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EX-32.1 - CERTIFICATION OF CEO AND CFO - Federal Home Loan Bank of Dallasfhlbdallas-63017xex_321.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Federal Home Loan Bank of Dallasfhlbdallas-63017xex_312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Federal Home Loan Bank of Dallasfhlbdallas-63017xex_311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
 
71-6013989
(I.R.S. Employer
Identification Number)
 
 
 
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
 
75063-2547
(Zip code)
(214) 441-8500
(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. Yes þ No o
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 (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 þ
 
Smaller reporting
company o
 
Emerging growth
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). Yes o No 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At July 31, 2017, the registrant had outstanding 22,367,701 shares of its Class B Capital Stock, $100 par value per share.
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)
 
June 30,
2017
 
December 31,
2016
ASSETS
 

 
 

Cash and due from banks
$
42,745

 
$
27,696

Interest-bearing deposits
367

 
255

Securities purchased under agreements to resell (Note 10)
3,600,000

 
3,100,000

Federal funds sold
7,903,000

 
6,242,000

Trading securities (Note 3)
113,959

 
111,638

Available-for-sale securities (Notes 4, 10 and 15) ($567,144 and $613,351 pledged at June 30, 2017 and December 31, 2016, respectively, which could be rehypothecated)
14,279,383

 
13,175,933

Held-to-maturity securities (a) (Note 5)
2,225,910

 
2,499,595

Advances (Notes 6 and 7)
34,132,238

 
32,506,175

Mortgage loans held for portfolio, net of allowance for credit losses of $141 at both
June 30, 2017 and December 31, 2016, respectively (Note 7)
378,885

 
123,961

Loan to other FHLBank (Note 17)

 
290,000

Accrued interest receivable
100,217

 
87,977

Premises and equipment, net
17,765

 
17,972

Derivative assets (Notes 10 and 11)
55,944

 
15,637

Other assets
12,084

 
13,238

TOTAL ASSETS
$
62,862,497

 
$
58,212,077

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
1,165,520

 
$
1,040,139

Non-interest bearing
19

 
19

Total deposits
1,165,539

 
1,040,158

Consolidated obligations (Note 8)
 
 
 
Discount notes
28,014,878

 
26,941,782

Bonds
30,020,333

 
26,997,487

Total consolidated obligations
58,035,211

 
53,939,269

Mandatorily redeemable capital stock
23,146

 
3,417

Accrued interest payable
57,075

 
43,274

Affordable Housing Program (Note 9)
27,068

 
22,871

Derivative liabilities (Notes 10 and 11)
15,772

 
14,343

Other liabilities (Note 4)
401,381

 
331,403

Total liabilities
59,725,192

 
55,394,735

 
 
 
 
Commitments and contingencies (Notes 7 and 15)


 


 
 
 
 
CAPITAL (Note 12)
 
 
 
Capital stock
 
 
 
Capital stock — Class B-1 putable ($100 par value) issued and outstanding shares: 8,074,375 and 6,904,110 shares at June 30, 2017 and December 31, 2016, respectively
807,438

 
690,411

Capital stock — Class B-2 putable ($100 par value) issued and outstanding shares: 13,071,370 and 12,397,371 shares at June 30, 2017 and December 31, 2016, respectively
1,307,137

 
1,239,737

Total Class B Capital Stock
2,114,575

 
1,930,148

Retained earnings
 
 
 
Unrestricted
794,884

 
745,104

Restricted
94,660

 
78,880

Total retained earnings
889,544

 
823,984

Accumulated other comprehensive income (Note 18)
133,186

 
63,210

Total capital
3,137,305

 
2,817,342

TOTAL LIABILITIES AND CAPITAL
$
62,862,497

 
$
58,212,077

_____________________________
(a) 
Fair values: $2,250,794 and $2,514,512 at June 30, 2017 and December 31, 2016, respectively.
The accompanying notes are an integral part of these financial statements.

1


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF INCOME
(Unaudited, in thousands)

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
95,724

 
$
50,928

 
$
171,137

 
$
95,350

Prepayment fees on advances, net
 
728

 
558

 
944

 
1,342

Interest-bearing deposits
 
550

 
800

 
938

 
1,519

Securities purchased under agreements to resell
 
1,524

 
1,271

 
1,722

 
2,165

Federal funds sold
 
17,663

 
4,983

 
30,325

 
9,202

Trading securities
 
580

 
864

 
1,148

 
1,757

Available-for-sale securities
 
56,543

 
31,170

 
105,585

 
55,823

Held-to-maturity securities
 
9,393

 
7,505

 
17,663

 
15,328

Mortgage loans held for portfolio
 
2,526

 
777

 
3,960

 
1,564

Total interest income
 
185,231

 
98,856

 
333,422

 
184,050

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
Bonds
 
76,684

 
31,924

 
138,347

 
60,595

Discount notes
 
44,236

 
28,613

 
76,335

 
48,836

Deposits
 
2,750

 
500

 
4,375

 
1,055

Mandatorily redeemable capital stock
 
43

 
6

 
51

 
17

Other borrowings
 
4

 

 
54

 

Total interest expense
 
123,717

 
61,043

 
219,162

 
110,503

NET INTEREST INCOME
 
61,514

 
37,813

 
114,260

 
73,547

 
 
 
 
 
 
 
 
 
OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
 

 

 

 
(310
)
Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income
 

 
(4
)
 

 
298

Credit component of other-than-temporary impairment losses on held-to-maturity securities
 

 
(4
)
 

 
(12
)
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 
1,169

 
3,013

 
2,048

 
9,930

Net gains (losses) on derivatives and hedging activities
 
802

 
(3,821
)
 
5,629

 
(20,760
)
Realized gains on sales of held-to-maturity securities
 
1,890

 
259

 
1,890

 
729

Realized gains on sales of available-for-sale securities
 
1,167

 
3,564

 
1,837

 
4,215

Letter of credit fees
 
1,745

 
1,573

 
3,393

 
2,845

Other, net
 
1,117

 
809

 
1,650

 
1,350

Total other income (loss)
 
7,890

 
5,393

 
16,447

 
(1,703
)
OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
12,485

 
11,971

 
26,171

 
23,601

Other operating expenses
 
6,274

 
5,638

 
11,712

 
11,182

Finance Agency
 
834

 
630

 
1,720

 
1,374

Office of Finance
 
641

 
735

 
1,605

 
1,480

Discretionary grant programs
 
228

 
413

 
1,212

 
949

Derivative clearing fees
 
312

 
275

 
614

 
506

Total other expense
 
20,774

 
19,662

 
43,034

 
39,092

INCOME BEFORE ASSESSMENTS
 
48,630

 
23,544

 
87,673

 
32,752

Affordable Housing Program assessment
 
4,867

 
2,355

 
8,772

 
3,277

NET INCOME
 
$
43,763

 
$
21,189

 
$
78,901

 
$
29,475

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

2


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
NET INCOME
 
$
43,763

 
$
21,189

 
$
78,901

 
$
29,475

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income
 
2,225

 
(11,129
)
 
74,240

 
(5,464
)
Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
 
(1,167
)
 
(3,564
)
 
(1,837
)
 
(4,215
)
Unrealized losses on cash flow hedges
 
(5,604
)
 
(9,768
)
 
(5,751
)
 
(15,127
)
Reclassification adjustment for losses on cash flow hedges included in net income
 
636

 
941

 
1,436

 
1,580

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 

 

 

 
(302
)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income
 

 
4

 

 
4

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
937

 
1,183

 
1,930

 
2,429

Postretirement benefit plan
 
 
 
 
 
 
 
 
Amortization of prior service cost included in net periodic benefit cost
 
5

 
5

 
10

 
10

Amortization of net actuarial gain included in net periodic benefit cost
 
(26
)
 
(25
)
 
(52
)
 
(49
)
Total other comprehensive income (loss)
 
(2,994
)
 
(22,353
)
 
69,976

 
(21,134
)
TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
40,769

 
$
(1,164
)
 
$
148,877

 
$
8,341


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

3




FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(Unaudited, in thousands)

 
Capital Stock
Class B-1 - Putable
(Membership/Excess)
 
Capital Stock
Class B-2 - Putable
(Activity)
 
 
 
 
 
 
 
Accumulated
 Other
Comprehensive
 Income (Loss)
 
 
 
 
 
Retained Earnings
 
 
Total
 Capital
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2017
6,904

 
$
690,411

 
12,397

 
$
1,239,737

 
$
745,104

 
$
78,880

 
$
823,984

 
$
63,210

 
$
2,817,342

Net transfers of shares between Class B-1 and Class B-2 Stock
5,828

 
582,809

 
(5,828
)
 
(582,809
)
 

 

 

 

 

Proceeds from sale of capital stock
69

 
6,922

 
6,625

 
662,476

 

 

 

 

 
669,398

Repurchase/redemption of capital stock
(4,779
)
 
(477,903
)
 

 

 

 

 

 

 
(477,903
)
Shares reclassified to mandatorily redeemable capital stock
(79
)
 
(7,899
)
 
(123
)
 
(12,267
)
 

 

 

 

 
(20,166
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
63,121

 
15,780

 
78,901

 

 
78,901

Other comprehensive income

 

 

 

 

 

 

 
69,976

 
69,976

Dividends on capital stock (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
(130
)
 

 
(130
)
 

 
(130
)
Mandatorily redeemable capital stock

 

 

 

 
(113
)
 

 
(113
)
 

 
(113
)
Stock
131

 
13,098

 

 

 
(13,098
)
 

 
(13,098
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2017
8,074

 
$
807,438

 
13,071

 
$
1,307,137

 
$
794,884

 
$
94,660

 
$
889,544

 
$
133,186

 
$
3,137,305

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2016
6,325

 
$
632,454

 
9,077

 
$
907,678

 
$
699,213

 
$
62,990

 
$
762,203

 
$
(103,023
)
 
$
2,199,312

Net transfers of shares between Class B-1 and Class B-2 Stock
3,805

 
380,542

 
(3,805
)
 
(380,542
)
 

 

 

 

 

Proceeds from sale of capital stock
46

 
4,663

 
6,484

 
648,486

 

 

 

 

 
653,149

Repurchase/redemption of capital stock
(3,898
)
 
(389,846
)
 

 

 

 

 

 

 
(389,846
)
Shares reclassified to mandatorily redeemable capital stock

 
(43
)
 

 

 

 

 

 

 
(43
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 

 

 
23,580

 
5,895

 
29,475

 

 
29,475

Other comprehensive income (loss)

 

 

 

 

 

 

 
(21,134
)
 
(21,134
)
Dividends on capital stock (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
(133
)
 

 
(133
)
 

 
(133
)
Mandatorily redeemable capital stock

 

 

 

 
(5
)
 

 
(5
)
 

 
(5
)
Stock
73

 
7,377

 

 

 
(7,377
)
 

 
(7,377
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2016
6,351

 
$
635,147

 
11,756

 
$
1,175,622

 
$
715,278

 
$
68,885

 
$
784,163

 
$
(124,157
)
 
$
2,470,775


(a) Dividends were paid at annualized rates of 0.599 percent and 1.599 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2017 and 0.83 percent and 1.83 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2017.

(b) Dividends were paid at annualized rates of 0.375 percent and 1.251 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2016 and 0.431 percent and 1.431 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2016.

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


4


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
For the Six Months Ended
 
June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
78,901

 
$
29,475

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
 
 
 
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
35,870

 
42,928

Concessions on consolidated obligations
1,893

 
2,247

Premises, equipment and computer software costs
1,808

 
1,902

Non-cash interest on mandatorily redeemable capital stock
12

 
14

Credit component of other-than-temporary impairment losses on held-to-maturity securities

 
12

Gains on sales of held-to-maturity securities
(1,890
)
 
(729
)
Gains on sales of available-for-sale securities
(1,837
)
 
(4,215
)
Net increase in trading securities
(2,217
)
 
(10,106
)
Loss due to changes in net fair value adjustment on derivative and hedging activities
28,122

 
44,499

Increase in accrued interest receivable
(12,266
)
 
(12,878
)
Decrease (increase) in other assets
1,662

 
(52
)
Increase (decrease) in Affordable Housing Program (AHP) liability
4,197

 
(1,415
)
Increase (decrease) in accrued interest payable
13,798

 
(5,749
)
Decrease in other liabilities
(3,669
)
 
(3,675
)
Total adjustments
65,483

 
52,783

Net cash provided by operating activities
144,384

 
82,258

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease (increase) in interest-bearing deposits, including swap collateral pledged
42,679

 
(557,025
)
Net increase in securities purchased under agreements to resell
(500,000
)
 
(2,250,000
)
Net increase in federal funds sold
(1,661,000
)
 
(1,773,000
)
Decrease in loan to other FHLBank
290,000

 

Decrease in trading securities held for investment

 
102,215

Purchases of available-for-sale securities
(1,437,108
)
 
(5,030,544
)
Proceeds from maturities of available-for-sale securities
275,616

 
3,030

Proceeds from sales of available-for-sale securities
250,262

 
2,454,292

Proceeds from sales of held-to-maturity securities
100,933

 
114,950

Proceeds from maturities of long-term held-to-maturity securities
302,972

 
276,129

Purchases of long-term held-to-maturity securities
(125,000
)
 

Principal collected on advances
293,566,545

 
328,938,105

Advances made
(295,200,240
)
 
(335,250,133
)
Principal collected on mortgage loans held for portfolio
9,385

 
6,981

Purchases of mortgage loans held for portfolio
(264,430
)
 
(18,797
)
Purchases of premises, equipment and computer software
(2,161
)
 
(2,278
)
Net cash used in investing activities
(4,351,547
)
 
(12,986,075
)
 
 
 
 

5


 
For the Six Months Ended
 
June 30,
 
2017
 
2016
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits, including swap collateral held
30,835

 
(194,153
)
Net payments on derivative contracts with financing elements
(46,475
)
 
(31,885
)
Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
148,237,989

 
159,471,548

Bonds
11,679,683

 
11,372,371

Debt issuance costs
(2,184
)
 
(2,021
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(147,170,903
)
 
(149,977,168
)
Bonds
(8,697,535
)
 
(8,705,600
)
Proceeds from issuance of capital stock
669,398

 
653,149

Payments for redemption of mandatorily redeemable capital stock
(563
)
 
(5,740
)
Payments for repurchase/redemption of capital stock
(477,903
)
 
(389,846
)
Cash dividends paid
(130
)
 
(133
)
Net cash provided by financing activities
4,222,212

 
12,190,522

 
 
 
 
Net increase (decrease) in cash and cash equivalents
15,049

 
(713,295
)
Cash and cash equivalents at beginning of the period
27,696

 
837,202

Cash and cash equivalents at end of the period
$
42,745

 
$
123,907

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
197,709

 
$
98,680

AHP payments, net
$
4,575

 
$
4,692

Stock dividends issued
$
13,098

 
$
7,377

Dividends paid through issuance of mandatorily redeemable capital stock
$
113

 
$
5

Variation margin recharacterized as settlement payments on derivative contracts (Note 10)
$
72,053

 
$

Net capital stock reclassified to mandatorily redeemable capital stock
$
20,166

 
$
43


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

6


FEDERAL HOME LOAN BANK OF DALLAS
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation
The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2016. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 24, 2017 (the “2016 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2016 10-K.
The Bank is one of 11 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the housing government-sponsored enterprises ("GSEs"), including the FHLBanks and the Office of Finance.
     Use of Estimates and Assumptions. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Note 2—Recently Issued Accounting Guidance
Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-06, "Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"), which clarifies the requirements for assessing whether contingent call or 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 or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call or put option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call or put option is related to interest rates or credit risks. For public business entities, the guidance in ASU 2016-06 is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the Bank), and interim periods within those fiscal years. Early adoption is permitted. The guidance is to 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 Bank adopted this guidance effective January 1, 2017. The adoption of ASU 2016-06 has not had any impact on the Bank's results of operations or financial condition.
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"), which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. For public business entities, the guidance in ASU 2017-08 is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts ASU 2017-08 in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The guidance is to be applied using a modified retrospective transition approach, with the cumulative-effect adjustment recognized in retained earnings as of the beginning of the period of adoption. The adoption of ASU 2017-08 is not expected to have a material impact on the Bank's results of operations or financial condition.


7


Note 3—Trading Securities
Trading securities as of June 30, 2017 and December 31, 2016 were as follows (in thousands):
 
June 30, 2017
 
December 31, 2016
U.S. Treasury Notes
$
103,008

 
$
101,495

Other
10,951

 
10,143

Total
$
113,959

 
$
111,638

Other trading securities consist solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
Note 4—Available-for-Sale Securities
 Major Security Types. Available-for-sale securities as of June 30, 2017 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
489,301

 
$
7,222

 
$

 
$
496,523

GSE obligations
6,623,880

 
79,694

 
77

 
6,703,497

Other
240,296

 
1,028

 

 
241,324

 
7,353,477

 
87,944

 
77

 
7,441,344

GSE commercial mortgage-backed securities
6,794,916

 
55,573

 
12,450

 
6,838,039

Total
$
14,148,393

 
$
143,517

 
$
12,527

 
$
14,279,383

Included in the table above are GSE debentures and GSE commercial mortgage-backed securities ("MBS") that were purchased but which had not yet settled as of June 30, 2017. The aggregate amounts due of $61,996,000 and $309,206,000, respectively, are included in other liabilities on the statement of condition at that date.
Available-for-sale securities as of December 31, 2016 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
489,573

 
$
6,325

 
$

 
$
495,898

GSE obligations
6,475,140

 
52,746

 
2,361

 
6,525,525

Other
318,223

 
1,770

 

 
319,993

 
7,282,936

 
60,841

 
2,361

 
7,341,416

GSE commercial MBS
5,834,410

 
32,861

 
32,754

 
5,834,517

Total
$
13,117,346

 
$
93,702

 
$
35,115

 
$
13,175,933

Included in the table above are GSE debentures and GSE commercial MBS that were purchased but which had not yet settled as of December 31, 2016. The aggregate amounts due of $15,000,000 and $282,595,000, respectively, are included in other liabilities on the statement of condition at that date.
Other debentures are comprised of securities issued by the Private Export Funding Corporation ("PEFCO"). These debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments.

8


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of June 30, 2017. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
GSE debentures
2

 
$
40,208

 
$
77

 

 
$

 
$

 
2

 
$
40,208

 
$
77

GSE commercial MBS
15

 
586,334

 
737

 
53

 
1,910,003

 
11,713

 
68

 
2,496,337

 
12,450

Total
17

 
$
626,542

 
$
814

 
53

 
$
1,910,003

 
$
11,713

 
70

 
$
2,536,545

 
$
12,527


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2016. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
GSE debentures
8

 
$
839,683

 
$
2,293

 
1

 
$
50,476

 
$
68

 
9

 
$
890,159

 
$
2,361

GSE commercial MBS
49

 
1,388,917

 
15,595

 
46

 
1,531,930

 
17,159

 
95

 
2,920,847

 
32,754

Total
57

 
$
2,228,600

 
$
17,888

 
47

 
$
1,582,406

 
$
17,227

 
104

 
$
3,811,006

 
$
35,115


At June 30, 2017, the gross unrealized losses on the Bank’s available-for-sale securities were $12,527,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by GSEs, or fully secured by collateral that is guaranteed by the U.S government. As of June 30, 2017, the U.S. government and the issuers of the Bank’s holdings of GSE debentures and GSE MBS were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by S&P Global Ratings (“S&P”). The Bank's holdings of PEFCO debentures are rated triple-A by Moody's and Fitch, and are not rated by S&P. Based upon the Bank's assessment of the creditworthiness of the issuers of the GSE debentures and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures that were in an unrealized loss position at June 30, 2017 would not be settled at an amount less than the Bank's amortized cost bases in these investments. In addition, based upon the Bank's assessment of the strength of the GSEs' guarantees of the Bank's holdings of GSE commercial MBS and the credit ratings assigned by each of the NRSROs, the Bank expects that its holdings of GSE commercial MBS that were in an unrealized loss position at June 30, 2017 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2017.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2017 and December 31, 2016 are presented below (in thousands).
 
 
 
June 30, 2017
 
December 31, 2016
 
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
858,865

 
$
859,784

 
$
1,001,054

 
$
1,003,309

 
Due after one year through five years
 
2,846,897

 
2,877,206

 
2,079,374

 
2,100,171

 
Due after five years through ten years
 
3,401,103

 
3,454,482

 
3,989,554

 
4,022,456

 
Due after ten years
 
246,612

 
249,872

 
212,954

 
215,480

 
 
 
7,353,477

 
7,441,344

 
7,282,936

 
7,341,416

 
GSE commercial MBS
 
6,794,916

 
6,838,039

 
5,834,410

 
5,834,517

 
Total
 
$
14,148,393

 
$
14,279,383

 
$
13,117,346

 
$
13,175,933


9


Interest Rate Payment Terms. At June 30, 2017 and December 31, 2016, all of the Bank's available-for-sale securities were fixed rate securities which were swapped to a variable rate.
Sales of Securities. During the three and six months ended June 30, 2017, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $79,838,000 and $248,425,000, respectively. Proceeds from the sales totaled $81,005,000 and $250,262,000, respectively, resulting in realized gains of $1,167,000 and $1,837,000, respectively. During the three and six months ended June 30, 2016, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $1,576,267,000 and $2,450,077,000, respectively. Proceeds from the sales totaled $1,579,831,000 and $2,454,292,000, respectively, resulting in realized gains of $3,564,000 and $4,215,000, respectively.

Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of June 30, 2017 were as follows (in thousands):
 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
13,187

 
$

 
$
13,187

 
$
12

 
$
9

 
$
13,190

State housing agency obligations
160,000

 

 
160,000

 
288

 
172

 
160,116

 
173,187

 

 
173,187

 
300

 
181

 
173,306

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
2,238

 

 
2,238

 
6

 

 
2,244

GSE residential MBS
1,899,633

 

 
1,899,633

 
14,072

 
2,849

 
1,910,856

Non-agency residential MBS
104,269

 
15,227

 
89,042

 
15,091

 
1,377

 
102,756

GSE commercial MBS
61,810

 

 
61,810

 

 
178

 
61,632

 
2,067,950

 
15,227

 
2,052,723

 
29,169

 
4,404

 
2,077,488

Total
$
2,241,137

 
$
15,227

 
$
2,225,910

 
$
29,469

 
$
4,585

 
$
2,250,794


Held-to-maturity securities as of December 31, 2016 were as follows (in thousands):
 
Amortized
Cost
 
OTTI Recorded in
 Accumulated Other
Comprehensive
Income
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
15,973

 
$

 
$
15,973

 
$
8

 
$
94

 
$
15,887

State housing agency obligations
110,000

 

 
110,000

 
15

 
1,410

 
108,605

 
125,973

 

 
125,973

 
23

 
1,504

 
124,492

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
2,578

 

 
2,578

 
2

 
3

 
2,577

GSE residential MBS
2,211,159

 

 
2,211,159

 
12,086

 
7,914

 
2,215,331

Non-agency residential MBS
115,230

 
17,157

 
98,073

 
14,508

 
2,032

 
110,549

GSE commercial MBS
61,812

 

 
61,812

 

 
249

 
61,563

 
2,390,779

 
17,157

 
2,373,622

 
26,596

 
10,198

 
2,390,020

Total
$
2,516,752

 
$
17,157

 
$
2,499,595

 
$
26,619

 
$
11,702

 
$
2,514,512



10


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2017. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income ("AOCI") and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
1

 
$
5,218

 
$
9

 

 
$

 
$

 
1

 
$
5,218

 
$
9

State housing agency obligations
1

 
34,829

 
172

 

 

 

 
1

 
34,829

 
172

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
10

 
32,355

 
31

 
28

 
677,659

 
2,818

 
38

 
710,014

 
2,849

Non-agency residential MBS

 

 

 
19

 
71,029

 
4,155

 
19

 
71,029

 
4,155

GSE commercial MBS

 

 

 
3

 
61,632

 
178

 
3

 
61,632

 
178

Total
12

 
$
72,402

 
$
212

 
50

 
$
810,320

 
$
7,151

 
62

 
$
882,722

 
$
7,363


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2016. The unrealized losses include other-than-temporary impairments recorded in AOCI and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
2

 
$
10,998

 
$
94

 

 
$

 
$

 
2

 
$
10,998

 
$
94

State housing agency obligations
1

 
33,590

 
1,410

 

 

 

 
1

 
33,590

 
1,410

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
2

 
832

 
3

 

 

 

 
2

 
832

 
3

GSE residential MBS
24

 
513,602

 
1,291

 
33

 
790,653

 
6,623

 
57

 
1,304,255

 
7,914

Non-agency residential MBS
1

 
267

 
2

 
18

 
75,897

 
5,913

 
19

 
76,164

 
5,915

  GSE commercial MBS

 

 

 
3

 
61,563

 
249

 
3

 
61,563

 
249

Total
30

 
$
559,289

 
$
2,800

 
54

 
$
928,113

 
$
12,785

 
84

 
$
1,487,402

 
$
15,585


At June 30, 2017, the gross unrealized losses on the Bank’s held-to-maturity securities were $7,363,000, of which $4,155,000 were attributable to its holdings of non-agency (i.e., private-label) residential MBS, $3,036,000 were attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs and $172,000 were attributable to a security issued by a state housing agency.
As of June 30, 2017, the U.S. government and the issuers of the Bank’s holdings of GSE MBS were rated triple-A by Moody’s and Fitch and AA+ by S&P. Based upon the Bank's assessment of the strength of the government guaranty, the Bank expects that its holdings of U.S. government-guaranteed obligations that were in an unrealized loss position at June 30, 2017 would not be settled at an amount less than the Bank's amortized cost bases in these investments. In addition, based upon the credit ratings assigned by the NRSROs and the Bank's assessment of the strength of the GSEs’ guarantees of the Bank’s holdings of GSE MBS, the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at June 30, 2017 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Finally, based upon the Bank's assessment of the creditworthiness of the state housing agency and the triple-A credit ratings assigned by the NRSROs, the Bank expects that the state housing agency debenture that was in an unrealized loss position at June 30, 2017 would not be settled at an amount less than the Bank’s amortized cost basis in this investment. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the

11


investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2017.
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS (“RMBS”), generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2017 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its 24 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of June 30, 2017 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of June 30, 2017 assumed changes in home prices ranging from declines of 5 percent to increases of 11 percent over the 12-month period beginning April 1, 2017. For the vast majority of markets, the changes were projected to range from increases of 1 percent to 6 percent. Thereafter, home price changes for each market were projected to return (at varying rates and over varying transition periods based on historical housing price patterns) to their long-term historical equilibrium levels. Following these transition periods, the constant long-term annual rates of appreciation for the vast majority of markets were projected to range between 2 percent and 5 percent.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
Based on the results of its cash flow analyses, the Bank determined it is likely that it will fully recover the remaining amortized cost bases of all of its non-agency RMBS. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their remaining amortized cost bases, none of the Bank's non-agency RMBS were deemed to be other-than-temporarily impaired at June 30, 2017.
During the year ended December 31, 2016, one of the Bank's non-agency RMBS was determined to be other-than-temporarily impaired. In addition, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired in periods prior to 2013.

12


The following table presents a rollforward for the three and six months ended June 30, 2017 and 2016 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (in thousands).
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Balance of credit losses, beginning of period
$
10,245

 
$
11,423

 
$
10,515

 
$
11,696

Credit losses on securities for which an other-than-temporary impairment was previously recognized

 
4

 

 
12

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(284
)
 
(307
)
 
(554
)
 
(588
)
Balance of credit losses, end of period
9,961

 
11,120

 
9,961

 
11,120

Cumulative principal shortfalls on securities held at end of period
(1,939
)
 
(1,738
)
 
(1,939
)
 
(1,738
)
Cumulative amortization of the time value of credit losses at end of period
510

 
395

 
510

 
395

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
8,532

 
$
9,777

 
$
8,532

 
$
9,777

   Redemption Terms.