10-Q 1 a0331201410q.htm 10-Q 03.31.2014 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
 
71-6013989
(I.R.S. Employer
Identification Number)
 
 
 
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
 
75063-2547
(Zip code)
(214) 441-8500
(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.
Yes þ No o
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 (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At April 30, 2014, the registrant had outstanding 10,354,285 shares of its Class B Capital Stock, $100 par value per share.
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)
 
March 31,
2014
 
December 31,
2013
ASSETS
 

 
 

Cash and due from banks
$
1,694,036

 
$
911,081

Interest-bearing deposits
273

 
344

Security purchased under agreement to resell (Note 10)
200,000

 

Federal funds sold
1,597,000

 
1,468,000

Trading securities (Note 3)
1,008,104

 
1,007,757

Available-for-sale securities (Note 4)
5,464,319

 
5,455,693

Held-to-maturity securities (a) (Note 5)
5,117,786

 
5,198,549

Advances (Notes 6 and 7)
15,340,791

 
15,978,945

Mortgage loans held for portfolio, net of allowance for credit losses of $165 at both March 31, 2014 and December 31, 2013 (Note 7)
85,838

 
91,110

Accrued interest receivable
77,773

 
64,425

Premises and equipment, net
18,496

 
18,477

Derivative assets (Notes 10 and 11)
20,180

 
15,909

Other assets
10,767

 
11,534

TOTAL ASSETS
$
30,635,363

 
$
30,221,824

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
840,554

 
$
885,638

Non-interest bearing
29

 
29

Total deposits
840,583

 
885,667

 
 
 
 
Consolidated obligations (Note 8)
 
 
 
Discount notes
7,798,189

 
5,984,530

Bonds
20,146,668

 
21,486,712

Total consolidated obligations
27,944,857

 
27,471,242

 
 
 
 
Mandatorily redeemable capital stock
3,961

 
3,065

Accrued interest payable
43,934

 
47,035

Affordable Housing Program (Note 9)
30,277

 
31,864

Derivative liabilities (Notes 10 and 11)
5,707

 
10,991

Other liabilities
20,335

 
25,456

Total liabilities
28,889,654

 
28,475,320

 
 
 
 
Commitments and contingencies (Notes 7 and 15)


 


 
 
 
 
CAPITAL (Note 12)
 
 
 
Capital stock — Class B putable ($100 par value) issued and outstanding shares: 10,838,789 and 11,236,747 shares at March 31, 2014 and December 31, 2013, respectively
1,083,879

 
1,123,675

Retained earnings
 
 
 
Unrestricted
624,931

 
615,620

Restricted
42,432

 
39,850

Total retained earnings
667,363

 
655,470

Accumulated other comprehensive income (loss) (Note 18)
(5,533
)
 
(32,641
)
Total capital
1,745,709

 
1,746,504

TOTAL LIABILITIES AND CAPITAL
$
30,635,363

 
$
30,221,824

_____________________________
(a)
Fair values: $5,172,833 and $5,258,422 at March 31, 2014 and December 31, 2013, respectively.
The accompanying notes are an integral part of these financial statements.

1


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF INCOME
(Unaudited, in thousands)

 
 
For the Three Months Ended
 
 
March 31,
 
 
2014
 
2013
INTEREST INCOME
 
 
 
 
Advances
 
$
31,092

 
$
37,711

Prepayment fees on advances, net
 
550

 
394

Interest-bearing deposits
 
145

 
423

Securities purchased under agreements to resell
 
37

 
730

Federal funds sold
 
364

 
663

Trading securities
 
168

 

Available-for-sale securities
 
5,152

 
5,954

Held-to-maturity securities
 
10,889

 
14,436

Mortgage loans held for portfolio
 
1,260

 
1,632

Other
 

 
1

Total interest income
 
49,657

 
61,944

INTEREST EXPENSE
 
 
 
 
Consolidated obligations
 
 
 
 
Bonds
 
19,136

 
24,881

Discount notes
 
1,776

 
2,212

Deposits
 
22

 
36

Mandatorily redeemable capital stock
 
4

 
4

Other borrowings
 
1

 
2

Total interest expense
 
20,939

 
27,135

NET INTEREST INCOME
 
28,718

 
34,809

 
 
 
 
 
OTHER INCOME
 
 
 
 
Net gains on trading securities
 
209

 
344

Net gains on derivatives and hedging activities
 
695

 
1,788

Gains on early extinguishment of debt
 
321

 

Letter of credit fees
 
1,150

 
1,164

Other, net
 
473

 
530

Total other income
 
2,848

 
3,826

OTHER EXPENSE
 
 
 
 
Compensation and benefits
 
10,248

 
10,929

Other operating expenses
 
5,730

 
6,195

Finance Agency
 
663

 
720

Office of Finance
 
558

 
668

Other
 
20

 

Total other expense
 
17,219

 
18,512

INCOME BEFORE ASSESSMENTS
 
14,347

 
20,123

Affordable Housing Program assessment
 
1,435

 
2,013

NET INCOME
 
$
12,912

 
$
18,110

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

2


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

 
 
For the Three Months Ended
 
 
March 31,
 
 
2014
 
2013
NET INCOME
 
$
12,912

 
$
18,110

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Net unrealized gains on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income
 
25,272

 
23,130

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
1,859

 
2,054

Postretirement benefit plan
 
 
 
 
Prior service cost
 

 
(211
)
Amortization of prior service credit included in net periodic benefit cost
 

 
(4
)
Amortization of net actuarial gain included in net periodic benefit cost
 
(23
)
 
(6
)
Total other comprehensive income
 
27,108

 
24,963

TOTAL COMPREHENSIVE INCOME
 
$
40,020

 
$
43,073


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

3




FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited, in thousands)

 
 
 
 
 
 
 
 
 
 
 
Accumulated
 Other
Comprehensive
 Income (Loss)
 
 
 
Capital Stock
Class B - Putable
 
Retained Earnings
 
 
Total
 Capital
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2014
11,237

 
$
1,123,675

 
$
615,620

 
$
39,850

 
$
655,470

 
$
(32,641
)
 
$
1,746,504

Proceeds from sale of capital stock
2,253

 
225,277

 

 

 

 

 
225,277

Repurchase/redemption of capital stock
(2,647
)
 
(264,682
)
 

 

 

 

 
(264,682
)
Shares reclassified to mandatorily redeemable capital stock
(14
)
 
(1,367
)
 

 

 

 

 
(1,367
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 
10,330

 
2,582

 
12,912

 

 
12,912

Other comprehensive income

 

 

 

 

 
27,108

 
27,108

Dividends on capital stock (at 0.375 percent annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 
(41
)
 

 
(41
)
 

 
(41
)
Mandatorily redeemable capital stock

 

 
(2
)
 

 
(2
)
 

 
(2
)
Stock
10

 
976

 
(976
)
 

 
(976
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, MARCH 31, 2014
10,839

 
$
1,083,879

 
$
624,931

 
$
42,432

 
$
667,363

 
$
(5,533
)
 
$
1,745,709

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2013
12,170

 
$
1,216,986

 
$
549,617

 
$
22,276

 
$
571,893

 
$
(18,245
)
 
$
1,770,634

Proceeds from sale of capital stock
1,750

 
175,049

 

 

 

 

 
175,049

Repurchase/redemption of capital stock
(2,844
)
 
(284,388
)
 

 

 

 

 
(284,388
)
Net shares reclassified from mandatorily redeemable capital stock
3

 
246

 

 

 

 

 
246

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 
14,488

 
3,622

 
18,110

 

 
18,110

Other comprehensive income

 

 

 

 

 
24,963

 
24,963

Dividends on capital stock (at 0.375 percent annualized rate)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 
(44
)
 

 
(44
)
 

 
(44
)
Stock
11

 
1,110

 
(1,110
)
 

 
(1,110
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, MARCH 31, 2013
11,090

 
$
1,109,003

 
$
562,951

 
$
25,898

 
$
588,849

 
$
6,718

 
$
1,704,570


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



4


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
12,912

 
$
18,110

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
 
 
 
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
11,556

 
8,612

Concessions on consolidated obligation bonds
296

 
409

Premises, equipment and computer software costs
926

 
1,351

Non-cash interest on mandatorily redeemable capital stock
6

 
4

Gains on early extinguishment of debt
(321
)
 

Net increase in trading securities
(178
)
 
(431
)
Loss due to change in net fair value adjustment on derivative and hedging activities
31,307

 
22,449

Increase in accrued interest receivable
(13,338
)
 
(11,338
)
Decrease in other assets
1,223

 
740

Increase (decrease) in Affordable Housing Program (AHP) liability
(1,587
)
 
186

Increase (decrease) in accrued interest payable
(3,101
)
 
2,456

Decrease in other liabilities
(5,144
)
 
(3,445
)
Total adjustments
21,645

 
20,993

Net cash provided by operating activities
34,557

 
39,103

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease in interest-bearing deposits, including swap collateral pledged
42,706

 
62,359

Net decrease (increase) in securities purchased under agreements to resell
(200,000
)
 
3,000,000

Net decrease (increase) in federal funds sold
(129,000
)
 
144,000

Proceeds from maturities of long-term held-to-maturity securities
260,767

 
477,481

Purchases of long-term held-to-maturity securities
(175,226
)
 
(289,842
)
Principal collected on advances
101,135,034

 
87,530,721

Advances made
(100,503,193
)
 
(84,902,657
)
Principal collected on mortgage loans held for portfolio
5,233

 
8,097

Purchases of premises, equipment and computer software
(676
)
 
(702
)
Net cash provided by investing activities
435,645

 
6,029,457

 
 
 
 

5


 
For the Three Months Ended
 
March 31,
 
2014
 
2013
FINANCING ACTIVITIES
 
 
 
Net decrease in deposits, including swap collateral held
(47,033
)
 
(138,938
)
Net payments on derivative contracts with financing elements
(35,922
)
 
(37,092
)
Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
24,172,000

 
53,353,249

Bonds
3,679,795

 
2,024,081

Debt issuance costs
(1,024
)
 
(517
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(22,358,368
)
 
(55,780,110
)
Bonds
(5,056,771
)
 
(4,073,250
)
Proceeds from issuance of capital stock
225,277

 
175,049

Payments for redemption of mandatorily redeemable capital stock
(478
)
 
(16
)
Payments for repurchase/redemption of capital stock
(264,682
)
 
(284,388
)
Cash dividends paid
(41
)
 
(44
)
Net cash provided by (used in) financing activities
312,753

 
(4,761,976
)
 
 
 
 
Net increase in cash and cash equivalents
782,955

 
1,306,584

Cash and cash equivalents at beginning of the period
911,081

 
920,780

Cash and cash equivalents at end of the period
$
1,694,036

 
$
2,227,364

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
31,122

 
$
35,935

AHP payments, net
$
3,022

 
$
1,827

Stock dividends issued
$
976

 
$
1,110

Dividends paid through issuance of mandatorily redeemable capital stock
$
2

 
$

Net capital stock reclassified to (from) mandatorily redeemable capital stock
$
1,367

 
$
(246
)

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

6


FEDERAL HOME LOAN BANK OF DALLAS
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation
The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s 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.
The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2013. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 24, 2014 (the “2013 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2013 10-K.
The Bank is one of 12 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks and the Office of Finance.
     Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant assumptions include those that are used by the Bank in its periodic evaluation of its holdings of non-agency residential mortgage-backed securities for other-than-temporary impairment (“OTTI”). Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Note 2—Recently Issued Accounting Guidance
    Asset Classification and Charge-offs. On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, "Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention" ("AB 2012-02"). The guidance establishes a standard and uniform methodology for classifying assets and prescribes the timing of asset charge-offs, excluding investment securities. The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. The adoption of the accounting guidance in AB 2012-02, which is effective January 1, 2015, is not expected to have a significant impact on the Bank's results of operations or financial condition.
Joint and Several Liability Arrangements. On February 28, 2013, the FASB issued ASU 2013-04 “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”), which provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. ASU 2013-04 requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The guidance in ASU 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (January 1, 2014 for the Bank) and is to be applied retrospectively to all prior periods presented. The adoption of this guidance did not have any impact on the Bank's results of operations or financial condition.

7




Note 3—Trading Securities
Trading securities as of March 31, 2014 and December 31, 2013 were as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
U.S. Treasury Bills
$
999,779

 
$
999,505

Other
8,325

 
8,252

Total
$
1,008,104

 
$
1,007,757


Other trading securities consist solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans.

Note 4—Available-for-Sale Securities
 Major Security Types. Available-for-sale securities as of March 31, 2014 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
54,353

 
$
215

 
$
11

 
$
54,557

Government-sponsored enterprises
4,949,549

 
23,890

 
60

 
4,973,379

Other
436,013

 
523

 
153

 
436,383

Total
$
5,439,915

 
$
24,628

 
$
224

 
$
5,464,319

Available-for-sale securities as of December 31, 2013 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
54,195

 
$
48

 
$
101

 
$
54,142

Government-sponsored enterprises
4,965,468

 
6,111

 
6,201

 
4,965,378

Other
436,898

 
418

 
1,143

 
436,173

Total
$
5,456,561

 
$
6,577

 
$
7,445

 
$
5,455,693


Other debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments. The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of March 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
2

 
$
16,093

 
$
11

 

 
$

 
$

 
2

 
$
16,093

 
$
11

Government-sponsored enterprises
4

 
36,961

 
60

 

 

 

 
4

 
36,961

 
60

Other
10

 
90,673

 
116

 
3

 
14,693

 
37

 
13

 
105,366

 
153

Total
16

 
$
143,727

 
$
187

 
3

 
$
14,693

 
$
37

 
19

 
$
158,420

 
$
224



8


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2013. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
2

 
$
24,063

 
$
101

 

 
$

 
$

 
2

 
$
24,063

 
$
101

Government-sponsored enterprises
108

 
1,628,306

 
6,201

 

 

 

 
108

 
1,628,306

 
6,201

Other
22

 
192,549

 
1,070

 
3

 
14,754

 
73

 
25

 
207,303

 
1,143

Total
132

 
$
1,844,918

 
$
7,372

 
3

 
$
14,754

 
$
73

 
135

 
$
1,859,672

 
$
7,445


At March 31, 2014, the gross unrealized losses on the Bank’s available-for-sale securities were $224,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by government-sponsored enterprises (“GSEs”), or fully secured by collateral that is guaranteed by the U.S government. As of March 31, 2014, the U.S. government and the issuers of the Bank’s holdings of GSE debentures were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by Standard and Poor’s (“S&P”). The Bank's holdings of other debentures were rated Aaa by Moody's and AA+ by S&P at that date; the other debentures are not rated by Fitch. Based upon the Bank's assessment of the strength of the government guaranty, the Bank expects that the U.S. government-guaranteed debentures that were in an unrealized loss position at March 31, 2014 would not be settled at an amount less than the Bank's amortized cost basis in the investments. In addition, based upon the Bank’s assessment of the creditworthiness of the issuers of the GSE debentures and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures that were in an unrealized loss position at March 31, 2014 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Further, based on the creditworthiness of the issuer of the Bank's holdings of other debentures, the U.S. government's guaranty of the payment of principal and interest on the collateral securing those debentures, and the guaranty of the payment of interest on the debentures by an agency of the U.S. government, the Bank expects that its holdings of other debentures that were in an unrealized loss position at March 31, 2014 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at March 31, 2014.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at March 31, 2014 and December 31, 2013 are presented below (in thousands).
 
 
 
March 31, 2014
 
December 31, 2013
 
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
26,699

 
$
26,699

 
$
26,842

 
$
26,851

 
Due after one year through five years
 
4,201,884

 
4,216,069

 
3,910,837

 
3,914,956

 
Due after five years through ten years
 
1,211,332

 
1,221,551

 
1,518,882

 
1,513,886

 
Total
 
$
5,439,915

 
$
5,464,319

 
$
5,456,561

 
$
5,455,693


9


Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at March 31, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
December 31, 2013
Amortized cost of available-for-sale securities
 
 
 
Fixed-rate
$
5,364,915

 
$
5,381,561

Variable-rate
75,000

 
75,000

 
 
 
 
Total
$
5,439,915

 
$
5,456,561

At March 31, 2014 and December 31, 2013, all of the Bank's fixed-rate available-for-sale securities were swapped to a variable rate.

Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of March 31, 2014 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
30,588

 
$

 
$
30,588

 
$
112

 
$
92

 
$
30,608

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
9,470

 

 
9,470

 
46

 

 
9,516

Government-sponsored enterprises
4,917,818

 

 
4,917,818

 
44,741

 
8,810

 
4,953,749

Non-agency residential
   mortgage-backed securities
191,251

 
31,341

 
159,910

 
24,586

 
5,536

 
178,960

 
5,118,539

 
31,341

 
5,087,198

 
69,373

 
14,346

 
5,142,225

Total
$
5,149,127

 
$
31,341

 
$
5,117,786

 
$
69,485

 
$
14,438

 
$
5,172,833


Held-to-maturity securities as of December 31, 2013 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
32,689

 
$

 
$
32,689

 
$
126

 
$
156

 
$
32,659

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
10,110

 

 
10,110

 
58

 

 
10,168

Government-sponsored enterprises
4,990,347

 

 
4,990,347

 
46,734

 
4,683

 
5,032,398

Non-agency residential
    mortgage-backed securities
198,603

 
33,200

 
165,403

 
17,794

 

 
183,197

 
5,199,060

 
33,200

 
5,165,860

 
64,586

 
4,683

 
5,225,763

Total
$
5,231,749

 
$
33,200

 
$
5,198,549

 
$
64,712

 
$
4,839

 
$
5,258,422



10


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of March 31, 2014. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income (loss) and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential mortgage-backed securities, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations

 
$

 
$

 
2

 
$
15,724

 
$
92

 
2

 
$
15,724

 
$
92

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
42

 
1,636,531

 
6,155

 
17

 
396,914

 
2,655

 
59

 
2,033,445

 
8,810

Non-agency residential mortgage-backed securities

 

 

 
27

 
153,888

 
13,392

 
27

 
153,888

 
13,392

 
42

 
1,636,531

 
6,155

 
44

 
550,802

 
16,047

 
86

 
2,187,333

 
22,202

Total
42

 
$
1,636,531

 
$
6,155

 
46

 
$
566,526

 
$
16,139

 
88

 
$
2,203,057

 
$
22,294


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2013. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income (loss) and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential mortgage-backed securities, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations

 
$

 
$

 
2

 
$
16,157

 
$
156

 
2

 
$
16,157

 
$
156

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
42

 
1,591,628

 
4,353

 
13

 
102,236

 
330

 
55

 
1,693,864

 
4,683

Non-agency residential mortgage-backed securities
1

 
10,210

 
80

 
27

 
157,101

 
16,033

 
28

 
167,311

 
16,113

 
43

 
1,601,838

 
4,433

 
40

 
259,337

 
16,363

 
83

 
1,861,175

 
20,796

Total
43

 
$
1,601,838

 
$
4,433

 
42

 
$
275,494

 
$
16,519

 
85

 
$
1,877,332

 
$
20,952


At March 31, 2014, the gross unrealized losses on the Bank’s held-to-maturity securities were $22,294,000, of which $13,392,000 was attributable to its holdings of non-agency (i.e., private-label) residential mortgage-backed securities and $8,902,000 was attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs. As of March 31, 2014, the U.S. government and the issuers of the Bank’s holdings of GSE mortgage-backed securities ("MBS") were rated triple-A by Moody’s and Fitch and AA+ by S&P.
Based upon the Bank’s assessment of the strength of the government guarantees of the debentures held by the Bank, the credit ratings assigned by the NRSROs and the strength of the GSEs’ guarantees of the Bank’s holdings of agency MBS, the Bank expects that its holdings of U.S. government-guaranteed debentures and GSE MBS that were in an unrealized loss position at March 31, 2014 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at March 31, 2014.
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS (“RMBS”),

11


generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Based on its analysis of the securities in this portfolio, however, the Bank believes that the unrealized losses as of March 31, 2014 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its 29 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of March 31, 2014 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of March 31, 2014 assumed changes in home prices ranging from declines of 3 percent to increases of 9 percent over the 12-month period beginning January 1, 2014. For the vast majority of markets, the changes were projected to range from declines of 1 percent to increases of 4 percent. Thereafter, home prices were projected to increase (or continue to increase) using one of five different paths that vary by housing market. Under those paths, home prices were projected to increase as set forth in the table below.
Months
 
Range of Annualized Rates
1 - 6
 
0.0
%
-
3.0%
7 - 12
 
1.0
%
-
4.0%
13 - 18
 
2.0
%
-
4.0%
19 - 30
 
2.0
%
-
5.0%
31 - 54
 
2.0
%
-
6.0%
Thereafter
 
2.3
%
-
5.6%
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. 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.
Based on the results of its cash flow analyses, the Bank determined it is likely that it will fully recover the remaining amortized cost bases of all of its non-agency RMBS. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their remaining amortized cost bases, none of these securities were deemed to be other-than-temporarily impaired as of March 31, 2014.
Prior to 2013, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired. The following table sets forth additional information for each of the securities that was deemed to be other-than-temporarily impaired in a prior period (in thousands). All of the Bank’s non-agency RMBS are rated by Moody’s, S&P and/or Fitch. The credit ratings presented in the table represent the lowest rating assigned to the security by any of these NRSROs as of March 31, 2014.


12


 
 
 
 
March 31, 2014
 
Cumulative from Period of Initial Impairment Through March 31, 2014
 
March 31, 2014
 
 
Period of
Initial
Impairment
 
Credit
Rating
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Non-Credit
Component of OTTI
 
Accretion of
Non-Credit
Component
 
Carrying
Value
 
Estimated
Fair
Value
Security #1
 
Q1 2009
 
Triple-C
 
$
12,793

 
$
10,070

 
$
10,271

 
$
7,733

 
$
7,532

 
$
10,350

Security #2
 
Q1 2009
 
Triple-C
 
12,725

 
12,028

 
12,389

 
8,365

 
8,004

 
11,188

Security #3
 
Q2 2009
 
Single-D
 
17,946

 
13,902

 
15,283

 
11,517

 
10,136

 
14,723

Security #4
 
Q2 2009
 
Triple-C
 
8,801

 
8,085

 
7,890

 
5,551

 
5,746

 
7,906

Security #5
 
Q3 2009
 
Triple-C
 
15,525

 
13,800

 
10,047

 
7,188

 
10,941

 
13,328

Security #6
 
Q3 2009
 
Triple-C
 
13,400

 
11,995

 
10,567

 
6,988

 
8,416

 
11,151

Security #7
 
Q3 2009
 
Single-B
 
4,789

 
4,709

 
3,575

 
2,268

 
3,402

 
4,288

Security #8
 
Q1 2010
 
Triple-C
 
7,172

 
7,149

 
4,968

 
3,058

 
5,239

 
6,326

Security #9
 
Q1 2010
 
Triple-C
 
3,061

 
3,024

 
2,208

 
1,362

 
2,178

 
2,711

Security #10
 
Q4 2010
 
Triple-C
 
6,041

 
5,616

 
3,331

 
1,663

 
3,948

 
5,135

Security #11
 
Q4 2010
 
Triple-C
 
7,267

 
7,263

 
4,096

 
2,114

 
5,281

 
6,452

Security #12
 
Q4 2010
 
Triple-C
 
4,005

 
3,921

 
1,820

 
917

 
3,018

 
3,517

Security #13
 
Q4 2010
 
Triple-C
 
4,744

 
4,728

 
2,418

 
1,358

 
3,668

 
4,277

Security #14
 
Q2 2011
 
Triple-C
 
10,613

 
10,383

 
5,942

 
3,382

 
7,823

 
8,567

Totals
 
 
 
 
 
$
128,882

 
$
116,673

 
$
94,805

 
$
63,464

 
$
85,332

 
$
109,919


The following table presents a rollforward for the three months ended March 31, 2014 and 2013 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss) (in thousands).
 
Three Months Ended
 
March 31,
 
2014
 
2013
Balance of credit losses, beginning of period
$
12,901

 
$
13,039

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(65
)
 

Balance of credit losses, end of period
12,836

 
13,039

Cumulative principal shortfalls on securities held at end of period
(870
)
 

Cumulative amortization of the time value of credit losses at end of period
248

 
180

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
12,214

 
$
13,219

  

13


   Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at March 31, 2014 and December 31, 2013 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.

 
 
March 31, 2014
 
December 31, 2013
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
14,772

 
$
14,772

 
$
14,885

 
$
16,376

 
$
16,376

 
$
16,502

Due after five years through ten years
 
7,985

 
7,985

 
7,943

 
8,483

 
8,483

 
8,411

Due after ten years
 
7,831

 
7,831

 
7,780

 
7,830

 
7,830

 
7,746

 
 
30,588

 
30,588

 
30,608

 
32,689

 
32,689

 
32,659

Mortgage-backed securities
 
5,118,539

 
5,087,198

 
5,142,225

 
5,199,060

 
5,165,860

 
5,225,763

Total
 
$
5,149,127

 
$
5,117,786

 
$
5,172,833

 
$
5,231,749

 
$
5,198,549

 
$
5,258,422


The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $32,749,000 and $35,732,000 at March 31, 2014 and December 31, 2013, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at March 31, 2014 and December 31, 2013 (in thousands):

 
March 31, 2014
 
December 31, 2013
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities
$
30,588

 
$
32,689

Amortized cost of held-to-maturity mortgage-backed securities
 
 
 
Fixed-rate pass-through securities
328

 
344

Collateralized mortgage obligations
 
 
 
Fixed-rate
803

 
847

Variable-rate
5,117,408

 
5,197,869

 
5,118,539

 
5,199,060

Total
$
5,149,127

 
$
5,231,749


All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2013 or the three months ended March 31, 2014.

14



Note 6—Advances
     Redemption Terms. At March 31, 2014 and December 31, 2013, the Bank had advances outstanding at interest rates ranging from 0.08 percent to 8.61 percent and from 0.05 percent to 8.61 percent, respectively, as summarized below (dollars in thousands).

 
 
March 31, 2014
 
December 31, 2013
Contractual Maturity
 
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Overdrawn demand deposit accounts
 
$
82

 
4.05
%
 
$
3,499

 
4.07
%
 
 
 
 
 
 
 
 
 
Due in one year or less
 
7,635,970

 
0.37

 
8,343,704

 
0.34

Due after one year through two years
 
1,266,186

 
1.67

 
1,386,230

 
1.78

Due after two years through three years
 
1,029,015

 
1.70

 
822,497

 
1.79

Due after three years through four years
 
1,435,597

 
2.88

 
1,376,579

 
2.90

Due after four years through five years
 
927,023

 
2.50

 
1,075,960

 
2.43

Due after five years
 
929,379

 
3.14

 
789,625

 
3.14

Amortizing advances
 
1,940,271

 
3.60

 
1,997,270

 
3.64

Total par value
 
15,163,523

 
1.52
%
 
15,795,364

 
1.46
%
 
 
 
 
 
 
 
 
 
Deferred prepayment fees
 
(15,159
)
 
 
 
(15,916
)
 
 
Commitment fees
 
(110
)
 
 
 
(111
)
 
 
Hedging adjustments
 
192,537

 
 
 
199,608

 
 
Total
 
$
15,340,791

 
 
 
$
15,978,945

 
 

The balances of overdrawn demand deposit accounts were fully collateralized at March 31, 2014 and December 31, 2013 and were repaid on the first business day of April 2014 and January 2014, respectively. Amortizing advances require repayment according to predetermined amortization schedules.
The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At March 31, 2014 and December 31, 2013, the Bank had aggregate prepayable and callable advances totaling $101,547,000 and $106,304,000, respectively, all of which were amortizing advances.

The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed-rate advance on specified dates and offer, subject to certain conditions, replacement funding at prevailing market rates. At March 31, 2014 and December 31, 2013, the Bank had putable advances outstanding totaling $1,648,471,000 and $1,653,471,000, respectively.


15


The following table summarizes advances outstanding at March 31, 2014 and December 31, 2013, by the earlier of contractual maturity or next possible put date (in thousands):
Contractual Maturity or Next Put Date
 
March 31, 2014
 
December 31, 2013
Overdrawn demand deposit accounts
 
$
82

 
$
3,499

 
 
 
 
 
Due in one year or less
 
9,202,040

 
9,961,774

Due after one year through two years
 
1,144,686

 
1,230,230

Due after two years through three years
 
994,015

 
799,997

Due after three years through four years
 
577,027

 
677,459

Due after four years through five years
 
386,023

 
375,510

Due after five years
 
919,379

 
749,625

Amortizing advances
 
1,940,271

 
1,997,270

 
 
 
 
 
Total par value
 
$
15,163,523

 
$
15,795,364


     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at March 31, 2014 and December 31, 2013 (in thousands):

 
March 31, 2014
 
December 31, 2013
Fixed-rate
 
 
 
Due in one year or less
$
6,576,801

 
$
7,352,066

Due after one year
7,469,220

 
7,390,799

Total fixed-rate
14,046,021

 
14,742,865

Variable-rate
 
 
 
Due in one year or less
1,070,902

 
1,008,499

Due after one year
46,600

 
44,000

Total variable-rate
1,117,502

 
1,052,499

Total par value
$
15,163,523

 
$
15,795,364


At March 31, 2014 and December 31, 2013, 38 percent and 33 percent, respectively, of the Bank’s fixed-rate advances were swapped to a variable rate.
     Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income on advances over the life of the modified advance using the level-yield method. During the three months ended March 31, 2014 and 2013, gross advance prepayment fees received from members/borrowers were $720,000 and $608,000, respectively, of which $214,000 and $151,000, respectively, were deferred.


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Note 7—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 three months ended March 31, 2014 and 2013, 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 March 31, 2014 or December 31, 2013.
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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, the Bank did not have any advances that were past due, on nonaccrual 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 nonaccrual 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 2013 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, 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.

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The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on nonaccrual 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 nonaccrual status are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent i