Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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
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o |
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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)
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Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
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42-6000149
(I.R.S. employer identification number) |
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Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
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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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
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Shares outstanding
as of April 30, 2008 |
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Class B Stock, par value $100
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31,478,501 |
PART
1—FINANCIAL INFORMATION
Item 1. Financial Statements
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except shares)
(Unaudited)
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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and due from banks |
|
$ |
21,705 |
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$ |
58,675 |
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Interest-bearing deposits |
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|
126 |
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|
100,136 |
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Federal funds sold |
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3,615,000 |
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1,805,000 |
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Investments |
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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) |
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4,460,954 |
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|
3,433,640 |
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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) |
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4,000,853 |
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|
3,905,017 |
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Advances (Note 5) |
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47,092,228 |
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40,411,688 |
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Mortgage loans held for portfolio, net of allowance for credit losses on mortgage
loans of $232 at March 31, 2008 and $300 at December 31, 2007 (Note 6) |
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10,706,516 |
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10,801,695 |
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Accrued interest receivable |
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|
111,319 |
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|
129,758 |
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Premises and equipment, net |
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|
6,793 |
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6,966 |
|
Derivative assets (Note 7) |
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|
43,849 |
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60,468 |
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Other assets |
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22,540 |
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22,563 |
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Total assets |
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$ |
70,081,883 |
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$ |
60,735,606 |
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LIABILITIES AND CAPITAL |
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LIABILITIES |
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Deposits |
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Interest-bearing |
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$ |
1,177,283 |
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$ |
841,762 |
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Noninterest-bearing demand |
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40,697 |
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|
20,751 |
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Total deposits |
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1,217,980 |
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|
862,513 |
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Securities sold under agreements to repurchase |
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— |
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200,000 |
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Consolidated obligations, net (Note 8) |
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|
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Discount notes |
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32,365,251 |
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21,500,946 |
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Bonds |
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32,165,475 |
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34,564,226 |
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Total consolidated obligations, net |
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64,530,726 |
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56,065,172 |
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Mandatorily redeemable capital stock |
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42,752 |
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46,039 |
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Accrued interest payable |
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309,948 |
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|
300,907 |
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Affordable Housing Program |
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41,785 |
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|
42,622 |
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Payable to REFCORP |
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7,870 |
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|
6,280 |
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Derivative liabilities (Note 7) |
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280,834 |
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138,252 |
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Other liabilities |
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393,338 |
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21,598 |
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Total liabilities |
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66,825,233 |
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57,683,383 |
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Commitments and contingencies (Note 12) |
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CAPITAL (Note 9) |
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Capital stock — Class B putable ($100 par value) authorized, issued, and outstanding
30,117,487 and 27,172,465 shares at March 31, 2008 and December 31, 2007 |
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3,011,749 |
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2,717,247 |
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Retained earnings |
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366,987 |
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|
361,347 |
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Accumulated other comprehensive loss |
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Net unrealized loss on available-for-sale securities |
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(121,236 |
) |
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(25,467 |
) |
Employee retirement plans |
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(850 |
) |
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(904 |
) |
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Total capital |
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3,256,650 |
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3,052,223 |
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Total liabilities and capital |
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$ |
70,081,883 |
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$ |
60,735,606 |
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The accompanying notes are an integral part of these financial statements
2
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
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Three Months Ended March 31, |
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2008 |
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2007 |
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INTEREST INCOME |
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Advances |
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$ |
387,340 |
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$ |
290,488 |
|
Advance prepayment fees, net |
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|
605 |
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|
71 |
|
Interest-bearing deposits |
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|
624 |
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|
121 |
|
Securities purchased under agreements to resell |
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— |
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|
4,029 |
|
Federal funds sold |
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|
22,123 |
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|
39,249 |
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Investments |
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|
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Available-for-sale securities |
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35,480 |
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|
7,511 |
|
Held-to-maturity securities |
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|
46,323 |
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|
75,640 |
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Mortgage loans held for portfolio |
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|
134,303 |
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|
145,160 |
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Total interest income |
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|
626,798 |
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|
562,269 |
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INTEREST EXPENSE |
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Consolidated obligations |
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Discount notes |
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161,174 |
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|
67,955 |
|
Bonds |
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|
389,769 |
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|
434,030 |
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Deposits |
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|
8,804 |
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|
14,016 |
|
Borrowings from other FHLBanks |
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|
6 |
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|
— |
|
Securities sold under agreements to repurchase |
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|
1,960 |
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|
7,371 |
|
Mandatorily redeemable capital stock |
|
|
388 |
|
|
|
654 |
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|
|
|
|
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Total interest expense |
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562,101 |
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|
524,026 |
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|
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|
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|
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NET INTEREST INCOME |
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|
64,697 |
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|
38,243 |
|
Provision for credit losses on mortgage loans |
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|
— |
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|
— |
|
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|
|
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|
|
|
|
|
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NET INTEREST INCOME AFTER MORTGAGE LOAN
CREDIT LOSS PROVISION |
|
|
64,697 |
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|
38,243 |
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|
|
|
|
|
|
|
|
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|
|
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|
OTHER (LOSS) INCOME |
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|
|
|
|
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Service fees |
|
|
577 |
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|
|
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 |
|
|
|
|
|
|
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|
Total other (loss) income |
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|
(11,576 |
) |
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|
212 |
|
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|
|
|
|
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OTHER EXPENSE |
|
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|
|
|
|
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Salaries and Benefits |
|
|
6,229 |
|
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|
5,922 |
|
Operating |
|
|
3,351 |
|
|
|
3,405 |
|
Finance Board |
|
|
420 |
|
|
|
408 |
|
Office of Finance |
|
|
437 |
|
|
|
344 |
|
|
|
|
|
|
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Total other expense |
|
|
10,437 |
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|
10,079 |
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|
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|
|
|
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|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INCOME |
|
$ |
31,352 |
|
|
$ |
20,301 |
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these financial statements
3
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
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Accumulated |
|
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|
|
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Capital Stock |
|
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Other |
|
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Class B (putable) |
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Retained |
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|
Comprehensive |
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Total |
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Shares |
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Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
BALANCE DECEMBER 31, 2007 |
|
|
27,173 |
|
|
$ |
2,717,247 |
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|
$ |
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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 |
|
• |
|
prices of similar instruments. |
61
Pricing models and their underlying assumptions are based on the best estimates of the Bank
with respect to:
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
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
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
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
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
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
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
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
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
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:
|
• |
|
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
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
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
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
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
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
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
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
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
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
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