10-Q 1 fhlb_boston-10qseptember30.htm 10-Q FHLB_Boston-10Q September 30, 2014



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
––––––––––––––––––––––––––––––––––––––––––––––––––––
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. employer identification number)
 
 
 
 
 
 
 
800 Boylston Street
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(Registrant's telephone number, including area code)
 
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 (§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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding as of
October 31, 2014
Class A Stock, par value $100
 
zero
Class B Stock, par value $100
 
26,532,662



Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
 
 
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and due from banks
$
1,800,188

 
$
641,033

Interest-bearing deposits
210

 
195

Securities purchased under agreements to resell
3,500,000

 
3,750,000

Federal funds sold
2,450,000

 
850,000

Investment securities:
 
 
 

Trading securities
245,337

 
247,174

Available-for-sale securities - includes $3,381 pledged as collateral at December 31, 2013, that may be repledged
5,426,300

 
3,995,310

Held-to-maturity securities - includes $72,725 and $65,996 pledged as collateral at September 30, 2014, and December 31, 2013, respectively that may be repledged (a)
3,543,580

 
4,138,661

Total investment securities
9,215,217

 
8,381,145

Advances
31,409,529

 
27,516,678

Mortgage loans held for portfolio, net of allowance for credit losses of $2,367 and $2,221 at September 30, 2014, and December 31, 2013, respectively
3,403,883

 
3,368,476

Accrued interest receivable
71,560

 
83,458

Premises, software, and equipment, net
3,320

 
4,108

Derivative assets, net
12,636

 
4,318

Other assets
38,323

 
38,665

Total Assets
$
51,904,866

 
$
44,638,076

LIABILITIES
 

 
 

Deposits
$
520,864

 
$
517,565

Consolidated obligations (COs):
 
 
 

Bonds
25,011,037

 
23,465,906

Discount notes
22,559,486

 
16,060,781

Total COs
47,570,523

 
39,526,687

Mandatorily redeemable capital stock
244,045

 
977,348

Accrued interest payable
100,364

 
83,386

Affordable Housing Program (AHP) payable
64,831

 
62,591

Derivative liabilities, net
513,832

 
608,152

Other liabilities
61,169

 
24,602

Total liabilities
49,075,628

 
41,800,331

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 23,935 shares and 25,305 shares issued and outstanding at September 30, 2014, and December 31, 2013, respectively
2,393,508

 
2,530,471

Retained earnings:
 
 
 
Unrestricted
746,329

 
681,978

Restricted
129,863

 
106,812

Total retained earnings
876,192

 
788,790

Accumulated other comprehensive loss
(440,462
)
 
(481,516
)
Total capital
2,829,238

 
2,837,745

Total Liabilities and Capital
$
51,904,866

 
$
44,638,076

_______________________________________
(a)   Fair values of held-to-maturity securities were $3,920,778 and $4,499,441 at September 30, 2014, and December 31, 2013, respectively.

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


3


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
 
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
57,456

 
$
56,405

 
$
170,148

 
$
172,445

Prepayment fees on advances, net
1,179

 
1,821

 
4,441

 
18,437

Securities purchased under agreements to resell
886

 
478

 
2,267

 
1,896

Federal funds sold
1,027

 
545

 
2,416

 
1,291

Trading securities
2,346

 
2,363

 
7,051

 
7,201

Available-for-sale securities
18,911

 
14,437

 
46,195

 
49,197

Held-to-maturity securities
27,245

 
30,750

 
85,715

 
93,761

Prepayment fees on investments
130

 
1,605

 
1,240

 
5,331

Mortgage loans held for portfolio
30,918

 
31,474

 
94,136

 
96,166

Other
3

 
1

 
5

 
4

Total interest income
140,101

 
139,879

 
413,614

 
445,729

INTEREST EXPENSE
 
 
 
 
 
 
 
COs - bonds
82,489

 
78,715

 
238,193

 
243,113

COs - discount notes
4,620

 
1,846

 
11,515

 
5,057

Deposits
29

 
3

 
50

 
12

Mandatorily redeemable capital stock
1,358

 
911

 
7,632

 
2,083

Other borrowings
1

 
1

 
4

 
3

Total interest expense
88,497

 
81,476

 
257,394

 
250,268

NET INTEREST INCOME
51,604

 
58,403

 
156,220

 
195,461

Provision (reduction of provision) for credit losses
373

 
83

 
294

 
(2,194
)
NET INTEREST INCOME AFTER PROVISION FOR
(REDUCTION OF) CREDIT LOSSES
51,231

 
58,320

 
155,926

 
197,655

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(243
)
 
(80
)
 
(243
)
 
(180
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(68
)
 
(1,448
)
 
(925
)
 
(2,163
)
Net other-than-temporary impairment losses on investment securities, credit portion
(311
)
 
(1,528
)
 
(1,168
)
 
(2,343
)
Litigation settlements
17,543

 
812

 
22,012

 
812

Loss on early extinguishment of debt
(163
)
 
(568
)
 
(2,755
)
 
(4,956
)
Service fees
1,874

 
1,797

 
5,159

 
4,909

Net unrealized (losses) gains on trading securities
(2,387
)
 
726

 
576

 
(11,278
)
Net gains (losses) on derivatives and hedging activities
1,411

 
(1,070
)
 
(1,264
)
 
6,175

Other
(182
)
 
(293
)
 
(581
)
 
(3,000
)
Total other income (loss)
17,785

 
(124
)
 
21,979

 
(9,681
)
OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
8,990

 
9,162

 
27,847

 
25,983

Other operating expenses
4,961

 
4,693

 
15,273

 
14,082

Federal Housing Finance Agency (the FHFA)
576

 
666

 
1,960

 
2,373

Office of Finance
654

 
655

 
2,063

 
1,908

Other
492

 
608

 
1,857

 
2,283

Total other expense
15,673

 
15,784

 
49,000

 
46,629

INCOME BEFORE ASSESSMENTS
53,343

 
42,412

 
128,905

 
141,345

AHP
5,470

 
4,333

 
13,654

 
14,343

NET INCOME
$
47,873

 
$
38,079

 
$
115,251

 
$
127,002

 

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

4


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
47,873

 
$
38,079

 
$
115,251

 
$
127,002

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(9,274
)
 
(17,195
)
 
20,397

 
(61,671
)
Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 
 
 
 
 
 
 
Noncredit portion
 

 

 

 
(63
)
Reclassification of noncredit portion included in net income
 
68

 
1,448

 
925

 
2,226

Accretion of noncredit portion
 
12,531

 
14,256

 
37,278

 
44,000

Total net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
12,599

 
15,704

 
38,203

 
46,163

Net unrealized (losses) gains relating to hedging activities
 
 
 
 
 
 
 
 
Unrealized (losses) gains
 
(1,482
)
 
(6,173
)
 
(21,222
)
 
11,001

Reclassification adjustment for previously deferred hedging gains and losses included in net income
 
3,149

 
4

 
3,878

 
11

Total net unrealized gains (losses) relating to hedging activities
 
1,667

 
(6,169
)
 
(17,344
)
 
11,012

Pension and postretirement benefits
 
(67
)
 
(323
)
 
(202
)
 
(969
)
Total other comprehensive income (loss)
 
4,925

 
(7,983
)
 
41,054

 
(5,465
)
Total comprehensive income
 
$
52,798

 
$
30,096

 
$
156,305

 
$
121,537


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

5



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(dollars and shares in thousands)
(unaudited)


 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2012
34,552

 
$
3,455,165

 
$
523,203

 
$
64,351

 
$
587,554

 
$
(476,620
)
 
$
3,566,099

Proceeds from sale of capital stock
1,203

 
120,396

 
 
 
 
 
 
 
 
 
120,396

Repurchase of capital stock
(2,750
)
 
(275,011
)
 
 
 
 
 
 
 
 
 
(275,011
)
Shares reclassified to mandatorily redeemable capital stock
(8,595
)
 
(859,522
)
 
 
 
 
 
 
 
 
 
(859,522
)
Comprehensive income
 
 
 
 
101,601

 
25,401

 
127,002

 
(5,465
)
 
121,537

Cash dividends on capital stock
 
 
 
 
(8,811
)
 
 
 
(8,811
)
 
 
 
(8,811
)
BALANCE, SEPTEMBER 30, 2013
24,410

 
$
2,441,028

 
$
615,993

 
$
89,752

 
$
705,745

 
$
(482,085
)
 
$
2,664,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2013
25,305

 
$
2,530,471

 
$
681,978

 
$
106,812

 
$
788,790

 
$
(481,516
)
 
$
2,837,745

Proceeds from sale of capital stock
1,297

 
129,721

 
 
 
 
 
 
 
 
 
129,721

Repurchase of capital stock
(2,664
)
 
(266,346
)
 
 
 
 
 
 
 
 
 
(266,346
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(338
)
 
 
 
 
 
 
 
 
 
(338
)
Comprehensive income
 
 
 
 
92,200

 
23,051

 
115,251

 
41,054

 
156,305

Cash dividends on capital stock
 
 
 
 
(27,849
)
 
 
 
(27,849
)
 
 
 
(27,849
)
BALANCE, SEPTEMBER 30, 2014
23,935

 
$
2,393,508

 
$
746,329

 
$
129,863

 
$
876,192

 
$
(440,462
)
 
$
2,829,238


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





6



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)


 
For the Nine Months Ended September 30,
 
2014
 
2013
OPERATING ACTIVITIES
 

 
 

Net income
$
115,251

 
$
127,002

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
(53,714
)
 
(36,170
)
Provision (reduction of provision) for credit losses
294

 
(2,194
)
Change in net fair-value adjustments on derivatives and hedging activities
(61,402
)
 
(21,529
)
Net other-than-temporary impairment losses on investment securities, credit portion
1,168

 
2,343

Loss on early extinguishment of debt
2,755

 
4,956

Other adjustments
153

 
583

Net change in:
 

 
 
Market value of trading securities
(576
)
 
11,278

Accrued interest receivable
11,896

 
24,461

Other assets
5,237

 
2,862

Accrued interest payable
16,978

 
4,850

Other liabilities
1,856

 
7,107

Total adjustments
(75,355
)
 
(1,453
)
Net cash provided by operating activities
39,896

 
125,549

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(26,875
)
 
(3,948
)
Securities purchased under agreements to resell
250,000

 
2,515,000

Federal funds sold
(1,600,000
)
 
100,000

Premises, software, and equipment
(716
)
 
(671
)
Trading securities:
 

 
 

Proceeds from long-term
2,413

 
13,045

Available-for-sale securities:
 

 
 

Proceeds from long-term
1,123,129

 
1,506,945

Purchases of long-term
(2,452,584
)
 
(289,846
)
Held-to-maturity securities:
 

 
 

Proceeds from long-term
653,616

 
1,089,923

Advances to members:
 

 
 

Proceeds
210,734,280

 
157,664,653

Disbursements
(214,711,518
)
 
(159,602,066
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
311,167

 
595,488

Purchases
(358,866
)
 
(535,022
)
Proceeds from sale of foreclosed assets
7,455

 
9,454

Net cash (used in) provided by investing activities
(6,068,499
)
 
3,062,955

 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
4,821

 
(23,462
)
Net payments on derivatives with a financing element
(13,294
)
 
(14,275
)
Net proceeds from issuance of COs:
 

 
 

Discount notes
97,204,190

 
40,911,806


7


Bonds
9,192,605

 
4,802,462

Bonds transferred from other Federal Home Loan Banks (the FHLBanks)

 
80,135

Payments for maturing and retiring COs:
 

 
 

Discount notes
(90,706,106
)
 
(39,074,702
)
Bonds
(7,596,332
)
 
(6,677,223
)
Proceeds from issuance of capital stock
129,721

 
120,396

Payments for redemption of mandatorily redeemable capital stock
(733,641
)
 
(97,995
)
Payments for repurchase of capital stock
(266,346
)
 
(275,011
)
Cash dividends paid
(27,860
)
 
(8,808
)
Net cash provided by (used in) financing activities
7,187,758

 
(256,677
)
Net increase in cash and due from banks
1,159,155

 
2,931,827

Cash and due from banks at beginning of the year
641,033

 
240,945

Cash and due from banks at end of the period
$
1,800,188

 
$
3,172,772

Supplemental disclosures:
 
 
 
Interest paid
$
303,643

 
$
309,767

AHP payments
$
10,170

 
$
8,842

Noncash transfers of mortgage loans held for portfolio to real-estate-owned (REO)
$
7,141

 
$
7,863


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


8



FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
(unaudited)

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 information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2014. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the SEC) on March 24, 2014 (the 2013 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Recently Issued and Adopted Accounting Guidance
 
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the FASB issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance becomes effective for us for the interim and annual periods beginning after December 15, 2014, and may be adopted using either the modified retrospective transition method or the prospective transition method. The adoption of the new guidance is not expected to have a significant impact on our 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 provided guidance on accounting for repurchase financing arrangements. 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. The guidance will be effective for the first interim or annual period beginning after December 15, 2014, and early adoption is prohibited. The changes in accounting for transactions outstanding on the effective date are required to be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption of the new guidance is not expected to have a significant impact on our financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers. On May 28, 2014, the FASB issued guidance for accounting for revenue arising from contracts with customers. This guidance will supersede most current revenue recognition guidance regarding the measurement of revenue and timing of when it is recognized and provides for the recognition of revenue in an amount that the entity expects to be entitled to in exchange for goods or services. 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 other standards, such as financial instruments, guarantees (other than product or service warranties), insurance contracts, or lease contracts.

The guidance will be effective for the interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The guidance provides the entities with the option of using the following two methods upon adoption: a full retrospective method, retrospectively to each prior reporting period presented; or a transition method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We are currently assessing the impact that this guidance will have on our financial condition, results of operations, and cash flows.

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 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

9


agreement. This guidance is effective for interim and annual periods beginning on or after December 15, 2014, and may be adopted under either the modified retrospective transition method or the prospective transition method. We are currently assessing the impact the amended guidance will have on our financial condition, results of operations, and cash flows.

Framework for Adversely Classifying Loans, Other REO, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the FHFA issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other REO, and Other Assets and Listing Assets for Special Mention (AB 2012-02). AB 2012-02 establishes a standard and uniform methodology for adversely classifying loans, other REO, and certain other assets (excluding investment securities), and prescribes the timing of asset charge-offs based on these classifications. The guidance 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 did not have a material effect on our results of operations or financial condition. The charge-off requirements will be implemented no later than January 1, 2015, and are not expected to have a material effect on our results of operations or financial condition.

Note 3 — Trading Securities
 
Major Security Types. Our trading securities as of September 30, 2014, and December 31, 2013, were (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Mortgage-backed securities (MBS)
 

 
 
U.S. government guaranteed – residential
$
12,786

 
$
14,331

Government-sponsored enterprise (GSE) – residential
2,539

 
3,486

GSE – commercial
230,012

 
229,357

Total
$
245,337

 
$
247,174


Net unrealized gains or losses on trading securities for the nine months ended September 30, 2014 and 2013, amounted to net gains of $576,000 and net losses of $11.3 million for securities held on September 30, 2014 and 2013, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 4 — Available-for-Sale Securities
 
Major Security Types. Our available-for-sale securities as of September 30, 2014, were (dollars in thousands):
 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
457,751

 
$

 
$
(22,362
)
 
$
435,389

U.S. government-owned corporations
301,449

 

 
(31,563
)
 
269,886

GSEs
126,243

 

 
(8,506
)
 
117,737

 
885,443

 

 
(62,431
)
 
823,012

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – residential
222,025

 
356

 
(1,023
)
 
221,358

U.S. government guaranteed – commercial
793,583

 
29

 
(4,408
)
 
789,204

GSEs – residential
3,606,617

 
9,144

 
(23,035
)
 
3,592,726

 
4,622,225

 
9,529

 
(28,466
)
 
4,603,288

Total
$
5,507,668

 
$
9,529

 
$
(90,897
)
 
$
5,426,300

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

Our available-for-sale securities as of December 31, 2013, were (dollars in thousands):

10


 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
439,098

 
$

 
$
(23,963
)
 
$
415,135

U.S. government-owned corporations
273,342

 

 
(34,557
)
 
238,785

GSEs
896,767

 
2,292

 
(10,534
)
 
888,525

 
1,609,207

 
2,292

 
(69,054
)
 
1,542,445

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – residential
273,861

 
416

 
(2,680
)
 
271,597

U.S. government guaranteed – commercial
309,506

 
77

 
(482
)
 
309,101

GSEs – residential
1,904,501

 
5,237

 
(37,571
)
 
1,872,167

 
2,487,868

 
5,730

 
(40,733
)
 
2,452,865

Total
$
4,097,075

 
$
8,022

 
$
(109,787
)
 
$
3,995,310

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

The following table summarizes our available-for-sale securities with unrealized losses as of September 30, 2014, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands): 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
435,389

 
$
(22,362
)
 
$
435,389

 
$
(22,362
)
U.S. government-owned corporations

 

 
269,886

 
(31,563
)
 
269,886

 
(31,563
)
GSEs

 

 
117,737

 
(8,506
)
 
117,737

 
(8,506
)
 

 

 
823,012

 
(62,431
)
 
823,012

 
(62,431
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – residential

 

 
167,826

 
(1,023
)
 
167,826

 
(1,023
)
U.S. government guaranteed – commercial
700,590

 
(4,408
)
 

 

 
700,590

 
(4,408
)
GSEs – residential
1,000,019

 
(4,739
)
 
1,025,162

 
(18,296
)
 
2,025,181

 
(23,035
)
 
1,700,609

 
(9,147
)
 
1,192,988

 
(19,319
)
 
2,893,597

 
(28,466
)
Total temporarily impaired
$
1,700,609

 
$
(9,147
)
 
$
2,016,000

 
$
(81,750
)
 
$
3,716,609

 
$
(90,897
)

The following table summarizes our available-for-sale securities with unrealized losses as of December 31, 2013, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 

11


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
415,135

 
$
(23,963
)
 
$
415,135

 
$
(23,963
)
U.S. government-owned corporations

 

 
238,785

 
(34,557
)
 
238,785

 
(34,557
)
GSEs

 

 
105,644

 
(10,534
)
 
105,644

 
(10,534
)
 

 

 
759,564

 
(69,054
)
 
759,564

 
(69,054
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – residential
211,044

 
(2,680
)
 

 

 
211,044

 
(2,680
)
U.S. government guaranteed – commercial
164,407

 
(482
)
 

 

 
164,407

 
(482
)
GSEs – residential
1,383,396

 
(37,571
)
 

 

 
1,383,396

 
(37,571
)
 
1,758,847

 
(40,733
)
 

 

 
1,758,847

 
(40,733
)
Total temporarily impaired
$
1,758,847

 
$
(40,733
)
 
$
759,564

 
$
(69,054
)
 
$
2,518,411

 
$
(109,787
)
 
Redemption Terms. The amortized cost and fair value of our available-for-sale securities by contractual maturity at September 30, 2014, and December 31, 2013, were (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$

 
$

 
$
780,589

 
$
782,881

Due after one year through five years

 

 

 

Due after five years through 10 years

 

 

 

Due after 10 years
885,443

 
823,012

 
828,618

 
759,564

 
885,443

 
823,012

 
1,609,207

 
1,542,445

MBS (1)
4,622,225

 
4,603,288

 
2,487,868

 
2,452,865

Total
$
5,507,668

 
$
5,426,300

 
$
4,097,075

 
$
3,995,310

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 5 — Held-to-Maturity Securities
 
Major Security Types. Our held-to-maturity securities as of September 30, 2014, were (dollars in thousands):
 

12


 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
6,494

 
$

 
$
6,494

 
$
413

 
$

 
$
6,907

State or local housing-finance-agency obligations (HFA securities)
179,052

 

 
179,052

 
45

 
(22,256
)
 
156,841

 
185,546

 

 
185,546

 
458

 
(22,256
)
 
163,748

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – residential
22,023

 

 
22,023

 
520

 

 
22,543

U.S. government guaranteed – commercial
147,797

 

 
147,797

 
475

 
(12
)
 
148,260

GSEs – residential
1,504,219

 

 
1,504,219

 
42,904

 
(185
)
 
1,546,938

GSEs – commercial
585,973

 

 
585,973

 
30,603

 

 
616,576

Private-label – residential
1,363,262

 
(285,901
)
 
1,077,361

 
338,389

 
(13,415
)
 
1,402,335

Asset-backed securities (ABS) backed by home equity loans
21,484

 
(823
)
 
20,661

 
932

 
(1,215
)
 
20,378

 
3,644,758

 
(286,724
)
 
3,358,034

 
413,823

 
(14,827
)
 
3,757,030

Total
$
3,830,304

 
$
(286,724
)
 
$
3,543,580

 
$
414,281

 
$
(37,083
)
 
$
3,920,778


Our held-to-maturity securities as of December 31, 2013, were (dollars in thousands):
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
8,503

 
$

 
$
8,503

 
$
682

 
$

 
$
9,185

HFA securities
183,625

 

 
183,625

 
30

 
(19,598
)
 
164,057

GSEs
67,504

 

 
67,504

 
160

 

 
67,664

 
259,632

 

 
259,632

 
872

 
(19,598
)
 
240,906

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – residential
27,767

 

 
27,767

 
644

 

 
28,411

U.S. government guaranteed – commercial
213,144

 

 
213,144

 
883

 

 
214,027

GSEs – residential
1,773,905

 

 
1,773,905

 
45,472

 
(360
)
 
1,819,017

GSEs – commercial
700,348

 

 
700,348

 
38,683

 

 
739,031

Private-label – residential
1,465,379

 
(323,989
)
 
1,141,390

 
312,228

 
(17,595
)
 
1,436,023

ABS backed by home equity loans
23,414

 
(939
)
 
22,475

 
986

 
(1,435
)
 
22,026

 
4,203,957

 
(324,928
)
 
3,879,029

 
398,896

 
(19,390
)
 
4,258,535

Total
$
4,463,589

 
$
(324,928
)
 
$
4,138,661

 
$
399,768

 
$
(38,988
)
 
$
4,499,441


The following table summarizes our held-to-maturity securities with unrealized losses as of September 30, 2014, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

13


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$

 
$

 
$
135,938

 
$
(22,256
)
 
$
135,938

 
$
(22,256
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government guaranteed – commercial
11,057

 
(12
)
 

 

 
11,057

 
(12
)
GSEs – residential

 

 
40,306

 
(185
)
 
40,306

 
(185
)
Private-label – residential
18,558

 
(70
)
 
590,411

 
(40,428
)
 
608,969

 
(40,498
)
ABS backed by home equity loans

 

 
18,863

 
(1,347
)
 
18,863

 
(1,347
)
 
29,615

 
(82
)
 
649,580

 
(41,960
)
 
679,195

 
(42,042
)
Total
$
29,615

 
$
(82
)
 
$
785,518

 
$
(64,216
)
 
$
815,133

 
$
(64,298
)

The following table summarizes our held-to-maturity securities with unrealized losses as of December 31, 2013, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$

 
$

 
$
157,752

 
$
(19,598
)
 
$
157,752

 
$
(19,598
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – residential
35,723

 
(144
)
 
42,229

 
(216
)
 
77,952

 
(360
)
Private-label – residential
34,910

 
(317
)
 
910,016

 
(72,461
)
 
944,926

 
(72,778
)
ABS backed by home equity loans

 

 
20,418

 
(1,586
)
 
20,418

 
(1,586
)
 
70,633

 
(461
)
 
972,663

 
(74,263
)
 
1,043,296

 
(74,724
)
Total
$
70,633

 
$
(461
)
 
$
1,130,415

 
$
(93,861
)
 
$
1,201,048

 
$
(94,322
)

Redemption Terms. The amortized cost and fair value of our held-to-maturity securities by contractual maturity at September 30, 2014, and December 31, 2013, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.
 
September 30, 2014
 
December 31, 2013
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
150

 
$
150

 
$
151

 
$
67,504

 
$
67,504

 
$
67,664

Due after one year through five years
10,086

 
10,086

 
10,534

 
2,794

 
2,794

 
2,984

Due after five years through 10 years
17,115

 
17,115

 
17,125

 
27,229

 
27,229

 
27,427

Due after 10 years
158,195

 
158,195

 
135,938

 
162,105

 
162,105

 
142,831

 
185,546

 
185,546

 
163,748

 
259,632

 
259,632

 
240,906

MBS (2)
3,644,758

 
3,358,034

 
3,757,030

 
4,203,957

 
3,879,029

 
4,258,535

Total
$
3,830,304

 
$
3,543,580

 
$
3,920,778

 
$
4,463,589

 
$
4,138,661

 
$
4,499,441

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

14



Note 6 — Other-Than-Temporary Impairment

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at September 30, 2014. At September 30, 2014, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. These unrealized losses are considered temporary as we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security. Regarding securities that were in an unrealized loss position as of September 30, 2014:
 
Debentures issued by a supranational institution that were in an unrealized loss position as of September 30, 2014, are expected to return contractual principal and interest based on our review and analysis of independent third-party credit reports on the supranational institution, and the supranational institution's triple-A (or equivalent) rating by each of the nationally recognized statistical rating organizations (NRSROs) that rates it.
Debentures issued by U.S. government-owned corporations are not obligations of the U.S. government and not guaranteed by the U.S. government. However, these securities are rated at the same level as the U.S. government by the NRSROs. These ratings reflect the U.S. government's implicit support of the government-owned corporation as well as the entity's underlying business and financial risk.
The probability of default on debt issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) is remote given their status as GSEs and their support from the U.S. government.
The U.S. government-guaranteed securities that we hold are MBS issued by the Government National Mortgage Association (Ginnie Mae). The strength of Ginnie Mae's guarantees as a direct obligation from the U.S. government is sufficient to protect us from losses based on current expectations.
Agency MBS. For MBS issued by Fannie Mae and Freddie Mac, which we sometimes refer to as agency MBS in this report, the strength of the issuers' guarantees through direct obligation or support from the U.S. government is sufficient to protect us from losses based on current expectations.

Held-to-Maturity Securities

HFA Securities. We have reviewed our investments in HFA securities and have determined that unrealized losses reflect the impact of normal market yield and spread fluctuations and illiquidity in the credit markets. We have determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral, including an assessment of past payment history (no shortfalls of principal or interest), property vacancy rates, debt service ratios, over-collateralization and other credit enhancement, and third-party bond insurance as applicable. As of September 30, 2014, none of our held-to-maturity investments in HFA securities were rated below investment grade by an NRSRO. Because the decline in market value is attributable to changes in interest rates and credit spreads and to illiquidity in this market and not to a significant deterioration in the fundamental credit quality of these obligations, and because we do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider these investments to be other-than-temporarily impaired at September 30, 2014.
 
Agency MBS. For agency MBS, we determined that the strength of the issuers' guarantees through direct obligation or support from the U.S. government is sufficient to protect us from losses based on current expectations. Additionally, there have been no shortfalls of principal or interest on any such security. As a result, we have determined that, as of September 30, 2014, all of the gross unrealized losses on such MBS are temporary. We do not believe that the declines in market value of these securities are attributable to credit quality, and because we do not intend to sell the investments, nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider any of these investments to be other-than-temporarily impaired at September 30, 2014.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. Our evaluation includes estimating the projected cash flows that we are likely to collect based on an assessment of available information, including the structure of the applicable security and certain assumptions to determine whether we will recover the entire amortized cost basis of the security, such as:

the remaining payment terms for the security;

15


prepayment speeds;
default rates;
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
expected housing price changes; and
interest-rate assumptions.

To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of our private-label residential MBS were performed. These analyses use two third-party models.
 
The first third-party model considers borrower characteristics and the particular attributes of the loans underlying our securities, in conjunction with assumptions about current home prices and future changes in home prices and interest rates, producing monthly projections of prepayments, defaults, and loss severities. A significant input to the first model is the forecast of future housing-price changes, based on an assessment of individual housing markets for the relevant states and core-based statistical areas (CBSA), as defined by the United States Office of Management and Budget. The FHLBank System governance committee (the OTTI Governance Committee) developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0 percent to an increase of 9.0 percent over the 12-month period beginning July 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from 0.0 percent to an increase of 6.0 percent.

Thereafter, we have projected a different recovery path for each relevant geographic area based on an internally developed mean reversion and moving average framework that we have developed using historical data.

The month-by-month projections of future loan level performance are derived from the first model to determine projected prepayments, defaults, and loss severities. These projections are then input into a second model that then allocates the cash flows and losses among the various classes in the securitization structure in accordance with the cash-flow and loss-allocation rules prescribed by the securitization structure. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path described in the prior paragraph.

For those securities for which an other-than-temporary impairment was determined to have occurred during the three months ended September 30, 2014, the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS in each category shown (dollars in thousands).
 
 
 
 
Significant Inputs
 
 
 
 
 
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Current
Credit Enhancement
Private-label MBS by Year of Securitization
 
Par Value
 
Weighted
Average
Percent
 
Weighted
Average
Percent
 
Weighted
Average
Percent
 
Weighted
Average
Percent
Private-label residential MBS - Alt-A (1)
 
 
 
 
 
 
 
 
 
 
2007
 
$
12,289

 
7.5
%
 
56.9
%
 
42.0
%
 
%
2005
 
5,560

 
7.5

 
29.4

 
39.3

 
37.4

2004 and prior
 
2,764

 
14.2

 
9.3

 
5.0

 
5.0

Total Alt-A
 
$
20,613

 
8.4
%
 
43.1
%
 
36.3
%
 
10.8
%
_______________________
(1)
Securities are classified in the table above based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.
 

16


The following table sets forth our securities for which other-than-temporary impairment credit losses were recognized during the life of the security through September 30, 2014 (dollars in thousands). Securities are classified in the table below based on their classifications at the time of issuance. We note that we have instituted litigation in relation to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance (as per the following tables in this Note 6, for example), as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.
 
September 30, 2014
Other-Than-Temporarily Impaired Investment
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
60,589

 
$
51,939

 
$
40,564

 
$
53,002

Private-label residential MBS – Alt-A
1,460,569

 
1,064,414

 
789,888

 
1,115,716

ABS backed by home equity loans – Subprime
4,323

 
3,857

 
3,034

 
3,962

Total other-than-temporarily impaired securities
$
1,525,481

 
$
1,120,210

 
$
833,486

 
$
1,172,680

 
The following table presents a roll-forward of the amounts related to credit losses recognized in earnings. The roll-forward is the amount of credit losses on investment securities on which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss (dollars in thousands).
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
587,334

 
$
614,440

 
$
603,786

 
$
631,330

Additions:
 
 
 
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized
31

 

 
31

 

Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
280

 
1,529

 
1,137

 
2,344

Reductions:
 
 
 
 
 
 
 
Securities matured during the period
(173
)
 

 
(173
)
 
(10,397
)
Increase in cash flows expected to be collected which are recognized over the remaining life of the security(2)
(8,991
)
 
(5,864
)
 
(26,300
)
 
(13,172
)
Balance at end of period
$
578,481

 
$
610,105

 
$
578,481

 
$
610,105

_______________________
(1)
For the three months ended September 30, 2014 and 2013, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to July 1, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2014 and 2013.
(2)
Represents amounts accreted as interest income during the current period.
 
Note 7 — Advances
 
General Terms. At September 30, 2014, and December 31, 2013, we had advances outstanding with interest rates ranging from (0.23) percent to 8.37 percent and (0.22) percent to 8.37 percent, as summarized below (dollars in thousands). Advances with negative interest rates contain embedded interest-rate features that have met the requirements to be separated from the host contract and are recorded as stand-alone derivatives, and which we economically hedge with derivatives containing offsetting interest-rate features.

17


 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
8,596

 
0.42
%
 
$
9,287

 
0.43
%
Due in one year or less
19,797,985

 
0.43

 
15,413,949

 
0.50

Due after one year through two years
2,802,003

 
1.93

 
2,025,840

 
1.99

Due after two years through three years
3,648,098

 
2.62

 
2,875,074

 
2.26

Due after three years through four years
2,293,813

 
2.42