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EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnatiex3122016q310-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnatiex3112016q310-q.htm
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnatiex322016q310-q.htm
EX-4 - EXHIBIT 4 - Federal Home Loan Bank of Cincinnatiex42016q310-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 September 30, 2016
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, 2016, the registrant had 41,886,807 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 - September 30, 2016 and December 31, 2015
 
 
 
 
Statements of Income - Three and nine months ended September 30, 2016 and 2015
 
 
 
 
Statements of Comprehensive Income - Three and nine months ended September 30, 2016 and 2015
 
 
 
 
Statements of Capital - Nine months ended September 30, 2016 and 2015
 
 
 
 
Statements of Cash Flows - Nine months ended September 30, 2016 and 2015
 
 
 
 
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 5.
Other Information
 
 
 
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)
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Cash and due from banks
$
13,939

 
$
10,136

Interest-bearing deposits
102

 
99

Securities purchased under agreements to resell
2,288,971

 
10,531,979

Federal funds sold
5,495,000

 
10,845,000

Investment securities:
 
 
 
Trading securities
1,027

 
1,159

Available-for-sale securities
700,228

 
700,081

Held-to-maturity securities (includes $0 and $0 pledged as collateral at September 30, 2016 and December 31, 2015, respectively, that may be repledged) (a)
15,139,859

 
15,278,206

Total investment securities
15,841,114

 
15,979,446

Advances (includes $15,200 and $15,057 at fair value under fair value option at September 30, 2016 and December 31, 2015, respectively)
68,873,269

 
73,292,172

Mortgage loans held for portfolio:
 
 
 
Mortgage loans held for portfolio
8,821,460

 
7,981,293

Less: allowance for credit losses on mortgage loans
1,139

 
1,686

Mortgage loans held for portfolio, net
8,820,321

 
7,979,607

Accrued interest receivable
108,626

 
94,855

Premises, software, and equipment, net
9,659

 
10,436

Derivative assets
98,828

 
26,996

Other assets
6,228

 
13,013

TOTAL ASSETS
$
101,556,057

 
$
118,783,739

LIABILITIES
 
 
 
Deposits
$
759,113

 
$
804,342

Consolidated Obligations, net:
 
 
 
Discount Notes
38,491,740

 
77,199,208

Bonds (includes $9,146,712 and $2,214,590 at fair value under fair value option at September 30, 2016 and December 31, 2015, respectively)
56,750,418

 
35,091,722

Total Consolidated Obligations, net
95,242,158

 
112,290,930

Mandatorily redeemable capital stock
169,292

 
37,895

Accrued interest payable
123,243

 
118,823

Affordable Housing Program payable
98,056

 
107,352

Derivative liabilities
21,176

 
31,087

Other liabilities
232,580

 
212,254

Total liabilities
96,645,618

 
113,602,683

Commitments and contingencies

 

CAPITAL
 
 
 
Capital stock Class B putable ($100 par value); issued and outstanding shares: 41,231 shares at September 30, 2016 and 44,288 shares at December 31, 2015
4,123,084

 
4,428,756

Retained earnings:
 
 
 
Unrestricted
556,853

 
556,139

Restricted
241,860

 
209,438

Total retained earnings
798,713

 
765,577

Accumulated other comprehensive loss
(11,358
)
 
(13,277
)
Total capital
4,910,439

 
5,181,056

TOTAL LIABILITIES AND CAPITAL
$
101,556,057

 
$
118,783,739

(a)
Fair values: $15,355,196 and $15,229,965 at September 30, 2016 and December 31, 2015, 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,
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME:
 
 
 
 
 
 
 
Advances
$
146,600

 
$
93,204

 
$
418,608

 
$
264,471

Prepayment fees on Advances, net
5,136

 
439

 
9,211

 
1,731

Interest-bearing deposits
82

 
21

 
238

 
62

Securities purchased under agreements to resell
2,388

 
437

 
6,145

 
1,213

Federal funds sold
8,189

 
2,482

 
27,049

 
6,252

Investment securities:
 
 
 
 
 
 
 
Trading securities
4

 
6

 
15

 
17

Available-for-sale securities
1,708

 
725

 
3,997

 
1,601

Held-to-maturity securities
80,173

 
81,348

 
247,387

 
241,113

Total investment securities
81,885

 
82,079

 
251,399

 
242,731

Mortgage loans held for portfolio
60,381

 
59,291

 
177,629

 
180,784

Total interest income
304,661

 
237,953

 
890,279

 
697,244

INTEREST EXPENSE:
 
 
 
 
 
 
 
Consolidated Obligations:
 
 
 
 
 
 
 
Discount Notes
37,773

 
15,132

 
137,072

 
35,401

Bonds
176,190

 
145,045

 
503,026

 
420,423

Total Consolidated Obligations
213,963

 
160,177

 
640,098

 
455,824

Deposits
301

 
83

 
881

 
260

Mandatorily redeemable capital stock
877

 
671

 
2,969

 
1,920

Total interest expense
215,141

 
160,931

 
643,948

 
458,004

NET INTEREST INCOME
89,520

 
77,022

 
246,331

 
239,240

NON-INTEREST (LOSS) INCOME:
 
 
 
 
 
 
 
Net losses on trading securities
(3
)
 
(2
)
 
(2
)
 
(9
)
Net gains (losses) on financial instruments held under fair value option
9,734

 
(101
)
 
(23,213
)
 
(1,711
)
Net (losses) gains on derivatives and hedging activities
(17,627
)
 
5,392

 
10,403

 
12,975

Standby Letters of Credit fees
3,039

 
3,255

 
9,269

 
9,564

Other, net
670

 
830

 
1,783

 
2,221

Total non-interest (loss) income
(4,187
)
 
9,374

 
(1,760
)
 
23,040

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Compensation and benefits
10,722

 
9,795

 
31,500

 
29,608

Other operating expenses
6,053

 
5,751

 
17,905

 
15,202

Finance Agency
1,535

 
1,676

 
4,604

 
5,029

Office of Finance
1,062

 
1,234

 
3,280

 
3,476

Other
2,100

 
364

 
6,830

 
2,223

Total non-interest expense
21,472

 
18,820

 
64,119

 
55,538

INCOME BEFORE ASSESSMENTS
63,861

 
67,576

 
180,452

 
206,742

Affordable Housing Program assessments
6,474

 
6,824

 
18,342

 
20,866

NET INCOME
$
57,387

 
$
60,752

 
$
162,110

 
$
185,876


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,
 
2016
 
2015
 
2016
 
2015
Net income
$
57,387

 
$
60,752

 
$
162,110

 
$
185,876

Other comprehensive income adjustments:
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
161

 
17

 
147

 
54

Pension and postretirement benefits
591

 
726

 
1,772

 
1,962

Total other comprehensive income adjustments
752

 
743

 
1,919

 
2,016

Comprehensive income
$
58,139

 
$
61,495

 
$
164,029

 
$
187,892


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, 2014
42,665

 
$
4,266,543

 
$
529,367

 
$
159,694

 
$
689,061

 
$
(16,596
)
 
$
4,939,008

Proceeds from sale of capital stock
1,522

 
152,164

 
 
 
 
 
 
 
 
 
152,164

Net shares reclassified to mandatorily
   redeemable capital stock
(235
)
 
(23,531
)
 
 
 
 
 
 
 
 
 
(23,531
)
Comprehensive income
 
 
 
 
148,701

 
37,175

 
185,876

 
2,016

 
187,892

Cash dividends on capital stock
 
 
 
 
(128,259
)
 
 
 
(128,259
)
 
 
 
(128,259
)
BALANCE, SEPTEMBER 30, 2015
43,952

 
$
4,395,176

 
$
549,809

 
$
196,869

 
$
746,678

 
$
(14,580
)
 
$
5,127,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2015
44,288

 
$
4,428,756

 
$
556,139

 
$
209,438

 
$
765,577

 
$
(13,277
)
 
$
5,181,056

Proceeds from sale of capital stock
548

 
54,844

 
 
 
 
 
 
 
 
 
54,844

Net shares reclassified to mandatorily
   redeemable capital stock
(3,605
)
 
(360,516
)
 
 
 
 
 
 
 
 
 
(360,516
)
Comprehensive income
 
 
 
 
129,688

 
32,422

 
162,110

 
1,919

 
164,029

Cash dividends on capital stock
 
 
 
 
(128,974
)
 
 
 
(128,974
)
 
 
 
(128,974
)
BALANCE, SEPTEMBER 30, 2016
41,231

 
$
4,123,084

 
$
556,853

 
$
241,860

 
$
798,713

 
$
(11,358
)
 
$
4,910,439


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,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
162,110

 
$
185,876

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
53,555

 
23,859

Net change in derivative and hedging activities
(21,517
)
 
136

Net change in fair value adjustments on trading securities
2

 
9

Net change in fair value adjustments on financial instruments held under fair value option
23,213

 
1,711

Other adjustments

 
(4
)
Net change in:
 
 
 
Accrued interest receivable
(13,774
)
 
(8,772
)
Other assets
6,786

 
6,500

Accrued interest payable
17,614

 
12,279

Other liabilities
12,680

 
33,818

Total adjustments
78,559

 
69,536

Net cash provided by operating activities
240,669

 
255,412

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(85,378
)
 
(28,745
)
Securities purchased under agreements to resell
8,243,008

 
619,000

Federal funds sold
5,350,000

 
1,210,000

Premises, software, and equipment
(1,375
)
 
(1,198
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
129

 
125

Available-for-sale securities:
 
 
 
Net decrease in short-term

 
350,000

Held-to-maturity securities:
 
 
 
Net decrease (increase) in short-term
1,439

 
(6,573
)
Proceeds from maturities of long-term
2,116,533

 
1,967,034

Purchases of long-term
(1,985,981
)
 
(2,335,814
)
Advances:
 
 
 
Proceeds
958,525,955

 
748,391,884

Made
(954,096,510
)
 
(755,296,545
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
1,148,622

 
1,085,371

Purchases
(2,021,080
)
 
(2,140,179
)
Net cash provided by (used in) investing activities
17,195,362

 
(6,185,640
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
 
2016
 
2015
FINANCING ACTIVITIES:
 
 
 
Net (decrease) increase in deposits and pass-through reserves
$
(38,879
)
 
$
24,415

Net payments on derivative contracts with financing elements
(14,343
)
 
(18,667
)
Net proceeds from issuance of Consolidated Obligations:
 
 
 
Discount Notes
242,299,316

 
210,125,772

Bonds
44,356,127

 
16,068,135

Payments for maturing and retiring Consolidated Obligations:
 
 
 
Discount Notes
(281,005,147
)
 
(191,280,449
)
Bonds
(22,726,053
)
 
(31,124,288
)
Proceeds from issuance of capital stock
54,844

 
152,164

Payments for repurchase/redemption of mandatorily redeemable capital stock
(229,119
)
 
(27,406
)
Cash dividends paid
(128,974
)
 
(128,259
)
Net cash (used in) provided by financing activities
(17,432,228
)
 
3,791,417

Net increase (decrease) in cash and cash equivalents
3,803

 
(2,138,811
)
Cash and cash equivalents at beginning of the period
10,136

 
3,109,970

Cash and cash equivalents at end of the period
$
13,939

 
$
971,159

Supplemental Disclosures:
 
 
 
Interest paid
$
645,493

 
$
465,369

Affordable Housing Program payments, net
$
27,638

 
$
14,837




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, 2015 filed with the Securities and Exchange Commission (SEC). Results for the three and nine months ended September 30, 2016 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 2015 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

Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the Financial Accounting Standards Board (FASB) issued amendments to clarify guidance on the classification of certain cash receipts and payments in the Statement of Cash Flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the statement of cash flows. This guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The FHLB is in the process of evaluating this guidance, but its effect on the FHLB’s cash flows is not expected to be material.


9


Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to immediately record the full amount of expected credit losses in their loan portfolios. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses and expanded disclosure requirements. The guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2019. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. 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 has not yet been determined.
Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2016, and early adoption is permitted. The guidance should be applied on a modified retrospective basis to existing debt instruments as of the beginning of the period for which the amendments are effective. The FHLB is in the process of evaluating this guidance, but its effect on the FHLB's financial condition, results of operations, and cash flows is not expected to be material.
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. On March 10, 2016, the FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2016, and early adoption is permitted. The amendments provide entities with the option to apply the guidance using either a prospective approach or a modified retrospective approach, retrospectively applied to all derivative instruments that meet the specific conditions. The FHLB elected to adopt the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and cash flows.
Leases. On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the Statement of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 month or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2018, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. 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 has not yet been determined.

Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income.
Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the Statement of Condition or the accompanying notes to the financial statements.
Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Statement of Condition.

10


The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2017, and early adoption is only permitted for certain provisions. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the Statement of Condition as of the beginning of the period of adoption. 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 has not yet been determined.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the 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 became effective for the FHLB for the interim and annual periods beginning on January 1, 2016, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, and cash flows.

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. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2016. As a result of adopting this guidance, unamortized concessions (in thousands) of $13,042 included in other assets at December 31, 2015 were reclassified as a reduction in the balance of the corresponding Consolidated Obligations. The reclassification resulted in a decrease (in thousands) of $13,042 in Consolidated Bonds at December 31, 2015. Accordingly, the FHLB's total assets and total liabilities each decreased by (in thousands) $13,042 at December 31, 2015. The adoption of this guidance had no effect on the FHLB's results of operations and cash flows.


Note 3 - Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)        
Fair Value
September 30, 2016
 
December 31, 2015
Mortgage-backed securities:
 
 
 
Other U.S. obligation single-family mortgage-backed securities
$
1,027

 
$
1,159

Total
$
1,027

 
$
1,159


Table 3.2 - Net Losses on Trading Securities (in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Net losses on trading securities held at period end
$
(2
)
 
$
(9
)
Net losses on trading securities
$
(2
)
 
$
(9
)



11


Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
700,000

 
$
228

 
$

 
$
700,228

Total
$
700,000

 
$
228

 
$

 
$
700,228

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
700,000

 
$
81

 
$

 
$
700,081

Total
$
700,000

 
$
81

 
$

 
$
700,081


Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 
September 30, 2016
 
December 31, 2015
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
700,000

 
$
700,228

 
$
700,000

 
$
700,081


Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 
September 30, 2016
 
December 31, 2015
Amortized cost of available-for-sale securities:
 
 
 
Fixed-rate
$
700,000

 
$
700,000


Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the nine months ended September 30, 2016 or 2015.


12



Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
 
September 30, 2016
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSE)
$
31,245

 
$
8

 
$

 
$
31,253

Total non-mortgage-backed securities
31,245

 
8

 

 
31,253

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities
3,372,568

 
62,639

 
(247
)
 
3,434,960

GSE single-family mortgage-backed securities
9,619,099

 
172,317

 
(18,283
)
 
9,773,133

GSE multi-family mortgage-backed securities
2,116,947

 
776

 
(1,873
)
 
2,115,850

Total mortgage-backed securities
15,108,614

 
235,732

 
(20,403
)
 
15,323,943

Total
$
15,139,859

 
$
235,740

 
$
(20,403
)
 
$
15,355,196

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
GSE
$
32,683

 
$

 
$

 
$
32,683

Total non-mortgage-backed securities
32,683

 

 

 
32,683

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities
3,894,432

 
3,629

 
(25,292
)
 
3,872,769

GSE single-family mortgage-backed securities
10,891,089

 
122,044

 
(148,589
)
 
10,864,544

GSE multi-family mortgage-backed securities
460,002

 

 
(33
)
 
459,969

Total mortgage-backed securities
15,245,523

 
125,673

 
(173,914
)
 
15,197,282

Total
$
15,278,206

 
$
125,673

 
$
(173,914
)
 
$
15,229,965

 
(1)
Carrying value equals amortized cost.

Table 5.2 - Net Purchased Premiums Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
 
September 30, 2016
 
December 31, 2015
Premiums
$
68,382

 
$
84,450

Discounts
(31,479
)
 
(40,667
)
Net purchased premiums
$
36,903

 
$
43,783



13


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, 2016
 
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
$
442,123

 
$
(247
)
 
$

 
$

 
$
442,123

 
$
(247
)
GSE single-family mortgage-backed securities
1,174,238

 
(3,537
)
 
1,315,724

 
(14,746
)
 
2,489,962

 
(18,283
)
GSE multi-family mortgage-backed securities
1,732,904

 
(1,873
)
 

 

 
1,732,904

 
(1,873
)
Total
$
3,349,265

 
$
(5,657
)
 
$
1,315,724

 
$
(14,746
)
 
$
4,664,989

 
$
(20,403
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
2,574,649

 
$
(25,292
)
 
$

 
$

 
$
2,574,649

 
$
(25,292
)
GSE single-family mortgage-backed securities
4,332,237

 
(74,068
)
 
2,065,926

 
(74,521
)
 
6,398,163

 
(148,589
)
GSE multi-family mortgage-backed securities
459,969

 
(33
)
 

 

 
459,969

 
(33
)
Total
$
7,366,855

 
$
(99,393
)
 
$
2,065,926

 
$
(74,521
)
 
$
9,432,781

 
$
(173,914
)

Table 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
 
September 30, 2016
 
December 31, 2015
Year of Maturity
Amortized Cost (1)
 
Fair Value
 
Amortized Cost (1)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in 1 year or less
$
31,245

 
$
31,253

 
$
32,683

 
$
32,683

Due after 1 year through 5 years

 

 

 

Due after 5 years through 10 years

 

 

 

Due after 10 years

 

 

 

Total non-mortgage-backed securities
31,245

 
31,253

 
32,683

 
32,683

Mortgage-backed securities (2)
15,108,614

 
15,323,943

 
15,245,523

 
15,197,282

Total
$
15,139,859

 
$
15,355,196

 
$
15,278,206

 
$
15,229,965

(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.

14



Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 
September 30, 2016
 
December 31, 2015
Amortized cost of non-mortgage-backed securities:
 
 
 
Fixed-rate
$
31,245

 
$
32,683

Total amortized cost of non-mortgage-backed securities
31,245

 
32,683

Amortized cost of mortgage-backed securities:
 
 
 
Fixed-rate
11,205,827

 
12,664,603

Variable-rate
3,902,787

 
2,580,920

Total amortized cost of mortgage-backed securities
15,108,614

 
15,245,523

Total
$
15,139,859

 
$
15,278,206


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 nine months ended September 30, 2016 and 2015, 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 September 30, 2016, 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 September 30, 2016.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2015.


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. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

15



Table 7.1 - Advance Redemption Terms (dollars in thousands)
 
 
September 30, 2016
 
December 31, 2015
Redemption Term
 
Amount
 
Weighted Average Interest
Rate
 
Amount
 
Weighted Average Interest
Rate
Overdrawn demand deposit accounts
 
$
5,900

 
0.47
%
 
$

 
%
Due in 1 year or less
 
21,378,409

 
0.77

 
27,177,311

 
0.57

Due after 1 year through 2 years
 
19,487,596

 
0.92

 
12,360,345

 
0.79

Due after 2 years through 3 years
 
13,697,773

 
0.97

 
15,839,007

 
0.77

Due after 3 years through 4 years
 
8,266,488

 
1.07

 
11,107,509

 
0.78

Due after 4 years through 5 years
 
1,235,459

 
1.68

 
3,391,892

 
1.06

Thereafter
 
4,741,306

 
1.71

 
3,366,205

 
1.69

Total par value
 
68,812,931

 
0.97

 
73,242,269

 
0.75

Commitment fees
 
(541
)
 
 
 
(629
)
 
 
Discount on Affordable Housing Program (AHP) Advances
 
(7,868
)
 
 
 
(9,396
)
 
 
Premiums
 
2,505

 
 
 
2,744

 
 
Discounts
 
(6,823
)
 
 
 
(8,386
)
 
 
Hedging adjustments
 
72,865

 
 
 
65,513

 
 
Fair value option valuation adjustments and accrued interest
 
200

 
 
 
57

 
 
Total
 
$
68,873,269

 
 
 
$
73,292,172

 
 

The FHLB offers certain fixed and variable-rate 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 to members. 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.

Table 7.2 - Advances by Year of Contractual Maturity or Next Call Date (in thousands)
Year of Contractual Maturity or Next Call Date
September 30, 2016
 
December 31, 2015
Overdrawn demand deposit accounts
$
5,900

 
$

Due in 1 year or less
29,574,667

 
33,384,838

Due after 1 year through 2 years
16,673,446

 
11,289,035

Due after 2 years through 3 years
12,775,673

 
13,959,002

Due after 3 years through 4 years
6,052,275

 
10,356,770

Due after 4 years through 5 years
2,346,664

 
2,747,419

Thereafter
1,384,306

 
1,505,205

Total par value
$
68,812,931

 
$
73,242,269


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.


16


Table 7.3 - Advances by Year of Contractual Maturity or Next Put Date for Putable Advances (in thousands)
Year of Contractual Maturity or Next Put Date
September 30, 2016
 
December 31, 2015
Overdrawn demand deposit accounts
$
5,900

 
$

Due in 1 year or less
21,891,909

 
28,111,211

Due after 1 year through 2 years
19,239,596

 
11,895,945

Due after 2 years through 3 years
13,592,273

 
15,549,007

Due after 3 years through 4 years
8,266,488

 
11,098,009

Due after 4 years through 5 years
1,235,459

 
3,391,892

Thereafter
4,581,306

 
3,196,205

Total par value
$
68,812,931

 
$
73,242,269


Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)                    
 
September 30, 2016
 
December 31, 2015
Total fixed-rate (1)
$
22,910,776

 
$
25,312,958

Total variable-rate (1)
45,902,155

 
47,929,311

Total par value
$
68,812,931

 
$
73,242,269

(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)
September 30, 2016
 
December 31, 2015
 
Principal
 
% of Total Par Value of Advances
 
 
Principal
 
% of Total Par Value of Advances
JPMorgan Chase Bank, N.A.
$
32,300

 
47
%
 
JPMorgan Chase Bank, N.A.
$
35,350

 
48
%
U.S. Bank, N.A.
9,929

 
14

 
U.S. Bank, N.A.
10,086

 
14

Total
$
42,229

 
61
%
 
Total
$
45,436

 
62
%


Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
 
September 30, 2016
 
December 31, 2015
Unpaid principal balance:
 
 
 
Fixed rate medium-term single-family mortgage loans (1)
$
1,345,035

 
$
1,478,780

Fixed rate long-term single-family mortgage loans
7,234,942

 
6,278,904

Total unpaid principal balance
8,579,977

 
7,757,684

Premiums
208,413

 
205,600

Discounts
(1,490
)
 
(1,989
)
Hedging basis adjustments (2)
34,560

 
19,998

Total mortgage loans held for portfolio
$
8,821,460

 
$
7,981,293


(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.


17


Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
 
September 30, 2016
 
December 31, 2015
Unpaid principal balance:
 
 
 
Conventional mortgage loans
$
8,164,907

 
$
7,277,584

Federal Housing Administration (FHA) mortgage loans
415,070

 
480,100

Total unpaid principal balance
$
8,579,977

 
$
7,757,684


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)
 
September 30, 2016
 
 
December 31, 2015
 
Principal
 
% of Total
 
 
Principal
 
% of Total
Union Savings Bank
$
2,745

 
32
%
 
Union Savings Bank
$
2,242

 
29
%
Guardian Savings Bank FSB
786

 
9

 
PNC Bank, N.A. (1)
839

 
11

PNC Bank, N.A. (1)
707

 
8

 
Guardian Savings Bank FSB
633

 
8

 
(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 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 Federal Home Loan Bank Act of 1932 (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, agriculture loans and community development 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 September 30, 2016 and December 31, 2015, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

18



The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At September 30, 2016 and December 31, 2015, 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 nine months ended September 30, 2016 or 2015.

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 and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of September 30, 2016 or December 31, 2015. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At September 30, 2016 and December 31, 2015, 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 a best efforts attempt to sell a specific dollar amount of loans to the FHLB generally 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,

19


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,
 
2016
 
2015
Balance, beginning of period
$
1,217

 
$
1,701

Net (charge offs) recoveries
(78
)
 
14

Balance, end of period
$
1,139

 
$
1,715

 
 
 
 
 
Nine Months Ended September 30,
 
2016
 
2015
Balance, beginning of period
$
1,686

 
$
4,919

Net charge offs
(547
)
 
(3,204
)
Balance, end of period
$
1,139

 
$
1,715


Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
 
September 30, 2016
 
December 31, 2015
Allowance for credit losses, end of period:
 
 
 
Collectively evaluated for impairment
$
1,139

 
$
1,686

Individually evaluated for impairment

 

Total allowance for credit losses
$
1,139

 
$
1,686

Recorded investment, end of period:
 
 
 
Collectively evaluated for impairment
$
8,418,236

 
$
7,510,089

Individually evaluated for impairment
10,108

 
9,385

Total recorded investment
$
8,428,344

 
$
7,519,474


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. The LRA is recorded in other liabilities in the Statements of Condition. 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, 2016
LRA at beginning of year
$
158,010

Additions
24,426

Claims
(701
)
Scheduled distributions
(2,807
)
LRA at end of period
$
178,928



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)
 
September 30, 2016
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
39,623

 
$
26,121

 
$
65,744

Past due 60-89 days delinquent
8,842

 
7,947

 
16,789

Past due 90 days or more delinquent
22,463

 
14,815

 
37,278

Total past due
70,928

 
48,883

 
119,811

Total current mortgage loans
8,357,416

 
372,874

 
8,730,290

Total mortgage loans
$
8,428,344

 
$
421,757

 
$
8,850,101

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
18,201

 
$
6,137

 
$
24,338

Serious delinquency rate (2)
0.28
%
 
3.56
%
 
0.44
%
Past due 90 days or more still accruing interest (3)
$
18,882

 
$
14,815

 
$
33,697

Loans on non-accrual status, included above
$
5,087

 
$

 
$
5,087

 
 
 
 
 
 
 
December 31, 2015
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
42,606

 
$
31,846

 
$
74,452

Past due 60-89 days delinquent
10,125

 
9,887

 
20,012

Past due 90 days or more delinquent
30,575

 
17,426

 
48,001

Total past due
83,306

 
59,159

 
142,465

Total current mortgage loans
7,436,168

 
429,551

 
7,865,719

Total mortgage loans
$
7,519,474

 
$
488,710

 
$
8,008,184

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
23,171

 
$
7,043

 
$
30,214

Serious delinquency rate (2)
0.42
%
 
3.63
%
 
0.62
%
Past due 90 days or more still accruing interest (3)
$
25,016

 
$
17,426

 
$
42,442

Loans on non-accrual status, included above
$
6,753

 
$

 
$
6,753

(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 September 30, 2016 or December 31, 2015.
 
 
 
 

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)
 
September 30, 2016
 
December 31, 2015
Conventional MPP loans
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related
allowance
$
10,108

 
$
9,886

 
$

 
$
9,385

 
$
9,187

 
$

With an allowance

 

 

 

 

 

Total
$
10,108

 
$
9,886

 
$

 
$
9,385

 
$
9,187

 
$


Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 
Three Months Ended September 30,
 
2016
 
2015
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
9,620

 
$
122

 
$
9,445

 
$
123

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2016
 
2015
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
9,343

 
$
357

 
$
8,758

 
$
342


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) $10,108 and $9,385 at September 30, 2016 and December 31, 2015, 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 interest-bearing liabilities 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 interest-bearing liabilities. See Note 11 - Derivatives and Hedging Activities in the FHLB's 2015 Annual Report on Form 10-K for additional information on the FHLB's derivative transactions.


22


The FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives. The FHLB re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

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 (uncleared 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 FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

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 counterparties, the types of 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, 2016
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
6,441,525

 
$
7,331

 
$
80,417

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
9,398,955

 
7,669

 
2,013

Interest rate swaptions
1,525,000

 
2,854

 

Forward rate agreements
789,000

 
55

 
4,077

Mortgage delivery commitments
624,192

 
3,590

 
14

Total derivatives not designated as hedging instruments
12,337,147

 
14,168

 
6,104

Total derivatives before netting and collateral adjustments
$
18,778,672

 
21,499

 
86,521

Netting adjustments and cash collateral (1)
 
 
77,329

 
(65,345
)
Total derivative assets and total derivative liabilities
 
 
$
98,828

 
$
21,176

 
 
 
 
 
 
 
December 31, 2015
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
5,548,351

 
$
12,205

 
$
77,950

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
2,719,000

 
1,051

 
4,029

Interest rate swaptions
281,000

 
683

 

Forward rate agreements
462,000

 
1,680

 
69

Mortgage delivery commitments
449,856

 
342

 
1,650

Total derivatives not designated as hedging instruments
3,911,856

 
3,756

 
5,748

Total derivatives before netting and collateral adjustments