The flowers and balloons festooning the reception desk in the lobby of the Federal Home Loan Bank of Des Moines building last week weren’t there because of anyone’s new baby or a birthday. They were sent to celebrate the bank’s long-awaited filing of its first Form 10 with the U.S. Securities and Exchange Commission. Based on the findings of the report, however, sympathy flowers may have been more appropriate.

The completion of the report — which has led to the bank’s recent restatement of four years of financial statements and a warning that its earnings will be reduced for the next several years — follows two years of both internal and external examinations. The report stated that several material weaknesses were found in the bank’s internal controls that it said contributed to the accounting errors and the need for the earnings restatements.

The report comes in the wake of a shakeup in the bank’s senior management, beginning with the resignation of former CEO and president Patrick Conway on Dec. 22. The bank’s chief risk officer and chief operating officer subsequently resigned last month, and the chief accounting officer plans to resign in July.

Additional investor information

Under a rule filed by the bank’s regulator in June 2004, each Federal Home Loan Bank is required to register its debt securities with the SEC. The Des Moines bank, along with several of its sister banks, missed the initial filing deadline in August 2005 because of the accounting errors that were discovered.

Following a 60-day waiting period, the bank expects the SEC registration to be finalized by mid-July. It’s the first time the Federal Home Loan Banks will be subject to the SEC filing requirements, though on a more limited basis than publicly traded companies.

“This provides investors, and the general public, who can also buy our debt, additional information they wouldn’t have had or wouldn’t have known where to get it,” said Nicky Schissel, a spokeswoman for the bank. That debt is issued by the Treasury Department’s Office of Domestic Finance on a consolidated basis for the 12 Federal Home Loan Banks.

The SEC registration does not apply to the shares the bank issues to its member institutions, which are not publicly traded. The institutions are required to purchase stock based on their asset size and level of borrowing activity with the bank.

On April 6, the bank announced it had accepted the resignations of its chief operating officer, Amy Angle, and its chief risk officer, Jamie Bishop. In March, the bank created a new chief financial officer position, which has been filled on an interim basis by James Huston, a former Ames National Corp. executive.

Schissel declined to comment on whether the resignations were directly tied to the financial review of the bank that was just completed, but said the resignations were “by mutual agreement.”

On April 26, Standard & Poor’s Corp. placed the bank’s AAA bond rating, its highest rating, on a credit watch with negative implications, citing “uncertainties created by the senior management changes and prospects for a slowing mortgage finance market.” The credit rating agency also cited the bank’s higher credit rate risk exposure from the growth of its mortgage loans as a critical change in its credit portfolio.

The bank’s mortgage portfolio declined approximately 14 percent in 2005, due to significantly lower acquisitions from Superior Guaranty Insurance Corp., a subsidiary of Wells Fargo & Co.

During the same period, Wells Fargo Bank, the Federal Home Loan Bank of Des Moines’ single largest borrower with $5.5 billion in advances, reduced its advance activity to just $700,000, which caused the bank’s advance balances to decline by 18 percent.

Executive compensation

According to the Form 10, the financial review of the bank uncovered “several material weaknesses and other deficiencies in the bank’s internal controls,” which “allowed the bank to enter into financial transactions that were not in compliance with established policies and procedures.” Those deficiencies were a direct result, the report said, of an “insufficient complement of personnel with appropriate levels of accounting knowledge and experience.”

Information detailed on the filing indicates that Conway was paid $545,695 in 2005, which represented more than a 10 percent raise from his 2004 salary. He received a severance package that included a payment of $380,000, plus unspecified payments related to his retirement accounts. He also received $7,500 in attorney’s fees related to negotiations related to unused accrued vacation time.

Angle and Bishop, whose 2005 salaries were $280,333 and $198,083 respectively, received severance pay of $142,000 and $101,050, respectively, and also retained their medical and dental benefits.

The bank’s board of directors hasn’t determined when it will announce the results of a national search for a new president and CEO, Schissel said. The chief operating officer and chief risk officer positions remain vacant. And according to the Form 10, Ronald Greeson, the bank’s chief accounting officer, has notified the board he plans to resign his position in July.

“It would be the board’s intent to get the new CEO on board and then fill the positions,” Schissel said, referring to the current open positions.

In November 2005, the bank announced it would restate its previously reported financial results for the years 2001 through 2004 to correct errors discovered in methods used in hedge accounting for mortgage loans. According to the Form 10 filed with the SEC on May 12, the effect of that restatement “is to significantly accelerate the timing of the bank’s recognition of income,” which is “expected to result in a corresponding reduction in earnings in future periods.”

According to the filing, the net cumulative effect of the restatement through Dec. 31, 2004, is an increase of $29.8 million to retained earnings, and an increase of $225.9 million in net income. The subsequent reduction in earnings will occur over a number of years, the bank said, with the early years experiencing greater impacts than the later years.

The bank said it expects to establish a new retained earnings and dividend policy for its member banks “that considers the expected future decrease in earnings related to the restatement.”