10-Q 1 fhlb09301410q.htm FORM 10-Q FHLB 093014 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, 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 October 31, 2014
 
Class B Stock, par value $100
 
34,669,277
 
 
 
 
 
 
 
 
 




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(Unaudited)

(dollars and shares in thousands, except capital stock par value)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
 
Cash and due from banks
 
$
9,477,515

 
$
448,278

Interest-bearing deposits
 
1,772

 
1,863

Securities purchased under agreements to resell
 
2,060,000

 
8,200,000

Federal funds sold
 
2,635,000

 
1,200,000

Investment securities
 
 
 
 
Trading securities (Note 3)
 
1,046,748

 
1,018,373

Available-for-sale securities (Note 4)
 
10,878,835

 
7,932,520

Held-to-maturity securities (fair value of $1,404,834 and $1,842,599) (Note 5)
 
1,325,741

 
1,778,306

Total investment securities
 
13,251,324

 
10,729,199

Advances (Note 7)
 
64,220,363

 
45,650,220

Mortgage loans held for portfolio, net
 
 
 
 
Mortgage loans held for portfolio (Note 8)
 
6,529,465

 
6,565,293

Allowance for credit losses on mortgage loans (Note 9)
 
(5,600
)
 
(8,000
)
Total mortgage loans held for portfolio, net
 
6,523,865

 
6,557,293

Accrued interest receivable
 
85,960

 
72,561

Premises, software, and equipment, net
 
19,077

 
18,968

Derivative assets, net (Note 10)
 
95,155

 
93,011

Other assets
 
28,686

 
32,626

TOTAL ASSETS
 
$
98,398,717

 
$
73,004,019

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
395,183

 
$
467,362

Non-interest-bearing
 
76,143

 
231,704

Total deposits
 
471,326

 
699,066

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
62,802,758

 
38,136,652

Bonds (includes $0 and $50,033 at fair value under the fair value option)
 
30,387,302

 
30,195,568

Total consolidated obligations
 
93,190,060

 
68,332,220

Mandatorily redeemable capital stock (Note 12)
 
8,400

 
8,719

Accrued interest payable
 
102,201

 
81,420

Affordable Housing Program payable
 
41,400

 
37,688

Derivative liabilities, net (Note 10)
 
52,429

 
57,420

Other liabilities
 
213,371

 
330,619

TOTAL LIABILITIES
 
94,079,187

 
69,547,152

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 34,557 and 26,916 issued and outstanding shares
 
3,455,729

 
2,691,568

Retained earnings
 
 
 
 
Unrestricted
 
643,306

 
627,473

Restricted
 
68,900

 
50,782

Total retained earnings
 
712,206

 
678,255

Accumulated other comprehensive income
 
151,595

 
87,044

TOTAL CAPITAL
 
4,319,530

 
3,456,867

TOTAL LIABILITIES AND CAPITAL
 
$
98,398,717

 
$
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
(Unaudited)

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
59,662

 
$
46,542

 
$
166,525

 
$
140,392

Prepayment fees on advances, net
 
(401
)
 
1,351

 
2,983

 
4,437

Interest-bearing deposits
 
65

 
57

 
174

 
325

Securities purchased under agreements to resell
 
1,251

 
289

 
2,868

 
2,831

Federal funds sold
 
737

 
211

 
1,533

 
909

Trading securities
 
8,231

 
8,370

 
24,714

 
24,920

Available-for-sale securities
 
27,531

 
19,569

 
74,790

 
54,445

Held-to-maturity securities
 
10,253

 
14,619

 
33,892

 
51,414

Mortgage loans held for portfolio
 
60,584

 
62,020

 
184,167

 
190,923

Total interest income
 
167,913

 
153,028

 
491,646

 
470,596

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
12,314

 
2,431

 
31,705

 
6,114

Consolidated obligations - Bonds
 
91,607

 
99,734

 
283,102

 
309,442

Deposits
 
13

 
28

 
55

 
92

Borrowings from other FHLBanks
 

 
1

 
1

 
1

Mandatorily redeemable capital stock
 
43

 
93

 
134

 
235

Total interest expense
 
103,977

 
102,287

 
314,997

 
315,884

NET INTEREST INCOME
 
63,936

 
50,741

 
176,649

 
154,712

Reversal for credit losses on mortgage loans
 
(1,412
)
 

 
(1,746
)
 

NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES
 
65,348

 
50,741

 
178,395

 
154,712

OTHER (LOSS) INCOME
 
 
 
 
 
 
 
 
Other-than-temporary impairment losses
 

 
(1,293
)
 

 
(1,293
)
Net gains (losses) on trading securities
 
641

 
(7,851
)
 
47,175

 
(87,153
)
Net gains from sale of available-for-sale securities
 

 
1,094

 
826

 
3,039

Net gains from sale of held-to-maturity securities
 
6,404

 

 
8,887

 

Net gains on consolidated obligations held at fair value
 

 
28

 
2

 
1,001

Net (losses) gains on derivatives and hedging activities
 
(16,833
)
 
2,364

 
(78,793
)
 
72,343

Net losses on extinguishment of debt
 
(9,915
)
 

 
(12,651
)
 
(25,742
)
Other, net
 
1,645

 
2,243

 
5,289

 
6,975

Total other loss
 
(18,058
)
 
(3,415
)
 
(29,265
)
 
(30,830
)
OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
8,663

 
7,103

 
24,267

 
21,518

Contractual services
 
1,136

 
1,556

 
4,995

 
4,673

Professional fees
 
1,815

 
823

 
3,492

 
2,382

Other operating expenses
 
2,332

 
2,413

 
6,902

 
7,000

Federal Housing Finance Agency
 
720

 
608

 
2,377

 
2,193

Office of Finance
 
1,036

 
685

 
2,797

 
2,141

Other, net
 
2,049

 
671

 
3,633

 
2,766

Total other expense
 
17,751

 
13,859

 
48,463

 
42,673

NET INCOME BEFORE ASSESSMENTS
 
29,539

 
33,467

 
100,667

 
81,209

Affordable Housing Program assessments
 
2,959

 
3,357

 
10,081

 
8,145

NET INCOME
 
$
26,580

 
$
30,110

 
$
90,586

 
$
73,064

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

4



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

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
26,580

 
$
30,110

 
$
90,586

 
$
73,064

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
 
 
 
 
 
 
 
Unrealized gains (losses)
 
17,531

 
(13,809
)
 
65,190

 
(75,767
)
Reclassification adjustment for other-than-temporary impairment losses on available-for-sale securities included in net income
 

 
1,293

 

 
1,293

Reclassification of realized net gains included in net income
 

 
(1,094
)
 
(826
)
 
(3,039
)
Total net unrealized gains (losses) on available-for-sale securities
 
17,531

 
(13,610
)
 
64,364

 
(77,513
)
Pension and postretirement benefits
 
98

 
141

 
187

 
588

Total other comprehensive income (loss)
 
17,629

 
(13,469
)
 
64,551

 
(76,925
)
TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
44,209

 
$
16,641

 
$
155,137

 
$
(3,861
)
The accompanying notes are an integral part of these financial statements.




5


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(Unaudited)

 
 
Capital Stock
Class B (putable)
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
 
(dollars and shares in thousands)
 
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
 
19,603

 
1,960,276

 

 

 

 

 
1,960,276

Repurchases/redemptions 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
20,293

 
2,029,303

 

 

 

 

 
2,029,303

Repurchases/redemptions of capital stock
 
(12,607
)
 
(1,260,698
)
 

 

 

 

 
(1,260,698
)
Net shares reclassified to mandatorily redeemable capital stock
 
(45
)
 
(4,444
)
 

 

 

 

 
(4,444
)
Comprehensive income
 

 

 
72,468

 
18,118

 
90,586

 
64,551

 
155,137

Cash dividends on capital stock
 

 

 
(56,635
)
 

 
(56,635
)
 

 
(56,635
)
BALANCE, SEPTEMBER 30, 2014
 
34,557

 
$
3,455,729

 
$
643,306

 
$
68,900

 
$
712,206

 
$
151,595

 
$
4,319,530

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




6


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

 
 
For the Nine Months Ended
 
 
September 30,
(dollars in thousands)
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
90,586

 
$
73,064

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
10,742

 
2,707

Other-than-temporary impairment losses
 

 
1,293

Net (gains) losses on trading securities
 
(47,175
)
 
87,153

Net gains from sale of available-for-sale securities
 
(826
)
 
(3,039
)
Net gains from sale of held-to-maturity securities
 
(8,887
)
 

Net gains on consolidated obligations held at fair value
 
(2
)
 
(1,001
)
Net change in derivatives and hedging activities
 
58,227

 
(79,538
)
Net losses on extinguishment of debt
 
12,651

 
25,742

Other adjustments
 
(4,226
)
 
1,280

Net change in:
 
 
 
 
Accrued interest receivable
 
(16,124
)
 
(8,275
)
Other assets
 
2,882

 
1,691

Accrued interest payable
 
20,748

 
(455
)
Other liabilities
 
4,605

 
(1,825
)
Total adjustments
 
32,615

 
25,733

Net cash provided by operating activities
 
123,201

 
98,797

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(50,079
)
 
129,546

Securities purchased under agreements to resell
 
6,140,000

 
975,000

Federal funds sold
 
(1,435,000
)
 
375,000

Premises, software, and equipment
 
(2,645
)
 
(6,197
)
Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
18,800

 
15,928

Purchases of long-term
 

 
(140,579
)
Available-for-sale securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
905,699

 
948,144

Purchases of long-term
 
(3,749,223
)
 
(2,277,344
)
Held-to-maturity securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
460,307

 
1,087,245

Advances
 
 
 
 
Principal collected
 
66,484,479

 
46,552,289

Originated
 
(85,144,126
)
 
(65,935,653
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
657,185

 
1,338,707

Originated or purchased
 
(635,972
)
 
(1,011,847
)
Proceeds from sales of foreclosed assets
 
12,498

 
19,763

Net cash used in investing activities
 
(16,338,077
)
 
(17,929,998
)
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)
(Unaudited)

 
 
For the Nine Months Ended
 
 
September 30,
(dollars in thousands)
 
2014
 
2013
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
(297,163
)
 
(399,416
)
Net payments on derivative contracts with financing elements
 
(6,022
)
 
(5,987
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
159,080,542

 
90,857,889

Bonds
 
21,536,831

 
30,389,908

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(134,416,372
)
 
(71,313,457
)
Bonds
 
(21,360,910
)
 
(32,186,422
)
Bonds transferred to other FHLBanks
 

 
(172,741
)
Proceeds from issuance of capital stock
 
2,029,303

 
1,960,276

Payments for repurchases/redemptions of capital stock
 
(1,260,698
)
 
(1,313,113
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(4,763
)
 
(16,119
)
Cash dividends paid
 
(56,635
)
 
(39,058
)
Net cash provided by financing activities
 
25,244,113

 
17,761,760

Net increase (decrease) in cash and due from banks
 
9,029,237

 
(69,441
)
Cash and due from banks at beginning of the period
 
448,278

 
252,113

Cash and due from banks at end of the period
 
$
9,477,515

 
$
182,672

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Interest paid
 
$
602,319

 
$
630,785

Affordable Housing Program payments
 
$
6,369

 
$
7,654

Transfers of mortgage loans to real estate owned
 
$
7,221

 
$
12,465

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.

Potential Merger

On July 31, 2014, the Bank and the Federal Home Loan Bank of Seattle (Seattle Bank) announced that they had entered into an exclusivity arrangement regarding a potential merger of the two banks. A detailed due diligence process was completed by both banks throughout the third quarter of 2014 for the purpose of weighing the long-term benefits and impact of a potential merger.

On September 25, 2014, the boards of both banks unanimously approved, and the banks executed, a definitive merger agreement. Material details of the merger agreement are included in the Bank’s Form 8-K filed with the Securities and Exchange Commission (SEC) on September 25, 2014. The closing of the merger is subject to certain closing conditions, including approval by the Finance Agency and ratification by the member-owners of both banks. A merger application was sent to the Finance Agency for approval on October 31, 2014.

The boards of both banks believe that a merger would combine two complementary organizations with similar cultures, membership characteristics, and solid financial positions. The combined bank would remain a member-owned and member-centric cooperative, deeply focused on helping its members strengthen their institutions to better serve their customers and communities. It would provide funding solutions for more than 1,500 member financial institutions in 13 states and the U.S. Pacific territories. The combined bank is currently expected to be headquartered in Des Moines. 


9


Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the 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 SEC 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 accordance with GAAP requires management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these 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 and nine months ended September 30, 2014. Additionally, certain other prior period amounts have been revised and may not agree to the Bank's 2013 Form 10-K. These amounts were not deemed to be material.

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 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 has corrected the recorded investment classification error in the Bank's 2014 Form 10-Q filings and the average recorded investment classification error will be corrected in the Bank's 2014 Form 10-K filing. 

The following table summarizes the revisions made to the Bank’s allowance for credit losses footnote for December 31, 2013 in the 2014 Form 10-Q filings (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 allowance for credit losses footnote for the year ended December 31, 2013 in the 2014 Form 10-K filing (dollars in thousands):
 
Previously Reported
 
Revised
Average recorded investment on impaired loans with an allowance
$
48,930

 
$
38,932

Average recorded investment on impaired loans without an allowance
1,162

 
11,160



10


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

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

On August 27, 2014, the FASB issued guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the financial statements are available to be issued, when applicable. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the assessed period. This guidance becomes effective for the interim and annual periods ending after December 15, 2016, and early application is permitted. Management will be required to make the initial assessment as of December 31, 2016.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

On August 8, 2014, the FASB issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be de-recognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance becomes effective for the interim and annual periods beginning after December 15, 2014, and may be adopted using either the modified retrospective transition method or the prospective transition method. The Bank is in the process of evaluating this guidance, and its effect on the Bank's financial condition, results of operations, or cash flows is not expected to be material.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

On June 12, 2014, the FASB issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financing. This amendment requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. In addition, this guidance requires additional disclosures, particularly on transfers accounted for as sales that are economically similar to repurchase agreements and on the nature of collateral pledged in repurchase agreements accounted for as secured borrowings. This guidance becomes effective for the interim or annual period beginning after December 15, 2014, and early adoption is prohibited. The changes in accounting for transactions outstanding on the effective date are required to be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This guidance is not expected to affect the Bank's financial condition, results of operations, cash flows, or financial statement disclosures.


11


Revenue from Contracts with Customers

On May 28, 2014, the FASB issued guidance on revenue from contracts with customers. This guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, or lease contracts. This guidance becomes effective for the interim and annual reporting periods beginning after December 15, 2016, and early application is not permitted. The guidance provides entities with the option of using the following two methods upon adoption: a full retrospective method, retrospectively to each prior reporting period presented; or a transition method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. The Bank is in the process of evaluating this guidance and its effect on the Bank's financial condition, results of operations, or cash flows is not expected to be material.

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.

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 is not expected to 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):
 
September 30,
2014
 
December 31,
2013
Non-mortgage-backed securities
 
 
 
Other U.S. obligations
$
259,097

 
$
266,898

GSE obligations
59,652

 
54,971

Other1
275,248

 
263,354

     Total non-mortgage-backed securities
593,997

 
585,223

Mortgage-backed securities
 
 
 
GSE residential
452,751

 
433,150

Total fair value
$
1,046,748

 
$
1,018,373


1
Consists of taxable municipal bonds.


12


Net Gains (Losses) on Trading Securities

During the three and nine months ended September 30, 2014, the Bank recorded net holding gains of $0.7 million and $47.2 million on its trading securities compared to net holding losses of $7.9 million and $87.2 million for the same periods in 2013.

Note 4 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities were as follows (dollars in thousands):
 
September 30, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
162,401

 
$
5,639

 
$

 
$
168,040

GSE obligations
1,033,937

 
24,730

 
(3,646
)
 
1,055,021

State or local housing agency obligations
25,219

 
55

 
(556
)
 
24,718

Other2
170,153

 
9,312

 

 
179,465

Total non-mortgage-backed securities
1,391,710

 
39,736

 
(4,202
)
 
1,427,244

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations residential
1,368,359

 
5,679

 

 
1,374,038

GSE residential
7,966,003

 
114,085

 
(2,535
)
 
8,077,553

Total mortgage-backed securities
9,334,362

 
119,764

 
(2,535
)
 
9,451,591

Total
$
10,726,072

 
$
159,500

 
$
(6,737
)
 
$
10,878,835


 
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/or taxable municipal bonds.
 

13


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):
 
September 30, 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
$
230,884

 
$
(357
)
 
$
110,552

 
$
(3,289
)
 
$
341,436

 
$
(3,646
)
State or local housing agency obligations

 

 
23,208

 
(556
)
 
23,208

 
(556
)
Total non-mortgage-backed securities
230,884

 
(357
)
 
133,760

 
(3,845
)
 
364,644

 
(4,202
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE residential
788,551

 
(2,301
)
 
188,814

 
(234
)
 
977,365

 
(2,535
)
Total
$
1,019,435

 
$
(2,658
)
 
$
322,574

 
$
(4,079
)
 
$
1,342,009

 
$
(6,737
)
 
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
)

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):
 
 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
12,650

 
$
12,954

 
$
9,981

 
$
10,071

Due after one year through five years
 
960,828

 
980,145

 
1,031,840

 
1,056,323

Due after five years through ten years
 
277,219

 
285,857

 
331,391

 
339,266

Due after ten years
 
141,013

 
148,288

 
186,030

 
189,308

Total non-mortgage-backed securities
 
1,391,710

 
1,427,244

 
1,559,242

 
1,594,968

Mortgage-backed securities
 
9,334,362

 
9,451,591

 
6,284,879

 
6,337,552

Total
 
$
10,726,072

 
$
10,878,835

 
$
7,844,121

 
$
7,932,520


Net Gains from Sale of AFS Securities

During the three months ended September 30, 2014, the Bank did not sell any AFS securities. During the nine months ended September 30, 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 and nine months ended September 30, 2013, the Bank received $88.0 million and $100.6 million in proceeds from the sale of AFS securities and recognized gross gains of $1.1 million and $3.0 million.

14


Note 5 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities were as follows (dollars in thousands):
 
September 30, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
305,561

 
$
58,633

 
$

 
$
364,194

State or local housing agency obligations
64,170

 
5,680

 

 
69,850

Other2
211

 

 

 
211

Total non-mortgage-backed securities
369,942

 
64,313

 

 
434,255

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations residential
3,717

 
12

 

 
3,729

Other U.S. obligations commercial
1,471

 

 
(1
)
 
1,470

GSE residential
924,462

 
15,264

 
(45
)
 
939,681

Private-label residential
26,149

 
52

 
(502
)
 
25,699

Total mortgage-backed securities
955,799

 
15,328

 
(548
)
 
970,579

Total
$
1,325,741

 
$
79,641

 
$
(548
)
 
$
1,404,834


 
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.
 

15


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):
 
September 30, 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
$

 
$

 
$
258

 
$
(1
)
 
$
258

 
$
(1
)
GSE residential

 

 
54,470

 
(45
)
 
54,470

 
(45
)
Private-label residential

 

 
17,149

 
(502
)
 
17,149

 
(502
)
Total mortgage-backed securities
$

 
$

 
$
71,877

 
$
(548
)
 
$
71,877

 
$
(548
)
 
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
)

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):
 
 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
211

 
$
211

 
$
807

 
$
807

Due after ten years
 
369,731

 
434,044

 
379,515

 
412,895

Total non-mortgage-backed securities
 
369,942

 
434,255

 
380,322

 
413,702

Mortgage-backed securities
 
955,799

 
970,579

 
1,397,984

 
1,428,897

Total
 
$
1,325,741

 
$
1,404,834

 
$
1,778,306

 
$
1,842,599


Net Gains from Sale of HTM Securities

During the three months ended September 30, 2014, the Bank sold an HTM security with a carrying amount of $45.7 million and recognized a gross gain of $6.4 million. During the nine months ended September 30, 2014, the Bank sold HTM securities with a carrying amount of $65.7 million and recognized gross gains of $8.9 million. The HTM securities sold had less than 15 percent of the acquired principal outstanding at the time of sale. As such, the sales were considered maturities for purpose of security classification and did not impact the Bank's ability and intent to hold the remaining HTM securities through their stated maturities. During the three and nine months ended September 30, 2013, the Bank did not sell any HTM securities.

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.


16


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. For a description of these models, refer to "Item 8. Financial Statements and Supplementary Data - Note 7 - Other-than-Temporary Impairment" in the Bank's 2013 Form 10-K.

The FHLBanks' 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 July 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from zero percent to an increase of six percent. Thereafter, a unique path is projected for each geographical area based on an internally developed framework derived from historical data. Prior to the second quarter of 2014, home price projections following the short-term period were projected to recover using one of five different recovery paths.

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, 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 September 30, 2014.

All Other AFS and HTM 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, 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 September 30, 2014.

State housing agency obligations. 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 September 30, 2014.


17


Note 7 — Advances

Contractual Maturity

The following table summarizes the Bank's advances outstanding by contractual maturity (dollars in thousands):
 
 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
722

 
3.28
 
$

 
Due in one year or less
 
9,620,032

 
0.50
 
6,948,856

 
0.60
Due after one year through two years
 
3,816,682

 
1.52
 
4,479,162

 
0.95
Due after two years through three years
 
4,357,848

 
1.48
 
2,936,056

 
1.76
Due after three years through four years
 
17,925,309

 
0.63
 
3,298,142

 
2.28
Due after four years through five years
 
19,372,056

 
0.35
 
20,558,211

 
0.54
Thereafter
 
8,927,245

 
0.75
 
7,139,820

 
0.85
Total par value
 
64,019,894

 
0.66
 
45,360,247

 
0.84
Premiums
 
141

 
 
 
153

 
 
Discounts
 
(6,762
)
 
 
 
(7,879
)
 
 
Fair value hedging adjustments
 
207,090

 
 
 
297,699

 
 
Total
 
$
64,220,363

 
 
 
$
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 September 30, 2014 and December 31, 2013, the Bank had callable advances outstanding totaling $41.7 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 September 30, 2014 and December 31, 2013, the Bank had putable advances outstanding totaling $2.2 billion and $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
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Gross prepayment fee income
$
4,643

 
$
1,650

 
$
21,810

 
$
15,460

Fair value hedging adjustments1
(5,044
)
 
(299
)
 
(18,827
)
 
(11,023
)
Prepayment fees on advances, net
$
(401
)
 
$
1,351

 
$
2,983

 
$
4,437


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."


18


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,
2014
 
December 31,
2013
Fixed rate, long-term single family mortgage loans
$
4,946,728

 
$
4,823,351

Fixed rate, medium-term1 single family mortgage loans
1,504,430

 
1,668,190

Total unpaid principal balance
6,451,158

 
6,491,541

Premiums
81,471

 
80,911

Discounts
(13,001
)
 
(15,652
)
Basis adjustments from mortgage loan commitments
9,837

 
8,493

Total mortgage loans held for portfolio
$
6,529,465

 
$
6,565,293


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):
 
September 30,
2014
 
December 31,
2013
Conventional mortgage loans
$
5,884,401

 
$
5,944,999

Government-insured mortgage loans
566,757

 
546,542

Total unpaid principal balance
$
6,451,158

 
$
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.


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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 September 30, 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 September 30, 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 nine months ended September 30, 2014