10-Q 1 fhlb06301610q.htm FORM 10-Q - FHLB DES MOINES Q2 2016 Document
 
 
 
 
 
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 June 30, 2016
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 July 31, 2016
 
Class B Stock, par value $100
 
60,781,396
 
 
 
 
 
 
 
 
 




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 15 - Activities with Stockholders
 
 
 
 
 
 
Note 16 - 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 millions, except capital stock par value)
(Unaudited)
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Cash and due from banks
 
$
460

 
$
982

Interest-bearing deposits
 
2

 
2

Securities purchased under agreements to resell
 
6,800

 
6,775

Federal funds sold
 
4,350

 
2,270

Investment securities
 
 
 
 
Trading securities (Note 3)
 
5,686

 
4,047

Available-for-sale securities (Note 4)
 
21,917

 
20,988

Held-to-maturity securities (fair value of $5,491 and $6,142) (Note 5)
 
5,388

 
6,085

Total investment securities
 
32,991

 
31,120

Advances (includes $2 and $8 at fair value under the fair value option) (Note 7)
 
116,294

 
89,173

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Notes 8 and 9)
 
6,640

 
6,755

Accrued interest receivable
 
168

 
143

Premises, software, and equipment, net
 
29

 
25

Derivative assets, net (Note 10)
 
90

 
94

Other assets
 
36

 
35

TOTAL ASSETS
 
$
167,860

 
$
137,374

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
969

 
$
924

Non-interest-bearing
 
97

 
186

Total deposits
 
1,066

 
1,110

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
92,521

 
98,990

Bonds (includes $15 and $15 at fair value under the fair value option)
 
66,599

 
31,208

Total consolidated obligations
 
159,120

 
130,198

Mandatorily redeemable capital stock (Note 12)
 
698

 
103

Accrued interest payable
 
133

 
119

Affordable Housing Program payable
 
101

 
62

Derivative liabilities, net (Note 10)
 
86

 
102

Other liabilities
 
152

 
55

TOTAL LIABILITIES
 
161,356

 
131,749

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 52 and 47 issued and outstanding shares
 
5,241

 
4,714

Additional capital from merger
 
128

 
194

Retained earnings
 
 
 
 
Unrestricted
 
1,035

 
700

Restricted
 
185

 
101

Total retained earnings
 
1,220

 
801

Accumulated other comprehensive income (loss)
 
(85
)
 
(84
)
TOTAL CAPITAL
 
6,504

 
5,625

TOTAL LIABILITIES AND CAPITAL
 
$
167,860

 
$
137,374

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

3


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
Revised
 
2016
 
2015
Revised
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
188

 
$
63

 
$
357

 
$
129

Prepayment fees on advances, net
 
1

 
8

 
5

 
9

Interest-bearing deposits
 

 

 
1

 

Securities purchased under agreements to resell
 
5

 
2

 
9

 
3

Federal funds sold
 
4

 
1

 
8

 
2

Trading securities
 
14

 
9

 
26

 
18

Available-for-sale securities
 
57

 
36

 
113

 
67

Held-to-maturity securities
 
19

 
13

 
40

 
21

Mortgage loans held for portfolio
 
59

 
61

 
120

 
120

Total interest income
 
347

 
193

 
679

 
369

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
113

 
15

 
222

 
30

Consolidated obligations - Bonds
 
135

 
97

 
251

 
190

Mandatorily redeemable capital stock
 
5

 
1

 
9

 
1

Total interest expense
 
253

 
113

 
482

 
221

NET INTEREST INCOME
 
94

 
80

 
197

 
148

Provision (reversal) for credit losses on mortgage loans
 
1

 
1

 
1

 
1

NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
93

 
79

 
196

 
147

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
18

 
(27
)
 
53

 
(8
)
Net gains (losses) on derivatives and hedging activities
 
(30
)
 
35

 
(73
)
 
4

Net gains (losses) on disposal of fixed assets
 

 
(3
)
 

 
(3
)
Gains on litigation settlements, net
 
200

 

 
337

 

Other, net
 
4

 
1

 
7

 
4

Total other income (loss)
 
192

 
6

 
324

 
(3
)
OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
12

 
12

 
26

 
22

Contractual services
 
3

 
4

 
6

 
5

Professional fees
 
3

 
1

 
4

 
2

Merger related expenses
 

 
33

 

 
35

Other operating expenses
 
5

 
3

 
9

 
6

Federal Housing Finance Agency
 
2

 
2

 
4

 
3

Office of Finance
 
1

 
1

 
3

 
2

Other, net
 
1

 

 
2

 
1

Total other expense
 
27

 
56

 
54

 
76

NET INCOME BEFORE ASSESSMENTS
 
258

 
29

 
466

 
68

Affordable Housing Program assessments
 
26

 
3

 
47

 
7

NET INCOME
 
$
232

 
$
26

 
$
419

 
$
61

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 millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
Revised
 
2016
 
2015
Revised
Net income
 
$
232

 
$
26

 
$
419

 
$
61

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
36

 
(9
)
 
(1
)
 
(2
)
Pension and postretirement benefits
 
1

 
1

 

 
1

Total other comprehensive income (loss)
 
37

 
(8
)
 
(1
)
 
(1
)
TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
269

 
$
18

 
$
418

 
$
60

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 millions)
(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, 2014
 

 
$

 
35

 
$
3,469

 
35

 
$
3,469

Proceeds from issuance of capital stock
 

 

 
12

 
1,255

 
12

 
1,255

Capital stock issued from merger
 

 
31

 
9

 
863

 
9

 
894

Repurchases/redemptions of capital stock
 

 
(31
)
 
(18
)
 
(1,791
)
 
(18
)
 
(1,822
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
1

 
89

 
1

 
89

Additional capital from merger
 

 

 

 

 

 

Comprehensive income (loss)
 

 

 

 

 

 

Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, JUNE 30, 2015 REVISED
 

 
$

 
39

 
$
3,885

 
39

 
$
3,885

 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2015
 

 
$

 
47

 
$
4,714

 
47

 
$
4,714

Proceeds from issuance of capital stock
 

 

 
32

 
3,232

 
32

 
3,232

Repurchases/redemptions of capital stock
 

 

 
(20
)
 
(1,974
)
 
(20
)
 
(1,974
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
(7
)
 
(731
)
 
(7
)
 
(731
)
Comprehensive income (loss)
 

 

 

 

 

 

Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, JUNE 30, 2016
 

 
$

 
52

 
$
5,241

 
52

 
$
5,241

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 millions)
(Unaudited)
 
 
Additional Capital from Merger
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Capital
 
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2014
 
$

 
$
645

 
$
75

 
$
720

 
$
123

 
$
4,312

Proceeds from issuance of capital stock
 

 

 

 

 

 
1,255

Capital stock issued from merger
 

 

 

 

 

 
894

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(1,822
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
89

Additional capital from merger
 
246

 

 

 

 

 
246

Comprehensive income (loss)
 

 
49

 
12

 
61

 
(1
)
 
60

Cash dividends on capital stock
 

 
(50
)
 

 
(50
)
 

 
(50
)
BALANCE, JUNE 30, 2015 REVISED
 
$
246

 
$
644

 
$
87

 
$
731

 
$
122

 
$
4,984

 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2015
 
$
194

 
$
700

 
$
101

 
$
801

 
$
(84
)
 
$
5,625

Proceeds from issuance of capital stock
 

 

 

 

 

 
3,232

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(1,974
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
(731
)
Comprehensive income (loss)
 

 
335

 
84

 
419

 
(1
)
 
418

Cash dividends on capital stock
 
(66
)
 

 

 

 

 
(66
)
BALANCE, JUNE 30, 2016
 
$
128

 
$
1,035

 
$
185

 
$
1,220

 
$
(85
)
 
$
6,504

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 millions)
(Unaudited)
 
 
For the Six Months Ended
 
 
June 30,
 
 
2016
 
2015
Revised
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
419

 
$
61

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
52

 
18

Net (gains) losses on trading securities
 
(53
)
 
8

Net change in derivatives and hedging activities
 
45

 
(26
)
Other adjustments
 
(8
)
 
2

Net change in:
 
 
 
 
Accrued interest receivable
 
(37
)
 
(5
)
Other assets
 
(2
)
 
2

Accrued interest payable
 
14

 
(2
)
Other liabilities
 
38

 
10

Total adjustments
 
49

 
7

Net cash provided by (used in) operating activities
 
468

 
68

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(460
)
 
114

Securities purchased under agreements to resell
 
(25
)
 
(2,559
)
Federal funds sold
 
(2,080
)
 
(1,140
)
Premises, software, and equipment
 
(5
)
 
(3
)
Cash transferred for merger
 

 
2,341

Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
12

 
12

Purchases of long-term
 
(1,598
)
 

Available-for-sale securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
1,306

 
725

Purchases of long-term
 
(1,791
)
 
(1,080
)
Held-to-maturity securities
 
 
 
 
Proceeds from sales and maturities of long-term
 
752

 
320

Purchases of long-term
 

 
(89
)
Advances
 
 
 
 
Principal collected
 
90,807

 
52,388

Originated
 
(117,776
)
 
(46,258
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
555

 
603

Originated or purchased
 
(452
)
 
(468
)
Proceeds from sales of foreclosed assets
 
9

 
6

Net cash provided by (used in) investing activities
 
(30,746
)
 
4,912

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 millions)
(Unaudited)
 
 
For the Six Months Ended
 
 
June 30,
 
 
2016
 
2015
Revised
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
(44
)
 
151

Net payments on derivative contracts with financing elements
 
(3
)
 
(4
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
143,494

 
123,100

Bonds
 
49,439

 
9,867

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(150,017
)
 
(123,097
)
Bonds
 
(14,169
)
 
(13,851
)
Proceeds from issuance of capital stock
 
3,232

 
1,255

Payments for repurchases/redemptions of capital stock
 
(1,974
)
 
(1,822
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(136
)
 
(541
)
Cash dividends paid
 
(66
)
 
(50
)
Net cash provided by (used in) financing activities
 
29,756

 
(4,992
)
Net increase (decrease) in cash and due from banks
 
(522
)
 
(12
)
Cash and due from banks at beginning of the period
 
982

 
495

Cash and due from banks at end of the period
 
$
460

 
$
483

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
783

 
$
496

Affordable Housing Program payments
 
8

 
5

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

 
7

Traded but not yet settled investment security purchases
 
99

 
28

Mortgage loan charge-offs
 
1

 
5

Transfers of mortgage loans to real estate owned
 
5

 
4

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
731

 
(89
)
Capital stock issued from merger
 

 
894

Assets acquired (liabilities assumed) from merger:
 
 
 
 
Trading securities
 

 
551

Available-for-sale securities
 

 
9,825

Held-to-maturity securities
 

 
5,829

Advances
 

 
9,191

Mortgage loans held for portfolio
 

 
615

Accrued interest receivable
 

 
47

Premises, software, and equipment
 

 
3

Derivative assets
 

 
40

Other assets
 

 
22

Deposits
 

 
(371
)
Consolidated obligation discount notes
 

 
(12,449
)
Consolidated obligation bonds
 

 
(13,613
)
Mandatorily redeemable capital stock
 

 
(725
)
Accrued interest payable
 

 
(38
)
Affordable Housing Program payable
 

 
(17
)
Derivative liabilities
 

 
(74
)
Other liabilities
 

 
(37
)
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) 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 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. 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, subject to a minimum and maximum amount, 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 and former members own all of the outstanding capital stock (including mandatorily redeemable capital stock) of the Bank. Former members own 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.




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, 2015, which are contained in the Bank's 2015 Annual Report on Form 10-K filed with the SEC on March 21, 2016 (2015 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, 2016.

On May 31, 2015, the Bank completed the merger (the Merger) with the Federal Home Loan Bank of Seattle (Seattle Bank). The Merger had a significant impact on all aspects of the Bank's financial condition, results of operations, and cash flows. As a result, income statement results for the current period are not directly comparable to results prior to the Merger.

The following unaudited pro forma information 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 millions):
 
Six Months Ended
 
June 30, 2015
Revised
Interest income
$
464

Net income
$
65


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.

CHANGE IN ACCOUNTING PRINCIPLE

On January 1, 2016, the Bank retrospectively adopted Accounting Standards Codification Update 2015-03, Simplifying the Presentation of Debt Issuance Costs issued by the Financial Accounting Standards Board (FASB) on April 7, 2015. As a result, $7 million of unamortized concessions included in “Other assets” at December 31, 2015 were reclassified as a reduction in the balance of the corresponding consolidated obligations. The reclassification resulted in a decrease of $4 million in “Consolidated obligation discount notes” and of $3 million in “Consolidated obligation bonds” at December 31, 2015. Accordingly, the Bank’s total assets and total liabilities each decreased by $7 million at December 31, 2015. The adoption of this guidance did not have any effect on the Bank’s results of operations or cash flows. See “Note 2 - Recently Adopted and Issued Accounting Guidance” for discussion on this guidance.

RECLASSIFICATIONS

The Bank's 2015 financial statements and footnotes have been reclassified to conform to the presentation for the three and six months ended June 30, 2016. These amounts were not deemed to be material.

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 related to hedge ineffectiveness calculations on swapped available-for-sale (AFS) investments. Management determined after evaluating the quantitative and qualitative aspects of these errors that the previously issued financial statements and footnotes were not materially misstated. The Bank chose to revise the information for the three and six months ended June 30, 2015 in the Third Quarter 2015 Form 10-Q filing. Accordingly, where presented in this Form 10-Q filing, the June 30, 2015 balance sheet and income statement data has been revised for this error.



11


SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank's significant accounting policies during the six months ended June 30, 2016, with the exception of one policy noted below. Descriptions of all significant accounting policies are included in "Note 1 - Summary of Significant Accounting Policies" in the 2015 Form 10-K.

Concessions. The Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The Office of Finance prorates the amount of the concession to each FHLBank based upon the percentage of the debt issued that is attributed to that FHLBank. Concessions paid on consolidated obligations designated under the fair value option are expensed as incurred and recorded in other expense. Concessions paid on consolidated obligations not designated under the fair value option are deferred and amortized over the contractual life of the consolidated obligations using the level-yield method. Unamortized concessions are included as a direct deduction from the carrying amount of “Consolidated obligation discount notes” or “Consolidated obligation bonds” in the Statements of Condition and the amortization of those concessions is included in consolidated obligation interest expense.

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

On March 10, 2016, the FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2017 and early adoption is permitted. The amendments provide entities with the option to apply the guidance using either a prospective approach or a modified retrospective approach. The Bank elected to early adopt this guidance prospectively on January 1, 2016. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, or cash flows.

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 became effective for the Bank beginning on January 1, 2016 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.

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 became effective for the Bank beginning on January 1, 2016 and was adopted prospectively. The adoption of this guidance did not effect 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 became effective for the Bank beginning on January 1, 2016 and was adopted on a retrospective basis. The adoption of this guidance resulted in a reclassification of unamortized debt issuance costs from other assets to consolidated obligations on the Bank's Statement of Condition. The adoption of this guidance did not have a material effect on the Bank's financial condition, results of operations, or cash flows. Refer to "Note 1 — Basis of Presentation — Change in Accounting Principle" for additional details on this reclassification.

12



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 became effective for the Bank beginning on January 1, 2016. The adoption of this guidance did not have an effect on the Bank’s financial condition, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

Measurement of Credit Losses on Financial Instruments

On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

Entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (PCD assets) that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price of the assets acquired.

Entities to record credit losses relating to AFS debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.

Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).

This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for PCD assets upon adoption and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank is in the process of evaluating this guidance, and its effect on the Bank's financial condition, results of operations, and cash flows has not yet been determined.

13


Contingent Put and Call Options in Debt Instruments

On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2017, and early adoption is permitted. The guidance should be applied on a modified retrospective basis to existing debt instruments as of the beginning of the period for which the amendments are effective. The Bank is in the process of evaluating this guidance, but its effect on the Bank's financial condition, results of operations, or cash flows is not expected to be material.
Leases

On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires a lessee, of operating or finance leases, to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

The guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The Bank is in the process of evaluating this guidance, and its anticipated effect on the Bank's financial condition, results of operations, or cash flows has not yet been determined.

Recognition and Measurement of Financial Assets and Financial Liabilities

On January 5, 2016, FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income.

Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

The guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2018, and early adoption is only permitted for certain provisions. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the period of adoption. 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.


14


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 annual period ending December 31, 2016 and for the annual and interim periods thereafter, and early application is permitted. 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 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.

On August 12, 2015, the FASB issued an amendment to defer the effective date of this guidance issued in May 2014 by one year. In 2016, the FASB has issued additional amendments to clarify certain aspects of the new revenue guidance. However, these amendments do not change the core principle in the new revenue standard.

This 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. The Bank is in the process of evaluating this guidance, but its effect on the Bank's financial condition, results of operations, and cash flows is not expected to be material.

Note 3 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
June 30,
2016
 
December 31,
2015
Non-mortgage-backed securities
 
 
 
U.S. Treasury obligations1
$
1,600

 
$

Other U.S. obligations1
236

 
237

GSE and Tennessee Valley Authority obligations
3,085

 
3,077

Other2
289

 
276

     Total non-mortgage-backed securities
5,210

 
3,590

Mortgage-backed securities
 
 
 
GSE multifamily
476

 
457

Total fair value
$
5,686

 
$
4,047


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 six months ended June 30, 2016, the Bank recorded net holding gains of $18 million and $53 million on its trading securities compared to net holding losses of $27 million and $8 million for the same periods in 2015. The Bank did not sell any trading securities during the three and six months ended June 30, 2016 and 2015.


15


Note 4 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
June 30, 2016
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
3,853

 
$
3

 
$
(27
)
 
$
3,829

GSE and Tennessee Valley Authority obligations
1,606

 
11

 
(19
)
 
1,598

State or local housing agency obligations
1,025

 
1

 
(1
)
 
1,025

Other3
293

 
3

 

 
296

Total non-mortgage-backed securities
6,777

 
18

 
(47
)
 
6,748

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
3,249

 
2

 
(14
)
 
3,237

GSE single-family
1,432

 
16

 

 
1,448

GSE multifamily
10,542

 
39

 
(97
)
 
10,484

Total mortgage-backed securities
15,223

 
57

 
(111
)
 
15,169

Total
$
22,000

 
$
75

 
$
(158
)
 
$
21,917


 
December 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
4,010

 
$
4

 
$
(29
)
 
$
3,985

GSE and Tennessee Valley Authority obligations
2,124

 
14

 
(23
)
 
2,115

State or local housing agency obligations
1,048

 

 
(1
)
 
1,047

Other3
276

 
4

 
(2
)
 
278

Total non-mortgage-backed securities
7,458

 
22

 
(55
)
 
7,425

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
2,284

 

 
(14
)
 
2,270

GSE single-family
1,593

 
13

 
(1
)
 
1,605

GSE multifamily
9,735

 
36

 
(83
)
 
9,688

Total mortgage-backed securities
13,612

 
49

 
(98
)
 
13,563

Total
$
21,070

 
$
71

 
$
(153
)
 
$
20,988


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/or Private Export Funding Corporation (PEFCO) bonds.



16


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 millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
June 30, 2016
 
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. obligations1
$
1,586

 
$
(14
)
 
$
1,912

 
$
(13
)
 
$
3,498

 
$
(27
)
GSE and Tennessee Valley Authority obligations
548

 
(14
)
 
638

 
(5
)
 
1,186

 
(19
)
State or local housing agency obligations
721

 
(1
)
 

 

 
721

 
(1
)
Other2
104

 

 

 

 
104

 

Total non-mortgage-backed securities
2,959

 
(29
)
 
2,550

 
(18
)
 
5,509

 
(47
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
2,083

 
(12
)
 
204

 
(2
)
 
2,287

 
(14
)
GSE single-family
80

 

 
28

 

 
108

 

GSE multifamily
5,448

 
(64
)
 
2,751

 
(33
)
 
8,199

 
(97
)
Total mortgage-backed securities
7,611

 
(76
)
 
2,983

 
(35
)
 
10,594

 
(111
)
Total
$
10,570

 
$
(105
)
 
$
5,533

 
$
(53
)
 
$
16,103

 
$
(158
)

 
December 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
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations1
$
3,645

 
$
(29
)
 
$

 
$

 
$
3,645

 
$
(29
)
GSE and Tennessee Valley Authority obligations
1,701

 
(23
)
 

 

 
1,701

 
(23
)
State or local housing agency obligations
555

 
(1
)
 
6

 

 
561

 
(1
)
Other2
97

 
(2
)
 

 

 
97

 
(2
)
Total non-mortgage-backed securities
5,998

 
(55
)
 
6

 

 
6,004

 
(55
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
2,270

 
(14
)
 

 

 
2,270

 
(14
)
GSE single-family
277

 
(1
)
 
33

 

 
310

 
(1
)
GSE multifamily
8,166

 
(66
)
 
926

 
(17
)
 
9,092

 
(83
)
Total mortgage-backed securities
10,713

 
(81
)
 
959

 
(17
)
 
11,672

 
(98
)
Total
$
16,711

 
$
(136
)
 
$
965

 
$
(17
)
 
$
17,676

 
$
(153
)

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

2
Consists of taxable municipal bonds and/or PEFCO bonds.



17


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 millions):
 
 
June 30, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
149

 
$
151

 
$
430

 
$
431

Due after one year through five years
 
637

 
644

 
968

 
978

Due after five years through ten years
 
4,769

 
4,744

 
4,664

 
4,637

Due after ten years
 
1,222

 
1,209

 
1,396

 
1,379

Total non-mortgage-backed securities
 
6,777

 
6,748

 
7,458

 
7,425

Mortgage-backed securities
 
15,223

 
15,169

 
13,612

 
13,563

Total
 
$
22,000

 
$
21,917

 
$
21,070

 
$
20,988


NET GAINS (LOSSES) FROM SALE OF AFS SECURITIES

During the six months ended June 30, 2016, the Bank received $287 million in proceeds from the sale of AFS securities and recognized gains of less than $1 million. During the three months ended June 30, 2016 and the three and six months ended June 30, 2015, the Bank did not sell any AFS securities.

PREPAYMENT FEES

Prepayment fees on AFS securities are recorded as interest income in the Statements of Income. During the six months ended June 30, 2016, AFS MBS were prepaid and the Bank received $3 million in prepayment fees, which were offset in part by fair value hedging adjustments and discount amortization of $1 million. During the three months ended June 30, 2016 and the three and six months ended June 30, 2015, the Bank did not receive any prepayment fees on AFS securities.


18


Note 5 — Held-to-Maturity Securities

MAJOR SECURITY TYPES

Held-to-maturity (HTM) securities were as follows (dollars in millions):
 
June 30, 2016
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
399

 
$
91

 
$

 
$
490

State or local housing agency obligations
819

 
9

 
(4
)
 
824

Total non-mortgage-backed securities
1,218

 
100

 
(4
)
 
1,314

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
35

 

 

 
35

Other U.S. obligations commercial2
5

 

 

 
5

GSE single-family
4,112

 
14

 
(6
)
 
4,120

Private-label residential
18

 

 
(1
)
 
17

Total mortgage-backed securities
4,170

 
14

 
(7
)
 
4,177

Total
$
5,388

 
$
114

 
$
(11
)
 
$
5,491


 
December 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
401

 
$
57

 
$
(2
)
 
$
456

State or local housing agency obligations
956

 
9

 

 
965

Total non-mortgage-backed securities
1,357

 
66

 
(2
)
 
1,421

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
47

 

 

 
47

Other U.S. obligations commercial2
6

 

 

 
6

GSE single-family
4,655

 
9

 
(15
)
 
4,649

Private-label residential
20

 

 
(1
)
 
19

Total mortgage-backed securities
4,728

 
9

 
(16
)
 
4,721

Total
$
6,085

 
$
75

 
$
(18
)
 
$
6,142


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

2
Represents investment securities backed by the full faith and credit of the U.S. Government.



19


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 millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
June 30, 2016
 
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
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency obligations
$
515

 
$
(4
)
 
$
5

 
$

 
$
520

 
$
(4
)
Total non-mortgage-backed securities
515

 
(4
)
 
5

 

 
520

 
(4
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
34

 

 

 

 
34

 

Other U.S. obligations commercial1
1

 

 
3

 

 
4

 

GSE single-family
2,309

 
(5
)