10-Q 1 ind6301510-q.htm 10-Q IND 6/30/15 10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:  000-51404
 
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
35-6001443
(I.R.S. employer identification number)
8250 Woodfield Crossing Boulevard
Indianapolis, IN
(Address of principal executive offices)
 
46240
(Zip code)
(317) 465-0200
(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 for the past 90 days.

x  Yes            o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
o  Large accelerated filer
o  Accelerated filer
x Non-accelerated filer (Do not check if a smaller reporting company)
o  Smaller reporting company

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Shares outstanding
as of July 31, 2015

Class B Stock, par value $100
14,129,950




Table of Contents
Page
 
 
Number
PART I.
FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (unaudited)
 
 
 
 
 
Statements of Condition as of June 30, 2015 and December 31, 2014
 
 
 
 
Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Statements of Capital for the Six Months Ended June 30, 2014 and 2015
 
 
 
 
Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
 
 
 
Notes to Financial Statements:
 
 
Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle
 
Note 2 - Recently Adopted and Issued Accounting Guidance
 
Note 3 - Available-for-Sale Securities
 
Note 4 - Held-to-Maturity Securities
 
Note 5 - Other-Than-Temporary Impairment
 
Note 6 - Advances
 
Note 7 - Mortgage Loans Held for Portfolio
 
Note 8 - Allowance for Credit Losses
 
Note 9 - Derivatives and Hedging Activities
 
Note 10 - Consolidated Obligations
 
Note 11 - Affordable Housing Program
 
Note 12 - Capital
 
Note 13 - Accumulated Other Comprehensive Income
 
Note 14 - Segment Information
 
Note 15 - Estimated Fair Values
 
Note 16 - Commitments and Contingencies
 
Note 17 - Transactions with Related Parties and Other Entities
 
 
 
 
GLOSSARY OF TERMS
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Special Note Regarding Forward-Looking Statements
 
Executive Summary
 
Selected Financial Data
 
Results of Operations and Changes in Financial Condition
 
Operating Segments
 
Analysis of Financial Condition
 
Liquidity and Capital Resources
 
Off-Balance Sheet Arrangements
 
Critical Accounting Policies and Estimates
 
Recent Accounting and Regulatory Developments
 
Risk Management
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
Item 6.
EXHIBITS
 
Signatures
 
Exhibit 31.1
 
 
Exhibit 31.2
 
 
Exhibit 31.3
 
 
Exhibit 32
 




PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts in thousands, except par value per share and number of shares)
 
June 30,
2015
 
December 31,
2014
Assets:
 
 
 
Cash and due from banks
$
635,017

 
$
3,550,939

Interest-bearing deposits
251

 
483

Securities purchased under agreements to resell
200,000

 

Federal funds sold
1,895,000

 

Available-for-sale securities (Notes 3 and 5)
3,570,926

 
3,556,165

Held-to-maturity securities (estimated fair values of $6,590,575 and $7,098,616, respectively) (Notes 4 and 5)
6,481,002

 
6,982,115

Advances (Note 6)
24,318,357

 
20,789,667

Mortgage loans held for portfolio, net of allowance for loan losses of $(1,350) and $(2,500), respectively (Notes 7 and 8)
7,932,724

 
6,820,262

Accrued interest receivable
86,971

 
82,866

Premises, software, and equipment, net
37,970

 
38,418

Derivative assets, net (Note 9)
41,763

 
25,487

Other assets
36,536

 
6,630

 
 
 
 
Total assets
$
45,236,517

 
$
41,853,032

 
 
 
 
Liabilities:
 

 
 
Deposits
$
1,163,762

 
$
1,084,042

Consolidated obligations (Note 10):
 

 
 
Discount notes
11,802,629

 
12,567,696

Bonds
29,647,600

 
25,503,138

Total consolidated obligations
41,450,229

 
38,070,834

Accrued interest payable
83,461

 
77,034

Affordable Housing Program payable (Note 11)
35,120

 
36,899

Derivative liabilities, net (Note 9)
95,634

 
103,253

Mandatorily redeemable capital stock (Note 12)
14,341

 
15,673

Other liabilities
152,962

 
90,027

Total liabilities
42,995,509

 
39,477,762

 
 
 
 
Commitments and contingencies (Note 16)


 


 
 
 
 
Capital (Note 12):
 

 
 
Capital stock putable (at par value of $100 per share):
 
 
 
Class B-1 issued and outstanding shares: 13,882,023 and 15,509,811, respectively
1,388,202

 
1,550,981

Class B-2 issued and outstanding shares: 371 and 0, respectively
37

 

     Total capital stock putable
1,388,239

 
1,550,981

Retained earnings:
 
 
 
Unrestricted
691,512

 
672,159

Restricted
118,409

 
105,470

Total retained earnings
809,921

 
777,629

Total accumulated other comprehensive income (Note 13)
42,848

 
46,660

Total capital
2,241,008

 
2,375,270

 
 
 
 
Total liabilities and capital
$
45,236,517

 
$
41,853,032


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

1



Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Interest Income:
 
 
 
 
 
 
 
Advances
$
29,951

 
$
24,443

 
$
57,679

 
$
52,559

Prepayment fees on advances, net
101

 
12

 
292

 
1,061

Interest-bearing deposits
53

 
60

 
107

 
114

Securities purchased under agreements to resell
352

 
68

 
467

 
157

Federal funds sold
545

 
416

 
1,164

 
696

Available-for-sale securities
8,014

 
6,865

 
14,826

 
13,011

Held-to-maturity securities
29,346

 
31,313

 
58,747

 
63,423

Mortgage loans held for portfolio
64,174

 
57,511

 
126,400

 
115,616

Other interest income, net
(108
)
 
421

 
45

 
535

Total interest income
132,428

 
121,109

 
259,727

 
247,172

Interest Expense:
 
 
 
 
 
 
 
Consolidated obligation discount notes
3,457

 
1,347

 
6,473

 
2,749

Consolidated obligation bonds
81,528

 
75,910

 
156,919

 
152,352

Deposits
23

 
22

 
42

 
45

Mandatorily redeemable capital stock
122

 
135

 
256

 
745

Total interest expense
85,130

 
77,414

 
163,690

 
155,891

 
 
 
 
 
 
 
 
Net interest income
47,298

 
43,695

 
96,037

 
91,281

Provision for (reversal of) credit losses
(951
)
 
(86
)
 
(388
)
 
(790
)
 
 
 
 
 
 
 
 
Net interest income after provision for credit losses
48,249

 
43,781

 
96,425

 
92,071

 
 
 
 
 
 
 
 
Other Income (Loss):
 
 
 
 
 
 
 
Total other-than-temporary impairment losses

 

 

 

Non-credit portion reclassified to (from) other comprehensive income, net
(32
)
 
(58
)
 
(32
)
 
(228
)
Net other-than-temporary impairment losses, credit portion
(32
)
 
(58
)
 
(32
)
 
(228
)
Net gains (losses) on derivatives and hedging activities
7,263

 
3,138

 
5,383

 
6,106

Service fees
200

 
227

 
388

 
442

Standby letters of credit fees
188

 
134

 
339

 
293

Other, net (Note 16)
322

 
6,521

 
5,439

 
9,234

Total other income
7,941

 
9,962

 
11,517

 
15,847

 
 
 
 
 
 
 
 
Other Expenses:
 
 
 
 
 
 
 
Compensation and benefits
10,998

 
10,567

 
21,698

 
20,514

Other operating expenses
5,541

 
4,452

 
10,633

 
8,496

Federal Housing Finance Agency
590

 
619

 
1,310

 
1,418

Office of Finance
787

 
625

 
1,650

 
1,443

Other
388

 
345

 
740

 
636

Total other expenses
18,304

 
16,608

 
36,031

 
32,507

 
 
 
 
 
 
 
 
Income before assessments
37,886

 
37,135

 
71,911

 
75,411

 
 
 
 
 
 
 
 
Affordable Housing Program assessments
3,801

 
3,727

 
7,217

 
7,616

 
 
 
 
 
 
 
 
Net income
$
34,085

 
$
33,408

 
$
64,694

 
$
67,795


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

2



Federal Home Loan Bank of Indianapolis
Statements of Comprehensive Income
(Unaudited, $ amounts in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
34,085

 
$
33,408

 
$
64,694

 
$
67,795

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available-for-sale securities
(2,908
)
 
538

 
(1,404
)
 
12,577

 
 
 
 
 
 
 
 
Non-credit portion of other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
 
 
Reclassification of non-credit portion to other income (loss)
32

 
58

 
32

 
228

Net change in fair value not in excess of cumulative non-credit losses
(107
)
 
38

 
(106
)
 
(181
)
Unrealized gains (losses)
828

 
8,619

 
(1,531
)
 
12,873

Net non-credit portion of other-than-temporary impairment losses on available-for-sale securities
753

 
8,715

 
(1,605
)
 
12,920

 
 
 
 
 
 
 
 
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
 
 
 
 
 
Accretion of non-credit portion
12

 
19

 
24

 
32

Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
12

 
19

 
24

 
32

 
 
 
 
 
 
 
 
Pension benefits, net
(1,075
)
 
(208
)
 
(827
)
 
(72
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
(3,218
)
 
9,064

 
(3,812
)
 
25,457

 
 
 
 
 
 
 
 
Total comprehensive income
$
30,867

 
$
42,472

 
$
60,882

 
$
93,252



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

3



Federal Home Loan Bank of Indianapolis
Statements of Capital
Six Months Ended June 30, 2014 and 2015
(Unaudited, $ amounts and shares in thousands)

 
 
Capital Stock
Class B Putable
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Capital
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
 
16,099

 
$
1,609,931

 
$
647,624

 
$
82,151

 
$
729,775

 
$
21,720

 
$
2,361,426

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
54,236

 
13,559

 
67,795

 
25,457

 
93,252

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of capital stock
 
568

 
56,724

 
 
 
 
 
 
 
 
 
56,724

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(4.63% annualized)
 
 
 
 
 
(37,084
)
 

 
(37,084
)
 
 
 
(37,084
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2014
 
16,667

 
$
1,666,655

 
$
664,776

 
$
95,710

 
$
760,486

 
$
47,177

 
$
2,474,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
15,510

 
$
1,550,981

 
$
672,159

 
$
105,470

 
$
777,629

 
$
46,660

 
$
2,375,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
51,755

 
12,939

 
64,694

 
(3,812
)
 
60,882

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of capital stock
 
775

 
77,593

 
 
 
 
 
 
 
 
 
77,593

Repurchase/redemption of capital stock
 
(2,403
)
 
(240,335
)
 
 
 
 
 
 
 
 
 
(240,335
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(4.00% annualized)
 
 
 
 
 
(32,402
)
 

 
(32,402
)
 
 
 
(32,402
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015
 
13,882

 
$
1,388,239

 
$
691,512

 
$
118,409

 
$
809,921

 
$
42,848

 
$
2,241,008




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

4



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
64,694

 
$
67,795

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
27,464

 
13,106

Prepayment fees on advances, net of related swap termination fees
(1,862
)
 

Changes in net derivative and hedging activities
24,463

 
26,822

Net other-than-temporary impairment losses, credit portion
32

 
228

Provision for (reversal of) credit losses
(388
)
 
(790
)
Changes in:
 
 
 
Accrued interest receivable
(4,237
)
 
1,624

Other assets
(139
)
 
9,121

Accrued interest payable
6,428

 
(2,616
)
Other liabilities
18,687

 
7,083

Total adjustments, net
70,448

 
54,578

 
 
 
 
Net cash provided by operating activities
135,142

 
122,373

 
 
 
 
Investing Activities:
 
 


Changes in:
 
 
 
Interest-bearing deposits
36,505

 
59,164

Securities purchased under agreements to resell
(200,000
)
 

Federal funds sold
(1,895,000
)
 
(230,000
)
Purchases of premises, software, and equipment
(2,190
)
 
(2,019
)
Available-for-sale securities:
 
 
 
Proceeds from maturities
38,055

 
40,539

Purchases
(79,866
)
 

Held-to-maturity securities:
 
 
 
Proceeds from maturities
810,146

 
379,421

Purchases
(316,868
)
 
(174,142
)
Advances:
 
 
 
Principal collected
38,155,389

 
33,858,469

Disbursed to members
(41,710,652
)
 
(35,765,339
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
714,805

 
406,321

Purchases from members
(1,827,183
)
 
(472,545
)
 
 
 
 
Net cash used in investing activities
(6,276,859
)
 
(1,900,131
)
 


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

5



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Financing Activities:
 
 
 
Changes in deposits
79,680

 
(108,354
)
Net payments on derivative contracts with financing elements
(29,874
)
 
(30,349
)
Net proceeds from issuance of consolidated obligations:
 
 
 
Discount notes
33,034,814

 
24,336,904

Bonds
12,243,592

 
8,605,005

Payments for matured and retired consolidated obligations:
 
 
 
Discount notes
(33,801,641
)
 
(22,769,510
)
Bonds
(8,104,300
)
 
(8,993,200
)
Other Federal Home Loan Banks:
 
 
 
Proceeds from borrowings

 
22,000

Principal payments

 
(22,000
)
Proceeds from sale of capital stock
77,593

 
56,724

Payments for redemption/repurchase of mandatorily redeemable capital stock
(1,332
)
 
(2
)
Payments for redemption/repurchase of capital stock
(240,335
)
 

Cash dividends paid on capital stock
(32,402
)
 
(37,084
)
 
 
 
 
Net cash provided by financing activities
3,225,795

 
1,060,134

 
 
 
 
Net increase (decrease) in cash and due from banks
(2,915,922
)
 
(717,624
)
 
 
 
 
Cash and due from banks at beginning of period
3,550,939

 
3,318,564

 
 
 
 
Cash and due from banks at end of period
$
635,017

 
$
2,600,940

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
149,504

 
$
153,880

Affordable Housing Program payments
8,996

 
6,932

Capitalized interest on certain held-to-maturity securities
836

 
1,303

Net transfers of mortgage loans to real estate owned

 
117

 

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

6



Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle

Basis of Presentation. The accompanying interim financial statements of the Federal Home Loan Bank of Indianapolis have been prepared in accordance with GAAP and SEC requirements for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. The interim financial statements presented herein should be read in conjunction with our audited financial statements and notes thereto, which are included in our 2014 Form 10-K.

The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

Our significant accounting policies and certain other disclosures are set forth in Note 1 - Summary of Significant Accounting Policies in our 2014 Form 10-K. There have been no significant changes to these policies through June 30, 2015.

We use certain acronyms and terms throughout these financial statements, which are defined in the Glossary of Terms. Unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis or its management.

Reclassifications. We have reclassified certain amounts from the prior periods to conform to the current period presentation. These reclassifications had no effect on net income, total comprehensive income, total capital, or net cash flows.

Use of Estimates. When preparing financial statements in accordance with GAAP, we are required to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant estimates include the determination of other-than-temporary impairment of certain private-label RMBS, the fair values of derivatives and other financial instruments, and the allowance for credit losses. Although the reported amounts and disclosures reflect our best estimates, actual results could differ significantly from these estimates.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Change in Accounting Principle. Effective October 1, 2014, we changed our method of accounting for the amortization and accretion of premiums and discounts, deferred loan fees or costs, and hedging basis adjustments on our mortgage loans held for portfolio to the contractual interest method. The contractual method recognizes the income effects of premiums and discounts in a manner that reflects the actual prepayments and other activity of the mortgage loans during that period and the contractual terms of the loans without regard to estimated prepayments based upon assumptions about future borrower activity. Historically, we deferred and amortized premiums and accreted discounts into interest income using the retrospective interest method, which used both actual prepayment experience and estimates of future principal repayments in calculating the estimated lives of the loans. While both the retrospective interest and contractual interest methods are acceptable under GAAP, the contractual interest method has become preferable for recognizing net unamortized premiums on our mortgage loans held for portfolio because (i) it reduces our reliance on subjective assumptions and estimates that affect the reported amounts of assets, capital and income in the financial statements and (ii) it represents the base accounting model articulated in GAAP applicable to accounting for the amortization of premiums and the accretion of discounts, whereas the retrospective method is only permitted by the guidance in narrowly defined circumstances.

The change to the contractual method for amortizing premiums and accreting discounts, deferred loan fees or costs, and hedging basis adjustments on our mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented. For the three and six months ended June 30, 2014, the effect of this change was an increase to net income of $267 and $994, respectively.

The following table illustrates the impact of the change in amortization and accretion methodology on our previously reported financial statements as of and for the three and six months ended June 30, 2014.
 
 
For the Three Months Ended June 30, 2014
 
 
Previous Method
 
New Method
 
Effect of Change
Statements of Income:
 
 
 
 
 
 
Interest income - mortgage loans held for portfolio
 
$
57,214

 
$
57,511

 
$
297

Net interest income after provision for credit losses
 
43,484

 
43,781

 
297

Income before assessments
 
36,838

 
37,135

 
297

Affordable Housing Program assessments
 
3,697

 
3,727

 
30

Net income
 
$
33,141

 
$
33,408

 
$
267

 
 
 
 
 
 
 
Statements of Comprehensive Income:
 
 
 
 
 
 
Net income
 
$
33,141

 
$
33,408

 
$
267

Total comprehensive income
 
$
42,205

 
$
42,472

 
$
267







Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


 
 
As of and for the Six Months Ended June 30, 2014
 
 
Previous Method
 
New Method
 
Effect of Change
Statements of Condition:
 
 
 
 
 
 
Mortgage loans held for portfolio, net
 
$
6,251,472

 
$
6,230,400

 
$
(21,072
)
Total assets
 
39,055,075

 
39,034,003

 
(21,072
)
Affordable Housing Program payable
 
43,351

 
43,462

 
111

Total liabilities
 
36,559,574

 
36,559,685

 
111

Unrestricted retained earnings
 
682,872

 
664,776

 
(18,096
)
Restricted retained earnings
 
98,797

 
95,710

 
(3,087
)
Total retained earnings
 
781,669

 
760,486

 
(21,183
)
Total capital
 
2,495,501

 
2,474,318

 
(21,183
)
Total liabilities and capital
 
$
39,055,075

 
$
39,034,003

 
$
(21,072
)
 
 
 
 
 
 
 
Statements of Income:
 
 
 
 
 
 
Interest income - mortgage loans held for portfolio
 
$
114,511

 
$
115,616

 
$
1,105

Net interest income after provision for credit losses
 
90,966

 
92,071

 
1,105

Income before assessments
 
74,306

 
75,411

 
1,105

Affordable Housing Program assessments
 
7,505

 
7,616

 
111

Net income
 
$
66,801

 
$
67,795

 
$
994

 
 
 
 
 
 
 
Statements of Comprehensive Income:
 
 
 
 
 
 
Net income
 
$
66,801

 
$
67,795

 
$
994

Total comprehensive income
 
$
92,258

 
$
93,252

 
$
994

 
 
 
 
 
 
 
Statements of Capital:
 
 
 
 
 
 
Total retained earnings, as of beginning of year
 
$
751,952

 
$
729,775

 
$
(22,177
)
Total comprehensive income
 
92,258

 
93,252

 
994

Total retained earnings, as of end of period
 
781,669

 
760,486

 
(21,183
)
Total capital
 
$
2,495,501

 
$
2,474,318

 
$
(21,183
)
 
 
 
 
 
 
 
Statements of Cash Flows:
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
Net income
 
$
66,801

 
$
67,795

 
$
994

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Amortization and depreciation
 
14,211

 
13,106

 
(1,105
)
Changes in:
 
 
 
 
 
 
Other liabilities
 
6,972

 
7,083

 
111

Total adjustments, net
 
55,572

 
54,578

 
(994
)
Net cash provided by operating activities
 
$
122,373

 
$
122,373

 
$






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 2 - Recently Adopted and Issued Accounting Guidance

Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued amendments to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. This guidance becomes effective for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We can elect to adopt the amendments either (i) prospectively to all arrangements entered into or materially modified after the effective date or (ii) retrospectively. We are in the process of evaluating this guidance, but its effect on our financial condition, results of operations, and cash flows is not expected to be material.

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

Amendments to the Consolidation Analysis. On February 18, 2015, the FASB issued amended guidance intended to enhance consolidation analysis for legal entities such as limited partnerships, limited liability companies, and securitization structures (collateralized debt obligations, collateralized loan obligations, and MBS transactions). The new guidance primarily focuses on: (i) placing more emphasis on risk of loss when determining a controlling financial interest, such that a reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement when certain criteria are met; (ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE; and (iii) changing consolidation conclusions for entities in several industries that typically make use of limited partnerships or VIEs. This guidance becomes effective for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted, including adoption in an interim period. We are in the process of evaluating this guidance, but its effect on our financial condition, results of operations, or cash flows is not expected to be material.

Note 3 - Available-for-Sale Securities

Major Security Types. The following table presents information on our AFS securities by type of security.
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Non-Credit
 
Unrealized
 
Unrealized
 
Estimated
June 30, 2015
 
Cost (1)
 
OTTI
 
Gains
 
Losses
 
Fair Value
GSE and TVA debentures
 
$
3,113,797

 
$

 
$
14,695

 
$
(739
)
 
$
3,127,753

GSE MBS
 
77,736

 

 
718

 

 
78,454

Private-label RMBS
 
328,152

 
(201
)
 
36,768

 

 
364,719

Total AFS securities
 
$
3,519,685

 
$
(201
)
 
$
52,181

 
$
(739
)
 
$
3,570,926

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
GSE and TVA debentures
 
$
3,139,037

 
$

 
$
17,430

 
$
(1,352
)
 
$
3,155,115

Private-label RMBS
 
362,878

 
(127
)
 
38,299

 

 
401,050

Total AFS securities
 
$
3,501,915

 
$
(127
)
 
$
55,729

 
$
(1,352
)
 
$
3,556,165


(1) 
Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses) and fair-value hedge accounting adjustments.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Unrealized Loss Positions. The following table presents impaired AFS securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position. None of our GSE MBS were in an unrealized loss position at June 30, 2015.
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
June 30, 2015
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
GSE and TVA debentures
 
$
266,017

 
$
(739
)
 
$

 
$

 
$
266,017

 
$
(739
)
Private-label RMBS
 

 

 
4,995

 
(201
)
 
4,995

 
(201
)
Total impaired AFS securities
 
$
266,017

 
$
(739
)
 
$
4,995

 
$
(201
)
 
$
271,012

 
$
(940
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA debentures
 
$
264,959

 
$
(1,352
)
 
$

 
$

 
$
264,959

 
$
(1,352
)
Private-label RMBS
 

 

 
5,656

 
(127
)
 
5,656

 
(127
)
Total impaired AFS securities
 
$
264,959

 
$
(1,352
)
 
$
5,656

 
$
(127
)
 
$
270,615

 
$
(1,479
)

Contractual Maturity. The amortized cost and estimated fair value of non-MBS AFS securities by contractual maturity are presented below. MBS are not presented by contractual maturity because their actual maturities will likely differ from contractual maturities as borrowers have the right to prepay their obligations with or without prepayment fees.
 
 
June 30, 2015
 
December 31, 2014
 
 
Amortized
 
Estimated
 
Amortized
 
Estimated
Year of Contractual Maturity
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
 
$
207,315

 
$
207,905

 
$

 
$

Due after one year through five years
 
2,252,418

 
2,262,091

 
2,484,379

 
2,497,034

Due after five years through ten years
 
654,064

 
657,757

 
654,658

 
658,081

Total non-MBS
 
3,113,797

 
3,127,753

 
3,139,037

 
3,155,115

Total MBS
 
405,888

 
443,173

 
362,878

 
401,050

Total AFS securities
 
$
3,519,685

 
$
3,570,926

 
$
3,501,915

 
$
3,556,165


Realized Gains and Losses. There were no sales of AFS securities during the three and six months ended June 30, 2015 or 2014. As of June 30, 2015, we had no intention of selling the AFS securities in an unrealized loss position nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.
 
 
 
 
 
 
 
 
 




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 4 - Held-to-Maturity Securities

Major Security Types. The following table presents information on our HTM securities by type of security.
 
 
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
 
 
 
 
Unrecognized
 
Unrecognized
 
 
 
 
Amortized
 
Non-Credit
 
Carrying
 
Holding
 
Holding
 
Estimated
June 30, 2015
 
Cost (1)
 
OTTI
 
Value
 
Gains
 
Losses
 
 Fair Value
GSE debentures
 
$
100,000

 
$

 
$
100,000

 
$
111

 
$

 
$
100,111

MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations -guaranteed MBS
 
2,986,326

 

 
2,986,326

 
30,870

 
(2,097
)
 
3,015,099

GSE MBS
 
3,296,309

 

 
3,296,309

 
82,921

 
(713
)
 
3,378,517

Private-label RMBS
 
86,549

 

 
86,549

 
418

 
(957
)
 
86,010

Manufactured housing loan ABS
 
10,394

 

 
10,394

 

 
(1,010
)
 
9,384

Home equity loan ABS
 
1,575

 
(151
)
 
1,424

 
76

 
(46
)
 
1,454

Total MBS and ABS
 
6,381,153

 
(151
)
 
6,381,002

 
114,285

 
(4,823
)
 
6,490,464

Total HTM securities
 
$
6,481,153

 
$
(151
)
 
$
6,481,002

 
$
114,396

 
$
(4,823
)
 
$
6,590,575

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
 
$
269,000

 
$

 
$
269,000

 
$
199

 
$

 
$
269,199

MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations -guaranteed MBS
 
3,032,494

 

 
3,032,494

 
30,598

 
(5,959
)
 
3,057,133

GSE MBS
 
3,567,958

 

 
3,567,958

 
93,583

 
(104
)
 
3,661,437

Private-label RMBS
 
99,879

 

 
99,879

 
360

 
(1,049
)
 
99,190

Manufactured housing loan ABS
 
11,243

 

 
11,243

 

 
(1,164
)
 
10,079

Home equity loan ABS
 
1,716

 
(175
)
 
1,541

 
114

 
(77
)
 
1,578

Total MBS and ABS
 
6,713,290

 
(175
)
 
6,713,115

 
124,655

 
(8,353
)
 
6,829,417

Total HTM securities
 
$
6,982,290

 
$
(175
)
 
$
6,982,115

 
$
124,854

 
$
(8,353
)
 
$
7,098,616


(1) 
Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses).




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Unrealized Loss Positions. The following table presents impaired HTM securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position. None of our non-MBS were in an unrealized loss position at June 30, 2015 or December 31, 2014.
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
June 30, 2015
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses (1)
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
71,333

 
$
(69
)
 
$
642,368

 
$
(2,028
)
 
$
713,701

 
$
(2,097
)
GSE MBS
 
549,432

 
(713
)
 

 

 
549,432

 
(713
)
Private-label RMBS
 
8,632

 
(30
)
 
37,448

 
(927
)
 
46,080

 
(957
)
Manufactured housing loan ABS
 

 

 
9,384

 
(1,010
)
 
9,384

 
(1,010
)
Home equity loan ABS
 

 

 
1,454

 
(121
)
 
1,454

 
(121
)
Total MBS and ABS
 
629,397

 
(812
)
 
690,654

 
(4,086
)
 
1,320,051

 
(4,898
)
Total impaired HTM securities
 
$
629,397

 
$
(812
)
 
$
690,654

 
$
(4,086
)
 
$
1,320,051

 
$
(4,898
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
MBS and ABS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
528,242

 
$
(1,254
)
 
$
702,768

 
$
(4,705
)
 
$
1,231,010

 
$
(5,959
)
GSE MBS
 
31,554

 
(8
)
 
26,013

 
(96
)
 
57,567

 
(104
)
Private-label RMBS
 
3,274

 
(3
)
 
41,050

 
(1,046
)
 
44,324

 
(1,049
)
Manufactured housing loan ABS
 

 

 
10,080

 
(1,164
)
 
10,080

 
(1,164
)
Home equity loan ABS
 

 

 
1,579

 
(138
)
 
1,579

 
(138
)
Total MBS and ABS
 
563,070

 
(1,265
)
 
781,490

 
(7,149
)
 
1,344,560

 
(8,414
)
Total impaired HTM securities
 
$
563,070

 
$
(1,265
)
 
$
781,490

 
$
(7,149
)
 
$
1,344,560

 
$
(8,414
)

(1) 
For home equity loan ABS, total unrealized losses does not agree to total gross unrecognized holding losses at June 30, 2015 and December 31, 2014 of $(46) and $(77), respectively. Total unrealized losses include non-credit-related OTTI losses recorded in AOCI of $(151) and $(175), respectively, and gross unrecognized holding gains on previously OTTI securities of $76 and $114, respectively.

Contractual Maturity. The amortized cost, carrying value and estimated fair value of non-MBS HTM securities by contractual maturity are presented below. MBS and ABS are not presented by contractual maturity because their actual maturities will likely differ from contractual maturities as certain borrowers have the right to prepay their obligations with or without prepayment fees.
 
 
June 30, 2015
 
December 31, 2014
 
 
Amortized
 
Carrying
 
Estimated
 
Amortized
 
Carrying
 
Estimated
Year of Contractual Maturity
 
Cost (1)
 
Value (2)
 
Fair Value
 
Cost (1)
 
Value (2)
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
100,000

 
$
100,000

 
$
100,111

 
$
169,000

 
$
169,000

 
$
169,099

Due after one year through five years
 

 

 

 
100,000

 
100,000

 
100,100

Total non-MBS
 
100,000

 
100,000

 
100,111

 
269,000

 
269,000

 
269,199

Total MBS and ABS
 
6,381,153

 
6,381,002

 
6,490,464

 
6,713,290

 
6,713,115

 
6,829,417

Total HTM securities
 
$
6,481,153

 
$
6,481,002

 
$
6,590,575

 
$
6,982,290

 
$
6,982,115

 
$
7,098,616


(1) 
Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses).
(2) 
Represents amortized cost after adjustment for non-credit OTTI recognized in AOCI.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 5 - Other-Than-Temporary Impairment

OTTI Evaluation Process and Results - Private-label RMBS and ABS. On a quarterly basis, we evaluate our individual AFS and HTM securities that have been previously OTTI or are in an unrealized loss position for OTTI. As part of our evaluation, we consider whether we intend to sell each security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we recognize an OTTI loss equal to the entire difference between the security's amortized cost basis and its estimated fair value at the statement of condition date. For those securities that meet neither of these conditions, we perform a cash flow analysis to determine whether we expect to recover the entire amortized cost basis of the security as described in Note 1 - Summary of Significant Accounting Policies and Note 6 - Other-Than-Temporary Impairment in our 2014 Form 10-K.

OTTI - Significant Inputs. The FHLBanks' OTTI Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 2% to an increase of 8% over a twelve-month period. For the vast majority of housing markets, the changes range from an increase of 2% to an increase of 5%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

The following table presents the significant modeling assumptions used to determine the amount of credit loss recognized in earnings for the three months ended June 30, 2015 on the security for which an OTTI was determined to have occurred, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. A credit enhancement percentage of zero reflects a security that has no remaining credit support and is likely to have experienced an actual principal loss. The calculated averages represent the dollar-weighted averages of the private-label RMBS in each category shown. The classification (prime, Alt-A or subprime) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification by the rating agency at the time of origination.
 
 
Significant Modeling Assumptions
for OTTI private-label RMBS
for the three months ended June 30, 2015
 
Year of Securitization
 
Prepayment Rates (1)
 
Default Rates (1)
 
Loss Severities (1)
 
Current Credit
 Enhancement (1)
Prime - 2006
 
16.0
%
 
16.3
%
 
34.3
%
 
0.0
%

(1) 
Weighted average based on UPB.

Results of OTTI Evaluation Process. As a result of our analysis, OTTI credit losses were recognized for one security for the three and six months ended June 30, 2015 and one security for the three and six months ended June 30, 2014. We determined that the unrealized losses on the remaining private-label RMBS and ABS were temporary as we expect to recover the entire amortized cost. The following table presents a rollforward of the amounts related to credit losses recognized in earnings. The rollforward excludes accretion of credit losses for securities that have not experienced a significant increase in cash flows.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Credit Loss Rollforward
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
 
$
68,374

 
$
72,457

 
$
69,626

 
$
72,287

Additions:
 
 
 
 
 
 
 
 
Additional credit losses for which OTTI was previously recognized (1)
 
32

 
58

 
32

 
228

Reductions:
 
 
 
 
 
 
 
 
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
 
(2,357
)
 
(931
)
 
(3,609
)
 
(931
)
Balance at end of period
 
$
66,049

 
$
71,584

 
$
66,049

 
$
71,584


(1) 
For the three and six months ended June 30, 2015 and 2014, the amount relates to one security originally impaired prior to January 1, 2014.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)


The following table presents the June 30, 2015 classification and balances of OTTI securities impaired prior to that date (i.e., life-to-date) but not necessarily as of that date. Securities are classified based on the originator's classification at the time of origination or based on the classification by the NRSROs upon issuance. Because there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, such classifications are subjective.
 
 
June 30, 2015
 
 
HTM Securities
 
AFS Securities
OTTI Life-to-Date
 
UPB
 
Amortized Cost