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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnatiex322017q110-q.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnatiex3122017q110-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnatiex3112017q110-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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

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 April 30, 2017, the registrant had 42,210,782 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 - March 31, 2017 and December 31, 2016
 
 
 
 
Statements of Income - Three months ended March 31, 2017 and 2016
 
 
 
 
Statements of Comprehensive Income - Three months ended March 31, 2017 and 2016
 
 
 
 
Statements of Capital - Three months ended March 31, 2017 and 2016
 
 
 
 
Statements of Cash Flows - Three months ended March 31, 2017 and 2016
 
 
 
 
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)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and due from banks
$
8,913

 
$
8,737

Interest-bearing deposits
210

 
129

Securities purchased under agreements to resell
4,458,528

 
5,229,487

Federal funds sold
5,740,000

 
4,257,000

Investment securities:
 
 
 
Trading securities
923

 
970

Available-for-sale securities
149,997

 
1,300,023

Held-to-maturity securities (includes $0 and $0 pledged as collateral at March 31, 2017 and December 31, 2016, respectively, that may be repledged) (a)
15,176,403

 
14,546,979

Total investment securities
15,327,323

 
15,847,972

Advances (includes $15,078 and $15,093 at fair value under fair value option at March 31, 2017 and December 31, 2016, respectively)
61,286,346

 
69,882,074

Mortgage loans held for portfolio:
 
 
 
Mortgage loans held for portfolio
9,292,714

 
9,149,860

Less: allowance for credit losses on mortgage loans
880

 
1,142

Mortgage loans held for portfolio, net
9,291,834

 
9,148,718

Accrued interest receivable
112,515

 
109,886

Premises, software, and equipment, net
8,837

 
9,187

Derivative assets
85,291

 
104,753

Other assets
7,995

 
37,338

TOTAL ASSETS
$
96,327,792

 
$
104,635,281

LIABILITIES
 
 
 
Deposits
$
674,038

 
$
765,879

Consolidated Obligations:
 
 
 
Discount Notes
36,297,626

 
44,689,662

Bonds (includes $5,955,586 and $7,895,510 at fair value under fair value option at March 31, 2017 and December 31, 2016, respectively)
53,497,391

 
53,190,866

Total Consolidated Obligations
89,795,017

 
97,880,528

Mandatorily redeemable capital stock
31,956

 
34,782

Accrued interest payable
129,823

 
119,322

Affordable Housing Program payable
106,818

 
104,883

Derivative liabilities
7,603

 
17,874

Other liabilities
569,078

 
733,918

Total liabilities
91,314,333

 
99,657,186

Commitments and contingencies

 

CAPITAL
 
 
 
Capital stock Class B putable ($100 par value); issued and outstanding shares: 41,736 shares at March 31, 2017 and 41,569 shares at December 31, 2016
4,173,641

 
4,156,944

Retained earnings:
 
 
 
Unrestricted
579,433

 
574,122

Restricted
273,325

 
260,285

Total retained earnings
852,758

 
834,407

Accumulated other comprehensive loss
(12,940
)
 
(13,256
)
Total capital
5,013,459

 
4,978,095

TOTAL LIABILITIES AND CAPITAL
$
96,327,792

 
$
104,635,281

(a)
Fair values: $15,054,404 and $14,413,231 at March 31, 2017 and December 31, 2016, 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 March 31,
 
2017
 
2016
INTEREST INCOME:
 
 
 
Advances
$
181,253

 
$
133,520

Prepayment fees on Advances, net
347

 
2,244

Interest-bearing deposits
16

 
79

Securities purchased under agreements to resell
4,726

 
1,922

Federal funds sold
10,450

 
11,170

Investment securities:
 
 
 
Trading securities
4

 
5

Available-for-sale securities
1,782

 
1,011

Held-to-maturity securities
72,755

 
84,557

Total investment securities
74,541

 
85,573

Mortgage loans held for portfolio
72,437

 
67,884

Total interest income
343,770

 
302,392

INTEREST EXPENSE:
 
 
 
Consolidated Obligations:
 
 
 
Discount Notes
56,649

 
54,880

Bonds
182,613

 
157,324

Total Consolidated Obligations
239,262

 
212,204

Deposits
764

 
280

Mandatorily redeemable capital stock
471

 
1,063

Total interest expense
240,497

 
213,547

NET INTEREST INCOME
103,273

 
88,845

NON-INTEREST (LOSS) INCOME:
 
 
 
Net losses on trading securities
(3
)
 

Net losses on financial instruments held under fair value option
(6,061
)
 
(13,657
)
Net (losses) gains on derivatives and hedging activities
(8,116
)
 
5,645

Standby Letters of Credit fees
2,863

 
3,144

Other, net
604

 
680

Total non-interest (loss) income
(10,713
)
 
(4,188
)
NON-INTEREST EXPENSE:
 
 
 
Compensation and benefits
11,765

 
10,568

Other operating expenses
5,162

 
5,909

Finance Agency
1,640

 
1,535

Office of Finance
1,102

 
1,195

Other
397

 
2,544

Total non-interest expense
20,066

 
21,751

INCOME BEFORE ASSESSMENTS
72,494

 
62,906

Affordable Housing Program assessments
7,296

 
6,397

NET INCOME
$
65,198

 
$
56,509

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 March 31,
 
2017
 
2016
Net income
$
65,198

 
$
56,509

Other comprehensive income adjustments:
 
 
 
Net unrealized (losses) gains on available-for-sale securities
(26
)
 
144

Pension and postretirement benefits
342

 
472

Total other comprehensive income adjustments
316

 
616

Comprehensive income
$
65,514

 
$
57,125


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, 2015
44,288

 
$
4,428,756

 
$
530,998

 
$
206,648

 
$
737,646

 
$
(13,277
)
 
$
5,153,125

Proceeds from sale of capital stock
104

 
10,400

 
 
 
 
 
 
 
 
 
10,400

Net shares reclassified to mandatorily
   redeemable capital stock
(2,288
)
 
(228,751
)
 
 
 
 
 
 
 
 
 
(228,751
)
Comprehensive income
 
 
 
 
45,207

 
11,302

 
56,509

 
616

 
57,125

Cash dividends on capital stock
 
 
 
 
(44,483
)
 
 
 
(44,483
)
 
 
 
(44,483
)
BALANCE, MARCH 31, 2016
42,104

 
$
4,210,405

 
$
531,722

 
$
217,950

 
$
749,672

 
$
(12,661
)
 
$
4,947,416

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2016
41,569

 
$
4,156,944

 
$
574,122

 
$
260,285

 
$
834,407

 
$
(13,256
)
 
$
4,978,095

Proceeds from sale of capital stock
183

 
18,291

 
 
 
 
 
 
 
 
 
18,291

Net shares reclassified to mandatorily
   redeemable capital stock
(16
)
 
(1,594
)
 
 
 
 
 
 
 
 
 
(1,594
)
Comprehensive income
 
 
 
 
52,158

 
13,040

 
65,198

 
316

 
65,514

Cash dividends on capital stock
 
 
 
 
(46,847
)
 
 
 
(46,847
)
 
 
 
(46,847
)
BALANCE, MARCH 31, 2017
41,736

 
$
4,173,641

 
$
579,433

 
$
273,325

 
$
852,758

 
$
(12,940
)
 
$
5,013,459


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)
 
Three Months Ended March 31,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
65,198

 
$
56,509

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,079

 
15,726

Net change in derivative and hedging activities
7,222

 
(14,795
)
Net change in fair value adjustments on trading securities
3

 

Net change in fair value adjustments on financial instruments held under fair value option
6,061

 
13,657

Other adjustments

 
(1
)
Net change in:
 
 
 
Accrued interest receivable
(2,630
)
 
(9,466
)
Other assets
29,343

 
4,327

Accrued interest payable
6,728

 
7,183

Other liabilities
(4,976
)
 
(1,459
)
Total adjustments
49,830

 
15,172

Net cash provided by operating activities
115,028

 
71,681

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
22,418

 
(67,961
)
Securities purchased under agreements to resell
770,959

 
6,337,045

Federal funds sold
(1,483,000
)
 
4,535,000

Premises, software, and equipment
(383
)
 
(526
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
44

 
44

Available-for-sale securities:
 
 
 
Net decrease (increase) in short-term
1,150,000

 
(100,000
)
Held-to-maturity securities:
 
 
 
Net (increase) decrease in short-term
(1,460
)
 
1,708

Proceeds from maturities of long-term
557,070

 
591,605

Purchases of long-term
(1,343,696
)
 
(666,531
)
Advances:
 
 
 
Proceeds
426,150,933

 
266,907,192

Made
(417,564,160
)
 
(262,292,242
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
321,672

 
256,977

Purchases
(482,513
)
 
(552,351
)
Net cash provided by investing activities
8,097,884

 
14,949,960

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
Three Months Ended March 31,
 
2017
 
2016
FINANCING ACTIVITIES:
 
 
 
Net decrease in deposits and pass-through reserves
$
(94,590
)
 
$
(133,596
)
Net payments on derivative contracts with financing elements
(1,716
)
 
(4,029
)
Net proceeds from issuance of Consolidated Obligations:
 
 
 
Discount Notes
102,823,446

 
90,885,753

Bonds
7,815,958

 
14,864,968

Payments for maturing and retiring Consolidated Obligations:
 
 
 
Discount Notes
(111,218,858
)
 
(114,421,545
)
Bonds
(7,504,000
)
 
(6,017,943
)
Proceeds from issuance of capital stock
18,291

 
10,400

Payments for repurchase/redemption of mandatorily redeemable capital stock
(4,420
)
 
(163,795
)
Cash dividends paid
(46,847
)
 
(44,483
)
Net cash used in financing activities
(8,212,736
)
 
(15,024,270
)
Net increase (decrease) in cash and cash equivalents
176

 
(2,629
)
Cash and cash equivalents at beginning of the period
8,737

 
10,136

Cash and cash equivalents at end of the period
$
8,913

 
$
7,507

Supplemental Disclosures:
 
 
 
Interest paid
$
237,088

 
$
206,515

Affordable Housing Program payments, net
$
5,361

 
$
6,802




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, 2016 filed with the Securities and Exchange Commission (SEC). Results for the three months ended March 31, 2017 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 2016 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.

Change in Accounting Principle. Effective October 1, 2016, the FHLB changed its method of accounting for the amortization and accretion of premiums and discounts and hedging basis adjustments on mortgage loans held for portfolio to the contractual interest method (contractual method). Historically, the FHLB deferred and amortized premiums and accreted discounts into interest income using the retrospective interest method (retrospective method), which used both actual prepayment experience and estimates of future principal repayments in calculating the estimated lives of the loans. While both the retrospective and contractual methods are acceptable under GAAP, the contractual method has become preferable for recognizing net unamortized premiums on mortgage loans held for portfolio because (i) it reduces the FHLB's reliance on subjective assumptions and estimates that affected the reported amounts of assets, capital and income in the financial statements and (ii) it represents the base accounting model articulated in GAAP applicable to accounting for the amortization of premiums and the accretion of discounts, whereas the retrospective method is only permitted by the guidance in narrowly defined circumstances.
The change to the contractual method for amortizing premiums and accreting discounts and hedging basis adjustments on mortgage loans has been reported through retroactive application of the change in accounting principle to all periods presented. For the three months ended March 31, 2016, the effect of this change was an increase to net income (in thousands) of $8,162.

9


The following table illustrates the effect of the change in amortization and accretion method on the FHLB's financial statements as of and for the three months ended March 31, 2016.
 
As of and for the Three Months Ended March 31, 2016
(In thousands)
Previous Method
 
New Method
 
Effect of Change
Statements of Condition:
 
 
 
 
 
Mortgage loans held for portfolio, net
$
8,262,995

 
$
8,244,133

 
$
(18,862
)
Total assets
103,888,370

 
103,869,508

 
(18,862
)
Affordable Housing Program payable
106,040

 
106,947

 
907

Total liabilities
98,921,185

 
98,922,092

 
907

Retained earnings:
 
 
 
 
 
Unrestricted
550,334

 
531,722

 
(18,612
)
Restricted
219,107

 
217,950

 
(1,157
)
Total retained earnings
769,441

 
749,672

 
(19,769
)
Total capital
4,967,185

 
4,947,416

 
(19,769
)
Total liabilities and capital
103,888,370

 
103,869,508

 
(18,862
)
Statements of Income:
 
 
 
 
 
Interest income - mortgage loans held for portfolio
$
58,815

 
$
67,884

 
$
9,069

Net interest income
79,776

 
88,845

 
9,069

Income before assessments
53,837

 
62,906

 
9,069

Affordable Housing Program assessments
5,490

 
6,397

 
907

Net income
48,347

 
56,509

 
8,162

Statements of Comprehensive Income:
 
 
 
 
 
Net income
$
48,347

 
$
56,509

 
$
8,162

Comprehensive income
48,963

 
57,125

 
8,162

Statements of Capital:
 
 
 
 
 
Total retained earnings, as of December 31, 2015
$
765,577

 
$
737,646

 
$
(27,931
)
Total comprehensive income
48,963

 
57,125

 
8,162

Total retained earnings, as of March 31, 2016
769,441

 
749,672

 
(19,769
)
Total capital
4,967,185

 
4,947,416

 
(19,769
)
Statements of Cash Flows:
 
 
 
 
 
Operating activities:
 
 
 
 
 
Net income
$
48,347

 
$
56,509

 
$
8,162

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
24,795

 
15,726

 
(9,069
)
Changes in:
 
 
 
 
 
Other liabilities
(2,366
)
 
(1,459
)
 
907

Total adjustments
23,334

 
15,172

 
(8,162
)
Net cash provided by operating activities
71,681

 
71,681

 




Note 2 - Recently Issued Accounting Standards and Interpretations
 
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2018, and early adoption is permitted.

10


This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings 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.
Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost. On March 10, 2017, the FASB issued amended guidance that requires an employer to disaggregate the service cost component from the other components of net periodic pension and postretirement benefit costs (net benefit costs). The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. 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 retrospectively for the presentation of the service cost component and the other components of net benefit costs in the income statement. For the capitalization of the service cost component of net benefit costs, this guidance should be applied prospectively on and after 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.
Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the 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 does not intend to adopt the new guidance early. At this time, the FHLB does not expect the new guidance to have a material impact on the FHLB’s cash flows.
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 does not intend to adopt the new guidance early. While the FHLB is still in the process of evaluating this guidance, the FHLB expects the guidance will result in an increase in the allowance for credit losses given the requirement to estimate losses for the entire estimated life of the financial asset. The extent of the impact on the FHLB’s financial condition, results of operations, and cash flows will depend upon the composition of the FHLB’s financial assets at the adoption date and the economic conditions and forecasts at that time.
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 became effective for the FHLB for the interim and annual periods beginning on January 1, 2017. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and cash flows.

11


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 months 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 does not intend to adopt the new guidance early. Upon adoption, the FHLB expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities on its Statement of Condition. While the FHLB is still in the process of evaluating this guidance, the FHLB does not expect the new guidance to have a material impact on its financial condition, results of operations, and cash flows.

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.
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 does not intend to adopt the new guidance early. At this time, the FHLB does not expect the new guidance to have a material impact on the FHLB's financial condition, results of operations, and cash flows.


Note 3 - Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)        
Fair Value
March 31, 2017
 
December 31, 2016
Mortgage-backed securities:
 
 
 
Other U.S. obligation single-family mortgage-backed securities
$
923

 
$
970

Total
$
923

 
$
970


Table 3.2 - Net Losses on Trading Securities (in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Net losses on trading securities held at period end
$
(3
)
 
$

Net losses on trading securities
$
(3
)
 
$




12


Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
150,000

 
$

 
$
(3
)
 
$
149,997

Total
$
150,000

 
$

 
$
(3
)
 
$
149,997

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
1,300,000

 
$
38

 
$
(15
)
 
$
1,300,023

Total
$
1,300,000

 
$
38

 
$
(15
)
 
$
1,300,023


All securities outstanding with gross unrealized losses at March 31, 2017 and December 31, 2016 were in a continuous unrealized loss position for less than 12 months.

Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 
March 31, 2017
 
December 31, 2016
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
150,000

 
$
149,997

 
$
1,300,000

 
$
1,300,023


Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 
March 31, 2017
 
December 31, 2016
Amortized cost of available-for-sale securities:
 
 
 
Fixed-rate
$
150,000

 
$
1,300,000


Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the three months ended March 31, 2017 or 2016.


13



Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
 
March 31, 2017
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSE)
$
32,739

 
$

 
$
(19
)
 
$
32,720

Total non-mortgage-backed securities
32,739

 

 
(19
)
 
32,720

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities
3,031,185

 
3,704

 
(26,017
)
 
3,008,872

GSE single-family mortgage-backed securities
7,813,068

 
36,982

 
(137,542
)
 
7,712,508

GSE multi-family mortgage-backed securities
4,299,411

 
2,592

 
(1,699
)
 
4,300,304

Total mortgage-backed securities
15,143,664

 
43,278

 
(165,258
)
 
15,021,684

Total
$
15,176,403

 
$
43,278

 
$
(165,277
)
 
$
15,054,404

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
GSE
$
31,279

 
$
1

 
$

 
$
31,280

Total non-mortgage-backed securities
31,279

 
1

 

 
31,280

Mortgage-backed securities:
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities
3,183,219

 
3,653

 
(23,151
)
 
3,163,721

GSE single-family mortgage-backed securities
8,186,733

 
36,161

 
(147,494
)
 
8,075,400

GSE multi-family mortgage-backed securities
3,145,748

 
988

 
(3,906
)
 
3,142,830

Total mortgage-backed securities
14,515,700

 
40,802

 
(174,551
)
 
14,381,951

Total
$
14,546,979

 
$
40,803

 
$
(174,551
)
 
$
14,413,231

 
(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)
 
March 31, 2017
 
December 31, 2016
Premiums
$
58,237

 
$
60,519

Discounts
(29,837
)
 
(31,474
)
Net purchased premiums
$
28,400

 
$
29,045



14


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)
 
March 31, 2017
 
Less than 12 Months
 
12 Months or more
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Non-mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
GSE
$
32,720

 
$
(19
)
 
$

 
$

 
$
32,720

 
$
(19
)
Total non-mortgage-backed securities
32,720

 
(19
)
 

 

 
32,720

 
(19
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligation single-family
   mortgage-backed securities
1,910,280

 
(26,017
)
 

 

 
1,910,280

 
(26,017
)
GSE single-family mortgage-backed securities
4,180,253

 
(83,997
)
 
1,152,511

 
(53,545
)
 
5,332,764

 
(137,542
)
GSE multi-family mortgage-backed securities
1,878,894

 
(1,699
)
 

 

 
1,878,894

 
(1,699
)
Total mortgage-backed securities
7,969,427

 
(111,713
)
 
1,152,511

 
(53,545
)
 
9,121,938

 
(165,258
)
Total
$
8,002,147

 
$
(111,732
)
 
$
1,152,511

 
$
(53,545
)
 
$
9,154,658

 
$
(165,277
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
2,151,584

 
$
(23,151
)
 
$

 
$

 
$
2,151,584

 
$
(23,151
)
GSE single-family mortgage-backed securities
4,548,897

 
(90,119
)
 
1,193,241

 
(57,375
)
 
5,742,138

 
(147,494
)
GSE multi-family mortgage-backed securities
1,897,043

 
(3,906
)
 

 

 
1,897,043

 
(3,906
)
Total
$
8,597,524

 
$
(117,176
)
 
$
1,193,241

 
$
(57,375
)
 
$
9,790,765

 
$
(174,551
)

Table 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
 
March 31, 2017
 
December 31, 2016
Year of Maturity
Amortized Cost (1)
 
Fair Value
 
Amortized Cost (1)
 
Fair Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Due in 1 year or less
$
32,739

 
$
32,720

 
$
31,279

 
$
31,280

Due after 1 year through 5 years

 

 

 

Due after 5 years through 10 years

 

 

 

Due after 10 years

 

 

 

Total non-mortgage-backed securities
32,739

 
32,720

 
31,279

 
31,280

Mortgage-backed securities (2)
15,143,664

 
15,021,684

 
14,515,700

 
14,381,951

Total
$
15,176,403

 
$
15,054,404

 
$
14,546,979

 
$
14,413,231

(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.

15



Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 
March 31, 2017
 
December 31, 2016
Amortized cost of non-mortgage-backed securities:
 
 
 
Fixed-rate
$
32,739

 
$
31,279

Total amortized cost of non-mortgage-backed securities
32,739

 
31,279

Amortized cost of mortgage-backed securities:
 
 
 
Fixed-rate
9,287,979

 
9,706,072

Variable-rate
5,855,685

 
4,809,628

Total amortized cost of mortgage-backed securities
15,143,664

 
14,515,700

Total
$
15,176,403

 
$
14,546,979


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 three months ended March 31, 2017 and 2016, 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 March 31, 2017, 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 March 31, 2017.

The FHLB also reviewed its available-for-sale securities that have experienced unrealized losses at March 31, 2017 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLB will recover its entire amortized cost basis. Additionally, because the FHLB does not intend to sell these securities, nor is it more likely than not that the FHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at March 31, 2017.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2016.


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.


16


Table 7.1 - Advance Redemption Terms (dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Redemption Term
Amount
 
Weighted Average Interest
Rate
 
Amount
 
Weighted Average Interest
Rate
Overdrawn demand deposit accounts
$
81

 
0.96
%
 
$

 
%
Due in 1 year or less
21,976,409

 
1.07

 
23,129,060

 
0.85

Due after 1 year through 2 years
17,215,841

 
1.25

 
21,503,138

 
1.06

Due after 2 years through 3 years
12,945,195

 
1.29

 
14,292,353

 
1.12

Due after 3 years through 4 years
3,753,691

 
1.51

 
5,322,050

 
1.26

Due after 4 years through 5 years
744,760

 
1.94

 
963,105

 
1.78

Thereafter
4,684,274

 
1.85

 
4,697,315

 
1.75

Total par value
61,320,251

 
1.26

 
69,907,021

 
1.07

Commitment fees
(528
)
 
 
 
(534
)
 
 
Discount on Affordable Housing Program (AHP) Advances
(7,019
)
 
 
 
(7,435
)
 
 
Premiums
1,994

 
 
 
2,061

 
 
Discounts
(5,519
)
 
 
 
(5,994
)
 
 
Hedging adjustments
(22,911
)
 
 
 
(13,138
)
 
 
Fair value option valuation adjustments and accrued interest
78

 
 
 
93

 
 
Total
$
61,286,346

 
 
 
$
69,882,074

 
 

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
March 31, 2017
 
December 31, 2016
Overdrawn demand deposit accounts
$
81

 
$

Due in 1 year or less
27,735,701

 
33,831,156

Due after 1 year through 2 years
16,503,466

 
15,901,805

Due after 2 years through 3 years
12,224,073

 
13,608,214

Due after 3 years through 4 years
2,817,896

 
2,982,425

Due after 4 years through 5 years
711,760

 
2,243,105

Thereafter
1,327,274

 
1,340,316

Total par value
$
61,320,251

 
$
69,907,021


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.


17


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
March 31, 2017
 
December 31, 2016
Overdrawn demand deposit accounts
$
81

 
$

Due in 1 year or less
22,267,909

 
23,499,560

Due after 1 year through 2 years
17,034,341

 
21,248,138

Due after 2 years through 3 years
12,945,195

 
14,286,853

Due after 3 years through 4 years
3,753,691

 
5,322,050

Due after 4 years through 5 years
744,760

 
963,105

Thereafter
4,574,274

 
4,587,315

Total par value
$
61,320,251

 
$
69,907,021


Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)                    
 
March 31, 2017
 
December 31, 2016
Total fixed-rate (1)
$
20,559,609

 
$
24,700,450

Total variable-rate (1)
40,760,642

 
45,206,571

Total par value
$
61,320,251

 
$
69,907,021

(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)
March 31, 2017
 
December 31, 2016
 
Principal
 
% of Total Par Value of Advances
 
 
Principal
 
% of Total Par Value of Advances
JPMorgan Chase Bank, N.A.
$
28,600

 
47
%
 
JPMorgan Chase Bank, N.A.
$
32,300

 
46
%
U.S. Bank, N.A.
8,161

 
13

 
U.S. Bank, N.A.
8,563

 
12

Third Federal Savings and Loan Association
3,365

 
5

 
Total
$
40,863

 
58
%
Total
$
40,126

 
65
%
 
 


 




Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
 
March 31, 2017
 
December 31, 2016
Unpaid principal balance:
 
 
 
Fixed rate medium-term single-family mortgage loans (1)
$
1,271,195

 
$
1,320,585

Fixed rate long-term single-family mortgage loans
7,803,381

 
7,605,088

Total unpaid principal balance
9,074,576

 
8,925,673

Premiums
214,171

 
211,058

Discounts
(3,785
)
 
(3,740
)
Hedging basis adjustments (2)
7,752

 
16,869

Total mortgage loans held for portfolio
$
9,292,714

 
$
9,149,860


(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.


18


Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
 
March 31, 2017
 
December 31, 2016
Unpaid principal balance:
 
 
 
Conventional mortgage loans
$
8,701,868

 
$
8,534,542

Federal Housing Administration (FHA) mortgage loans
372,708

 
391,131

Total unpaid principal balance
$
9,074,576

 
$
8,925,673


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)
 
March 31, 2017
 
 
December 31, 2016
 
Principal
 
% of Total
 
 
Principal
 
% of Total
Union Savings Bank
$
3,019

 
33
%
 
Union Savings Bank
$
2,886

 
32
%
Guardian Savings Bank FSB
875

 
10

 
Guardian Savings Bank FSB
855

 
10

PNC Bank, N.A. (1)
619

 
7

 
PNC Bank, N.A. (1)
660

 
7

 
(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, ongoing review of each borrower's financial condition, 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 law, 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, 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 March 31, 2017 and December 31, 2016, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.


19


The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017 or 2016.

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 March 31, 2017 or December 31, 2016. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At March 31, 2017 and December 31, 2016, 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,

20


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 March 31,
 
2017
 
2016
Balance, beginning of period
$
1,142

 
$
1,686

Net charge offs
(262
)
 
(203
)
Balance, end of period
$
880

 
$
1,483


Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
 
March 31, 2017
 
December 31, 2016
Allowance for credit losses:
 
 
 
Collectively evaluated for impairment
$
880

 
$
1,142

Individually evaluated for impairment

 

Total allowance for credit losses
$
880

 
$
1,142

Recorded investment:
 
 
 
Collectively evaluated for impairment
$
8,935,119

 
$
8,772,681

Individually evaluated for impairment
9,469

 
9,889

Total recorded investment
$
8,944,588

 
$
8,782,570


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)
 
Three Months Ended
 
March 31, 2017
LRA at beginning of year
$
187,684

Additions
5,448

Claims
(65
)
Scheduled distributions
(2,530
)
LRA at end of period
$
190,537



21


Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. 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)
 
March 31, 2017
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
43,472

 
$
22,800

 
$
66,272

Past due 60-89 days delinquent
8,579

 
7,381

 
15,960

Past due 90 days or more delinquent
21,872

 
12,856

 
34,728

Total past due
73,923

 
43,037

 
116,960

Total current mortgage loans
8,870,665

 
335,078

 
9,205,743

Total mortgage loans
$
8,944,588

 
$
378,115

 
$
9,322,703

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
15,501

 
$
5,570

 
$
21,071

Serious delinquency rate (2)
0.25
%
 
3.49
%
 
0.38
%
Past due 90 days or more still accruing interest (3)
$
19,680

 
$
12,856

 
$
32,536

Loans on non-accrual status, included above
$
3,723

 
$

 
$
3,723

 
 
 
 
 
 
 
December 31, 2016
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
39,409

 
$
23,206

 
$
62,615

Past due 60-89 days delinquent
9,350

 
8,275

 
17,625

Past due 90 days or more delinquent
21,773

 
14,054

 
35,827

Total past due
70,532

 
45,535

 
116,067

Total current mortgage loans
8,712,038

 
351,299

 
9,063,337

Total mortgage loans
$
8,782,570

 
$
396,834

 
$
9,179,404

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
15,412

 
$
5,841

 
$
21,253

Serious delinquency rate (2)
0.26
%
 
3.59
%
 
0.40
%
Past due 90 days or more still accruing interest (3)
$
19,408

 
$
14,054

 
$
33,462

Loans on non-accrual status, included above
$
3,908

 
$

 
$
3,908

(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 March 31, 2017 or December 31, 2016.
 
 
 
 

22


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)
 
March 31, 2017
 
December 31, 2016
Conventional MPP loans
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related
allowance
$
9,469

 
$
9,292

 
$

 
$
9,889

 
$
9,708

 
$

With an allowance

 

 

 

 

 

Total
$
9,469

 
$
9,292

 
$

 
$
9,889

 
$
9,708

 
$


Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
9,356

 
$
111

 
$
9,471

 
$
121


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 estimating expected cash shortfalls incurred as of the reporting date.

The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $9,469 and $9,889 at March 31, 2017 and December 31, 2016, 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 2016 Annual Report on Form 10-K for additional information on the FHLB's derivative transactions.

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).


23


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.

Table 10.1 summarizes the notional amount, fair value of derivative instruments (excluding fair value adjustments related to variation margin on settled daily contracts), and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments, cash collateral and variation margin for daily settled contracts. 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)
 
March 31, 2017
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
5,498,756

 
$
42,009

 
$
20,187

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
6,316,840

 
981

 
68,564

Interest rate swaptions
2,515,000

 
4,972

 

Forward rate agreements
315,000

 

 
1,920

Mortgage delivery commitments
331,698

 
1,146

 
72

Total derivatives not designated as hedging instruments
9,478,538

 
7,099

 
70,556

Total derivatives before netting and collateral adjustments
$
14,977,294

 
49,108

 
90,743

Netting adjustments, cash collateral and variation margin for daily settled contracts (1)
 
 
36,183

 
(83,140
)
Total derivative assets and total derivative liabilities
 
 
$
85,291

 
$
7,603

 
 
 
 
 
 
 
December 31, 2016
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
5,660,420

 
$
37,379

 
$
26,610

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
8,199,000

 
2,135

 
64,661

Interest rate swaptions
2,346,000

 
13,335