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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnatiex322015q210-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnatiex3112015q210-q.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnatiex3122015q210-q.htm


 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 June 30, 2015
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 July 31, 2015, the registrant had 43,967,812 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 of


Table of Contents
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
Statements of Condition - June 30, 2015 and December 31, 2014
 
 
 
 
Statements of Income - Three and six months ended June 30, 2015 and 2014
 
 
 
 
Statements of Comprehensive Income - Three and six months ended June 30, 2015 and 2014
 
 
 
 
Statements of Capital - Six months ended June 30, 2015 and 2014
 
 
 
 
Statements of Cash Flows - Six months ended June 30, 2015 and 2014
 
 
 
 
Notes to Unaudited Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 

2



PART I – FINANCIAL INFORMATION
Item 1.     Financial Statements

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
(Unaudited)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and due from banks
$
11,368

 
$
3,109,970

Interest-bearing deposits
180

 
119

Securities purchased under agreements to resell
1,465,000

 
3,343,000

Federal funds sold
4,250,000

 
6,600,000

Investment securities:
 
 
 
Trading securities
1,255

 
1,341

Available-for-sale securities
550,013

 
1,349,977

Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2015 and December 31, 2014, respectively, that may be repledged) (a)
14,544,782

 
14,712,271

Total investment securities
15,096,050

 
16,063,589

Advances (includes $15,129 and $15,042 at fair value under fair value option at June 30, 2015 and December 31, 2014, respectively)
71,107,890

 
70,405,616

Mortgage loans held for portfolio:
 
 
 
Mortgage loans held for portfolio
7,731,941

 
6,989,602

Less: allowance for credit losses on mortgage loans
1,701

 
4,919

Mortgage loans held for portfolio, net
7,730,240

 
6,984,683

Accrued interest receivable
83,571

 
81,384

Premises, software, and equipment, net
10,675

 
11,282

Derivative assets
22,501

 
14,699

Other assets
24,709

 
26,077

TOTAL ASSETS
$
99,802,184

 
$
106,640,419

LIABILITIES
 
 
 
Deposits
$
725,362

 
$
729,936

Consolidated Obligations, net:
 
 
 
Discount Notes
48,262,505

 
41,232,127

Bonds (includes $5,623,179 and $4,209,640 at fair value under fair value option at June 30, 2015 and December 31, 2014, respectively)
45,230,501

 
59,216,557

Total Consolidated Obligations, net
93,493,006

 
100,448,684

Mandatorily redeemable capital stock
65,162

 
62,963

Accrued interest payable
114,843

 
114,781

Affordable Housing Program payable
102,023

 
98,103

Derivative liabilities
54,308

 
63,767

Other liabilities
199,460

 
183,177

Total liabilities
94,754,164

 
101,701,411

Commitments and contingencies

 

CAPITAL
 
 
 
Capital stock Class B putable ($100 par value); issued and outstanding shares: 43,343 shares at June 30, 2015 and 42,665 shares at December 31, 2014
4,334,264

 
4,266,543

Retained earnings:
 
 
 
Unrestricted
544,360

 
529,367

Restricted
184,719

 
159,694

Total retained earnings
729,079

 
689,061

Accumulated other comprehensive loss
(15,323
)
 
(16,596
)
Total capital
5,048,020

 
4,939,008

TOTAL LIABILITIES AND CAPITAL
$
99,802,184

 
$
106,640,419

(a)
Fair values: $14,532,213 and $14,794,326 at June 30, 2015 and December 31, 2014, 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME:
 
 
 
 
 
 
 
Advances
$
86,470

 
$
77,046

 
$
171,267

 
$
153,197

Prepayment fees on Advances, net
262

 
1,075

 
1,292

 
2,071

Interest-bearing deposits
20

 
24

 
41

 
43

Securities purchased under agreements to resell
307

 
325

 
776

 
621

Federal funds sold
1,905

 
1,230

 
3,770

 
2,359

Trading securities
5

 
6

 
11

 
13

Available-for-sale securities
389

 
988

 
876

 
1,748

Held-to-maturity securities
79,330

 
88,100

 
159,765

 
177,353

Mortgage loans held for portfolio
65,294

 
57,444

 
121,493

 
117,709

Total interest income
233,982

 
226,238

 
459,291

 
455,114

INTEREST EXPENSE:
 
 
 
 
 
 
 
Consolidated Obligations - Discount Notes
10,329

 
6,247

 
20,269

 
14,696

Consolidated Obligations - Bonds
138,095

 
141,835

 
275,378

 
283,992

Deposits
84

 
64

 
177

 
127

Mandatorily redeemable capital stock
617

 
1,158

 
1,249

 
2,351

Total interest expense
149,125

 
149,304

 
297,073

 
301,166

NET INTEREST INCOME
84,857

 
76,934

 
162,218

 
153,948

Reversal for credit losses

 
(900
)
 

 
(900
)
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES
84,857

 
77,834

 
162,218

 
154,848

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Net losses on trading securities
(2
)
 
(2
)
 
(7
)
 
(4
)
Net (losses) gains on financial instruments held under fair value option
(441
)
 
(80
)
 
(1,610
)
 
1,280

Net gains on derivatives and hedging activities
2,281

 
3,332

 
7,583

 
2,249

Standby Letters of Credit fees
3,266

 
2,625

 
6,309

 
4,969

Other, net
430

 
449

 
1,391

 
1,574

Total non-interest income
5,534

 
6,324

 
13,666

 
10,068

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Compensation and benefits
9,706

 
8,448

 
19,813

 
17,734

Other operating expenses
4,742

 
4,174

 
9,451

 
8,576

Finance Agency
1,677

 
1,626

 
3,353

 
3,565

Office of Finance
1,316

 
1,164

 
2,242

 
2,211

Other
1,574

 
1,273

 
1,859

 
1,675

Total non-interest expense
19,015

 
16,685

 
36,718

 
33,761

INCOME BEFORE ASSESSMENTS
71,376

 
67,473

 
139,166

 
131,155

Affordable Housing Program assessments
7,200

 
6,863

 
14,042

 
13,351

NET INCOME
$
64,176

 
$
60,610

 
$
125,124

 
$
117,804


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
64,176

 
$
60,610

 
$
125,124

 
$
117,804

Other comprehensive income adjustments:
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
45

 
141

 
37

 
102

Pension and postretirement benefits
619

 
313

 
1,236

 
626

Total other comprehensive income adjustments
664

 
454

 
1,273

 
728

Comprehensive income
$
64,840

 
$
61,064

 
$
126,397

 
$
118,532


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, 2013
46,980

 
$
4,697,985

 
$
510,321

 
$
110,843

 
$
621,164

 
$
(9,042
)
 
$
5,310,107

Proceeds from sale of capital stock
310

 
30,970

 
 
 
 
 
 
 
 
 
30,970

Repurchase of capital stock
(4,979
)
 
(497,875
)
 
 
 
 
 
 
 
 
 
(497,875
)
Net shares reclassified to mandatorily
   redeemable capital stock
(166
)
 
(16,600
)
 
 
 
 
 
 
 
 
 
(16,600
)
Comprehensive income
 
 
 
 
94,243

 
23,561

 
117,804

 
728

 
118,532

Cash dividends on capital stock
 
 
 
 
(91,792
)
 
 
 
(91,792
)
 
 
 
(91,792
)
BALANCE, JUNE 30, 2014
42,145

 
$
4,214,480

 
$
512,772

 
$
134,404

 
$
647,176

 
$
(8,314
)
 
$
4,853,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
42,665

 
$
4,266,543

 
$
529,367

 
$
159,694

 
$
689,061

 
$
(16,596
)
 
$
4,939,008

Proceeds from sale of capital stock
787

 
78,652

 
 
 
 
 
 
 
 
 
78,652

Net shares reclassified to mandatorily
   redeemable capital stock
(109
)
 
(10,931
)
 
 
 
 
 
 
 
 
 
(10,931
)
Comprehensive income
 
 
 
 
100,099

 
25,025

 
125,124

 
1,273

 
126,397

Cash dividends on capital stock
 
 
 
 
(85,106
)
 
 
 
(85,106
)
 
 
 
(85,106
)
BALANCE, JUNE 30, 2015
43,343

 
$
4,334,264

 
$
544,360

 
$
184,719

 
$
729,079

 
$
(15,323
)
 
$
5,048,020


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)
 
Six Months Ended June 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
125,124

 
$
117,804

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,342

 
2,879

Net change in derivative and hedging activities
2,415

 
11,972

Net change in fair value adjustments on trading securities
7

 
4

Net change in fair value adjustments on financial instruments held under fair value option
1,610

 
(1,280
)
Other adjustments
(3
)
 
(791
)
Net change in:
 
 
 
Accrued interest receivable
(2,184
)
 
3,095

Other assets
671

 
3,359

Accrued interest payable
1,903

 
(417
)
Other liabilities
20,454

 
2,302

Total adjustments
33,215

 
21,123

Net cash provided by operating activities
158,339

 
138,927

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
5,571

 
10,546

Securities purchased under agreements to resell
1,878,000

 
(3,600,000
)
Federal funds sold
2,350,000

 
635,000

Premises, software, and equipment
(706
)
 
(447
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
79

 
106

Available-for-sale securities:
 
 
 
Net decrease in short-term
800,000

 
180,000

Held-to-maturity securities:
 
 
 
Net (increase) decrease in short-term
(5,650
)
 
1,436

Proceeds from maturities of long-term
1,239,443

 
975,121

Purchases of long-term
(1,065,952
)
 
(561,789
)
Advances:
 
 
 
Proceeds
520,583,099

 
471,592,155

Made
(521,302,623
)
 
(475,835,179
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
759,202

 
490,081

Purchases
(1,518,074
)
 
(383,148
)
Net cash provided by (used in) investing activities
3,722,389

 
(6,496,118
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
Six Months Ended June 30,
 
2015
 
2014
FINANCING ACTIVITIES:
 
 
 
Net decrease in deposits and pass-through reserves
$
(5,674
)
 
$
(125,183
)
Net payments on derivative contracts with financing elements
(13,071
)
 
(15,269
)
Net proceeds from issuance of Consolidated Obligations:
 
 
 
Discount Notes
125,046,626

 
113,292,004

Bonds
9,137,176

 
31,755,220

Payments for maturing and retiring Consolidated Obligations:
 
 
 
Discount Notes
(118,019,259
)
 
(116,111,544
)
Bonds
(23,109,942
)
 
(30,239,044
)
Proceeds from issuance of capital stock
78,652

 
30,970

Payments for repurchase/redemption of mandatorily redeemable capital stock
(8,732
)
 
(20,181
)
Payments for repurchase of capital stock

 
(497,875
)
Cash dividends paid
(85,106
)
 
(91,792
)
Net cash used in financing activities
(6,979,330
)
 
(2,022,694
)
Net decrease in cash and cash equivalents
(3,098,602
)
 
(8,379,885
)
Cash and cash equivalents at beginning of the period
3,109,970

 
8,598,933

Cash and cash equivalents at end of the period
$
11,368

 
$
219,048

Supplemental Disclosures:
 
 
 
Interest paid
$
309,598

 
$
315,558

Affordable Housing Program payments, net
$
10,122

 
$
10,597




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 FHLB), a federally chartered corporation, is one of 11 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 FHLB is regulated by the Federal Housing Finance Agency (Finance Agency).


Note 1 - Basis of Presentation

The accompanying interim financial statements of the FHLB 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 FHLB's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (SEC). Results for the three and six months ended June 30, 2015 are not necessarily indicative of operating results for the full year.

The FHLB 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 FHLB 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 FHLB 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 FHLB'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 FHLB's 2014 Annual Report on Form 10-K.

The FHLB 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

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition, results of operations, and cash flows.


9


Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the Statement of Condition as a direct deduction from the carrying amount of the liability, consistent with the presentation of debt discounts. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to Consolidated Obligations on the FHLB's Statement of Condition. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The guidance is required to be applied on a retrospective basis to each individual period presented on the Statement of Condition. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition and cash flows.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the 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 became effective for the FHLB for the interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or cash flows.

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 became effective for the FHLB for interim and annual periods beginning on January 1, 2015. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or cash flows.

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 became effective for the FHLB for interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB'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 had no material effect on the FHLB's financial condition, results of operations, or cash flows. The charge-off requirements were implemented on January 1, 2015. The adoption of these requirements had no material effect on the FHLB's financial condition, results of operations, or cash flows.



10


Note 3 - Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)        
Fair Value
June 30, 2015
 
December 31, 2014
Mortgage-backed securities:
 
 
 
Other U.S. obligation single-family mortgage-backed securities (1)
$
1,255

 
$
1,341

Total
$
1,255

 
$
1,341

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

Table 3.2 - Net Losses on Trading Securities (in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Net losses on trading securities held at period end
$
(7
)
 
$
(4
)
Net losses on trading securities
$
(7
)
 
$
(4
)


Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
 
June 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
550,000

 
$
13

 
$

 
$
550,013

Total
$
550,000

 
$
13

 
$

 
$
550,013

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
1,350,001

 
$
3

 
$
(27
)
 
$
1,349,977

Total
$
1,350,001

 
$
3

 
$
(27
)
 
$
1,349,977


All securities outstanding with gross unrealized losses at December 31, 2014 were in a continuous unrealized loss position for less than 12 months.

Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 
June 30, 2015
 
December 31, 2014
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
550,000

 
$
550,013

 
$
1,350,001

 
$
1,349,977


Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 
June 30, 2015
 
December 31, 2014
Amortized cost of available-for-sale securities:
 
 
 
Fixed-rate
$
550,000

 
$
1,350,001


Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the six months ended June 30, 2015 or 2014.



11


Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
 
June 30, 2015
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSE) (2)
$
31,748

 
$
1

 
$

 
$
31,749

Total non-mortgage-backed securities
31,748

 
1

 

 
31,749

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities (3)
2,927,484

 
4,036

 
(18,009
)
 
2,913,511

GSE single-family mortgage-backed securities (4)
11,585,550

 
149,261

 
(147,858
)
 
11,586,953

Total mortgage-backed securities
14,513,034

 
153,297

 
(165,867
)
 
14,500,464

Total
$
14,544,782

 
$
153,298

 
$
(165,867
)
 
$
14,532,213

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
GSE (2)
$
26,099

 
$

 
$

 
$
26,099

Total non-mortgage-backed securities
26,099

 

 

 
26,099

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities (3)
2,038,960

 
10,021

 
(1,017
)
 
2,047,964

GSE single-family mortgage-backed securities (4)
12,647,212

 
191,870

 
(118,819
)
 
12,720,263

Total mortgage-backed securities
14,686,172

 
201,891

 
(119,836
)
 
14,768,227

Total
$
14,712,271

 
$
201,891

 
$
(119,836
)
 
$
14,794,326

 
(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 Premiums (Discounts) Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
 
June 30, 2015
 
December 31, 2014
Premiums
$
51,861

 
$
24,473

Discounts
(46,156
)
 
(51,357
)
Net purchased premiums (discounts)
$
5,705

 
$
(26,884
)


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)
 
June 30, 2015
 
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 single-family
   mortgage-backed securities (1)
$
1,497,452

 
$
(18,009
)
 
$

 
$

 
$
1,497,452

 
$
(18,009
)
GSE single-family mortgage-backed securities (2)
3,854,304

 
(70,443
)
 
2,216,962

 
(77,415
)
 
6,071,266

 
(147,858
)
Total
$
5,351,756

 
$
(88,452
)
 
$
2,216,962

 
$
(77,415
)
 
$
7,568,718

 
$
(165,867
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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 single-family
   mortgage-backed securities (1)
$

 
$

 
$
197,625

 
$
(1,017
)
 
$
197,625

 
$
(1,017
)
GSE single-family mortgage-backed securities (2)
631,907

 
(1,348
)
 
5,555,049

 
(117,471
)
 
6,186,956

 
(118,819
)
Total
$
631,907

 
$
(1,348
)
 
$
5,752,674

 
$
(118,488
)
 
$
6,384,581

 
$
(119,836
)
(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)
 
June 30, 2015
 
December 31, 2014
Year of Maturity
Amortized Cost (1)
 
Fair Value
 
Amortized Cost (1)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in 1 year or less
$
31,748

 
$
31,749

 
$
26,099

 
$
26,099

Due after 1 year through 5 years

 

 

 

Due after 5 years through 10 years

 

 

 

Due after 10 years

 

 

 

Total non-mortgage-backed securities
31,748

 
31,749

 
26,099

 
26,099

Mortgage-backed securities (2)
14,513,034

 
14,500,464

 
14,686,172

 
14,768,227

Total
$
14,544,782

 
$
14,532,213

 
$
14,712,271

 
$
14,794,326

(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)
 
June 30, 2015
 
December 31, 2014
Amortized cost of non-mortgage-backed securities:
 
 
 
Fixed-rate
$
31,748

 
$
26,099

Total amortized cost of non-mortgage-backed securities
31,748

 
26,099

Amortized cost of mortgage-backed securities:
 
 
 
Fixed-rate
12,155,126

 
12,091,591

Variable-rate
2,357,908

 
2,594,581

Total amortized cost of mortgage-backed securities
14,513,034

 
14,686,172

Total
$
14,544,782

 
$
14,712,271


Realized Gains and Losses. From time to time the FHLB 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 six months ended June 30, 2015 and 2014, the FHLB did not sell any held-to-maturity securities.
 
 
 
 

Note 6 - Other-Than-Temporary Impairment Analysis

The FHLB evaluates any of 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 FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of June 30, 2015, 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 FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2014.


Note 7 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. At June 30, 2015 and December 31, 2014, the FHLB had Advances outstanding, including Affordable Housing Program (AHP) Advances (see Note 13), at interest rates ranging from 0.00 percent to 8.85 percent and from 0.00 percent to 9.20 percent, respectively. 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)
 
 
June 30, 2015
 
December 31, 2014
Redemption Term
 
Amount
 
Weighted Average Interest
Rate
 
Amount
 
Weighted Average Interest
Rate
Due in 1 year or less
 
$
20,282,144

 
0.33
%
 
$
14,139,630

 
0.40
%
Due after 1 year through 2 years
 
14,889,748

 
0.66

 
14,810,847

 
0.54

Due after 2 years through 3 years
 
13,116,148

 
0.70

 
12,829,760

 
0.69

Due after 3 years through 4 years
 
13,079,778

 
0.61

 
14,222,722

 
0.60

Due after 4 years through 5 years
 
7,699,260

 
0.66

 
10,724,619

 
0.54

Thereafter
 
1,951,025

 
2.34

 
3,570,929

 
1.51

Total par value
 
71,018,103

 
0.61

 
70,298,507

 
0.60

Commitment fees
 
(685
)
 
 
 
(699
)
 
 
Discount on AHP Advances
 
(10,636
)
 
 
 
(12,110
)
 
 
Premiums
 
2,902

 
 
 
3,058

 
 
Discounts
 
(10,076
)
 
 
 
(12,572
)
 
 
Hedging adjustments
 
108,153

 
 
 
129,390

 
 
Fair value option valuation adjustments and accrued interest
 
129

 
 
 
42

 
 
Total
 
$
71,107,890

 
 
 
$
70,405,616

 
 

The FHLB offers Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). 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 FHLB that makes the FHLB financially indifferent to the prepayment of the Advance. At June 30, 2015 and December 31, 2014, the FHLB had callable Advances (in thousands) of $13,675,333 and $15,098,357.

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
June 30, 2015
 
December 31, 2014
Due in 1 year or less
$
26,633,174

 
$
23,003,946

Due after 1 year through 2 years
11,673,072

 
12,159,384

Due after 2 years through 3 years
13,220,823

 
9,659,975

Due after 3 years through 4 years
11,220,811

 
12,295,893

Due after 4 years through 5 years
6,680,198

 
9,970,280

Thereafter
1,590,025

 
3,209,029

Total par value
$
71,018,103

 
$
70,298,507


The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates. At June 30, 2015 and December 31, 2014, the FHLB had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,569,900 and $1,617,400.


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
June 30, 2015
 
December 31, 2014
Due in 1 year or less
$
21,833,044

 
$
15,753,030

Due after 1 year through 2 years
14,476,948

 
14,663,847

Due after 2 years through 3 years
12,323,548

 
12,115,860

Due after 3 years through 4 years
12,904,278

 
13,649,722

Due after 4 years through 5 years
7,699,260

 
10,715,119

Thereafter
1,781,025

 
3,400,929

Total par value
$
71,018,103

 
$
70,298,507


Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)                    
 
June 30, 2015
 
December 31, 2014
Total fixed-rate (1)
$
22,178,670

 
$
17,945,050

Total variable-rate (1)
48,839,433

 
52,353,457

Total par value
$
71,018,103

 
$
70,298,507

(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 FHLB (dollars in millions)
June 30, 2015
 
December 31, 2014
 
Principal
 
% of Total
 
 
Principal
 
% of Total
JPMorgan Chase Bank, N.A.
$
37,300

 
53
%
 
JPMorgan Chase Bank, N.A.
$
41,300

 
59
%
U.S. Bank, N.A.
8,121

 
11

 
U.S. Bank, N.A.
8,338

 
12

Total
$
45,421

 
64
%
 
Total
$
49,638

 
71
%


Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
 
June 30, 2015
 
December 31, 2014
Unpaid principal balance:
 
 
 
Fixed rate medium-term single-family mortgage loans (1)
$
1,447,549

 
$
1,393,525

Fixed rate long-term single-family mortgage loans
6,062,984

 
5,402,479

Total unpaid principal balance
7,510,533

 
6,796,004

Premiums
204,067

 
179,540

Discounts
(2,299
)
 
(2,460
)
Hedging basis adjustments (2)
19,640

 
16,518

Total mortgage loans held for portfolio
$
7,731,941

 
$
6,989,602


(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)
 
June 30, 2015
 
December 31, 2014
Unpaid principal balance:
 
 
 
Conventional mortgage loans
$
6,976,296

 
$
6,203,318

Federal Housing Administration (FHA) mortgage loans
534,237

 
592,686

Total unpaid principal balance
$
7,510,533

 
$
6,796,004


For information related to the FHLB'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 FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
 
June 30, 2015
 
 
December 31, 2014
 
Principal
 
% of Total
 
 
Principal
 
% of Total
Union Savings Bank
$
2,080

 
28
%
 
Union Savings Bank
$
1,593

 
23
%
PNC Bank, N.A. (1)
954

 
13

 
PNC Bank, N.A. (1)
1,074

 
16

Guardian Savings Bank FSB
557

 
7

 
Guardian Savings Bank FSB
406

 
6

 
(1)
Former member.     


Note 9 - Allowance for Credit Losses

The FHLB has established an allowance methodology for each of the FHLB'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 FHLB 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 FHLB lends to eligible borrowers in accordance with federal statutes, including the FHLBank Act, and Finance Agency regulations, which require the FHLB 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 FHLB accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans. The FHLB'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 FHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from credit products.

Members experiencing financial difficulties are subject to FHLB-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 FHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB 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 FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At June 30, 2015 and December 31, 2014, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.


17


The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At June 30, 2015 and December 31, 2014, the FHLB 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 FHLB during the six months ended June 30, 2015 or 2014.

The FHLB 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 FHLB did not record any credit losses on credit products as of June 30, 2015 or December 31, 2014. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At June 30, 2015 and December 31, 2014, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 19 for additional information on the FHLB's off-balance sheet credit exposure.

Mortgage Loans Held for Portfolio - FHA

The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans 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. Therefore, the FHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLB 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 FHLB determines the allowance for conventional loans through 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 FHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans 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 FHLB over a one-year period. Migration analysis is a methodology for determining, through the FHLB's experience over a historical period, the rate of default on loans. The FHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLB 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 available credit enhancements. 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 FHLB 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. The FHLB removes specifically identified loans evaluated for impairment from the collectively evaluated mortgage loan population.

Qualitative Factors. The FHLB 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 June 30,
 
2015
 
2014
Balance, beginning of period
$
2,162

 
$
6,655

Charge-offs, net of recoveries (1)
(461
)
 
(314
)
Reversal for credit losses

 
(900
)
Balance, end of period
$
1,701

 
$
5,441

 
 
 
 
 
Six Months Ended June 30,
 
2015
 
2014
Balance, beginning of period
$
4,919

 
$
7,233

Charge-offs, net of recoveries (1)
(3,218
)
 
(892
)
Reversal for credit losses

 
(900
)
Balance, end of period
$
1,701

 
$
5,441

(1)
On January 1, 2015, the FHLB adopted the charge off provisions of the Finance Agency's Advisory Bulletin 2012-02, which require the FHLB to charge off the estimated loss portion of loans 180 days or more past due and certain loans in which the borrower has filed for bankruptcy.

Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
 
June 30, 2015
 
December 31, 2014
Allowance for credit losses, end of period:
 
 
 
Collectively evaluated for impairment
$
1,701

 
$
4,766

Individually evaluated for impairment

 
153

Total
$
1,701

 
$
4,919

Recorded investment, end of period:
 
 
 
Collectively evaluated for impairment
$
7,206,042

 
$
6,402,994

Individually evaluated for impairment
8,779

 
8,639

Total recorded investment
$
7,214,821

 
$
6,411,633


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 FHLB 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 FHLB 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 FHLB 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.


19


Table 9.3 - Changes in the LRA (in thousands)
 
Six Months Ended
 
June 30, 2015
LRA at beginning of year
$
129,213

Additions
21,754

Claims
(757
)
Scheduled distributions
(1,115
)
LRA at end of period
$
149,095



20


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 FHLB's key credit quality indicators for mortgage loans.

Table 9.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
 
June 30, 2015
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
43,922

 
$
33,985

 
$
77,907

Past due 60-89 days delinquent
9,006

 
8,609

 
17,615

Past due 90 days or more delinquent
35,360

 
17,518

 
52,878

Total past due
88,288

 
60,112

 
148,400

Total current mortgage loans
7,126,533

 
483,138

 
7,609,671

Total mortgage loans
$
7,214,821

 
$
543,250

 
$
7,758,071

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
27,841

 
$
9,272

 
$
37,113

Serious delinquency rate (2)
0.50
%
 
3.28
%
 
0.69
%
Past due 90 days or more still accruing interest (3)
$
29,328

 
$
17,518

 
$
46,846

Loans on non-accrual status, included above
$
6,925

 
$

 
$
6,925

 
 
 
 
 
 
 
December 31, 2014
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
49,053

 
$
42,744

 
$
91,797

Past due 60-89 days delinquent
13,597

 
12,881

 
26,478

Past due 90 days or more delinquent
42,991

 
25,045

 
68,036

Total past due
105,641

 
80,670

 
186,311

Total current mortgage loans
6,305,992

 
522,042

 
6,828,034

Total mortgage loans
$
6,411,633

 
$
602,712

 
$
7,014,345

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
34,854

 
$
11,687

 
$
46,541

Serious delinquency rate (2)
0.68
%
 
4.27
%
 
0.99
%
Past due 90 days or more still accruing interest (3)
$
41,857

 
$
25,045

 
$
66,902

Loans on non-accrual status, included above
$
3,574

 
$

 
$
3,574

(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 FHLB did not have any real estate owned at June 30, 2015 or December 31, 2014.


 
 
 
 
 
 
 
 

21


Individually Evaluated Impaired Loans. Table 9.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment.

Table 9.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
 
June 30, 2015
 
December 31, 2014
Conventional MPP loans
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related
allowance
$
8,779

 
$
8,588

 
$

 
$
5,297

 
$
5,165

 
$

With an allowance

 

 

 
3,342

 
3,293

 
153

Total
$
8,779

 
$
8,588

 
$

 
$
8,639

 
$
8,458

 
$
153


Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 
Three Months Ended June 30,
 
2015
 
2014
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
8,651

 
$
111

 
$
7,969

 
$
104

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2015
 
2014
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
8,415

 
$
219

 
$
7,839

 
$
204


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 FHLB'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. 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 as of the reporting date.

The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $8,779 and $8,639 at June 30, 2015 and December 31, 2014, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.


Note 10 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLB 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 FHLB'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 FHLB 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 FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.

The FHLB transacts 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

22


(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.

Consistent with Finance Agency regulations, the FHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLB'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 FHLB's financial management strategy. However, Finance Agency regulations and the FHLB'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 FHLB 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;
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 FHLB 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 FHLB in its derivatives is LIBOR.

Application of Interest Rate Swaps

The FHLB may use derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLB 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 FHLB 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 FHLB 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 FHLB 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; and
Firm Commitments.

23



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 FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB 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.

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)
 
June 30, 2015
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
5,227,101

 
$
17,904

 
$
117,599

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
6,028,000

 
3,589

 
5,542

Forward rate agreements
485,000

 
2,906

 
216

Mortgage delivery commitments
495,054

 
102

 
4,451

Total derivatives not designated as hedging instruments
7,008,054

 
6,597

 
10,209

Total derivatives before netting and collateral adjustments
$
12,235,155

 
24,501

 
127,808

Netting adjustments and cash collateral (1)
 
 
(2,000
)
 
(73,500
)
Total derivative assets and total derivative liabilities
 
 
$
22,501

 
$
54,308

 
 
 
 
 
 
 
December 31, 2014
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
4,301,547

 
$
19,826

 
$
138,150

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
4,635,000

 
900

 
6,559

Forward rate agreements
439,000

 
6

 
4,924

Mortgage delivery commitments
451,292

 
3,799

 
1

Total derivatives not designated as hedging instruments
5,525,292

 
4,705

 
11,484

Total derivatives before netting and collateral adjustments
$
9,826,839

 
24,531

 
149,634

Netting adjustments and cash collateral (1)
 
 
(9,832
)
 
(85,867
)
Total derivative assets and total derivative liabilities
 
 
$
14,699

 
$
63,767

 
(1)
Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $73,120 and $78,755 at June 30, 2015 and December 31, 2014. Cash collateral received and related accrued interest was (in thousands) $1,620 and $2,720 at June 30, 2015 and December 31, 2014.






24


Table 10.2 presents the components of net gains on derivatives and hedging activities as presented in the Statements of Income.

Table 10.2 - Net Gains on Derivatives and Hedging Activities (in thousands)
 
Three Months Ended June 30,
 
2015
 
2014
Derivatives and hedged items in fair value hedging relationships:
 
 
 
Interest rate swaps
$
1,110

 
$
869

Derivatives not designated as hedging instruments:
 
 
 
Economic hedges:
 
 
 
Interest rate swaps
214