10-Q 1 fhlb03311510q.htm FORM 10-Q MARCH 31, 2015 FHLB 033115 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, 2015
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, 2015
 
Class B Stock, par value $100
 
35,313,090
 
 
 
 
 
 
 
 
 




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,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
341,844

 
$
495,197

Interest-bearing deposits
 
1,854

 
1,942

Securities purchased under agreements to resell
 
9,170,000

 
5,091,000

Federal funds sold
 
1,580,000

 
1,860,000

Investment securities
 
 
 
 
Trading securities (Note 3)
 
2,544,459

 
2,530,490

Available-for-sale securities (Note 4)
 
12,656,377

 
12,383,792

Held-to-maturity securities (fair value of $1,198,021 and $1,299,048) (Note 5)
 
1,105,821

 
1,211,460

Total investment securities
 
16,306,657

 
16,125,742

Advances (Note 7)
 
63,562,410

 
65,168,274

Mortgage loans held for portfolio, net
 
 
 
 
Mortgage loans held for portfolio (Note 8)
 
6,544,741

 
6,567,369

Allowance for credit losses on mortgage loans (Note 9)
 
(1,100
)
 
(4,900
)
Total mortgage loans held for portfolio, net
 
6,543,641

 
6,562,469

Accrued interest receivable
 
90,687

 
84,440

Premises, software, and equipment, net
 
19,792

 
18,794

Derivative assets, net (Note 10)
 
85,236

 
80,112

Other assets
 
29,987

 
35,975

TOTAL ASSETS
 
$
97,732,108

 
$
95,523,945

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
603,134

 
$
417,348

Non-interest-bearing
 
114,382

 
95,210

Total deposits
 
717,516

 
512,558

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
60,419,645

 
57,772,890

Bonds
 
32,031,318

 
32,362,110

Total consolidated obligations
 
92,450,963

 
90,135,000

Mandatorily redeemable capital stock (Note 12)
 
24,191

 
24,367

Accrued interest payable
 
102,816

 
89,509

Affordable Housing Program payable
 
43,725

 
41,232

Derivative liabilities, net (Note 10)
 
73,858

 
76,632

Other liabilities
 
31,631

 
332,499

TOTAL LIABILITIES
 
93,444,700

 
91,211,797

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 34,278 and 34,685 issued and outstanding shares
 
3,427,778

 
3,468,503

Retained earnings
 
 
 
 
Unrestricted
 
647,470

 
645,434

Restricted
 
81,910

 
74,989

Total retained earnings
 
729,380

 
720,423

Accumulated other comprehensive income
 
130,250

 
123,222

TOTAL CAPITAL
 
4,287,408

 
4,312,148

TOTAL LIABILITIES AND CAPITAL
 
$
97,732,108

 
$
95,523,945

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,
 
 
2015
 
2014
INTEREST INCOME
 
 
 
 
Advances
 
$
66,176

 
$
52,862

Prepayment fees on advances, net
 
507

 
166

Interest-bearing deposits
 
125

 
45

Securities purchased under agreements to resell
 
1,310

 
785

Federal funds sold
 
1,019

 
306

Trading securities
 
8,618

 
8,242

Available-for-sale securities
 
31,114

 
22,743

Held-to-maturity securities
 
8,098

 
12,247

Mortgage loans held for portfolio
 
59,198

 
62,303

Total interest income
 
176,165

 
159,699

INTEREST EXPENSE
 
 
 
 
Consolidated obligations - Discount notes
 
14,824

 
9,288

Consolidated obligations - Bonds
 
92,667

 
97,946

Deposits
 
15

 
22

Mandatorily redeemable capital stock
 
179

 
45

Total interest expense
 
107,685

 
107,301

NET INTEREST INCOME
 
68,480

 
52,398

Provision (reversal) for credit losses on mortgage loans
 
415

 
(334
)
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
68,065

 
52,732

OTHER (LOSS) INCOME
 
 
 
 
Net gains on trading securities
 
18,863

 
24,203

Net gains from sale of available-for-sale securities
 

 
826

Net gains on consolidated obligations held at fair value
 

 
2

Net losses on derivatives and hedging activities
 
(30,911
)
 
(23,084
)
Other, net
 
2,587

 
1,515

Total other (loss) income
 
(9,461
)
 
3,462

OTHER EXPENSE
 
 
 
 
Compensation and benefits
 
9,786

 
7,684

Contractual services
 
1,619

 
2,080

Professional fees
 
2,429

 
647

Other operating expenses
 
2,942

 
2,136

Federal Housing Finance Agency
 
1,537

 
938

Office of Finance
 
1,128

 
1,208

Other, net
 
691

 
369

Total other expense
 
20,132

 
15,062

NET INCOME BEFORE ASSESSMENTS
 
38,472

 
41,132

Affordable Housing Program assessments
 
3,865

 
4,118

NET INCOME
 
$
34,607

 
$
37,014

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,
 
 
2015
 
2014
Net income
 
$
34,607

 
$
37,014

Other comprehensive income
 
 
 
 
Net unrealized gains on available-for-sale securities
 
 
 
 
Unrealized gains
 
6,836

 
21,150

Reclassification of realized net gains included in net income
 

 
(826
)
Total net unrealized gains on available-for-sale securities
 
6,836

 
20,324

Pension and postretirement benefits
 
192

 
44

Total other comprehensive income
 
7,028

 
20,368

TOTAL COMPREHENSIVE INCOME
 
$
41,635

 
$
57,382

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, 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

Repurchases/redemptions 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
 
34,685

 
$
3,468,503

 
$
645,434

 
$
74,989

 
$
720,423

 
$
123,222

 
$
4,312,148

Proceeds from issuance of capital stock
 
4,119

 
411,917

 

 

 

 

 
411,917

Repurchases/redemptions of capital stock
 
(4,515
)
 
(451,549
)
 

 

 

 

 
(451,549
)
Net shares reclassified to mandatorily redeemable capital stock
 
(11
)
 
(1,093
)
 

 

 

 

 
(1,093
)
Comprehensive income
 

 

 
27,686

 
6,921

 
34,607

 
7,028

 
41,635

Cash dividends on capital stock
 

 

 
(25,650
)
 

 
(25,650
)
 

 
(25,650
)
BALANCE, MARCH 31, 2015
 
34,278

 
$
3,427,778

 
$
647,470

 
$
81,910

 
$
729,380

 
$
130,250

 
$
4,287,408

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,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
34,607

 
$
37,014

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
1,629

 
(3,732
)
Net gains on trading securities
 
(18,863
)
 
(24,203
)
Net gains from sale of available-for-sale securities
 

 
(826
)
Net gains on consolidated obligations held at fair value
 

 
(2
)
Net change in derivatives and hedging activities
 
22,173

 
21,358

Other adjustments
 
(376
)
 
(1,405
)
Net change in:
 
 
 
 
Accrued interest receivable
 
(9,917
)
 
(9,550
)
Other assets
 
790

 
2,432

Accrued interest payable
 
13,306

 
21,390

Other liabilities
 
558

 
(831
)
Total adjustments
 
9,300

 
4,631

Net cash provided by operating activities
 
43,907

 
41,645

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(117,818
)
 
(38,196
)
Securities purchased under agreements to resell
 
(4,079,000
)
 
710,000

Federal funds sold
 
280,000

 
(675,000
)
Premises, software, and equipment
 
(1,813
)
 
(889
)
Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
7,194

 
7,003

Available-for-sale securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
241,140

 
505,237

Purchases of long-term
 
(697,364
)
 
(1,216,342
)
Held-to-maturity securities
 
 
 
 
Proceeds from maturities of long-term
 
108,259

 
132,733

Advances
 
 
 
 
Principal collected
 
19,138,962

 
15,911,267

Originated
 
(17,500,548
)
 
(15,199,350
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
274,691

 
191,569

Originated or purchased
 
(261,241
)
 
(123,840
)
Proceeds from sales of foreclosed assets
 
2,420

 
5,419

Net cash (used in) provided by investing activities
 
(2,605,118
)
 
209,611

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,
 
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
204,958

 
3,233

Net payments on derivative contracts with financing elements
 
(1,930
)
 
(1,971
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
61,115,718

 
36,783,899

Bonds
 
7,926,797

 
4,021,253

Payments for maturing consolidated obligations
 
 
 
 
Discount notes
 
(58,469,742
)
 
(32,106,084
)
Bonds
 
(8,301,392
)
 
(8,998,239
)
Proceeds from issuance of capital stock
 
411,917

 
326,536

Payments for repurchases/redemptions of capital stock
 
(451,549
)
 
(347,539
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(1,269
)
 
(418
)
Cash dividends paid
 
(25,650
)
 
(18,867
)
Net cash provided by (used in) financing activities
 
2,407,858

 
(338,197
)
Net decrease in cash and due from banks
 
(153,353
)
 
(86,941
)
Cash and due from banks at beginning of the period
 
495,197

 
448,278

Cash and due from banks at end of the period
 
$
341,844

 
$
361,337

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
216,272

 
$
181,037

Affordable Housing Program payments
 
$
1,372

 
$
1,939

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage securities
 
$
3,548

 
$

Mortgage loan charge-offs
 
$
4,343

 
$
266

Transfers of mortgage loans to real estate owned
 
$
1,805

 
$
3,255

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.

Proposed Merger

On September 25, 2014, the Bank and the Federal Home Loan Bank of Seattle (Seattle Bank) executed a definitive merger agreement after receiving unanimous approval from their boards of directors. On December 19, 2014, the Finance Agency approved the merger application submitted by the banks, subject to the satisfaction of certain specified closing conditions. Following this approval, on January 12, 2015, the banks distributed a Joint Merger Disclosure Statement and voting materials to their members seeking ratification of the Merger Agreement by the members of both banks through a voting process which was completed on February 23, 2015. On February 27, 2015, the banks issued a joint press release announcing the ratification of the merger by members of both banks. The consummation of the merger will be effective only after the Finance Agency determines that the closing conditions identified in its approval letter have been satisfied and the Finance Agency determines that the combined bank's organizational certificate complies with the requirements of the Finance Agency's merger rules. Assuming the Finance Agency makes these determinations, the merger is expected to be effective on May 31, 2015. Material details of the Merger Agreement and the Joint Merger Disclosure Statement are included in the banks’ related Form 8-K filings with the Securities and Exchange Commission (SEC).

The Bank believes the 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, 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 would 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, 2014, which are contained in the Bank's 2014 Annual Report on Form 10-K filed with the SEC on March 6, 2015 (2014 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, 2015.

Descriptions of the Bank's significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2014 Form 10-K.

Reclassifications

Certain amounts in the Bank's 2014 financial statements have been reclassified to conform to the presentation for the three months ended March 31, 2015.

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

On August 8, 2014, the Financial Accounting Standards Board (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 became effective for the Bank beginning on January 1, 2015 and was adopted prospectively. The adoption of this guidance did not have a material effect on the Bank's financial condition, results of operations, or cash flows.

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 became effective for the Bank beginning on January 1, 2015. 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.

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 became effective for the Bank beginning on January 1, 2015 and was adopted prospectively. The adoption of this guidance did not have an effect on 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 and the charge-off requirements were implemented on January 1, 2015. This guidance did not have a material effect on the Bank's financial condition, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

Cloud Computing Arrangements

On April 15, 2015, the FASB issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license and how to account for it. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. The Bank can elect to adopt the amendments either (i) prospectively to all arrangements entered into or materially modified after the effective date or (ii) retrospectively. This guidance is not expected to affect the Bank’s financial condition, results of operations, or cash flows.

Simplifying the Presentation of Debt Issuance Costs

On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented on the statement of condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of condition. 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.

Amendments to the Consolidation Analysis

On February 18, 2015, the FASB issued amended guidance intended to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance primarily focuses on the following:

Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met. 

Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE.

Changing consolidation conclusions for entities in several industries that typically make use of limited partnerships or VIEs.

This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted, including adoption in an interim period. This guidance is not expected to affect the Bank’s financial condition, results of operations, or cash flows.


11


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 required by this guidance as of December 31, 2016. This guidance is not expected to have an effect on the Bank's financial condition, results of operations, cash flows, or financial statement disclosures.

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.

Note 3 — Trading Securities

Major Security Types

Trading securities were as follows (dollars in thousands):
 
March 31,
2015
 
December 31,
2014
Non-mortgage-backed securities
 
 
 
Other U.S. obligations
$
257,222

 
$
256,267

GSE obligations
1,532,786

 
1,531,811

Other1
284,324

 
280,215

     Total non-mortgage-backed securities
2,074,332

 
2,068,293

Mortgage-backed securities
 
 
 
GSE multifamily
470,127

 
462,197

Total fair value
$
2,544,459

 
$
2,530,490


1
Consists of taxable municipal bonds.

Net Gains on Trading Securities

During the three months ended March 31, 2015, the Bank recorded net holding gains of $18.9 million on its trading securities compared to net holding gains of $24.2 million for the same period in 2014. The Bank did not sell any trading securities during the three months ended March 31, 2015 and 2014.


12


Note 4 — Available-for-Sale Securities

Major Security Types

Available-for-sale (AFS) securities were as follows (dollars in thousands):
 
March 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
155,373

 
$
4,735

 
$

 
$
160,108

GSE obligations
987,599

 
24,174

 
(4
)
 
1,011,769

State or local housing agency obligations
35,529

 
88

 
(397
)
 
35,220

Other2
180,272

 
7,710

 

 
187,982

Total non-mortgage-backed securities
1,358,773

 
36,707

 
(401
)
 
1,395,079

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family
2,200,806

 
7,653

 

 
2,208,459

GSE single-family
1,894,163

 
20,481

 
(184
)
 
1,914,460

GSE multifamily
7,069,168

 
75,024

 
(5,813
)
 
7,138,379

Total mortgage-backed securities
11,164,137

 
103,158

 
(5,997
)
 
11,261,298

Total
$
12,522,910

 
$
139,865

 
$
(6,398
)
 
$
12,656,377


 
December 31, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations
$
158,864

 
$
4,761

 
$
(56
)
 
$
163,569

GSE obligations
993,681

 
22,682

 
(4,055
)
 
1,012,308

State or local housing agency obligations
36,320

 
176

 
(148
)
 
36,348

Other2
176,277

 
7,425

 

 
183,702

Total non-mortgage-backed securities
1,365,142

 
35,044

 
(4,259
)
 
1,395,927

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family
1,979,226

 
340

 
(3,875
)
 
1,975,691

GSE single-family
1,991,471

 
17,586

 
(150
)
 
2,008,907

GSE multifamily
6,921,322

 
85,334

 
(3,389
)
 
7,003,267

Total mortgage-backed securities
10,892,019

 
103,260

 
(7,414
)
 
10,987,865

Total
$
12,257,161

 
$
138,304

 
$
(11,673
)
 
$
12,383,792


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.


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):
 
March 31, 2015
 
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
$

 
$

 
$
48,499

 
$
(4
)
 
$
48,499

 
$
(4
)
State or local housing agency obligations
11,499

 
(68
)
 
6,116

 
(329
)
 
17,615

 
(397
)
Total non-mortgage-backed securities
11,499

 
(68
)
 
54,615

 
(333
)
 
66,114

 
(401
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
40,904

 
(6
)
 
100,583

 
(178
)
 
141,487

 
(184
)
GSE multifamily
1,838,368

 
(4,797
)
 
230,330

 
(1,016
)
 
2,068,698

 
(5,813
)
Total mortgage-backed securities
1,879,272

 
(4,803
)
 
330,913

 
(1,194
)
 
2,210,185

 
(5,997
)
Total
$
1,890,771

 
$
(4,871
)
 
$
385,528

 
$
(1,527
)
 
$
2,276,299

 
$
(6,398
)

 
December 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
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
$
34,993

 
$
(56
)
 
$

 
$

 
$
34,993

 
$
(56
)
GSE obligations
230,965

 
(286
)
 
109,669

 
(3,769
)
 
340,634

 
(4,055
)
State or local housing agency obligations

 

 
6,527

 
(148
)
 
6,527

 
(148
)
Total non-mortgage-backed securities
265,958

 
(342
)
 
116,196

 
(3,917
)
 
382,154

 
(4,259
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family
1,698,157

 
(3,875
)
 

 

 
1,698,157

 
(3,875
)
GSE single-family

 

 
107,910

 
(150
)
 
107,910

 
(150
)
GSE multifamily
1,331,057

 
(3,053
)
 
74,806

 
(336
)
 
1,405,863

 
(3,389
)
Total mortgage-backed securities
3,029,214

 
(6,928
)
 
182,716

 
(486
)
 
3,211,930

 
(7,414
)
Total
$
3,295,172

 
$
(7,270
)
 
$
298,912

 
$
(4,403
)
 
$
3,594,084

 
$
(11,673
)

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, 2015
 
December 31, 2014
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
89,447

 
$
90,484

 
$
66,673

 
$
66,904

Due after one year through five years
 
869,370

 
891,114

 
898,464

 
915,574

Due after five years through ten years
 
245,605

 
253,041

 
247,821

 
255,333

Due after ten years
 
154,351

 
160,440

 
152,184

 
158,116

Total non-mortgage-backed securities
 
1,358,773

 
1,395,079

 
1,365,142

 
1,395,927

Mortgage-backed securities
 
11,164,137

 
11,261,298

 
10,892,019

 
10,987,865

Total
 
$
12,522,910

 
$
12,656,377

 
$
12,257,161

 
$
12,383,792



14


Net Gains from Sale of AFS Securities

During the three months ended March 31, 2015, the Bank did not sell any 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.

Note 5 — Held-to-Maturity Securities

Major Security Types

Held-to-maturity (HTM) securities were as follows (dollars in thousands):
 
March 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
304,675

 
$
76,859

 
$

 
$
381,534

State or local housing agency obligations
58,588

 
5,267

 

 
63,855

Total non-mortgage-backed securities
363,263

 
82,126

 

 
445,389

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family
2,803

 
9

 

 
2,812

Other U.S. obligations commercial
1,178

 

 
(1
)
 
1,177

GSE single-family
714,702

 
10,678

 
(53
)
 
725,327

Private-label residential
23,875

 
123

 
(682
)
 
23,316

Total mortgage-backed securities
742,558

 
10,810

 
(736
)
 
752,632

Total
$
1,105,821

 
$
92,936

 
$
(736
)
 
$
1,198,021


 
December 31, 2014
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE obligations
$
305,126

 
$
69,730

 
$

 
$
374,856

State or local housing agency obligations
59,963

 
6,042

 

 
66,005

Total non-mortgage-backed securities
365,089

 
75,772

 

 
440,861

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family
3,247

 
11

 

 
3,258

Other U.S. obligations commercial
1,415

 

 
(1
)
 
1,414

GSE single-family
816,793

 
12,302

 
(31
)
 
829,064

Private-label residential
24,916

 
58

 
(523
)
 
24,451

Total mortgage-backed securities
846,371

 
12,371

 
(555
)
 
858,187

Total
$
1,211,460

 
$
88,143

 
$
(555
)
 
$
1,299,048


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


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):
 
March 31, 2015
 
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
$

 
$

 
$
373

 
$
(1
)
 
$
373

 
$
(1
)
GSE single-family
3,861

 
(7
)
 
36,676

 
(46
)
 
40,537

 
(53
)
Private-label residential

 

 
15,407

 
(682
)
 
15,407

 
(682
)
Total mortgage-backed securities
$
3,861

 
$
(7
)
 
$
52,456

 
$
(729
)
 
$
56,317

 
$
(736
)

 
December 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
$

 
$

 
$
248

 
$
(1
)
 
$
248

 
$
(1
)
GSE single-family
1,436

 
(4
)
 
38,607

 
(27
)
 
40,043

 
(31
)
Private-label residential

 

 
16,243

 
(523
)
 
16,243

 
(523
)
Total mortgage-backed securities
$
1,436

 
$
(4
)
 
$
55,098

 
$
(551
)
 
$
56,534

 
$
(555
)

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, 2015
 
December 31, 2014
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due after ten years
 
$
363,263

 
$
445,389

 
$
365,089

 
$
440,861

Total non-mortgage-backed securities
 
363,263

 
445,389

 
365,089

 
440,861

Mortgage-backed securities
 
742,558

 
752,632

 
846,371

 
858,187

Total
 
$
1,105,821

 
$
1,198,021

 
$
1,211,460

 
$
1,299,048


Note 6 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (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. 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 2014 Form 10-K.


16


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 eight percent over the twelve month period beginning January 1, 2015. For the vast majority of markets, the projected short-term housing price changes range from an increase of one percent to an increase of five percent. Thereafter, a unique path is projected for each geographical area based on an internally developed framework derived from historical data.

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, 2015, 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, 2015.

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 March 31, 2015:

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, 2015.

State or local 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 were 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, 2015.

Note 7 — Advances

Contractual Maturity

The following table summarizes the Bank's advances outstanding by contractual maturity (dollars in thousands):
 
 
March 31, 2015
 
December 31, 2014
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
261

 
3.28
 
$
66

 
3.28
Due in one year or less
 
6,422,064

 
0.84
 
7,997,497

 
0.66
Due after one year through two years
 
4,710,261

 
1.33
 
4,028,617

 
1.45
Due after two years through three years
 
4,187,208

 
2.06
 
4,437,280

 
1.68
Due after three years through four years
 
23,814,150

 
0.42
 
20,706,329

 
0.56
Due after four years through five years
 
17,706,098

 
0.36
 
21,447,326

 
0.33
Thereafter
 
6,473,752

 
0.93
 
6,335,093

 
0.98
Total par value
 
63,313,794

 
0.67
 
64,952,208

 
0.67
Premiums
 
133

 
 
 
137

 
 
Discounts
 
(6,020
)
 
 
 
(6,388
)
 
 
Fair value hedging adjustments
 
254,503

 
 
 
222,317

 
 
Total
 
$
63,562,410

 
 
 
$
65,168,274

 
 
 

17


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). 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 both March 31, 2015 and December 31, 2014, the Bank had callable advances outstanding totaling $44.6 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, 2015 and December 31, 2014, the Bank had putable advances outstanding totaling $2.1 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,
 
2015
 
2014
Gross prepayment fee income
$
265

 
$
331

Fair value hedging adjustments1
242

 
(165
)
Prepayment fees on advances, net
$
507

 
$
166


1
Represents the amortization/accretion of fair value hedging adjustments on closed advance fair value 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."

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,
2015
 
December 31,
2014
Fixed rate, long-term single-family mortgage loans
$
5,042,306

 
$
5,024,393

Fixed rate, medium-term1 single-family mortgage loans
1,421,520

 
1,462,014

Total unpaid principal balance
6,463,826

 
6,486,407

Premiums
81,322

 
82,206

Discounts
(11,461
)
 
(12,191
)
Basis adjustments from mortgage loan commitments
11,054

 
10,947

Total mortgage loans held for portfolio
$
6,544,741

 
$
6,567,369


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


18


The following table presents the Bank's mortgage loans held for portfolio by collateral or guarantee type (dollars in thousands):
 
March 31,
2015
 
December 31,
2014
Conventional mortgage loans
$
5,899,768

 
$
5,916,651

Government-insured mortgage loans
564,058

 
569,756

Total unpaid principal balance
$
6,463,826

 
$
6,486,407


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.

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.


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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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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, 2015 and 2014.

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, 2015 and December 31, 2014. Accordingly, the Bank has not recorded any allowance for credit losses for its credit products.

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 or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI 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 losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at March 31, 2015 and December 31, 2014. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Conventional Mortgage Loans

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

Homeowner Equity.

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

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 $1.2 million and $1.1 million during the three months ended March 31, 2015 and 2014. 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 $92.4 million and $92.2 million at March 31, 2015 and December 31, 2014.

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.


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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, including TDRs and collateral-dependent loans, for impairment. 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's collateral-dependent loans include loans in process of foreclosure, loans 180 days or more past due, and bankruptcy loans and TDRs 60 days or more past due. The Bank measures impairment of collateral-dependent loans based on the estimated fair value of the underlying collateral, which is determined using property values, less selling costs and expected proceeds from PMI.

A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The Bank evaluates whether to record a charge-off based upon the occurrence of a confirming event. Prior to January 1, 2015, charge-offs generally were recorded at the time a mortgage loan was transferred to real estate owned. Beginning January 1, 2015, the Bank began to also charge-off the portion of the outstanding conventional mortgage loan balance in excess of the fair value of the underlying collateral for all collateral-dependent mortgage loans. This change did not have a material effect on the Bank's financial condition or results of operations.

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.

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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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.


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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,
 
2015
 
2014
Balance, beginning of period
$
4,900

 
$
8,000

Charge-offs
(4,343
)
 
(266
)
Recoveries
128

 

Provision (reversal) for credit losses
415

 
(334
)
Balance, end of period
$
1,100

 
$
7,400


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,
2015
 
December 31,
2014
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
1,100

 
$
1,500

Individually evaluated for impairment

 
3,400

Total allowance for credit losses
$
1,100

 
$
4,900

Recorded investment1
 
 
 
Collectively evaluated for impairment
$
5,953,474

 
$
5,966,025

Individually evaluated for impairment, with or without a related allowance
45,472

 
50,151

Total recorded investment
$
5,998,946

 
$
6,016,176


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

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The table below summarizes the Bank's key credit quality indicators for mortgage loans (dollars in thousands):
 
March 31, 2015
 
Conventional
 
Government Insured
 
Total
Past due 30 - 59 days
$
65,744

 
$
18,297

 
$
84,041

Past due 60 - 89 days
20,826

 
5,118

 
25,944

Past due 90 - 179 days
14,172

 
5,767

 
19,939

Past due 180 days or more
35,779

 
6,409

 
42,188

Total past due mortgage loans
136,521

 
35,591

 
172,112

Total current mortgage loans
5,862,425

 
544,311

 
6,406,736

Total recorded investment of mortgage loans1
$
5,998,946

 
$
579,902

 
$
6,578,848

 
 
 
 
 
 
In process of foreclosure (included above)2
$
25,614

 
$
4,485

 
$
30,099

Serious delinquency rate3
0.8
%
 
2.1
%
 
0.9
%
Past due 90 days or more and still accruing interest4
$

 
$
12,176

 
$
12,176

Non-accrual mortgage loans5
$
54,425

 
$

 
$
54,425


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.


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The table below summarizes the Bank's key credit quality indicators for mortgage loans (dollars in thousands):
 
December 31, 2014
 
Conventional
 
Government Insured
 
Total