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

 
3,116,119

 
2.89

Due after four years through five years
1,223,228

 
2.06

 
2,156,717

 
2.21

Thereafter
1,420,489

 
3.05

 
1,614,278

 
2.98

Total par value
31,194,212

 
1.15
%
 
27,211,264

 
1.35
%
Premiums
36,088

 
 

 
49,447

 
 

Discounts
(19,154
)
 
 

 
(20,290
)
 
 

Market value of bifurcated derivatives (1)
1,057

 
 
 
892

 
 
Hedging adjustments
197,326

 
 

 
275,365

 
 

Total
$
31,409,529

 
 

 
$
27,516,678

 
 

_________________________
(1)
At September 30, 2014, and December 31, 2013, we had certain advances with embedded features that met the requirements to be separated from the host contract and designate the embedded features as a stand-alone derivative.

At September 30, 2014, and December 31, 2013, we had putable advances outstanding totaling $2.3 billion and $2.6 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next put date for putable advances (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity or Next Put Date
Par Value
 
Percentage
of Total
 
Par Value
 
Percentage
of Total
Overdrawn demand-deposit accounts
$
8,596

 
0.0
%
 
$
9,287

 
0.0
%
Due in one year or less
22,017,410

 
70.6

 
17,778,624

 
65.4

Due after one year through two years
2,577,603

 
8.3

 
1,938,590

 
7.1

Due after two years through three years
2,245,573

 
7.2

 
2,477,674

 
9.1

Due after three years through four years
1,752,563

 
5.6

 
1,619,094

 
6.0

Due after four years through five years
1,182,978

 
3.8

 
1,824,967

 
6.7

Thereafter
1,409,489

 
4.5

 
1,563,028

 
5.7

Total par value
$
31,194,212

 
100.0
%
 
$
27,211,264

 
100.0
%

At September 30, 2014, and December 31, 2013, we had callable advances outstanding totaling $30.0 million and $30.5 million, respectively.

Interest-Rate-Payment Terms. The following table details interest-rate-payment types for our outstanding advances (dollars in thousands):
Par value of advances
September 30, 2014
 
December 31, 2013
Fixed-rate
$
25,467,316

 
$
25,578,977

Variable-rate
5,726,896

 
1,632,287

Total par value
$
31,194,212

 
$
27,211,264

 
Credit-Risk Exposure. At September 30, 2014, and December 31, 2013, we had $10.0 billion and $7.8 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to three borrowers at both September 30, 2014, and December 31, 2013, representing 31.9 percent and 28.6 percent, respectively, of total par value of

18


outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Prepayment Fees. For the three and nine months ended September 30, 2014 and 2013, net advance prepayment fees recognized in income are reflected in the following table (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Prepayment fees received from borrowers
 
$
2,864

 
$
12,270

 
$
10,687

 
$
40,644

Less: hedging fair-value adjustments on prepaid advances
 

 
(6,123
)
 
(552
)
 
(19,330
)
Less: net discounts (premiums) associated with prepaid advances
 
110

 
(430
)
 
(3,819
)
 
(4,424
)
Less: deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 
(1,795
)
 
(3,896
)
 
(1,875
)
 
(5,298
)
Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 

 

 

 
6,845

    Net prepayment fees recognized in income
 
$
1,179

 
$
1,821

 
$
4,441

 
$
18,437


Note 8 — Mortgage Loans Held for Portfolio

We invest in mortgage loans through the Mortgage Partnership Finance® (MPF® program). These investments are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced by the related participating financial institution, as is the case with conventional mortgage loans. All such investments are held for portfolio.

The following table presents certain characteristics of these investments (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Real estate
 

 
 

Fixed-rate, 15-year, single-family mortgages
$
566,454

 
$
595,319

Fixed-rate, 20- and 30-year, single-family mortgages
2,780,020

 
2,717,973

Premiums
60,460

 
59,154

Discounts
(2,954
)
 
(3,440
)
Deferred derivative gains, net
2,270

 
1,691

Total mortgage loans held for portfolio
3,406,250

 
3,370,697

Less: allowance for credit losses
(2,367
)
 
(2,221
)
Total mortgage loans, net of allowance for credit losses
$
3,403,883

 
$
3,368,476

 
The following table details the par value of mortgage loans held for portfolio (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Conventional mortgage loans
$
2,920,562

 
$
2,873,935

Government mortgage loans
425,912

 
439,357

Total par value
$
3,346,474

 
$
3,313,292

 
See Note 9 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF," are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 9 — Allowance for Credit Losses


19


An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2013 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower, an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

We continue to evaluate and make changes to our collateral guidelines based on market conditions. At September 30, 2014, and December 31, 2013, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the nine months ended September 30, 2014 and 2013.

Based on the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at September 30, 2014, and December 31, 2013. At September 30, 2014, and December 31, 2013, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

For additional information on our secured member credit exposure to credit products, see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2013 Annual Report.

Government Mortgage Loans Held for Portfolio

Based on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of September 30, 2014, and December 31, 2013. In addition, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information on our secured member credit exposure to credit products, see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2013 Annual Report.

Conventional Mortgage Loans Held for Portfolio

Our methodology for determining our loan loss reserve consists of estimating loan loss severity using a third-party model incorporating delinquency to default transition performance of the loans, relevant market conditions affecting the performance of the loans, and portfolio level credit protection, particularly credit enhancements. Our inputs to the third-party model consist of loan-related characteristics, such as credit scores, occupancy statuses, loan-to-value ratios, property types, and locations. We update our view of the loan transition performance and market conditions quarterly and periodically adjust our methodology to reflect the changes in the loans’ performances and the market.

For additional information on our secured member credit exposure to credit products, see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2013 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past-due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below set forth certain key credit quality indicators for our investments in mortgage loans at September 30, 2014, and December 31, 2013 (dollars in thousands):

20


 
September 30, 2014
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
30,317

 
$
18,306

 
$
48,623

Past due 60-89 days delinquent
9,661

 
5,313

 
14,974

Past due 90 days or more delinquent
40,221

 
7,345

 
47,566

Total past due
80,199

 
30,964

 
111,163

Total current loans
2,905,395

 
407,024

 
3,312,419

Total mortgage loans
$
2,985,594

 
$
437,988

 
$
3,423,582

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
15,969

 
$
2,322

 
$
18,291

Serious delinquency rate (2)
1.37
%
 
1.68
%
 
1.41
%
Past due 90 days or more still accruing interest
$

 
$
7,345

 
$
7,345

Loans on nonaccrual status (3)
$
40,834

 
$

 
$
40,834

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

 
December 31, 2013
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
31,401

 
$
17,690

 
$
49,091

Past due 60-89 days delinquent
10,786

 
4,618

 
15,404

Past due 90 days or more delinquent
45,916

 
19,913

 
65,829

Total past due
88,103

 
42,221

 
130,324

Total current loans
2,848,158

 
409,478

 
3,257,636

Total mortgage loans
$
2,936,261

 
$
451,699

 
$
3,387,960

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
18,570

 
$
7,904

 
$
26,474

Serious delinquency rate (2)
1.59
%
 
4.41
%
 
1.97
%
Past due 90 days or more still accruing interest
$

 
$
19,913

 
$
19,913

Loans on nonaccrual status (3)
$
46,208

 
$

 
$
46,208

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Individually Evaluated Impaired Loans. The following table presents the recorded investment, par value, and any related allowance for impaired loans individually assessed for impairment at September 30, 2014, and December 31, 2013 (dollars in thousands).

21


 
 
As of September 30, 2014
 
As of December 31, 2013
 
 
Recorded Investment
 
Par Value
 
Related Allowance
 
Recorded Investment
 
Par Value
 
Related Allowance
Individually evaluated impaired mortgage loans with no related allowance
 
$
4,989

 
$
4,968

 
$

 
$
3,231

 
$
3,223

 
$

Individually evaluated impaired mortgage loans with a related allowance
 
2,955

 
2,935

 
490

 
3,440

 
3,415

 
605

Total individually evaluated impaired mortgage loans
 
$
7,944

 
$
7,903

 
$
490

 
$
6,671

 
$
6,638

 
$
605

 
The following tables present the average recorded investment and interest income recognized on these loans individually assessed for impairment during the three and nine months ended September 30, 2014 and 2013 (dollars in thousands).

 
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
4,930

 
$
38

 
$
3,516

 
$
31

Individually evaluated impaired mortgage loans with a related allowance
 
2,760

 
2

 
4,144

 
1

Total individually evaluated impaired mortgage loans
 
$
7,690

 
$
40

 
$
7,660

 
$
32

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
4,304

 
$
130

 
$
3,315

 
$
140

Individually evaluated impaired mortgage loans with a related allowance
 
2,868

 
15

 
2,072

 
3

Total individually evaluated impaired mortgage loans
 
$
7,172

 
$
145

 
$
5,387

 
$
143


Roll-Forward of Allowance for Credit Losses on Mortgage Loans. The following table presents a roll-forward of the allowance for credit losses on conventional mortgage loans for the three and nine months ended September 30, 2014 and 2013, as well as the recorded investment in mortgage loans by impairment methodology at September 30, 2014 and 2013 (dollars in thousands). The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs.

22


 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
2,042

 
$
1,999

 
$
2,221

 
$
4,414

Charge-offs
(48
)
 
(125
)
 
(148
)
 
(310
)
Recoveries

 

 

 
47

Provision (reduction of provision) for credit losses
373

 
83

 
294

 
(2,194
)
Balance, end of period
$
2,367

 
$
1,957

 
$
2,367

 
$
1,957

Ending balance, individually evaluated for impairment
$
490

 
$
562

 
$
490

 
$
562

Ending balance, collectively evaluated for impairment
$
1,877

 
$
1,395

 
$
1,877

 
$
1,395

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
7,944

 
$
6,743

 
$
7,944

 
$
6,743

Collectively evaluated for impairment
$
2,977,650

 
$
2,961,768

 
$
2,977,650

 
$
2,961,768

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

REO. At September 30, 2014, and December 31, 2013, we had $3.8 million and $5.3 million, respectively, in assets classified as REO. During the nine months ended September 30, 2014, and 2013, we sold REO assets with a recorded carrying value of $7.6 million and $9.9 million, respectively. Upon the sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, we recognized net losses totaling $335,000 and $3.0 million during the nine months ended September 30, 2014, and 2013, respectively. Gains and losses on the sale of REO assets are recorded in other income.

Note 10 — Derivatives and Hedging Activities     

The following table presents the fair value of derivatives, including the effect of netting adjustments and cash collateral as of September 30, 2014 (dollars in thousands):
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

Interest-rate swaps
$
12,617,585

 
$
29,049

 
$
(515,817
)
Forward-start interest-rate swaps
1,069,800

 
4

 
(24,739
)
Total derivatives designated as hedging instruments
13,687,385

 
29,053

 
(540,556
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
Interest-rate swaps
397,000

 
96

 
(18,560
)
Interest-rate caps or floors
300,000

 

 

Mortgage-delivery commitments (1)
25,880

 
35

 
(20
)
Total derivatives not designated as hedging instruments
722,880

 
131

 
(18,580
)
Total notional amount of derivatives
$
14,410,265

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
29,184

 
(559,136
)
Netting adjustments (2)
 

 
(45,304
)
 
45,304

Cash collateral and related accrued interest
 
 
28,756

 

Derivative assets and derivative liabilities
 

 
$
12,636

 
$
(513,832
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.

23


(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty.

The following table presents the fair value of derivatives as of December 31, 2013 (dollars in thousands):

 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

Interest-rate swaps
$
11,707,590

 
$
33,361

 
$
(568,477
)
Forward-start interest-rate swaps
1,410,800

 
2,408

 
(53,875
)
Total derivatives designated as hedging instruments
13,118,390

 
35,769

 
(622,352
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 

 
 

 
 

Interest-rate swaps
1,273,500

 
610

 
(20,146
)
Interest-rate caps or floors
300,000

 
43

 

Mortgage-delivery commitments (1)
11,056

 
5

 
(39
)
Total derivatives not designated as hedging instruments
1,584,556

 
658

 
(20,185
)
Total notional amount of derivatives
$
14,702,946

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
36,427

 
(642,537
)
Netting adjustments (2)
 

 
(34,385
)
 
34,385

Cash collateral and related accrued interest
 

 
2,276

 

Derivative assets and derivative liabilities
 

 
$
4,318

 
$
(608,152
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty.

Net gains (losses) on derivatives and hedging activities recorded in Other Income (Loss) for the three and nine months ended September 30, 2014, and 2013, were as follows (dollars in thousands):

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Derivatives and hedged items in fair-value hedging relationships:
 
 
 
 
 
 
 
 
   Interest-rate swaps
 
$
334

 
$
491

 
$
1,793

 
$
1,827

Cash flow hedge ineffectiveness
 
(78
)
 
13

 
(248
)
 
53

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
   Economic hedges:
 
 
 
 
 
 
 
 
      Interest-rate swaps
 
1,062

 
(1,611
)
 
(3,581
)
 
5,720

      Interest-rate caps or floors
 
(1
)
 
(67
)
 
(43
)
 
55

   Mortgage-delivery commitments
 
94

 
104

 
815

 
(1,480
)
Total net gains (losses) related to derivatives not designated as hedging instruments
 
1,155

 
(1,574
)
 
(2,809
)
 
4,295

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

 
$
(1,070
)
 
$
(1,264
)
 
$
6,175


The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedge relationships and the impact of those derivatives on our net interest income for the three and nine months ended September 30, 2014, and 2013 (dollars in thousands):

24


 
For the Three Months Ended September 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
48,280

 
$
(48,158
)
 
$
122

 
$
(32,487
)
Investments
(2,683
)
 
3,040

 
357

 
(9,496
)
Deposits
(362
)
 
362

 

 
357

COs – bonds
(17,834
)
 
17,689

 
(145
)
 
14,856

Total
$
27,401

 
$
(27,067
)
 
$
334

 
$
(26,770
)

 
For the Three Months Ended September 30, 2013
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
21,441

 
$
(21,300
)
 
$
141

 
$
(36,468
)
Investments
16,806

 
(16,418
)
 
388

 
(9,437
)
Deposits
(372
)
 
372

 

 
395

COs – bonds
3,407

 
(3,445
)
 
(38
)
 
13,640

Total
$
41,282

 
$
(40,791
)
 
$
491

 
$
(31,870
)

 
For the Nine Months Ended September 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
78,389

 
$
(78,039
)
 
$
350

 
$
(98,917
)
Investments
(55,952
)
 
56,825

 
873

 
(28,494
)
Deposits
(1,143
)
 
1,143

 

 
1,151

COs – bonds
2,921

 
(2,351
)
 
570

 
38,629

Total
$
24,215

 
$
(22,422
)
 
$
1,793

 
$
(87,631
)

 
For the Nine Months Ended September 30, 2013
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
176,729

 
$
(175,986
)
 
$
743

 
$
(114,058
)
Investments
111,118

 
(109,922
)
 
1,196

 
(29,004
)
Deposits
(1,150
)
 
1,150

 

 
1,183

COs – bonds
(65,727
)
 
65,615

 
(112
)
 
52,616

Total
$
220,970

 
$
(219,143
)
 
$
1,827

 
$
(89,263
)
_____________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

The following table presents the gains (losses) recognized in accumulated other comprehensive loss, the gains (losses) reclassified from accumulated other comprehensive loss into income, and the effect of our hedging activities on our net gains

25


(losses) on derivatives and hedging activities in the statement of income for our forward-start interest-rate swaps associated with CO bond hedged items in cash-flow hedging relationships (dollars in thousands).
Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
(Losses) Gains Recognized in Accumulated Other Comprehensive Loss on Derivatives
(Effective Portion)
 
Location of (Losses) Gains Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
(Losses) Gains Recognized in Net Gains (Losses) on Derivatives and Hedging Activities
(Ineffective Portion)
Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2014
 
$
(1,482
)
 
Interest expense
 
$
(3,145
)
 
$
(78
)
For the Three Months Ended September 30, 2013
 
(6,173
)
 
Interest expense
 

 
13

 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2014
 
(21,222
)
 
Interest expense
 
(3,865
)
 
(248
)
For the Nine Months Ended September 30, 2013
 
11,001

 
Interest expense
 

 
53


For the nine months ended September 30, 2014, and 2013, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2014, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is nine years.

As of September 30, 2014, the amount of deferred net losses on derivatives accumulated in other comprehensive loss, related to cash-flow hedges expected to be reclassified to earnings during the next 12 months, is $20.9 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a derivatives clearing organization (DCO), which is our counterparty for such derivatives. We also enter into derivatives that are not cleared with a DCO (bilateral derivatives). Certain of our bilateral derivatives master-netting agreements contain provisions that require us to post additional collateral with our bilateral derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's Investor Service (Moody's) or Standard and Poor’s Rating Service (S&P) to a certain level, we are required to deliver additional collateral on bilateral derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all bilateral derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at September 30, 2014, was $513.8 million, for which we had delivered collateral with a post-haircut value of $406.5 million in accordance with the terms of the master-netting agreements. The following table sets forth the post-haircut value of incremental collateral that certain bilateral derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at September 30, 2014 (dollars in thousands).

Post-haircut Value of Incremental Collateral to be Delivered
 as of September 30, 2014
Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral(2)
AA+
 
AA or AA-
 
$
31,459

AA-
 
A+, A or A-
 
39,247

A-
 
below A-
 
48,062

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.
(2)
Additional collateral of $1.2 million could be called by counterparties as of September 30, 2014, at our current credit rating of AA+ (based on the lower of our credit ratings from S&P and Moody's) and is not included in the table.

For cleared derivatives, the DCO determines initial margin requirements. We note that we clear our trades via futures commission merchants (FCMs), and our FCMs may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our FCMs at September 30, 2014.

26



Offsetting of Certain Derivatives. We present derivatives, related cash collateral, including initial and variation margin, received or pledged and associated accrued interest, on a net basis by FCMs and/or by counterparty.

The following table presents separately the fair value of derivatives meeting or not meeting netting requirements, with and without the legal right of offset, including the related collateral received from or pledged to counterparties, based on the terms of our master netting arrangements or similar agreements as of September 30, 2014, and December 31, 2013 (dollars in thousands).

 
 
September 30, 2014
 
December 31, 2013
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivatives meeting netting requirements
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
27,131

 
$
(539,929
)
 
$
31,271

 
$
(639,372
)
Cleared derivatives
 
2,018

 
(19,187
)
 
5,151

 
(3,126
)
Total gross recognized amount
 
29,149

 
(559,116
)
 
36,422

 
(642,498
)
Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
(26,497
)
 
26,117

 
(31,259
)
 
31,259

Cleared derivatives
 
9,949

 
19,187

 
(850
)
 
3,126

Total gross amounts of netting adjustments and cash collateral
 
(16,548
)
 
45,304

 
(32,109
)
 
34,385

Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
634

 
(513,812
)
 
12

 
(608,113
)
Cleared derivatives
 
11,967

 

 
4,301

 

Total net amounts after netting adjustments and cash collateral
 
12,601

 
(513,812
)
 
4,313

 
(608,113
)
Derivatives not meeting netting requirements
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
35

 
(20
)
 
5

 
(39
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
 
Bilateral derivatives
 
634

 
(513,812
)
 
12

 
(608,113
)
Cleared derivatives
 
11,967

 

 
4,301

 

Mortgage delivery commitments
 
35

 
(20
)
 
5

 
(39
)
Total derivative assets and total derivative liabilities presented in the statement of condition
 
12,636

 
(513,832
)
 
4,318

 
(608,152
)
 
 
 
 
 
 
 
 
 
Non-cash collateral received or pledged, not offset (1)
 
 
 
 
 
 
 
 
Can be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 

 
72,162

 

 
71,063

Cannot be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 

 
351,575

 

 
420,910

Total non-cash collateral received or pledged, not offset
 

 
423,737

 

 
491,973

 Net amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
634

 
(90,075
)
 
12

 
(116,140
)
Cleared derivatives
 
11,967

 

 
4,301

 

Mortgage delivery commitments
 
35

 
(20
)
 
5

 
(39
)
Total net amount
 
$
12,636

 
$
(90,095
)
 
$
4,318

 
$
(116,179
)
_______________________
(1)
Includes noncash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At September 30, 2014, and December 31, 2013, we had additional net credit exposure of $4.1 million

27


and $7.1 million, respectively, due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

We offer demand and overnight deposits for members and qualifying nonmembers. In addition, we offer short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans. We classify these items as "other" in the following table.

At December 31, 2013, deposits included hedging adjustments of $1.1 million.

The following table details interest-bearing and noninterest-bearing deposits (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Interest-bearing
 

 
 
Demand and overnight
$
499,654

 
$
473,600

Term

 
20,676

Other
3,328

 
4,399

Noninterest-bearing
 

 
 

Other
17,882

 
18,890

Total deposits
$
520,864

 
$
517,565


The aggregate amount of time deposits with a denomination of $100,000 or more as of December 31, 2013, was $20.0 million.

Note 12 — Consolidated Obligations

COs - Bonds. The following table sets forth the outstanding CO bonds for which we were primarily liable at September 30, 2014, and December 31, 2013, by year of contractual maturity (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
 
 

 
 

 
 

 
 

Due in one year or less
$
5,591,945

 
1.45
%
 
$
7,646,100

 
0.99
%
Due after one year through two years
5,439,130

 
1.69

 
4,454,885

 
2.07

Due after two years through three years
4,922,030

 
1.55

 
2,903,390

 
1.93

Due after three years through four years
2,796,515

 
2.11

 
3,245,980

 
2.17

Due after four years through five years
1,965,400

 
1.80

 
1,651,560

 
1.85

Thereafter
4,123,630

 
2.65

 
3,368,740

 
2.64

Total par value
24,838,650

 
1.82
%
 
23,270,655

 
1.78
%
Premiums
204,379

 
 

 
228,753

 
 

Discounts
(20,923
)
 
 

 
(20,081
)
 
 

Hedging adjustments
(11,069
)
 
 

 
(13,421
)
 
 

 
$
25,011,037

 
 

 
$
23,465,906

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.

Our CO bonds outstanding at September 30, 2014, and December 31, 2013, included (dollars in thousands):

28


 
September 30, 2014
 
December 31, 2013
Par value of CO bonds
 

 
 

Noncallable and nonputable
$
20,018,650

 
$
20,755,655

Callable
4,820,000

 
2,515,000

Total par value
$
24,838,650

 
$
23,270,655


The following is a summary of the CO bonds for which we were primarily liable at September 30, 2014, and December 31, 2013, by year of contractual maturity or next call date for callable CO bonds (dollars in thousands):
Year of Contractual Maturity or Next Call Date
 
September 30, 2014
 
December 31, 2013
Due in one year or less
 
$
9,971,945

 
$
10,066,100

Due after one year through two years
 
5,229,130

 
4,459,885

Due after two years through three years
 
4,047,030

 
2,838,390

Due after three years through four years
 
2,306,515

 
3,105,980

Due after four years through five years
 
1,415,400

 
1,476,560

Thereafter
 
1,868,630

 
1,323,740

Total par value
 
$
24,838,650

 
$
23,270,655


The following table sets forth the CO bonds for which we were primarily liable by interest-rate-payment type at September 30, 2014, and December 31, 2013 (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Par value of CO bonds
 

 
 

Fixed-rate
$
22,033,650

 
$
19,815,655

Simple variable-rate
1,620,000

 
2,570,000

Step-up
1,185,000

 
885,000

Total par value
$
24,838,650

 
$
23,270,655


COs – Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
September 30, 2014
$
22,559,486

 
$
22,560,800

 
0.06
%
December 31, 2013
$
16,060,781

 
$
16,062,000

 
0.07
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 13 — Affordable Housing Program

The following table presents a roll-forward of the AHP liability for the nine months ended September 30, 2014, and the year ended December 31, 2013 (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Balance at beginning of year
$
62,591

 
$
50,545

AHP expense for the period
13,654

 
24,229

AHP direct grant disbursements
(10,170
)
 
(11,077
)
AHP subsidy for AHP advance disbursements
(1,321
)
 
(1,148
)
Return of previously disbursed grants and subsidies
77

 
42

Balance at end of period
$
64,831

 
$
62,591


Note 14 — Capital

29



We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended
(the FHLBank Act), and FHFA regulations:
 
1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.
 
2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.
 
3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. A leverage capital-to-assets ratio is defined as permanent capital weighted 1.5 times divided by total assets.
 
The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

The following tables demonstrate our compliance with our regulatory capital requirements at September 30, 2014, and December 31, 2013 (dollars in thousands):
Risk-Based Capital Requirements
September 30,
2014
 
December 31,
2013
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,393,508

 
$
2,530,471

Mandatorily redeemable capital stock
244,045

 
977,348

Retained earnings
876,192

 
788,790

Total permanent capital
$
3,513,745

 
$
4,296,609

Risk-based capital requirement
 

 
 

Credit-risk capital
$
436,035

 
$
423,522

Market-risk capital
91,551

 
136,943

Operations-risk capital
158,276

 
168,140

Total risk-based capital requirement
$
685,862

 
$
728,605

Permanent capital in excess of risk-based capital requirement
$
2,827,883

 
$
3,568,004

 
 
September 30, 2014
 
December 31, 2013
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
685,862

 
$
3,513,745

 
$
728,605

 
$
4,296,609

Total regulatory capital
 
$
2,076,195

 
$
3,513,745

 
$
1,785,523

 
$
4,296,609

Total capital-to-asset ratio
 
4.0
%
 
6.8
%
 
4.0
%
 
9.6
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
2,595,243

 
$
5,270,618

 
$
2,231,904

 
$
6,444,913

Leverage capital-to-assets ratio
 
5.0
%
 
10.2
%
 
5.0
%
 
14.4
%

Note 15 — Accumulated Other Comprehensive Loss


30


The following tables present a summary of changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, June 30, 2013
 
$
(67,119
)
 
$
(354,716
)
 
$
(47,846
)
 
$
(4,421
)
 
$
(474,102
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized losses
 
(17,195
)
 

 
(6,173
)
 

 
(23,368
)
Accretion of noncredit loss
 

 
14,256

 

 

 
14,256

Net actuarial loss
 

 

 

 
(523
)
 
(523
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
1,448

 

 

 
1,448

Amortization - hedging activities (2)
 

 

 
4

 

 
4

Amortization - pension and postretirement benefits (3)
 

 

 

 
200

 
200

Other comprehensive (loss) income
 
(17,195
)
 
15,704

 
(6,169
)
 
(323
)
 
(7,983
)
Balance, September 30, 2013
 
$
(84,314
)
 
$
(339,012
)
 
$
(54,015
)
 
$
(4,744
)
 
$
(482,085
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2014
 
$
(72,094
)
 
$
(299,324
)
 
$
(70,605
)
 
$
(3,364
)
 
$
(445,387
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized losses
 
(9,274
)
 

 
(1,482
)
 

 
(10,756
)
Accretion of noncredit loss
 

 
12,531

 

 

 
12,531

Net actuarial loss
 

 

 

 
(185
)
 
(185
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
68

 

 

 
68

Amortization - hedging activities (4)
 

 

 
3,149

 

 
3,149

Amortization - pension and postretirement benefits (3)
 

 

 

 
118

 
118

Other comprehensive (loss) income
 
(9,274
)
 
12,599

 
1,667

 
(67
)
 
4,925

Balance, September 30, 2014
 
$
(81,368
)
 
$
(286,725
)
 
$
(68,938
)
 
$
(3,431
)
 
$
(440,462
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified (from) to accumulated other comprehensive loss in the statement of operations.
(2)
Recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $3.1 million recorded in interest expense CO bonds and $4,000 recorded in net gains on derivatives and hedging activities in the statement of operations.


31


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2012
 
$
(22,643
)
 
$
(385,175
)
 
$
(65,027
)
 
$
(3,775
)
 
$
(476,620
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(61,671
)
 

 
11,001

 

 
(50,670
)
Noncredit other-than-temporary impairment losses
 

 
(63
)
 

 

 
(63
)
Accretion of noncredit loss
 

 
44,000

 

 

 
44,000

Net actuarial loss
 

 

 

 
(1,569
)
 
(1,569
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
2,226

 

 

 
2,226

Amortization - hedging activities (2)
 

 

 
11

 

 
11

Amortization - pension and postretirement benefits (3)
 

 

 

 
600

 
600

Other comprehensive (loss) income
 
(61,671
)
 
46,163

 
11,012

 
(969
)
 
(5,465
)
Balance, September 30, 2013
 
$
(84,314
)
 
$
(339,012
)
 
$
(54,015
)
 
$
(4,744
)
 
$
(482,085
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
 
$
(101,765
)
 
$
(324,928
)
 
$
(51,594
)
 
$
(3,229
)
 
$
(481,516
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
20,397

 

 
(21,222
)
 

 
(825
)
Accretion of noncredit loss
 

 
37,278

 

 

 
37,278

Net actuarial loss
 

 

 

 
(558
)
 
(558
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
925

 

 

 
925

Amortization - hedging activities (4)
 

 

 
3,878

 

 
3,878

Amortization - pension and postretirement benefits (3)
 

 

 

 
356

 
356

Other comprehensive income (loss)
 
20,397

 
38,203

 
(17,344
)
 
(202
)
 
41,054

Balance, September 30, 2014
 
$
(81,368
)
 
$
(286,725
)
 
$
(68,938
)
 
$
(3,431
)
 
$
(440,462
)
_____________________
(1)
Recorded in net amount of impairment losses reclassified (from) to accumulated other comprehensive loss in the statement of operations.
(2)
Recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $3.9 million recorded in interest expense CO bonds and $11,000 recorded in net gains on derivatives and hedging activities in the statement of operations.

Note 16 — Employee Retirement Plans

Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan

32


under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. The plan covers substantially all of our officers and employees.

Qualified Defined Contribution Plan. We also participate in the Pentegra Defined Contribution Plan for Financial
Institutions, a tax-qualified defined contribution plan. The plan covers substantially all of our officers and employees. We contribute a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. Our matching contributions are charged to compensation and benefits expense.

Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals.

The following table sets forth our net pension costs under our defined benefit plan and expenses relating to our defined contribution plans (dollars in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Qualified Defined Benefit Multiemployer Plan - Pentegra Defined Benefit Plan
$
871

 
$
880

 
$
2,397

 
$
1,362

Qualified Defined Contribution Plan - Pentegra Defined Contribution Plan
222

 
215

 
726

 
699

Nonqualified Defined Contribution Plan - Thrift Benefit Equalization Plan
18

 
16

 
124

 
120


Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust intended to meet future benefit obligations.

Postretirement Benefits. We sponsor a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. We provide life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.

The following tables present the components of net periodic benefit cost for our nonqualified supplemental defined benefit retirement plan and postretirement benefits for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):
 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Three Months Ended September 30,
 
Postretirement Benefits For the Three Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
138

 
$
169

 
$
6

 
$
8

Interest cost
 
116

 
109

 
8

 
7

Amortization of net actuarial loss
 
118

 
197

 

 
3

Net periodic benefit cost
 
$
372

 
$
475

 
$
14

 
$
18



33


 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Nine Months Ended September 30,
 
Postretirement Benefits For the Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
414

 
$
419

 
$
18

 
$
24

Interest cost
 
347

 
271

 
24

 
22

Amortization of net actuarial loss
 
355

 
591

 
1

 
9

Net periodic benefit cost
 
$
1,116

 
$
1,281

 
$
43

 
$
55


Note 17 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 1 — Financial Statements and Supplementary Data — Note 19 — Fair Values in the 2013 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the nine months ended September 30, 2014.

The carrying values, fair values, and fair-value hierarchy of our financial instruments at September 30, 2014, and December 31, 2013, were as follows (dollars in thousands). These fair values do not represent an estimate of our overall market value as a going concern, which would take into account, among other things, our future business opportunities and the net profitability of our assets and liabilities.

34


 
September 30, 2014
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
1,800,188

 
$
1,800,188

 
$
1,800,188

 
$

 
$

 
$

Interest-bearing deposits
210

 
210

 
210

 

 

 

Securities purchased under agreements to resell
3,500,000

 
3,499,937

 

 
3,499,937

 

 

Federal funds sold
2,450,000

 
2,449,991

 

 
2,449,991

 

 

Trading securities(1)
245,337

 
245,337

 

 
245,337

 

 

Available-for-sale securities(1)
5,426,300

 
5,426,300

 

 
5,426,300

 

 

Held-to-maturity securities(2)
3,543,580

 
3,920,778

 

 
2,341,223

 
1,579,555

 

Advances
31,409,529

 
31,544,522

 

 
31,544,522

 

 

Mortgage loans, net
3,403,883

 
3,492,888

 

 
3,492,888

 

 

Accrued interest receivable
71,560

 
71,560

 

 
71,560

 

 

Derivative assets(1)
12,636

 
12,636

 

 
29,184

 

 
(16,548
)
Other assets (1)
10,852

 
10,852

 
5,371

 
5,481

 

 

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(520,864
)
 
(520,864
)
 

 
(520,864
)
 

 

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(25,011,037
)
 
(25,203,146
)
 

 
(25,203,146
)
 

 

Discount notes
(22,559,486
)
 
(22,559,659
)
 

 
(22,559,659
)
 

 

Mandatorily redeemable capital stock
(244,045
)
 
(244,045
)
 
(244,045
)
 

 

 

Accrued interest payable
(100,364
)
 
(100,364
)
 

 
(100,364
)
 

 

Derivative liabilities(1)
(513,832
)
 
(513,832
)
 

 
(559,136
)
 

 
45,304

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
(361
)
 

 
(361
)
 

 

Standby letters of credit
(848
)
 
(848
)
 

 
(848
)
 

 

_______________________
(1)
Carried at fair value on a recurring basis.
(2)
Private-label residential MBS and HFA securities are categorized as Level 3. Private-label residential MBS that have incurred other-than-temporary impairment losses are measured at fair value on a nonrecurring basis. See the recurring and nonrecurring tables below for more details.


35


 
December 31, 2013
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
641,033

 
$
641,033

 
$
641,033

 
$

 
$

 
$

Interest-bearing deposits
195

 
195

 
195

 

 

 

Securities purchased under agreements to resell
3,750,000

 
3,749,942

 

 
3,749,942

 

 

Federal funds sold
850,000

 
849,993

 

 
849,993

 

 

Trading securities(1)
247,174

 
247,174

 

 
247,174

 

 

Available-for-sale securities(1)
3,995,310

 
3,995,310

 

 
3,995,310

 

 

Held-to-maturity securities(2)
4,138,661

 
4,499,441

 

 
2,877,334

 
1,622,107

 

Advances
27,516,678

 
27,632,970

 

 
27,632,970

 

 

Mortgage loans, net
3,368,476

 
3,396,499

 

 
3,396,499

 

 

Accrued interest receivable
83,458

 
83,458

 

 
83,458

 

 

Derivative assets(1)
4,318

 
4,318

 

 
36,427

 

 
(32,109
)
Other assets(1)
10,086

 
10,086

 
5,197

 
4,889

 

 

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(517,565
)
 
(517,552
)
 

 
(517,552
)
 

 

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(23,465,906
)
 
(23,584,981
)
 

 
(23,584,981
)
 

 

Discount notes
(16,060,781
)
 
(16,061,486
)
 

 
(16,061,486
)
 

 

Mandatorily redeemable capital stock
(977,348
)
 
(977,348
)
 
(977,348
)
 

 

 

Accrued interest payable
(83,386
)
 
(83,386
)
 

 
(83,386
)
 

 

Derivative liabilities(1)
(608,152
)
 
(608,152
)
 

 
(642,537
)
 

 
34,385

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
(2,098
)
 

 
(2,098
)
 

 

Standby letters of credit
(562
)
 
(562
)
 

 
(562
)
 

 

_______________________
(1)
Carried at fair value on a recurring basis.
(2)
Private-label residential MBS and HFA securities are categorized as Level 3. Private-label residential MBS that have incurred other-than-temporary impairment losses are measured at fair value on a nonrecurring basis. See the recurring and nonrecurring tables below for more details.

Fair Value Measured on a Recurring Basis.

The following tables present our assets and liabilities that are measured at fair value on the statement of condition, which are recorded on a recurring basis at September 30, 2014, and December 31, 2013, by fair-value hierarchy level (dollars in thousands):
 

36


 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – residential MBS
$

 
$
12,786

 
$

 
$

 
$
12,786

GSEs – residential MBS

 
2,539

 

 

 
2,539

GSEs – commercial MBS

 
230,012

 

 

 
230,012

Total trading securities

 
245,337

 

 

 
245,337

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
435,389

 

 

 
435,389

U.S. government-owned corporations

 
269,886

 

 

 
269,886

GSEs

 
117,737

 

 

 
117,737

U.S. government guaranteed – residential MBS

 
221,358

 

 

 
221,358

U.S. government guaranteed – commercial MBS

 
789,204

 

 

 
789,204

GSEs – residential MBS

 
3,592,726

 

 

 
3,592,726

Total available-for-sale securities

 
5,426,300

 

 

 
5,426,300

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
29,149

 

 
(16,548
)
 
12,601

Mortgage delivery commitments

 
35

 

 

 
35

Total derivative assets

 
29,184

 

 
(16,548
)
 
12,636

Other assets
5,371

 
5,481

 

 

 
10,852

Total assets at fair value
$
5,371

 
$
5,706,302

 
$

 
$
(16,548
)
 
$
5,695,125

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(559,116
)
 
$

 
$
45,304

 
$
(513,812
)
Mortgage delivery commitments

 
(20
)
 

 

 
(20
)
Total liabilities at fair value
$

 
$
(559,136
)
 
$

 
$
45,304

 
$
(513,832
)
_______________________
(1)
These amounts represent the application of the netting requirements which allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same FCM and/or counterparty.



37


 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – residential MBS
$

 
$
14,331

 
$

 
$

 
$
14,331

GSEs – residential MBS

 
3,486

 

 

 
3,486

GSEs – commercial MBS

 
229,357

 

 

 
229,357

Total trading securities

 
247,174

 

 

 
247,174

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
415,135

 

 

 
415,135

U.S. government-owned corporations

 
238,785

 

 

 
238,785

GSEs

 
888,525

 

 

 
888,525

U.S. government guaranteed – residential MBS

 
271,597

 

 

 
271,597

U.S. government guaranteed – commercial MBS

 
309,101

 

 

 
309,101

GSEs – residential MBS

 
1,872,167

 

 

 
1,872,167

Total available-for-sale securities

 
3,995,310

 

 

 
3,995,310

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
36,422

 

 
(32,109
)
 
4,313

Mortgage delivery commitments

 
5

 

 

 
5

Total derivative assets

 
36,427

 

 
(32,109
)
 
4,318

Other assets
5,197

 
4,889

 

 

 
10,086

Total assets at fair value
$
5,197

 
$
4,283,800

 
$

 
$
(32,109
)
 
$
4,256,888

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(642,498
)
 
$

 
$
34,385

 
$
(608,113
)
Mortgage delivery commitments

 
(39
)
 

 

 
(39
)
Total liabilities at fair value
$

 
$
(642,537
)
 
$

 
$
34,385

 
$
(608,152
)
_______________________
(1)
These amounts represent the application of the netting requirements which allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same FCM and/or counterparty.

Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).
 
The following tables present financial assets by level within the fair-value hierarchy which are recorded at fair value on a nonrecurring basis at September 30, 2014, and December 31, 2013 (dollars in thousands).
 
 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$

 
$

 
$
9,873

 
$
9,873

REO

 

 
1,620

 
1,620

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
11,493

 
$
11,493


38



 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
REO
$

 
$

 
$
115

 
$
115


Note 18 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the 12 district Federal Home Loan Banks (FHLBanks or FHLBank System). The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of September 30, 2014, and through the filing of this report, we do not believe that it is reasonably likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by FHFA regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at September 30, 2014, and December 31, 2013. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $769.6 billion and $727.5 billion at September 30, 2014, and December 31, 2013, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

The following table sets forth our off-balance-sheet commitments as of September 30, 2014, and December 31, 2013 (dollars in thousands):

 
 
September 30, 2014
 
December 31, 2013
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
3,929,469

 
$
112,817

 
$
4,042,286

 
$
2,873,616

 
$
247,399

 
$
3,121,015

Commitments for unused lines of credit - advances (2)
 
1,276,723

 

 
1,276,723

 
1,283,361

 

 
1,283,361

Commitments to make additional advances
 
773,707

 
69,406

 
843,113

 
436,954

 
60,078

 
497,032

Commitments to invest in mortgage loans
 
25,880

 

 
25,880

 
11,056

 

 
11,056

Unsettled CO bonds, at par (3)
 
29,000

 

 
29,000

 
36,400

 

 
36,400

Unsettled CO discount notes, at par
 
875,000

 

 
875,000

 
1,215,000

 

 
1,215,000

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year totaling $47.7 million as of September 30, 2014. Also excluded are commitments to issue standby letters of credit that expire within one year totaling $15.7 million at December 31, 2013.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.
(3) We had $15.0 million in unsettled CO bonds that were hedged with associated interest-rate swaps at September 30, 2014.

39



Standby Letters of Credit. A standby letter of credit is a financing arrangement pursuant to which we agree for a fee to fund the associated obligation to a third-party beneficiary should the primary obligor fail to fund such obligation. If we are required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized advance to the primary obligor. Standby letters of credit are fully collateralized at the time of issuance. Based on our credit analyses and collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.

The original terms of our outstanding standby letters of credit range from final expiries in 27 days to 20 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $848,000 and $562,000 at September 30, 2014, and December 31, 2013, respectively.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.
 
Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 10 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Note 19 — Transactions with Shareholders
 
Related Parties. We define related parties as members with 10 percent or more of the voting interests of our capital stock outstanding. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of our stock that are required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At September 30, 2014, and December 31, 2013, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding. The following tables present transactions with shareholders whose holdings of capital stock exceed 10 percent or more of total capital stock outstanding at September 30, 2014, and December 31, 2013 (dollars in thousands):

As of September 30, 2014
Capital Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Accrued
Interest
Receivable on Advances
 
Percent of Total
Accrued Interest
Receivable on
Advances
Citizens Bank, N.A.
$
317,502

 
12.0
%
 
$
5,468,698

 
17.5
%
 
$
624

 
2.0
%

As of December 31, 2013
Capital Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Accrued
Interest
Receivable on Advances
 
Percent of Total
Accrued Interest
Receivable on
Advances
Bank of America, N.A. (1)
$
857,835

 
24.5
%
 
$
98,370

 
0.4
%
 
$
420

 
1.4
%
Citizens Bank, N.A.
430,077

 
12.3

 
2,269,149

 
8.3

 
187

 
0.6

_______________________
(1)
Bank of America, N.A. is a nonmember and its shares of capital stock are classified as mandatorily redeemable capital stock.


40


We held sufficient collateral to support the advances to the above institutions such that we do not expect to incur any credit losses on these advances.

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank N.A during the three and nine months ended September 30, 2014, and 2013 as follows (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Citizens Bank, N.A.
 
2014
 
2013
 
2014
 
2013
Interest income on advances
 
$
3,755

 
$
210

 
$
9,505

 
$
977

Fees on letters of credit
 
1,133

 
898

 
2,791

 
2,315


We recognized interest income on outstanding advances and fees on letters of credit from Bank of America, N.A during the three and nine months ended September 30, 2013, as follows (dollars in thousands):
Bank of America, N.A.
 
For the Three Months Ended September 30, 2013
 
For the Nine Months Ended September 30, 2013
Interest income on advances
 
$
1,295

 
$
3,984

Fees on letters of credit
 
15

 
15


Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member. 

The following table presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2014
$
78,395

 
3.0
%
 
$
765,522

 
2.5
%
 
$
1,142

 
3.7
%
As of December 31, 2013
127,020

 
3.6

 
659,333

 
2.4

 
1,693

 
5.6


Note 20 — Subsequent Events

On October 24, 2014, our board of directors declared a cash dividend at an annualized rate of 1.49 percent based on capital stock balances outstanding during the third quarter of 2014. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $10.4 million and was paid on November 4, 2014.







41


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are “forward-looking statements.” These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2013 Annual Report and Part II —Item 1A — Risk Factors of this quarterly report, and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. We do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
 
Forward-looking statements in this report may include, among others, our expectations for:

income, retained earnings, and dividend payouts;
repurchases of excess stock;
credit losses on advances and investments in mortgage loans and ABS, particularly private-label MBS;
balance-sheet changes and components thereof, such as changes in advances balances and the size of our portfolio of investments in mortgage loans;
our minimum retained earnings target; and
the interest-rate environment in which we do business.

Actual results may differ from forward-looking statements for many reasons, including, but not limited to:
 
changes in interest rates, the rate of inflation (or deflation), housing prices, employment rates, and the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government;
changes in demand for our advances and other products;
the willingness of our members to do business with us;
changes in the financial health of our members;
insolvencies of our members;
changes in borrower defaults on mortgage loans;
changes in the credit performance and loss severities of our investments;
changes in prepayment rates on advances and investments;
the value of collateral we hold as security for obligations of our members and counterparties;
issues and events across the FHLBank System and in the political arena that may lead to legislative, regulatory, judicial, or other developments impacting demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, the manner in which we operate, or the organization and structure of the FHLBank System;
competitive forces including, without limitation, other sources of funding available to our members, other entities borrowing funds in the capital markets, and our ability to attract and retain skilled employees;
the pace of technological change and our ability to develop and support technology and information systems sufficient to manage the risks of our business effectively;
the loss of members due to, among other ways, member withdrawals, mergers, and acquisitions;
changes in investor demand for COs;
changes in the terms or availability of derivatives and other agreements we enter into in support of our business operations;
the timing and volume of market activity;
the volatility of reported results due to changes in the fair value of certain assets and liabilities, including, but not limited to, private-label MBS;
our ability to introduce new (or adequately adapt current) products and services and successfully manage the risks associated with our products and services, including new types of collateral used to secure advances;

42


losses arising from litigation filed against us or one or more of the other FHLBanks;
gains resulting from legal claims we have;
losses arising from our joint and several liability on COs;
significant business disruptions resulting from natural or other disasters, acts of war, or terrorism; and
new accounting standards, including the development of supporting systems.

These risk factors are not exhaustive. New risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2013 Annual Report.

EXECUTIVE SUMMARY

Our net income was $47.9 million for the three months ended September 30, 2014, compared with net income of $38.1 million for the same period in 2013. Our net income for the quarter was impacted by an increase of $16.7 million from litigation settlements related to certain investments in private-label MBS. However, we also continue to experience compression in net interest margin and net interest spread, as we have been anticipating given the prolonged low interest-rate environment. Nonetheless, during the nine months ended September 30, 2014, we experienced growth in advances balances, though this growth has been primarily in product categories that generate very low margins. Also, we believe that absent a stronger economic recovery, further growth in advances balances could remain a challenge. Additionally:

retained earnings increased from $788.8 million at December 31, 2013, to $876.2 million at September 30, 2014;
accumulated other comprehensive loss related to the noncredit portion of other-than-temporary impairment losses on held-to-maturity securities improved from an accumulated other comprehensive loss of $324.9 million at December 31, 2013, to an accumulated other comprehensive loss of $286.7 million at September 30, 2014;
we are in compliance with all regulatory and internal capital requirements as of September 30, 2014;
we repurchased $500.0 million of excess capital stock on each of May 1, 2014 and July 31, 2014; and
on October 24, 2014, our board of directors declared a cash dividend that was equivalent to an annual yield of 1.49 percent.

The principal challenges we face are the continuing, prolonged low interest-rate environment and uncertain demand for continued growth of advances, each as discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2013 Annual Report. We continue to believe that these factors are likely to negatively impact future earnings, absent unpredictable events such as prepayment fee income and litigation settlements.

Other significant trends and developments include the following:

Income from Increased Accretable Yields on Certain Investments. For the three months ended September 30, 2014, we recognized $9.0 million in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized other-than temporary impairment credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 Summary of Significant Accounting Policies — Investment Securities - Other-than-Temporary Impairment — Interest Income Recognition in the 2013 Annual Report.

Net Interest Margin and Net Interest Spread. Net interest margin and net interest spread continue to decline toward historical norms. Net interest margin is expressed as the percentage of net interest income to average earning assets. Net interest margin for the three months ended September 30, 2014, was 0.38 percent, a 19 basis point decrease from net interest margin for the three months ended September 30, 2013. Net interest spread was 0.33 percent for the quarter ended September 30, 2014, a 16 basis point decrease from the same period in 2013.

We have been expecting this compression in net interest margin and net interest spread due to the prolonged low interest-rate environment and the gradual replacement of higher-yielding assets with lower-yielding, short-term assets, and we expect such compression to continue at least through 2015. For additional information on net interest income, see Results of Operations — Net Interest Income.


43


ECONOMIC CONDITIONS

Economic Environment

The U.S. economy improved during the third quarter relative to the second quarter of 2014. Gross Domestic Product gains in the third quarter were led by an increase in consumer spending, which was fueled by an improving employment situation, record stock prices, and stabilizing housing prices. Home prices pushed higher for five straight months. The unemployment rate also declined to 5.9 percent in September, 2014, according the U.S. Bureau of Labor Statistics. The Federal Open Market Committee (the FOMC) met twice during the third quarter and their announcements indicate the data show that economic growth could be slowing.

Interest-Rate Environment

On October 29, 2014, the FOMC issued a press release reaffirming its view that a highly accommodative stance of monetary policy remains appropriate and that when it decides to take a less accommodative stance, it will take a balanced approach consistent with its longer-range goals of maximum employment and inflation of two percent.

The following chart illustrates the interest-rate environment.


The federal funds target rate has remained constant at 0.25 percent during the time periods displayed in the chart above.

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition for December 31, 2013, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.

44


SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
 (dollars in thousands)
 
 
 
 
 
September 30, 2014
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013
 
September 30, 2013
Statement of Condition Data at Quarter End
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
51,904,866

 
$
54,582,707

 
$
50,061,243

 
$
44,638,076

 
$
39,720,660

Investments(1)
 
15,165,427

 
18,533,830

 
16,878,224

 
12,981,340

 
10,471,910

Advances
 
31,409,529

 
32,299,253

 
29,699,600

 
27,516,678

 
22,555,122

Mortgage loans held for portfolio, net(2)
 
3,403,883

 
3,353,946

 
3,347,987

 
3,368,476

 
3,401,111

Deposits and other borrowings
 
520,864

 
466,755

 
522,003

 
517,565

 
570,356

COs:
 
 
 
 
 
 
 
 
 
 
    Bonds
 
25,011,037

 
23,796,134

 
24,477,903

 
23,465,906

 
24,201,697

    Discount notes
 
22,559,486

 
26,062,381

 
20,247,904

 
16,060,781

 
10,475,911

    Total COs
 
47,570,523

 
49,858,515

 
44,725,807

 
39,526,687

 
34,677,608

Mandatorily redeemable capital stock
 
244,045

 
603,987

 
977,685

 
977,348

 
977,390

Class B capital stock outstanding-putable(3)
 
2,393,508

 
2,489,859

 
2,562,857

 
2,530,471

 
2,441,028

Unrestricted retained earnings
 
746,329

 
717,271

 
701,567

 
681,978

 
615,993

Restricted retained earnings
 
129,863

 
120,288

 
114,026

 
106,812

 
89,752

Total retained earnings
 
876,192

 
837,559

 
815,593

 
788,790

 
705,745

Accumulated other comprehensive loss
 
(440,462
)
 
(445,387
)
 
(469,991
)
 
(481,516
)
 
(482,085
)
Total capital
 
2,829,238

 
2,882,031

 
2,908,459

 
2,837,745

 
2,664,688

Other Information
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio(4)
 
6.77
%
 
7.20
%
 
8.70
%
 
9.63
%
 
10.38
%
_____________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $2.4 million, $2.0 million, $1.8 million, $2.2 million, and $2.0 million for the quarters ended September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, respectively.
(3)
Capital stock is putable at the option of a member, subject to applicable restrictions.
(4)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to the Financial Statements — Note 14 — Capital.



45


SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
 (dollars in thousands)
 
 
 
 
 
Results of Operations for the Three Months Ended
 
 
September 30, 2014
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013
 
September 30, 2013
Net interest income
 
$
51,604

 
$
50,047

 
$
54,569

 
$
60,394

 
$
58,403

Provision (reduction of provision) for credit losses
 
373

 
243

 
(322
)
 
240

 
83

Net impairment losses on held-to-maturity securities recognized in earnings
 
(311
)
 
(399
)
 
(458
)
 
(223
)
 
(1,528
)
Litigation settlements
 
17,543

 
159

 
4,310

 
52,493

 
812

Other income (loss)
 
553

 
1,900

 
(1,318
)
 
855

 
592

Other expense
 
15,673

 
16,373

 
16,954

 
18,088

 
15,784

AHP assessments
 
5,470

 
3,778

 
4,406

 
9,886

 
4,333

Net income
 
$
47,873

 
$
31,313

 
$
36,065

 
$
85,305

 
$
38,079

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
9,240

 
$
9,347

 
$
9,262

 
$
2,260

 
$
2,256

Dividend payout ratio
 
19.30
%
 
29.85
%
 
25.68
%
 
2.65
%
 
5.92
%
Weighted-average dividend rate(1)
 
1.48

 
1.49

 
1.49

 
0.37

 
0.38

Return on average equity(2)
 
6.70

 
4.38

 
5.10

 
12.39

 
5.73

Return on average assets
 
0.35

 
0.24

 
0.31

 
0.84

 
0.37

Net interest margin(3)
 
0.38

 
0.38

 
0.46

 
0.59

 
0.57

Average equity to average assets
 
5.24

 
5.44

 
5.99

 
6.76

 
6.44

_______________________
(1)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends during the preceding quarter.
(2)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss, and total retained earnings.
(3)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

RESULTS OF OPERATIONS

Third Quarter of 2014 Compared with Third Quarter of 2013

For the three months ended September 30, 2014 and 2013, we recognized net income of $47.9 million and $38.1 million, respectively. This $9.8 million increase was driven by an increase of $16.7 million from litigation settlements related to certain investments in private-label MBS and an increase of $2.5 million in net gains on derivatives and hedging activities. These increases to net income were partially offset by a decline of $6.8 million in net interest income, of which $2.1 million relates to net prepayment fees. Net prepayment fees declined from $3.4 million in the third quarter of 2013 to $1.3 million during the same period in 2014. Additionally, net unrealized losses on trading securities increased by $3.1 million.

Nine Months Ended September 30, 2014, Compared with Nine Months Ended September 30, 2013

For the nine months ended September 30, 2014 and 2013, we recognized net income of $115.3 million and $127.0 million, respectively. This $11.8 million decrease was driven by a decline of $39.2 million in net interest income of which $18.1 million relates to net prepayment fees. Net prepayment fees declined from $23.8 million in the nine months ended September 30, 2013 to $5.7 million during the same period in 2014. In addition, there was an increase of $7.4 million in net losses on derivatives and hedging activities and the provision for credit losses changed from a reversal of $2.2 million to a provision of $294,000. Partially offsetting these decreases to net income was an increase of $21.2 million resulting from private-label MBS litigation settlements and an increase of $11.9 million in net unrealized gains on trading securities.

Net Interest Income

46



Third Quarter of 2014 Compared with Third Quarter of 2013

Net interest income after provision for credit losses for the quarter ending September 30, 2014, was $51.2 million, compared with $58.3 million for the same period in 2013. Contributing to the $7.1 million decrease in net interest income after provision for credit losses was a decrease in net prepayment fees of $2.1 million, from $3.4 million in 2013 to $1.3 million in 2014, as well as a narrowing of the spread between interest earned on assets and interest paid on liabilities. Partially offsetting these decreases to net interest income after provision for credit losses was an increase in interest income resulting from an increase in average earning assets of $13.2 billion from $40.7 billion for 2013, to $53.9 billion for 2014. The increase in average earning assets was driven by an increase of $8.8 billion in average advances and an increase of $4.6 billion in average money-market investments. For additional information see — Rate and Volume Analysis. We note that growth in these asset categories was concentrated in low-margin, short-term maturities, which, together with the ongoing decline in higher-yielding, long-term assets, such as MBS and mortgage loans held for portfolio, is a primary contributing factor to the decline in net interest income.

Additionally, $9.0 million of our interest income for the quarter ended September 30, 2014, was from the accretion of discount on securities that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $3.1 million from $5.9 million of accretion recorded in the third quarter of 2013.

Notwithstanding the increase in the accretion of discount on securities that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows has subsequently been recognized, net interest spread was 0.33 percent for the quarter ended September 30, 2014, a 16 basis point decrease from the same period in 2013, and net interest margin was 0.38 percent, a 19 basis point decrease from the same period in 2013. This trend is attributable to several factors. First, a 33 basis point decrease in the average yield on earning assets (of which two basis points is attributable to declining net prepayment fee income) and a 17 basis point decrease in the average yield on interest-bearing liabilities. Second, much of the growth in advances that has occurred this year has been in low-margin products such as short-term and floating rate advances, which have replaced higher-yielding advances that have matured or were prepaid. Third, though we were able to refinance much of our higher-cost callable debt in the years between 2008 and 2012, these opportunities have largely been exhausted, but our fixed rate, mortgage-related assets continue to expire. We have been expecting this compression as noted under — Executive Summary, and anticipate that the trend will continue through at least 2015.

Nine Months Ended September 30, 2014, Compared with Nine Months Ended September 30, 2013

Net interest income after provision for credit losses for the nine months ended September 30, 2014, was $155.9 million, compared with $197.7 million for the same period in 2013. Contributing to the $41.7 million decrease in net interest income after provision for credit losses was a decrease in net prepayment fees of $18.1 million, from $23.8 million in 2013 to $5.7 million in 2014, as well as a narrowing of the spread between interest earned on assets and interest paid on liabilities. Partially offsetting these decreases to net interest income after provision for credit losses was an increase in interest income resulting from an increase in average earning assets, which increased $12.5 billion from $38.9 billion for 2013, to $51.4 billion for 2014. The increase in average earning assets was driven by an increase of $8.9 billion in average advances. For additional information see — Rate and Volume Analysis. However, growth in advances has been concentrated in low-margin, short-term maturities, which, together with the ongoing decline in higher-yielding, long-term assets, such as MBS and mortgage loans held for portfolio, is a primary contributing factor to the decline in net interest income.

Additionally, $26.3 million of our interest income for the nine months ended September 30, 2014, was from the accretion of discount on securities that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $13.1 million from $13.2 million of accretion recorded in the nine months ended September 30, 2013.

Net interest spread was 0.36 percent for the nine months ended September 30, 2014, a 22 basis point decrease from the same period in 2013, and net interest margin was 0.41 percent, a 26 basis point decrease from the same period in 2013. The decrease in net interest spread reflects a 45 basis point decrease in the average yield on earning assets and a 23 basis point decrease in the average yield on interest-bearing liabilities. Seven basis points of the decline in net interest spread is attributable to the decline of prepayment fees and the remainder is attributable to the ongoing decline of higher-yielding long term assets, such as MBS and mortgage loans held for portfolio, and growth in lower-margin, short-term and floating-rate advances and money-market investments.


47


The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.

Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended September 30,
 
 
2014
 
2013
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
30,637,647

 
$
58,635

 
0.76
%
 
$
21,860,432

 
$
58,226

 
1.06
%
Securities purchased under agreements to resell
 
5,526,087

 
886

 
0.06

 
3,514,131

 
478

 
0.05

Federal funds sold
 
5,368,696

 
1,027

 
0.08

 
2,798,587

 
545

 
0.08

Investment securities(2)
 
8,976,404

 
48,632

 
2.15

 
9,120,214

 
49,155

 
2.14

Mortgage loans
 
3,376,618

 
30,918

 
3.63

 
3,434,435

 
31,474

 
3.64

Other earning assets
 
9,792

 
3

 
0.12

 
1,504

 
1

 
0.26

Total interest-earning assets
 
53,895,244

 
140,101

 
1.03
%
 
40,729,303

 
139,879

 
1.36
%
Other non-interest-earning assets
 
381,364

 
 
 
 
 
399,341

 
 
 
 
Fair-value adjustments on investment securities
 
(126,308
)
 
 
 
 
 
(208,601
)
 
 
 
 
Total assets
 
$
54,150,300

 
$
140,101

 
1.03
%
 
$
40,920,043

 
$
139,879

 
1.36
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
COs
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
25,300,156

 
$
4,620

 
0.07
%
 
$
11,482,030

 
$
1,846

 
0.06
%
Bonds
 
24,397,442

 
82,489

 
1.34

 
24,317,395

 
78,715

 
1.28

Deposits
 
427,861

 
29

 
0.03

 
585,427

 
3

 

Mandatorily redeemable capital stock
 
361,418

 
1,358

 
1.49

 
977,390

 
911

 
0.37

Other borrowings
 
1,840

 
1

 
0.22

 
2,854

 
1

 
0.14

Total interest-bearing liabilities
 
50,488,717

 
88,497

 
0.70
%
 
37,365,096

 
81,476

 
0.87
%
Other non-interest-bearing liabilities
 
826,799

 
 
 
 
 
919,775

 
 
 
 
Total capital
 
2,834,784

 
 
 
 
 
2,635,172

 
 
 
 
Total liabilities and capital
 
$
54,150,300

 
$
88,497

 
0.65
%
 
$
40,920,043

 
$
81,476

 
0.79
%
Net interest income
 
 

 
$
51,604

 
 
 
 

 
$
58,403

 
 
Net interest spread
 
 

 
 

 
0.33
%
 
 

 
 

 
0.49
%
Net interest margin
 
 

 
 

 
0.38
%
 
 

 
 

 
0.57
%
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.


48


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
29,853,588

 
$
174,589

 
0.78
%
 
$
20,976,335

 
$
190,882

 
1.22
%
Securities purchased under agreements to resell
 
5,291,941

 
2,267

 
0.06

 
2,737,326

 
1,896

 
0.09

Federal funds sold
 
4,418,432

 
2,416

 
0.07

 
1,740,989

 
1,291

 
0.10

Investment securities(2)
 
8,496,878

 
140,201

 
2.21

 
10,006,737

 
155,490

 
2.08

Mortgage loans
 
3,360,072

 
94,136

 
3.75

 
3,478,241

 
96,166

 
3.70

Other earning assets
 
5,483

 
5

 
0.12

 
777

 
4

 
0.69

Total interest-earning assets
 
51,426,394

 
413,614

 
1.08
%
 
38,940,405

 
445,729

 
1.53
%
Other non-interest-earning assets
 
369,058

 
 
 
 
 
417,898

 
 
 
 
Fair-value adjustments on investment securities
 
(166,983
)
 
 
 
 
 
(139,762
)
 
 
 
 
Total assets
 
$
51,628,469

 
$
413,614

 
1.07
%
 
$
39,218,541

 
$
445,729

 
1.52
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
COs
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
22,474,754

 
$
11,515

 
0.07
%
 
$
8,488,726

 
$
5,057

 
0.08
%
Bonds
 
24,261,430

 
238,193

 
1.31

 
25,416,757

 
243,113

 
1.28

Deposits
 
491,259

 
50

 
0.01

 
606,015

 
12

 

Mandatorily redeemable capital stock
 
686,409

 
7,632

 
1.49

 
738,003

 
2,083

 
0.38

Other borrowings
 
3,677

 
4

 
0.15

 
2,065

 
3

 
0.19

Total interest-bearing liabilities
 
47,917,529

 
257,394

 
0.72
%
 
35,251,566

 
250,268

 
0.95
%
Other non-interest-bearing liabilities
 
852,769

 
 
 
 
 
1,053,098

 
 
 
 
Total capital
 
2,858,171

 
 
 
 
 
2,913,877

 
 
 
 
Total liabilities and capital
 
$
51,628,469

 
$
257,394

 
0.67
%
 
$
39,218,541

 
$
250,268

 
0.85
%
Net interest income
 
 

 
$
156,220

 
 
 
 

 
$
195,461

 
 
Net interest spread
 
 

 
 

 
0.36
%
 
 

 
 

 
0.58
%
Net interest margin
 
 

 
 

 
0.41
%
 
 

 
 

 
0.67
%
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2014 and 2013. Changes in interest income and interest expense that are not identifiable as either volume- or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
 

49


Rate and Volume Analysis
(dollars in thousands)

 
 
For the Three Months Ended
September 30, 2014 vs. 2013
 
For the Nine Months Ended
 September 30, 2014 vs. 2013
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
19,510

 
$
(19,101
)
 
$
409

 
$
65,131

 
$
(81,424
)
 
$
(16,293
)
Securities purchased under agreements to resell
 
311

 
97

 
408

 
1,290

 
(919
)
 
371

Federal funds sold
 
492

 
(10
)
 
482

 
1,540

 
(415
)
 
1,125

Investment securities
 
(778
)
 
255

 
(523
)
 
(24,491
)
 
9,202

 
(15,289
)
Mortgage loans
 
(529
)
 
(27
)
 
(556
)
 
(3,298
)
 
1,268

 
(2,030
)
Other earning assets
 
3

 
(1
)
 
2

 
7

 
(6
)
 
1

Total interest income
 
19,009

 
(18,787
)
 
222

 
40,179

 
(72,294
)
 
(32,115
)
Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

COs
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
2,493

 
281

 
2,774

 
7,257

 
(799
)
 
6,458

Bonds
 
260

 
3,514

 
3,774

 
(11,235
)
 
6,315

 
(4,920
)
Deposits
 
(1
)
 
27

 
26

 
(2
)
 
40

 
38

Mandatorily redeemable capital stock
 
(873
)
 
1,320

 
447

 
(156
)
 
5,705

 
5,549

Other borrowings
 

 

 

 
2

 
(1
)
 
1

Total interest expense
 
1,879


5,142


7,021

 
(4,134
)
 
11,260

 
7,126

Change in net interest income
 
$
17,130

 
$
(23,929
)
 
$
(6,799
)
 
$
44,313

 
$
(83,554
)
 
$
(39,241
)

Average Balance of Advances Outstanding

The average balance of total advances increased $8.9 billion, or 42.3 percent, for the nine months ended September 30, 2014, compared with the same period in 2013. This increase was concentrated in short-term advances, as discussed under — Executive Summary. The following table summarizes average balances of advances outstanding during the nine months ended September 30, 2014 and 2013, by product type.


50


Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
10,594,690

 
$
9,968,455

Short-term
 
9,996,162

 
5,506,302

Putable
 
2,357,067

 
2,840,631

Amortizing
 
871,378

 
884,788

Overnight
 
757,572

 
645,840

All other fixed-rate advances
 
72,000

 
78,317

 
 
24,648,869

 
19,924,333

 
 
 
 
 
Variable-rate indexed advances—par value
 
 
 
 
Simple variable
 
4,819,799

 
475,091

Putable
 
68,385

 
112,374

All other variable-rate indexed advances
 
38,393

 
32,103

 
 
4,926,577

 
619,568

Total average par value
 
29,575,446

 
20,543,901

Net premiums
 
22,184

 
33,164

Market value of bifurcated derivatives
 
1,373

 
987

Hedging adjustments
 
254,585

 
398,283

Total average balance of advances
 
$
29,853,588

 
$
20,976,335


Putable advances that are classified as fixed-rate advances in the table above are typically hedged with interest-rate-exchange agreements in which a short-term rate is received, typically three-month London Interbank Offered Rate (LIBOR). In addition, approximately 19.2 percent of average long-term fixed-rate advances were similarly hedged with interest-rate swaps. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $20.1 billion for the nine months ended September 30, 2014, representing 67.2 percent of the total average balance of advances outstanding during the nine months ended September 30, 2014. The average balance of all such advances totaled $11.7 billion for the nine months ended September 30, 2013, representing 55.6 percent of the total average balance of advances outstanding during the nine months ended September 30, 2013.

For the nine months ended September 30, 2014 and 2013, net prepayment fees on advances and investments were $5.7 million and $23.8 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances and investments.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $5.2 billion, or 116.9 percent, for the nine months ended September 30, 2014, compared with the same period in 2013. The yield earned on short-term money market investments is highly correlated to short-term market interest rates. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. We have increased these investments principally in response to growth in our advances balances to maintain our contingency liquidity to refinance debt used to fund advances. For the nine months ended September 30, 2014, the average balances of federal funds sold increased $2.7 billion and the average balances of securities purchased under agreements to resell increased $2.6 billion in comparison to the nine months ended September 30, 2013.


51


Average investment securities balances decreased $1.5 billion, or 15.1 percent for the nine months ended September 30, 2014, compared with the same period in 2013, a decrease consisting primarily of a $1.4 billion decline in agency and supranational institutions' debentures and a $82.1 million decline in MBS.

The average balance of our investments in mortgage loans for the nine months ended September 30, 2014, was $118.2 million lower than the average balance of these investments for the nine months ended September 30, 2013, representing a decrease of 3.4 percent.

Average Balance of COs

Average CO balances increased $12.8 billion, or 37.8 percent, for the nine months ended September 30, 2014, compared with the same period in 2013, resulting from our increased funding needs principally due to the increase in our average advances and short-term money market investment balances. This overall increase consisted of an increase of $14.0 billion in CO discount notes offset by a decrease of $1.2 billion in CO bonds.

The average balance of CO discount notes represented approximately 48.1 percent of total average COs during the nine months ended September 30, 2014, as compared with 25.0 percent of total average COs during the nine months ended September 30, 2013. The average balance of CO bonds represented 51.9 percent and 75.0 percent of total average COs outstanding during the nine months ended September 30, 2014 and 2013, respectively. The growth in average CO discount notes is commensurate with our asset growth, which has been primarily in short-term assets.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy. The following tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities, and net unrealized gains (losses) on trading securities for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands).


52


 
 
For the Three Months Ended September 30, 2014
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,331
)
 
$

 
$
(68
)
 
$

 
$
1,383

 
$
(16
)
 
Net interest settlements included in net interest income (2)
 
(32,487
)
 
(9,496
)
 

 
357

 
14,856

 
(26,770
)
 
Total net interest income
 
(33,818
)
 
(9,496
)
 
(68
)
 
357

 
16,239

 
(26,786
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
122

 
356

 

 

 
(144
)
 
334

 
Losses on cash-flow hedges
 

 

 

 

 
(78
)
 
(78
)
 
Gains (losses) on derivatives not receiving hedge accounting
 

 
1,091

 

 

 
(30
)
 
1,061

 
Mortgage delivery commitments
 

 

 
94

 

 

 
94

 
Net gains (losses) on derivatives and hedging activities
 
122

 
1,447

 
94

 

 
(252
)
 
1,411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(33,696
)
 
(8,049
)
 
26

 
357

 
15,987

 
(25,375
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(2,387
)
 

 

 

 
(2,387
)
 
Total net effect of derivatives and hedging activities
 
$
(33,696
)
 
$
(10,436
)
 
$
26

 
$
357

 
$
15,987

 
$
(27,762
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
 
 
For the Three Months Ended September 30, 2013
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,576
)
 
$

 
$
(89
)
 
$

 
$
6,716

 
$
5,051

 
Net interest settlements included in net interest income (2)
 
(36,468
)
 
(9,437
)
 

 
395

 
13,640

 
(31,870
)
 
Total net interest income
 
(38,044
)
 
(9,437
)
 
(89
)
 
395

 
20,356

 
(26,819
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
141

 
388

 

 

 
(38
)
 
491

 
Gains on cash-flow hedges
 

 

 

 

 
13

 
13

 
(Losses) gains on derivatives not receiving hedge accounting
 

 
(1,711
)
 

 

 
33

 
(1,678
)
 
Mortgage delivery commitments
 

 

 
104

 

 

 
104

 
Net gains (losses) on derivatives and hedging activities
 
141

 
(1,323
)
 
104

 

 
8

 
(1,070
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(37,903
)
 
(10,760
)
 
15

 
395

 
20,364

 
(27,889
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
726

 

 

 

 
726

 
Total net effect of derivatives and hedging activities
 
$
(37,903
)
 
$
(10,034
)
 
$
15

 
$
395

 
$
20,364

 
$
(27,163
)
 

53


_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.

 
 
For the Nine Months Ended September 30, 2014
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(4,712
)
 
$

 
$
(174
)
 
$

 
$
10,838

 
$
5,952

 
Net interest settlements included in net interest income (2)
 
(98,917
)
 
(28,494
)
 

 
1,151

 
38,629

 
(87,631
)
 
Total net interest income
 
(103,629
)
 
(28,494
)
 
(174
)
 
1,151

 
49,467

 
(81,679
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
350

 
873

 

 

 
570

 
1,793

 
Losses on cash-flow hedges
 

 

 

 

 
(248
)
 
(248
)
 
(Losses) gains on derivatives not receiving hedge accounting
 

 
(3,646
)
 

 

 
22

 
(3,624
)
 
Mortgage delivery commitments
 

 

 
815

 

 

 
815

 
Net gains (losses) on derivatives and hedging activities
 
350

 
(2,773
)
 
815

 

 
344

 
(1,264
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(103,279
)
 
(31,267
)
 
641

 
1,151

 
49,811

 
(82,943
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
576

 

 

 

 
576

 
Total net effect of derivatives and hedging activities
 
$
(103,279
)
 
$
(30,691
)
 
$
641

 
$
1,151

 
$
49,811

 
$
(82,367
)
 
________________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

54


 
 
For the Nine Months Ended September 30, 2013
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(6,151
)
 
$

 
$
(390
)
 
$

 
$
20,141

 
$
13,600

 
Net interest settlements included in net interest income (2)
 
(114,058
)
 
(29,004
)
 

 
1,183

 
52,616

 
(89,263
)
 
Total net interest income
 
(120,209
)
 
(29,004
)
 
(390
)
 
1,183

 
72,757

 
(75,663
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
743

 
1,196

 

 

 
(112
)
 
1,827

 
Gains on cash-flow hedges
 

 

 

 

 
53

 
53

 
Gains on derivatives not receiving hedge accounting
 
1

 
5,527

 

 

 
247

 
5,775

 
Mortgage delivery commitments
 

 

 
(1,480
)
 

 

 
(1,480
)
 
Net gains (losses) on derivatives and hedging activities
 
744

 
6,723

 
(1,480
)
 

 
188

 
6,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(119,465
)
 
(22,281
)
 
(1,870
)
 
1,183

 
72,945

 
(69,488
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(11,278
)
 

 

 

 
(11,278
)
 
Total net effect of derivatives and hedging activities
 
$
(119,465
)
 
$
(33,559
)
 
$
(1,870
)
 
$
1,183

 
$
72,945

 
$
(80,766
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.

Net interest margin for the three months ended September 30, 2014 and 2013, was 0.38 percent and 0.57 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.58 percent and 0.88 percent, respectively.

Net interest margin for the nine months ended September 30, 2014 and 2013, was 0.41 percent and 0.67 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.63 percent and 0.98 percent, respectively.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) and Operating Expenses below, interest accruals on derivatives classified as economic hedges totaled a net expense of $1.7 million and $191,000, respectively, for the three months ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, interest accruals on derivatives classified as economic hedges totaled a net expense of $5.2 million and $2.1 million, respectively.

For more information about our use of derivatives to manage interest-rate risk, see Item 3 — Quantitative and Qualitative Disclosures about Market Risk — Strategies to Manage Market and Interest-Rate Risk.

Other Income (Loss)
 
The following table presents a summary of other income (loss) for the three and nine months ended September 30, 2014 and 2013. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
 

55


Other Income (Loss)
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Net gains related to fair-value hedge ineffectiveness
 
$
334

 
$
491

 
$
1,793

 
$
1,827

Net (losses) gains related to cash-flow hedge ineffectiveness
 
(78
)
 
13

 
(248
)
 
53

Net unrealized (losses) gains related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
 
 
Advances
 
(61
)
 
(1,669
)
 
(215
)
 
(3,109
)
Trading securities
 
2,869

 
182

 
1,760

 
10,966

Mortgage delivery commitments
 
94

 
104

 
815

 
(1,480
)
Net interest-accruals related to derivatives not receiving hedge accounting
 
(1,747
)
 
(191
)
 
(5,169
)
 
(2,082
)
Net gain (losses) on derivatives and hedging activities
 
1,411

 
(1,070
)
 
(1,264
)
 
6,175

Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(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-fee income
 
1,874

 
1,797

 
5,159

 
4,909

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

 
576

 
(11,278
)
Other
 
(182
)
 
(293
)
 
(581
)
 
(3,000
)
Total other income (loss)
 
$
17,785

 
$
(124
)
 
$
21,979

 
$
(9,681
)

As noted in the Other Income (Loss) table above, accounting for derivatives and hedged items results in the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.

Operating Expenses

For the three months ended September 30, 2014, compensation and benefits expense and other operating expenses totaled $14.0 million, representing an increase of $96,000 from the total of $13.9 million for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, compensation and benefits expense and other operating expenses totaled $43.1 million, representing an increase of $3.0 million from the total of $40.1 million for the nine months ended September 30, 2013. This increase was due to a $1.8 million increase in compensation and benefits expense resulting primarily from annual merit increases and planned staffing increases along with an increase of $1.2 million in other operating expenses.

FINANCIAL CONDITION

Advances

At September 30, 2014, the advances portfolio totaled $31.4 billion, an increase of $3.9 billion compared with $27.5 billion at December 31, 2013.

The following table summarizes advances outstanding by product type at September 30, 2014, and December 31, 2013.

56


 
Advances Outstanding by Product Type
(dollars in thousands)

 
September 30, 2014
 
December 31, 2013
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Long-term
$
11,192,481

 
35.9
%
 
$
10,331,903

 
38.0
%
Short-term
10,153,644

 
32.6

 
10,340,279

 
38.0

Putable
2,252,675

 
7.2

 
2,492,175

 
9.1

Amortizing
909,933

 
2.9

 
868,869

 
3.2

Overnight
886,583

 
2.8

 
1,473,251

 
5.4

All other fixed-rate advances
72,000

 
0.2

 
72,500

 
0.3

 
25,467,316

 
81.6

 
25,578,977

 
94.0

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable
5,615,000

 
18.0

 
1,485,000

 
5.5

Putable
73,000

 
0.3

 
116,000

 
0.4

All other variable-rate indexed advances
38,896

 
0.1

 
31,287

 
0.1

 
5,726,896

 
18.4

 
1,632,287

 
6.0

Total par value
$
31,194,212

 
100.0
%
 
$
27,211,264

 
100.0
%
 
See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.

At September 30, 2014, we had advances outstanding to 312, or 70.4 percent, of our 443 members. At December 31, 2013, we had advances outstanding to 302, or 68.2 percent, of our 443 members.

The following table presents the top five advance-borrowing institutions at September 30, 2014, and the interest earned on outstanding advances to such institutions for the three and nine months ended September 30, 2014.

Top Five Advance-Borrowing Institutions
(dollars in thousands)
 
 
September 30, 2014
 
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended September 30, 2014
 
Advances Interest Income for the
Nine Months Ended September 30, 2014
Citizens Bank N.A.
 
$
5,468,698

 
17.5
%
 
0.24
%
 
$
3,755

 
$
9,505

People's United Bank
 
2,205,702

 
7.1

 
0.20

 
1,196

 
3,908

Webster Bank, N.A.
 
2,290,161

 
7.4

 
0.48

 
2,666

 
7,822

Berkshire Bank
 
940,992

 
3.0

 
0.23

 
646

 
2,123

Brookline Bank
 
812,281

 
2.6

 
0.88

 
1,889

 
5,364

Total of top five advance-borrowing institutions
 
$
11,717,834

 
37.6
%
 
 
 
$
10,152

 
$
28,722

_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Advances Credit Risk


57


We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect us from credit losses. Our approaches to credit risk on advances are described under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk in the 2013 Annual Report. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

Category-1: members that are generally in satisfactory financial condition;
Category-2: members that show weakening financial trends in key financial indices and/or regulatory findings; and
Category-3: members with financial weaknesses that present an elevated level of concern. We also place housing associates and non-member borrowers in Category-3.

We lend to insurance company members upon a review of an updated statement of their financial condition and their pledge of sufficient amounts of eligible collateral.

The following table provides information regarding advances outstanding with our borrowers in Category-1, Category-2, Category-3, and insurance company members, at September 30, 2014, along with their corresponding collateral balances.

Advances Outstanding by Borrower Credit Status Category
As of September 30, 2014
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
270

 
$
22,920,805

 
$
55,863,870

 
243.7
%
Category-2
19

 
5,919,023

 
10,380,466

 
175.4

Category-3
17

 
609,480

 
860,999

 
141.3

Insurance companies
11

 
1,744,904

 
1,905,304

 
109.2

Total
317

 
$
31,194,212

 
$
69,010,639

 
221.2
%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Based upon the method by which borrowers pledge collateral to us, the following table shows the total potential lending value of the collateral that borrowers have pledged to us, net of our collateral valuation discounts as of September 30, 2014.

Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
35,182,620

Collateral specifically listed and identified
30,086,108

Collateral delivered to us
8,562,712


We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk in the 2013 Annual Report. At both September 30, 2014, and December 31, 2013, the amount of pledged nontraditional and subprime loan collateral was nine percent of total member borrowing capacity.

We have not recorded any allowance for credit losses on credit products at September 30, 2014, and December 31, 2013, for the reasons discussed in Item 1 Notes to the Financial Statements Note 9 Allowance for Credit Losses.

Investments

58


 
At September 30, 2014, investment securities and short-term money market instruments totaled $15.2 billion, compared with $13.0 billion at December 31, 2013.

Short-term money market investments totaled $6.0 billion and $4.6 billion at September 30, 2014, and December 31, 2013, respectively.

Investment securities increased $834.1 million to $9.2 billion at September 30, 2014, compared with December 31, 2013. The increase was attributable to an increase of $1.6 billion in MBS offset by a decrease of $807.2 million in agency debentures.

Our MBS investment portfolio consists of the following categories of securities as of September 30, 2014, and December 31, 2013. The percentages in the table below are based on carrying value.

Mortgage-Backed Securities
 
September 30, 2014
 
December 31, 2013
Residential MBS - U.S. government-guaranteed and GSE
65.2
%
 
60.2
%
Commercial MBS - U.S. government-guaranteed and GSE
21.4

 
22.1

Private-label residential MBS
13.1

 
17.4

ABS backed by home-equity loans
0.3

 
0.3

Total MBS
100.0
%
 
100.0
%

See Item 1 — Notes to the Financial Statements — Note 3 — Trading Securities, Note 4 — Available-for-Sale Securities, Note 5 — Held-to-Maturity Securities, and Note 6 — Other-Than-Temporary Impairment for additional information on our investment securities.

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently consisting of overnight risk only) money market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. We place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis; currently all such placements expire within one day.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, with terms to maturity of up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

Credit ratings of our investments are provided in the following table.


59


Credit Ratings of Investments at Carrying Value
As of September 30, 2014
(dollars in thousands)
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money market instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$

 
$
210

 
$

 
$

 
$

 
$

Securities purchased under agreements to resell
 

 

 
3,500,000

 

 

 

Federal funds sold
 

 
900,000

 
1,550,000

 

 

 

Total money market instruments
 

 
900,210

 
5,050,000

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 

 
6,494

 

 

 

 

U.S. government-owned corporations
 

 
269,886

 

 

 

 

GSEs
 

 
117,737

 

 

 

 

Supranational institutions
 
435,389

 

 

 

 

 

HFA securities
 
22,475

 
40,465

 
113,997

 

 

 
2,115

Total non-MBS
 
457,864

 
434,582

 
113,997

 

 

 
2,115

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - residential (2)
 

 
256,167

 

 

 

 

U.S. government guaranteed - commercial (2)
 

 
937,001

 

 

 

 

GSE – residential (2)
 

 
5,099,484

 

 

 

 

GSE – commercial (2)
 

 
815,985

 

 

 

 

Private-label – residential
 
7,542

 
363

 
41,200

 
88,295

 
939,952

 
9

ABS backed by home-equity loans
 
572

 
1,136

 
8,177

 
2,352

 
4,303

 
4,121

Total MBS
 
8,114

 
7,110,136

 
49,377

 
90,647

 
944,255

 
4,130

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment securities
 
465,978

 
7,544,718

 
163,374

 
90,647

 
944,255

 
6,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
465,978

 
$
8,444,928

 
$
5,213,374

 
$
90,647

 
$
944,255

 
$
6,245

_______________________
(1)
Ratings are obtained from Moody's, Fitch Ratings Inc. (Fitch), and S&P and are as of September 30, 2014. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used.
(2)
The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

At September 30, 2014, our unsecured credit exposure related to money market instruments and debentures, including accrued interest, was $3.3 billion to 10 counterparties and issuers, of which $2.5 billion was for federal funds sold and $836.6 million was for debentures issued by GSEs, U.S. government-owned corporations and supranational institutions. The following issuers/counterparties individually accounted for greater than 10 percent of total unsecured credit exposure as of September 30, 2014:


60


Issuers / Counterparties Representing Greater Than
10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures
As of September 30, 2014
Issuer / counterparty
 
Percent
National Australia Bank LTD (1)
 
13.7
%
National Bank of Canada (1)
 
13.7

Bank of Nova Scotia (1)
 
13.7

Rabobank Nederland (1)
 
13.7

Standard Chartered Bank (1)
 
13.7

Inter-American Development Bank (a supranational institution)
 
13.4

_______________________
(1)
Overnight federal funds sold.

Of our $8.8 billion in par value of MBS and ABS investments at September 30, 2014, $1.8 billion in par value are private-label MBS. These private-label MBS are comprised as follows:

Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans
by Fixed Rate or Variable Rate
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
December 31, 2013
Private-label MBS
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
 
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
Private-label residential MBS
 

 
 

 
 

 
 

 
 

 
 

Prime
$
13,128

 
$
158,332

 
$
171,460

 
$
15,585

 
$
176,416

 
$
192,001

Alt-A
28,376

 
1,568,419

 
1,596,795

 
31,040

 
1,684,971

 
1,716,011

Total private-label residential MBS
41,504

 
1,726,751

 
1,768,255

 
46,625

 
1,861,387

 
1,908,012

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime

 
21,977

 
21,977

 

 
23,980

 
23,980

Total par value of private-label MBS
$
41,504

 
$
1,748,728

 
$
1,790,232

 
$
46,625

 
$
1,885,367

 
$
1,931,992

_______________________
 (1)
The determination of fixed or variable rate is based upon the contractual coupon type of the security.

The following table provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The amounts outstanding as of September 30, 2014, are stratified by year of issuance of the security. The tables also set forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS, stratified by year of securitization. Average current credit enhancements as of September 30, 2014, reflect the percentage of subordinated class outstanding balances as of September 30, 2014, to our senior class outstanding balances as of September 30, 2014, weighted by the par value of our respective senior class securities, and shown by year of securitization. Average current credit enhancements as of September 30, 2014, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


61


Private-Label MBS and ABS Backed by Home Equity Loans
by Year of Securitization
At September 30, 2014
(dollars in thousands)
 
 
 
Year of Securitization
 
Total
 
2007
 
2006
 
2005
 
2004 and prior
Par value by credit rating
 

 
 

 
 

 
 

 
 

   Triple-A
$
8,140

 
$

 
$

 
$
7,542

 
$
598

   Double-A
1,499

 

 

 

 
1,499

   Single-A
49,377

 

 

 
27,457

 
21,920

   Triple-B
91,151

 

 

 
18,975

 
72,176

Below Investment Grade
 
 
 
 
 
 
 
 
 
   Double-B
60,891

 

 

 
31,369

 
29,522

   Single-B
73,076

 
16,862

 

 
44,471

 
11,743

   Triple-C
891,739

 
199,022

 
487,903

 
188,771

 
16,043

   Double-C
297,585

 
129,793

 
128,057

 
39,735

 

   Single-C
72,041

 
7,356

 
30,970

 
33,715

 

   Single-D
240,603

 
64,675

 
67,614

 
107,558

 
756

   Unrated
4,130

 

 

 

 
4,130

Total
$
1,790,232

 
$
417,708

 
$
714,544

 
$
499,593

 
$
158,387

 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,384,746

 
$
294,247

 
$
499,114

 
$
434,089

 
$
157,296

Gross unrealized gains
79,812

 
33,527

 
32,575

 
13,346

 
364

Gross unrealized losses
(41,845
)
 
(5,137
)
 
(10,631
)
 
(18,997
)
 
(7,080
)
Fair value
$
1,422,713

 
$
322,637

 
$
521,058

 
$
428,438

 
$
150,580

Other-than-temporary impairment for the nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
$
(243
)
 
$
(211
)
 
$

 
$

 
$
(32
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(925
)
 
(532
)
 
(375
)
 
(2
)
 
(16
)
Net impairment losses on held-to-maturity securities recognized in income
$
(1,168
)
 
$
(743
)
 
$
(375
)
 
$
(2
)
 
$
(48
)
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to par value
79.47
%
 
77.24
%
 
72.92
%
 
85.76
%
 
95.07
%
Original weighted average credit support
26.36

 
28.63

 
28.77

 
26.14

 
10.23

Weighted average credit support
10.41

 
6.33

 
6.32

 
16.14

 
21.51

Weighted average collateral delinquency (1)
26.81

 
33.13

 
30.16

 
20.92

 
13.65

_______________________
 (1)
Represents loans that are 60 days or more delinquent.

Insured Investments

Certain of our private-label MBS are insured by monoline insurers that guarantee the timely payment of principal and interest on such MBS if such payments cannot be satisfied from the cash flows of the underlying mortgage pool. As of September 30, 2014, our private-label MBS and ABS backed by home equity loan investments covered by monoline insurance was $93.9 million, of which $90.7 million represents private-label MBS covered by the monoline bond insurance for some period of time in the cash-flow modeling. Of the $90.7 million, 79.3 percent represents Alt-A MBS and 20.7 percent represents subprime ABS backed by home equity loan investments.

Mortgage Loans

62



As of September 30, 2014, our mortgage loan investment portfolio totaled $3.4 billion, an increase of $35.4 million from December 31, 2013.

References to our investments in mortgage loans throughout this report include the 100 percent participation interests in mortgage loans purchased under a participation facility we have with the FHLBank of Chicago. The expiration date of this facility has been extended to December 31, 2015. As of September 30, 2014, we had $534.6 million in 100 percent participation interests outstanding that had been purchased under this facility. For additional information on this facility, see Item 1 — Business — Business Lines — Mortgage Loan Finance — MPF Loan Participations in the 2013 Annual Report.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2013 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in the following table:

State Concentrations by Outstanding Principal Balance
 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
September 30, 2014
 
December 31, 2013
    Massachusetts
42
%
 
41
%
    Maine
12

 
11

    Wisconsin
9

 
8

    Connecticut
7

 
7

    California
5

 
7

    All others
25

 
26

    Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $2.4 million at September 30, 2014, compared with $2.2 million at December 31, 2013.

For information on the determination of the allowance at September 30, 2014, see Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses, and for information on our methodology for estimating the allowance, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Allowance for Loan Losses in the 2013 Annual Report.

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis. Our investments in conventional mortgage loans that are delinquent are shown in the following table:

Delinquent Mortgage Loans
(dollars in thousands)
 
September 30, 2014
 
December 31, 2013
Total par value past due 90 days or more and still accruing interest
$
7,065

 
$
19,450

Nonaccrual loans, par value
40,664

 
46,012

Troubled debt restructurings (not included above)
2,937

 
2,589



63


Mortgage Insurance Companies. We are exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of September 30, 2014, we were the beneficiary of primary mortgage insurance coverage of $56.3 million on $228.2 million of conventional mortgage loans, and supplemental mortgage insurance coverage of $22.5 million on mortgage pools with a total unpaid principal balance of $372.0 million.

Deposits

At September 30, 2014, and December 31, 2013, deposits totaled $520.9 million and $517.6 million, respectively.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivatives
 
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Derivatives outstanding with counterparties with which we have an enforceable master-netting agreement are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivatives that have been cleared through a FCM with a DCO are classified as assets or liabilities according to the net fair value of those derivatives which have been transacted through a particular FCM with a particular DCO. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $12.6 million and $4.3 million as of September 30, 2014, and December 31, 2013, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $513.8 million and $608.2 million as of September 30, 2014, and December 31, 2013, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of September 30, 2014, and December 31, 2013. The notional amount is a factor in determining periodic interest payments or cash flows received and paid. Accordingly, the notional amount does not represent actual amounts exchanged or our overall exposure to credit and market risk. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under our risk-management policy.

64


Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
September 30, 2014
 
December 31, 2013
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
4,674,730

 
$
(198,648
)
 
$
4,962,980

 
$
(277,060
)
 
 
Swaps
 
Economic
 
164,500

 
(1,057
)
 
154,500

 
(893
)
Total associated with advances
 
 
 
 
 
4,839,230

 
(199,705
)
 
5,117,480

 
(277,953
)
Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(275,610
)
 
611,915

 
(218,658
)
 
 
Caps and floors
 
Economic
 
300,000

 

 
300,000

 
43

Total associated with available-for-sale securities
 
 
 
 
 
911,915

 
(275,610
)
 
911,915

 
(218,615
)
Trading securities
 
Swaps
 
Economic
 
210,000

 
(16,842
)
 
215,000

 
(18,602
)
COs
 
Swaps
 
Fair value
 
7,330,940

 
(3,689
)
 
6,112,695

 
(14,453
)
 
 
Swaps
 
Economic
 
22,500

 
(53
)
 
904,000

 
120

 
 
Forward starting swaps
 
Cash flow
 
1,069,800

 
(24,736
)
 
1,410,800

 
(51,466
)
Total associated with COs
 
 
 
 
 
8,423,240

 
(28,478
)
 
8,427,495

 
(65,799
)
Deposits
 
Swaps
 
Fair value
 

 

 
20,000

 
1,143

Total
 
 
 
 
 
14,384,385

 
(520,635
)
 
14,691,890

 
(579,826
)
Mortgage delivery commitments
 
 
 
 
 
25,880

 
16

 
11,056

 
(35
)
Total derivatives
 
 
 
 
 
$
14,410,265

 
(520,619
)
 
$
14,702,946

 
(579,861
)
Accrued interest
 
 
 
 
 
 

 
(9,333
)
 
 

 
(26,249
)
Cash collateral and accrued interest
 
 
 
 
 
 
 
28,756

 
 
 
2,276

Net derivatives
 
 
 
 
 
 

 
$
(501,196
)
 
 

 
$
(603,834
)
Derivative asset
 
 
 
 
 
 

 
$
12,636

 
 

 
$
4,318

Derivative liability
 
 
 
 
 
 

 
(513,832
)
 
 

 
(608,152
)
Net derivatives
 
 
 
 
 
 

 
$
(501,196
)
 
 

 
$
(603,834
)
 _______________________
(1)
Embedded advance derivatives separated from the host contract with a notional amount of $164.5 million and $154.5 million as of September 30, 2014, and December 31, 2013, respectively, and fair values of $1.1 million and $892,000, respectively, are not included in the table.

The following tables provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $12.0 billion, representing 83.3 percent of all derivatives outstanding as of September 30, 2014. Economic hedges and cash-flow hedges are not included within the two tables below.


65


Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of September 30, 2014
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
Advances(1)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value
 
Hedged
Amount
 
Fair-Value
Adjustment(2)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
504,515

 
$
(5,683
)
 
$
504,515

 
$
5,704

 
2.94
%
 
0.23
%
 
2.62
%
 
0.55
%
Due after one year through two years
650,695

 
(19,272
)
 
650,695

 
19,239

 
2.77

 
0.24

 
2.51

 
0.50

Due after two years through three years
1,810,130

 
(113,686
)
 
1,810,130

 
112,494

 
3.65

 
0.24

 
3.47

 
0.42

Due after three years through four years
975,850

 
(52,373
)
 
975,850

 
52,271

 
3.15

 
0.23

 
2.95

 
0.43

Due after four years through five years
454,250

 
(4,740
)
 
454,250

 
4,739

 
2.52

 
0.23

 
2.04

 
0.71

Thereafter
279,290

 
(2,894
)
 
279,290

 
2,879

 
2.81

 
0.24

 
2.34

 
0.71

Total
$
4,674,730

 
$
(198,648
)
 
$
4,674,730

 
$
197,326

 
3.19
%
 
0.23
%
 
2.93
%
 
0.49
%
_______________________
(1)
Included in the advances hedged amount are $2.3 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(2)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2014.
 
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of September 30, 2014
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
CO Bonds (1)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(2)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
1,592,695

 
$
1,851

 
$
1,592,695

 
$
(1,851
)
 
0.49
%
 
0.52
%
 
0.15
%
 
0.12
%
Due after one year through two years
1,888,000

 
8,832

 
1,888,000

 
(6,651
)
 
0.91

 
0.97

 
0.17

 
0.11

Due after two years through three years
1,910,245

 
(2,793
)
 
1,910,245

 
5,056

 
1.00

 
1.02

 
0.14

 
0.12

Due after three years through four years
530,000

 
35

 
530,000

 
738

 
1.28

 
1.28

 
0.11

 
0.11

Due after four years through five years
370,000

 
(774
)
 
370,000

 
2,437

 
1.57

 
1.57

 
0.06

 
0.06

Thereafter
1,040,000

 
(9,877
)
 
1,040,000

 
11,340

 
1.47

 
1.47

 
0.02

 
0.02

Total
$
7,330,940

 
$
(2,726
)
 
$
7,330,940

 
$
11,069

 
0.98
%
 
1.01
%
 
0.13
%
 
0.10
%
_______________________
(1)
Included in the CO bonds hedged amount are $3.2 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(2) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2014.

We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.

Derivatives Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative. The amount of loss created by default is the replacement cost of the defaulted contract, net of any collateral held by us or pledged by us to counterparties (unsecured derivatives exposure). We currently are receiving only cash collateral from counterparties with whom we are in a current positive fair-value position (i.e., we are in-the-money). The resulting net exposure at fair value is reflected in the derivatives table below. We presently pledge securities collateral for bilateral derivatives to

66


counterparties with whom we are in a current negative fair-value position (i.e., we are out-of-the-money) by an amount that exceeds an exposure threshold defined in our master netting agreement with the counterparty. We may also pledge cash collateral, including, for cleared derivatives, initial and variation margin as required by the applicable DCO. From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied, we pledge to counterparties securities collateral whose fair value exceeds the current negative fair-value positions with them. The table below details our counterparty credit exposure as of September 30, 2014.

Derivatives Counterparty Current Credit Exposure
As of September 30, 2014
(dollars in thousands)

Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To /(From) Counterparty
 
Non-cash Collateral Pledged To Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
535,000

 
$
632

 
$

 
$

 
$
632

Single-A
 
415,000

 
382

 
(380
)
 

 
2

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
2,732,545

 
(57,370
)
 

 
59,346

 
1,976

Triple-B
 
1,007,310

 
(37,736
)
 

 
39,863

 
2,127

Cleared derivatives
 
3,483,045

 
(17,169
)
 
29,136

 

 
11,967

Total derivative positions with nonmember counterparties to which we had credit exposure
 
8,172,900

 
(111,261
)
 
28,756

 
99,209

 
16,704

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
25,880

 
35

 

 

 
35

Total
 
$
8,198,780

 
$
(111,226
)
 
$
28,756

 
$
99,209

 
$
16,739

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
334,000

 
 
 
 
 
 
 
 
Single-A
 
4,371,445

 
 
 
 
 
 
 
 
Triple-B
 
1,506,040

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
6,211,485

 

 
 
 
 
 
 
_______________________
(1)
Bilateral derivatives ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
These represent derivatives positions with counterparties for which we are in a net liability position, and for which we have delivered securities collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position, and for which the counterparty has delivered collateral to us in an amount which exceeds our net derivative asset.


67


For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risks in the 2013 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES
 
Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations in the 2013 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — External Sources of Liquidity. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

Internal Sources of Liquidity

We maintain structural liquidity to support our day-to-day business needs and our contractual obligations. We define structural liquidity as projected net cash flow adjusted to assume all maturing advances are renewed, member overnight deposits are withdrawn at a rate of 50 percent per day, and loan investment commitments are taken down at a rate in excess of our ordinary experience (such adjustments are collectively referred to as our secondary uses of funds). We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, as applicable. We have a management action trigger based on our structural liquidity, which is a five business day test that is triggered if structural liquidity is less than negative $1.0 billion. We complied with this management action trigger at all times during the quarter ended September 30, 2014.

The following table shows our structural liquidity as of September 30, 2014.

Structural Liquidity
As of September 30, 2014
(dollars in thousands)
 
 
5 Days
Projected net cash flow
$
7,274,249

Less: Secondary uses of funds
(3,788,752
)
Structural liquidity
$
3,485,497


We also have a management action trigger based on projected net cash flow. This is a 21 business day test that is triggered if projected net cash flow is negative at or before day 21. We complied with this management action trigger at all times during the quarter ended September 30, 2014. At September 30, 2014, projected net cash flow at day 21 was $6.8 billion.

FHFA regulations require us to hold contingency liquidity in an amount sufficient to enable us to cover our liquidity requirements for a minimum of five business days without access to the CO debt markets. For contingency liquidity, we define adjusted net cash flow as projected sources of funds less uses of funds excluding reliance on access to the CO debt markets and including funding a portion of outstanding letters of credit. We complied with this requirement at all times during the nine months ended September 30, 2014. As of September 30, 2014, and December 31, 2013, we held a surplus of $11.9 billion and $10.9 billion, respectively, of contingency liquidity for the following five days, exclusive of access to the proceeds of CO debt issuance. The following table demonstrates our contingency liquidity as of September 30, 2014.


68


Contingency Liquidity
As of September 30, 2014
(dollars in thousands)
 
Cumulative
Fifth
Business Day
Adjusted net cash flow
$
417,768

Contingency borrowing capacity (exclusive of CO issuances)
11,531,165

Net contingency liquidity
$
11,948,933


In addition, certain FHFA guidance requires us to maintain sufficient liquidity, through short-term investments, in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot borrow funds from the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the nine months ended September 30, 2014.
 
Further, we are sensitive to maintaining an appropriate funding balance between our assets and liabilities and maintain a policy that limits the potential gap between assets inclusive of projected prepayments, funded by liabilities, inclusive of projected calls, maturing in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets. We maintained compliance with this limit at all times during the nine months ended September 30, 2014. During the three months ended September 30, 2014, this gap averaged 1.5 percent (maximum level 2.1 percent and minimum level 0.5 percent). As of September 30, 2014, this gap was 1.8 percent, compared with 2.1 percent at December 31, 2013.

External Sources of Liquidity

FHLBank P&I Funding Contingency Plan Agreement
 
We have a source of emergency external liquidity through the FHLBank P&I Funding Contingency Plan Agreement, as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — External Sources of Liquidity in the 2013 Annual Report. We have never drawn funding under this agreement.

Debt Financing Consolidated Obligations
 
At September 30, 2014, and December 31, 2013, outstanding COs, including both CO bonds and CO discount notes, totaled $47.6 billion and $39.5 billion, respectively.

CO bonds outstanding for which we are primarily liable at September 30, 2014, and December 31, 2013, include issued callable bonds totaling $4.8 billion and $2.5 billion, respectively.

CO discount notes comprised 47.4 percent and 40.6 percent of the outstanding COs for which we are primarily liable at September 30, 2014, and December 31, 2013, respectively, but accounted for 91.4 percent and 89.3 percent of the proceeds from the issuance of such COs during the nine months ended September 30, 2014 and 2013, respectively, due, in particular, to our frequent overnight CO discount note issuances.

See Item 1 — Notes to the Financial Statements — Note 12 — Consolidated Obligations for additional information on the COs for which we are primarily liable.

Financial Conditions for Consolidated Obligations

We have experienced relatively favorable CO issuance costs and stable market access during the period covered by this report. Further, financial markets have remained generally calm. Due to diminished issuance by the other GSEs, our relative cost of issuing long-term debt as measured against yields on similar-term U.S. Treasury obligations remains low compared with historical averages.

Capital

69



Capital at September 30, 2014, was $2.8 billion, a decrease of $8.5 million from December 31, 2013. Capital stock decreased by $137.0 million and accumulated other comprehensive loss totaled $440.5 million at September 30, 2014, an improvement of $41.1 million from December 31, 2013. Restricted retained earnings totaled $129.9 million at September 30, 2014, and $106.8 million at December 31, 2013. Total retained earnings at September 30, 2014, grew to $876.2 million, an increase of $87.4 million from December 31, 2013. Amounts in our restricted retained earnings account are not available to be paid as dividends. For information on our restricted retained earnings contribution requirement, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 16 — Capital in the 2013 Annual Report.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at September 30, 2014, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital.

Subject to applicable law following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock declined $733.3 million to $244.0 million as of September 30, 2014, from $977.3 million as of year-end 2013, due to our repurchases of excess capital stock.
For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 1 — Business — Capital Resources — Mandatorily Redeemable Capital Stock in the 2013 Annual Report.

The following table sets forth the amount of mandatorily redeemable capital stock by year of expiry of redemption period at September 30, 2014, and December 31, 2013 (dollars in thousands).

Expiry of Redemption Period
 
September 30, 2014
 
December 31, 2013
Past redemption date (1)
 
$
697

 
$
697

Due in one year or less
 

 

Due after one year through two years
 
25,383

 

Due after two years through three years
 
207

 
116,745

Due after three years through four years
 
217,420

 
832

Due after four years through five years
 
338

 
859,074

Total
 
$
244,045

 
$
977,348

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption period but the member-related activity remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.

Members without excess stock are required to increase their capital-stock investment as their outstanding advances increase, as described in Item 1 — Business — Capital Resources in the 2013 Annual Report. As discussed in that Item, we may repurchase excess stock at our sole discretion, although we note our continuing moratorium on repurchases of excess stock at the member's request other than in limited, former member-related instances of insolvency. Notwithstanding the moratorium, we repurchased $500.0 million of excess stock on each of May 1, 2014 and July 31, 2014.

At September 30, 2014, and December 31, 2013, excess capital stock totaled $648.7 million and $1.7 billion, respectively, as set forth in the following table (dollars in thousands):
 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
September 30, 2014
$
623,565

 
$
1,365,282

 
$
1,988,869

 
$
2,637,553

 
$
648,684

December 31, 2013
626,354

 
1,169,536

 
1,795,913

 
3,507,819

 
1,711,906

_______________________
(1)
Total stock-investment requirement is rounded up to the nearest $100 on an individual member basis.

70


(2) 
Class B capital stock outstanding includes mandatorily redeemable capital stock.

Capital Rule

The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated September 23, 2014, the Director of the FHFA notified us that, based on June 30, 2014, financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2013 Annual Report.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital as discussed below and under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Internal Capital Practices and Policies in the 2013 Annual Report.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.8 percent at September 30, 2014.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must exceed the sum of our regulatory capital requirement plus our minimum retained earnings target (together, our internal minimum capital requirement). As of September 30, 2014, this internal minimum capital requirement equaled $2.8 billion, which was satisfied by our actual regulatory capital of $3.5 billion.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
 
Our significant off-balance-sheet arrangements consist of the following:
 
commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 20 — Commitments and Contingencies in the 2013 Annual Report.

The FHLBanks must annually set aside for the AHP the greater of an aggregate of $100 million or 10 percent of the current year's income before charges for AHP and interest expense on mandatorily redeemable capital stock. For the nine months ended September 30, 2014, our AHP assessment was $13.7 million. See Item 1 — Business — Assessments in the 2013 Annual Report for additional information regarding the AHP assessment.

CRITICAL ACCOUNTING ESTIMATES
 
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

71


 
We have identified five accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2013 Annual Report.

As of September 30, 2014, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements. Described below are the results of the sensitivity analysis for other-than-temporary impairment of private-label MBS.

Other-Than-Temporary Impairment of Investment Securities
 
See Item 1 — Notes to the Financial Statements — Note 6 — Other-Than-Temporary Impairment for additional information related to management's other-than-temporary impairment analysis for the current period.

In addition to evaluating our residential private-label MBS under a base-case (or best estimate) scenario, a cash-flow analysis was also performed for each of these securities under a more stressful housing price index scenario that was determined by the OTTI Governance Committee. This more stressful scenario was based on a housing price forecast that was decreased five percentage points followed by a recovery path that is 33.0 percent lower than the base case. The base case and adverse case scenarios for other-than-temporarily impaired private-label MBS for the three months ended September 30, 2014, were $311,000 and $1.9 million, respectively.
 
RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

The legislative and regulatory environment in which we and our members operate continues to evolve rapidly due to the implementation of reforms for financial entities, which reforms commenced in the wake of the last recession. Our business operations, funding costs, rights, obligations, and/or the environment in which we carry out our housing finance mission are likely to continue to be significantly impacted by these changes. We summarize certain significant regulatory actions and developments for the period covered by this report below.

FHFA Proposed Rule on FHLBank Membership. On September 12, 2014, the FHFA issued a proposed rule with a comment deadline of January 12, 2015 that would, among other things:

require all FHLBank members to maintain, on an ongoing basis, at least 1 percent of their assets in first-lien home mortgage loans, including MBS, with maturities of five years or more in order to maintain their membership in the FHLBanks;

require all insured depository members (other than FDIC-insured depositories with less than $1.1 billion in assets) to maintain, on an ongoing basis, at least 10 percent of their assets in a broader range of residential mortgage loans, including those secured by junior liens and MBS, in order to maintain their membership in the FHLBanks; and

eliminate virtually all currently eligible captive insurance companies from FHLBank membership, with such existing members having their access to membership benefits wound down during a sunset period.

If adopted as proposed, the rule would lead to the loss of members and potential members that do not meet the new requirements and could adversely impact our results of operations.

Proposed Rules for Margin and Capital Requirements for Covered Swap Entities. On September 3, 2014, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the FHFA (collectively, the Agencies) jointly proposed a rule with a November 24, 2014, comment deadline that would establish minimum margin collection requirements for registered swap

72


dealers, major swap participants, security-based swap dealers, and major security-based swap participants that are subject to the jurisdiction of one of the Agencies.

In addition, on September 17, 2014, the Commodity Futures Trading Commission (CFTC) proposed a rule with a comment deadline of December 2, 2014, for entities that are not subject to regulation by the Agencies. The CFTC’s proposed rule’s requirements generally conform with the Agencies’ proposed requirements.

These proposed rules would subject certain non-cleared swaps to a mandatory two-way initial margin requirement. The amount of initial margin required to be posted would be either the amount calculated using a standardized schedule set forth in the proposed rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model conforming to the requirements of the proposed rule that is approved by the applicable Agency. The proposed rules specify the types of collateral that may be posted as initial margin (generally, cash, government securities, liquid debt, equity securities, and gold); and sets forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and may not be rehypothecated.

The proposed rules would also require variation margin to be exchanged daily for certain non-cleared swaps. The variation margin amount is the daily mark-to-market change in the value of the swap taking into account variation margin previously paid or collected. Variation margin may only be paid in cash, is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

Under the proposed rules, the variation margin requirement would become effective on December 1, 2015, and the initial margin requirement would be phased in over a four-year period commencing on that date. For entities that have less than a $1 trillion notional amount of non-cleared derivatives, the proposed rule’s initial margin requirement would not come into effect until December 1, 2019.

We would not be directly covered by the proposed rules, however, the FHFA would have discretion to designate us to be directly covered. In any case, our swap dealer counterparties would be required to collect initial and variation margin from us due to our status as a financial end user and based on the aggregate notional amount of our swaps.

If the proposed rules are adopted, our cost of engaging in non-cleared swaps would increase, and adversely impact our results of operations to the extent we could not satisfy our hedging goals without using non-cleared swaps.

Basel Committee on Bank Supervision Final Liquidity Coverage Ratio (the LCR) Rule. On September 3, 2014, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation finalized the LCR rule, applicable to: (i) U.S. banking organizations with $250 billion or more in consolidated total assets or $10 billion or more in total on-balance sheet foreign exposure, and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets; and (ii) certain other U.S. bank or savings and loan holding companies having at least $50 billion in total consolidated assets. The LCR rule requires such covered companies to maintain a stock of “high quality liquid assets” (HQLA) that is no less than 100 percent of their total net cash outflows over a prospective 30-day stress period. Among other things, the final rule defines the various categories of HQLA, called Levels 1, 2A, or 2B. The treatment of HQLAs for the LCR is most favorable under the Level 1 category, less favorable under the Level 2A category, and least favorable under the Level 2B category.

Under the final rule, collateral pledged to us but not securing existing borrowings may be considered eligible HQLA to the extent the collateral itself qualifies as eligible HQLA; COs are categorized as Level 2A HQLAs; and the amount of a covered company’s funding that is assumed to run off includes 25 percent of our advances maturing within 30 days, to the extent such advances are not secured by Level 1 or Level 2A HQLA, where zero percent and 15 percent run-off assumptions apply, respectively. At this time, the impact of the final rule on us is uncertain. The final rule requires that all covered companies be fully compliant by January 1, 2017.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk

Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Sources and Types of Market and Interest-Rate Risk in the 2013 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

73



General
 
We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:

the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at September 30, 2014, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.3 billion, compared with $13.4 billion at December 31, 2013);
the use of derivatives and/or COs with embedded options to hedge the interest-rate risk of our debt (at September 30, 2014, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.6 billion, compared with $1.2 billion at December 31, 2013);
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements, was $7.3 billion, or 29.5 percent of our total outstanding CO bonds at September 30, 2014, compared with $7.0 billion, or 30.2 percent of total outstanding CO bonds, at December 31, 2013);
contractual provisions for advances that require borrowers to pay us prepayment fees, which make us financially indifferent if the borrower prepays such advances prior to maturity; and
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Strategies to Manage Market and Interest Rate Risk in the 2013 Annual Report.

Measurement of Market and Interest-Rate Risk

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure Value at Risk (VaR), duration of equity, convexity and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the theoretical market value of our assets and the theoretical market value of our liabilities.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a theoretical measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. BVE is equal to our permanent capital, which consists of the par value of capital stock including mandatorily redeemable capital stock, plus retained earnings. BVE excludes accumulated other comprehensive loss. However, we caution that care must be taken to properly interpret the results of the MVE analysis as the theoretical basis for these valuations may not be fully representative of future realized prices. Further, valuations are based on market curves and prices respective of individual assets, liabilities, and derivatives, and therefore are not representative of future net income to be earned by us through the spread between asset market curves and the market curves for funding costs. MVE should not be considered indicative of our market value as a going concern because it does not consider future new business activities, risk-management strategies, or the net profitability of assets after funding costs are subtracted. 

We measure our exposure to market and interest-rate risk using several metrics, including:

the ratio of MVE to BVE;
the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;
the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;
VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;
duration of equity, which measures percentage change to market value for a 100 basis point shift in rates;

74


MVE sensitivity, which is the percent change in MVE in various shocked interest rate scenarios vs. base case MVE;
the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched;
targeted metrics for our investments in mortgage loans; and
the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR.

We maintain limits and management action triggers in connection with each of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Measurement of Market and Interest-Rate Risk in the 2013 Annual Report.

The following table sets forth each of the foregoing metrics together with any targets, associated limits and management actions triggers at September 30, 2014, and December 31, 2013,

Interest/Market-Rate Risk Metric
 
At September 30, 2014
 
At December 31, 2013
 
Target, Limit or Management Action Trigger at September 30, 2014
MVE
 
$3.4 billion
 
$4.2 billion
 
None
MVE/BVE
 
97.7%
 
97.5%
 
None
MVE/Par Stock
 
130.2%
 
119.4%
 
100% or higher (target)
Economic Capital Ratio
 
6.5%
 
9.3%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$91.6 million
 
$136.9 million
 
Maintain below $275.0 million (limit)
Duration of Equity
 
 +0.1 years
 
+0.9 years
 
Maintain below +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(3.6)%
 
(3.5)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
+0.1 months
 
+1.0 months
 
None
MPF Portfolio VaR
 
$65.8 million
 
$87.0 million
 
Maintain below $68.8 million (management action trigger)
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 52 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 173 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

See Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios in the 2013 annual report on Form 10-K for a discussion of the MPF Portfolio VaR at December 31, 2013, which exceeded the threshold for our management action trigger at that date.

Value at Risk. The table below presents the historical simulation VaR estimate as of September 30, 2014, and December 31, 2013, which represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on historical behavior of interest rates and other market factors over a 120-business-day time horizon.

75


 
 
 
Value-at-Risk
(Gain) Loss Exposure
 
 
September 30, 2014
 
December 31, 2013
Confidence Level
 
% of
MVE (1)
 
$ million
 
% of
MVE (1)
 
$ million
50%
 
0.13
%
 
$
4.4

 
(0.12
)%
 
$
(5.0
)
75%
 
0.36

 
12.3

 
0.46

 
19.1

95%
 
1.41

 
48.3

 
1.64

 
68.8

99%
 
2.67

 
91.6

 
3.27

 
136.9

_______________________
(1)
Loss exposure is expressed as a percentage of base MVE.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios

Convexity Management Action Trigger and Limit. We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. In particular, we measure the convexity of our MVE and have established a management action trigger at a decline of 10 percent and a limit at a decline of 15 percent in an up or down 200 basis point parallel rate shock scenario. Our policies require management to notify the board of director’s risk committee if the limit is breached and to take steps to reduce the risk exposure.

The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in thousands).

 
 
September 30, 2014
 
 
Down(1) 300
 
Down(1) 200
 
Down(1) 100
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,317
 
$3,352
 
$3,401
 
$3,433
 
$3,404
 
$3,308
 
$3,179
Percent change in MVE from base
 
(3.4)%
 
(2.4)%
 
(0.9)%
 
—%
 
(0.8)%
 
(3.6)%
 
(7.4)%
MVE/BVE
 
94.4%
 
95.4%
 
96.8%
 
97.7%
 
96.9%
 
94.1%
 
90.5%
MVE/Par Stock
 
125.7%
 
127.1%
 
128.9%
 
130.2%
 
129.1%
 
125.4%
 
120.5%
Duration of Equity
 
 +0.6 years
 
 -1.3 years
 
 -1.5 years
 
 +0.1 years
 
 +2.0 years
 
 +3.4 years
 
 +4.2 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.5%
 
2.5%
 
2.5%
 
2.9%
 
2.3%
 
1.5%
 
0.5%
Net income percent change from base
 
(24.4)%
 
(25.3)%
 
(25.9)%
 
—%
 
11.7%
 
15.7%
 
16.9%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for September 30, 2014, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude interest expense on mandatorily redeemable capital stock.


76


 
 
December 31, 2013
 
 
Down(1) 300
 
Down(1) 200
 
Down(1) 100
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$4,223
 
$4,245
 
$4,211
 
$4,189
 
$4,135
 
$4,042
 
$3,930
Percent change in MVE from base
 
0.8%
 
1.3%
 
0.5%
 
—%
 
(1.3)%
 
(3.5)%
 
(6.2)%
MVE/BVE
 
98.3%
 
98.8%
 
98.0%
 
97.5%
 
96.2%
 
94.1%
 
91.5%
MVE/Par Stock
 
120.4%
 
121.0%
 
120.1%
 
119.4%
 
117.9%
 
115.2%
 
112.0%
Duration of Equity
 
+ 0.1 year
 
+ 0.1 year
 
+0.4 years
 
 +0.9 years
 
+1.9 years
 
+ 2.5 years
 
+2.9 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.6%
 
2.8%
 
2.6%
 
2.8%
 
2.6%
 
2.2%
 
1.7%
Net Income percent change from base
 
(16.0)%
 
(12.0)%
 
(17.5)%
 
—%
 
24.0%
 
42.4%
 
59.9%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for December 31, 2013, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude interest expense on mandatorily redeemable capital stock.

As shown in the percent change in MVE lines in the above tables, we satisfied the limit at each period ended September 30, 2014, and December 31, 2013.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer, and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

77



PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe certain continuing legal proceedings in Item 3 — Legal Proceedings in the 2013 Annual Report, including, but not limited to, information on: a private-label MBS complaint we continue against various defendants, including securities dealers, underwriters, control persons, issuers/depositors and credit rating agencies; and a class action complaint against EMC Mortgage Corporation and Bear, Stearns & Co., now known as J.P. Morgan Securities, LLC, based on our investment in certain private-label MBS trusts.

Private-label MBS Complaint Developments

On July 1, 2014, we agreed with certain defendants in our private-label MBS litigation to settle our claims against them for an aggregate amount of $17.4 million (which amount is net of legal fees and expenses).

On September 30, 2014, Judge O’Toole dismissed our claims against the credit rating agency defendants, based on a recent Supreme Court case. The judge ruled that the United States District Court for the District of Massachusetts (the Massachusetts District Court) lacks personal jurisdiction over our claims against the credit rating agency defendants and declined to grant our motion to transfer those claims to another federal district court that does have personal jurisdiction. Judge O’Toole certified the ruling for immediate appeal. To preserve our rights with respect to a permissive appeal, on October 10, 2014, we sought permission from the United States Court of Appeals for the First Circuit to appeal. Later that same month, we filed a notice of appeal to preserve our right to appeal under a separate grant of appellate jurisdiction. On October 14, 2014, we entered into tolling agreements with the credit rating agency defendants regarding the claims we had asserted against them in the Massachusetts District Court. Those agreements toll the statute of limitations for purposes of our filing a possible new action in a different jurisdiction, which we may determine is appropriate in the event our appeal is not successful.

In addition to our appeal with respect to the dismissal of our claims against Moody’s and S&P, we continue to pursue claims in this litigation against the following and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Barclays Capital Inc.; The Bear Stearns Companies LLC; Credit Suisse (USA), Inc.; DB Structured Products, Inc.; DB U.S. Financial Market Holding Corporation; EMC Mortgage Corporation; Impac Mortgage Holdings, Inc.; JPMorgan Chase & Co.; Morgan Stanley; Nomura Holding America, Inc.; RBS Holdings USA Inc.; UBS Americas Inc.; and WaMu Capital Corp.

Class Action Complaint Developments

The defendants in the class action complaint previously filed a motion to dismiss our complaint, arguing, among other things, that we lacked standing to pursue the claims and that we had failed to adequately plead our claims. On September 19, 2014, we filed our response to that motion. We cannot predict when the court will issue a ruling.

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A.    RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2013 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None


78


ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

None.

79



ITEM 6.  EXHIBITS

Number
Exhibit Description
10.1
 
The Federal Home Loan Bank of Boston 2015 Director Compensation Policy * (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on October 24, 2014)
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
November 7, 2014
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
November 7, 2014
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

80