10-Q 1 fhlb03311410q.htm FORM 10-Q FHLB 033114 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 March 31, 2014
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 April 30, 2014
 
Class B Stock, par value $100
 
27,263,498
 
 
 
 
 
 
 
 
 




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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)

 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Cash and due from banks
$
361,337

 
$
448,278

Interest-bearing deposits
1,684

 
1,863

Securities purchased under agreements to resell
7,490,000

 
8,200,000

Federal funds sold
1,875,000

 
1,200,000

Investment securities
 
 
 
Trading securities (Note 3)
1,035,573

 
1,018,373

Available-for-sale securities (Note 4)
8,837,462

 
7,932,520

Held-to-maturity securities (fair value of $1,721,652 and $1,842,599) (Note 5)
1,645,231

 
1,778,306

Total investment securities
11,518,266

 
10,729,199

Advances (Note 7)
44,923,786

 
45,650,220

Mortgage loans held for portfolio, net
 
 
 
Mortgage loans held for portfolio (Note 8)
6,491,943

 
6,565,293

Allowance for credit losses on mortgage loans (Note 9)
(7,400
)
 
(8,000
)
Total mortgage loans held for portfolio, net
6,484,543

 
6,557,293

Accrued interest receivable
81,858

 
72,561

Premises, software, and equipment, net
19,260

 
18,968

Derivative assets, net (Note 10)
104,030

 
93,011

Other assets
29,381

 
32,626

TOTAL ASSETS
$
72,889,145

 
$
73,004,019

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
632,309

 
$
467,362

Non-interest-bearing
123,563

 
231,704

Total deposits
755,872

 
699,066

Consolidated obligations (Note 11)
 
 
 
Discount notes
42,815,869

 
38,136,652

Bonds (includes $0 and $50,033 at fair value under the fair value option)
25,224,745

 
30,195,568

Total consolidated obligations
68,040,614

 
68,332,220

Mandatorily redeemable capital stock (Note 12)
8,479

 
8,719

Accrued interest payable
102,842

 
81,420

Affordable Housing Program payable
39,867

 
37,688

Derivative liabilities, net (Note 10)
49,473

 
57,420

Other liabilities
417,797

 
330,619

TOTAL LIABILITIES
69,414,944

 
69,547,152

Commitments and contingencies (Note 14)

 

CAPITAL (Note 12)
 
 
 
Capital stock - Class B putable ($100 par value); 26,704 and 26,916 issued and outstanding shares
2,670,387

 
2,691,568

Retained earnings
 
 
 
Unrestricted
638,217

 
627,473

Restricted
58,185

 
50,782

Total retained earnings
696,402

 
678,255

Accumulated other comprehensive income
107,412

 
87,044

TOTAL CAPITAL
3,474,201

 
3,456,867

TOTAL LIABILITIES AND CAPITAL
$
72,889,145

 
$
73,004,019

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
 
March 31,
 
2014
 
2013
INTEREST INCOME
 
 
 
Advances
$
52,862

 
$
48,439

Prepayment fees on advances, net
166

 
1,821

Interest-bearing deposits
45

 
149

Securities purchased under agreements to resell
785

 
1,669

Federal funds sold
306

 
440

Trading securities
8,242

 
8,171

Available-for-sale securities
22,743

 
17,121

Held-to-maturity securities
12,247

 
19,786

Mortgage loans held for portfolio
62,303

 
65,693

Total interest income
159,699

 
163,289

INTEREST EXPENSE
 
 
 
Consolidated obligations - Discount notes
9,288

 
2,307

Consolidated obligations - Bonds
97,946

 
107,596

Deposits
22

 
37

Mandatorily redeemable capital stock
45

 
58

Total interest expense
107,301

 
109,998

NET INTEREST INCOME
52,398

 
53,291

Reversal for credit losses on mortgage loans
(334
)
 

NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES
52,732

 
53,291

OTHER INCOME (LOSS)
 
 
 
Net gains (losses) on trading securities
24,203

 
(6,928
)
Net gains on sale of available-for-sale securities
826

 

Net gains on consolidated obligations held at fair value
2

 
643

Net (losses) gains on derivatives and hedging activities
(23,084
)
 
10,930

Net losses on extinguishment of debt

 
(15,123
)
Other, net
1,515

 
2,729

Total other income (loss)
3,462

 
(7,749
)
OTHER EXPENSE
 
 
 
Compensation and benefits
7,684

 
7,220

Contractual services
2,080

 
1,810

Other operating expenses
2,783

 
3,034

Federal Housing Finance Agency
938

 
976

Office of Finance
1,208

 
749

Other, net
369

 
1,368

Total other expense
15,062

 
15,157

INCOME BEFORE ASSESSMENT
41,132

 
30,385

Affordable Housing Program assessment
4,118

 
3,044

NET INCOME
$
37,014

 
$
27,341

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
 
March 31,
 
2014
 
2013
Net income
$
37,014

 
$
27,341

Other comprehensive income (loss)
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
 
 
Unrealized gains (losses)
21,150

 
(2,972
)
Reclassification adjustment for realized net gains on the sale of available-for-sale securities included in net income
(826
)
 

Total net unrealized gains (losses) on available-for-sale securities
20,324

 
(2,972
)
Pension and postretirement benefits
44

 
224

Total other comprehensive income (loss)
20,368

 
(2,748
)
TOTAL COMPREHENSIVE INCOME
$
57,382

 
$
24,593

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, 2012
20,627

 
$
2,062,714

 
$
593,129

 
$
28,820

 
$
621,949

 
$
149,638

 
$
2,834,301

Proceeds from issuance of capital stock
2,322

 
232,180

 

 

 

 

 
232,180

Repurchase/redemption of capital stock
(3,170
)
 
(316,977
)
 

 

 

 

 
(316,977
)
Net shares reclassified to mandatorily redeemable capital stock
(80
)
 
(8,062
)
 

 

 

 

 
(8,062
)
Comprehensive income (loss)

 

 
21,873

 
5,468

 
27,341

 
(2,748
)
 
24,593

Cash dividends on capital stock

 

 
(13,116
)
 

 
(13,116
)
 

 
(13,116
)
BALANCE, MARCH 31, 2013
19,699

 
$
1,969,855

 
$
601,886

 
$
34,288

 
$
636,174

 
$
146,890

 
$
2,752,919

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2013
26,916

 
$
2,691,568

 
$
627,473

 
$
50,782

 
$
678,255

 
$
87,044

 
$
3,456,867

Proceeds from issuance of capital stock
3,265

 
326,536

 

 

 

 

 
326,536

Repurchase/redemption of capital stock
(3,475
)
 
(347,539
)
 

 

 

 

 
(347,539
)
Net shares reclassified to mandatorily redeemable capital stock
(2
)
 
(178
)
 

 

 

 

 
(178
)
Comprehensive income

 

 
29,611

 
7,403

 
37,014

 
20,368

 
57,382

Cash dividends on capital stock

 

 
(18,867
)
 

 
(18,867
)
 

 
(18,867
)
BALANCE, MARCH 31, 2014
26,704

 
$
2,670,387

 
$
638,217

 
$
58,185

 
$
696,402

 
$
107,412

 
$
3,474,201

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 Three Months Ended
 
March 31,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
37,014

 
$
27,341

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
(3,732
)
 
(3,405
)
Net (gains) losses on trading securities
(24,203
)
 
6,928

Net gains on sale of available-for-sale securities
(826
)
 

Net gains on consolidated obligations held at fair value
(2
)
 
(643
)
Net change in derivatives and hedging activities
21,358

 
(5,702
)
Net losses on extinguishment of debt

 
15,123

Other adjustments
(1,405
)
 
4,700

Net change in:
 
 
 
Accrued interest receivable
(9,550
)
 
(7,389
)
Other assets
2,432

 
1,715

Accrued interest payable
21,390

 
6,556

Other liabilities
(831
)
 
(4,754
)
Total adjustments
4,631

 
13,129

Net cash provided by operating activities
41,645

 
40,470

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(38,196
)
 
20,010

Securities purchased under agreements to resell
710,000

 
(2,020,000
)
Federal funds sold
(675,000
)
 
(450,000
)
Premises, software, and equipment
(889
)
 
(2,836
)
Trading securities
 
 
 
Proceeds from maturities of long-term
7,003

 
4,595

Purchases of long-term

 
(140,579
)
Available-for-sale securities
 
 
 
Proceeds from sales and maturities of long-term
505,237

 
272,647

Purchases of long-term
(1,216,342
)
 
(374,076
)
Held-to-maturity securities
 
 
 
Proceeds from maturities of long-term
132,733

 
411,323

Advances
 
 
 
Principal collected
15,911,267

 
12,788,054

Originated
(15,199,350
)
 
(11,031,485
)
Mortgage loans held for portfolio
 
 
 
Principal collected
191,569

 
526,708

Originated or purchased
(123,840
)
 
(359,206
)
Proceeds from sales of foreclosed assets
5,419

 
6,986

Net cash provided by (used in) investing activities
209,611

 
(347,859
)
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 Three Months Ended
 
March 31,
 
2014
 
2013
FINANCING ACTIVITIES
 
 
 
Net change in deposits
3,233

 
15,530

Net payments on derivative contracts with financing elements
(1,971
)
 
(1,984
)
Net proceeds from issuance of consolidated obligations
 
 
 
Discount notes
36,783,899

 
20,614,205

Bonds
4,021,253

 
11,575,042

Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(32,106,084
)
 
(23,960,336
)
Bonds
(8,998,239
)
 
(7,659,844
)
Bonds transferred to other FHLBanks

 
(92,606
)
Proceeds from issuance of capital stock
326,536

 
232,180

Payments for repurchase/redemption of capital stock
(347,539
)
 
(316,977
)
Net payments for repurchase/redemption of mandatorily redeemable capital stock
(418
)
 
(6,733
)
Cash dividends paid
(18,867
)
 
(13,116
)
Net cash (used in) provided by financing activities
(338,197
)
 
385,361

Net (decrease) increase in cash and due from banks
(86,941
)
 
77,972

Cash and due from banks at beginning of the period
448,278

 
252,113

Cash and due from banks at end of the period
$
361,337

 
$
330,085

 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
Interest paid
$
181,037

 
$
215,318

Affordable Housing Program payments
$
1,939

 
$
2,033

Transfers of mortgage loans to real estate owned
$
3,255

 
$
5,168

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. 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 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, 2013, which are contained in the Bank's 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2014 (2013 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, 2014.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” of the Bank's 2013 Form 10-K.

Reclassifications

Certain amounts in the Bank's 2013 financial statements and footnotes have been reclassified to conform to the presentation for the three months ended March 31, 2014.


9


During the first quarter of 2014, the Bank identified certain classification errors in its previously reported Note 10 - Allowance for Credit Losses - Individually Evaluated Impaired Loans for the year ended December 31, 2013 contained in the 2013 Form 10-K. Management has determined after evaluating the quantitative and qualitative aspects of the classification errors that such errors were not material to the previously issued financial statements and footnotes. The Bank will correct the recorded investment classification error in its 2014 first quarter Form 10-Q filing and the average recorded investment balances in its 2014 Form 10-K filing. 

The following table summarizes the revisions to be made to the Bank’s footnote for December 31, 2013 in the 2014 first quarter Form 10-Q (dollars in thousands):
 
Previously Reported
 
Revised
Recorded investment
 
 
 
Impaired loans with an allowance
$
39,715

 
$
19,719

Impaired loans without an allowance
1,125

 
21,121


The following table summarizes the revisions to be made to the Bank’s footnote for the year ended December 31, 2013 in the 2014 Form 10-K filing (dollars in millions):
 
Previously Reported
 
Revised
Average recorded investment on impaired loans with an allowance
$
48.9

 
$
38.9

Average recorded investment on impaired loans without an allowance
1.2

 
11.2


Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Joint and Several Liability Arrangements

On February 28, 2013, the Financial Accounting Standards Board (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 was 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 these obligations. This guidance became effective for the Bank beginning on January 1, 2014 and was applied retrospectively to obligations with joint and several liabilities that existed at January 1, 2014. Based on how the Bank previously reported joint and several liability arrangements, the adoption of this guidance did not have an effect on the Bank's financial condition, results of operations, cash flows, or financial statement disclosures.

ISSUED ACCOUNTING GUIDANCE

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

On January 17, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned (REO). Specifically, such collateralized mortgage loans should be reclassified to REO when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This guidance is effective for interim and annual periods beginning on or after December 15, 2014 and may be adopted under either the modified retrospective transition method or the prospective transition method. This guidance is not expected to affect the Bank’s financial condition, results of operations, or cash flows.


10


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. The adverse classification requirements were implemented as of January 1, 2014; this implementation did not have a material effect on the the Bank's financial condition, results of operations, or cash flows. The charge-off requirements should be implemented no later than January 1, 2015. This guidance will not have a material impact on the Bank's financial condition, results of operations, or cash flows.

Note 3 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
March 31,
2014
 
December 31,
2013
Non-mortgage-backed securities
 
 
 
Other U.S. obligations
$
264,070

 
$
266,898

GSE obligations
57,166

 
54,971

Other1
269,988

 
263,354

Total non-mortgage-backed securities
591,224

 
585,223

Mortgage-backed securities
 
 
 
GSE - residential
444,349

 
433,150

Total fair value
$
1,035,573

 
$
1,018,373


1
Consists of taxable municipal bonds.
 
Net Gains (Losses) on Trading Securities

During the three months ended March 31, 2014, the Bank recorded net holding gains of $24.2 million on its trading securities compared to net holding losses of $6.9 million for the same period in 2013. The Bank did not sell any trading securities during the three months ended March 31, 2014 and 2013.

Note 4 — Available-for-Sale Securities

Major Security Type

Available-for-sale (AFS) securities were as follows (dollars in thousands):
 
March 31, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
171,226

 
$
6,031

 
$

 
$
177,257

GSE obligations
1,111,833

 
27,657

 
(3,161
)
 
1,136,329

State or local housing agency obligations
25,978

 

 
(1,107
)
 
24,871

Other2
166,279

 
7,656

 

 
173,935

Total non-mortgage-backed securities
1,475,316

 
41,344

 
(4,268
)
 
1,512,392

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
7,253,423

 
79,402

 
(7,755
)
 
7,325,070

Total
$
8,728,739

 
$
120,746

 
$
(12,023
)
 
$
8,837,462


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments.

2
Consists of taxable municipal bonds.

11


AFS securities were as follows (dollars in thousands):
 
December 31, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
175,097

 
$
6,474

 
$
(23
)
 
$
181,548

GSE obligations
1,101,693

 
27,845

 
(2,663
)
 
1,126,875

State or local housing agency obligations
24,868

 

 
(1,897
)
 
22,971

Other2
257,584

 
5,994

 
(4
)
 
263,574

Total non-mortgage-backed securities
1,559,242

 
40,313

 
(4,587
)
 
1,594,968

Mortgage-backed securities
 
 
 
 
 
 
 
GSE - residential
6,284,879

 
66,381

 
(13,708
)
 
6,337,552

Total
$
7,844,121

 
$
106,694

 
$
(18,295
)
 
$
7,932,520


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

2
Consists of Private Export Funding Corporation bonds and taxable municipal bonds.
 
Unrealized Losses

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
March 31, 2014
 
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
$
284,693

 
$
(1,422
)
 
$
58,550

 
$
(1,739
)
 
$
343,243

 
$
(3,161
)
State or local housing agency obligations
17,918

 
(697
)
 
6,953

 
(410
)
 
24,871

 
(1,107
)
Total non-mortgage-backed securities
302,611

 
(2,119
)
 
65,503

 
(2,149
)
 
368,114

 
(4,268
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
1,540,074

 
(5,557
)
 
564,953

 
(2,198
)
 
2,105,027

 
(7,755
)
Total
$
1,842,685

 
$
(7,676
)
 
$
630,456

 
$
(4,347
)
 
$
2,473,141

 
$
(12,023
)
 
December 31, 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
$
38,342

 
$
(23
)
 
$

 
$

 
$
38,342

 
$
(23
)
GSE obligations
135,655

 
(1,081
)
 
59,061

 
(1,582
)
 
194,716

 
(2,663
)
State or local housing agency obligations
22,971

 
(1,897
)
 

 

 
22,971

 
(1,897
)
Other
10,190

 
(4
)
 

 

 
10,190

 
(4
)
Total non-mortgage-backed securities
207,158

 
(3,005
)
 
59,061

 
(1,582
)
 
266,219

 
(4,587
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE - residential
2,156,010

 
(12,061
)
 
263,983

 
(1,647
)
 
2,419,993

 
(13,708
)
Total
$
2,363,168

 
$
(15,066
)
 
$
323,044

 
$
(3,229
)
 
$
2,686,212

 
$
(18,295
)


12


Contractual Maturity

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in thousands):
 
 
March 31, 2014
 
December 31, 2013
Year of Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
9,997

 
$
10,011

 
$
9,981

 
$
10,071

Due after one year through five years
 
1,041,437

 
1,064,804

 
1,031,840

 
1,056,323

Due after five years through ten years
 
233,508

 
241,308

 
331,391

 
339,266

Due after ten years
 
190,374

 
196,269

 
186,030

 
189,308

Total non-mortgage-backed securities
 
1,475,316

 
1,512,392

 
1,559,242

 
1,594,968

Mortgage-backed securities
 
7,253,423

 
7,325,070

 
6,284,879

 
6,337,552

Total
 
$
8,728,739

 
$
8,837,462

 
$
7,844,121

 
$
7,932,520


Net Gains on Sale of AFS Securities

During the three months ended March 31, 2014, the Bank received $97.2 million in proceeds from the sale of an AFS security and recognized a gross gain of $0.8 million. During the three months ended March 31, 2013, the Bank did not sell any AFS securities.

Note 5 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities were as follows (dollars in thousands):
 
March 31, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
306,425

 
$
43,463

 
$

 
$
349,888

State or local housing agency obligations
68,259

 
4,643

 

 
72,902

Other2
680

 

 

 
680

Total non-mortgage-backed securities
375,364

 
48,106

 

 
423,470

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
4,745

 
17

 

 
4,762

Other U.S. obligations - commercial
1,914

 
1

 
(1
)
 
1,914

GSE - residential
1,234,260

 
29,039

 
(374
)
 
1,262,925

Private-label - residential
28,948

 
188

 
(555
)
 
28,581

Total mortgage-backed securities
1,269,867

 
29,245

 
(930
)
 
1,298,182

Total
$
1,645,231

 
$
77,351

 
$
(930
)
 
$
1,721,652


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

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


13


HTM securities were as follows (dollars in thousands):
 
December 31, 2013
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
306,853

 
$
30,862

 
$

 
$
337,715

State or local housing agency obligations
72,662

 
2,518

 

 
75,180

Other2
807

 

 

 
807

Total non-mortgage-backed securities
380,322

 
33,380

 

 
413,702

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations - residential
5,303

 
22

 

 
5,325

Other U.S. obligations - commercial
1,985

 
6

 

 
1,991

GSE - residential
1,360,705

 
31,937

 
(426
)
 
1,392,216

Private-label - residential
29,991

 
63

 
(689
)
 
29,365

Total mortgage-backed securities
1,397,984

 
32,028

 
(1,115
)
 
1,428,897

Total
$
1,778,306

 
$
65,408

 
$
(1,115
)
 
$
1,842,599


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

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

The following tables summarize HTM securities with unrealized losses by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
March 31, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - commercial
$
705

 
$
(1
)
 
$

 
$

 
$
705

 
$
(1
)
GSE - residential
67,265

 
(67
)
 
107,472

 
(307
)
 
174,737

 
(374
)
Private-label - residential

 

 
18,860

 
(555
)
 
18,860

 
(555
)
Total mortgage-backed securities
$
67,970

 
$
(68
)
 
$
126,332

 
$
(862
)
 
$
194,302

 
$
(930
)
 
December 31, 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
$
71,023

 
$
(54
)
 
$
113,532

 
$
(372
)
 
$
184,555

 
$
(426
)
Private-label - residential

 

 
19,517

 
(689
)
 
19,517

 
(689
)
Total mortgage-backed securities
$
71,023

 
$
(54
)
 
$
133,049

 
$
(1,061
)
 
$
204,072

 
$
(1,115
)


14


Contractual Maturity

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in thousands):
 
 
March 31, 2014
 
December 31, 2013
Year of Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
680

 
$
680

 
$
807

 
$
807

Due after ten years
 
374,684

 
422,790

 
379,515

 
412,895

Total non-mortgage-backed securities
 
375,364

 
423,470

 
380,322

 
413,702

Mortgage-backed securities
 
1,269,867

 
1,298,182

 
1,397,984

 
1,428,897

Total
 
$
1,645,231

 
$
1,721,652

 
$
1,778,306

 
$
1,842,599


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 evaluation of securities for OTTI, 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.
 
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) using two third-party models in order to assess whether the entire amortized cost bases of these securities will 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 March 31, 2014, the Bank obtained cash flow analyses for all of its private-label MBS from its designated FHLBanks.

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 with projected changes ranging from a decrease of three percent to an increase of nine percent over the twelve month period beginning January 1, 2014. For the vast majority of markets, the change in short-term housing price forecast ranges from one percent to four 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


15


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 March 31, 2014, 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 March 31, 2014.

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 March 31, 2014:

Other U.S. obligations and GSE securities. The unrealized losses were due primarily to interest rate volatility. 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. 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. As such, the Bank did not consider these securities to be other-than-temporarily impaired at March 31, 2014.

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 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. 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 their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at March 31, 2014.


16


Note 7 — Advances

Contractual Maturity

The following table summarizes the Bank's advances outstanding by contractual maturity (dollars in thousands):
 
 
March 31, 2014
 
December 31, 2013
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
54

 
3.28
 
$

 
Due in one year or less
 
7,279,973

 
0.57
 
6,948,856

 
0.60
Due after one year through two years
 
3,484,560

 
1.29
 
4,479,162

 
0.95
Due after two years through three years
 
3,568,432

 
1.57
 
2,936,056

 
1.76
Due after three years through four years
 
3,550,565

 
2.47
 
3,298,142

 
2.28
Due after four years through five years
 
21,622,027

 
0.43
 
20,558,211

 
0.54
Thereafter
 
5,142,719

 
1.08
 
7,139,820

 
0.85
Total par value
 
44,648,330

 
0.85
 
45,360,247

 
0.84
Premiums
 
149

 
 
 
153

 
 
Discounts
 
(7,514
)
 
 
 
(7,879
)
 
 
Fair value hedging adjustments
 
282,821

 
 
 
297,699

 
 
Total
 
$
44,923,786

 
 
 
$
45,650,220

 
 
 
The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). In exchange for receiving the right to call the advance on a predetermined call date, the borrower typically 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 March 31, 2014 and December 31, 2013, the Bank had callable advances outstanding totaling $26.3 billion and $26.4 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on predetermined exercise dates, and the borrower may then apply for a new advance at the prevailing market rate. Generally, put options are exercised when interest rates increase. At both March 31, 2014 and December 31, 2013, the Bank had putable advances outstanding totaling $2.4 billion.
 
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
 
March 31,
 
2014
 
2013
Gross prepayment fee income
$
331

 
$
2,524

Fair value hedging adjustments1
(165
)
 
(703
)
Prepayment fees on advances, net
$
166

 
$
1,821


1
Represents the amortization/accretion of fair value hedging adjustments on closed advance hedge relationships resulting from advance prepayments.

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


17


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):
 
March 31,
2014
 
December 31,
2013
Fixed rate, medium-term single family mortgages1
$
1,611,723

 
$
1,668,190

Fixed rate, long-term single family mortgages
4,806,520

 
4,823,351

Total unpaid principal balance
6,418,243

 
6,491,541

Premiums
79,986

 
80,911

Discounts
(14,816
)
 
(15,652
)
Basis adjustments from mortgage loan commitments
8,530

 
8,493

Total mortgage loans held for portfolio
6,491,943

 
6,565,293

Allowance for credit losses
(7,400
)
 
(8,000
)
Total mortgage loans held for portfolio, net
$
6,484,543

 
$
6,557,293


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 collateral or guarantee type (dollars in thousands):
 
March 31,
2014
 
December 31,
2013
Conventional loans
$
5,870,487

 
$
5,944,999

Government-insured loans
547,756

 
546,542

Total unpaid principal balance
$
6,418,243

 
$
6,491,541

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

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 includes establishing a 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 eligible borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.


18


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. In addition, 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 also require 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 by 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.

Using a risk-based approach and 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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings (TDRs) related to credit products during the three months ended March 31, 2014 and 2013.

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 were no probable credit losses on its credit products as of March 31, 2014 and December 31, 2013. Accordingly, the Bank has not recorded any allowance for credit losses.

Government-Insured Mortgage Loans

The Bank invests in government-insured fixed rate mortgage loans that 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 guarantee or insurance with respect to defaulted government-insured mortgage loans. Any principal losses incurred on these loans that are not recovered from the guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer fails to pay for losses not covered by the guarantee or insurance. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at March 31, 2014 and December 31, 2013. 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.


19


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 $1.1 million during both the three months ended March 31, 2014 and 2013. 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 $87.9 million and $87.3 million at March 31, 2014 and December 31, 2013.

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 pledge collateral to secure this obligation.

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, (iv) considering the recapture of performance-based credit enhancement fees from the PFI, if available, and (v) considering the credit enhancement obligation of the PFI, if estimated losses exceed the FLA.

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 collateral-dependent status, (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 collateral-dependent status based on historical average rates of delinquency. The Bank then applies a loss severity factor to calculate an estimate of credit losses.

Individually Identified Conventional Mortgage Loans. The Bank individually evaluates certain conventional mortgage loans for impairment, including TDRs and collateral-dependent loans. The Bank's TDRs include loans granted under its temporary loan modification plan and loans discharged under Chapter 7 bankruptcy that have not been reaffirmed by the borrower. 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 and expected proceeds from PMI.

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 factors that may not be captured in the methodology previously described at the balance sheet date.


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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, if any, 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 March 31, 2014 and December 31, 2013, 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.

PFI Credit Enhancement Obligation. When reserving for estimated credit losses, the Bank may take into consideration the PFI credit enhancement obligation, which is intended to absorb losses in excess of the FLA. At March 31, 2014 and December 31, 2013, the Bank determined that the amount of credit enhancement obligation available to offset losses was immaterial. As such, it did not factor credit enhancement obligation 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
 
March 31,
 
2014
 
2013
Balance, beginning of period
$
8,000

 
$
15,793

Charge-offs
(266
)
 
(540
)
Reversal for credit losses
(334
)
 

Balance, end of period
$
7,400

 
$
15,253


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):
 
March 31,
2014
 
December 31,
2013
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
2,600

 
$
4,500

Individually evaluated for impairment
4,800

 
3,500

Total allowance for credit losses
$
7,400

 
$
8,000

Recorded investment1
 
 
 
Collectively evaluated for impairment
$
5,903,515

 
$
5,996,590

Individually evaluated for impairment, with or without a related allowance
58,816

 
40,840

Total recorded investment
$
5,962,331

 
$
6,037,430


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

The Bank evaluates certain conventional mortgage loans for impairment individually. Prior to January 1, 2014, these loans were limited to TDRs and collateral-dependent loans (i.e., loans in which repayment is expected to be provided solely by the sale of the underlying collateral). Beginning January 1, 2014, the Bank expanded the population of individually evaluated mortgage loans to include loans that are 180 days or more delinquent and loans that are not severely delinquent, but where the borrower has filed for bankruptcy.


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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):
 
March 31, 2014
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
61,423

 
$
15,575

 
$
76,998

Past due 60 - 89 days
21,655

 
5,259

 
26,914

Past due 90 - 179 days
18,440

 
4,163

 
22,603

Past due 180 days or more
47,508

 
5,315

 
52,823

Total past due loans
149,026

 
30,312

 
179,338

Total current loans
5,813,305

 
532,453

 
6,345,758

Total recorded investment of mortgage loans1
$
5,962,331

 
$
562,765

 
$
6,525,096

 
 
 
 
 
 
In process of foreclosure (included above)2
$
34,792

 
$
2,805

 
$
37,597

Serious delinquency rate3
1.1
%
 
1.7
%
 
1.2
%
Past due 90 days or more and still accruing interest4
$

 
$
9,478

 
$
9,478

Non-accrual mortgage loans5
$
69,284

 
$

 
$
69,284

 
December 31, 2013
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
75,521

 
$
19,714

 
$
95,235

Past due 60 - 89 days
21,925

 
7,128

 
29,053

Past due 90 - 179 days
17,864

 
5,515

 
23,379

Past due 180 days or more
50,271

 
4,130

 
54,401

Total past due loans
165,581

 
36,487

 
202,068

Total current loans
5,871,849

 
524,947

 
6,396,796

Total recorded investment of mortgage loans1
$
6,037,430

 
$
561,434

 
$
6,598,864

 
 
 
 
 
 
In process of foreclosure (included above)2
$
37,582

 
$
1,106

 
$
38,688

Serious delinquency rate3
1.1
%
 
1.7
%
 
1.2
%
Past due 90 days or more and still accruing interest4
$

 
$
9,645

 
$
9,645

Non-accrual mortgage loans5
$
71,221

 
$

 
$
71,221


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

2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.

3
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment.

4
Represents government-insured mortgage loans that are 90 days or more past due.

5
Represents conventional mortgage loans that are 90 days or more past due and TDRs.

Individually Evaluated Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank considers all TDRs and collateral-dependent loans (i.e., loans in which repayment is expected to be provided solely by the sale of the underlying collateral) to be impaired. The following table summarizes the recorded investment and related allowance of the Bank's individually evaluated impaired loans (dollars in thousands):
 
March 31, 2014
 
December 31, 2013
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Related Allowance
Impaired loans with an allowance
$
23,575

 
$
4,800

 
$
19,719

 
$
3,500

Impaired loans without an allowance
35,241

 

 
21,121

 

Total
$
58,816

 
$
4,800

 
$
40,840

 
$
3,500



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The Bank did not recognize any interest income on impaired loans during the three months ended March 31, 2014 and 2013. The average recorded investment on impaired loans with an allowance was $21.6 million and $54.1 million during the three months ended March 31, 2014 and 2013. The average recorded investment on impaired loans without an allowance was $28.2 million and $1.1 million during the three months ended March 31, 2014 and 2013.

Real Estate Owned. At March 31, 2014 and December 31, 2013, the Bank had $10.8 million and $12.2 million of REO recorded as a component of "Other assets" in the Statements of Condition.

Term Securities Purchased Under Agreements to Resell

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will decrease accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for its term securities purchased under agreements to resell at March 31, 2014 and December 31, 2013.

Off-Balance Sheet Credit Exposures

At March 31, 2014 and December 31, 2013, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the Bank's off-balance sheet credit exposures, see "Note 14 — Commitments and Contingencies."

Note 10 — Derivatives and Hedging Activities

Nature of Business Activity

The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank's interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank's Enterprise Risk Management Policy (ERMP) establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.

The most common ways in which the Bank uses derivatives are to:
 
reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;

reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

preserve a favorable interest rate spread between the yield of an asset (e.g., advance) and the cost of the related liability (e.g., consolidated obligation). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;

mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., mortgage assets) and liabilities; and

manage embedded options in assets and liabilities.


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Application of Derivatives
 
Derivative instruments are used by the Bank in two ways:
 
as a fair value hedge of an associated financial instrument or firm commitment; or

as an economic hedge to manage certain defined risks in its Statements of Condition. These hedges are primarily used to manage mismatches between t