10-Q 1 fhlb09301510q.htm FHLB DES MOINES Q3 2015 10-Q 10-Q
 
 
 
 
 
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, 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 October 31, 2015
 
Class B Stock, par value $100
 
41,897,735
 
 
 
 
 
 
 
 
 




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 2 - Merger
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 16 - Activities with Stockholders
 
 
 
 
 
 
Note 17 - Activities with Other FHLBanks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in thousands, except capital stock par value)
(Unaudited)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
765,478

 
$
495,197

Interest-bearing deposits
 
1,943

 
1,942

Securities purchased under agreements to resell
 
5,000,000

 
5,091,000

Federal funds sold
 
2,180,000

 
1,860,000

Investment securities
 
 
 
 
Trading securities (Note 4)
 
2,572,725

 
2,530,490

Available-for-sale securities (Note 5)
 
21,755,407

 
12,383,792

Held-to-maturity securities (fair value of $6,485,530 and $1,299,048) (Note 6)
 
6,400,683

 
1,211,460

Total investment securities
 
30,728,815

 
16,125,742

Advances (includes $7,981 and $0 at fair value under the fair value option) (Note 8)
 
74,484,088

 
65,168,274

Mortgage loans held for portfolio, net
 
 
 
 
Mortgage loans held for portfolio (Note 9)
 
6,879,410

 
6,567,369

Allowance for credit losses on mortgage loans (Note 10)
 
(1,252
)
 
(4,900
)
Total mortgage loans held for portfolio, net
 
6,878,158

 
6,562,469

Accrued interest receivable
 
130,590

 
84,440

Premises, software, and equipment, net
 
22,485

 
18,794

Derivative assets, net (Note 11)
 
116,251

 
80,112

Other assets
 
52,514

 
35,975

TOTAL ASSETS
 
$
120,360,322

 
$
95,523,945

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
936,265

 
$
417,348

Non-interest-bearing
 
69,735

 
95,210

Total deposits
 
1,006,000

 
512,558

Consolidated obligations (Note 12)
 
 
 
 
Discount notes (includes $1,999,966 and $0 at fair value under the fair value option)
 
77,246,870

 
57,772,890

Bonds (includes $1,581,583 and $0 at fair value under the fair value option)
 
36,488,058

 
32,362,110

Total consolidated obligations
 
113,734,928

 
90,135,000

Mandatorily redeemable capital stock (Note 13)
 
105,916

 
24,367

Accrued interest payable
 
148,830

 
89,509

Affordable Housing Program payable
 
60,727

 
41,232

Derivative liabilities, net (Note 11)
 
127,750

 
76,632

Other liabilities
 
57,849

 
332,499

TOTAL LIABILITIES
 
115,242,000

 
91,211,797

Commitments and contingencies (Note 15)
 

 

CAPITAL (Note 13)
 
 
 
 
Capital stock - Class B putable ($100 par value); 41,260 and 34,685 issued and outstanding shares
 
4,126,027

 
3,468,503

Additional capital from merger
 
220,581

 

Retained earnings
 
 
 
 
Unrestricted
 
675,255

 
645,434

Restricted
 
95,050

 
74,989

Total retained earnings
 
770,305

 
720,423

Accumulated other comprehensive income
 
1,409

 
123,222

TOTAL CAPITAL
 
5,118,322

 
4,312,148

TOTAL LIABILITIES AND CAPITAL
 
$
120,360,322

 
$
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
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
80,371

 
$
59,662

 
$
209,628

 
$
166,525

Prepayment fees on advances, net
 
283

 
(401
)
 
9,323

 
2,983

Interest-bearing deposits
 
160

 
65

 
418

 
174

Securities purchased under agreements to resell
 
1,674

 
1,251

 
4,329

 
2,868

Federal funds sold
 
1,333

 
737

 
3,620

 
1,533

Trading securities
 
9,353

 
8,231

 
26,997

 
24,714

Available-for-sale securities
 
48,072

 
27,531

 
115,369

 
74,790

Held-to-maturity securities
 
18,916

 
10,253

 
39,563

 
33,892

Mortgage loans held for portfolio
 
62,789

 
60,584

 
182,369

 
184,167

Total interest income
 
222,951

 
167,913

 
591,616

 
491,646

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
22,928

 
12,314

 
52,628

 
31,705

Consolidated obligations - Bonds
 
111,511

 
91,607

 
301,636

 
283,102

Deposits
 
92

 
13

 
146

 
55

Borrowings from other FHLBanks
 

 

 
1

 
1

Mandatorily redeemable capital stock
 
982

 
43

 
1,614

 
134

Total interest expense
 
135,513

 
103,977

 
356,025

 
314,997

NET INTEREST INCOME
 
87,438

 
63,936

 
235,591

 
176,649

Provision (reversal) for credit losses on mortgage loans
 
469

 
(1,412
)
 
1,367

 
(1,746
)
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
86,969

 
65,348

 
234,224

 
178,395

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
16,814

 
641

 
8,588

 
47,175

Net gains (losses) from sale of available-for-sale securities
 

 

 

 
826

Net gains (losses) from sale of held-to-maturity securities
 

 
6,404

 

 
8,887

Net gains (losses) on financial instruments held at fair value
 
461

 

 
71

 
2

Net gains (losses) on derivatives and hedging activities
 
(43,602
)
 
(16,833
)
 
(38,767
)
 
(78,793
)
Net gains (losses) on extinguishment of debt
 

 
(9,915
)
 

 
(12,651
)
Gains on litigation settlements, net
 
12,500

 

 
12,500

 

Other, net
 
2,070

 
1,645

 
2,942

 
5,289

Total other income (loss)
 
(11,757
)
 
(18,058
)
 
(14,666
)
 
(29,265
)
OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
12,439

 
8,663

 
33,939

 
24,267

Contractual services
 
3,830

 
1,136

 
8,454

 
4,995

Professional fees
 
4,531

 
1,090

 
6,436

 
2,767

Merger related expenses
 
2,767

 
732

 
38,119

 
732

Other operating expenses
 
4,178

 
2,325

 
10,111

 
6,895

Federal Housing Finance Agency
 
1,930

 
720

 
5,030

 
2,377

Office of Finance
 
1,372

 
1,036

 
3,758

 
2,797

Other, net
 
797

 
2,049

 
2,083

 
3,633

Total other expense
 
31,844

 
17,751

 
107,930

 
48,463

NET INCOME BEFORE ASSESSMENTS
 
43,368

 
29,539

 
111,628

 
100,667

Affordable Housing Program assessments
 
4,434

 
2,959

 
11,324

 
10,081

NET INCOME
 
$
38,934

 
$
26,580

 
$
100,304

 
$
90,586

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

4



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

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
38,934

 
$
26,580

 
$
100,304

 
$
90,586

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
 
 
 
 
 
 
 
Unrealized gains (losses)
 
(119,929
)
 
17,531

 
(122,289
)
 
65,190

Reclassification of realized net gains included in net income
 

 

 

 
(826
)
Total net unrealized gains (losses) on available-for-sale securities
 
(119,929
)
 
17,531

 
(122,289
)
 
64,364

Pension and postretirement benefits
 
92

 
98

 
476

 
187

Total other comprehensive income (loss)
 
(119,837
)
 
17,629

 
(121,813
)
 
64,551

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
(80,903
)
 
$
44,209

 
$
(21,509
)
 
$
155,137

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 A (putable)
 
Capital Stock Class B (putable)
 
Total Capital Stock
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Shares
 
Par Value
BALANCE, DECEMBER 31, 2013
 

 
$

 
26,916

 
$
2,691,568

 
26,916

 
$
2,691,568

Proceeds from issuance of capital stock
 

 

 
20,293

 
2,029,303

 
20,293

 
2,029,303

Repurchases/redemptions of capital stock
 

 

 
(12,607
)
 
(1,260,698
)
 
(12,607
)
 
(1,260,698
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
(45
)
 
(4,444
)
 
(45
)
 
(4,444
)
Comprehensive income (loss)
 

 

 

 

 

 

Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, SEPTEMBER 30, 2014
 

 
$

 
34,557

 
$
3,455,729

 
34,557

 
$
3,455,729

 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
 

 
$

 
34,685

 
$
3,468,503

 
34,685

 
$
3,468,503

Proceeds from issuance of capital stock
 

 

 
22,345

 
2,234,472

 
22,345

 
2,234,472

Capital stock issued from merger
 
313

 
31,340

 
8,631

 
863,055

 
8,944

 
894,395

Repurchases/redemptions of capital stock
 
(313
)
 
(31,340
)
 
(25,152
)
 
(2,515,136
)
 
(25,465
)
 
(2,546,476
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
751

 
75,133

 
751

 
75,133

Additional capital from merger
 

 

 

 

 

 

Comprehensive income (loss)
 

 

 

 

 

 

Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, SEPTEMBER 30, 2015
 

 
$

 
41,260

 
$
4,126,027

 
41,260

 
$
4,126,027

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





























6




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

 
 
Additional Capital from Merger
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Capital
 
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2013
 
$

 
$
627,473

 
$
50,782

 
$
678,255

 
$
87,044

 
$
3,456,867

Proceeds from issuance of capital stock
 

 

 

 

 

 
2,029,303

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(1,260,698
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
(4,444
)
Comprehensive income (loss)
 

 
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
 
$

 
$
643,306

 
$
68,900

 
$
712,206

 
$
151,595

 
$
4,319,530

 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
 
$

 
$
645,434

 
$
74,989

 
$
720,423

 
$
123,222

 
$
4,312,148

Proceeds from issuance of capital stock
 

 

 

 

 

 
2,234,472

Capital stock issued from merger
 

 

 

 

 

 
894,395

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(2,546,476
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
75,133

Additional capital from merger
 
246,462

 

 

 

 

 
246,462

Comprehensive income (loss)
 

 
80,243

 
20,061

 
100,304

 
(121,813
)
 
(21,509
)
Cash dividends on capital stock
 
(25,881
)
 
(50,422
)
 

 
(50,422
)
 

 
(76,303
)
BALANCE, SEPTEMBER 30, 2015
 
$
220,581

 
$
675,255

 
$
95,050

 
$
770,305

 
$
1,409

 
$
5,118,322

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


7


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

 
 
For the Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
100,304

 
$
90,586

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
25,243

 
10,742

Net (gains) losses on trading securities
 
(8,588
)
 
(47,175
)
Net (gains) losses from sale of available-for-sale securities
 

 
(826
)
Net (gains) losses from sale of held-to-maturity securities
 

 
(8,887
)
Net (gains) losses on financial instruments held at fair value
 
(71
)
 
(2
)
Net change in derivatives and hedging activities
 
(611
)
 
58,227

Net (gains) losses on extinguishment of debt
 

 
12,651

Other adjustments
 
1,199

 
(4,226
)
Net change in:
 
 
 
 
Accrued interest receivable
 
(10,074
)
 
(16,124
)
Other assets
 
(3,574
)
 
2,882

Accrued interest payable
 
20,914

 
20,748

Other liabilities
 
(9,479
)
 
4,605

Total adjustments
 
14,959

 
32,615

Net cash provided by (used in) operating activities
 
115,263

 
123,201

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(155,471
)
 
(50,079
)
Securities purchased under agreements to resell
 
91,000

 
6,140,000

Federal funds sold
 
(320,000
)
 
(1,435,000
)
Premises, software, and equipment
 
(5,402
)
 
(2,645
)
Cash transferred for merger
 
2,341,201

 

Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
519,126

 
18,800

Available-for-sale securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
1,316,663

 
905,699

Purchases of long-term
 
(1,108,162
)
 
(3,749,223
)
Held-to-maturity securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
723,795

 
460,307

Purchases of long-term
 
(88,805
)
 

Advances
 
 
 
 
Principal collected
 
88,353,644

 
66,484,479

Originated
 
(88,454,466
)
 
(85,144,126
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
930,807

 
657,185

Originated or purchased
 
(652,282
)
 
(635,972
)
Proceeds from sales of foreclosed assets
 
10,254

 
12,498

Net cash provided by (used in) investing activities
 
3,501,902

 
(16,338,077
)
The accompanying notes are an integral part of these financial statements.

8


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

 
 
For the Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
122,728

 
(297,163
)
Net payments on derivative contracts with financing elements
 
(5,872
)
 
(6,022
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
198,088,318

 
159,080,542

Bonds
 
15,564,414

 
21,536,831

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(191,073,337
)
 
(134,416,372
)
Bonds
 
(25,086,683
)
 
(21,360,910
)
Proceeds from issuance of capital stock
 
2,234,472

 
2,029,303

Payments for repurchases/redemptions of capital stock
 
(2,546,476
)
 
(1,260,698
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(568,145
)
 
(4,763
)
Cash dividends paid
 
(76,303
)
 
(56,635
)
Net cash provided by (used in) financing activities
 
(3,346,884
)
 
25,244,113

Net increase (decrease) in cash and due from banks
 
270,281

 
9,029,237

Cash and due from banks at beginning of the period
 
495,197

 
448,278

Cash and due from banks at end of the period
 
$
765,478

 
$
9,477,515

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
798,304

 
$
602,319

Affordable Housing Program payments
 
8,957

 
6,369

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage securities
 
11,430

 
2,583

Mortgage loan charge-offs
 
5,421

 
654

Transfers of mortgage loans to real estate owned
 
6,463

 
7,221

Capital stock issued from merger
 
894,395

 

Assets acquired (liabilities assumed) from merger:
 
 
 
 
Interest-bearing deposits
 
202

 

Trading securities
 
550,473

 

Available-for-sale securities
 
9,825,223

 

Held-to-maturity securities
 
5,829,043

 

Advances
 
9,190,741

 

Mortgage loans held for portfolio
 
614,829

 

Accrued interest receivable
 
47,570

 

Premises, software, and equipment
 
3,239

 

Derivative assets
 
39,777

 

Other assets
 
22,412

 

Deposits
 
(370,814
)
 

Consolidated obligation discount notes
 
(12,448,960
)
 

Consolidated obligation bonds
 
(13,613,400
)
 

Mandatorily redeemable capital stock
 
(724,827
)
 

Accrued interest payable
 
(38,198
)
 

Affordable Housing Program payable
 
(17,128
)
 

Derivative liabilities
 
(74,110
)
 

Other liabilities
 
(36,415
)
 

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


9


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 or the Des Moines 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 11 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 source of funding to its member institutions and eligible housing associates. 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.

MERGER

On June 1, 2015, the Bank announced the successful completion of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), (the Merger), pursuant to the definitive merger agreement (Merger Agreement) dated September 25, 2014. The Merger closed on May 31, 2015 and the two Banks were operational as one Bank, the Federal Home Loan Bank of Des Moines (the combined Bank), on June 1, 2015.
The combined Bank remains a member-owned and member-centric cooperative, focused on helping its members strengthen their institutions to better serve their customers and communities. It now provides funding solutions and liquidity to nearly 1,500 member financial institutions in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. The headquarters remain in Des Moines with a western regional office in Seattle. For additional discussion on the Merger, refer to "Note 2 — Merger".


10


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.

The operations of the merged Seattle Bank have been included in the Bank's financial statements since June 1, 2015. The Merger had a significant impact on all aspects of the Bank's financial condition, results of operations, and cash flows. As a result, financial results for the current period are not directly comparable to financial results prior to the Merger. For additional information on the Merger, refer to "Note 2 — Merger".

RECLASSIFICATIONS

Certain amounts in the Bank's 2014 financial statements and footnotes have been reclassified to conform to the presentation for the three and nine months ended September 30, 2015.

REVISIONS TO SECOND QUARTER 2015 FINANCIAL STATEMENTS

 During the third quarter of 2015, the Bank identified certain immaterial errors in its previously issued financial statements and footnotes for the three and six months ended June 30, 2015. These errors related to hedge ineffectiveness calculations on swapped available-for-sale (AFS) investments acquired from the Seattle Bank. The errors caused the amortized cost of AFS securities to be understated by $6.4 million at June 30, 2015; however, the total fair value for these investments recorded in the Bank’s Statements of Condition was accurate. The errors also caused “net gains (losses) on derivatives and hedging activities” reported in “other income (loss)” to be understated by $6.4 million for the three and six months ended June 30, 2015 and “net income” to be understated by $5.7 million net of the Affordable Housing Program assessment for these same periods in the Bank’s second quarter 2015 Statements of Income. Additional financial statement lines in the Bank’s Statements of Condition, Statements of Income, Statements of Comprehensive Income, Statements of Capital, Statements of Cash Flows, and footnotes were also impacted by these errors. The financial statement lines impacted are summarized in the following table.

Management has determined after evaluating the quantitative and qualitative aspects of these corrections that the previously issued financial statements and footnotes were not materially misstated. The Bank has chosen to revise the information for the three and six months ended June 30, 2015 in this third quarter 2015 Form 10-Q filing. Accordingly, where presented, the June 30, 2015 balance sheet data has been revised for these errors. In addition, the impact of the revision is reflected in the Bank’s Statements of Income, Statements of Comprehensive Income, Statements of Capital, Statements of Cash Flows, and footnotes, where shown, for the nine months ended September 30, 2015.

11


The following table summarizes the financial statement lines impacted by this error for the period ending June 30, 2015 (dollars in thousands):  
Line Item
 
As Previously Reported
 
Adjustment
 
As Revised
Statement of Condition as of June 30, 2015
 
 
 
 
 
 
     Affordable Housing Program Payable
 
$
60,029

 
$
637

 
$
60,666

     Total Liabilities
 
113,773,299

 
637

 
113,773,936

     Unrestricted Retained Earnings
 
639,526

 
4,582

 
644,108

     Restricted Retained Earnings
 
86,117

 
1,146

 
87,263

     Total Retained Earnings
 
725,643

 
5,728

 
731,371

     Accumulated Other Comprehensive Income
 
127,611

 
(6,365
)
 
121,246

     Total Capital
 
4,984,403

 
(637
)
 
4,983,766

 
 
 
 
 
 
 
Statement of Income for the Three Months Ended June 30, 2015
 
 
 
 
 
 
     Net Gains (Losses) on Derivatives and Hedging Activities
 
29,381

 
6,365

 
35,746

     Total Other Income
 
187

 
6,365

 
6,552

     Net Income Before Assessments
 
23,423

 
6,365

 
29,788

     Affordable Housing Program Assessments
 
2,388

 
637

 
3,025

     Net Income
 
21,035

 
5,728

 
26,763

 
 
 
 
 
 
 
Statement of Income for the Six Months Ended June 30, 2015
 
 
 
 
 
 
     Net Gains (Losses) on Derivatives and Hedging Activities
 
(1,530
)
 
6,365

 
4,835

     Total Other Income
 
(9,274
)
 
6,365

 
(2,909
)
     Net Income Before Assessments
 
61,895

 
6,365

 
68,260

     Affordable Housing Program Assessments
 
6,253

 
637

 
6,890

     Net Income
 
55,642

 
5,728

 
61,370

 
 
 
 
 
 
 
Statement of Comprehensive Income for the Three Months Ended June 30, 2015
 
 
 
 
 
 
     Net Income
 
21,035

 
5,728

 
26,763

     Net Unrealized Gains (Losses) on Available-For-Sale Securities
 
(2,831
)
 
(6,365
)
 
(9,196
)
Total Net Unrealized Gains (Losses) on Available-For-Sale Securities
 
(2,831
)
 
(6,365
)
 
(9,196
)
     Total Other Comprehensive Income
 
(2,639
)
 
(6,365
)
 
(9,004
)
     Total Comprehensive Income
 
18,396

 
(637
)
 
17,759

 
 
 
 
 
 
 
Statement of Comprehensive Income for the Six Months Ended June 30, 2015
 
 
 
 
 
 
     Net Income
 
55,642

 
5,728

 
61,370

     Net Unrealized Gains (Losses) on Available-For-Sale Securities
 
4,005

 
(6,365
)
 
(2,360
)
Total Net Unrealized Gains (Losses) on Available-For-Sale Securities
 
4,005

 
(6,365
)
 
(2,360
)
     Total Other Comprehensive Income
 
4,389

 
(6,365
)
 
(1,976
)
     Total Comprehensive Income
 
60,031

 
(637
)
 
59,394




12


The following table summarizes the financial statement lines impacted by this error for the period ending June 30, 2015 (dollars in thousands) (continued):  
Line Item
 
As Previously Reported
 
Adjustment
 
As Revised
Statement of Capital
 
 
 
 
 
 
For the Six Months Ended June 30, 2015
 
 
 
 
 
 
     Comprehensive Income (Loss) - Unrestricted Retained Earnings
 
44,514

 
4,582

 
49,096

     Comprehensive Income (Loss) - Restricted Retained Earnings
 
11,128

 
1,146

 
12,274

     Comprehensive Income (Loss) - Total Retained Earnings
 
55,642

 
5,728

 
61,370

Comprehensive Income (Loss) - Total Accumulated Other Comprehensive Income
 
4,389

 
(6,365
)
 
(1,976
)
     Comprehensive Income (Loss) - Total
 
60,031

 
(637
)
 
59,394

As of June 30, 2015
 
 
 
 
 
 
     Unrestricted Retained Earnings
 
639,526

 
4,582

 
644,108

     Restricted Retained Earnings
 
86,117

 
1,146

 
87,263

     Total Retained Earnings
 
725,643

 
5,728

 
731,371

     Accumulated Other Comprehensive Income
 
127,611

 
(6,365
)
 
121,246

     Total Capital
 
4,984,403

 
(637
)
 
4,983,766

 
 
 
 
 
 
 
Statement of Cash Flows for the Six Months Ended June 30, 2015
 
 
 
 
 
 
     Net Income
 
55,642

 
5,728

 
61,370

     Net Change in Derivatives and Hedging Activities
 
(20,423
)
 
(6,365
)
 
(26,788
)
     Net Change in Other Liabilities
 
9,663

 
637

 
10,300

     Total Operating Adjustments
 
11,902

 
(5,728
)
 
6,174


SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank's significant accounting policies during the nine months ended September 30, 2015. However, as a result of the Merger, the Bank revised its allowance for credit losses accounting policy to incorporate the credit loss protection on conventional mortgage loans acquired under the Mortgage Purchase Program (MPP). For additional information on changes to the Bank's allowance for credit losses accounting policy, refer to “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates”. In addition, the Bank established a significant accounting policy on business combinations.

Business Combinations

The Bank applies the acquisition method of accounting for business combinations of mutual entities. Under the acquisition method, the Bank recognizes the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed, is recorded as goodwill.

Consideration transferred includes (i) equity interests of the Bank (i.e. par value of capital stock exchanged on a one-for-one basis for Seattle capital stock outstanding) and (ii) member interests in the Bank (i.e. the post-merger interest of Seattle members in the Bank, including a proportionate interest in the liquidation value of the Bank). Consideration transferred is recognized by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion being reflected in a new capital account captioned as “Additional capital from merger.” Acquisition-related costs are expensed as incurred.

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


13


Note 2 — Merger

Effective May 31, 2015, the Bank and the Seattle Bank, two mutual entities for accounting purposes, completed the previously announced merger pursuant to the Merger Agreement, dated September 25, 2014. Similar to the Bank, the Seattle Bank, a cooperative owned by its members, was one of the 12 district Federal Home Loan Banks and served the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank believes the Merger combines two complementary organizations with similar cultures that emphasized service to members, membership characteristics, and solid financial positions. At closing, the Seattle Bank merged with and into the Des Moines Bank, with the Des Moines Bank surviving the Merger as the continuing Bank. The first date of operations for the combined Bank was June 1, 2015.

As part of the Merger, on the effective date of the Merger (merger date), each share of Seattle Bank Class A stock outstanding was converted into one share of Des Moines Bank Class A stock and each share of Seattle Bank Class B stock outstanding was converted into one share of Des Moines Bank Class B stock. Immediately following the Merger, all shares of Des Moines Bank Class A stock and excess shares of Class B stock were repurchased and Des Moines Class B stock was issued as needed to meet the Bank's activity and membership stock requirements in accordance with the combined Bank's Capital Plan. No shares of Seattle Bank capital stock remained outstanding. The Merger did not have an impact on the total capital stock held by Des Moines Bank stockholders.

At the time of the Merger, the corporate existence of the Seattle Bank ceased, and each member of the Seattle Bank automatically ceased to be a member of the Seattle Bank and automatically became a member of the Des Moines Bank. In addition, the geographical territory previously included in the district for the Seattle Bank (Alaska, Hawaii, Idaho, Montana, Oregon, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands) is now included in the district for the Des Moines Bank.

The operations of the merged Seattle Bank have been included in the Bank's financial statements since June 1, 2015. However, the former Seattle Bank is not a separate reporting segment and the Bank does not separately account for the amounts of revenues, expenses, and net income of the former Seattle Bank. To do so would involve significant estimates of amounts, distinct segregation of operational and business practices inconsistent with the benefits of the Merger, and would require management to subjectively distinguish information about specific assets and liabilities transacted. As such, it is impracticable to determine such amounts for the period from June 1, 2015 through September 30, 2015.

PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma summary has been prepared by adjusting the Bank's historical data to give effect to the Merger as if it had occurred on January 1, 2014 (dollars in thousands):
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
Interest income
$
707,218

 
$
672,897

Net income
$
109,955

 
$
103,691


The unaudited pro forma financial information was prepared in accordance with the acquisition method of accounting for mutual entities under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Merger had been completed on the date indicated, nor is it indicative of the future operating results of the Bank.

The unaudited pro forma results have been adjusted with respect to certain aspects of the Merger to reflect:

additional premium/discount amortization as well as depreciation expense that would have been recognized assuming fair value adjustments to the assets acquired and liabilities assumed;

inclusion of merger related expenses incurred by the Bank totaling $39.7 million in the pro forma nine months ended September 30, 2014; and

higher (lower) Affordable Housing Program assessments due to higher (lower) combined net income.

The above pro forma adjustments do not reflect the impact of anticipated future cost savings resulting from the Merger. The adjustments included in these unaudited pro forma results are preliminary and may be revised.


14


CONSIDERATION TRANSFERRED AND ASSETS ACQUIRED AND LIABILITIES ASSUMED

The Merger purchase accounting entries were recorded in accordance with business combination accounting guidance prescribed in Accounting Standard Codification Topic 805 with the Bank considered the acquirer of the Seattle Bank for accounting purposes. Consideration transferred included (i) equity interests of the Bank (i.e. par value of capital stock to be exchanged on a one-for-one basis for Seattle capital stock outstanding) and (ii) member interests in the Bank (i.e. the post-merger interest of Seattle members in the Bank, including a proportionate interest in the liquidation value of the Bank). The amount of consideration transferred was compared to the acquisition date fair value of the net identifiable assets acquired. Based on the consideration transferred, no goodwill was recorded.

The Bank recognized net assets acquired by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a new capital account captioned as “Additional capital from merger.” This balance primarily represents the amount of the Seattle Bank's closing retained earnings balance, adjusted for fair value and other purchase accounting adjustments, and identified intangible assets. The Bank treats this additional capital from merger as a component of total capital for regulatory capital purposes and, subject to the Bank's Board of Directors' discretion and applicable regulatory requirements, plans to distribute dividends to the Bank’s members from this account until the additional capital from merger balance is depleted.

The following table discloses the fair value of the consideration transferred and the total identifiable net assets acquired relating to the Merger (dollars in thousands):
 
May 31, 2015
Fair value of consideration transferred:
 
Fair value of shares issued
$
894,395

Member interests
246,462

Total fair value of consideration transferred
$
1,140,857

 
 
Assets acquired:
 
Cash and due from banks
$
141

Interest-bearing deposits
202

Accounts receivable1
2,341,059

Trading securities
550,473

Available-for-sale securities
9,825,223

Held-to-maturity securities
5,829,043

Advances
9,190,741

Mortgage loans held for portfolio
614,829

Accrued interest receivable
47,570

Premises, software, and equipment
3,239

Derivative assets
39,777

Other assets
22,412

Total assets acquired
$
28,464,709

 
 
Liabilities assumed:
 
Deposits
$
370,814

Consolidated obligation discount notes
12,448,960

Consolidated obligation bonds
13,613,400

Mandatorily redeemable capital stock
724,827

Accrued interest payable
38,198

Affordable Housing Program payable
17,128

Derivative liabilities
74,110

Other liabilities
36,415

Total liabilities assumed
27,323,852

Net assets acquired
$
1,140,857


1
In anticipation of the closing of the Merger, on Friday, May 29, 2015, the Seattle Bank transferred $2.3 billion in cash to the Bank. The transfer was made to ensure the Bank had access to the Seattle Bank's cash balances on the first day of operations for the combined Bank, Monday, June 1, 2015. The Bank recorded a liability for this cash and the Seattle Bank recorded a receivable for this cash in their respective Statements of Condition for May 31, 2015. These balances were eliminated to arrive at the combined opening Statement of Condition.

15


The fair value of financial assets acquired included $9.2 billion of advances and $0.6 billion of mortgage loans. The gross contractual amounts receivable for acquired advances were $9.5 billion, none of which were expected to be uncollectible. The gross contractual amounts receivable for acquired mortgage loans were $0.7 billion, of which an immaterial amount was expected to be uncollectible.

INTANGIBLES

On the merger date, the Bank recognized a customer relationship intangible asset through "Other assets" in the Statements of Condition and determined that amortization would be calculated on a straight-line basis using an estimated life of 20 years (with no residual value). The Bank will assess the customer relationship intangible asset for impairment on at least an annual basis. As of September 30, 2015, this intangible asset had a gross carrying value of $3.0 million and accumulated amortization of $49 thousand. Going forward, the Bank expects to recognize $148 thousand of amortization expense on an annual basis for the life of the intangible asset.

MERGER RELATED EXPENSES

The following table provides a summary of merger related expenses incurred during the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Compensation and benefits1
$
1,368

 
$

 
$
28,433

 
$

Contractual services and professional fees
1,280

 
725

 
7,949

 
725

Other merger related expenses
119

 
7

 
1,737

 
7

Total
$
2,767

 
$
732

 
$
38,119

 
$
732


1
Primarily includes expenses related to change in control, severance, and retention agreements. Also includes a $10.2 million discretionary contribution made to bring the Seattle qualified defined benefit pension plan to a similar funding status as the Des Moines qualified defined benefit pension plan during the nine months ended September 30, 2015.

CONTINGENCIES
As a result of the Merger, the Bank is currently involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label mortgage-backed securities (the Private-Label MBS Litigation). Although the Seattle Bank sold all private-label MBS during the first quarter of 2015, the Bank continues to be involved in these proceedings. After consultation with legal counsel, other than the Private-Label MBS Litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in "other expenses" in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are received, at which time these fees are netted against the gains received on the litigation settlement. During the three and nine months ended September 30, 2015, the Bank recognized $12.5 million in a gain on a litigation settlement.

16


Note 3 — 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.

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

Simplifying the Accounting for Measurement-Period Adjustments

On September 25, 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments recognized in a business combination. This guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. It also requires that the acquirer present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance becomes effective for the Bank for the interim and annual periods beginning January 1, 2016, and should be applied prospectively. This guidance is not expected to affect the Bank’s financial condition, results of operations, or cash flows.


17


Cloud Computing Arrangements

On April 15, 2015, the FASB issued amendments to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2016, 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 on January 1, 2016, 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 adoption of this guidance will result in a reclassification of unamortized debt issuance costs from other assets to consolidated obligations on the Bank's 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 variable interest entity (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 on January 1, 2016, 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.

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 Bank for the interim and annual periods beginning January 1, 2017, 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.


18


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 recognizing 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, and lease contracts. The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, retrospectively to each prior reporting period presented; or a modified retrospective 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.

On August 12, 2015, the FASB issued an amendment to defer the effective date of this guidance issued in May 2014 by one year. The guidance is effective for the Bank for interim and annual periods beginning on January 1, 2018. Early application is permitted only as of the interim and annual reporting periods beginning after December 15, 2016.

Note 4 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in thousands):
 
September 30,
2015
 
December 31,
2014
Non-mortgage-backed securities
 
 
 
Other U.S. obligations1
$
244,936

 
$
256,267

GSE obligations
1,579,725

 
1,531,811

Other2
281,177

 
280,215

     Total non-mortgage-backed securities
2,105,838

 
2,068,293

Mortgage-backed securities
 
 
 
GSE multifamily
466,887

 
462,197

Total fair value
$
2,572,725

 
$
2,530,490


1
Represents investment securities backed by the full faith and credit of the U.S. Government.

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

During the three and nine months ended September 30, 2015, the Bank recorded net holding gains of $16.8 million and $8.6 million on its trading securities compared to net holding gains of $0.7 million and $47.2 million for the same periods in 2014. The Bank did not sell any trading securities during the three and nine months ended September 30, 2015 and 2014.


19


Note 5 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in thousands):
 
September 30, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
4,128,157

 
$
3,892

 
$
(23,925
)
 
$
4,108,124

GSE obligations
2,220,815

 
18,161

 
(18,508
)
 
2,220,468

State or local housing agency obligations
1,069,524

 
531

 
(186
)
 
1,069,869

Other3
300,015

 
4,487

 
(1,363
)
 
303,139

Total non-mortgage-backed securities
7,718,511

 
27,071

 
(43,982
)
 
7,701,600

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
2,340,704

 
1,610

 
(975
)
 
2,341,339

GSE single-family
1,681,927

 
20,339

 
(16
)
 
1,702,250

GSE multifamily
10,009,923

 
45,290

 
(44,995
)
 
10,010,218

Total mortgage-backed securities
14,032,554

 
67,239

 
(45,986
)
 
14,053,807

Total
$
21,751,065

 
$
94,310

 
$
(89,968
)
 
$
21,755,407


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

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
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

Other3
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-family2
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
Represents investment securities backed by the full faith and credit of the U.S. Government.

3
Consists of taxable municipal bonds and Private Export Funding Corporation bonds. The Bank did not hold any Private Export Funding Corporation bonds in 2014.



20


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, 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
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
$
3,968,240

 
$
(23,925
)
 
$

 
$

 
$
3,968,240

 
$
(23,925
)
GSE obligations
1,279,632

 
(18,508
)
 

 

 
1,279,632

 
(18,508
)
State or local housing agency obligations
186,371

 
(121
)
 
5,970

 
(65
)
 
192,341

 
(186
)
Other
118,524

 
(1,363
)
 

 

 
118,524

 
(1,363
)
Total non-mortgage-backed securities
5,552,767

 
(43,917
)
 
5,970

 
(65
)
 
5,558,737

 
(43,982
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family
1,233,145

 
(975
)
 

 

 
1,233,145

 
(975
)
GSE single-family

 

 
35,563

 
(16
)
 
35,563

 
(16
)
GSE multifamily
7,980,130

 
(39,145