Allowance for Credit Losses

An allowance for credit losses is separately established for each of the Bank’s identified portfolio segments, if necessary, to provide for probable losses inherent in its financing receivables portfolio and other off-balance sheet credit exposures as of the balance sheet date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.

A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments: (1) advances and other extensions of credit to members, collectively referred to as “extensions of credit to members;” (2) government-guaranteed/insured mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.

Classes of financing receivables are generally a disaggregation of a portfolio segment and are determined on the basis of their initial measurement attribute, the risk characteristics of the financing receivable and an entity’s method for monitoring and assessing credit risk. Because the credit risk arising from the Bank’s financing receivables is assessed and measured at the portfolio segment level, the Bank does not have separate classes of financing receivables within each of its portfolio segments.

During the nine months ended September 30, 2013 and 2012, there were no purchases or sales of financing receivables, nor were any financing receivables reclassified to held for sale.

Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”), the Bank lends to financial institutions within its five-state district that are involved in housing finance. The FHLB Act requires the Bank to obtain and maintain sufficient collateral for advances and other extensions of credit to protect against losses. The Bank makes advances and otherwise extends credit only against eligible collateral, as defined by regulation. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances and other extensions of credit, the Bank applies various haircuts, or discounts, to the collateral to determine the value against which borrowers may borrow. As additional security, the Bank has a statutory lien on each borrower’s capital stock in the Bank.

On at least a quarterly basis, the Bank evaluates all outstanding extensions of credit to members/borrowers for potential credit losses. These evaluations include a review of: (1) the amount, type and performance of collateral available to secure the outstanding obligations; (2) metrics that may be indicative of changes in the financial condition and general creditworthiness of the member/borrower; and (3) the payment status of the obligations. Any outstanding extensions of credit that exhibit a potential credit weakness that could jeopardize the full collection of the outstanding obligations would be classified as substandard, doubtful or loss. The Bank did not have any advances or other extensions of credit to members/borrowers that were classified as substandard, doubtful or loss at September 30, 2013 or December 31, 2012.

The Bank considers the amount, type and performance of collateral to be the primary indicator of credit quality with respect to its extensions of credit to members/borrowers. At September 30, 2013 and December 31, 2012, the Bank had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of each borrower’s outstanding extensions of credit.

The Bank continues to evaluate and, as necessary, modify its credit extension and collateral policies based on market conditions. At September 30, 2013 and December 31, 2012, the Bank did not have any advances that were past due, on non-accrual status, or considered impaired. There have been no troubled debt restructurings related to advances.

The Bank has never experienced a credit loss on an advance or any other extension of credit to a member/borrower and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on its extensions of credit to members/borrowers. Accordingly, the Bank has not provided any allowance for credit losses on advances, nor has it recorded any liabilities to reflect an allowance for credit losses related to its off-balance sheet credit exposures.

Mortgage Loans — Government-guaranteed/Insured. The Bank’s government-guaranteed/insured fixed-rate mortgage loans are insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. Any losses from these loans are expected to be recovered from those entities. Any losses from these loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank has not established an allowance for credit losses on government-guaranteed/insured mortgage loans. Government-guaranteed/insured loans are not placed on non-accrual status.

Mortgage Loans — Conventional Mortgage Loans. The Bank’s conventional mortgage loans were acquired through the Mortgage Partnership Finance^® (“MPF”^®) program, as more fully described in the Bank’s 2012 10-K. The allowance for losses on conventional mortgage loans is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The allowance for losses on conventional mortgage loans also factors in the credit enhancement under the MPF program. Any incurred losses that are expected to be recovered from the credit enhancements are not reserved as part of the Bank’s allowance for loan losses.

The Bank places a conventional mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on non-accrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on non-accrual status is restored to accrual status when none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans that are on non-accrual status are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A collateral-dependent loan is impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal and interest on the loan. Interest income on impaired loans is recognized in the same manner as it is for non-accrual loans noted above.

The Bank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.

The Bank considers the key credit quality indicator for conventional mortgage loans to be the payment status of each loan. The table below summarizes the unpaid principal balance by payment status for mortgage loans at September 30, 2013 and December 31, 2012 (dollars in thousands). The unpaid principal balance approximates the recorded investment in the loans.



	September 30, 2013									December 31, 2012
	Conventional Loans			Government- Guaranteed/ Insured Loans			Total			Conventional Loans			Government- Guaranteed/ Insured Loans			Total
Mortgage loans:
30-59 days delinquent	$	1,148		$	2,947		$	4,095		$	1,344		$	3,897		$	5,241
60-89 days delinquent	384			423			807			284			615			899
90 days or more delinquent	809			226			1,035			994			313			1,307
Total past due	2,341			3,596			5,937			2,622			4,825			7,447
Total current loans	43,966			45,973			89,939			57,257			56,204			113,461
Total mortgage loans	$	46,307		$	49,569		$	95,876		$	59,879		$	61,029		$	120,908

Other delinquency statistics:
In process of foreclosure ⁽¹⁾	$	383		$	22		$	405		$	465		$	15		$	480
Serious delinquency rate ⁽²⁾	1.7		%	0.5		%	1.1		%	1.6		%	0.5		%	1.1		%
Past due 90 days or more and still accruing interest ⁽³⁾	$	—		$	226		$	226		$	—		$	313		$	313
Non-accrual loans	$	809		$	—		$	809		$	994		$	—		$	994
Troubled debt restructurings	$	144		$	—		$	144		$	98		$	—		$	98

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⁽¹⁾	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been made.


⁽²⁾	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio.


⁽³⁾	Only government-guaranteed/insured mortgage loans continue to accrue interest after they become 90 days or more past due.

At September 30, 2013 and December 31, 2012, the Bank’s other assets included $227,000 and $25,000, respectively, of real estate owned.

Mortgage loans are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. Each non-accrual mortgage loan and each troubled debt restructuring is specifically reviewed for impairment. At September 30, 2013 and December 31, 2012, the estimated value of the collateral securing each of these loans was in excess of the outstanding loan amount. Therefore, no specific reserve was established for any of these mortgage loans. The remaining conventional mortgage loans were evaluated for impairment on a pool basis. Based upon the current and past performance of these loans, the underwriting standards in place at the time the loans were acquired, and current economic conditions, the Bank determined that an allowance for loan losses of $175,000 was adequate to reserve for credit losses in its conventional mortgage loan portfolio at September 30, 2013. The following table presents the activity in the allowance for credit losses on conventional mortgage loans held for portfolio during the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Balance, beginning of period	$	175	$	190		$	183		$	192
Chargeoffs	—		(7		)	(8		)	(9		)
Balance, end of period	$	175	$	183		$	175		$	183

The following table presents information regarding the balances of the Bank's conventional mortgage loans held for portfolio that were individually or collectively evaluated for impairment as well as information regarding the ending balance of the allowance for credit losses as of September 30, 2013 and December 31, 2012 (in thousands).



	September 30, 2013		December 31, 2012
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment	$	175	$	183

Unpaid principal balance
Individually evaluated for impairment	$	927	$	1,092
Collectively evaluated for impairment	45,380		58,787
	$	46,307	$	59,879