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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
–––––––––––––––––––––––––––––––––––––––––––––––––––– 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. employer identification number)
 
 
 
 
 
 
 
800 Boylston Street
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(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 (§232.405 of this chapter) 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 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
 
Shares outstanding as of
April 30, 2018
Class A Stock, par value
$100
 
zero
Class B Stock, par value
$100
 
24,417,272



Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2
Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks
$
26,681

 
$
261,673

Interest-bearing deposits
51,160

 
246

Securities purchased under agreements to resell
2,999,000

 
5,349,000

Federal funds sold
6,225,000

 
3,450,000

Investment securities:
 
 
 

Trading securities
942,874

 
191,510

Available-for-sale securities - includes $3,348 and $1,414 pledged as collateral at March 31, 2018, and December 31, 2017, respectively that may be repledged
6,966,772

 
7,324,736

Held-to-maturity securities - includes $8,231 and $6,444 pledged as collateral at March 31, 2018, and December 31, 2017, respectively that may be repledged (a)
1,545,726

 
1,626,122

Total investment securities
9,455,372

 
9,142,368

Advances
37,987,775

 
37,565,967

Mortgage loans held for portfolio, net of allowance for credit losses of $500 at March 31, 2018, and December 31, 2017
4,026,998

 
4,004,737

Loans to other FHLBanks
—

 
400,000

Accrued interest receivable
93,749

 
94,100

Premises, software, and equipment, net
6,077

 
6,388

Derivative assets, net
30,079

 
34,786

Other assets
56,220

 
52,681

Total Assets
$
60,958,111

 
$
60,361,946

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
502,676

 
$
450,922

Non-interest-bearing
25,156

 
26,147

Total deposits
527,832

 
477,069

Consolidated obligations (COs):
 
 
 

Bonds
27,125,212

 
28,344,623

Discount notes
29,467,314

 
27,720,906

Total consolidated obligations
56,592,526

 
56,065,529

Mandatorily redeemable capital stock
36,113

 
35,923

Accrued interest payable
101,593

 
90,626

Affordable Housing Program (AHP) payable
80,445

 
81,600

Derivative liabilities, net
260,565

 
300,450

Other liabilities
40,469

 
45,619

Total liabilities
57,639,543

 
57,096,816

Commitments and contingencies (Note 17)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 23,239 shares and 22,837 shares issued and outstanding at March 31, 2018, and December 31, 2017, respectively
2,323,891

 
2,283,721

Retained earnings:
 
 
 
Unrestricted
1,057,195

 
1,041,033

Restricted
278,327

 
267,316

Total retained earnings
1,335,522

 
1,308,349

Accumulated other comprehensive loss
(340,845
)
 
(326,940
)
Total capital
3,318,568

 
3,265,130

Total Liabilities and Capital
$
60,958,111

 
$
60,361,946


_______________________________________
(a)   Fair values of held-to-maturity securities were $1,823,482 and $1,903,227 at March 31, 2018, and December 31, 2017, respectively.

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

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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2018
 
2017
INTEREST INCOME
 
 
 
Advances
$
177,450

 
$
106,583

Prepayment fees on advances, net
156

 
164

Securities purchased under agreements to resell
10,363

 
4,418

Federal funds sold
22,761

 
10,284

Investment securities:
 
 
 
Trading securities
2,483

 
2,553

Available-for-sale securities
40,778

 
24,664

Held-to-maturity securities
18,561

 
20,354

Prepayment fees on investments
22

 
65

Total investment securities
61,844

 
47,636

Mortgage loans held for portfolio
33,025

 
29,947

Other
334

 
59

Total interest income
305,933

 
199,091

INTEREST EXPENSE
 
 
 
Consolidated obligations:
 
 
 
Bonds
119,201

 
98,175

Discount notes
104,980

 
37,579

Total consolidated obligations
224,181

 
135,754

Deposits
1,347

 
502

Mandatorily redeemable capital stock
486

 
329

Other borrowings
8

 
2

Total interest expense
226,022

 
136,587

NET INTEREST INCOME
79,911

 
62,504

Provision for (reduction of) credit losses
9

 
(51
)
NET INTEREST INCOME AFTER PROVISION FOR (REDUCTION OF) CREDIT LOSSES
79,902

 
62,555

OTHER INCOME (LOSS)
 
 
 
Total other-than-temporary impairment losses on investment securities
(7
)
 
(53
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(72
)
 
(365
)
Net other-than-temporary impairment losses on investment securities, credit portion
(79
)
 
(418
)
Service fees
2,356

 
2,012

Net unrealized losses on trading securities
(1,964
)
 
(1,414
)
Net gains on derivatives and hedging activities
1,140

 
36

Other
341

 
(207
)
Total other income
1,794

 
9

OTHER EXPENSE
 
 
 
Compensation and benefits
10,743

 
10,466

Other operating expenses
5,882

 
5,884

Federal Housing Finance Agency (the FHFA)
930

 
1,002

Office of Finance
830

 
842

Other
2,083

 
2,780

Total other expense
20,468

 
20,974

INCOME BEFORE ASSESSMENTS
61,228

 
41,590

AHP
6,171

 
4,192

NET INCOME
$
55,057

 
$
37,398

 


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


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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
55,057

 
$
37,398

Other comprehensive income:
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(31,622
)
 
26,906

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
7,428

 
8,661

Net unrealized gains relating to hedging activities
 
10,104

 
4,181

Pension and postretirement benefits
 
185

 
194

Total other comprehensive (loss) income
 
(13,905
)
 
39,942

Comprehensive income
 
$
41,152

 
$
77,340


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

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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
THREE MONTHS ENDED MARCH 31, 2018 and 2017
(dollars and shares in thousands)
(unaudited)


 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2016
24,113

 
$
2,411,306

 
$
987,711

 
$
229,275

 
$
1,216,986

 
$
(383,514
)
 
$
3,244,778

Comprehensive income
 
 
 
 
29,918

 
7,480

 
37,398

 
39,942

 
77,340

Proceeds from sale of capital stock
1,820

 
181,947

 
 
 
 
 
 
 
 
 
181,947

Repurchase of capital stock
(1,346
)
 
(134,586
)
 
 
 
 
 
 
 
 
 
(134,586
)
Cash dividends on capital stock
 
 
 
 
(23,618
)
 
 
 
(23,618
)
 
 
 
(23,618
)
BALANCE, MARCH 31, 2017
24,587

 
$
2,458,667

 
$
994,011

 
$
236,755

 
$
1,230,766

 
$
(343,572
)
 
$
3,345,861

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
22,837

 
$
2,283,721

 
$
1,041,033

 
$
267,316

 
$
1,308,349

 
$
(326,940
)
 
$
3,265,130

Comprehensive income
 
 
 
 
44,046

 
11,011

 
55,057

 
(13,905
)
 
41,152

Proceeds from sale of capital stock
4,083

 
408,332

 
 
 
 
 
 
 
 
 
408,332

Repurchase of capital stock
(3,678
)
 
(367,871
)
 
 
 
 
 
 
 
 
 
(367,871
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(291
)
 
 
 
 
 
 
 
 
 
(291
)
Cash dividends on capital stock
 
 
 
 
(27,884
)
 
 
 
(27,884
)
 
 
 
(27,884
)
BALANCE, MARCH 31, 2018
23,239

 
$
2,323,891

 
$
1,057,195

 
$
278,327

 
$
1,335,522

 
$
(340,845
)
 
$
3,318,568


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





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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2018
 
2017
OPERATING ACTIVITIES
 

 
 

Net income
$
55,057

 
$
37,398

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
2,036

 
(4,855
)
Provision for (reduction of) credit losses
9

 
(51
)
Change in net fair-value adjustments on derivatives and hedging activities
54,303

 
(3,811
)
Net other-than-temporary impairment losses on investment securities, credit portion
79

 
418

Other adjustments
735

 
1,597

Net change in:
 

 
 
Market value of trading securities
1,964

 
1,414

Accrued interest receivable
351

 
5,837

Other assets
(2,159
)
 
(2,404
)
Accrued interest payable
10,967

 
20,142

Other liabilities
(4,600
)
 
(5,724
)
Total adjustments
63,685

 
12,563

Net cash provided by operating activities
118,742

 
49,961

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(93,777
)
 
(225,734
)
Securities purchased under agreements to resell
2,350,000

 
3,000,000

Federal funds sold
(2,775,000
)
 
(2,450,000
)
Premises, software, and equipment
(139
)
 
(786
)
Loans to other FHLBanks
400,000

 
—

Trading securities:
 

 
 

Proceeds
3,337

 
403,333

Purchases
(749,072
)
 
(308,671
)
Available-for-sale securities:
 

 
 

Proceeds from long-term
294,897

 
298,387

Held-to-maturity securities:
 

 
 

Proceeds from long-term
85,694

 
146,485

Advances to members:
 

 
 

Repaid
178,092,765

 
124,105,993

Originated
(178,561,964
)
 
(120,511,148
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
98,311

 
122,979

Purchases
(124,220
)
 
(108,181
)
Proceeds from sale of foreclosed assets
796

 
1,384

Net cash (used in) provided by investing activities
(978,372
)
 
4,474,041

 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
51,014

 
8,105

Net payments on derivatives with a financing element
—

 
(2,353
)
Net proceeds from issuance of consolidated obligations:
 

 
 

Discount notes
46,679,715

 
38,926,960


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Bonds
2,320,993

 
2,094,792

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(44,948,350
)
 
(44,804,024
)
Bonds
(3,491,210
)
 
(1,278,430
)
Proceeds from issuance of capital stock
408,332

 
181,947

Payments for repurchase of capital stock
(367,871
)
 
(134,586
)
Payments for redemption of mandatorily redeemable capital stock
(101
)
 
(10
)
Cash dividends paid
(27,884
)
 
(23,617
)
Net cash provided by (used in) financing activities
624,638

 
(5,031,216
)
Net decrease in cash and due from banks
(234,992
)
 
(507,214
)
Cash and due from banks at beginning of the period
261,673

 
520,031

Cash and due from banks at end of the period
$
26,681

 
$
12,817

Supplemental disclosures:
 
 
 
Interest paid
$
207,991

 
$
128,146

AHP payments
$
5,163

 
$
5,385

Noncash receipt of trading securities
$
7,130

 
$
—

Noncash transfers of mortgage loans held for portfolio to other assets
$
471

 
$
940


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


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FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2018. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the SEC) on March 16, 2018 (the 2017 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Recently Issued and Adopted Accounting Guidance

Effective January 1, 2018

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance resulted in the reclassification of $372,000 of non-service cost components of net benefit cost from compensation and benefits expense to other non-interest expense in the statements of operations for the three months ended March 31, 2017.

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 requires, among other things, that we:

•
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 we elect to measure the liability at fair value in accordance with the fair value option for financial instruments.
•
Present separately financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or the accompanying notes to the financial statements.
•
Discontinue the disclosure of the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition.

This guidance did not have any effect on our financial condition, results of operations, or cash flows. In accordance with the updated guidance, we have made insignificant revisions to Note 16 — Fair Values to specify the measurement category for each form of financial asset (that is, securities or loans and receivables).

Becoming effective January 1, 2019

Targeted Improvements to Accounting for Hedging Activities, On August 28, 2017, the 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 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 and permit, among other things, the following:


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•
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;
•
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;
•
Consideration of only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk;
•
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate;
•
For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, an entity can designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method) into a hedging relationship;
•
An entity can perform subsequent assessments of hedge effectiveness qualitatively in instances where initial quantitative testing is required; and
•
For financial instruments eligible to be designated as a hedged item under the last-of-layer method, a one-time reclassification of prepayable financial instruments from held-to-maturity to available-for-sale at the date of adoption is permitted.

This guidance becomes effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. For all cash flow hedges existing on the date of adoption, this guidance will be applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively. We are in the process of evaluating this guidance, and its anticipated effect on our 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 affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. This guidance will 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. We currently do not have a significant amount of assets that are in scope to be evaluated under the updated guidance. As such, adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows.

Leases. On February 25, 2016, the FASB issued guidance that 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. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. The guidance becomes effective for us for the interim and annual periods beginning on January 1, 2019, and while early application is permitted, we do not intend to adopt the new guidance early. We are in the process of evaluating this guidance and its anticipated effect on our financial condition, results of operations, and cash flows.

Becoming effective January 1, 2020

Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses 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. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:


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•
Reflect in the statement of operations the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
•
Determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price.
•
Record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
•
Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.

This guidance is effective for us 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; however, we do not intend to adopt the new guidance early. This guidance is required to 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 purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. While we are in the process of evaluating this guidance, we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset. The effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the adoption date as well as the economic conditions and forecasts at that time.

Note 3 — Trading Securities
 
Table 3.1 - Trading Securities by Major Security Type
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
U.S. Treasury obligations
$
749,578

 
$
—

Corporate bonds
7,170

 
—

 
756,748

 
—

Mortgage backed securities (MBS)
 

 
 
U.S. government-guaranteed – single-family
6,429

 
6,807

Government-sponsored enterprise (GSE)s – single-family
275

 
346

GSEs – multifamily
179,422

 
184,357

 
186,126

 
191,510

Total
$
942,874

 
$
191,510



Net unrealized losses on trading securities for the three months ended March 31, 2018 and 2017, amounted to $2.0 million and $1.4 million, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 4 — Available-for-Sale Securities


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Table 4.1 - Available-for-Sale Securities by Major Security Type
(dollars in thousands)

 
March 31, 2018
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
State or local housing-finance-agency obligations (HFA securities)
$
42,700

 
$
—

 
$
(5,205
)
 
$
37,495

Supranational institutions
423,968

 
—

 
(17,238
)
 
406,730

U.S. government-owned corporations
299,687

 
—

 
(14,660
)
 
285,027

GSEs
123,318

 
—

 
(5,567
)
 
117,751

 
889,673

 
—

 
(42,670
)
 
847,003

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
95,666

 
75

 
(3,513
)
 
92,228

U.S. government guaranteed – multifamily
420,987

 
—

 
(6,834
)
 
414,153

GSEs – single-family
4,391,152

 
974

 
(103,886
)
 
4,288,240

GSEs – multifamily
1,323,247

 
2,120

 
(219
)
 
1,325,148

 
6,231,052

 
3,169

 
(114,452
)
 
6,119,769

Total
$
7,120,725

 
$
3,169

 
$
(157,122
)
 
$
6,966,772

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.
 
 
December 31, 2017
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
HFA securities
$
42,700

 
$
—

 
$
(5,017
)
 
$
37,683

Supranational institutions
438,667

 
—

 
(20,382
)
 
418,285

U.S. government-owned corporations
313,985

 
—

 
(21,908
)
 
292,077

GSEs
128,744

 
—

 
(7,401
)
 
121,343

 
924,096

 
—

 
(54,708
)
 
869,388

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
98,720

 
55

 
(2,998
)
 
95,777

U.S. government guaranteed – multifamily
447,975

 
—

 
(4,602
)
 
443,373

GSEs – single-family
4,625,333

 
1,194

 
(63,535
)
 
4,562,992

GSEs – multifamily
1,350,943

 
2,263

 
—

 
1,353,206

 
6,522,971

 
3,512

 
(71,135
)
 
6,455,348

Total
$
7,447,067

 
$
3,512

 
$
(125,843
)
 
$
7,324,736

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.


12
Table of Contents

Table 4.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
March 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
29,193

 
$
(4,157
)
 
$
8,302

 
$
(1,048
)
 
$
37,495

 
$
(5,205
)
Supranational institutions
—

 
—

 
406,730

 
(17,238
)
 
406,730

 
(17,238
)
U.S. government-owned corporations
—

 
—

 
285,027

 
(14,660
)
 
285,027

 
(14,660
)
GSEs
—

 
—

 
117,751

 
(5,567
)
 
117,751

 
(5,567
)
 
29,193

 
(4,157
)
 
817,810

 
(38,513
)
 
847,003

 
(42,670
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
68,864

 
(3,513
)
 
68,864

 
(3,513
)
U.S. government guaranteed – multifamily
—

 
—

 
414,153

 
(6,834
)
 
414,153

 
(6,834
)
GSEs – single-family
1,794,394

 
(29,597
)
 
2,376,944

 
(74,289
)
 
4,171,338

 
(103,886
)
GSEs – multifamily
226,781

 
(219
)
 
—

 
—

 
226,781

 
(219
)
 
2,021,175

 
(29,816
)
 
2,859,961

 
(84,636
)
 
4,881,136

 
(114,452
)
Total temporarily impaired
$
2,050,368

 
$
(33,973
)
 
$
3,677,771


$
(123,149
)

$
5,728,139


$
(157,122
)

 
December 31, 2017
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
29,345

 
$
(4,005
)
 
$
8,338

 
$
(1,012
)
 
$
37,683

 
$
(5,017
)
Supranational institutions
—

 
—

 
418,285

 
(20,382
)
 
418,285

 
(20,382
)
U.S. government-owned corporations
—

 
—

 
292,077

 
(21,908
)
 
292,077

 
(21,908
)
GSEs
—

 
—

 
121,343

 
(7,401
)
 
121,343

 
(7,401
)
 
29,345

 
(4,005
)
 
840,043

 
(50,703
)
 
869,388

 
(54,708
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
70,877

 
(2,998
)
 
70,877

 
(2,998
)
U.S. government guaranteed – multifamily
64,219

 
(571
)
 
379,154

 
(4,031
)
 
443,373

 
(4,602
)
GSEs – single-family
1,853,323

 
(12,661
)
 
2,540,006

 
(50,874
)
 
4,393,329

 
(63,535
)
 
1,917,542

 
(13,232
)
 
2,990,037

 
(57,903
)
 
4,907,579

 
(71,135
)
Total temporarily impaired
$
1,946,887

 
$
(17,237
)
 
$
3,830,080

 
$
(108,606
)
 
$
5,776,967

 
$
(125,843
)



13
Table of Contents

Table 4.3 - Available-for-Sale Securities by Contractual Maturity
(dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$
—

 
$
—

 
$
—

 
$
—

Due after one year through five years
42,700

 
37,495

 
42,700

 
37,683

Due after five years through 10 years
423,968

 
406,730

 
438,667

 
418,285

Due after 10 years
423,005

 
402,778

 
442,729

 
413,420

 
889,673

 
847,003

 
924,096

 
869,388

MBS (1)
6,231,052

 
6,119,769

 
6,522,971

 
6,455,348

Total
$
7,120,725

 
$
6,966,772

 
$
7,447,067

 
$
7,324,736

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 5 — Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Type
(dollars in thousands)

 
March 31, 2018
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
854

 
$
—

 
$
854

 
$
5

 
$
—

 
$
859

HFA securities
145,185

 
—

 
145,185

 
22

 
(6,616
)
 
138,591

 
146,039

 
—

 
146,039

 
27

 
(6,616
)
 
139,450

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
9,527

 
—

 
9,527

 
173

 
—

 
9,700

GSEs – single-family
528,730

 
—

 
528,730

 
9,130

 
(1,126
)
 
536,734

GSEs – multifamily
213,723

 
—

 
213,723

 
3,728

 
—

 
217,451

Private-label – residential
790,847

 
(150,767
)
 
640,080

 
275,649

 
(2,939
)
 
912,790

Asset-backed securities (ABS) backed by home equity loans
7,649

 
(22
)
 
7,627

 
26

 
(296
)
 
7,357

 
1,550,476

 
(150,789
)
 
1,399,687

 
288,706

 
(4,361
)
 
1,684,032

Total
$
1,696,515

 
$
(150,789
)
 
$
1,545,726

 
$
288,733

 
$
(10,977
)
 
$
1,823,482



14
Table of Contents

 
December 31, 2017
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
1,042

 
$
—

 
$
1,042

 
$
10

 
$
—

 
$
1,052

HFA securities
146,410

 
—

 
146,410

 
26

 
(14,372
)
 
132,064

 
147,452

 
—

 
147,452

 
36

 
(14,372
)
 
133,116

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
10,097

 
—

 
10,097

 
190

 
—

 
10,287

U.S. government guaranteed – multifamily
280

 
—

 
280

 
—

 
—

 
280

GSEs – single-family
568,948

 
—

 
568,948

 
10,410

 
(310
)
 
579,048

GSEs – multifamily
214,641

 
—

 
214,641

 
6,451

 
—

 
221,092

Private-label – residential
835,070

 
(158,194
)
 
676,876

 
278,217

 
(3,195
)
 
951,898

ABS backed by home equity loans
7,851

 
(23
)
 
7,828

 
27

 
(349
)
 
7,506

 
1,636,887

 
(158,217
)
 
1,478,670

 
295,295

 
(3,854
)
 
1,770,111

Total
$
1,784,339

 
$
(158,217
)
 
$
1,626,122

 
$
295,331

 
$
(18,226
)
 
$
1,903,227



Table 5.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
March 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
—

 
$
—

 
$
127,734

 
$
(6,616
)
 
$
127,734

 
$
(6,616
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
118,383

 
(793
)
 
27,254

 
(333
)
 
145,637

 
(1,126
)
Private-label – residential
—

 
—

 
148,538

 
(4,917
)
 
148,538

 
(4,917
)
ABS backed by home equity loans
—

 
—

 
7,223

 
(296
)
 
7,223

 
(296
)
 
118,383

 
(793
)
 
183,015

 
(5,546
)
 
301,398

 
(6,339
)
Total
$
118,383

 
$
(793
)
 
$
310,749

 
$
(12,162
)
 
$
429,132

 
$
(12,955
)


15
Table of Contents

 
December 31, 2017
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
—

 
$
—

 
$
121,203

 
$
(14,372
)
 
$
121,203

 
$
(14,372
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
44,759

 
(52
)
 
28,771

 
(258
)
 
73,530

 
(310
)
Private-label – residential
—

 
—

 
158,963

 
(5,558
)
 
158,963

 
(5,558
)
ABS backed by home equity loans
—

 
—

 
7,371

 
(350
)
 
7,371

 
(350
)
 
44,759

 
(52
)
 
195,105

 
(6,166
)
 
239,864

 
(6,218
)
Total
$
44,759

 
$
(52
)
 
$
316,308

 
$
(20,538
)
 
$
361,067

 
$
(20,590
)

Table 5.3 - Held-to-Maturity Securities by Contractual Maturity
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
551

 
$
551

 
$
554

 
$
264

 
$
264

 
$
267

Due after one year through five years
11,138

 
11,138

 
11,162

 
11,613

 
11,613

 
11,645

Due after five years through 10 years
18,245

 
18,245

 
18,127

 
18,245

 
18,245

 
18,226

Due after 10 years
116,105

 
116,105

 
109,607

 
117,330

 
117,330

 
102,978

 
146,039

 
146,039

 
139,450

 
147,452

 
147,452

 
133,116

MBS (2)
1,550,476

 
1,399,687

 
1,684,032

 
1,636,887

 
1,478,670

 
1,770,111

Total
$
1,696,515

 
$
1,545,726

 
$
1,823,482

 
$
1,784,339

 
$
1,626,122

 
$
1,903,227

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 6 — Other-Than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at March 31, 2018. At March 31, 2018, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.

Held-to-Maturity Securities

HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be

16
Table of Contents

required to sell the investments before recovery of the amortized cost basis, we do not consider these investments to be other-than-temporarily impaired at March 31, 2018.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. For those securities for which a credit loss was recognized during the three months ended March 31, 2018, Table 6.1 presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS.

Table 6.1 - Significant Inputs and Current Credit Enhancement for Securities with a Current Period Credit Loss
(dollars in thousands)

 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Classification
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A - Private-label residential MBS (1)
 
$
10,345

 
12.3
%
 
20.8
%
 
31.9
%
 
5.3
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.

Table 6.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security
(dollars in thousands)

 
March 31, 2018
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
28,890

 
$
24,692

 
$
19,333

 
$
27,065

Private-label residential MBS – Alt-A
907,387

 
658,402

 
512,993

 
780,710

ABS backed by home equity loans – Subprime
171

 
159

 
137

 
164

Total other-than-temporarily impaired securities
$
936,448

 
$
683,253

 
$
532,463

 
$
807,939


_______________________
(1)
Securities are classified based on their classifications at the time of issuance. We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

Table 6.3 presents a roll forward of the amounts related to credit losses recognized in earnings. The roll forward is the amount of credit losses on investment securities for which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss.


17
Table of Contents

Table 6.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings
(dollars in thousands)

 
For the Three Months Ended March 31,
 
2018
 
2017
Balance at beginning of period
$
452,523

 
$
490,404

Additions:
 
 
 
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
79

 
418

Reductions:
 
 
 
Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income
(7,316
)
 
(8,601
)
Balance at end of period
$
445,286

 
$
482,221

_______________________
(1)
For the three months ended March 31, 2018 and 2017, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2018 and 2017.

Note 7 — Advances

General Terms. At both March 31, 2018, and December 31, 2017, we had advances outstanding with interest rates ranging from zero percent to 7.72 percent.

Table 7.1 - Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
7,674

 
2.16
%
 
$
5,698

 
1.70
%
Due in one year or less
19,913,161

 
1.86

 
21,501,397

 
1.56

Due after one year through two years
9,464,785

 
1.92

 
7,462,785

 
1.65

Due after two years through three years
2,615,780

 
1.98

 
2,709,951

 
1.85

Due after three years through four years
1,987,993

 
2.16

 
2,084,105

 
2.03

Due after four years through five years
2,427,407

 
1.74

 
2,071,989

 
1.56

Thereafter
1,699,565

 
2.30

 
1,811,241

 
2.23

Total par value
38,116,365

 
1.91
%
 
37,647,166

 
1.66
%
Premiums
16,735

 
 

 
17,931

 
 

Discounts
(34,553
)
 
 

 
(32,757
)
 
 

Fair value of bifurcated derivatives (1)
(2,215
)
 
 
 
(1,591
)
 
 
Hedging adjustments
(108,557
)
 
 

 
(64,782
)
 
 

Total
$
37,987,775

 
 

 
$
37,565,967

 
 


_________________________
(1)
At March 31, 2018, and December 31, 2017, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.


18
Table of Contents

Table 7.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (1) 
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Overdrawn demand-deposit accounts
$
7,674

 
$
5,698

Due in one year or less
26,252,136

 
25,842,572

Due after one year through two years
3,964,785

 
3,722,785

Due after two years through three years
2,605,780

 
2,709,951

Due after three years through four years
1,837,993

 
1,924,105

Due after four years through five years
1,802,407

 
1,684,789

Thereafter
1,645,590

 
1,757,266

Total par value
$
38,116,365

 
$
37,647,166

_______________________
(1)
Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

Table 7.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)

Year of Contractual Maturity or Next Put Date, Par Value
March 31, 2018
 
December 31, 2017
Overdrawn demand-deposit accounts
$
7,674

 
$
5,698

Due in one year or less
21,405,861

 
22,828,547

Due after one year through two years
9,892,785

 
7,921,035

Due after two years through three years
2,624,780

 
2,686,951

Due after three years through four years
1,843,093

 
1,984,705

Due after four years through five years
1,393,607

 
1,216,989

Thereafter
948,565

 
1,003,241

Total par value
$
38,116,365

 
$
37,647,166



Table 7.4 - Advances by Current Interest Rate Terms
(dollars in thousands)

Par value of advances
March 31, 2018
 
December 31, 2017
Fixed-rate
$
30,623,916

 
$
31,658,293

Variable-rate
7,492,449

 
5,988,873

Total par value
$
38,116,365

 
$
37,647,166



Credit-Risk Exposure and Security Terms. Our potential credit risk from advances is principally concentrated in commercial banks, insurance companies, savings institutions, and credit unions. At March 31, 2018, and December 31, 2017, we had $11.2 billion and $12.1 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five borrowers and six borrowers, respectively, at March 31, 2018, and December 31, 2017, representing 29.4 percent and 32.3 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Note 8 — Mortgage Loans Held for Portfolio

We invest in mortgage loans through the MPF program. These mortgage loans are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio.


19
Table of Contents

Table 8.1 - Mortgage Loans Held for Portfolio
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
448,260

 
$
466,952

Fixed-rate 20- and 30-year single-family mortgages
3,509,845

 
3,466,752

Premiums
68,785

 
70,074

Discounts
(1,599
)
 
(1,541
)
Deferred derivative gains, net
2,207

 
3,000

Total mortgage loans held for portfolio
4,027,498

 
4,005,237

Less: allowance for credit losses
(500
)
 
(500
)
Total mortgage loans, net of allowance for credit losses
$
4,026,998

 
$
4,004,737



Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Conventional mortgage loans
$
3,600,878

 
$
3,568,473

Government mortgage loans
357,227

 
365,231

Total par value
$
3,958,105

 
$
3,933,704



See Note 9 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF" are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 9 — Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

At March 31, 2018, and December 31, 2017, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the three months ended March 31, 2018, and 2017.

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at March 31, 2018, and December 31, 2017. At March 31, 2018, and December 31, 2017, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 17 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

Government Mortgage Loans Held for Portfolio

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Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of March 31, 2018, and December 31, 2017. Additionally, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on our conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. Table 9.1 sets forth certain key credit quality indicators for our investments in mortgage loans at March 31, 2018, and December 31, 2017 (dollars in thousands):

Table 9.1 - Recorded Investment in Delinquent Mortgage Loans
(dollars in thousands)

 
March 31, 2018
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
26,962

 
$
13,427

 
$
40,389

Past due 60-89 days delinquent
6,543

 
4,295

 
10,838

Past due 90 days or more delinquent
12,635

 
5,199

 
17,834

Total past due
46,140

 
22,921

 
69,061

Total current loans
3,635,455

 
343,853

 
3,979,308

Total mortgage loans
$
3,681,595

 
$
366,774

 
$
4,048,369

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
5,360

 
$
1,529

 
$
6,889

Serious delinquency rate (2)
0.36
%
 
1.42
%
 
0.46
%
Past due 90 days or more still accruing interest
$
—

 
$
5,199

 
$
5,199

Loans on nonaccrual status (3)
$
13,245

 
$
—

 
$
13,245

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.


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December 31, 2017
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
28,622

 
$
13,862

 
$
42,484

Past due 60-89 days delinquent
6,617

 
4,142

 
10,759

Past due 90 days or more delinquent
13,310

 
4,831

 
18,141

Total past due
48,549

 
22,835

 
71,384

Total current loans
3,601,952

 
352,249

 
3,954,201

Total mortgage loans
$
3,650,501

 
$
375,084

 
$
4,025,585

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
6,389

 
$
1,306

 
$
7,695

Serious delinquency rate (2)
0.38
%
 
1.29
%
 
0.46
%
Past due 90 days or more still accruing interest
$
—

 
$
4,831

 
$
4,831

Loans on nonaccrual status (3)
$
13,598

 
$
—

 
$
13,598

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Individually Evaluated Impaired Loans.

Table 9.2 - Individually Impaired Conventional Mortgage Loans
(dollars in thousands)

 
 
March 31, 2018
 
December 31, 2017
 
 
Recorded Investment
 
Par Value
 
Recorded Investment
 
Par Value
Individually evaluated impaired mortgage loans with no related allowance
 
$
16,540

 
$
16,505

 
$
17,668

 
$
17,630



Table 9.3 - Average Recorded Investment of Individually Impaired Mortgage Loans and Related Interest Income
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
16,731

 
$
112

 
$
21,699

 
$
116



Credit Enhancements.

For information on our credit enhancements held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Roll-Forward of Allowance for Credit Losses on Mortgage Loans. Table 9.4 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the three months ended March 31, 2018 and 2017, as well as the recorded

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investment in mortgage loans by impairment methodology at March 31, 2018 and 2017. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.

Table 9.4 - Allowance for Credit Losses on Conventional Mortgage Loans
(dollars in thousands)

 
For the Three Months Ended March 31,
 
2018
 
2017
Allowance for credit losses
 
 
 
Balance, beginning of period
$
500

 
$
650

Charge-offs, net of recoveries
(9
)
 
26

Provision for (reduction of) credit losses
9

 
(51
)
Balance, end of period
$
500

 
$
625

Ending balance, individually evaluated for impairment
$
—

 
$
—

Ending balance, collectively evaluated for impairment
$
500

 
$
625

Recorded investment, end of period (1)
 
 
 
Individually evaluated for impairment
$
16,540

 
$
21,352

Collectively evaluated for impairment
$
3,665,055

 
$
3,281,864

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

Note 10 — Derivatives and Hedging Activities


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Table 10.1 - Fair Value of Derivative Instruments
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
13,961,344

 
$
16,113

 
$
(316,074
)
 
$
14,118,994

 
$
52,557

 
$
(332,830
)
Forward-start interest-rate swaps
388,200

 
—

 
(469
)
 
481,200

 
—

 
(9,807
)
Total derivatives designated as hedging instruments
14,349,544

 
16,113

 
(316,543
)
 
14,600,194

 
52,557

 
(342,637
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
1,292,700

 
4,517

 
(2,941
)
 
1,166,900

 
3,512

 
(4,688
)
Mortgage-delivery commitments (1)
32,756

 
283

 
(6
)
 
42,918

 
169

 
(27
)
Total derivatives not designated as hedging instruments
1,325,456

 
4,800

 
(2,947
)
 
1,209,818

 
3,681

 
(4,715
)
Total notional amount of derivatives
$
15,675,000

 
 

 
 

 
$
15,810,012

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
20,913

 
(319,490
)
 
 
 
56,238

 
(347,352
)
Netting adjustments and cash collateral, including related accrued interest (2)
 

 
9,166

 
58,925

 
 
 
(21,452
)
 
46,902

Derivative assets and derivative liabilities
 

 
$
30,079

 
$
(260,565
)
 
 
 
$
34,786

 
$
(300,450
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $68.7 million and $25.8 million at March 31, 2018, and December 31, 2017, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $601,000 and $350,000 at March 31, 2018, and December 31, 2017.


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Table 10.2 - Net Gains and Losses on Derivatives and Hedging Activities
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Derivatives designated as hedging instruments
 
 
 
 
Interest-rate swaps
 
$
1,108

 
$
(659
)
Forward-start interest-rate swaps
 
76

 
134

Total net gains (losses) related to derivatives designated as hedging instruments
 
1,184

 
(525
)
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Economic hedges:
 
 
 
 
Interest-rate swaps
 
624

 
153

Mortgage-delivery commitments
 
(518
)
 
357

Total net gains related to derivatives not designated as hedging instruments
 
106

 
510

 
 
 
 
 
Other(1)
 
(150
)
 
51

 
 
 
 
 
Net gains on derivatives and hedging activities
 
$
1,140

 
$
36

______________
(1) Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

Table 10.3 - Effect of Fair Value Hedge Relationships
(dollars in thousands)

 
For the Three Months Ended March 31, 2018
 
Gain/(Loss) on
Derivative
 
(Loss)/Gain on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
43,797

 
$
(43,775
)
 
$
22

 
$
5,695

Investments
34,846

 
(34,423
)
 
423

 
(7,311
)
COs – bonds
(41,771
)
 
42,434

 
663

 
(3,017
)
Total
$
36,872

 
$
(35,764
)
 
$
1,108

 
$
(4,633
)
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2017
 
Gain/(Loss) on
Derivative
 
(Loss)/Gain on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
21,095

 
$
(20,453
)
 
$
642

 
$
(13,405
)
Investments
10,268

 
(9,808
)
 
460

 
(8,341
)
COs – bonds
76

 
(1,837
)
 
(1,761
)
 
4,641

 Total
$
31,439

 
$
(32,098
)
 
$
(659
)
 
$
(17,105
)

______________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.


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Table of Contents

Table 10.4 - Effect of Cash Flow Hedge Relationships
(dollars in thousands)

Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Gains (Losses) Recognized in Other Comprehensive Loss on Derivatives
(Effective Portion)
 
Location of Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Gains Recognized in Net Losses on Derivatives and Hedging Activities
(Ineffective Portion)
Forward-start Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2018
 
$
9,166

 
Interest expense
 
$
(934
)
 
$
76

For the Three Months Ended March 31, 2017
 
(138
)
 
Interest expense
 
(4,315
)
 
134



For the three months ended March 31, 2018 and 2017, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of March 31, 2018, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is seven years.

As of March 31, 2018, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $3.1 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a DCO, our counterparty for such derivatives. We also enter into derivatives that are not cleared (uncleared derivatives) under master-netting agreements. Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position, unless the collateral delivery threshold is set to zero. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at March 31, 2018, was $299.3 million for which we had delivered collateral with a post-haircut value of $276.4 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 10.5 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at March 31, 2018.

Table 10.5 - Post Haircut Value of Incremental Collateral to be Delivered as of March 31, 2018
(dollars in thousands)

Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral
AA+
 
AA or AA-
 
$
3,080

AA-
 
A+, A or A-
 
14,994

A-
 
below A-
 
18,797

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.

Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook, we began to characterize variation margin payments related to CME Inc. contracts as daily settlement payments, rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. We began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral, based upon a change effective January 16, 2018, to LCH Ltd.’s rulebook. A

26
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t both DCOs, initial margin has been, and continues to be, considered cash collateral. We post initial margin and exchange variation margin through a clearing member who acts as our agent to the DCO and who guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are CFTC-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at March 31, 2018.

Offsetting of Certain Derivatives. We present derivatives, any related cash collateral, including initial and certain variation margin, received or pledged, and associated accrued interest, on a net basis by counterparty.

We have analyzed the rights, rules, and regulations governing our cleared derivatives and determined that those rights, rules, and regulations should result in a net claim through each of our clearing members with the related DCO upon an event of default including a bankruptcy, insolvency or similar proceeding involving the DCO or one of our clearing members, or both. For this purpose, net claim generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant DCO and indirectly payable to us from the relevant DCO.

Table 10.6 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of March 31, 2018, and December 31, 2017, and the fair value of derivatives that are not subject to such netting. Such netting includes any related cash collateral received from or pledged to counterparties.

Table 10.6 - Netting of Derivative Assets and Derivative Liabilities
(dollars in thousands)

 
March 31, 2018
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral Received or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
20,069

$
(18,671
)
 
$
283

 
$
1,681

 
$
—

$
—

 
$
1,681

Cleared
561

27,837

 
 
 
28,398

 
—

—

 
28,398

Total
 
 
 
 
 
$
30,079

 
 
 
 
$
30,079

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(317,892
)
$
57,333

 
$
(6
)
 
$
(260,565
)
 
$
10,687

$
237,658

 
$
(12,220
)
Cleared
(1,592
)
1,592

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(260,565
)
 
 
 
 
$
(12,220
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.
(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At March 31, 2018, we had additional net credit exposure of $178,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.


27
Table of Contents

 
December 31, 2017
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral Received or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
15,587

$
(13,481
)
 
$
169

 
$
2,275

 
$
—

$
—

 
$
2,275

Cleared
40,482

(7,971
)
 
 
 
32,511

 
—

—

 
32,511

Total
 
 
 
 
 
$
34,786

 
 
 
 
$
34,786

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(335,289
)
$
34,866

 
$
(27
)
 
$
(300,450
)
 
$
7,627

$
280,486

 
$
(12,337
)
Cleared
(12,036
)
12,036

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(300,450
)
 
 
 
 
$
(12,337
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.
(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2017, we had additional net credit exposure of $502,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

We offer demand and overnight deposits for members and qualifying nonmembers. In addition, we offer short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans, which we classify as "other" in the following table.

Table 11.1 - Deposits
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Interest-bearing
 

 
 
Demand and overnight
$
500,634

 
$
447,700

Short-term
2,042

 
3,222

Noninterest-bearing
 

 
 

Other
25,156

 
26,147

Total deposits
$
527,832

 
$
477,069



Note 12 — Consolidated Obligations

CO Bonds for which we have received issuance proceeds and are primarily liable.


28
Table of Contents

Table 12.1 - CO Bonds Outstanding by Contractual Maturity
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
Due in one year or less
$
10,747,200

 
1.55
%
 
$
12,186,510

 
1.35
%
Due after one year through two years
5,596,915

 
1.82

 
5,288,470

 
1.63

Due after two years through three years
3,065,675

 
1.89

 
3,128,240

 
1.81

Due after three years through four years
2,681,605

 
1.77

 
2,759,460

 
1.74

Due after four years through five years
1,723,330

 
2.04

 
1,572,775

 
2.00

Thereafter
3,337,165

 
2.82

 
3,389,695

 
2.76

Total par value
27,151,890

 
1.85
%
 
28,325,150

 
1.70
%
Premiums
87,594

 
 

 
90,836

 
 

Discounts
(16,160
)
 
 

 
(15,685
)
 
 

Hedging adjustments
(98,112
)
 
 

 
(55,678
)
 
 

 
$
27,125,212

 
 

 
$
28,344,623

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.

Table 12.2 - CO Bonds Outstanding by Call Feature
(dollars in thousands)

Par Value of CO bonds
March 31, 2018
 
December 31, 2017
Noncallable and nonputable
$
22,644,890

 
$
23,931,150

Callable
4,507,000

 
4,394,000

Total par value
$
27,151,890

 
$
28,325,150



Table 12.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date
(dollars in thousands)

Year of Contractual Maturity or Next Call Date
 
March 31, 2018
 
December 31, 2017
Due in one year or less
 
$
14,137,200

 
$
15,309,510

Due after one year through two years
 
5,813,915

 
5,580,470

Due after two years through three years
 
2,857,675

 
3,020,240

Due after three years through four years
 
1,539,605

 
1,542,460

Due after four years through five years
 
1,148,330

 
1,107,775

Thereafter
 
1,655,165

 
1,764,695

Total par value
 
$
27,151,890

 
$
28,325,150




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Table of Contents

Table 12.4 - CO Bonds by Interest Rate-Payment Type
(dollars in thousands)

Par Value of CO bonds
March 31, 2018
 
December 31, 2017
Fixed-rate
$
21,582,890

 
$
21,416,150

Simple variable-rate
4,027,000

 
5,432,000

Step-up
1,542,000

 
1,477,000

Total par value
$
27,151,890

 
$
28,325,150



CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
Table 12.5 - CO Discount Notes Outstanding
(dollars in thousands)

 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
March 31, 2018
$
29,467,314

 
$
29,508,841

 
1.61
%
December 31, 2017
$
27,720,906

 
$
27,752,860

 
1.25
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 13 — Affordable Housing Program

Table 13.1 - AHP Liability
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Balance at beginning of period
$
81,600

 
$
81,627

AHP expense for the period
6,171

 
21,307

AHP direct grant disbursements
(5,163
)
 
(18,628
)
AHP subsidy for AHP advance disbursements
(2,172
)
 
(2,782
)
Return of previously disbursed grants and subsidies
9

 
76

Balance at end of period
$
80,445

 
$
81,600



Note 14 — Capital

We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), and FHFA regulations:
 
1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.
 
2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.
 

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Table of Contents

3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.
 
The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

Table 14.1 demonstrates our compliance with our regulatory capital requirements at March 31, 2018, and December 31, 2017.

Table 14.1 - Regulatory Capital Requirements
(dollars in thousands)

Risk-Based Capital Requirements
March 31, 2018
 
December 31, 2017
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,323,891

 
$
2,283,721

Mandatorily redeemable capital stock
36,113

 
35,923

Retained earnings
1,335,522

 
1,308,349

Total permanent capital
$
3,695,526

 
$
3,627,993

Risk-based capital requirement
 

 
 

Credit-risk capital
$
338,828

 
$
328,557

Market-risk capital
211,211

 
170,102

Operations-risk capital
165,012

 
149,598

Total risk-based capital requirement
$
715,051

 
$
648,257

Permanent capital in excess of risk-based capital requirement
$
2,980,475

 
$
2,979,736

 
 
March 31, 2018
 
December 31, 2017
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
715,051

 
$
3,695,526

 
$
648,257

 
$
3,627,993

Total regulatory capital
 
$
2,438,324

 
$
3,695,526

 
$
2,414,478

 
$
3,627,993

Total capital-to-asset ratio
 
4.0
%
 
6.1
%
 
4.0
%
 
6.0
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
3,047,906

 
$
5,543,289

 
$
3,018,097

 
$
5,441,990

Leverage capital-to-assets ratio
 
5.0
%
 
9.1
%
 
5.0
%
 
9.0
%


Note 15 — Accumulated Other Comprehensive Loss

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Table 15.1 - Accumulated Other Comprehensive Loss
(dollars in thousands)

 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2016
 
$
(136,809
)
 
$
(192,379
)
 
$
(48,187
)
 
$
(6,139
)
 
$
(383,514
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
26,906

 
—

 
(138
)
 
—

 
26,768

Accretion of noncredit loss
 
—

 
8,296

 
—

 
—

 
8,296

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
365

 
—

 
—

 
365

Amortization - hedging activities (2)
 
—

 
—

 
4,319

 
—

 
4,319

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
194

 
194

Other comprehensive income
 
26,906

 
8,661

 
4,181

 
194

 
39,942

Balance, March 31, 2017
 
$
(109,903
)
 
$
(183,718
)
 
$
(44,006
)
 
$
(5,945
)
 
$
(343,572
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
$
(122,331
)
 
$
(158,218
)
 
$
(40,436
)
 
$
(5,955
)
 
$
(326,940
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(31,622
)
 
—

 
9,166

 
—

 
(22,456
)
Accretion of noncredit loss
 
—

 
7,356

 
—

 
—

 
7,356

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
72

 
—

 
—

 
72

Amortization - hedging activities (4)
 
—

 
—

 
938

 
—

 
938

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
185

 
185

Other comprehensive (loss) income
 
(31,622
)
 
7,428

 
10,104

 
185

 
(13,905
)
Balance, March 31, 2018
 
$
(153,953
)
 
$
(150,790
)
 
$
(30,332
)
 
$
(5,770
)
 
$
(340,845
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified to accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $4.3 million recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other non-interest expenses in the statement of operations.
(4)
Amortization of hedging activities includes $934,000 recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

Note 16 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2017 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the three months ended March 31, 2018.

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Table of Contents


We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and under certain circumstances, certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to the tables below related to financial assets and liabilities held at fair value on either a recurring or non-recurring basis for further details.

Table 16.1 - Fair Value Summary
(dollars in thousands)

 
March 31, 2018
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
26,681

 
$
26,681

 
$
26,681

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
51,160

 
51,160

 
51,160

 
—

 
—

 
—

Securities purchased under agreements to resell
2,999,000

 
2,998,981

 
—

 
2,998,981

 
—

 
—

Federal funds sold
6,225,000

 
6,224,991

 
—

 
6,224,991

 
—

 
—

Trading securities(1)
942,874

 
942,874

 
—

 
942,874

 
—

 
—

Available-for-sale securities(1)
6,966,772

 
6,966,772

 
—

 
6,929,277

 
37,495

 
—

Held-to-maturity securities
1,545,726

 
1,823,482

 
—

 
764,744

 
1,058,738

 
—

Advances
37,987,775

 
37,962,720

 
—

 
37,962,720

 
—

 
—

Mortgage loans, net
4,026,998

 
3,966,900

 
—

 
3,945,318

 
21,582

 
—

Accrued interest receivable
93,749

 
93,749

 
—

 
93,749

 
—

 
—

Derivative assets(1)
30,079

 
30,079

 
—

 
20,913

 
—

 
9,166

Other assets (1)
25,122

 
25,122

 
12,031

 
13,091

 
—

 
—

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(527,832
)
 
(527,791
)
 
—

 
(527,791
)
 
—

 
—

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(27,125,212
)
 
(27,005,475
)
 
—

 
(27,005,475
)
 
—

 
—

Discount notes
(29,467,314
)
 
(29,465,498
)
 
—

 
(29,465,498
)
 
—

 
—

Mandatorily redeemable capital stock
(36,113
)
 
(36,113
)
 
(36,113
)
 
—

 
—

 
—

Accrued interest payable
(101,593
)
 
(101,593
)
 
—

 
(101,593
)
 
—

 
—

Derivative liabilities(1)
(260,565
)
 
(260,565
)
 
—

 
(319,490
)
 
—

 
58,925

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(3,829
)
 
—

 
(3,829
)
 
—

 
—

Standby letters of credit
(1,148
)
 
(1,148
)
 
—

 
(1,148
)
 
—

 
—

_______________________
(1)
Carried at fair value on a recurring basis.
(2)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


33
Table of Contents

 
December 31, 2017
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
261,673

 
$
261,673

 
$
261,673

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
246

 
246

 
246

 
—

 
—

 
—

Securities purchased under agreements to resell
5,349,000

 
5,348,898

 
—

 
5,348,898

 
—

 
—

Federal funds sold
3,450,000

 
3,449,981

 
—

 
3,449,981

 
—

 
—

Trading securities(1)
191,510

 
191,510

 
—

 
191,510

 
—

 
—

Available-for-sale securities(1)
7,324,736

 
7,324,736

 
—

 
7,287,053

 
37,683

 
—

Held-to-maturity securities
1,626,122

 
1,903,227

 
—

 
811,759

 
1,091,468

 
—

Advances
37,565,967

 
37,591,048

 
—

 
37,591,048

 
—

 
—

Mortgage loans, net
4,004,737

 
4,035,928

 
—

 
4,013,704

 
22,224

 
—

Loans to other FHLBanks(3)
400,000

 
399,997

 
—

 
399,997

 
—

 
—

Accrued interest receivable
94,100

 
94,100

 
—

 
94,100

 
—

 
—

Derivative assets(1)
34,786

 
34,786

 
—

 
56,238

 
—

 
(21,452
)
Other assets(1)
22,351

 
22,351

 
9,726

 
12,625

 
—

 
—

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(477,069
)
 
(477,060
)
 
—

 
(477,060
)
 
—

 
—

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(28,344,623
)
 
(28,353,945
)
 
—

 
(28,353,945
)
 
—

 
—

Discount notes
(27,720,906
)
 
(27,719,598
)
 
—

 
(27,719,598
)
 
—

 
—

Mandatorily redeemable capital stock
(35,923
)
 
(35,923
)
 
(35,923
)
 
—

 
—

 
—

Accrued interest payable
(90,626
)
 
(90,626
)
 
—

 
(90,626
)
 
—

 
—

Derivative liabilities(1)
(300,450
)
 
(300,450
)
 
—

 
(347,352
)
 
—

 
46,902

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(3,817
)
 
—

 
(3,817
)
 
—

 
—

Standby letters of credit
(1,100
)
 
(1,100
)
 
—

 
(1,100
)
 
—

 
—


_______________________
(1)
Carried at fair value on a recurring basis.
(2)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.
(3)
The Fair Value Summary table for December 31, 2017, has been revised to correct the omission of Loans to Other FHLBanks. This revision had no impact on the Statements of Condition, Statements of Operations, or Statements of Cash Flows.

Fair Value Measured on a Recurring Basis.


34
Table of Contents

Table 16.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)

 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
—

 
$
749,578

 
$
—

 
$
—

 
$
749,578

Corporate bonds
—

 
7,170

 
—

 
—

 
7,170

U.S. government-guaranteed – single-family MBS
—

 
6,429

 
—

 
—

 
6,429

GSEs – single-family MBS
—

 
275

 
—

 
—

 
275

GSEs – multifamily MBS
—

 
179,422

 
—

 
—

 
179,422

Total trading securities
—

 
942,874

 
—

 
—

 
942,874

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
37,495

 
—

 
37,495

Supranational institutions
—

 
406,730

 
—

 
—

 
406,730

U.S. government-owned corporations
—

 
285,027

 
—

 
—

 
285,027

GSEs
—

 
117,751

 
—

 
—

 
117,751

U.S. government guaranteed – single-family MBS
—

 
92,228

 
—

 
—

 
92,228

U.S. government guaranteed – multifamily MBS
—

 
414,153

 
—

 
—

 
414,153

GSEs – single-family MBS
—

 
4,288,240

 
—

 
—

 
4,288,240

GSEs – multifamily
—

 
1,325,148

 
—

 
—

 
1,325,148

Total available-for-sale securities
—

 
6,929,277

 
37,495

 
—

 
6,966,772

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
20,630

 
—

 
9,166

 
29,796

Mortgage delivery commitments
—

 
283

 
—

 
—

 
283

Total derivative assets
—

 
20,913

 
—

 
9,166

 
30,079

Other assets
12,031

 
13,091

 
—

 
—

 
25,122

Total assets at fair value
$
12,031

 
$
7,906,155

 
$
37,495

 
$
9,166

 
$
7,964,847

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(319,484
)
 
$
—

 
$
58,925

 
$
(260,559
)
Mortgage delivery commitments
—

 
(6
)
 
—

 
—

 
(6
)
Total liabilities at fair value
$
—

 
$
(319,490
)
 
$
—

 
$
58,925

 
$
(260,565
)
_______________________
(1)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


35
Table of Contents

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments and Cash Collateral  (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed – single-family MBS
$
—

 
$
6,807

 
$
—

 
$
—

 
$
6,807

GSEs – single-family MBS
—

 
346

 
—

 
—

 
346

GSEs – multifamily MBS
—

 
184,357

 
—

 
—

 
184,357

Total trading securities
—

 
191,510

 
—

 
—

 
191,510

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
37,683

 
—

 
37,683

Supranational institutions
—

 
418,285

 
—

 
—

 
418,285

U.S. government-owned corporations
—

 
292,077

 
—

 
—

 
292,077

GSEs
—

 
121,343

 
—

 
—

 
121,343

U.S. government guaranteed – single-family MBS
—

 
95,777

 
—

 
—

 
95,777

U.S. government guaranteed – multifamily MBS
—

 
443,373

 
—

 
—

 
443,373

GSEs – single-family MBS
—

 
4,562,992

 
—

 
—

 
4,562,992

GSEs – multifamily MBS
—

 
1,353,206

 
—

 
—

 
1,353,206

Total available-for-sale securities
—

 
7,287,053

 
37,683

 
—

 
7,324,736

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
56,069

 
—

 
(21,452
)
 
34,617

Mortgage delivery commitments
—

 
169

 
—

 
—

 
169

Total derivative assets
—

 
56,238

 
—

 
(21,452
)
 
34,786

Other assets
9,726

 
12,625

 
—

 
—

 
22,351

Total assets at fair value
$
9,726

 
$
7,547,426

 
$
37,683

 
$
(21,452
)
 
$
7,573,383

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(347,325
)
 
$
—

 
$
46,902

 
$
(300,423
)
Mortgage delivery commitments
—

 
(27
)
 
—

 
—

 
(27
)
Total liabilities at fair value
$
—

 
$
(347,352
)
 
$
—

 
$
46,902

 
$
(300,450
)
_______________________
(1)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Table 16.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2018 and 2017.

Table 16.3 - Roll Forward of Level 3 Available-for-Sale Securities
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Balance at beginning of period
 
$
37,683

 
$
8,146

Unrealized (losses) gains included in other comprehensive income
 
(188
)
 
38

Balance at end of period
 
$
37,495

 
$
8,184




36
Table of Contents

Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and real-estate-owned property (REO) at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).

Table 16.4 - Fair Value of Assets Measured at Fair Value on a Nonrecurring Basis (1) 
(dollars in thousands)

 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
1,890

 
$
1,890

Mortgage loans held for portfolio
—

 
—

 
354

 
354

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$
—

 
$
—

 
$
2,244

 
$
2,244


 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
1,970

 
$
1,970

Mortgage loans held for portfolio
—

 
—

 
4,608

 
4,608

REO
—

 
—

 
784

 
784

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$
—

 
$
—

 
$
7,362

 
$
7,362


_______________________
(1)
The fair values presented are as of the date the fair value adjustment was recorded during the three months ended March 31, 2018, and year ended December 31, 2017.

Note 17 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of March 31, 2018, and through the filing of this report, we believe there is only a remote likelihood that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at March 31, 2018, and December 31, 2017. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $962.6 billion and $978.2 billion at March 31, 2018, and December 31, 2017, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments


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Table 17.1 - Off-Balance Sheet Commitments
(dollars in thousands)

 
 
March 31, 2018
 
December 31, 2017
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
6,147,846

 
$
277,842

 
$
6,425,688

 
$
5,034,725

 
$
223,167

 
$
5,257,892

Commitments for unused lines of credit - advances (2)
 
1,207,681

 
—

 
1,207,681

 
1,216,592

 
—

 
1,216,592

Commitments to make additional advances
 
40,228

 
52,427

 
92,655

 
18,851

 
63,488

 
82,339

Commitments to invest in mortgage loans
 
32,756

 
—

 
32,756

 
42,918

 
—

 
42,918

Unsettled CO bonds, at par
 
25,000

 
—

 
25,000

 
52,550

 
—

 
52,550

Unsettled CO discount notes, at par
 
1,762,000

 
—

 
1,762,000

 
—

 
—

 
—

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At March 31, 2018, and December 31, 2017, these amounts totaled $2.4 million and $1.4 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $543,000 at December 31, 2017.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.

Standby Letters of Credit. We issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as security for deposits from federal, state, and municipal government agencies. Standby letters of credit are executed for members for a fee. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor's demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. Historically, however, standby letters of credit usually expire without being drawn upon. The original terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2027. Currently, we offer new standby letters of credit with expiration periods of up to 10 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.1 million at March 31, 2018, and December 31, 2017.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 10 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Note 18 — Transactions with Shareholders


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Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at any time during the year.
Table 18.1 - Shareholder Concentrations, Balance Sheet
(dollars in thousands)

 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
253,348

 
10.7
%
 
$
5,508,833

 
14.5
%
 
$
4,406

 
9.1
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
227,287

 
9.8
%
 
$
4,858,592

 
12.9
%
 
$
2,558

 
6.0
%


We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three months ended March 31, 2018, and 2017, as follows (dollars in thousands):
Table 18.2 - Shareholder Concentrations, Income Statement
(dollars in thousands)

 
 
For the Three Months Ended March 31,
Citizens Bank, N.A.
 
2018
 
2017
Interest income on advances
 
$
26,892

 
$
14,111

Fees on letters of credit
 
1,097

 
745



Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member.

Table 18.3 presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition:
Table 18.3 - Transactions with Directors' Institutions
(dollars in thousands)

 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of March 31, 2018
$
112,214

 
4.8
%
 
$
2,062,824

 
5.4
%
 
$
2,646

 
5.5
%
As of December 31, 2017
114,498

 
4.9

 
2,133,374

 
5.7

 
2,466

 
5.8



Note 19 — Subsequent Events


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On April 20, 2018, the board of directors declared a cash dividend at an annualized rate of 5.46 percent based on capital stock balances outstanding during the first quarter of 2018. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $32.4 million and was paid on May 2, 2018.


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Index to Management's Discussion and Analysis of Financial Condition and Results of Operations



41
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Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are “forward-looking statements.” These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2017 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
 
Forward-looking statements in this report may include, among others, our expectations for:

•
income, retained earnings, and dividend payouts;
•
repurchases of stock in excess of a shareholder’s total stock investment requirement (excess stock);
•
credit losses on advances and investments in mortgage loans and ABS, particularly private-label MBS;
•
balance-sheet changes and components thereof, such as changes in advances balances and the size of our portfolio of investments in mortgage loans;
•
our minimum retained earnings target; and
•
the interest-rate environment in which we do business.

Actual results may differ from forward-looking statements for many reasons, including, but not limited to:
 
•
changes in interest rates, the rate of inflation (or deflation), housing prices, employment rates, and the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government;
•
changes in demand for our advances and other products;
•
the willingness of our members to do business with us;
•
changes in the financial health of our members;
•
changes in borrower defaults on mortgage loans;
•
changes in the credit performance and loss severities of our investments;
•
changes in prepayment rates on advances and investments;
•
the value of collateral we hold as security for obligations of our members and counterparties;
•
issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, the manner in which we operate, or the organization and structure of the FHLBank System;
•
competitive forces including, without limitation, other sources of funding available to our members, other entities borrowing funds in the capital markets, and our ability to attract and retain skilled employees;
•
the pace of technological change and our ability to develop and support technology and information systems sufficient to manage the risks of our business effectively;
•
the addition of new members;
•
the loss of members due to, among other ways, member withdrawals, mergers and acquisitions;
•
changes in investor demand for COs;
•
changes in the terms or availability of derivatives and other agreements we enter into in support of our business operations;
•
the timing and volume of market activity;
•
the volatility of reported results due to changes in the fair value of certain assets and liabilities;
•
our ability to introduce new (or adequately adapt current) products and services and successfully manage the risks associated with our products and services, including new types of collateral used to secure advances;
•
losses arising from litigation filed against us or one or more of the other FHLBanks;
•
gains resulting from legal claims we have;

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•
losses arising from our joint and several liability on COs;
•
significant business disruptions resulting from vendor or third-party failure, natural or other disasters, cyberincidents, acts of war, or terrorism; and
•
new accounting standards.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2017 Annual Report.

EXECUTIVE SUMMARY

For the three months ended March 31, 2018, net income increased to $55.1 million, from $37.4 million for the three months ended March 31, 2017, largely the result of an increase of $17.3 million in net interest income after provision for credit losses and a $1.1 million increase in net gains on derivatives and hedging activities. Our return on average equity was 6.65 percent for the three months ended March 31, 2018, compared with 4.56 percent for the three months ended March 31, 2017, an increase of 209 basis points. The increase in return on average equity was largely a result of the aforementioned increase in net interest income after provision for credit losses. Our financial condition continued to strengthen with retained earnings growing to $1.3 billion at March 31, 2018, a surplus of $635.5 million over our minimum retained earnings target, as we continue to satisfy all regulatory capital requirements as of March 31, 2018. On April 20, 2018, our board of directors declared a cash dividend that was equivalent to an annual yield of 5.46 percent, the approximate daily average three-month London Interbank Offered Rate (LIBOR) yield for the first quarter of 2018 plus 350 basis points.

Net Interest Margin

For the three months ended March 31, 2018, net interest margin was 0.52 percent, an increase of nine basis points from the three months ended March 31, 2017. The improvement of net interest margin benefited from improvement in net interest spread and an increase in interest rates, as the economy continued to strengthen as discussed under — Economic Conditions — Interest-Rate Environment.

Advances Balances

We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $38.0 billion at March 31, 2018, compared to $37.6 billion at December 31, 2017. The increase in advances was primarily in variable-rate advances, partially offset by a decrease in short-term fixed-rate advances. The daily average balance of advances for the quarter ending March 31, 2018 was $39.3 billion, compared to $37.8 billion for the quarter ending March 31, 2017.

Accretable yields from investments in private-label MBS

For the three months ended March 31, 2018 and 2017, we recognized $7.3 million and $8.6 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2017 Annual Report.

The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $798.5 million at March 31, 2018. Other-than-temporary impairment credit losses were $79,000 for the three months ended March 31, 2018.

Regulatory Developments

The FHFA and other regulators with authority over us or our way of doing business have proposed regulations during the quarter as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.

ECONOMIC CONDITIONS

Economic Environment


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The labor market continued to strengthen in the first quarter of 2018. The national unemployment rate held steady at 4.1 percent, while jobs gains were strong at an average of 202,000 jobs per month during the first quarter. The New England region also continued to see improvements in the labor market. The February 2018 unemployment rate for the six New England states as a whole was 3.6 percent, the lowest level since June 2001, and a 0.4 percent decrease from February 2017.  

Interest-Rate Environment

On May 2, 2018, the Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 1.50 percent to 1.75 percent. The FOMC stated that it expects the economy to expand at a moderate pace and labor market conditions to remain strong. Projections by FOMC participants in March 2018 suggest a further increase in the target range for the federal funds rate of approximately 50 basis points by the end of 2018. Market data and forecaster surveys since the FOMC meeting suggest an expectation of a further increase in the federal funds rate of 50 to 75 basis points.
 
Long-term interest rates have risen slightly since the beginning of 2018, reaching multi-year highs on expectations that the continuing economic expansion may result in stronger inflation. Increases in long-term interest rates, especially the increase in mortgage rates, led to higher income from mortgage-backed securities as actual and projected mortgage prepayment speeds slowed down. At the same time, short-term interest rates, the 3-month LIBOR rate in particular, increased by a larger magnitude than long-term rates, resulting in a flattening yield curve. Higher short-term interest rates enabled the Bank to earn higher income from investing the Bank’s capital.

Table 1 - Key Interest Rates
 
Three Months Average
 
Ending rate
 
March 31, 2018
 
March 31, 2017
 
March 31, 2018
 
December 31, 2017
Federal funds effective rate
1.45%
 
0.70%
 
1.67%
 
1.33%
3-month LIBOR
1.93%
 
1.07%
 
2.31%
 
1.69%
3-month U.S. Treasury yield
1.57%
 
0.59%
 
1.70%
 
1.38%
2-year U.S. Treasury yield
2.15%
 
1.23%
 
2.27%
 
1.88%
5-year U.S. Treasury yield
2.53%
 
1.94%
 
2.56%
 
2.21%
10-year U.S. Treasury yield
2.76%
 
2.44%
 
2.74%
 
2.41%
________________
Source: Bloomberg

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition and statement of operations for December 31, 2017, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.


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Table of Contents

Table 2 - Selected Financial Data
(dollars in thousands)

 
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
Statement of Condition at period end
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
60,958,111

 
$
60,361,946

 
$
60,975,455

 
$
60,754,247

 
$
56,568,802

Investments(1)
 
18,730,532

 
17,941,614

 
19,340,597

 
18,142,252

 
17,215,779

Advances
 
37,987,775

 
37,565,967

 
37,467,404

 
38,427,616

 
35,479,424

Mortgage loans held for portfolio, net(2)
 
4,026,998

 
4,004,737

 
3,942,776

 
3,804,581

 
3,675,598

Deposits and other borrowings
 
527,832

 
477,069

 
492,631

 
469,173

 
490,268

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Bonds
 
27,125,212

 
28,344,623

 
28,492,595

 
28,518,424

 
27,978,423

Discount notes
 
29,467,314

 
27,720,906

 
28,047,762

 
27,865,529

 
24,179,050

Total consolidated obligations
 
56,592,526

 
56,065,529

 
56,540,357

 
56,383,953

 
52,157,473

Mandatorily redeemable capital stock
 
36,113

 
35,923

 
36,042

 
37,380

 
32,677

Class B capital stock outstanding-putable(3)
 
2,323,891

 
2,283,721

 
2,272,648

 
2,408,647

 
2,458,667

Unrestricted retained earnings
 
1,057,195

 
1,041,033

 
1,011,532

 
1,000,694

 
994,011

Restricted retained earnings
 
278,327

 
267,316

 
253,750

 
244,631

 
236,755

Total retained earnings
 
1,335,522

 
1,308,349

 
1,265,282

 
1,245,325

 
1,230,766

Accumulated other comprehensive loss
 
(340,845
)
 
(326,940
)
 
(310,314
)
 
(320,461
)
 
(343,572
)
Total capital
 
3,318,568

 
3,265,130

 
3,227,616

 
3,333,511

 
3,345,861

Results of Operations for the quarter ended
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
79,911

 
$
79,570

 
$
71,109

 
$
63,820

 
$
62,504

Provision for (reduction of) credit losses
 
9

 
52

 
28

 
(125
)
 
(51
)
Net impairment losses on held-to-maturity securities recognized in earnings
 
(79
)
 
(36
)
 
(432
)
 
(568
)
 
(418
)
Litigation settlements
 
—

 
20,761

 
—

 
—

 
—

Other gains, net
 
1,873

 
1,130

 
1,028

 
1,020

 
427

Other expense
 
20,468

 
25,958

 
20,972

 
20,597

 
20,974

AHP assessments
 
6,171

 
7,587

 
5,110

 
4,418

 
4,192

Net income
 
$
55,057

 
$
67,828

 
$
45,595

 
$
39,382

 
$
37,398

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
27,884

 
$
24,761

 
$
25,637

 
$
24,822

 
$
23,619

Dividend payout ratio
 
50.65
%
 
36.51
%
 
56.23
%
 
63.03
%
 
63.16
%
Weighted-average dividend rate(4)
 
4.99

 
4.33

 
4.22

 
4.08

 
3.94

Return on average equity(5)
 
6.65

 
8.46

 
5.64

 
4.74

 
4.56

Return on average assets
 
0.36

 
0.45

 
0.31

 
0.26

 
0.25

Net interest margin(6)
 
0.52

 
0.53

 
0.49

 
0.43

 
0.43

Average equity to average assets
 
5.41

 
5.37

 
5.50

 
5.56

 
5.55

Total regulatory capital ratio at period end(7)
 
6.06

 
6.01

 
5.86

 
6.08

 
6.58

_______________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $500,000 for each of the quarters ended March 31, 2018, December 31, 2017, September 30, 2017, and June 30, 2017, and $625,000 for the quarter ended March 31, 2017.
(3)
Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. We also initiated daily repurchases of excess stock from members on June 1, 2017. See below under Liquidity and Capital Resources - Internal Capital Practices and Policies.
(4)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends during the preceding quarter.

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(5)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss and total retained earnings.
(6)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.
(7)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets.

RESULTS OF OPERATIONS

Net Income

Net income increased to $55.1 million for three months ended March 31, 2018, from $37.4 million for the same period in 2017. The reasons for the increase are discussed under — Executive Summary.

Net Interest Income

Net interest income after provision for credit losses for the three months ended March 31, 2018, was $79.9 million, compared with $62.6 million for the same period in 2017. The $17.3 million increase in net interest income after provision for credit losses was primarily attributable to the increase in accretion on Agency MBS, resulting from the increase in 30-year mortgage rates, that positively impacted our retrospective amortization adjustments. In addition, average earning assets increased $2.3 billion, from $59.6 billion for the three months ended March 31, 2017, to $61.9 billion for the three months ended March 31, 2018. The increase in average earning assets was driven by increases of $1.6 billion in average advances balances and $348.8 million in average investments balances. For additional information see — Rate and Volume Analysis.

Net interest spread was 0.42 percent for three months ended March 31, 2018, a six basis point increase from the same period in 2017, and net interest margin was 0.52 percent, a nine basis point increase from three months ended March 31, 2017. The increase in net interest spread reflects a 65 basis point increase in the average yield on earning assets and a 59 basis point increase in the average yield on interest-bearing liabilities.

Table 3 presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.


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Table 3 - Net Interest Spread and Margin
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
 
2018
 
2017
 
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
39,346,131

 
$
177,606

 
1.83
%
 
$
37,753,835

 
$
106,747

 
1.15
%
 
Securities purchased under agreements to resell
 
3,027,333

 
10,363

 
1.39

 
3,065,667

 
4,418

 
0.58

 
Federal funds sold
 
6,295,756

 
22,761

 
1.47

 
5,877,000

 
10,284

 
0.71

 
Investment securities(2)
 
9,087,136

 
61,844

 
2.76

 
9,155,405

 
47,636

 
2.11

 
Mortgage loans
 
4,022,113

 
33,025

 
3.33

 
3,673,168

 
29,947

 
3.31

 
Other earning assets
 
109,263

 
334

 
1.24

 
72,618

 
59

 
0.33

 
Total interest-earning assets
 
61,887,732

 
305,933

 
2.00

 
59,597,693

 
199,091

 
1.35

 
Other non-interest-earning assets
 
262,860

 
 
 
 
 
403,446

 
 
 
 
 
Fair-value adjustments on investment securities
 
(79,528
)
 
 
 
 
 
(56,436
)
 
 
 
 
 
Total assets
 
$
62,071,064

 
$
305,933

 
2.00
%
 
$
59,944,703

 
$
199,091

 
1.35
%
 
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
29,825,914

 
$
104,980

 
1.43
%
 
$
27,681,790

 
$
37,579

 
0.55
%
 
Bonds
 
27,731,428

 
119,201

 
1.74

 
27,763,168

 
98,175

 
1.43

 
Deposits
 
500,115

 
1,347

 
1.09

 
451,900

 
502

 
0.45

 
Mandatorily redeemable capital stock
 
36,133

 
486

 
5.46

 
32,683

 
329

 
4.08

 
Other borrowings
 
2,222

 
8

 
1.46

 
1,111

 
2

 
0.73

 
Total interest-bearing liabilities
 
58,095,812

 
226,022

 
1.58

 
55,930,652

 
136,587

 
0.99

 
Other non-interest-bearing liabilities
 
619,699

 
 
 
 
 
688,382

 
 
 
 
 
Total capital
 
3,355,553

 
 
 
 
 
3,325,669

 
 
 
 
 
Total liabilities and capital
 
$
62,071,064

 
$
226,022

 
1.48
%
 
$
59,944,703

 
$
136,587

 
0.92
%
 
Net interest income
 
 

 
$
79,911

 
 
 
 

 
$
62,504

 
 
 
Net interest spread
 
 

 
 

 
0.42
%
 
 

 
 

 
0.36
%
 
Net interest margin
 
 

 
 

 
0.52
%
 
 

 
 

 
0.43
%
 
_________________________
(1)
Yields are annualized.

(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 4 summarizes changes in interest income and interest expense for the three months ended March 31, 2018 and 2017. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
 

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Table 4 - Rate and Volume Analysis
(dollars in thousands)

 
 
For the Three Months Ended March 31, 2018 vs. 2017
 
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
Advances
 
$
4,680

 
$
66,179

 
$
70,859

Securities purchased under agreements to resell
 
(56
)
 
6,001

 
5,945

Federal funds sold
 
782

 
11,695

 
12,477

Investment securities
 
(358
)
 
14,566

 
14,208

Mortgage loans
 
2,864

 
214

 
3,078

Other earning assets
 
42

 
233

 
275

Total interest income
 
7,954

 
98,888

 
106,842

Interest expense
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
Discount notes
 
3,125

 
64,276

 
67,401

Bonds
 
(112
)
 
21,138

 
21,026

Deposits
 
59

 
786

 
845

Mandatorily redeemable capital stock
 
38

 
119

 
157

Other borrowings
 
3

 
3

 
6

Total interest expense
 
3,113

 
86,322

 
89,435

Change in net interest income
 
$
4,841

 
$
12,566

 
$
17,407


Average Balance of Advances Outstanding

The average balance of total advances increased $1.6 billion, or 4.2 percent, for the three months ended March 31, 2018, compared with the same period in 2017, with short-term fixed-rate advances and fixed-rate overnight advances as the most significant contributors. We cannot predict whether this trend will continue.


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Table 5 - Average Balance of Advances Outstanding by Product Type
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
14,061,630

 
$
13,300,970

Short-term
 
13,071,751

 
11,692,882

Overnight
 
2,187,808

 
1,435,293

Putable
 
1,206,006

 
2,634,528

Amortizing
 
943,491

 
857,935

All other fixed-rate advances
 
27,867

 
46,333

 
 
31,498,553

 
29,967,941

 
 
 
 
 
Variable-rate indexed advances—par value
 
 
 
 
Simple variable (1)
 
7,089,995

 
7,246,067

Putable
 
834,308

 
519,883

All other variable-rate indexed advances
 
33,238

 
42,749

 
 
7,957,541

 
7,808,699

Total average par value
 
39,456,094

 
37,776,640

Net discounts
 
(15,498
)
 
(4,635
)
Market value of bifurcated derivatives
 
(3,009
)
 
(211
)
Hedging adjustments
 
(91,456
)
 
(17,959
)
Total average balance of advances
 
$
39,346,131

 
$
37,753,835

_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $7.1 billion for the three months ended March 31, 2018. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $30.3 billion for the three months ended March 31, 2018, representing 77.1 percent of the total average balance of advances outstanding during that period. The average balance of all such advances totaled $30.4 billion for the three months ended March 31, 2017, representing 80.6 percent of the total average balance of advances outstanding during that period.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $417.1 million, or 4.6 percent, for the three months ended March 31, 2018, compared with the same period in 2017. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.71 percent during the three months ended March 31, 2017 to 1.47 percent during the three months ended March 31, 2018, while average yields on securities purchased under agreements to resell increased from 0.58 percent for the three months ended March 31, 2017 to 1.39 percent for the three months ended March 31, 2018. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the three months ended March 31, 2018, average balances of federal funds sold increased $418.8 million and average balances of securities purchased under agreements to resell increased $38.3 million in comparison to the three months ended March 31, 2017.

Average investment-securities balances decreased $68.3 million, or 0.7 percent for the three months ended March 31, 2018, compared with the same period in 2017, a decrease consisting primarily of a $297.0 million decrease in U.S. Treasury obligations partially offset by a $210.4 million increase in MBS.

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Average Balance of COs

Average CO balances increased $2.1 billion, or 3.8 percent, for the three months ended March 31, 2018, compared with the same period in 2017, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of an increase of $2.1 billion in CO discount notes offset by a decrease of $31.7 million in CO bonds.

The average balance of CO discount notes represented approximately 51.8 percent of total average COs during the three months ended March 31, 2018, compared with 49.9 percent of total average COs during the same period in 2017. The average balance of CO bonds represented 48.2 percent and 50.1 percent of total average COs outstanding during the three months ended March 31, 2018 and 2017, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.

Table 6 - Effect of Derivative and Hedging Activities
(dollars in thousands)

 
 
For the Three Months Ended March 31, 2018
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(453
)
 
$
—

 
$
(139
)
 
$
272

 
$
—

 
$
(320
)
 
Net interest settlements included in net interest income (2)
 
5,695

 
(7,311
)
 
—

 
(3,017
)
 
—

 
(4,633
)
 
Total net interest income
 
5,242

 
(7,311
)
 
(139
)
 
(2,745
)
 
—

 
(4,953
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
22

 
423

 
—

 
663

 
—

 
1,108

 
Gains on cash-flow hedges
 
—

 
—

 
—

 
76

 
—

 
76

 
(Losses) gains on derivatives not receiving hedge accounting
 
(15
)
 
639

 
—

 
—

 
—

 
624

 
Mortgage delivery commitments
 
—

 
—

 
(518
)
 
—

 
—

 
(518
)
 
Other(3)
 
—

 
—

 
—

 
—

 
(150
)
 
(150
)
 
Net gains (losses) on derivatives and hedging activities
 
7

 
1,062

 
(518
)
 
739

 
(150
)
 
1,140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
5,249

 
(6,249
)
 
(657
)
 
(2,006
)
 
(150
)
 
(3,813
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(1,964
)
 
—

 
—

 
—

 
(1,964
)
 
Total net effect of derivatives and hedging activities
 
$
5,249

 
$
(8,213
)
 
$
(657
)
 
$
(2,006
)
 
$
(150
)
 
$
(5,777
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

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Table of Contents

(3)
Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.
 
 
For the Three Months Ended March 31, 2017
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(683
)
 
$
—

 
$
(81
)
 
$
(103
)
 
$
—

 
$
(867
)
 
Net interest settlements included in net interest income (2)
 
(13,405
)
 
(8,341
)
 
—

 
4,641

 
—

 
(17,105
)
 
Total net interest income
 
(14,088
)
 
(8,341
)
 
(81
)
 
4,538

 
—

 
(17,972
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
642

 
460

 
—

 
(1,761
)
 
—

 
(659
)
 
Gains on cash-flow hedges
 
—

 
—

 
—

 
134

 
—

 
134

 
(Losses) gains on derivatives not receiving hedge accounting
 
(5
)
 
154

 
—

 
4

 
—

 
153

 
Mortgage delivery commitments
 
—

 
—

 
357

 
—

 
—

 
357

 
Other (3)
 
—

 
—

 
—

 
—

 
51

 
51

 
Net gain (losses) on derivatives and hedging activities
 
637

 
614

 
357

 
(1,623
)
 
51

 
36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(13,451
)
 
(7,727
)
 
276

 
2,915

 
51

 
(17,936
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(1,414
)
 
—

 
—

 
—

 
(1,414
)
 
Total net effect of derivatives and hedging activities
 
$
(13,451
)
 
$
(9,141
)
 
$
276

 
$
2,915

 
$
51

 
$
(19,350
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $875,000 and $1.3 million for the three months ended March 31, 2018 and 2017, respectively.

Other Income (Loss)
  

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Table 7 - Other Income (Loss)
(dollars in thousands)

 
 
For the Three Months Ended March 31,
 
 
 
2018
 
2017
 
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
Net gains (losses) related to fair-value hedge ineffectiveness
 
$
1,108

 
$
(659
)
 
Net gains related to cash-flow hedge ineffectiveness
 
76

 
134

 
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
Advances
 
(15
)
 
(5
)
 
Trading securities
 
1,514

 
1,442

 
CO Bonds
 
—

 
29

 
Mortgage delivery commitments
 
(518
)
 
357

 
Net interest-accruals related to derivatives not receiving hedge accounting
 
(875
)
 
(1,313
)
 
Other (1)
 
(150
)
 
51

 
Net gains on derivatives and hedging activities
 
1,140

 
36

 
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(79
)
 
(418
)
 
Service-fee income
 
2,356

 
2,012

 
Net unrealized losses on trading securities
 
(1,964
)
 
(1,414
)
 
Other
 
341

 
(207
)
 
Total other income
 
$
1,794

 
$
9

 
______________
(1)
Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

FINANCIAL CONDITION

Advances

At March 31, 2018, the par value of our advances portfolio totaled $38.1 billion, an increase of $469.2 million compared with $37.6 billion at December 31, 2017.

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Table 8 - Advances Outstanding by Product Type
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Long-term
$
14,033,672

 
36.8
%
 
$
14,188,347

 
37.7
%
Short-term
12,433,217

 
32.6

 
13,533,417

 
35.9

Overnight
1,957,412

 
5.1

 
1,717,823

 
4.6

Putable
1,206,250

 
3.2

 
1,242,750

 
3.3

Amortizing
973,365

 
2.5

 
943,956

 
2.5

All other fixed-rate advances
20,000

 
0.1

 
32,000

 
0.1

 
30,623,916

 
80.3

 
31,658,293

 
84.1

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable (1)
6,493,975

 
17.0

 
5,143,175

 
13.7

Putable
946,700

 
2.5

 
775,400

 
2.0

All other variable-rate indexed advances
51,774

 
0.2

 
70,298

 
0.2

 
7,492,449

 
19.7

 
5,988,873

 
15.9

Total par value
$
38,116,365

 
100.0
%
 
$
37,647,166

 
100.0
%
_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.
 
See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.

At March 31, 2018, we had advances outstanding to 309, or 70.1 percent, of our 441 members. At December 31, 2017, we had advances outstanding to 314, or 70.9 percent percent, of our 443 members.

Advances Credit Risk

We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance of the collateral, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

•
Category-1: members that are generally in satisfactory financial condition;
•
Category-2: members that show financial weakness or weakening financial trends in key financial indices and/or regulatory findings; and
•
Category-3: members with financial weaknesses that present an elevated level of concern. We also place housing associates and nonmember borrowers in Category-3.

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.


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Table of Contents

Table 9 - Advances Outstanding by Borrower Credit Status Category
(dollars in thousands)

 
As of March 31, 2018
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
264

 
$
33,832,234

 
$
89,397,936

 
264.2
%
Category-2
13

 
380,395

 
775,067

 
203.8

Category-3
22

 
538,751

 
780,924

 
145.0

Insurance companies
19

 
3,364,985

 
4,255,417

 
126.5

Total
318

 
$
38,116,365

 
$
95,209,344

 
249.8
%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.

The Bank may adjust the credit status category of a member at any time based on the financial reviews and other conditions of the members. Due to their weaker profile, the Bank requires Category-3 members to deliver collateral to the Bank or its custodian. Table 10 shows the total potential lending value of the collateral that borrowers have pledged, based upon the method by which borrowers pledge collateral to us, net of our collateral valuation discounts as of March 31, 2018.

Table 10 - Collateral by Pledge Type
(dollars in thousands)

 
Discounted Collateral
Collateral not specifically listed and identified
$
27,030,514

Collateral specifically listed and identified
61,238,834

Collateral delivered to us
12,522,907


We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances Credit Risk in the 2017 Annual Report.

At March 31, 2018, and December 31, 2017, the amount of pledged nontraditional and subprime loan collateral was nine percent and 10 percent, respectively, of total member discounted collateral.

We have not recorded any allowance for credit losses on advances at March 31, 2018, and December 31, 2017, for the reasons discussed in Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses.


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Table 11 - Top Five Advance-Borrowing Institutions
(dollars in thousands)

 
 
March 31, 2018
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended March 31, 2018
Citizens Bank, N.A.
 
$
5,508,833

 
14.4
%
 
2.01
%
 
$
26,892

People's United Bank, N.A.
 
2,354,770

 
6.2

 
1.94

 
9,793

Webster Bank, N.A.
 
1,202,030

 
3.1

 
1.97

 
5,656

Berkshire Bank
 
1,096,828

 
2.9

 
1.88

 
4,635

Massachusetts Mutual Life Insurance Co.
 
1,050,000

 
2.8

 
2.10

 
5,601

Total of top five advance-borrowing institutions
 
$
11,212,461

 
29.4
%
 
 
 
$
52,577

_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments
 
At March 31, 2018, investment securities and short-term money-market instruments totaled $18.7 billion, an increase of $788.9 million from December 31, 2017.

Short-term money-market investments increased $475.9 million to $9.3 billion at March 31, 2018, compared with December 31, 2017. The increase was attributable to a $2.8 billion increase in federal funds sold offset by a $2.4 billion decrease in securities purchased under agreements to resell.

Investment securities increased $313.0 million to $9.5 billion at March 31, 2018, compared with December 31, 2017. The increase was attributable to an increase of $749.6 million in U.S. Treasury obligations offset by a $419.9 million decrease in MBS.

Table 12 - Mortgage-Backed Securities
(percentage based on carrying value)

 
March 31, 2018
 
December 31, 2017
Single-family MBS - U.S. government-guaranteed and GSE
63.9
%
 
64.6
%
Multifamily MBS - U.S. government-guaranteed and GSE
27.7

 
27.0

Private-label residential MBS
8.3

 
8.3

ABS backed by home-equity loans
0.1

 
0.1

Total MBS
100.0
%
 
100.0
%

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently only consisting of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently expire within one day.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

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We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals such as credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.

Table 13 - Credit Ratings of Investments at Carrying Value
(dollars in thousands)
 
 
As of March 31, 2018
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$
—

 
$
160

 
$
51,000

 
$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
 
—

 
—

 
1,000,000

 
1,999,000

 
—

 
—

Federal funds sold
 
—

 
2,175,000

 
4,050,000

 
—

 
—

 
—

Total money-market instruments
 
—

 
2,175,160

 
5,101,000

 
1,999,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 
—

 
854

 
—

 
—

 
—

 
—

U.S. Treasury obligations
 
—

 
749,578

 
—

 
—

 
—

 
—

Corporate bonds
 
—

 
—

 
—

 
—

 
—

 
7,170

U.S. government-owned corporations
 
—

 
285,027

 
—

 
—

 
—

 
—

GSEs
 
—

 
117,751

 
—

 
—

 
—

 
—

Supranational institutions
 
406,730

 
—

 
—

 
—

 
—

 
—

HFA securities
 
32,981

 
55,255

 
57,584

 
36,860

 
—

 
—

Total non-MBS
 
439,711

 
1,208,465

 
57,584

 
36,860

 
—

 
7,170

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family (2)
 
—

 
108,184

 
—

 
—

 
—

 
—

U.S. government guaranteed - multifamily(2)
 
—

 
414,153

 
—

 
—

 
—

 
—

GSE – single-family (2)
 
—

 
4,817,245

 
—

 
—

 
—

 
—

GSE – multifamily (2)
 
—

 
1,718,293

 
—

 
—

 
—

 
—

Private-label – residential
 
922

 
5,815

 
10,139

 
52,631

 
539,447

 
31,126

ABS backed by home-equity loans
 
598

 
1,136

 
3,448

 
1,518

 
927

 
—

Total MBS
 
1,520

 
7,064,826

 
13,587

 
54,149

 
540,374

 
31,126


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
441,231

 
8,273,291

 
71,171

 
91,009

 
540,374

 
38,296

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
441,231

 
$
10,448,451

 
$
5,172,171

 
$
2,090,009

 
$
540,374

 
$
38,296

_______________________
(1)
Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of March 31, 2018. If there is a split rating, the lowest rating is used.
(2)
The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

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Table 14 - Unsecured Money-Market Instruments and Debentures by Carrying Value
(dollars in thousands)

 
 
Carrying Value
 
 
March 31, 2018
 
December 31, 2017
Federal funds sold
 
$
6,225,000

 
$
3,450,000

U.S. Treasury obligations
 
749,578

 
—

Supranational institutions
 
406,730

 
418,285

U.S. government-owned corporations
 
285,027

 
292,077

GSEs
 
117,751

 
121,343

Corporate bonds
 
7,170

 
—

U.S. agency obligations
 
854

 
1,042

Loans to other FHLBanks
 
—

 
400,000


Private-Label MBS

Table 15 - Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
Private-label MBS(1)
Fixed
Rate (2)
 
Variable
Rate (2)
 
Total
 
Fixed
Rate (2)
 
Variable
Rate (2)
 
Total
Private-label residential MBS
 

 
 

 
 

 
 

 
 

 
 

Prime
$
7,204

 
$
75,552

 
$
82,756

 
$
7,363

 
$
79,424

 
$
86,787

Alt-A
14,952

 
946,342

 
961,294

 
15,473

 
982,860

 
998,333

Total private-label residential MBS
22,156

 
1,021,894

 
1,044,050

 
22,836

 
1,062,284

 
1,085,120

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime
—

 
7,661

 
7,661

 
—

 
7,864

 
7,864

Total par value of private-label MBS
$
22,156

 
$
1,029,555

 
$
1,051,711

 
$
22,836

 
$
1,070,148

 
$
1,092,984

_______________________
 (1) We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

 (2)
The determination of fixed or variable rate is based upon the contractual coupon type of the security.

Table 16 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of March 31, 2018, reflect the percentage of subordinated class outstanding balances as of March 31, 2018, to our senior class outstanding balances as of March 31, 2018, weighted by the par value of our respective senior class securities. Average current credit enhancements as of March 31, 2018, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


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Table 16 - Private-Label MBS and ABS Backed by Home Equity
(dollars in thousands)

 
As of March 31, 2018
 
Total
Par value by credit rating
 

Triple-A
$
1,521

Double-A
6,951

Single-A
13,587

Triple-B
54,149

Below Investment Grade
 
Double-B
23,958

Single-B
31,226

Triple-C
570,177

Double-C
260,036

Single-C
13,728

Single-D
34,138

Unrated
42,240

Total par value
$
1,051,711

 
 
Amortized cost
$
798,496

Gross unrealized gains
126,865

Gross unrealized losses
(5,214
)
Fair value
$
920,147

 
 
Weighted average percentage of fair value to par value
87.49
%
Original weighted average credit support
27.53

Weighted average credit support
7.84

Weighted average collateral delinquency (1)
19.22

_______________________
 (1)
Represents loans that are 60 days or more delinquent.

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2017 Annual Report.

As of March 31, 2018, our mortgage loan investment portfolio totaled $4.0 billion, an increase of $22.3 million from December 31, 2017. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2017 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 17:


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Table 17 - State Concentrations by Outstanding Principal Balance

 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
March 31, 2018
 
December 31, 2017
 
 

 
 

Massachusetts
56
%
 
56
%
Maine
11

 
11

Connecticut
8

 
8

Wisconsin
6

 
7

New Hampshire
6

 
6

All others
13

 
12

Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $500,000 at both March 31, 2018, and December 31, 2017, respectively.

For information on the determination of the allowance at March 31, 2018, see Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses.

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis.

Table 18 - Delinquent Mortgage Loans
(dollars in thousands)

 
March 31, 2018
 
December 31, 2017
Total par value of government loans past due 90 days or more and still accruing interest
$
5,027

 
$
4,664

Nonaccrual loans, par value
13,091

 
13,450

Troubled debt restructurings (not included above)
6,251

 
6,637


Mortgage Insurance Companies. We are exposed to credit risk from supplemental mortgage insurance (SMI) companies that provide credit enhancement in place of the participating financial institution and from primary mortgage insurance coverage (PMI) on individual loans. As of March 31, 2018, we were the beneficiary of PMI coverage of $107.2 million on $416.9 million of conventional mortgage loans, and SMI coverage of $15.4 million on mortgage pools with a total unpaid principal balance of $96.0 million.

We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments
 
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $30.1 million and $34.8 million as of March 31, 2018, and December 31, 2017, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $260.6 million and $300.5 million as of March 31, 2018, and December 31, 2017, respectively.


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Table of Contents

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of March 31, 2018 and December 31, 2017. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk.
Table 19 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)

 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
Hedged Item
 
Derivative
 
Designation(2)
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
6,901,964

 
$
19,399

 
$
7,293,414

 
$
52,244

 
 
Swaps
 
Economic
 
1,116,700

 
2,180

 
974,900

 
1,570

Total associated with advances
 
 
 
 
 
8,018,664

 
21,579

 
8,268,314

 
53,814

Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(236,749
)
 
611,915

 
(271,182
)
Trading securities
 
Swaps
 
Economic
 
176,000

 
(2,351
)
 
192,000

 
(4,183
)
COs
 
Swaps
 
Fair value
 
6,447,465

 
(78,742
)
 
6,213,665

 
(45,446
)
 
 
Forward starting swaps
 
Cash Flow
 
388,200

 
(469
)
 
481,200

 
(9,807
)
Total associated with COs
 
 
 
 
 
6,835,665

 
(79,211
)
 
6,694,865

 
(55,253
)
Total
 
 
 
 
 
15,642,244

 
(296,732
)
 
15,767,094

 
(276,804
)
Mortgage delivery commitments
 
 
 
 
 
32,756

 
277

 
42,918

 
142

Total derivatives
 
 
 
 
 
$
15,675,000

 
(296,455
)
 
$
15,810,012

 
(276,662
)
Accrued interest
 
 
 
 
 
 

 
(2,122
)
 
 

 
(14,452
)
Netting adjustments, cash collateral, and variation margin for daily settled contracts including related accrued interest
 
 
 
 
 
 
 
68,091

 
 
 
25,450

Net derivatives
 
 
 
 
 
 

 
$
(230,486
)
 
 

 
$
(265,664
)
Derivative asset
 
 
 
 
 
 

 
$
30,079

 
 

 
$
34,786

Derivative liability
 
 
 
 
 
 

 
(260,565
)
 
 

 
(300,450
)
Net derivatives
 
 
 
 
 
 

 
$
(230,486
)
 
 

 
$
(265,664
)
 _______________________
(1)
As of March 31, 2018, and December 31, 2017, embedded derivatives separated from the advance contract with notional amounts of $1.1 billion and $974.9 million, respectively, and fair values of $(2.2) million and $(1.6) million, respectively, are not included in the table.
(2)
The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting, but are acceptable hedging strategies under our risk-management policy.

Tables 20 and 21 provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $13.3 billion, representing 85.2 percent of all derivatives outstanding as of March 31, 2018. Economic hedges and cash-flow hedges are not included within the two tables below.


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Table 20 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity
(dollars in thousands)

 
As of March 31, 2018
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
Advances(2)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value(1)
 
Hedged
Amount
 
Fair-Value
Adjustment(3)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
2,001,660

 
$
7,092

 
$
2,001,660

 
$
(7,611
)
 
1.84
%
 
1.95
%
 
1.62
%
 
2.17
%
Due after one year through two years
1,489,686

 
25,149

 
1,489,686

 
(25,481
)
 
1.57

 
1.88

 
1.36

 
2.09

Due after two years through three years
1,222,203

 
29,690

 
1,222,203

 
(29,893
)
 
1.94

 
1.90

 
1.60

 
2.24

Due after three years through four years
845,715

 
21,859

 
845,715

 
(21,832
)
 
2.28

 
2.04

 
1.86

 
2.46

Due after four years through five years
597,450

 
10,371

 
597,450

 
(10,489
)
 
1.95

 
1.88

 
1.64

 
2.19

Thereafter
745,250

 
13,217

 
745,250

 
(13,251
)
 
1.31

 
1.98

 
0.87

 
2.42

Total
$
6,901,964

 
$
107,378

 
$
6,901,964

 
$
(108,557
)
 
1.81
%
 
1.94
%
 
1.51
%
 
2.24
%
_______________________
(1)
Not included in the fair value is $88.0 million of variation margin received for daily settled contracts.
(2)
Included in the advances hedged amount are $1.2 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(3)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2018.
 
Table 21 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity
(dollars in thousands)

 
As of March 31, 2018
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
CO Bonds (2)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value(1)
 
Hedged Amount
 
Fair-Value
Adjustment(3)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
2,193,355

 
$
(10,546
)
 
$
2,193,355

 
$
11,358

 
1.05
%
 
1.00
%
 
1.87
%
 
1.92
%
Due after one year through two years
1,226,685

 
(11,607
)
 
1,226,685

 
11,867

 
1.55

 
1.60

 
1.80

 
1.75

Due after two years through three years
640,760

 
(9,762
)
 
640,760

 
9,741

 
1.70

 
1.54

 
1.58

 
1.74

Due after three years through four years
1,214,445

 
(29,199
)
 
1,214,445

 
29,268

 
1.37

 
1.37

 
1.78

 
1.78

Due after four years through five years
572,220

 
(10,129
)
 
572,220

 
9,994

 
1.99

 
1.99

 
1.73

 
1.73

Thereafter
600,000

 
(25,937
)
 
600,000

 
25,654

 
1.78

 
1.26

 
1.29

 
1.81

Total
$
6,447,465

 
$
(97,180
)
 
$
6,447,465

 
$
97,882

 
1.42
%
 
1.35
%
 
1.75
%
 
1.82
%
_______________________
(1)
Not included in the fair value is $18.4 million of variation margin paid for daily settled contracts.
(2)
Included in the CO bonds hedged amount are $3.2 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(3) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of March 31, 2018.

We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.


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Table of Contents

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 22 below. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty.

From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value is greater than the current negative fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. Similarly, from time to time, due to timing differences or derivatives valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current positive fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.

Table 22 - Credit Exposure to Derivatives Counterparties
(dollars in thousands)

 
 
As of March 31, 2018
Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged to Counterparty
 
Non-cash Collateral Pledged to Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
351,500

 
$
(1,266
)
 
$
1,271

 
$
—

 
$
5

Single-A
 
3,205,050

 
(35,237
)
 
36,630

 
(671
)
 
722

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
1,610,400

 
(2,956
)
 
—

 
3,149

 
193

Triple-B
 
423,500

 
(6,074
)
 
—

 
6,374

 
300

Cleared derivatives
 
7,906,989

 
(1,031
)
 
29,429

 
—

 
28,398

Total derivative positions with nonmember counterparties to which we had credit exposure
 
13,497,439

 
(46,564
)
 
67,330

 
8,852

 
29,618

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
32,756

 
283

 
—

 
—

 
283

Total
 
$
13,530,195

 
$
(46,281
)
 
$
67,330

 
$
8,852

 
$
29,901

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Single-A
 
$
754,000

 
 
 
 
 
 
 
 
Triple-B
 
1,390,805

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
2,144,805

 

 
 
 
 
 
 
_______________________

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Table of Contents

(1)
Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risk in the 2017 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity

We are required to maintain liquidity in accordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.

We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends and anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are able to expand our CO debt issuance in response to our members' increased credit needs for advances and mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, or repurchase and retire outstanding COs, allowing our balance sheet to shrink.

Sources and Uses of Liquidity. Our sources of liquidity are proceeds from the issuance of COs and advance repayments, as well as cash and investment holdings that are primarily high-quality, short-, and intermediate-term financial instruments.

During the three months ended March 31, 2018, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. During the three months ended March 31, 2018, our short-term funding was generally driven by member demand and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access to short-term debt markets has been reliable because investors continue to view our short-term debt as an asset of choice, which has led to consistently low funding costs compared to those of other high-quality issuers and increased utilization of debt maturing in one year or less.

We may use a portion of the short-term COs issued to fund both short- and long-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does not expose us to significant interest rate risk because the rates on both the floating-rate assets and liabilities reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin. Accordingly, we measure and monitor interest rate risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, duration gap, and earnings at risk. See Item 3 — Quantitative and Qualitative Disclosures About Market Risk for additional information. We have also established funding gap limits designed to limit our exposure to refinancing risk. See — Balance Sheet Funding Gap Policy for additional information.

Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, at our discretion, upon the request of a member or under our capital plan.


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Table of Contents

Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the three months ended March 31, 2018.

Our contingency liquidity plans are intended to ensure that we are able to meet our obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.

Internal Liquidity Sources / Liquidity Management

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:

•
all maturing advances are renewed;
•
member overnight deposits are withdrawn at a rate of 50 percent per day;
•
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
•
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
•
MPF master commitments are funded at a rate of 10 percent of the previous day's total amount on the first day and at a rate of one percent on each day thereafter.

The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.

This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, and to help ensure that we meet all of our obligations as they come due and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:

•
if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and
•
if projected net cash flow falls below zero on or before the 21st day following the measurement date.

We did not exceed either of these thresholds at any time during the three months ended March 31, 2018. If either of these thresholds is exceeded, then management of the Bank is notified and determines whether any corrective action is necessary.


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Table 23 - Projected Net Cash Flow and Structural Liquidity
(dollars in thousands)

 
 
As of March 31, 2018
 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
9,363

 
$
29,047

Maturing liabilities
 
4,854,000

 
13,134,754

Committed asset settlements
 
30,500

 
30,500

Capital outflow
 
105,713

 
105,713

MPF delivery commitments
 
32,756

 
32,756

Other
 
1,173

 
1,173

Gross uses of funds
 
5,033,505

 
13,333,943

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
51,905

 
85,430

Maturing or projected amortization of assets
 
12,491,698

 
19,108,263

Committed liability settlements
 
1,758,004

 
1,767,974

Cash and due from banks and interest bearing deposits
 
77,618

 
77,618

Gross sources of funds
 
14,379,225

 
21,039,285

 
 
 
 
 
Projected net cash flow
 
9,345,720

 
$
7,705,342

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
449,931

 
 
Drawdown of standby letters of credit and lines of credit
 
681,352

 
 
Rollover of all maturing advances
 
3,747,226

 
 
Projected funding of MPF master commitments
 
189,283

 
 
Total secondary uses of funds
 
5,067,792

 

 
 
 
 
 
Structural liquidity
 
$
4,277,928

 


Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

•
marketable securities with a maturity greater than one week and less than one year that can be sold;
•
self-liquidating assets with a maturity of seven days or less;
•
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
•
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the three months ended March 31, 2018. As of March 31, 2018, and December 31, 2017, we held a surplus of $14.5 billion and $13.2 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.


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Table 24 - Contingency Liquidity
(dollars in thousands)

 
 
As of March 31, 2018
 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
9,363

Maturing liabilities
 
4,854,000

Committed asset settlements
 
30,500

Drawdown of standby letters of credit
 
186,793

Other
 
1,173

Gross uses of funds
 
5,081,829

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
51,905

Maturing or amortizing advances
 
3,747,577

Committed liability settlements
 
1,758,004

Gross sources of funds
 
5,557,486

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
1,250,665

Self-liquidating assets
 
8,724,000

Cash and due from banks and interest bearing deposits
 
77,618

Marketable securities available for repo
 
3,961,326

Total sources of contingency liquidity
 
14,013,609

 
 
 
Net contingency liquidity
 
$
14,489,266


Additional Liquidity Requirements. The FHFA requires us to have available at all times an amount greater than or equal to the current deposits received from our members invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The FHFA also requires us to maintain, in the aggregate, qualifying assets free from any lien or pledge in an amount at least equal to the amount of our participation in total COs outstanding.

In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios.

•
The first scenario assumes that we cannot borrow funds from the capital markets for a period of between 10 to 20 days, with initial guidance set at 15 business days, and that during that time we do not renew any maturing, prepaid, and put or called advances.

•
The second scenario assumes that we cannot raise funds in the capital markets for a period of between three to seven days, with initial guidance set at five business days, and that during that period we will renew maturing and called advances for all members except very large, highly rated members.

We were in compliance with these additional liquidity requirements at all times during the three months ended March 31, 2018.

Balance Sheet Funding Gap Policy. The Bank is exposed to refinancing risk due to the fact that over certain time horizons, it has more liabilities than assets maturing. To adequately fund assets the maturing liabilities must be replaced by new liabilities, which may occur at higher cost, putting spread margin at risk. In order to manage the Bank’s refinancing risk, we maintain an appropriate funding balance between financial assets and financial liabilities and maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected prepayment and call activity. We measure this difference, or gap, as a

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percentage of total assets under two alternative formats. One funding gap format effectively assumes that all floating rate advances indexed to the discount note auction rate that both mature beyond the three-month or one-year time horizon and are prepayable without fees on coupon reset dates mature within the three-month or one-year time horizon; this assumption results in an adjustment that reduces the funding gap measurement. (Such advances are not subject to margin compression because the cost of the refinanced debt defines the reset rate on the advance coupon.) The other funding gap format includes no such adjustment. The Bank has instituted a limit and management action trigger framework around these metrics as follows:

Table 25 - Funding Gap Metric

Funding Gap Metric (1)
 
Limit
 
Management Action Trigger
 
Actual as of March 31, 2018
 
Actual as of December 31, 2017
3-month Funding Gap
 
 
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
12.3
%
 
8.7
%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity
 
20%
 
10%
 
1.6
%
 
0.6
%
 
 
 
 
 
 
 
 
 
1-year Funding Gap
 
 
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
12.8
%
 
10.9
%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity
 
20%
 
10%
 
2.2
%
 
3.9
%
 _______________________
(1)
The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period.

Funding Concentration Policy. To limit the liquidity risk potentially associated with a high volume of short-term debt refinancing we have a funding concentration policy that limits the volume of discount notes outstanding as a proportion of total assets. The policy establishes a management action trigger when discount notes (excluding the amount of discount notes matched to short-term advances) exceed 40 percent of total assets. In addition, we have adopted a separate management action trigger that is triggered when total discount notes exceed 50 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets. We were in compliance with these internal policies during the three months ended March 31, 2018.

External Sources of Liquidity

Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund our principal and interest payments due with respect to any CO within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.

Debt Financing — Consolidated Obligations
 
At March 31, 2018, and December 31, 2017, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $56.6 billion and $56.1 billion, respectively. CO bonds outstanding for which we are primarily liable at March 31, 2018, and December 31, 2017, include issued callable bonds totaling $4.5 billion and $4.4 billion, respectively.

CO discount notes comprised 52.1 percent and 49.4 percent of the outstanding COs for which we are primarily liable at March 31, 2018, and December 31, 2017, respectively, but accounted for 95.3 percent and 94.9 percent of the proceeds from the issuance of such COs during the three months ended March 31, 2018 and 2017, respectively.

Market Conditions for Consolidated Obligations

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Overall, by historical standards, we have experienced relatively low CO issuance costs during the period covered by this report, reflecting continued high demand for all tenors of COs with the strongest demand for short-term COs. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. Throughout 2017, COs were issued at yields that were generally at or below equivalent-maturity LIBOR swap yields for debt maturing in less than five years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the period covered by this report, CO yields generally moved with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. However, LIBOR rates have recently risen faster than CO yields and it cannot be known whether this trend will continue. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including the decision to reduce the Federal Reserve’s holdings of U.S. Treasury obligations and MBS, is potentially an important factor that could shape investor demand for debt, including COs, in 2018. Moreover, expected increases in U.S. Treasury security issuance in response to the fiscal policy implications of the Tax Cut and Jobs Act of 2017 or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.

Capital

Total capital was $3.3 billion at both March 31, 2018, and December 31, 2017.

Capital stock increased by $40.2 million during the three months ended March 31, 2018, resulting from the issuance of $408.3 million of capital stock to support new advances borrowings by members offset by capital stock repurchases of $367.9 million.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at March 31, 2018, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital.

Subject to applicable law, following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $36.1 million and $35.9 million at March 31, 2018, and December 31, 2017, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2017 Annual Report.

Table 26 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period
(dollars in thousands)

 
 
March 31, 2018
 
December 31, 2017
Past redemption date (1)
 
$
4,338

 
$
420

Due in one year or less
 
128

 
4,018

Due after one year through two years
 
27,250

 
27,379

Due after two years through three years
 
54

 
54

Due after three years through four years
 
—

 
—

Due after four years through five years
 
4,323

 
4,022

Thereafter (2)
 
20

 
30

Total
 
$
36,113

 
$
35,923

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
(2)
Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021.

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Capital Rule

The FHFA’s regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated March 20, 2018, the Director of the FHFA notified us that, based on December 31, 2017 financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2017 Annual Report.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.1 percent at March 31, 2018.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of March 31, 2018, this internal minimum capital requirement equaled $3.0 billion, which was satisfied by our actual regulatory capital of $3.7 billion.

Minimum Retained Earnings Target

At March 31, 2018, we had total retained earnings of $1.3 billion compared with our minimum retained earnings target of $700.0 million. We generally view our minimum retained earnings target as a floor for retained earnings rather than as a retained earnings limit and expect to continue to grow our retained earnings modestly even though we exceed the target.

For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in the 2017 Annual Report.

Repurchases of Excess Stock

We have the authority, but are not obligated, to repurchase excess stock, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2017 Annual Report as well as below.

Table 27 - Capital Stock Requirements and Excess Capital Stock
(dollars in thousands)

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
March 31, 2018
$
743,055

 
$
1,511,215

 
$
2,254,292

 
$
2,360,005

 
$
105,713

December 31, 2017
705,924

 
1,502,996

 
2,208,942

 
2,319,644

 
110,702

_______________________
(1)
TSIR is rounded up to the nearest $100 on an individual member basis.

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(2) 
Class B capital stock outstanding includes mandatorily redeemable capital stock.

We currently conduct daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. Excess stock repurchases for the three months ended March 31, 2018 amounted to $368.0 million.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
 
Our significant off-balance-sheet arrangements consist of the following:
 
•
commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Commitments and Contingencies in the 2017 Annual Report.

CRITICAL ACCOUNTING ESTIMATES
 
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
 
We have identified three accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2017 Annual Report.

As of March 31, 2018, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.

RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Significant regulatory actions and developments for the period covered by this report are summarized below.

FHFA Proposed Amendments to Affording Housing Program (AHP) Regulations. On March 14, 2018, the FHFA published a proposed rule to amend the operating requirements of the FHLBanks’ AHP. The proposal is open for public comment through June 12, 2018. If adopted as proposed, among other updates, the AHP rule would:

•
require an FHLBank to create its own scoring criteria that are designed to satisfy new regulatory outcome requirements, replacing the existing regulatory scoring guidelines;
•
permit an FHLBank to voluntarily increase its AHP homeownership set-aside funding program to 40% of annual available funds (up from the current rule’s 35% annual limit);
•
increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
•
remove the retention agreement requirement for owner-occupied units;
•
further align AHP monitoring with certain federal government funding programs;

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•
increase threshold requirements for certain project types, such as projects dedicated to homeless or special needs populations; and
•
authorize an FHLBank using market research empirical data to create special targeted grant programs that would be a sub-set of the regular AHP competitive funding program.

The rule, as proposed, would represent a substantial overhaul of the existing regulation on the FHLBanks’ AHP and fundamentally change the structure and methodology for awarding grants to affordable housing projects. The proposed rule would also increase AHP’s complexity and administrative burden.

The rule, as proposed, would require changes in the areas of operations, communications and information systems of the FHLBanks. It would also require increased Board and Affordable Housing Advisory Council action and increased communications and education with members and sponsors. We do not believe that the rule, if adopted substantially as proposed, would be material to our financial condition or results of operation, since, among other things, it would not impact the annual AHP funding requirement. However, we do expect there to be increased costs related to implementing the rule requirements and making related adjustments to our systems. In addition, if the rule is adopted as proposed, the Bank expects a possible change to the types of projects that may be funded on a go-forward basis in the Bank’s district, with a commensurate impact on AHP sponsors and their respective communities.

Other Significant Developments

Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration, and FHFA Proposed Rule on Margin and Capital Requirements for Covered Swap Entities. On February 21, 2018, OCC, FRB, FDIC, Farm Credit Administration, and FHFA published a joint proposed amendment to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s, and FDIC’s final qualified financial contract (QFC) rules. It also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC Rules. The QFC rules previously published by the OCC, FRB and FDIC require their respective regulated entities to amend covered QFCs to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).

Comments on the proposed rule were due by April 23, 2018. We continue to evaluate the proposed rule, but we do not expect this rule, if adopted substantially as proposed, to materially affect our financial condition or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk

Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2017 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

General
 
We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:

•
the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at March 31, 2018, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $15.4 billion, compared with $15.5 billion at December 31, 2017);
•
the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at March 31, 2018, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.3 billion compared with $1.2 billion at December 31, 2017);
•
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements was $6.4 billion, or 23.7 percent of our total outstanding CO bonds at March 31, 2018, compared with $6.2 billion, or 21.9 percent of total outstanding CO bonds, at December 31, 2017);

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•
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and
•
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2017 Annual Report.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure Value at Risk (VaR), duration of equity, convexity, and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities.

We measure our exposure to market and interest-rate risk using several metrics, including:

•
the ratio of MVE to BVE;
•
the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;
•
the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;
•
VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;
•
duration of equity, which is calculated as the estimated percentage change to MVE for a 100 basis point parallel shift in rates;
•
MVE sensitivity, which is the estimated percent change in MVE in various shocked interest rate scenarios vs. base case MVE;
•
the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched;
•
targeted metrics for our investments in mortgage loans; and
•
the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR.

We maintain limits and management action triggers in connection with each of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2017 Annual Report.


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Table 28 - Interest Rate / Market-Rate Risk Metrics

Interest/Market-Rate Risk Metric
 
March 31, 2018
 
December 31, 2017
 
Target, Limit or Management Action Trigger
MVE
 
$3.7 billion
 
$3.6 billion
 
None
MVE/BVE
 
99%
 
100%
 
None
MVE/Par Stock
 
156%
 
156%
 
Maintain above 130% (management action trigger) with a floor of 125%
Economic Capital Ratio
 
6.0%
 
6.0%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$211.2 million
 
$170.1 million
 
Maintain below $275.0 million (management action trigger) and $350.0 million (limit)
Duration of Equity
 
+0.90 years
 
-0.46 years
 
Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(4.8)%
 
(7.8)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
+0.65 months
 
-0.33 months
 
None
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 131 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 141 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

Value at Risk. Table 29 presents the historical simulation VaR estimate as of March 31, 2018, and December 31, 2017, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.
 
Table 29 - Value-at-Risk
(dollars in millions)

 
 
Value-at-Risk
(Gain) Loss Exposure (1)
 
 
March 31, 2018
 
December 31, 2017
Confidence Level
 
% of
MVE (2)
 
Amount
 
% of
MVE (2)
 
Amount
50%
 
0.10
%
 
$
3.8

 
0.17
%
 
$
6.1

75%
 
1.00

 
36.8

 
1.13

 
41.1

95%
 
3.82

 
140.5

 
3.51

 
127.5

99%
 
5.75

 
211.2

 
4.69

 
170.1

_______________________
(1)
To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.
(2)
Loss exposure is expressed as a percentage of base MVE.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios

We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions).


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Table 30 - Market and Interest-Rate Risk Metrics
(dollars in millions)

 
 
March 31, 2018
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,485
 
$3,508
 
$3,653
 
$3,674
 
$3,603
 
$3,498
 
$3,379
Percent change in MVE from base
 
(5.1)%
 
(4.5)%
 
(0.6)%
 
—%
 
(1.9)%
 
(4.8)%
 
(8.0)%
MVE/BVE
 
94%
 
95%
 
99%
 
99%
 
97%
 
95%
 
91%
MVE/Par Stock
 
148%
 
149%
 
155%
 
156%
 
153%
 
148%
 
143%
Duration of Equity
 
+0.16 years
 
-2.38 years
 
-2.41 years
 
+0.90 years
 
+2.59 years
 
+3.20 years
 
+3.72 years
Return on Regulatory Capital less 3-month LIBOR
 
1.61%
 
1.95%
 
2.38%
 
2.32%
 
2.09%
 
1.73%
 
1.31%
Net income percent change from base
 
(66.36)%
 
(49.69)%
 
(19.66)%
 
—%
 
16.01%
 
29.24%
 
41.10%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

 
 
December 31, 2017
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,362
 
$3,345
 
$3,534
 
$3,628
 
$3,585
 
$3,484
 
$3,365
Percent change in MVE from base
 
(7.3)%
 
(7.8)%
 
(2.6)%
 
—%
 
(1.2)%
 
(4.0)%
 
(7.2)%
MVE/BVE
 
93%
 
92%
 
97%
 
100%
 
99%
 
96%
 
93%
MVE/Par Stock
 
145%
 
144%
 
152%
 
156%
 
155%
 
150%
 
145%
Duration of Equity
 
+0.75 years
 
-2.58 years
 
-4.67 years
 
-0.46 years
 
+2.26 years
 
+3.15 years
 
+3.76 years
Return on Regulatory Capital less 3-month LIBOR
 
1.62%
 
1.73%
 
2.17%
 
2.42%
 
2.23%
 
1.87%
 
1.41%
Net income percent change from base
 
(63.21)%
 
(59.42)%
 
(28.50)%
 
—%
 
18.56%
 
32.98%
 
44.98%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.


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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal year covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe our private-label MBS litigation in Item 3 — Legal Proceedings in the 2017 Annual Report.

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2017 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS
Number
 
Exhibit Description
Reference
10.1
 
The Federal Home Loan Bank of Boston 2018 Executive Incentive Plan * +.
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
Filed within this Form 10-Q
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
Filed within this Form 10-Q
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
Filed within this Form 10-Q
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
Filed within this Form 10-Q
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
Filed within this Form 10-Q
* Management contract or compensatory plan
+ Confidential treatment has been granted as to portions of this exhibit

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
May 10, 2018
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
May 10, 2018
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer


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