrease in the regulatory capital-to-asset ratio from 5.14 percent at December 31, 2007 to 4.88 percent at March 31, 2008, was primarily due to the increase in our assets at March 31, 2008. Although the ratio declined, it exceeds the regulatory requirement and we do not expect it to decline below that requirement. The Bank’s regulatory capital-to-asset ratio at March 31, 2008 and December 31, 2007 would have been 4.78 percent and 5.00 percent if all excess capital stock had been repurchased.
Capital Stock
We had 30.1 million shares of capital stock outstanding at March 31, 2008 compared with 27.2 million shares outstanding at December 31, 2007. We issued 13.3 million shares to members and repurchased 10.4 million shares from members during the three months ended March 31, 2008. Approximately 82 percent and 86 percent of our capital stock outstanding at March 31, 2008 and December 31, 2007 was activity-based stock that fluctuates primarily with the outstanding balances of advances made to members and mortgage loans purchased from members.
The Bank’s capital stock balances categorized by type of financial services company, as well as capital stock held by former members, are noted in the following table at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
Institutional Entity   2008     2007  
 
               
Commercial Banks
  $ 1,828     $ 1,556  
Insurance Companies
    931       925  
Savings and Loan Associations and Savings Banks
    174       160  
Credit Unions
    80       76  
Former Members
    42       46  
 
           
 
               
Total regulatory capital stock
  $ 3,055     $ 2,763  
 
           

 

59


Table of Contents

Our members are required to maintain a certain minimum capital stock investment in the Bank. The minimum investment requirements are designed so that we remain adequately capitalized as member activity changes. To ensure we remain adequately capitalized within ranges established in the capital plan, these requirements may be adjusted upward or downward by the Bank’s Board of Directors. At March 31, 2008 and December 31, 2007, approximately 92 and 89 percent of our total capital was capital stock.
Members are required to purchase and maintain activity-based capital stock to support outstanding mortgage loans and advances. Changes in mortgage loan and advance balances are accompanied by changes in capital stock, unless the member already owns excess activity-based stock. Beginning July 1, 2003, we required members to maintain activity-based capital stock amounting to 4.45 percent of outstanding advances and mortgage loans. Advances and mortgage loans acquired before July 1, 2003 were subject to the capital requirements specified in the contracts in effect at the time the assets were purchased.
Stock owned by members in excess of their minimum investment requirements is known as excess stock. The Bank’s excess capital stock, including amounts classified as mandatorily redeemable capital stock, were $75.0 million and $95.1 million at March 31, 2008 and December 31, 2007.
Mandatorily Redeemable Capital Stock
Although the mandatorily redeemable capital stock is not included in capital for financial reporting purposes, the Finance Board requires that such outstanding stock be considered capital for determining compliance with regulatory requirements.
At March 31, 2008, we had $42.8 million in capital stock subject to mandatory redemption from 43 members and former members. At December 31, 2007, we had $46.0 million in capital stock subject to mandatory redemption from 40 members and former members. This amount has been classified as mandatorily redeemable capital stock in the statements of condition in accordance with Statement of Financial Account Standards (SFAS) 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The following table shows the amount of capital stock subject to mandatory redemption by the time period in which we anticipate redeeming the capital stock based on our practices at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
Year of Redemption   2008     2007  
 
               
Due in one year or less
  $ 14     $ 14  
Due after one year through two years
    14       16  
Due after two years through three years
    8       9  
Due after three years through four years
    2       2  
Due after four years through five years
    4       4  
Thereafter
    1       1  
 
           
 
               
Total
  $ 43     $ 46  
 
           

 

60


Table of Contents

A majority of the capital stock subject to mandatory redemption at March 31, 2008 and December 31, 2007 was due to voluntary termination of membership as a result of a merger or consolidation into a nonmember or into a member of another FHLBank. The remainder of mandatorily redeemable capital stock was due to members requesting partial repurchases of excess stock. These partial repurchases amounted to $0.3 million and $0.4 million at March 31, 2008 and December 31, 2007.
Dividends
We paid cash dividends of $25.7 million during the three months ended March 31, 2008 compared to $20.1 million during the same period of 2007. The annualized dividend rate paid during the three months ended March 31, 2008 was 4.50 percent compared with 4.25 percent paid during the same period in 2007. The increase was driven by the Bank’s financial performance during the dividend period. The fourth quarter 2007 dividend paid during first quarter of 2008 was driven by higher-than-expected asset balances and wider spreads on earning assets due to market conditions. This absolute dividend level may not be sustainable long-term if interest rates remain at or decline from current levels and/or if the Bank’s assets shrink and spreads narrow as market conditions stabilize. The dividend level is also a function of the desired level of retained earnings.
Critical Accounting Policies and Estimates
Fair Values
The Bank carries certain assets and liabilities on the Statement of Condition at fair value, including investments classified as available-for-sale and derivatives. The Bank adopted SFAS 157, Fair Value Measurements (SFAS 157), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes fair value hierarchy based on the inputs used to measure fair value and requires additional disclosures for instruments carried at fair value on the Statement of Condition. SFAS 157 defines “fair value” as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, or an exit price.
Fair values play an important role in the valuation of certain of the assets, liabilities, and hedging transactions of the Bank. Fair values are based on quoted market prices or market-based prices, if such prices are available. If quoted market prices or market-based prices are not available, fair values are determined based on valuation models that use either:
    discounted cash flows, using market estimates of interest rates and volatility; or
    dealer prices; or
    prices of similar instruments.

 

61


Table of Contents

Pricing models and their underlying assumptions are based on the best estimates of the Bank with respect to:
    discount rates;
    prepayments;
    market volatility; and
    other factors.
These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, may result in materially different fair values.
The Bank categorizes our financial instruments carried at fair value into a three-level classification in accordance with SFAS 157. The valuation hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. For a discussion of our fair value measurement techniques, see our annual report on Form 10-K filed on March 14, 2008.
For further discussion regarding how the Bank measures financial assets and liabilities at fair value, see Note 11, Estimated Fair Values, to the financial statements.
Legislative and Regulatory Developments
Finance Board’s Temporary Increase on Purchase of MBS
On March 24, 2008, the Finance Board passed a resolution authorizing the FHLBanks to increase their purchases of agency MBS, effective immediately. Pursuant to the resolution, the limit on the FHLBank’s MBS investment authority would increase from 300 percent of capital to 600 percent of capital for two years. The resolution requires an FHLBank to notify the Finance Board prior to its first acquisition under the expanded authority and include in its notification a description of the risk management principles underlying its purchase. The expanded authority is limited to Fannie Mae and Freddie Mac securities. The securities purchased under the increased authority must be backed by mortgages that were originated after January 1, 2008 and are consistent with Federal bank regulatory guidance on nontraditional and subprime mortgage lending. The actual increase will depend on portfolio management decisions made by the Bank and is subject to the Bank meeting capital adequacy and other safety and soundness standards. The Board approved a strategy for the Bank to potentially increase its investments in additional agency MBS in accordance with the Finance Board resolution. The Bank intends to provide notification of its strategy to the Finance Board prior to exercising the expanded investment authority.

 

62


Table of Contents

Proposed Affordable Housing Program Regulation Amendment
On April 16, 2008, the Finance Board published a proposed rule that would temporarily add authority for FHLBanks to use their AHP direct set-aside subsidy to establish a program targeted to refinancing or restructuring existing nontraditional mortgage loans held by members of their affiliates. The proposed rule is subject to a 60-day comment period, and the final rule, if any, approved by the Finance Board may be different from the proposed rule.
Proposal to Treat Municipal Bonds Guaranteed by FHLBanks as Tax-Exempt Bonds
On April 9, 2008, the House of Representatives’ Ways and Means Committee approved a board housing tax bill that included a provision to temporarily allow municipal, industrial, and other private activity bonds that are guaranteed by standby letters of credit by the FHLBanks to be eligible for treatment as tax-exempt bonds regardless of whether the bonds are used to finance housing programs. Currently, municipal bonds that are guaranteed by the FHLBanks cannot qualify as tax-exempt bonds unless the bonds are used to finance housing programs. The House is expected to consider this legislation as part of a broader housing bill in May. The Senate is also expected to consider similar housing legislation in the near future, though it is unclear whether such legislation will include a similar FHLBank provision as in the House version. Ultimately, given the uncertain nature of the legislative process, it is not possible to predict the chances of this legislation being enacted.
Proposed Changes to GSE Regulation
On May 22, 2007, the House of Representatives passed H.R. 1427, the Federal Housing Finance Reform Act of 2007 (HR 1427). HR 1427 would, among other things, establish a new regulator for the housing GSEs. The Senate Banking Committee has not held a hearing or passed GSE reform legislation at this time.
It is impossible to predict whether the Senate will approve the above legislation and whether any such change in regulatory structure will be signed into law. Further, it is impossible to predict when any such change would go into effect if it were to be enacted and what effect the legislation would ultimately have on the Finance Board or the FHLBanks.
Risk Management
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, and business risk. Our primary objective is to manage assets, liabilities, and derivative exposures in ways that protect the par redemption value of capital stock from risks, including fluctuations in market interest rates and spreads. The Bank’s risk management strategies and limits decrease volatility in earnings. We periodically evaluate these strategies and limits in order to respond to changes in the Bank’s financial position and general market conditions. This periodic evaluation may continue to result in changes to the Bank’s risk management policies and/or risk measures.
The Bank’s Board of Directors determined that the Bank should operate under a risk management philosophy of maintaining an AAA rating. An AAA rating provides the Bank with ready access to funds in the capital markets. In line with the above objective, the Financial Risk Management Policy (FRMP) establishes risk measures, with limits consistent with the maintenance of an AAA rating, to monitor the Bank’s liquidity risk, market risk, and capital adequacy. The following is a list of the risk measures in place at March 31, 2008:
     
Market Risk:
  Mortgage Portfolio Market Value
 
  Market Value of Capital Stock
Liquidity Risk:
  Contingent Liquidity
Capital Adequacy:
  Economic Capital Ratio

 

63


Table of Contents

The Bank’s Board of Directors approved an amended FRMP that became effective May 1, 2008. The amended FRMP will provide the Bank with the ability to continue a robust risk management practice allowing for flexibility to make rational decisions in stressed interest rate environments. The amended FRMP has fewer policy limits as the policy limits have been replaced with management action triggers (MATs). The MATs require the Bank to closely monitor and measure the risks inherent in the Bank’s balance sheet but provide more flexibility to react prudently. Market Value of Capital Stock (MVCS) remains in the amended FRMP as the Bank’s key risk measure with associated policy limits.
The policy limits for MVCS will be 5 percent and 10 percent declines from base case in the up and down 100 and 200 basis point parallel interest rate shift scenarios, respectively. Any breach of policy limits requires an immediate action to bring the exposure back within policy limits, as well as a report to the Board of Directors. Measures outside MATs will be analyzed to determine the source of the issue, and if necessary, action will be taken immediately. The Chief Risk Officer will review the MATs analysis and approve any course of action as well as report the occurrence to the Risk Management Committee of the Board.
Market Risk/Capital Adequacy
We define market risk as the risk that net interest income or MVCS will change as a result of changes in market conditions such as interest rates, spreads, and volatilities. Interest rate risk was the predominant type of market risk exposure throughout the three months ended March 31, 2008 and throughout 2007. Our FRMP is designed to provide an asset and liability management framework to respond to changes in market conditions while minimizing balance sheet stress and income volatility. Bank management and the Board of Directors routinely review both the policy limits and the actual exposures to verify the interest rate risk in our balance sheet remains at prudent and reasonable levels.
The goal of the Bank’s interest rate risk management strategy is to manage interest rate risk by setting and operating within an appropriate framework and limits. The Bank’s general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities and hedges, which, taken together, limit the Bank’s expected exposure to market/interest rate risk. Management regularly monitors the Bank’s sensitivity to interest rate changes by monitoring its market risk measures in parallel and non-parallel interest rate shifts. Interest rate exposure is managed by the use of appropriate funding instruments and by employing hedging strategies. Hedging may occur for a single transaction or group of transactions as well as for the overall portfolio. The Bank’s hedge positions are evaluated regularly and are adjusted as deemed necessary by management. The Bank’s key market risk and capital adequacy measures are quantified in the following discussion.
Market Value of Capital Stock
MVCS, is defined by the Bank as the present value of assets minus the present value of liabilities plus the net present value of derivatives. See the “Net Market Value of Capital Stock” section in the Bank’s annual report on Form 10-K for additional information.

 

64


Table of Contents

Our FRMP states that the MVCS should not be lower than the base case by more than $5 per share in the up and down 100 basis points parallel interest rate shift scenarios and by more than $10 per share in the up and down 200 basis points parallel rate shift scenarios.
The following tables show our MVCS and the dollar per share change from base case, based on outstanding shares including shares classified as mandatorily redeemable, assuming instantaneous shifts in interest rates at each quarter-end during 2008 and 2007 (dollars in millions except dollars per share).
                                                                         
    Market Value of Capital Stock  
    Down 200     Down 150     Down 100     Down 50     Base Case     Up 50     Up 100     Up 150     Up 200  
2008
                                                                       
March
  $ 2,377     $ 2,501     $ 2,618     $ 2,709     $ 2,748     $ 2,734     $ 2,675     $ 2,625     $ 2,568  
2007
                                                                       
December
    2,434       2,465       2,509       2,567       2,608       2,605       2,609       2,621       2,630  
September
    2,215       2,225       2,235       2,252       2,258       2,246       2,222       2,188       2,148  
June
    1,936       1,976       1,978       1,982       1,984       1,979       1,966       1,947       1,922  
March
    1,807       1,898       1,956       1,990       1,992       1,969       1,933       1,890       1,842  
                                                                         
    Dollar Per Share Change from Base Case  
    Down 200     Down 150     Down 100     Down 50     Base Case     Up 50     Up 100     Up 150     Up 200  
2008
                                                                       
March
  $ (12.13 )   $ (8.07 )   $ (4.25 )   $ (1.28 )   $     $ (0.46 )   $ (2.39 )   $ (4.01 )   $ (5.90 )
2007
                                                                       
December
  $ (6.30 )   $ (5.18 )   $ (3.59 )   $ (1.50 )   $     $ (0.11 )   $ 0.03     $ 0.47     $ 0.79  
September
  $ (1.81 )   $ (1.41 )   $ (0.97 )   $ (0.24 )   $     $ (0.49 )   $ (1.53 )   $ (2.95 )   $ (4.60 )
June
  $ (2.40 )   $ (0.42 )   $ (0.32 )   $ (0.13 )   $     $ (0.25 )   $ (0.90 )   $ (1.87 )   $ (3.09 )
March
  $ (9.53 )   $ (4.84 )   $ (1.83 )   $ (0.10 )   $     $ (1.17 )   $ (3.02 )   $ (5.26 )   $ (7.70 )
The increase in MVCS at March 31, 2008 compared with December 31, 2007 was primarily attributable to an increase in capital stock requirements to support member activities related to advances. The increase was offset by increased OAS on our mortgage loans, and increased volatility in the market. To protect the MVCS from large interest rate swings, we use hedging transactions, such as entering into or canceling interest rate swaps on existing debt and altering the funding structures of new mortgage purchases.
At March 31, 2008 the Bank’s MVCS fell below the $10 loss threshold in the down 200 basis point rate shift scenario. However, in February 2008, management received a temporary suspension of all policy limits pertaining to the down 200 basis point rate shift scenario from the Board of Directors due to the low rate environment as defined by the Finance Board.

 

65


Table of Contents

Capital Adequacy
The capital adequacy risk measure ensures we maintain our required capital-to-asset ratio on a market value basis under a wide range of market scenarios. An adequate capital position is necessary for providing safe and sound operations of the Bank and in protecting our AAA credit rating.
Economic capital ratio (ECR) is defined as market value of equity divided by market value of assets and is required to be greater than four percent in the base case and up and down 200 basis points parallel interest rate shift.
The following table shows the ECR assuming parallel interest rate shifts up and down 200 basis points in 100 basis point increments at each quarter-end during 2008 and 2007.
                                         
    Economic Capital Ratio  
    Down 200     Down 100     Base Case     Up 100     Up 200  
2008
                                       
March
    3.36 %     3.73 %     3.95 %     3.89 %     3.78 %
2007
                                       
December
    3.94 %     4.11 %     4.31 %     4.36 %     4.45 %
September
    4.11 %     4.20 %     4.29 %     4.28 %     4.21 %
June
    4.05 %     4.19 %     4.26 %     4.29 %     4.26 %
March
    4.16 %     4.54 %     4.68 %     4.62 %     4.48 %
During the three months ended March 31, 2008, the Bank increased its leverage ratio to 21.5 at March 31, 2008 from 19.9 at December 31, 2007. The increase in our leverage ratio had a negative impact on the Bank’s ECR, which was further exacerbated by market conditions such as an increase in mortgage OAS and market volatility. The overall effect led to a decrease in the ECR for the base case at March 31, 2008 when compared to December 31, 2007.
At March 31, 2008 the Bank’s ECR fell below the 4.00 percent threshold in all parallel interest rate shift scenarios. At December 31, 2007 the Bank’s ECR fell below the 4.00 percent threshold in the down 200 basis point rate shift. Upon implementation of the FRMP, effective June 1, 2007, the Bank expected to adhere to the limits established for the ECR. However, due to market conditions during the latter half of 2007 and anticipated increased member activities, management determined that strict compliance with the ECR limits would not be prudent and would deter the Bank from fulfilling mission related initiatives. Therefore, a waiver was requested and approved by the Bank’s Board of Directors. The waiver remained effective throughout the first quarter of 2008. The Bank continued to measure the ECR and relied on additional risk metrics to ensure the Bank’s risk profile was reasonable given the market conditions and member activity.

 

66


Table of Contents

Liquidity Risk
See “Liquidity” beginning on page 55 for additional detail of our liquidity management.
Credit Risk
We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. The Bank’s primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.
Advances
We engage in secured lending activities with eligible borrowers. Credit risk arises from the possibility that the collateral pledged to us is insufficient to cover the obligations of a borrower in default.
We manage credit risk by securing borrowings with sufficient collateral acceptable to us, monitoring borrower creditworthiness through internal and independent third-party analysis, and performing collateral review and valuation procedures to verify the sufficiency of pledged collateral. We are required by law to make advances solely on a secured basis and have never experienced a credit loss on an advance since our inception. The Bank maintains policies and practices to monitor our exposure and take action where appropriate. In addition, the Bank has the ability to call for additional or substitute collateral during the life of a loan to protect its security interest.
We assign discounted values to collateral pledged to the Bank based on its relative risk. At March 31, 2008 and December 31, 2007, borrowers pledged $78 billion and $73 billion of collateral (net of applicable discount or margin factors) to support $48 billion and $42 billion of advances and other activities with the Bank. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate liquidity availability and to borrow in the future.
At March 31, 2008 and December 31, 2007, seven borrowers had outstanding advances greater than $1.0 billion. These advance holdings represented approximately 58 percent of the total par value of advances outstanding at March 31, 2008 and December 31, 2007. For further discussion on our largest borrowers of advances, see “Advances” on page 46.

 

67


Table of Contents

The following table shows the dollar and percentage composition (net of applicable discount and margin factors) of collateral pledged to the Bank at March 31, 2008 and December 31, 2007 (dollars in billions):
                                 
    March 31,     December 31,  
    2008     2007  
Collateral Type   Dollars     Percent     Dollars     Percent  
 
                               
Residential mortgage loans
  $ 31.0       39.8 %   $ 29.1       39.9 %
Other real estate related collateral
    18.5       23.7       17.3       23.6  
Investment securities/insured loans
    27.3       35.1       25.8       35.2  
Secured small business, small farm, and small agribusiness loans
    1.1       1.4       1.0       1.3  
 
                       
 
                               
Total collateral
  $ 77.9       100.0 %   $ 73.2       100.0 %
 
                       
In light of recent market conditions, the Bank recognizes the additional risk that may be inherent in its collateral. At March 31, 2008, the Bank does not believe we have material exposure to advance collateral.
Mortgage Assets
Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by numerous characteristics, including loan type, down payment amount, borrower’s credit history, and other factors such as home price appreciation. We are exposed to mortgage asset credit risk through our participation in the MPF program and certain investment activities.
We offer a variety of MPF products to meet the differing needs of our members. The Bank allows participating members to select the products they want to use. These products include Original MPF, MPF 100, MPF 125, MPF Plus, and Original MPF Government. For additional discussion of our mortgage assets and MPF products, see “Mortgage Assets” in the Bank’s annual report on Form 10-K.

 

68


Table of Contents

The following table presents our MPF portfolio by product type at March 31, 2008 and December 31, 2007 at par value (dollars in billions):
                                 
    March 31, 2008     December 31, 2007  
Product Type   Dollars     Percent     Dollars     Percent  
 
                               
Original MPF
  $ 0.2       1.9 %   $ 0.2       1.9 %
MPF 100
    0.1       0.9       0.1       0.9  
MPF 125
    1.4       13.0       1.2       11.0  
MPF Plus
    8.5       78.7       8.8       80.7  
 
                       
Total conventional loans
    10.2       94.5       10.3       94.5  
 
                               
Government-insured loans
    0.5       4.6       0.5       4.6  
 
                       
 
                               
Total mortgage loans
    10.7       99.1       10.8       99.1  
 
                               
MPF Shared Funding recorded in investments
    0.1       0.9       0.1       0.9  
 
                       
 
                               
Total MPF related assets
  $ 10.8       100.0 %   $ 10.9       100.0 %
 
                       
The MPF Shared Funding Certificates included in the preceding table are mortgage-backed certificates created from conventional conforming mortgages using a senior/subordinated tranche structure. The Bank’s investment is recorded in held-to-maturity securities. The following table shows our Shared Funding Certificates and credit ratings at March 31, 2008 and December 31, 2007 (dollars in millions):
                 
    March 31,     December 31,  
Credit Rating   2008     2007  
 
               
AAA
  $ 49     $ 51  
AA
    3       2  
 
           
 
               
Total MPF Shared Funding Certificates
  $ 52     $ 53  
 
           
We also manage the credit risk on our mortgage loan portfolio by monitoring portfolio performance and the creditworthiness of our participating members. All loans purchased by the Bank must comply with underwriting guidelines which follow standards generally required in the secondary mortgage market.

 

69


Table of Contents

We monitor the delinquency levels of our mortgage loan portfolio on a monthly basis. A summary of our delinquencies at March 31, 2008 follows (dollars in millions):
                         
    Unpaid Principal Balance  
            Government-        
    Conventional     Insured     Total  
 
                       
30 days
  $ 69     $ 15     $ 84  
60 days
    16       3       19  
90 days
    6       2       8  
Greater than 90 days
    1       1       2  
Foreclosures and bankruptcies
    41       4       45  
 
                 
 
                       
Total delinquencies
  $ 133     $ 25     $ 158  
 
                 
 
                       
Total mortgage loans outstanding
  $ 10,249     $ 448     $ 10,697  
 
                 
 
                       
Delinquencies as a percent of total mortgage loans
    1.3 %     5.5 %     1.5 %
 
                 
 
                       
Delinquencies 90 days and greater plus foreclosures and bankruptcies as a percent of total mortgage loans
    0.4 %     1.1 %     0.4 %
 
                 
A summary of our delinquencies at December 31, 2007 follows (dollars in millions):
                         
    Unpaid Principal Balance  
            Government-        
    Conventional     Insured     Total  
 
                       
30 days
  $ 83     $ 20     $ 103  
60 days
    20       4       24  
90 days
    6       2       8  
Greater than 90 days
    1       1       2  
Foreclosures and bankruptcies
    41       4       45  
 
                 
 
                       
Total delinquencies
  $ 151     $ 31     $ 182  
 
                 
 
                       
Total mortgage loans outstanding
  $ 10,330     $ 461     $ 10,791  
 
                 
 
                       
Delinquencies as a percent of total mortgage loans
    1.5 %     6.8 %     1.7 %
 
                 
 
                       
Delinquencies 90 days and greater plus foreclosures and bankruptcies as a percent of total mortgage loans
    0.4 %     1.1 %     0.4 %
 
                 
For additional information related to delinquent mortgage loans, see “Mortgage Assets” in the Bank’s annual report on Form 10-K.

 

70


Table of Contents

The allowance for credit losses was $0.2 million and $0.3 million at March 31, 2008 and December 31, 2007. The Bank recorded charge-offs of $68,000 and $19,000 during the three month period ended March 31, 2008 and December 31, 2007. The Bank did not have any recoveries during the three months ended March 31, 2008 and December 31, 2007. We increased our provision for credit losses by $69,000 for the three months ended December 31, 2007. As a result of our quarterly 2008 allowance for credit losses reviews, the Bank determined that an allowance for credit losses of $0.2 million was sufficient to cover projected losses in our MPF portfolio. Our charge-off activity has historically been small relative to the loan and allowance balances as our mortgage loan portfolio is a relatively new portfolio.
The Bank’s management of credit risk in the MPF program involves several layers of legal loss protection that are defined in agreements among the Bank and its participating members. Though the nature of these layers of loss protection differs slightly among the MPF products we offer, each product contains similar credit risk structures. For conventional loans, the credit risk structure contains the following layers of loss protections in order of priority:
    Homeowner equity.
    Primary Mortgage Insurance for all loans with home owner equity of less than 20 percent of the original purchase price or appraised value.
    First Loss Account (FLA) established by the Bank. FLA is a memorandum account for tracking losses and such losses are either recoverable from future payments of performance based credit enhancement fees to the member or absorbed by the Bank.
    Credit enhancements provided by participating members.
    Losses greater than credit enhancements provided by members are the responsibility of the Bank.
At March 31, 2008 and December 31, 2007, the Bank had $31.6 million and $27.3 million of nonaccrual loans. Interest income that was contractually owed to the Bank but not received on nonaccrual loans was $0.3 million for the three months ended March 31, 2008 and 2007. At March 31, 2008 and December 31, 2007, the Bank’s other assets included $6.3 million and $5.6 million of real estate owned.
In accordance with the Bank’s allowance for credit losses policy, the allowance estimate is based on historical loss experience, current delinquency levels, economic data, and other relevant factors using a pooled loan approach. On a regular basis, we monitor delinquency levels, loss rates, and portfolio characteristics such as geographic concentration, loan-to-value ratios, property types, and loan age. Other relevant factors evaluated in our methodology include changes in national/local economic conditions, changes in the nature of the portfolio, changes in the portfolio performance, and the existence and effect of geographic concentrations. The Bank monitors and reports portfolio performance regarding delinquency, nonperforming loans, and net charge-offs monthly. Adjustments to the allowance for credit losses are considered quarterly based upon charge-offs, current calculations for probability of default and loss severity, as well as the other relevant factors discussed above. Management periodically reports the status of the allowance for credit losses on mortgage loans to the Board of Directors. Management believes the Bank has policies and practices in place to manage this credit risk appropriately.

 

71


Table of Contents

As part of the mortgage portfolio, we also invest in MBS. Finance Board regulations allow us to invest in securities guaranteed by the U.S. government, government-sponsored housing enterprises, and other MBS that are rated Aaa by Moody’s, AAA by S&P, or AAA by Fitch on the purchase date. We are exposed to credit risk to the extent that these investments fail to perform adequately. We do ongoing analysis to evaluate the investments and creditworthiness of the issuers, trustees, and servicers for potential credit issues.
At March 31, 2008, we owned $7.7 billion of MBS, of which $7.6 billion were guaranteed by the U.S. government or issued by GSEs and $0.1 billion were private label securities backed by residential mortgage loans. At December 31, 2007, we owned $6.8 billion of MBS, of which $6.7 billion were guaranteed by the U.S. government or issued by GSEs and $0.1 billion were private label securities backed by residential mortgage loans. Our private label securities were all rated AA or better by a nationally recognized statistical rating organization (NRSRO) and were not backed by subprime loans or non traditional loans.
The Bank also invests in state housing finance agency bonds. At March 31, 2008 and December 31, 2007, we had $73.5 million and $74.0 million of state agency bonds rated AA or higher.
Investments
We maintain an investment portfolio to provide liquidity and promote asset diversification. Finance Board regulations and policies adopted by the Board of Directors limit the type of investments we may purchase.

 

72


Table of Contents

The largest unsecured exposure to any single short-term counterparty excluding GSE was $430 million at March 31, 2008 and $250 million at December 31, 2007. The following tables show our unsecured credit exposure to investment counterparties (including accrued interest receivable) at March 31, 2008 and December 31, 2007 (dollars in millions):
                                                 
    March 31, 2008  
    Certificates of     Commercial     Overnight     Term     Other        
Credit Rating1   Deposit     Paper     Federal Funds     Federal Funds     Obligations2     Total  
 
                                               
AAA
  $     $     $     $     $ 249     $ 249  
AA
          430       3,000             35       3,465  
A
                615             9       624  
 
                                   
 
                                               
Total
  $     $ 430     $ 3,615     $     $ 293     $ 4,338  
 
                                   
                                                 
    December 31, 2007  
    Certificates of     Commercial     Overnight     Term     Other        
Credit Rating1   Deposit     Paper     Federal Funds     Federal Funds     Obligations2     Total  
 
                                               
AAA
  $     $     $     $     $ 219     $ 219  
AA
          200             780       45       1,025  
A
    101             580       453       17       1,151  
 
                                   
 
                                               
Total
  $ 101     $ 200     $ 580     $ 1,233     $ 281     $ 2,395  
 
                                   
     
1   Credit rating is the lowest of S&P, Moody’s, and Fitch ratings stated in terms of the S&P equivalent.
 
2   Other obligations represent obligations in GSE and derivatives.

 

73


Table of Contents

Derivatives
Most of our hedging strategies use over-the-counter derivative instruments that expose us to counterparty credit risk because the transactions are executed and settled between two parties. When an over-the-counter derivative has a market value above zero, the counterparty owes that value to the Bank over the remaining life of the derivative. Credit risk arises from the possibility the counterparty will not be able to fulfill its commitment to pay the amount owed to us.
The Bank manages this credit risk by spreading its transactions among many highly rated counterparties, by entering into collateral exchange agreements with counterparties that include minimum collateral thresholds, and by monitoring its exposure to each counterparty at least monthly. In addition, all of the Bank’s collateral exchange agreements include master netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. The collateral exchange agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above the minimum thresholds.
Excluding mortgage delivery commitments that were fully collateralized, we had 28 and 26 active derivative counterparties at March 31, 2008 and December 31, 2007, most of which were large highly rated banks and broker-dealers. At March 31, 2008 and December 31, 2007, five counterparties represented approximately 60 percent and 55 percent, respectively, of the total notional amount of outstanding derivative transactions, and all five had a credit rating of A or better. At March 31, 2008, one counterparty with an AA credit rating, Deutsche Bank, represented $15.8 million or approximately 36.3 percent of our net derivatives exposure after collateral. At December 31, 2007, one counterparty with an AA credit rating, JP Morgan Chase Bank, N.A., represented $17.1 million or approximately 28 percent of our net derivatives exposure after collateral. In addition, we had mortgage delivery commitment derivatives with notional amounts of $103.4 million at March 31, 2008 compared with $23.4 million at December 31, 2007, which were fully collateralized. Participating members are assessed a fee for failing to fulfill their mortgage delivery commitments.

 

74


Table of Contents

The following tables show our derivative counterparty credit exposure at March 31, 2008 and December 31, 2007, excluding mortgage delivery commitments and after applying netting agreements and collateral (dollars in millions):
                                         
    March 31, 2008  
                    Total     Value     Exposure  
    Active     Notional     Exposure at     of Collateral     Net of  
Credit Rating1   Counterparties     Amount2     Fair Value3     Pledged     Collateral4  
 
                                       
AAA
    3     $ 860     $     $     $  
AA
    21       35,262       79       45       34  
A
    3       5,758       57       48       9  
BBB
    1       281                    
 
                             
 
                                       
Total
    28     $ 42,161     $ 136     $ 93     $ 43  
 
                             
                                         
    December 31, 2007  
                    Total     Value     Exposure  
    Active     Notional     Exposure at     of Collateral     Net of  
Credit Rating1   Counterparties     Amount2     Fair Value3     Pledged     Collateral4  
 
                                       
AAA
    3     $ 1,485     $     $     $  
AA
    19       33,779       67       23       44  
A
    4       5,594       25       8       17  
 
                             
 
                                       
Total
    26     $ 40,858     $ 92     $ 31     $ 61  
 
                             
     
1   Credit rating is the lower of the S&P, Moody’s, and Fitch ratings stated in terms of the S&P equivalent.
 
2   Notional amounts serve as a factor in determining periodic interest amounts to be received and paid and generally do not represent actual amounts to be exchanged or directly reflect our exposure to counterparty credit risk.
 
3   For each counterparty, this amount includes derivatives with a net positive market value including the related accrued interest receivable/payable (net).
 
4   Amount equals total exposure at fair value less value of collateral pledged as determined at the counterparty level.
Operational Risk
We define operational risk as the risk of loss resulting from inadequate or failed internal processes, people, systems, or external events. Operational risk is inherent in all of our business activities and processes. Management has established policies and procedures to reduce the likelihood of operational risk and designed our annual risk assessment process to provide ongoing identification, measurement, and monitoring of operational risk. For additional information related to operational risk, see “Operational Risk” in the Bank’s annual report on Form 10-K.

 

75


Table of Contents

Business Risk
We define business risk as the risk of an adverse impact on the Bank’s profitability resulting from external factors that may occur in both the short- and long-term. Business risk includes political, strategic, reputation, regulatory, and/or environmental factors, many of which are beyond our control. We control business risk through strategic and annual business planning and monitoring the Bank’s external environment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See “Market Risk” beginning on page 64 and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Bank’s executive management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted within the time periods specified in the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Bank’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
The Bank’s management has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the President and Chief Executive Officer and Chief Financial Officer as of the end of the quarterly period covered by this report. Based on that evaluation, the Bank’s President and Chief Executive Officer and Chief Financial Officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

 

76


Table of Contents

Internal Control Over Financial Reporting
For the first quarter of 2008, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
Item 4T. Controls and Procedures
Not applicable.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently aware of any pending or threatened legal proceedings against the Bank that could have a material adverse effect on its financial condition, results of operations, or cash flows.
Item 1A. Risk Factors
The following information should be read in conjunction with the risk factors and related information previously disclosed in the Bank’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 14, 2008 for the year ended December 31, 2007.
We could be adversely affected by Credit rating downgrades to our mortgage insurance providers
The Bank’s MPF Program uses eight mortgage insurance companies to provide primary mortgage insurance or supplemental mortgage insurance under its various programs. The Bank closely monitors the financial condition of these mortgage insurers. All providers are required to maintain a credit rating of AA- or better and are reviewed at least annually by the Bank’s Credit Risk Committee or more frequently as circumstances warrant.
At April 30, 2008, four of the Bank’s mortgage insurance providers have had their external ratings downgraded below AA- for claims paying ability or insurer financial strength by one or more NRSROs. The Bank had total credit exposure to these mortgage insurance providers of $124.2 million at April 30, 2008. Rating downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to reimburse the Bank for claims under insurance policies. If a mortgage insurer fails to fulfill its obligations, the Bank may bear the full loss of the borrower default on the related mortgage loans, subject to credit risk sharing arrangements with PFIs. To date, downgrades have not had a material impact on the operation of the Bank’s MPF Program; however, the Bank continues to monitor the mortgage insurer’s credit quality.

 

77


Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.

 

78


Table of Contents

Item 6. Exhibits
3.1   Organization Certificate of the Federal Home Loan Bank of Des Moines dated October 13, 1932.*
 
3.2   Bylaws of the Federal Home Loan Bank of Des Moines effective January 12, 2006.*
 
4.1   Federal Home Loan Bank of Des Moines Capital Plan dated July 8, 2002, approved by the Federal Housing Finance Board July 10, 2002.*
 
4.2   Reserve Capital Policy effective August 1, 2006 and as amended August 24, 2006.**
 
31.1   Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certification of the executive vice president and chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification of the president and chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2   Certification of the executive vice president and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
*   Incorporated by reference to the correspondingly numbered exhibit to our Form 10 filed with the Securities and Exchange Commission on May 12, 2006.
 
**   Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K furnished to the Securities and Exchange Commission on August 30, 2006.

 

79


Table of Contents

SIGNATURE
Pursuant to the requirements of Section 12 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 DES MOINES
(Registrant)
 
  Date:   May 12, 2008  
 
  By:   /s/ Richard S. Swanson  
    Richard S. Swanson   
    President and Chief Executive Officer   
 

 

80


Table of Contents

EXHIBIT INDEX
     
Exhibit    
Number   Description
 
   
31.1
  Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of the executive vice president and chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of the president and chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of the executive vice president and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

81