10-Q 1 fhlb09301310q.htm FORM 10-Q FHLB 093013 10Q
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

For the quarterly period ended September 30, 2013
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

Commission File Number: 000-51999
 

FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
 
 
 
 
Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
 


50309
(Zip code)
 

Registrant's telephone number, including area code: (515) 281-1000
 

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 (section 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, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o

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 October 31, 2013
 
Class B Stock, par value $100
 
26,889,212
 
 
 
 
 
 
 
 
 



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in thousands, except capital stock par value)
(Unaudited)

 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Cash and due from banks
$
182,672

 
$
252,113

Interest-bearing deposits
3,128

 
3,238

Securities purchased under agreements to resell
2,450,000

 
3,425,000

Federal funds sold
585,000

 
960,000

Investment securities
 
 
 
Trading securities (Note 3)
1,042,348

 
1,145,430

Available-for-sale securities (Note 4)
6,304,783

 
4,859,806

Held-to-maturity securities (fair value of $2,028,648 and $3,198,129) (Note 5)
1,950,808

 
3,039,721

Total investment securities
9,297,939

 
9,044,957

Advances (Note 7)
45,786,532

 
26,613,915

Mortgage loans held for portfolio, net
 
 
 
Mortgage loans held for portfolio (Note 8)
6,603,729

 
6,967,603

Allowance for credit losses on mortgage loans (Note 9)
(14,240
)
 
(15,793
)
Total mortgage loans held for portfolio, net
6,589,489

 
6,951,810

Accrued interest receivable
74,968

 
66,410

Premises, software, and equipment, net
17,890

 
13,534

Derivative assets, net (Note 10)
43,591

 
3,813

Other assets
31,514

 
32,486

TOTAL ASSETS
$
65,062,723

 
$
47,367,276

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
531,805

 
$
872,852

Non-interest-bearing
128,873

 
211,892

Total deposits
660,678

 
1,084,744

Consolidated obligations (Note 11)
 
 
 
Discount notes
28,217,530

 
8,674,370

Bonds (includes $50,060 and $1,866,985 at fair value under the fair value option)
32,227,351

 
34,345,183

Total consolidated obligations
60,444,881

 
43,019,553

Mandatorily redeemable capital stock (Note 12)
13,383

 
9,561

Accrued interest payable
107,078

 
106,611

Affordable Housing Program payable
37,211

 
36,720

Derivative liabilities, net (Note 10)
70,582

 
100,700

Other liabilities
310,306

 
175,086

TOTAL LIABILITIES
61,644,119

 
44,532,975

Commitments and contingencies (Note 14)

 

CAPITAL (Note 12)
 
 
 
Capital stock - Class B putable ($100 par value); 26,899 and 20,627 issued and outstanding shares
2,689,936

 
2,062,714

Retained earnings
 
 
 
Unrestricted
612,522

 
593,129

Restricted
43,433

 
28,820

Total retained earnings
655,955

 
621,949

Accumulated other comprehensive income
72,713

 
149,638

TOTAL CAPITAL
3,418,604

 
2,834,301

TOTAL LIABILITIES AND CAPITAL
$
65,062,723

 
$
47,367,276

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

3


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in thousands)
(Unaudited)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
46,542

 
$
60,087

 
$
140,392

 
$
187,442

Prepayment fees on advances, net
1,351

 
5,900

 
4,437

 
24,083

Interest-bearing deposits
57

 
167

 
325

 
498

Securities purchased under agreements to resell
289

 
1,067

 
2,831

 
2,482

Federal funds sold
211

 
640

 
909

 
1,787

Trading securities
8,370

 
5,622

 
24,920

 
17,834

Available-for-sale securities
19,569

 
18,812

 
54,445

 
57,868

Held-to-maturity securities
14,619

 
26,807

 
51,414

 
90,558

Mortgage loans held for portfolio
62,020

 
70,639

 
190,923

 
217,916

Total interest income
153,028

 
189,741

 
470,596

 
600,468

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
2,431

 
3,674

 
6,114

 
7,879

Consolidated obligations - Bonds
99,734

 
126,561

 
309,442

 
407,884

Deposits
28

 
133

 
92

 
308

Borrowings from other FHLBanks
1

 
1

 
1

 
1

Mandatorily redeemable capital stock
93

 
52

 
235

 
179

Total interest expense
102,287

 
130,421

 
315,884

 
416,251

NET INTEREST INCOME
50,741

 
59,320

 
154,712

 
184,217

OTHER (LOSS) INCOME
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(1,293
)
 

 
(1,293
)
 

Net (losses) gains on trading securities
(7,851
)
 
11,950

 
(87,153
)
 
26,871

Net gains on sale of available-for-sale securities
1,094

 

 
3,039

 

Net gains on consolidated obligations held at fair value
28

 
738

 
1,001

 
2,961

Net gains (losses) on derivatives and hedging activities
2,364

 
(11,361
)
 
72,343

 
(32,953
)
Net losses on extinguishment of debt

 
(25,866
)
 
(25,742
)
 
(48,605
)
Other, net
1,572

 
(10
)
 
4,209

 
2,473

Total other loss
(4,086
)
 
(24,549
)
 
(33,596
)
 
(49,253
)
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
7,103

 
7,700

 
21,518

 
24,025

Contractual services
1,556

 
1,434

 
4,673

 
4,155

Other operating expenses
3,236

 
3,695

 
9,382

 
10,624

Federal Housing Finance Agency
608

 
1,075

 
2,193

 
3,454

Office of Finance
685

 
676

 
2,141

 
2,111

Total other expense
13,188

 
14,580

 
39,907

 
44,369

INCOME BEFORE ASSESSMENTS
33,467

 
20,191

 
81,209

 
90,595

Affordable Housing Program assessments
3,357

 
2,025

 
8,145

 
9,078

NET INCOME
$
30,110

 
$
18,166

 
$
73,064

 
$
81,517

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

4



FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
30,110

 
$
18,166

 
$
73,064

 
$
81,517

Other comprehensive (loss) income
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
 
 
 
 
 
 
Unrealized (losses) gains
(13,809
)
 
18,467

 
(75,767
)
 
33,270

Reclassification adjustment for other-than-temporary impairment losses on available-for-sale securities included in net income
1,293

 

 
1,293

 

Reclassification adjustment for realized net gains on the sale of available-for-sale securities included in net income
(1,094
)
 

 
(3,039
)
 

Total net unrealized (losses) gains on available-for-sale securities
(13,610
)
 
18,467

 
(77,513
)
 
33,270

Pension and postretirement benefits
141

 
107

 
588

 
291

Total other comprehensive (loss) income
(13,469
)
 
18,574

 
(76,925
)
 
33,561

TOTAL COMPREHENSIVE INCOME (LOSS)
$
16,641

 
$
36,740

 
$
(3,861
)
 
$
115,078

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




5


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in thousands)
(Unaudited)

 
Capital Stock
Class B (putable)
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2011
21,089

 
$
2,108,878

 
$
562,442

 
$
6,533

 
$
568,975

 
$
134,561

 
$
2,812,414

Proceeds from issuance of capital stock
8,677

 
867,668

 

 

 

 

 
867,668

Repurchase/redemption of capital stock
(9,447
)
 
(944,673
)
 

 

 

 

 
(944,673
)
Net shares reclassified to mandatorily redeemable capital stock
(75
)
 
(7,513
)
 

 

 

 

 
(7,513
)
Comprehensive income

 

 
65,213

 
16,304

 
81,517

 
33,561

 
115,078

Cash dividends on capital stock

 

 
(44,933
)
 

 
(44,933
)
 

 
(44,933
)
BALANCE, SEPTEMBER 30, 2012
20,244

 
$
2,024,360

 
$
582,722

 
$
22,837

 
$
605,559

 
$
168,122

 
$
2,798,041

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2012
20,627

 
$
2,062,714

 
$
593,129

 
$
28,820

 
$
621,949

 
$
149,638

 
$
2,834,301

Proceeds from issuance of capital stock
19,603

 
1,960,276

 

 

 

 

 
1,960,276

Repurchase/redemption of capital stock
(13,131
)
 
(1,313,113
)
 

 

 

 

 
(1,313,113
)
Net shares reclassified to mandatorily redeemable capital stock
(200
)
 
(19,941
)
 

 

 

 

 
(19,941
)
Comprehensive income (loss)

 

 
58,451

 
14,613

 
73,064

 
(76,925
)
 
(3,861
)
Cash dividends on capital stock

 

 
(39,058
)
 

 
(39,058
)
 

 
(39,058
)
BALANCE, SEPTEMBER 30, 2013
26,899

 
$
2,689,936

 
$
612,522

 
$
43,433

 
$
655,955

 
$
72,713

 
$
3,418,604

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




6


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

 
For the Nine Months Ended
 
September 30,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
73,064

 
$
81,517

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
2,707

 
332,617

Other-than-temporary impairment losses
1,293

 

Net losses (gains) on trading securities
87,153

 
(26,871
)
Net gains on sale of available-for-sale securities
(3,039
)
 

Net gains on consolidated obligations held at fair value
(1,001
)
 
(2,961
)
Net change in derivatives and hedging activities
(79,538
)
 
(253,799
)
Net losses on extinguishment of debt
25,742

 
48,605

Other adjustments
1,280

 
(1,620
)
Net change in:
 
 
 
Accrued interest receivable
(8,275
)
 
(4,291
)
Other assets
1,691

 
8,689

Accrued interest payable
(455
)
 
(24,977
)
Other liabilities
(1,825
)
 
1,028

Total adjustments
25,733

 
76,420

Net cash provided by operating activities
98,797

 
157,937

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
129,546

 
220,904

Securities purchased under agreements to resell
975,000

 
(4,300,000
)
Federal funds sold
375,000

 
785,000

Premises, software, and equipment
(6,197
)
 
(1,882
)
Trading securities
 
 
 
Proceeds from maturities of long-term
15,928

 
1,010,660

Purchases of long-term
(140,579
)
 
(295,415
)
Available-for-sale securities
 
 
 
Proceeds from sales and maturities of long-term
948,144

 
1,618,173

Purchases of long-term
(2,277,344
)
 
(1,095,753
)
Held-to-maturity securities
 
 
 
Net decrease in short-term

 
340,000

Proceeds from maturities of long-term
1,087,245

 
1,350,452

Advances
 
 
 
Principal collected
46,552,289

 
36,196,408

Originated
(65,935,653
)
 
(35,740,185
)
Mortgage loans held for portfolio
 
 
 
Principal collected
1,338,707

 
1,669,472

Originated or purchased
(1,011,847
)
 
(1,674,486
)
Proceeds from sales of foreclosed assets
19,763

 
22,079

Net cash (used in) provided by investing activities
(17,929,998
)
 
105,427

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

7


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in thousands)
(Unaudited)

 
For the Nine Months Ended
 
September 30,
 
2013
 
2012
FINANCING ACTIVITIES
 
 
 
Net change in deposits
(399,416
)
 
457,796

Net payments on derivative contracts with financing elements
(5,987
)
 
(6,927
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
90,857,889

 
237,611,755

Bonds
30,389,908

 
15,666,208

Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(71,313,457
)
 
(230,263,866
)
Bonds
(32,186,422
)
 
(23,507,996
)
Bonds transferred to other FHLBanks
(172,741
)
 
(130,276
)
Proceeds from issuance of capital stock
1,960,276

 
867,668

Payments for repurchase/redemption of mandatorily redeemable capital stock
(16,119
)
 
(3,339
)
Payments for repurchase/redemption of capital stock
(1,313,113
)
 
(944,673
)
Cash dividends paid
(39,058
)
 
(44,933
)
Net cash provided by (used in) financing activities
17,761,760

 
(298,583
)
Net decrease in cash and due from banks
(69,441
)
 
(35,219
)
Cash and due from banks at beginning of the period
252,113

 
240,156

Cash and due from banks at end of the period
$
182,672

 
$
204,937

 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
Interest paid
$
630,785

 
$
880,235

Affordable Housing Program payments
$
7,654

 
$
11,503

Transfers of mortgage loans to real estate owned
$
12,465

 
$
16,431

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


8


FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks' Office of Finance, effective July 30, 2008. The Finance Agency's mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available, low cost source of funds to its member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Commercial banks, thrifts, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets as of the preceding December 31st subject to a cap of $10.0 million and a floor of $10,000. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank.

The Bank's current members own nearly all of the outstanding capital stock of the Bank. Former members own the remaining capital stock, included in mandatorily redeemable capital stock, to support business transactions still carried on the Bank's Statements of Condition. All stockholders, including current members and former members, may receive dividends on their capital stock investment to the extent declared by the Bank's Board of Directors.

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2012, which are contained in the Bank's 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2013 (2012 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in conformity with GAAP requires management 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 full year ending December 31, 2013.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2012 Form 10-K, with the exception of one policy noted below.

Financial Instruments Meeting Netting Requirements

The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that may be presented on a net basis when there is a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The Bank does not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

9


The net exposure for these financial instruments can change on a daily basis and therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in “Note 10 — Derivatives and Hedging Activities.”

Based on the fair value of the related collateral held, the Bank's securities purchased under agreements to resell were fully collateralized for the periods presented. Additional information about the Bank's securities purchased under agreements to resell is disclosed in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2012 Form 10-K.

Reclassifications

Certain amounts in the Bank's 2012 financial statements and footnotes have been reclassified to conform to the presentation for the three and nine months ended September 30, 2013.

Out of Period Adjustments

Included in net income for the three months ended September 30, 2013 was $3.0 million in out of period adjustments, of which $2.1 million and $0.1 million related to income that should have been recorded during the three months ended March 31, 2013 and June 30, 2013. The remaining $0.8 million related to income that should have been recorded in periods prior to 2013. These out of period adjustments were recorded as a component of other (loss) income in “Net gains (losses) on derivatives and hedging activities.” Management has determined after evaluating the quantitative and qualitative aspects of the errors that such errors were not material to the previously issued financial statements. 

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Inclusion of the Overnight Index Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
    
On July 17, 2013, the Financial Accounting Standards Board (FASB) amended existing guidance to include the Fed Funds Effective Swap Rate, also referred to as the Overnight Index Swap Rate (OIS), as a U.S. benchmark interest rate for hedge accounting purposes. Including OIS as an acceptable U.S. benchmark interest rate, in addition to U.S. Treasuries and London Interbank Offered Rate (LIBOR), provides a more comprehensive spectrum of interest rate resets to utilize as the designated benchmark interest rate risk component under hedge accounting guidance. The amendments also remove the restriction on using different benchmark interest rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate, and were effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Bank does not anticipate this guidance having an effect on its hedging strategies.

Presentation of Comprehensive Income

On February 5, 2013, the FASB issued guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income (AOCI). This guidance does not change the current requirements for reporting net income or comprehensive income in financial statements. However, it does require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements where net income is presented or in the footnotes, significant amounts reclassified out of AOCI. These amounts would be presented based on the respective lines of net income only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity would be required to cross-reference to other required disclosures that provide additional detail about these amounts. This guidance became effective for interim and annual periods beginning on January 1, 2013 and was applied prospectively. The adoption of this guidance resulted in increased interim and annual financial statement disclosures, but did not affect the Bank's financial condition, results of operations, or cash flows.


10


Disclosures about Offsetting Assets and Liabilities

On December 16, 2011, the FASB and the International Accounting Standards Board (IASB) issued common disclosure requirements intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a company's financial position, whether a company's financial statements are prepared on the basis of GAAP or International Financial Reporting Standards (IFRS). This guidance was amended on January 31, 2013 to clarify that its scope only included certain financial instruments that are either offset on the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. An entity is required to disclose both gross and net information about derivative, repurchase, and security lending instruments that meet these criteria. This guidance, as amended, became effective for interim and annual periods beginning on January 1, 2013 and was applied retrospectively for all comparative periods presented. The adoption of this guidance resulted in increased interim and annual financial statement disclosures, but did not affect the Bank's financial condition, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

Joint and Several Liability Arrangements

On February 28, 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligations as well as other information about the obligations. This guidance is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity's fiscal year of adoption. This guidance will not affect the Bank's financial condition, results of operations, or cash flows.

Finance Agency Advisory Bulletin on Asset Classification

On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02). AB 2012-02 establishes a standard and uniform methodology for classifying assets and prescribes the timing of asset charge-offs, excluding investment securities. The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 states that it was effective upon issuance. However, the Finance Agency issued additional guidance indicating that the adverse classification requirements should be implemented by January 1, 2014 and the charge-off requirements should be implemented no later than January 1, 2015. The Bank is currently assessing the provisions of AB 2012-02 and has not yet determined the effect that this guidance will have on its financial condition, results of operations, or cash flows.

Note 3 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
September 30,
2013
 
December 31,
2012
Non-mortgage-backed securities
 
 
 
Other U.S. obligations
$
276,990

 
$
309,540

GSE obligations
55,787

 
64,445

Other1
268,844

 
294,933

Total non-mortgage-backed securities
601,621

 
668,918

Mortgage-backed securities
 
 
 
GSE - residential
440,727

 
476,512

Total fair value
$
1,042,348

 
$
1,145,430


1
Consists of taxable municipal bonds.


11


Net (Losses) Gains on Trading Securities

During the three and nine months ended September 30, 2013, the Bank recorded net holding losses of $7.9 million and $87.2 million on its trading securities compared to net holding gains of $12.0 million and $26.9 million for the same periods in 2012. The Bank did not sell any trading securities during the three and nine months ended September 30, 2013 and 2012.

Note 4 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities were as follows (dollars in thousands):
 
September 30, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
180,575

 
$
6,912

 
$
(110
)
 
$
187,377

GSE obligations
491,796

 
30,159

 
(2,301
)
 
519,654

State or local housing agency obligations
25,260

 

 
(1,134
)
 
24,126

Other2
275,725

 
5,701

 
(16
)
 
281,410

Total non-mortgage-backed securities
973,356

 
42,772

 
(3,561
)
 
1,012,567

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
5,256,159

 
57,215

 
(21,158
)
 
5,292,216

Total
$
6,229,515

 
$
99,987

 
$
(24,719
)
 
$
6,304,783

 
December 31, 2012
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
151,764

 
$
11,451

 
$

 
$
163,215

GSE obligations
509,941

 
46,637

 
(747
)
 
555,831

State or local housing agency obligations
8,351

 
50

 

 
8,401

Other2
391,814

 
8,596

 

 
400,410

Total non-mortgage-backed securities
1,061,870

 
66,734

 
(747
)
 
1,127,857

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
3,645,155

 
88,595

 
(1,801
)
 
3,731,949

Total
$
4,707,025

 
$
155,329

 
$
(2,548
)
 
$
4,859,806


1
Amortized cost includes adjustments made to the cost basis of an investment for amortization, accretion, previous other-than-temporary impairment (OTTI) recognized in earnings, and fair value hedge accounting adjustments.

2
Consists of Private Export Funding Corporation (PEFCO) and taxable municipal bonds.


12


Unrealized Losses

The following table summarizes AFS securities with unrealized losses. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
September 30, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
$
39,075

 
$
(110
)
 
$

 
$

 
$
39,075

 
$
(110
)
GSE obligations
87,708

 
(882
)
 
59,564

 
(1,419
)
 
147,272

 
(2,301
)
State or local housing agency obligations
24,126

 
(1,134
)
 

 

 
24,126

 
(1,134
)
Other
10,407

 
(16
)
 

 

 
10,407

 
(16
)
Total non-mortgage-backed securities
161,316

 
(2,142
)
 
59,564

 
(1,419
)
 
220,880

 
(3,561
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
2,383,123

 
(20,028
)
 
231,932

 
(1,130
)
 
2,615,055

 
(21,158
)
Total
$
2,544,439

 
$
(22,170
)
 
$
291,496

 
$
(2,549
)
 
$
2,835,935

 
$
(24,719
)
 
December 31, 2012
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
$
39,483

 
$
(357
)
 
$
22,095

 
$
(390
)
 
$
61,578

 
$
(747
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
154,914

 
(1,395
)
 
257,974

 
(406
)
 
412,888

 
(1,801
)
Total
$
194,397

 
$
(1,752
)
 
$
280,069

 
$
(796
)
 
$
474,466

 
$
(2,548
)

Redemption Terms

The following table summarizes the amortized cost and fair value of AFS securities categorized by contractual maturity. Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in thousands):
 
 
September 30, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
9,965

 
$
10,135

 
$

 
$

Due after one year through five years
 
421,903

 
449,002

 
314,601

 
332,189

Due after five years through ten years
 
340,866

 
348,967

 
542,448

 
583,674

Due after ten years
 
200,622

 
204,463

 
204,821

 
211,994

Total non-mortgage-backed securities
 
973,356

 
1,012,567

 
1,061,870

 
1,127,857

Mortgage-backed securities
 
5,256,159

 
5,292,216

 
3,645,155

 
3,731,949

Total
 
$
6,229,515

 
$
6,304,783

 
$
4,707,025

 
$
4,859,806


Net Gains on Sale of AFS Securities

During the three months ended September 30, 2013, the Bank received $88.0 million in proceeds from the sale of AFS securities and recognized gross gains of $1.1 million. During the nine months ended September 30, 2013, the Bank received $100.6 million in proceeds from the sale of AFS securities and recognized gross gains of $3.0 million. During the three and nine months ended September 30, 2012, the Bank did not sell any AFS securities.


13


Note 5 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities were as follows (dollars in thousands):
 
September 30, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
307,268

 
$
39,879

 
$

 
$
347,147

State or local housing agency obligations
74,151

 
3,980

 

 
78,131

Other2
807

 

 

 
807

Total non-mortgage-backed securities
382,226

 
43,859

 

 
426,085

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
5,875

 
22

 

 
5,897

Other U.S. obligations - commercial
2,203

 
6

 

 
2,209

GSE - residential
1,528,683

 
35,459

 
(826
)
 
1,563,316

Private-label - residential
31,821

 
125

 
(805
)
 
31,141

Total mortgage-backed securities
1,568,582

 
35,612

 
(1,631
)
 
1,602,563

Total
$
1,950,808

 
$
79,471

 
$
(1,631
)
 
$
2,028,648

 
December 31, 2012
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
308,496

 
$
86,601

 
$

 
$
395,097

State or local housing agency obligations
87,659

 
8,930

 

 
96,589

Other2
1,795

 

 

 
1,795

Total non-mortgage-backed securities
397,950

 
95,531

 

 
493,481

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
7,756

 
32

 

 
7,788

Other U.S. obligations - commercial
2,884

 
10

 

 
2,894

GSE - residential
2,590,195

 
63,902

 
(226
)
 
2,653,871

Private-label - residential
40,936

 
480

 
(1,321
)
 
40,095

Total mortgage-backed securities
2,641,771

 
64,424

 
(1,547
)
 
2,704,648

Total
$
3,039,721

 
$
159,955

 
$
(1,547
)
 
$
3,198,129


1
Amortized cost includes adjustments made to the cost basis of an investment for amortization and accretion.

2
Consists of an investment in a Small Business Investment Company.


14


Unrealized Losses

The following tables summarize HTM securities with unrealized losses. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
September 30, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
$
76,816

 
$
(193
)
 
$
122,958

 
$
(633
)
 
$
199,774

 
$
(826
)
Private-label - residential

 

 
20,719

 
(805
)
 
20,719

 
(805
)
Total mortgage-backed securities
$
76,816

 
$
(193
)
 
$
143,677

 
$
(1,438
)
 
$
220,493

 
$
(1,631
)
 
December 31, 2012
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
$

 
$

 
$
156,945

 
$
(226
)
 
$
156,945

 
$
(226
)
Private-label - residential

 

 
26,277

 
(1,321
)
 
26,277

 
(1,321
)
Total mortgage-backed securities
$

 
$

 
$
183,222

 
$
(1,547
)
 
$
183,222

 
$
(1,547
)

Redemption Terms

The following table summarizes the amortized cost and fair value of HTM securities categorized by contractual maturity. Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in thousands):
 
 
September 30, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
807

 
$
807

 
$
1,795

 
$
1,795

Due after ten years
 
381,419

 
425,278

 
396,155

 
491,686

Total non-mortgage-backed securities
 
382,226

 
426,085

 
397,950

 
493,481

Mortgage-backed securities
 
1,568,582

 
1,602,563

 
2,641,771

 
2,704,648

Total
 
$
1,950,808

 
$
2,028,648

 
$
3,039,721

 
$
3,198,129


Note 6 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of its OTTI evaluation, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired.

During the third quarter of 2013, the Bank changed its intent and decided to sell three similar non-mortgage-backed securities held in its AFS portfolio. Two of these securities were sold during the third quarter of 2013 and the Bank recorded gross gains on these sales of $1.1 million through "Net gains on sale of available-for-sale securities" in the Statements of Income. The third and only remaining security of that type was in an unrealized loss position at September 30, 2013. The decline in value was due to changes in interest rates, credit spreads, and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligation. Due to the Bank's intent to sell the security, an OTTI charge of $1.3 million was recorded through “Other-than-temporary impairment losses" in the Statements of Income. This charge represented the entire difference between the amortized cost basis and estimated fair value of the security.


15


Private-Label Mortgage-Backed Securities

On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label mortgage-backed securities (MBS) in order to determine whether the entire amortized cost bases of these securities are expected to be recovered. To ensure consistency in the determination of OTTI, an OTTI Governance Committee, comprised of representation from all 12 FHLBanks, is responsible for reviewing and approving the key modeling assumptions, inputs, and methodologies used by the designated FHLBanks when generating the cash flow projections.

As of September 30, 2013, the Bank obtained cash flow analyses for all of its private-label MBS from its designated FHLBanks. The cash flow analyses used two third-party models. The first third-party model considered borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the first model was the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which is based upon an assessment of the individual housing markets. CBSAs refer collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget. A CBSA must contain at least one urban area with a population of 10,000 or more people.

The OTTI Governance Committee developed a short-term housing price forecast using whole percentages, with projected changes ranging from a decline of five percent to an increase of eight percent over the twelve month period beginning July 1, 2013. For the vast majority of markets, the short-term forecast had changes ranging from a decline of one percent to an increase of seven percent. Thereafter, home prices were projected to recover using one of five different recovery paths.

The following table presents projected home price recovery by months following the short-term housing price forecast:
 
 
Recovery Range % (Annualized Rates)
Months
 
Minimum
 
Maximum
1 - 6
 
0.0
 
3.0
7 - 12
 
1.0
 
4.0
13 - 18
 
2.0
 
4.0
19 - 30
 
2.0
 
5.0
31 - 54
 
2.0
 
6.0
Thereafter
 
2.3
 
5.6

The month-by-month projections of future loan performance derived from the first model, which reflected projected prepayments, defaults, and loss severities, were then input into a second model that allocated the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities was derived from the presence of subordinate securities, losses were generally allocated first to the subordinate securities until their principal balance was reduced to zero. The projected cash flows were based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.

The Bank compared the present value of the cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss existed. At September 30, 2013, the Bank's cash flow analyses for private-label MBS did not project any credit losses. Even under an adverse scenario that delays recovery of the housing price index, no credit losses were projected. The Bank does not intend to sell its private-label MBS and it is not more likely than not that the Bank will be required to sell its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at September 30, 2013.


16


All Other Investment Securities

On a quarterly basis, the Bank reviews all remaining AFS and HTM securities in an unrealized loss position to determine whether they are other-than temporarily impaired. The following was determined for the Bank's other investment securities in an unrealized loss position at September 30, 2013:

Other U.S. obligations and GSE securities. The unrealized losses were due primarily to interest rate volatility. Because the Bank expects to recover the amortized cost bases on these securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases, it did not consider any of these securities to be other-than-temporarily impaired at September 30, 2013. Additionally, the strength of the issuers' guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations.

State housing agency obligations and taxable municipal bonds. The unrealized losses were due to changes in interest rates, credit spreads, and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligations. The Bank does not intend to sell these securities nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at September 30, 2013. Additionally, the creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements was sufficient to protect the Bank from losses based on current expectations.

Note 7 — Advances

Redemption Terms

The following table summarizes the Bank's advances outstanding by year of contractual maturity (dollars in thousands):
 
 
September 30, 2013
 
December 31, 2012
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
17

 
3.30
 
$
35

 
3.32
Due in one year or less
 
7,906,978

 
0.72
 
10,306,571

 
1.03
Due after one year through two years
 
3,540,790

 
0.93
 
1,900,515

 
1.59
Due after two years through three years
 
2,713,391

 
1.89
 
2,289,104

 
1.62
Due after three years through four years
 
2,828,571

 
2.19
 
2,096,668

 
2.34
Due after four years through five years
 
22,590,181

 
0.52
 
2,893,016

 
2.49
Thereafter
 
5,858,200

 
0.96
 
6,568,855

 
1.58
Total par value
 
45,438,128

 
0.83
 
26,054,764

 
1.53
Premiums
 
157

 
 
 
169

 
 
Discounts
 
(8,262
)
 
 
 
(3,247
)
 
 
Fair value hedging adjustments
 
356,509

 
 
 
562,229

 
 
Total
 
$
45,786,532

 
 
 
$
26,613,915

 
 

The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) without incurring prepayment fees (callable advances). In exchange for receiving the right to call the advance on a predetermined call date, the borrower pays a higher fixed rate for the advance relative to an equivalent maturity, noncallable, fixed rate advance. If the call option is exercised, replacement funding may be available. Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At September 30, 2013 and December 31, 2012, the Bank had callable advances outstanding totaling $26.4 billion and $5.7 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance at predetermined exercise dates, which the Bank typically would exercise when interest rates increase, and the borrower may then apply for a new advance at the prevailing market rate. At September 30, 2013 and December 31, 2012, the Bank had putable advances outstanding totaling $2.5 billion and $2.9 billion.


17


Prepayment Fees

The Bank charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. Prepayment fees are recorded net of fair value hedging adjustments in the Statements of Income. The following table summarizes the Bank's prepayment fees on advances, net (dollars in thousands):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Gross prepayment fee income
$
1,650

 
$
13,347

 
$
15,460

 
$
353,876

Fair value hedging adjustments
(299
)
 
(7,447
)
 
(11,023
)
 
(329,793
)
Prepayment fees on advances, net
$
1,351

 
$
5,900

 
$
4,437

 
$
24,083


For information related to the Bank's credit risk exposure on advances, refer to "Note 9 — Allowance for Credit Losses."

Note 8 — Mortgage Loans Held for Portfolio

The Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) involves investment by the Bank in single family mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank's PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the PFI to a designated mortgage service provider.

The following table presents information on the Bank's mortgage loans held for portfolio (dollars in thousands):
 
September 30,
2013
 
December 31,
2012
Fixed rate, medium-term single family mortgages1
$
1,708,193

 
$
1,880,646

Fixed rate, long-term single family mortgages
4,821,562

 
5,005,194

Total unpaid principal balance
6,529,755

 
6,885,840

Premiums
81,833

 
86,112

Discounts
(16,482
)
 
(21,277
)
Basis adjustments from mortgage loan commitments
8,623

 
16,928

Total mortgage loans held for portfolio
6,603,729

 
6,967,603

Allowance for credit losses
(14,240
)
 
(15,793
)
Total mortgage loans held for portfolio, net
$
6,589,489

 
$
6,951,810


1
Medium-term is defined as a term of 15 years or less.

The following table presents the Bank's mortgage loans held for portfolio by type (dollars in thousands):
 
September 30,
2013
 
December 31,
2012
Conventional loans
$
5,990,943

 
$
6,372,542

Government-insured loans
538,812

 
513,298

Total unpaid principal balance
$
6,529,755

 
$
6,885,840

    
For information related to the Bank's credit risk exposure on mortgage loans held for portfolio, refer to "Note 9 — Allowance for Credit Losses."


18


Note 9 — Allowance for Credit Losses

The Bank has established an allowance for credit losses methodology for each of its financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell.

Credit Products

The Bank manages its credit exposure to credit products through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends to its borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

The Bank is required by regulation to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with the Bank, and (iv) other real estate-related collateral acceptable to the Bank provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest. The Bank periodically evaluates and makes changes to its collateral guidelines and collateral haircuts.

Borrowers may pledge collateral to the Bank by executing a blanket lien, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket lien, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower's obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower's obligation. With respect to non-blanket lien borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket lien borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

Taking into consideration each borrower's financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At September 30, 2013 and December 31, 2012, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.

At September 30, 2013 and December 31, 2012, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, none of the Bank's credit products were troubled debt restructurings (TDRs) during the nine months ended September 30, 2013 and 2012.

The Bank has never experienced a credit loss on its credit products. Based upon the Bank's collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there are no probable credit losses on its credit products as of September 30, 2013 and December 31, 2012. Accordingly, the Bank has not recorded any allowance for credit losses.

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Government-Insured Mortgage Loans

The Bank invests in government-insured fixed rate mortgage loans secured by one-to-four family residential properties. Government-insured mortgage loans are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer provides and maintains insurance or a guaranty from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government mortgage loans. Any principal losses incurred on such mortgage loans that are not recovered from the guarantor are absorbed by the servicers. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at September 30, 2013 and December 31, 2012. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Conventional Mortgage Loans

The Bank's management of credit risk in the MPF program involves several layers of legal loss protection that are defined in agreements among the Bank and its participating PFIs. For the Bank's conventional MPF loans, the availability of loss protection may differ slightly among MPF products. The Bank's loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance (PMI). At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.

First Loss Account. The first loss account (FLA) is a memorandum account used to track the Bank's potential loss exposure under each master commitment prior to the PFI's credit enhancement obligation. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. The Bank records credit enhancement fees paid to PFIs as a reduction to mortgage loan interest income. Credit enhancement fees paid totaled $3.2 million and $6.0 million during the nine months ended September 30, 2013 and 2012. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all master commitments with a PFI credit enhancement obligation was $86.8 million and $126.0 million at September 30, 2013 and December 31, 2012. The decline in the FLA balance was due to the Bank canceling supplemental mortgage insurance (SMI) policies on certain master commitments during the first quarter of 2013. This eliminated the PFI credit enhancement obligation on those master commitments, which in turn reduced the FLA balance on those master commitments to zero.

Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time a mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit the Bank's loss exposure to that of an investor in an MBS that is rated the equivalent of AA by a nationally recognized statistical rating organization (NRSRO). PFIs may either pledge collateral or purchase SMI from mortgage insurers to secure this obligation. If at any time the Bank cancels all or a portion of its SMI policies, the respective PFI is no longer required to retain a portion of the credit risk on the mortgage loans purchased by the Bank. In those instances, the Bank holds additional retained earnings to protect against losses and no credit enhancement fees are paid to the PFI.

The Bank utilizes an allowance for credit losses to reserve for estimated losses in its conventional mortgage loan portfolio at the balance sheet date. The measurement of the Bank's allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing conventional mortgage loans for impairment on an individual basis, (iii) estimating additional credit losses in the conventional mortgage loan portfolio, and (iv) considering the recapture of performance-based credit enhancement fees from the PFI, if available.

Collectively Evaluated Conventional Mortgage Loans. The Bank collectively evaluates the majority of its conventional mortgage loan portfolio for impairment and estimates an allowance for credit losses based upon factors that vary by MPF product. These factors include, but are not limited to, (i) loan delinquencies, (ii) loans migrating to real estate owned (REO), (iii) actual historical loss severities, and (iv) certain quantifiable economic factors, such as unemployment rates and home prices. The Bank utilizes a roll-rate methodology when estimating its allowance for credit losses. This methodology projects loans migrating to REO status based on historical average rates of delinquency. The Bank then applies a loss severity factor to calculate an estimate of credit losses.


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Individually Identified Conventional Mortgage Loans. The Bank individually evaluates certain conventional mortgage loans for impairment, including TDRs and collateral-dependent loans. TDRs occur when the Bank grants a concession to a borrower that it would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. The Bank's TDRs include loans granted under its temporary loan modification plan and loans discharged under Chapter 7 bankruptcy. The Bank generally measures impairment of TDRs based on the present value of expected future cash flows discounted at the loan's effective interest rate. Collateral-dependent loans are loans in which repayment is expected to be provided solely by the sale of the underlying collateral. The Bank considers TDRs where principal or interest is 60 days or more past due to be collateral-dependent. The Bank measures impairment of collateral-dependent loans based on the estimated fair value of the underlying collateral less selling costs.

Estimating Additional Credit Loss in the Conventional Mortgage Loan Portfolio. The Bank may make an adjustment for certain limitations in its estimation of credit losses. This adjustment recognizes the imprecise nature of an estimate and represents a subjective management judgment that is intended to cover losses resulting from other macroeconomic factors that may not be captured in the collective methodology previously described at the balance sheet date.

Performance-Based Credit Enhancement Fees. When reserving for estimated credit losses, the Bank may take into consideration performance-based credit enhancement fees available for recapture from the PFIs. Performance-based credit enhancement fees available for recapture consist of accrued performance-based credit enhancement fees to be paid to the PFIs and projected performance-based credit enhancement fees to be paid to the PFIs over the next 12 months, less any losses incurred that are in the process of recapture.

Available performance-based credit enhancement fees cannot be shared between master commitments and, as a result, some master commitments may have sufficient performance-based credit enhancement fees to recapture losses while other master commitments may not. At September 30, 2013 and December 31, 2012, the Bank determined that the amount of performance-based credit enhancement fees available for recapture from the PFIs at the master commitment level was immaterial. As such, it did not factor credit enhancement fees into its estimate of the allowance for credit losses.

Allowance for Credit Losses on Conventional Mortgage Loans

The following table presents a rollforward of the allowance for credit losses on the Bank's conventional mortgage loan portfolio (dollars in thousands):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
14,656

 
$
17,424

 
$
15,793

 
$
18,963

Charge-offs
(416
)
 
(1,058
)
 
(1,553
)
 
(2,597
)
Balance, end of period
$
14,240

 
$
16,366

 
$
14,240

 
$
16,366


The following table summarizes the allowance for credit losses and recorded investment of the Bank's conventional mortgage loan portfolio by impairment methodology (dollars in thousands):
 
September 30,
2013
 
December 31,
2012
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
3,858

 
$
5,444

Individually evaluated for impairment
10,382

 
10,349

Total allowance for credit losses
$
14,240

 
$
15,793

Recorded investment1
 
 
 
Collectively evaluated for impairment
$
6,039,275

 
$
6,415,718

Individually evaluated for impairment, with or without a related allowance
44,331

 
59,344

Total recorded investment
$
6,083,606

 
$
6,475,062


1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.


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Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The tables below summarize the Bank's key credit quality indicators for mortgage loans (dollars in thousands):
 
September 30, 2013
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
68,381

 
$
20,633

 
$
89,014

Past due 60 - 89 days
21,905

 
5,821

 
27,726

Past due 90 - 179 days
15,571

 
3,521

 
19,092

Past due 180 days or more
54,791

 
3,123

 
57,914

Total past due loans
160,648

 
33,098

 
193,746

Total current loans
5,922,958

 
520,338

 
6,443,296

Total recorded investment of mortgage loans1
$
6,083,606

 
$
553,436

 
$
6,637,042

 
 
 
 
 
 
In process of foreclosure (included above)2
$
40,907

 
$
1,056

 
$
41,963

Serious delinquency rate3
1.2
%
 
1.2
%
 
1.2
%
Past due 90 days or more and still accruing interest4
$

 
$
6,644

 
$
6,644

Non-accrual mortgage loans5