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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnatiex322014q310-q.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnatiex3122014q310-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnatiex3112014q310-q.htm
EXCEL - IDEA: XBRL DOCUMENT - Federal Home Loan Bank of CincinnatiFinancial_Report.xls


 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
Federally chartered corporation 
 
31-6000228
(State or other jurisdiction of
incorporation or organization) 
 
(I.R.S. Employer
Identification No.)
600 Atrium Two, P.O. Box 598,
 
 
Cincinnati, Ohio 
 
45201-0598
(Address of principal executive offices) 
 
(Zip Code)
(513) 852-7500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o No


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes   o No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   x No

As of October 31, 2014, the registrant had 43,240,461 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.



Page 1









Table of Contents
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 

2


PART I – FINANCIAL INFORMATION
Item 1.     Financial Statements

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
(Unaudited)
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and due from banks
$
861,125

 
$
8,598,933

Interest-bearing deposits
173

 
166

Securities purchased under agreements to resell
800,000

 
2,350,000

Federal funds sold
2,605,000

 
1,740,000

Investment securities:
 
 
 
Trading securities
1,396

 
1,578

Available-for-sale securities
2,145,009

 
2,184,879

Held-to-maturity securities (includes $0 and $0 pledged as collateral at September 30, 2014 and December 31, 2013, respectively, that may be repledged) (a)
15,089,361

 
16,087,162

Total investment securities
17,235,766

 
18,273,619

Advances (includes $9,968 and $0 at fair value under fair value option at September 30, 2014 and December 31, 2013, respectively)
71,442,417

 
65,270,390

Mortgage loans held for portfolio:
 
 
 
Mortgage loans held for portfolio
6,908,630

 
6,825,523

Less: allowance for credit losses on mortgage loans
5,027

 
7,233

Mortgage loans held for portfolio, net
6,903,603

 
6,818,290

Accrued interest receivable
80,783

 
85,151

Premises, software, and equipment, net
11,945

 
13,811

Derivative assets
3,451

 
3,241

Other assets
22,339

 
27,101

TOTAL ASSETS
$
99,966,602

 
$
103,180,702

LIABILITIES
 
 
 
Deposits
$
766,539

 
$
913,895

Consolidated Obligations, net:
 
 
 
Discount Notes
36,879,748

 
38,209,946

Bonds (includes $3,680,329 and $4,018,370 at fair value under fair value option at September 30, 2014 and December 31, 2013, respectively)
56,881,065

 
58,162,739

Total Consolidated Obligations, net
93,760,813

 
96,372,685

Mandatorily redeemable capital stock
109,553

 
115,853

Accrued interest payable
115,393

 
116,381

Affordable Housing Program payable
94,414

 
93,789

Derivative liabilities
59,808

 
97,766

Other liabilities
168,692

 
160,226

Total liabilities
95,075,212

 
97,870,595

Commitments and contingencies

 

CAPITAL
 
 
 
Capital stock Class B putable ($100 par value); issued and outstanding shares: 42,313 shares at September 30, 2014 and 46,980 shares at December 31, 2013
4,231,326

 
4,697,985

Retained earnings:
 
 
 
Unrestricted
520,704

 
510,321

Restricted
146,889

 
110,843

Total retained earnings
667,593

 
621,164

Accumulated other comprehensive loss
(7,529
)
 
(9,042
)
Total capital
4,891,390

 
5,310,107

TOTAL LIABILITIES AND CAPITAL
$
99,966,602

 
$
103,180,702

(a)
Fair values: $15,026,259 and $15,808,397 at September 30, 2014 and December 31, 2013, respectively.

The accompanying notes are an integral part of these financial statements.

3


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME:
 
 
 
 
 
 
 
Advances
$
78,887

 
$
79,132

 
$
232,084

 
$
227,778

Prepayment fees on Advances, net
383

 
165

 
2,454

 
1,391

Interest-bearing deposits
21

 
28

 
64

 
157

Securities purchased under agreements to resell
276

 
128

 
897

 
1,451

Federal funds sold
1,247

 
1,192

 
3,606

 
4,763

Trading securities
6

 
7

 
19

 
24

Available-for-sale securities
817

 
531

 
2,565

 
1,077

Held-to-maturity securities
83,855

 
83,603

 
261,208

 
228,100

Mortgage loans held for portfolio
62,860

 
65,747

 
180,569

 
206,650

Loans to other FHLBanks

 

 

 
4

Total interest income
228,352

 
230,533

 
683,466

 
671,395

INTEREST EXPENSE:
 
 
 
 
 
 
 
Consolidated Obligations - Discount Notes
6,243

 
8,440

 
20,939

 
28,948

Consolidated Obligations - Bonds
137,798

 
129,934

 
421,790

 
392,399

Deposits
63

 
81

 
190

 
255

Loans from other FHLBanks

 

 

 
5

Mandatorily redeemable capital stock
1,125

 
1,324

 
3,476

 
4,364

Total interest expense
145,229

 
139,779

 
446,395

 
425,971

NET INTEREST INCOME
83,123

 
90,754

 
237,071

 
245,424

Reversal for credit losses

 
(950
)
 
(900
)
 
(7,450
)
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES
83,123

 
91,704

 
237,971

 
252,874

OTHER NON-INTEREST INCOME:
 
 
 
 
 
 
 
Net losses on trading securities
(2
)
 
(9
)
 
(6
)
 
(13
)
Net (losses) gains on financial instruments held under fair value option
(159
)
 
(819
)
 
1,121

 
68

Net gains on derivatives and hedging activities
89

 
1,507

 
2,338

 
4,395

Standby Letters of Credit fees
2,801

 
2,130

 
7,770

 
5,829

Other, net
1,052

 
1,377

 
2,626

 
3,080

Total other non-interest income
3,781

 
4,186

 
13,849

 
13,359

OTHER EXPENSE:
 
 
 
 
 
 
 
Compensation and benefits
9,598

 
8,608

 
27,332

 
24,801

Other operating
4,484

 
4,439

 
13,060

 
12,639

Finance Agency
1,625

 
1,088

 
5,190

 
3,264

Office of Finance
1,149

 
1,180

 
3,360

 
3,391

Other
562

 
811

 
2,237

 
2,714

Total other expense
17,418

 
16,126

 
51,179

 
46,809

INCOME BEFORE ASSESSMENTS
69,486

 
79,764

 
200,641

 
219,424

Affordable Housing Program assessments
7,061

 
8,109

 
20,412

 
22,379

NET INCOME
$
62,425

 
$
71,655

 
$
180,229

 
$
197,045


The accompanying notes are an integral part of these financial statements.

4


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
62,425

 
$
71,655

 
$
180,229

 
$
197,045

Other comprehensive income adjustments:
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
28

 
(33
)
 
130

 
(28
)
Pension and postretirement benefits
757

 
576

 
1,383

 
1,508

Total other comprehensive income adjustments
785

 
543

 
1,513

 
1,480

Comprehensive income
$
63,210

 
$
72,198

 
$
181,742

 
$
198,525


The accompanying notes are an integral part of these financial statements.


5


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)
(Unaudited)
 
Capital Stock
Class B - Putable
 
Retained Earnings
 
Accumulated Other Comprehensive
 
Total
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
Loss
 
Capital
BALANCE, DECEMBER 31, 2012
40,106

 
$
4,010,622

 
$
479,253

 
$
58,628

 
$
537,881

 
$
(11,734
)
 
$
4,536,769

Proceeds from sale of capital stock
7,093

 
709,336

 
 
 
 
 
 
 
 
 
709,336

Net shares reclassified to mandatorily
   redeemable capital stock
(194
)
 
(19,455
)
 
 
 
 
 
 
 
 
 
(19,455
)
Comprehensive income
 
 
 
 
157,636

 
39,409

 
197,045

 
1,480

 
198,525

Cash dividends on capital stock
 
 
 
 
(130,452
)
 
 
 
(130,452
)
 
 
 
(130,452
)
BALANCE, SEPTEMBER 30, 2013
47,005

 
$
4,700,503

 
$
506,437

 
$
98,037

 
$
604,474

 
$
(10,254
)
 
$
5,294,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2013
46,980

 
$
4,697,985

 
$
510,321

 
$
110,843

 
$
621,164

 
$
(9,042
)
 
$
5,310,107

Proceeds from sale of capital stock
483

 
48,326

 
 
 
 
 
 
 
 
 
48,326

Repurchase of capital stock
(4,979
)
 
(497,875
)
 
 
 
 
 
 
 
 
 
(497,875
)
Net shares reclassified to mandatorily
   redeemable capital stock
(171
)
 
(17,110
)
 
 
 
 
 
 
 
 
 
(17,110
)
Comprehensive income
 
 
 
 
144,183

 
36,046

 
180,229

 
1,513

 
181,742

Cash dividends on capital stock
 
 
 
 
(133,800
)
 
 
 
(133,800
)
 
 
 
(133,800
)
BALANCE, SEPTEMBER 30, 2014
42,313

 
$
4,231,326

 
$
520,704

 
$
146,889

 
$
667,593

 
$
(7,529
)
 
$
4,891,390


The accompanying notes are an integral part of these financial statements.


6


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
180,229

 
$
197,045

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,001

 
(116
)
Net change in derivative and hedging activities
13,433

 
26,368

Net change in fair value adjustments on trading securities
6

 
13

Net change in fair value adjustments on financial instruments held under fair value option
(1,121
)
 
(68
)
Other adjustments
(794
)
 
(7,456
)
Net change in:
 
 
 
Accrued interest receivable
4,358

 
451

Other assets
3,635

 
3,174

Accrued interest payable
(2,864
)
 
2,737

Other liabilities
10,217

 
15,282

Total adjustments
27,871

 
40,385

Net cash provided by operating activities
208,100

 
237,430

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
27,568

 
102,208

Securities purchased under agreements to resell
1,550,000

 
750,000

Federal funds sold
(865,000
)
 
970,000

Premises, software, and equipment
(622
)
 
(2,633
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
177

 
243

Available-for-sale securities:
 
 
 
Net decrease (increase) in short-term
40,000

 
(1,835,000
)
Held-to-maturity securities:
 
 
 
Net decrease (increase) in short-term
1,392

 
(1,239
)
Proceeds from maturities of long-term
1,558,418

 
2,196,711

Purchases of long-term
(561,789
)
 
(4,774,742
)
Advances:
 
 
 
Proceeds
811,094,323

 
537,468,503

Made
(817,323,372
)
 
(549,492,193
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
794,538

 
1,629,429

Purchases
(895,796
)
 
(944,715
)
Net cash used in investing activities
(4,580,163
)
 
(13,933,428
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
 
 
 
 
 
 

7


(continued from previous page)
 
 
 
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
FINANCING ACTIVITIES:
 
 
 
Net decrease in deposits and pass-through reserves
$
(163,045
)
 
$
(265,480
)
Net payments on derivative contracts with financing elements
(22,822
)
 
(29,134
)
Net proceeds from issuance of Consolidated Obligations:
 
 
 
Discount Notes
208,014,633

 
124,097,934

Bonds
35,648,470

 
26,658,742

Payments for maturing and retiring Consolidated Obligations:
 
 
 
Discount Notes
(209,343,905
)
 
(121,398,636
)
Bonds
(36,892,317
)
 
(14,711,090
)
Proceeds from issuance of capital stock
48,326

 
709,336

Payments for repurchase/redemption of mandatorily redeemable capital stock
(23,410
)
 
(109,121
)
Payments for repurchase of capital stock
(497,875
)
 

Cash dividends paid
(133,800
)
 
(130,452
)
Net cash (used in) provided by financing activities
(3,365,745
)
 
14,822,099

Net (decrease) increase in cash and cash equivalents
(7,737,808
)
 
1,126,101

Cash and cash equivalents at beginning of the period
8,598,933

 
16,423

Cash and cash equivalents at end of the period
$
861,125

 
$
1,142,524

Supplemental Disclosures:
 
 
 
Interest paid
$
473,738

 
$
438,326

Affordable Housing Program payments, net
$
19,787

 
$
16,926


The accompanying notes are an integral part of these financial statements.


8


FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO UNAUDITED FINANCIAL STATEMENTS


Background Information    

The Federal Home Loan Bank of Cincinnati (the FHLBank), a federally chartered corporation, is one of 12 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBank is regulated by the Federal Housing Finance Agency (Finance Agency).


Note 1 - Basis of Presentation

The accompanying interim financial statements of the FHLBank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLBank's annual report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (SEC). Results for the three and nine months ended September 30, 2014 are not necessarily indicative of operating results for the full year.

The FHLBank presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The FHLBank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 10. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. For more information about the FHLBank's investments in securities purchased under agreements to resell, see “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLBank's 2013 Form 10-K.

The FHLBank has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.


Note 2 - Recently Issued Accounting Standards and Interpretations

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the Financial Accounting Standards Board (FASB) issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance becomes effective for the FHLBank for the interim and annual periods beginning after December 15, 2014, and may be adopted using either the modified retrospective transition method or the prospective transition method. The FHLBank is in the process of evaluating this guidance, but its effect on the FHLBank's financial condition, results of operations, or cash flows is not expected to be material.


9


Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures. On June 12, 2014, the FASB issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. This amendment requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. In addition, this guidance requires additional disclosures, particularly on transfers accounted for as sales that are economically similar to repurchase agreements and on the nature of collateral pledged in repurchase agreements accounted for as secured borrowings. This guidance becomes effective for the FHLBank for the first interim or annual period beginning after December 15, 2014. The changes in accounting for transactions outstanding on the effective date are required to be presented on a cumulative-effect approach. The FHLBank is in the process of evaluating this guidance, but its effect on the FHLBank's financial condition, results of operations, or cash flows is not expected to be material.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned. Specifically, such collateralized mortgage loans should be reclassified to real estate owned when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This guidance is effective for interim and annual periods beginning on or after December 15, 2014. The FHLBank is in the process of evaluating this guidance, but its effect on the FHLBank's financial condition, results of operations, or cash flows is not expected to be material.

Joint and Several Liability Arrangements. On February 28, 2013, the FASB issued guidance for recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance became effective for the FHLBank beginning on January 1, 2014. The adoption of this guidance had no effect on the FHLBank's financial condition, results of operations, or cash flows.

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Finance Agency issued an advisory bulletin that establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The adverse classification requirements were implemented as of January 1, 2014; this implementation did not have a material effect on the FHLBank's financial condition, results of operations, or cash flows. The charge-off requirements should be implemented no later than January 1, 2015. The FHLBank is currently assessing the charge-off provisions of this advisory bulletin, but its effect on the FHLBank's financial condition, results of operations, or cash flows is not expected to be material.


Note 3 - Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)        
 Fair Value
September 30, 2014
 
December 31, 2013
Mortgage-backed securities:
 
 
 
Other U.S. obligation residential mortgage-backed securities (1)
$
1,396

 
$
1,578

Total
$
1,396

 
$
1,578

 
(1)
Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities.

Table 3.2 - Net Losses on Trading Securities (in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Net losses on trading securities held at period end
$
(6
)
 
$
(13
)
Net losses on trading securities
$
(6
)
 
$
(13
)



10


Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
 
September 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Certificates of deposit
$
2,145,000

 
$
31

 
$
(22
)
 
$
2,145,009

Total
$
2,145,000

 
$
31

 
$
(22
)
 
$
2,145,009

 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Certificates of deposit
$
2,185,000

 
$
1

 
$
(122
)
 
$
2,184,879

Total
$
2,185,000

 
$
1

 
$
(122
)
 
$
2,184,879


All securities outstanding with gross unrealized losses at September 30, 2014 have been in a continuous unrealized loss position for less than 12 months.

Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 
September 30, 2014
 
December 31, 2013
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
2,145,000

 
$
2,145,009

 
$
2,185,000

 
$
2,184,879


Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 
September 30, 2014
 
December 31, 2013
Amortized cost of available-for-sale securities:
 
 
 
Fixed-rate
$
2,145,000

 
$
2,185,000


Realized Gains and Losses. The FHLBank had no sales of securities out of its available-for-sale portfolio during the nine months ended September 30, 2014 or 2013.



11


Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
 
September 30, 2014
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding (Losses)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSE) (2)
$
26,093

 
$
4

 
$

 
$
26,097

Total non-mortgage-backed securities
26,093

 
4

 

 
26,097

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation residential
   mortgage-backed securities (3)
2,112,838

 
4,163

 
(11,546
)
 
2,105,455

GSE residential mortgage-backed securities (4)
12,950,430

 
171,662

 
(227,385
)
 
12,894,707

Total mortgage-backed securities
15,063,268

 
175,825

 
(238,931
)
 
15,000,162

Total
$
15,089,361

 
$
175,829

 
$
(238,931
)
 
$
15,026,259

 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding (Losses)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
GSE (2)
$
27,485

 
$
1

 
$

 
$
27,486

Total non-mortgage-backed securities
27,485

 
1

 

 
27,486

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation residential
   mortgage-backed securities (3)
1,909,099

 
4,545

 
(26,396
)
 
1,887,248

GSE residential mortgage-backed securities (4)
14,150,578

 
141,962

 
(398,877
)
 
13,893,663

Total mortgage-backed securities
16,059,677

 
146,507

 
(425,273
)
 
15,780,911

Total
$
16,087,162

 
$
146,508

 
$
(425,273
)
 
$
15,808,397

 
(1)
Carrying value equals amortized cost.
(2)
Consists of debt securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.
(3)
Consists of Ginnie Mae mortgage-backed securities and/or mortgage-backed securities issued or guaranteed by the National Credit Union Administration (NCUA) and the U.S. government.
(4)
Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.


Table 5.2 - Net Purchased Discounts Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
 
September 30, 2014
 
December 31, 2013
Premiums
$
24,306

 
$
32,458

Discounts
(54,948
)
 
(58,658
)
Net purchased discounts
$
(30,642
)
 
$
(26,200
)


12


Table 5.3 summarizes the held-to-maturity securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 5.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
 
September 30, 2014
 
Less than 12 Months
 
12 Months or more
 
Total
 
Fair Value
 
Gross Unrealized (Losses)
 
Fair Value
 
Gross Unrealized (Losses)
 
Fair Value
 
Gross Unrealized (Losses)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligation residential
   mortgage-backed securities (1)
$
846,301

 
$
(11,546
)
 
$

 
$

 
$
846,301

 
$
(11,546
)
GSE residential mortgage-backed securities (2)
585,174

 
(4,379
)
 
6,124,092

 
(223,006
)
 
6,709,266

 
(227,385
)
Total
$
1,431,475

 
$
(15,925
)
 
$
6,124,092

 
$
(223,006
)
 
$
7,555,567

 
$
(238,931
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Less than 12 Months
 
12 Months or more
 
Total
 
Fair Value
 
Gross Unrealized (Losses)
 
Fair Value
 
Gross Unrealized (Losses)
 
Fair Value
 
Gross Unrealized (Losses)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligation residential
   mortgage-backed securities (1)
$
663,278

 
$
(26,396
)
 
$

 
$

 
$
663,278

 
$
(26,396
)
GSE residential mortgage-backed securities (2)
8,817,132

 
(397,252
)
 
48,902

 
(1,625
)
 
8,866,034

 
(398,877
)
Total
$
9,480,410

 
$
(423,648
)
 
$
48,902

 
$
(1,625
)
 
$
9,529,312

 
$
(425,273
)
(1)
Consists of Ginnie Mae mortgage-backed securities.
(2)
Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.

Table 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
 
September 30, 2014
 
December 31, 2013
Year of Maturity
Amortized Cost (1)
 
Fair Value
 
Amortized Cost (1)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in 1 year or less
$
26,093

 
$
26,097

 
$
27,485

 
$
27,486

Due after 1 year through 5 years

 

 

 

Due after 5 years through 10 years

 

 

 

Due after 10 years

 

 

 

Total non-mortgage-backed securities
26,093

 
26,097

 
27,485

 
27,486

Mortgage-backed securities (2)
15,063,268

 
15,000,162

 
16,059,677

 
15,780,911

Total
$
15,089,361

 
$
15,026,259

 
$
16,087,162

 
$
15,808,397

(1)
Carrying value equals amortized cost.
(2)
Mortgage-backed securities are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

13



Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 
September 30, 2014
 
December 31, 2013
Amortized cost of non-mortgage-backed securities:
 
 
 
Fixed-rate
$
26,093

 
$
27,485

Total amortized cost of non-mortgage-backed securities
26,093

 
27,485

Amortized cost of mortgage-backed securities:
 
 
 
Fixed-rate
12,358,603

 
13,048,808

Variable-rate
2,704,665

 
3,010,869

Total amortized cost of mortgage-backed securities
15,063,268

 
16,059,677

Total
$
15,089,361

 
$
16,087,162


Realized Gains and Losses. From time to time the FHLBank may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the nine months ended September 30, 2014 or 2013, the FHLBank did not sell any held-to-maturity securities.
 
 
 
 

Note 6 - Other-Than-Temporary Impairment Analysis

The FHLBank evaluates its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis.

For its other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLBank determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBank from losses based on current expectations. As a result, the FHLBank determined that, as of September 30, 2014, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLBank does not intend to sell the investments, and it is not more likely than not that the FHLBank will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBank did not consider any of these investments to be other-than-temporarily impaired at September 30, 2014.

The FHLBank also reviewed its available-for-sale securities that have experienced unrealized losses at September 30, 2014 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLBank will recover its entire amortized cost basis. Additionally, because the FHLBank does not intend to sell these securities, nor is it more likely than not that the FHLBank will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at September 30, 2014.

The FHLBank did not consider any of its investments to be other-than-temporarily impaired at December 31, 2013.


Note 7 - Advances

The FHLBank offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. At September 30, 2014 and December 31, 2013, the FHLBank had Advances outstanding, including Affordable Housing Program (AHP) Advances (see Note 13), at interest rates ranging from 0.00 percent to 9.20 percent. Advances with interest rates of 0.00 percent are AHP Advances. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

14



Table 7.1 - Advance Redemption Terms (dollars in thousands)
 
 
September 30, 2014
 
December 31, 2013
Redemption Term
 
Amount
 
Weighted Average Interest
Rate
 
Amount
 
Weighted Average Interest
Rate
Overdrawn demand deposit accounts
 
$
937

 
0.16
%
 
$
150

 
0.20
%
Due in 1 year or less
 
20,690,961

 
0.34

 
17,729,350

 
0.42

Due after 1 year through 2 years
 
10,044,351

 
0.44

 
6,614,470

 
0.63

Due after 2 years through 3 years
 
11,391,884

 
0.88

 
9,485,558

 
0.64

Due after 3 years through 4 years
 
12,637,735

 
0.61

 
9,444,110

 
0.81

Due after 4 years through 5 years
 
10,099,031

 
0.56

 
11,831,887

 
0.61

Thereafter
 
6,460,109

 
0.97

 
9,987,245

 
0.78

Total par value
 
71,325,008

 
0.58

 
65,092,770

 
0.62

Commitment fees
 
(711
)
 
 
 
(750
)
 
 
Discount on AHP Advances
 
(12,907
)
 
 
 
(14,953
)
 
 
Premiums
 
3,135

 
 
 
3,413

 
 
Discounts
 
(14,125
)
 
 
 
(14,104
)
 
 
Hedging adjustments
 
142,049

 
 
 
204,014

 
 
Fair value option valuation adjustments and accrued interest
 
(32
)
 
 
 

 
 
Total
 
$
71,442,417

 
 
 
$
65,270,390

 
 

The FHLBank offers Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). In exchange for receiving the right to call the Advance on a predetermined call schedule, the member typically pays a higher rate for the Advance relative to an equivalent maturity, non-callable Advance. If the call option is exercised, replacement funding may be available. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLBank that makes the FHLBank financially indifferent to the prepayment of the Advance. At September 30, 2014 and December 31, 2013, the FHLBank had callable Advances (in thousands) of $12,355,010 and $10,072,203.

Table 7.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)
Year of Contractual Maturity or Next Call Date
September 30, 2014
 
December 31, 2013
Overdrawn demand deposit accounts
$
937

 
$
150

Due in 1 year or less
26,756,139

 
25,109,451

Due after 1 year through 2 years
9,893,541

 
5,300,184

Due after 2 years through 3 years
7,432,509

 
7,149,237

Due after 3 years through 4 years
12,033,290

 
7,050,325

Due after 4 years through 5 years
9,110,382

 
10,877,078

Thereafter
6,098,210

 
9,606,345

Total par value
$
71,325,008

 
$
65,092,770


The FHLBank also offers putable Advances. With a putable Advance, the FHLBank effectively purchases put options from the member that allows the FHLBank to terminate the Advance at predetermined dates. The FHLBank normally would exercise its option when interest rates increase relative to contractual rates. At September 30, 2014 and December 31, 2013, the FHLBank had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,935,400 and $2,146,400.


15


Table 7.3 - Advances by Year of Contractual Maturity or Next Put/Convert Date for Putable/Convertible Advances (in thousands)
Year of Contractual Maturity or Next Put/Convert Date
September 30, 2014
 
December 31, 2013
Overdrawn demand deposit accounts
$
937

 
$
150

Due in 1 year or less
22,438,861

 
19,681,750

Due after 1 year through 2 years
10,025,351

 
6,424,970

Due after 2 years through 3 years
10,560,484

 
9,338,558

Due after 3 years through 4 years
12,019,735

 
8,582,710

Due after 4 years through 5 years
9,989,531

 
11,256,887

Thereafter
6,290,109

 
9,807,745

Total par value
$
71,325,008

 
$
65,092,770


Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)                    
 
September 30, 2014
 
December 31, 2013
Total fixed-rate (1)
$
21,548,962

 
$
15,480,817

Total variable-rate (1)
49,776,046

 
49,611,953

Total par value
$
71,325,008

 
$
65,092,770

(1)
Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance.

Table 7.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLBank (dollars in millions)
September 30, 2014
 
December 31, 2013
 
Principal
 
% of Total
 
 
Principal
 
% of Total
JPMorgan Chase Bank, N.A.
$
39,550

 
55
%
 
JPMorgan Chase Bank, N.A.
$
41,700

 
64
%
U.S. Bank, N.A.
7,880

 
11

 
U.S. Bank, N.A.
4,584

 
7

Total
$
47,430

 
66
%
 
Total
$
46,284

 
71
%


Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
 
September 30, 2014
 
December 31, 2013
Unpaid principal balance:
 
 
 
Fixed rate medium-term single-family mortgage loans (1)
$
1,407,495

 
$
1,482,345

Fixed rate long-term single-family mortgage loans
5,310,205

 
5,160,854

Total unpaid principal balance
6,717,700

 
6,643,199

Premiums
181,323

 
177,180

Discounts
(2,814
)
 
(3,631
)
Hedging basis adjustments (2)
12,421

 
8,775

Total mortgage loans held for portfolio
$
6,908,630

 
$
6,825,523


(1)
Medium-term is defined as a term of 15 years or less.
(2)
Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.


16


Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
 
September 30, 2014
 
December 31, 2013
Unpaid principal balance:
 
 
 
Conventional mortgage loans
$
6,093,324

 
$
5,897,804

Federal Housing Administration (FHA) mortgage loans
624,376

 
745,395

Total unpaid principal balance
$
6,717,700

 
$
6,643,199


For information related to the FHLBank's credit risk on mortgage loans and allowance for credit losses, see Note 9.

Table 8.3 - Members, Including Any Known Affiliates that are Members of the FHLBank, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
 
September 30, 2014
 
 
December 31, 2013
 
Principal
 
% of Total
 
 
Principal
 
% of Total
Union Savings Bank
$
1,561

 
23
%
 
Union Savings Bank
$
1,433

 
22
%
PNC Bank, N.A.(1)
1,143

 
17

 
PNC Bank, N.A. (1)
1,356

 
20

Guardian Savings Bank FSB
362

 
5

 
Total 
$
2,789

 
42
%
Total
$
3,066

 
45
%
 
 
 
 
 
 
(1)
Former member.     


Note 9 - Allowance for Credit Losses

The FHLBank has established an allowance methodology for each of the FHLBank's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.

Credit products

The FHLBank manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBank lends to eligible borrowers in accordance with federal statutes, including the Federal Home Loan Bank Act (FHLBank Act), and Finance Agency Regulations, which require the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans. The FHLBank's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLBank can also require additional or substitute collateral to protect its security interest. Management of the FHLBank believes that these policies effectively manage the FHLBank's credit risk from credit products.

Members experiencing financial difficulties are subject to FHLBank-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLBank or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLBank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the FHLBank considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At September 30, 2014 and December 31, 2013, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

17



The FHLBank evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At September 30, 2014 and December 31, 2013, the FHLBank did not have any Advances that were past due, in non-accrual status, or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLBank during the nine months ended September 30, 2014 or 2013.

The FHLBank has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies, management's credit analysis and the repayment history on credit products, the FHLBank did not record any credit losses on credit products as of September 30, 2014 or December 31, 2013. Accordingly, the FHLBank did not record any allowance for credit losses on Advances.

At September 30, 2014 and December 31, 2013, no liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded. See Note 19 for additional information on the FHLBank's off-balance sheet credit exposure.

Mortgage Loans Held for Portfolio - FHA

The FHLBank invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. Any losses from such loans are expected to be recovered from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions (PFIs). Therefore, the FHLBank only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by insurance. As a result, the FHLBank did not establish an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.

Mortgage Loans Held for Portfolio - Conventional Mortgage Purchase Program (MPP)

The allowance for conventional loans is determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.

Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank's best estimate of probable incurred losses at the reporting date. The credit risk analysis of all conventional mortgage loans is performed at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make every attempt to sell a specific dollar amount of loans to the FHLBank over a one-year period. Migration analysis is a methodology for determining, through the FHLBank's experience over a historical period, the rate of default on loans. The FHLBank applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLBank then estimates, based on historical experience, how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from credit enhancements available. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.

Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLBank measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. Specifically identified loans evaluated for impairment are removed from the collectively evaluated mortgage loan population.

Qualitative Factors. The FHLBank also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, that is intended to cover other incurred losses that may not otherwise be captured in the methodology described above.

Rollforward of Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest,

18


unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.

Table 9.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
 
Three Months Ended September 30,
Allowance for credit losses
2014
 
2013
Balance, beginning of period
$
5,441

 
$
9,176

Charge-offs
(414
)
 
(546
)
Reversal for credit losses

 
(950
)
Balance, end of period
$
5,027

 
$
7,680

 
 
 
 
 
Nine Months Ended September 30,
Allowance for credit losses
2014
 
2013
Balance, beginning of period
$
7,233

 
$
17,907

Charge-offs
(1,306
)
 
(2,777
)
Reversal for credit losses
(900
)
 
(7,450
)
Balance, end of period
$
5,027

 
$
7,680


Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
 
September 30, 2014
 
December 31, 2013
Allowance for credit losses, end of period:
 
 
 
Collectively evaluated for impairment
$
4,884

 
$
7,159

Individually evaluated for impairment
$
143

 
$
74

Recorded investment, end of period:
 
 
 
Collectively evaluated for impairment
$
6,289,080

 
$
6,082,636

Individually evaluated for impairment
8,608

 
7,799

Total recorded investment
$
6,297,688

 
$
6,090,435


Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLBank against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLBank discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLBank as a portion of the purchase proceeds to cover expected losses. Excess funds over required balances are distributed to the member in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.

Table 9.3 - Changes in the LRA (in thousands)
 
Nine Months Ended
 
September 30, 2014
LRA at beginning of year
$
115,236

Additions
13,519

Claims
(1,706
)
Scheduled distributions
(2,266
)
LRA at end of period
$
124,783



19


Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure. The table below summarizes the FHLBank's key credit quality indicators for mortgage loans.

Table 9.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
 
September 30, 2014
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
46,658

 
$
43,609

 
$
90,267

Past due 60-89 days delinquent
13,264

 
12,218

 
25,482

Past due 90 days or more delinquent
45,768

 
26,005

 
71,773

Total past due
105,690

 
81,832

 
187,522

Total current mortgage loans
6,191,998

 
553,574

 
6,745,572

Total mortgage loans
$
6,297,688

 
$
635,406

 
$
6,933,094

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
37,288

 
$
13,446

 
$
50,734

Serious delinquency rate (2)
0.74
%
 
4.17
%
 
1.05
%
Past due 90 days or more still accruing interest (3)
$
44,644

 
$
26,005

 
$
70,649

Loans on non-accrual status, included above
$
3,417

 
$

 
$
3,417

 
 
 
 
 
 
 
December 31, 2013
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
48,619

 
$
53,305

 
$
101,924

Past due 60-89 days delinquent
11,971

 
18,963

 
30,934

Past due 90 days or more delinquent
57,934

 
32,942

 
90,876

Total past due
118,524

 
105,210

 
223,734

Total current mortgage loans
5,971,911

 
654,399

 
6,626,310

Total mortgage loans
$
6,090,435

 
$
759,609

 
$
6,850,044

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
46,285

 
$
18,595

 
$
64,880

Serious delinquency rate (2)
0.96
%
 
4.41
%
 
1.34
%
Past due 90 days or more still accruing interest (3)
$
57,543

 
$
32,942

 
$
90,485

Loans on non-accrual status, included above
$
3,077

 
$

 
$
3,077

(1)
Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2)
Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount.
(3)
Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status.

The FHLBank did not have any real estate owned at September 30, 2014 or December 31, 2013.

Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLBank's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. The FHLBank had 51 and 42 modified loans considered troubled debt restructurings at September 30, 2014 and December 31, 2013, respectively.


20


A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date.

Table 9.5 - Recorded Investment in Troubled Debt Restructurings (in thousands)
Troubled debt restructurings
September 30, 2014
 
December 31, 2013
Conventional MPP Loans
$
8,608

 
$
7,799


Due to the minimal change in terms of modified loans (i.e., no principal forgiven), the FHLBank's pre-modification recorded investment was not materially different than the post-modification recorded investment in troubled debt restructurings.

Certain conventional MPP loans that were modified within the previous 12 months and considered troubled debt restructurings experienced a payment default as noted in the table below. A borrower is considered to have defaulted on a troubled debt restructuring if the borrower's contractually due principal or interest is 60 days or more past due at any time during the periods presented.

Table 9.6 - Recorded Investment of Financing Receivables Modified within the Previous 12 Months and Considered Troubled Debt Restructurings that Subsequently Defaulted (in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Defaulted troubled debt restructurings
 
 
 
 
 
 
 
Conventional MPP Loans
$
86

 
$
422

 
$
637

 
$
422


Modified loans that subsequently default may recognize a higher probability of loss when calculating the allowance for credit losses.

Individually Evaluated Impaired Loans. At September 30, 2014 and December 31, 2013, only certain conventional MPP loans individually evaluated for impairment required an allowance for credit losses. Table 9.7 presents the recorded investment, unpaid principal balance, and related allowance associated with these loans.

Table 9.7 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
 
September 30, 2014
 
December 31, 2013
Conventional MPP loans
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related
allowance
$
5,367

 
$
5,225

 
$

 
$
4,959

 
$
4,828

 
$

With an allowance
3,241

 
3,196

 
143

 
2,840

 
2,801

 
74

Total
$
8,608

 
$
8,421

 
$
143

 
$
7,799

 
$
7,629

 
$
74



21


Table 9.8 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 
Three Months Ended September 30,
 
2014
 
2013
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
8,575

 
$
111

 
$
6,757

 
$
90

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
8,096

 
$
315

 
$
6,108

 
$
244



Note 10 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLBank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sources that finance these assets. The goal of the FHLBank's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.

The FHLBank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the FHLBank of the required initial and variation margin.

Consistent with Finance Agency Regulations, the FHLBank enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLBank's financial management strategy. However, Finance Agency Regulations and the FHLBank's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.

The most common ways in which the FHLBank uses derivatives are to:

reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

manage embedded options in assets and liabilities;

reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond;


22


preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and

protect the value of existing asset or liability positions.

Types of Derivatives

The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.

An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate transacted by the FHLBank in its derivatives is the London Interbank Offered Rate (LIBOR).

Application of Interest Rate Swaps

The FHLBank generally uses derivatives as fair value hedges of underlying financial instruments. However, because the FHLBank uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLBank's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLBank re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
 
Types of Hedged Items

The FHLBank documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLBank also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBank currently uses regression analyses to assess the effectiveness of its hedges. The types of assets and liabilities currently hedged with derivatives are:

Consolidated Obligations
Advances
Firm Commitments

Financial Statement Effect and Additional Financial Information

The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLBanks' involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBank to credit and market risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.


23


Table 10.1 summarizes the fair value of derivative instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

Table 10.1 - Fair Value of Derivative Instruments (in thousands)
 
September 30, 2014
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
3,924,247

 
$
25,779

 
$
154,154

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
4,083,000

 
697

 
6,653

Forward rate agreements
209,000

 
61

 
1,200

Mortgage delivery commitments
243,447

 
1,164

 
28

Total derivatives not designated as hedging instruments
4,535,447

 
1,922

 
7,881

Total derivatives before netting and collateral adjustments
$
8,459,694

 
27,701

 
162,035

Netting adjustments
 
 
(26,587
)
 
(26,587
)
Cash collateral and related accrued interest
 
 
2,337

 
(75,640
)
Total collateral and netting adjustments (1)
 
 
(24,250
)
 
(102,227
)