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EX-4 - EXHIBIT 4 - Federal Home Loan Bank of Cincinnatiex42018q210-q.htm
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnatiex322018q110-q.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnatiex3122018q210-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnatiex3112018q210-q.htm
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
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 July 31, 2018, the registrant had 42,709,284 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.


Page 1 of


Table of Contents
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
Statements of Condition - June 30, 2018 and December 31, 2017
 
 
 
 
Statements of Income - Three and six months ended June 30, 2018 and 2017
 
 
 
 
Statements of Comprehensive Income - Three and six months ended June 30, 2018 and 2017
 
 
 
 
Statements of Capital - Six months ended June 30, 2018 and 2017
 
 
 
 
Statements of Cash Flows - Six months ended June 30, 2018 and 2017
 
 
 
 
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 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
(Unaudited)
(In thousands, except par value)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks
$
15,674

 
$
26,550

Interest-bearing deposits
205

 
140

Securities purchased under agreements to resell
4,133,322

 
7,701,929

Federal funds sold
13,670,000

 
3,650,000

Investment securities:
 
 
 
Trading securities
690

 
781

Available-for-sale securities
2,900,220

 
899,876

Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2018 and December 31, 2017, respectively, that may be repledged) (a)
16,677,453

 
14,804,970

Total investment securities
19,578,363

 
15,705,627

Advances (includes $4,970 and $15,013 at fair value under fair value option at June 30, 2018 and December 31, 2017, respectively)
60,558,979

 
69,918,224

Mortgage loans held for portfolio:
 
 
 
Mortgage loans held for portfolio
9,845,058

 
9,682,130

Less: allowance for credit losses on mortgage loans
953

 
1,190

Mortgage loans held for portfolio, net
9,844,105

 
9,680,940

Accrued interest receivable
187,414

 
128,561

Premises, software, and equipment, net
8,663

 
8,896

Derivative assets
67,900

 
60,695

Other assets
7,274

 
13,652

TOTAL ASSETS
$
108,071,899

 
$
106,895,214

LIABILITIES
 
 
 
Deposits
$
741,411

 
$
650,531

Consolidated Obligations:
 
 
 
Discount Notes
50,062,566

 
46,210,458

Bonds (includes $6,186,288 and $5,577,315 at fair value under fair value option at June 30, 2018 and December 31, 2017, respectively)
51,172,974

 
54,163,061

Total Consolidated Obligations
101,235,540

 
100,373,519

Mandatorily redeemable capital stock
23,241

 
30,031

Accrued interest payable
130,870

 
128,652

Affordable Housing Program payable
117,224

 
109,877

Derivative liabilities
1,787

 
2,893

Other liabilities
314,351

 
435,198

Total liabilities
102,564,424

 
101,730,701

Commitments and contingencies

 

CAPITAL
 
 
 
Capital stock Class B putable ($100 par value); issued and outstanding shares: 45,391 shares at June 30, 2018 and 42,411 shares at December 31, 2017
4,539,115

 
4,241,140

Retained earnings:
 
 
 
Unrestricted
627,182

 
617,034

Restricted
356,521

 
322,999

Total retained earnings
983,703

 
940,033

Accumulated other comprehensive loss
(15,343
)
 
(16,660
)
Total capital
5,507,475

 
5,164,513

TOTAL LIABILITIES AND CAPITAL
$
108,071,899

 
$
106,895,214

(a)
Fair values: $16,405,711 and $14,682,329 at June 30, 2018 and December 31, 2017, respectively.

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

3


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(Unaudited)
(In thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME:
 
 
 
 
 
 
 
Advances
$
349,054

 
$
215,191

 
$
667,475

 
$
396,444

Prepayment fees on Advances, net
421

 
98

 
461

 
445

Interest-bearing deposits
152

 
25

 
255

 
41

Securities purchased under agreements to resell
10,310

 
6,633

 
17,267

 
11,359

Federal funds sold
51,275

 
11,315

 
86,013

 
21,765

Investment securities:
 
 
 
 
 
 
 
Trading securities
5

 
6

 
10

 
10

Available-for-sale securities
10,176

 
967

 
13,455

 
2,749

Held-to-maturity securities
94,857

 
76,149

 
177,777

 
148,904

Total investment securities
105,038

 
77,122

 
191,242

 
151,663

Mortgage loans held for portfolio
77,675

 
74,279

 
155,421

 
146,716

Loans to other FHLBanks

 

 
20

 

Total interest income
593,925

 
384,663

 
1,118,154

 
728,433

INTEREST EXPENSE:
 
 
 
 
 
 
 
Consolidated Obligations:
 
 
 
 
 
 
 
Discount Notes
215,069

 
79,687

 
396,440

 
136,336

Bonds
246,739

 
197,573

 
469,207

 
380,186

Total Consolidated Obligations
461,808

 
277,260

 
865,647

 
516,522

Deposits
2,566

 
1,021

 
4,451

 
1,785

Loans from other FHLBanks
5

 
6

 
5

 
6

Mandatorily redeemable capital stock
355

 
608

 
800

 
1,079

Total interest expense
464,734

 
278,895

 
870,903

 
519,392

NET INTEREST INCOME
129,191

 
105,768

 
247,251

 
209,041

NON-INTEREST (LOSS) INCOME:
 
 
 
 
 
 
 
Net losses on trading securities
(3
)
 
(1
)
 
(5
)
 
(4
)
Net (losses) gains on financial instruments held under fair value option
(3,894
)
 
(6,397
)
 
15,831

 
(12,458
)
Net (losses) gains on derivatives and hedging activities
(11,592
)
 
13,260

 
(37,965
)
 
5,144

Other, net
2,680

 
3,194

 
5,473

 
6,661

Total non-interest (loss) income
(12,809
)
 
10,056

 
(16,666
)
 
(657
)
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Compensation and benefits
11,457

 
9,561

 
24,150

 
20,609

Other operating expenses
4,967

 
4,412

 
10,095

 
9,574

Finance Agency
1,565

 
1,641

 
3,129

 
3,281

Office of Finance
1,097

 
1,018

 
2,434

 
2,120

Other
3,055

 
2,908

 
4,457

 
4,022

Total non-interest expense
22,141

 
19,540

 
44,265

 
39,606

INCOME BEFORE ASSESSMENTS
94,241

 
96,284

 
186,320

 
168,778

Affordable Housing Program assessments
9,460

 
9,690

 
18,712

 
16,986

NET INCOME
$
84,781

 
$
86,594

 
$
167,608

 
$
151,792

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

4


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
84,781

 
$
86,594

 
$
167,608

 
$
151,792

Other comprehensive income adjustments:
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
201

 
7

 
344

 
(19
)
Pension and postretirement benefits
487

 
511

 
973

 
853

Total other comprehensive income adjustments
688

 
518

 
1,317

 
834

Comprehensive income
$
85,469

 
$
87,112

 
$
168,925

 
$
152,626


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


5


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(Unaudited)
(In thousands)
Capital Stock
Class B - Putable
 
Retained Earnings
 
Accumulated Other Comprehensive
 
Total
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
Loss
 
Capital
BALANCE, DECEMBER 31, 2016
41,569

 
$
4,156,944

 
$
574,122

 
$
260,285

 
$
834,407

 
$
(13,256
)
 
$
4,978,095

Comprehensive income
 
 
 
 
121,433

 
30,359

 
151,792

 
834

 
152,626

Proceeds from sale of capital stock
2,502

 
250,196

 
 
 
 
 
 
 
 
 
250,196

Net shares reclassified to mandatorily
   redeemable capital stock
(1,874
)
 
(187,405
)
 
 
 
 
 
 
 
 
 
(187,405
)
Cash dividends on capital stock
 
 
 
 
(95,629
)
 
 
 
(95,629
)
 
 
 
(95,629
)
BALANCE, JUNE 30, 2017
42,197

 
$
4,219,735

 
$
599,926

 
$
290,644

 
$
890,570

 
$
(12,422
)
 
$
5,097,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
42,411

 
$
4,241,140

 
$
617,034

 
$
322,999

 
$
940,033

 
$
(16,660
)
 
$
5,164,513

Comprehensive income
 

 
 

 
134,086

 
33,522

 
167,608

 
1,317

 
168,925

Proceeds from sale of capital stock
2,958

 
295,832

 
 
 
 
 
 
 
 
 
295,832

Net shares reclassified from mandatorily
redeemable capital stock
22

 
2,143

 
 
 
 
 
 
 
 
 
2,143

Cash dividends on capital stock
 
 
 
 
(123,938
)
 
 
 
(123,938
)
 
 
 
(123,938
)
BALANCE, JUNE 30, 2018
45,391

 
$
4,539,115

 
$
627,182

 
$
356,521

 
$
983,703

 
$
(15,343
)
 
$
5,507,475


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


6


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)
Six Months Ended June 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income
$
167,608

 
$
151,792

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,682

 
24,521

Net change in derivative and hedging activities
44,713

 
7,937

Net change in fair value adjustments on trading securities
5

 
4

Net change in fair value adjustments on financial instruments held under fair value option
(15,831
)
 
12,458

Net change in:
 
 
 
Accrued interest receivable
(58,868
)
 
(8,593
)
Other assets
6,378

 
29,486

Accrued interest payable
5,995

 
2,723

Other liabilities
10,312

 
2,234

Total adjustments
35,386

 
70,770

Net cash provided by operating activities
202,994

 
222,562

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(1,247
)
 
31,358

Securities purchased under agreements to resell
3,568,607

 
(636,212
)
Federal funds sold
(10,020,000
)
 
(2,773,000
)
Premises, software, and equipment
(1,248
)
 
(954
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
87

 
84

Available-for-sale securities:
 
 
 
Net (increase) decrease in short-term
(2,000,000
)
 
950,000

Held-to-maturity securities:
 
 
 
Net decrease (increase) in short-term
859

 
(1,510
)
Proceeds from maturities of long-term
1,279,858

 
1,067,947

Purchases of long-term
(3,279,323
)
 
(1,695,542
)
Advances:
 
 
 
Repaid
1,747,810,892

 
1,061,870,216

Originated
(1,738,498,377
)
 
(1,063,075,660
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
547,468

 
605,081

Purchases
(732,583
)
 
(925,134
)
Net cash used in investing activities
(1,325,007
)
 
(4,583,326
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
(Unaudited)
 
(In thousands)
Six Months Ended June 30,
 
2018
 
2017
FINANCING ACTIVITIES:
 
 
 
Net change in deposits and pass-through reserves
$
95,110

 
$
(71,905
)
Net payments on derivative contracts with financing elements
(693
)
 
(2,898
)
Net proceeds from issuance of Consolidated Obligations:
 
 
 
Discount Notes
282,305,387

 
293,476,586

Bonds
14,027,224

 
13,680,336

Payments for maturing and retiring Consolidated Obligations:
 
 
 
Discount Notes
(278,490,713
)
 
(288,823,225
)
Bonds
(16,992,425
)
 
(13,505,000
)
Proceeds from issuance of capital stock
295,832

 
250,196

Payments for repurchase/redemption of mandatorily redeemable capital stock
(4,647
)
 
(186,218
)
Cash dividends paid
(123,938
)
 
(95,629
)
Net cash provided by financing activities
1,111,137

 
4,722,243

Net (decrease) increase in cash and cash equivalents
(10,876
)
 
361,479

Cash and cash equivalents at beginning of the period
26,550

 
8,737

Cash and cash equivalents at end of the period
$
15,674

 
$
370,216

Supplemental Disclosures:
 
 
 
Interest paid
$
836,775

 
$
510,622

Affordable Housing Program payments, net
$
11,365

 
$
14,548




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 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, 2017 filed with the Securities and Exchange Commission (SEC). Results for the six months ended June 30, 2018 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 2017 Annual Report on Form 10-K.

The FHLB did not hold any equity securities as of June 30, 2018 and December 31, 2017.

Reclassifications. Certain amounts in the 2017 financial statements and footnotes have been reclassified to conform to the presentation as of June 30, 2018. Specifically, due to a change in presentation, variation margin on certain cleared derivatives has been reclassified from netting adjustments and cash collateral and allocated to the individual derivative instruments. Refer to Note 10 for additional information.

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


Note 2 - Recently Issued Accounting Standards and Interpretations
 
Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the

9


same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness. This guidance becomes effective for the FHLB for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. The amended presentation and disclosure guidance is required only prospectively. The FHLB does not intend to adopt the new guidance early. 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.
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the 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 on January 1, 2019, and early adoption is permitted. 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 does not intend to adopt this guidance early. The FHLB is in the process of evaluating this guidance, but its effect on the FHLB’s financial condition, results of operations, and cash flows is not expected to be material.
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 became effective for the FHLB for interim and annual periods beginning on January 1, 2018, and was adopted 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 was applied prospectively on and after the effective date. As a result of the adoption, $918,000 and $1,635,000 of other components of net benefit costs were reclassified from "Compensation and benefits" to "Other" within the non-interest expense section of the Statements of Income for the three and six months ended June 30, 2017, respectively. The adoption of this guidance had no effect on the FHLB's financial condition and cash flows.
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 became effective for the FHLB for interim and annual periods beginning on January 1, 2018. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and 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 on January 1, 2020. 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.

10


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 on January 1, 2019, and early application is permitted. As amended, the guidance allows lessors and lessees to recognize and measure leases at the adoption date by recognizing a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. 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 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 became effective for the FHLB for the interim and annual periods beginning on January 1, 2018. While the adoption of this guidance affected the FHLB's disclosures, the requirement to present the instrument-specific credit risk in other comprehensive income did not have any effect on the FHLB's financial condition, results of operations, and cash flows.

Revenue from Contracts with Customers. On May 28, 2014, the FASB issued guidance on revenue from contracts with customers. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2018. Given that the majority of the FHLB's financial instruments and other contractual rights that generate revenue are covered by other GAAP, the adoption of this guidance did not have any effect 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
June 30, 2018
 
December 31, 2017
Mortgage-backed securities (MBS):
 
 
 
U.S. obligation single-family MBS
$
690

 
$
781

Total
$
690

 
$
781


Table 3.2 - Net Losses on Trading Securities (in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Net losses on trading securities held at period end
$
(5
)
 
$
(4
)
Net losses on trading securities
$
(5
)
 
$
(4
)


11


Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
2,900,000

 
$
282

 
$
(62
)
 
$
2,900,220

Total
$
2,900,000

 
$
282

 
$
(62
)
 
$
2,900,220

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit
$
900,000

 
$

 
$
(124
)
 
$
899,876

Total
$
900,000

 
$

 
$
(124
)
 
$
899,876


All securities outstanding with gross unrealized losses at June 30, 2018 and December 31, 2017 were in a continuous unrealized loss position for less than 12 months.

Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 
June 30, 2018
 
December 31, 2017
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
2,900,000

 
$
2,900,220

 
$
900,000

 
$
899,876


Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 
June 30, 2018
 
December 31, 2017
Amortized cost of available-for-sale securities:
 
 
 
Fixed-rate
$
2,900,000

 
$
900,000


Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the six months ended June 30, 2018 or 2017.


12



Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
 
June 30, 2018
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
U.S. Treasury obligations
$
33,174

 
$

 
$
(7
)
 
$
33,167

Total non-MBS
33,174

 

 
(7
)
 
33,167

MBS:
 
 
 
 
 
 
 
U.S. obligation single-family MBS
2,250,289

 
1,937

 
(66,479
)
 
2,185,747

Government-sponsored enterprises (GSE)
   single-family MBS
6,091,868

 
12,031

 
(219,617
)
 
5,884,282

GSE multi-family MBS
8,302,122

 
5,087

 
(4,694
)
 
8,302,515

Total MBS
16,644,279

 
19,055

 
(290,790
)
 
16,372,544

Total
$
16,677,453

 
$
19,055

 
$
(290,797
)
 
$
16,405,711

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
U.S. Treasury obligations
$
34,033

 
$

 
$
(6
)
 
$
34,027

Total non-MBS
34,033

 

 
(6
)
 
34,027

MBS:
 
 
 
 
 
 
 
U.S. obligation single-family MBS
2,483,446

 
1,974

 
(23,547
)
 
2,461,873

GSE single-family MBS
6,703,367

 
37,265

 
(138,960
)
 
6,601,672

GSE multi-family MBS
5,584,124

 
4,956

 
(4,323
)
 
5,584,757

Total MBS
14,770,937

 
44,195

 
(166,830
)
 
14,648,302

Total
$
14,804,970

 
$
44,195

 
$
(166,836
)
 
$
14,682,329

 
(1)
Carrying value equals amortized cost.

Table 5.2 - Net Purchased Premiums Included in the Amortized Cost of MBS Classified as Held-to-Maturity (in thousands)
 
June 30, 2018
 
December 31, 2017
Premiums
$
46,029

 
$
49,713

Discounts
(22,078
)
 
(24,243
)
Net purchased premiums
$
23,951

 
$
25,470



13


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

Table 5.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
 
June 30, 2018
 
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-MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
33,167

 
$
(7
)
 
$

 
$

 
$
33,167

 
$
(7
)
Total non-MBS
33,167


(7
)





33,167


(7
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. obligation single-family MBS
1,187,267

 
(38,419
)
 
591,655

 
(28,060
)
 
1,778,922

 
(66,479
)
GSE single-family MBS
1,771,774

 
(37,882
)
 
3,194,252

 
(181,735
)
 
4,966,026

 
(219,617
)
GSE multi-family MBS
3,918,603

 
(4,660
)
 
31,845

 
(34
)
 
3,950,448

 
(4,694
)
Total MBS
6,877,644

 
(80,961
)
 
3,817,752

 
(209,829
)
 
10,695,396

 
(290,790
)
Total
$
6,910,811

 
$
(80,968
)
 
$
3,817,752

 
$
(209,829
)
 
$
10,728,563

 
$
(290,797
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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-MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
34,027

 
$
(6
)
 
$

 
$

 
$
34,027

 
$
(6
)
Total non-MBS
34,027

 
(6
)
 

 

 
34,027

 
(6
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. obligation single-family MBS
1,193,566

 
(10,455
)
 
657,209

 
(13,092
)
 
1,850,775

 
(23,547
)
GSE single-family MBS
1,169,590

 
(14,171
)
 
3,578,537

 
(124,789
)
 
4,748,127

 
(138,960
)
GSE multi-family MBS
1,133,452

 
(4,307
)
 
136,051

 
(16
)
 
1,269,503

 
(4,323
)
Total MBS
3,496,608

 
(28,933
)
 
4,371,797

 
(137,897
)
 
7,868,405

 
(166,830
)
Total
$
3,530,635

 
$
(28,939
)
 
$
4,371,797

 
$
(137,897
)
 
$
7,902,432

 
$
(166,836
)

Table 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
 
June 30, 2018
 
December 31, 2017
Year of Maturity
Amortized Cost (1)
 
Fair Value
 
Amortized Cost (1)
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
Due in 1 year or less
$
33,174

 
$
33,167

 
$
34,033

 
$
34,027

Due after 1 year through 5 years

 

 

 

Due after 5 years through 10 years

 

 

 

Due after 10 years

 

 

 

Total non-MBS
33,174

 
33,167

 
34,033

 
34,027

MBS (2)
16,644,279

 
16,372,544

 
14,770,937

 
14,648,302

Total
$
16,677,453

 
$
16,405,711

 
$
14,804,970

 
$
14,682,329

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

14



Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 
June 30, 2018
 
December 31, 2017
Amortized cost of non-MBS:
 
 
 
Fixed-rate
$
33,174

 
$
34,033

Total amortized cost of non-MBS
33,174

 
34,033

Amortized cost of MBS:
 
 
 
Fixed-rate
7,298,340

 
8,003,906

Variable-rate
9,345,939

 
6,767,031

Total amortized cost of MBS
16,644,279

 
14,770,937

Total
$
16,677,453

 
$
14,804,970


Realized Gains and Losses. From time to time the FHLB may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the six months ended June 30, 2018 and 2017, 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 U.S. obligations and GSE investments (MBS and non-MBS), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of June 30, 2018, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at June 30, 2018.

The FHLB also reviewed its available-for-sale securities that have experienced unrealized losses at June 30, 2018 and determined that the unrealized losses are due primarily to interest rate volatility and/or illiquidity. These losses are considered temporary as the FHLB expects to 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 June 30, 2018.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2017.


Note 7 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.


15


Table 7.1 - Advance Redemption Terms (dollars in thousands)
 
June 30, 2018
 
December 31, 2017
Redemption Term
Amount
 
Weighted Average Interest
Rate
 
Amount
 
Weighted Average Interest
Rate
Overdrawn demand deposit accounts
$

 
%
 
$
1,302

 
1.55
%
Due in 1 year or less
35,313,912

 
2.09

 
40,473,141

 
1.55

Due after 1 year through 2 years
15,314,072

 
2.31

 
15,655,118

 
1.69

Due after 2 years through 3 years
2,985,467

 
2.12

 
6,537,170

 
1.74

Due after 3 years through 4 years
1,701,851

 
2.26

 
1,980,655

 
2.00

Due after 4 years through 5 years
977,076

 
2.52

 
893,283

 
2.07

Thereafter
4,373,507

 
2.80

 
4,437,731

 
2.17

Total principal amount
60,665,885

 
2.21

 
69,978,400

 
1.66

Commitment fees
(498
)
 
 
 
(510
)
 
 
Discount on Affordable Housing Program (AHP) Advances
(5,071
)
 
 
 
(5,795
)
 
 
Premiums
1,651

 
 
 
1,789

 
 
Discounts
(3,645
)
 
 
 
(4,252
)
 
 
Hedging adjustments
(99,313
)
 
 
 
(51,421
)
 
 
Fair value option valuation adjustments and accrued interest
(30
)
 
 
 
13

 
 
Total
$
60,558,979

 
 
 
$
69,918,224

 
 

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
June 30, 2018
 
December 31, 2017
Overdrawn demand deposit accounts
$

 
$
1,302

Due in 1 year or less
44,738,694

 
46,390,733

Due after 1 year through 2 years
9,048,897

 
15,054,889

Due after 2 years through 3 years
3,788,467

 
3,768,534

Due after 3 years through 4 years
1,054,698

 
2,903,655

Due after 4 years through 5 years
661,622

 
506,557

Thereafter
1,373,507

 
1,352,730

Total principal amount
$
60,665,885

 
$
69,978,400


The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates.


16


Table 7.3 - Advances by Year of Contractual Maturity or Next Put Date for Putable Advances (in thousands)
Year of Contractual Maturity or Next Put Date
June 30, 2018
 
December 31, 2017
Overdrawn demand deposit accounts
$

 
$
1,302

Due in 1 year or less
35,423,912

 
40,588,641

Due after 1 year through 2 years
15,314,072

 
15,649,618

Due after 2 years through 3 years
2,985,467

 
6,537,170

Due after 3 years through 4 years
1,701,851

 
1,980,655

Due after 4 years through 5 years
977,076

 
893,283

Thereafter
4,263,507

 
4,327,731

Total principal amount
$
60,665,885

 
$
69,978,400


Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)                    
 
June 30, 2018
 
December 31, 2017
Total fixed-rate (1)
$
32,877,236

 
$
36,615,777

Total variable-rate (1)
27,788,649

 
33,362,623

Total principal amount
$
60,665,885

 
$
69,978,400

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

Table 7.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLB (dollars in millions)
June 30, 2018
 
December 31, 2017
 
Principal
 
% of Total Principal Amount of Advances
 
 
Principal
 
% of Total Principal Amount of Advances
JPMorgan Chase Bank, N.A.
$
19,500

 
32
%
 
JPMorgan Chase Bank, N.A.
$
23,950

 
34
%
U.S. Bank, N.A.
8,575

 
14

 
U.S. Bank, N.A.
8,975

 
13

Third Federal Savings and Loan Association
3,661

 
6

 
Third Federal Savings and Loan Association
3,756

 
5

Total
$
31,736

 
52
%
 
The Huntington National Bank
3,732

 
5

 


 

 
Total
$
40,413

 
57
%


Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
 
June 30, 2018
 
December 31, 2017
Unpaid principal balance:
 
 
 
Fixed rate medium-term single-family mortgage loans (1)
$
1,031,171

 
$
1,128,749

Fixed rate long-term single-family mortgage loans
8,591,947

 
8,325,465

Total unpaid principal balance
9,623,118

 
9,454,214

Premiums
217,615

 
217,716

Discounts
(2,900
)
 
(3,173
)
Hedging basis adjustments (2)
7,225

 
13,373

Total mortgage loans held for portfolio
$
9,845,058

 
$
9,682,130


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

17



Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
 
June 30, 2018
 
December 31, 2017
Unpaid principal balance:
 
 
 
Conventional mortgage loans
$
9,324,960

 
$
9,129,003

Federal Housing Administration (FHA) mortgage loans
298,158

 
325,211

Total unpaid principal balance
$
9,623,118

 
$
9,454,214


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

Table 8.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
 
June 30, 2018
 
 
December 31, 2017
 
Principal
 
% of Total
 
 
Principal
 
% of Total
Union Savings Bank
$
3,310

 
34
%
 
Union Savings Bank
$
3,247

 
34
%
Guardian Savings Bank FSB
948

 
10

 
Guardian Savings Bank FSB
933

 
10

Huntington National Bank
498

 
5

 
PNC Bank, N.A. (1)
516

 
5

 
(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 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 over-collateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At June 30, 2018 and December 31, 2017, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

18



The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At June 30, 2018 and December 31, 2017, the FHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLB during the six months ended June 30, 2018 or 2017.

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 June 30, 2018 or December 31, 2017. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At June 30, 2018 and December 31, 2017, 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 how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.

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

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

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

19


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

Table 9.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
 
Three Months Ended June 30,
 
2018
 
2017
Balance, beginning of period
$
1,068

 
$
880

Net (charge offs) recoveries
(115
)
 
90

Balance, end of period
$
953

 
$
970

 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
Balance, beginning of period
$
1,190

 
$
1,142

Net charge offs
(237
)
 
(172
)
Balance, end of period
$
953

 
$
970


Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
 
June 30, 2018
 
December 31, 2017
Allowance for credit losses:
 
 
 
Collectively evaluated for impairment
$
953

 
$
1,190

Individually evaluated for impairment

 

Total allowance for credit losses
$
953

 
$
1,190

Recorded investment:
 
 
 
Collectively evaluated for impairment
$
9,564,267

 
$
9,373,393

Individually evaluated for impairment
10,290

 
10,109

Total recorded investment
$
9,574,557

 
$
9,383,502


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)
 
Six Months Ended
 
June 30, 2018
LRA at beginning of year
$
200,745

Additions
8,923

Claims
(117
)
Scheduled distributions
(5,628
)
LRA at end of period
$
203,923



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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)
 
June 30, 2018
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
30,029

 
$
15,750

 
$
45,779

Past due 60-89 days delinquent
5,866

 
5,403

 
11,269

Past due 90 days or more delinquent
12,558

 
9,492

 
22,050

Total past due
48,453

 
30,645

 
79,098

Total current mortgage loans
9,526,104

 
271,665

 
9,797,769

Total mortgage loans
$
9,574,557

 
$
302,310

 
$
9,876,867

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
8,437

 
$
4,580

 
$
13,017

Serious delinquency rate (2)
0.13
%
 
3.14
%
 
0.23
%
Past due 90 days or more still accruing interest (3)
$
11,134

 
$
9,492

 
$
20,626

Loans on non-accrual status, included above
$
2,805

 
$

 
$
2,805

 
 
 
 
 
 
 
December 31, 2017
 
Conventional MPP Loans
 
FHA Loans
 
Total
Past due 30-59 days delinquent
$
36,662

 
$
20,992

 
$
57,654

Past due 60-89 days delinquent
8,040

 
6,974

 
15,014

Past due 90 days or more delinquent
16,702

 
10,484

 
27,186

Total past due
61,404

 
38,450

 
99,854

Total current mortgage loans
9,322,098

 
291,371

 
9,613,469

Total mortgage loans
$
9,383,502

 
$
329,821

 
$
9,713,323

Other delinquency statistics:
 
 
 
 
 
In process of foreclosure, included above (1)
$
10,039

 
$
4,767

 
$
14,806

Serious delinquency rate (2)
0.19
%
 
3.19
%
 
0.29
%
Past due 90 days or more still accruing interest (3)
$
15,431

 
$
10,484

 
$
25,915

Loans on non-accrual status, included above
$
2,713

 
$

 
$
2,713

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

The FHLB did not have any real estate owned at June 30, 2018 or December 31, 2017.
 
 
 
 

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

Table 9.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
 
June 30, 2018
 
December 31, 2017
Conventional MPP loans
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related
allowance
$
10,290

 
$
10,083

 
$

 
$
10,109

 
$
9,912

 
$

With an allowance

 

 

 

 

 

Total
$
10,290

 
$
10,083

 
$

 
$
10,109

 
$
9,912

 
$


Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 
Three Months Ended June 30,
 
2018
 
2017
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
10,070

 
$
115

 
$
9,529

 
$
113

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
Individually impaired loans
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPP Loans
$
9,914

 
$
228

 
$
9,284

 
$
221


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) $10,290 and $10,109 at June 30, 2018 and December 31, 2017, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.
 
 
 
 
 
 

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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. 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. See Note 11 - Derivatives and Hedging Activities in the FHLB's 2017 Annual Report on Form 10-K for additional information on the FHLB's derivative transactions.

The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

Financial Statement Effect and Additional Financial Information

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



23



Table 10.1 summarizes the notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

Table 10.1 - Fair Value of Derivative Instruments (in thousands)
 
June 30, 2018
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
Interest rate swaps
$
6,077,037

 
$
2,393

 
$
5,131

Derivatives not designated as hedging instruments: