10-Q 1 a331201510q.htm 10-Q 3.31.2015 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, 2015
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, 2015, the registrant had outstanding 11,565,461 shares of its Class B Capital Stock, $100 par value per share.
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.1
 EX-10.2
 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,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and due from banks
$
102,281

 
$
1,507,708

Interest-bearing deposits
343

 
266

Securities purchased under agreements to resell (Note 10)
5,250,000

 
350,000

Federal funds sold
3,244,000

 
5,613,000

Trading securities (Notes 3, 10 and 15) ($99,974 and $35,985 pledged at March 31, 2015 and December 31, 2014, respectively, which can be rehypothecated)
259,020

 
408,563

Available-for-sale securities (Note 4)
6,528,195

 
6,388,502

Held-to-maturity securities (a) (Note 5)
4,125,985

 
4,662,013

Advances (Notes 6 and 7)
17,215,265

 
18,942,400

Mortgage loans held for portfolio, net of allowance for credit losses of $143 at both
March 31, 2015 and December 31, 2014 (Note 7)
67,350

 
71,411

Accrued interest receivable
74,900

 
65,168

Premises and equipment, net
19,200

 
18,368

Derivative assets (Notes 10 and 11)
18,276

 
10,454

Other assets
11,743

 
8,015

TOTAL ASSETS
$
36,916,558

 
$
38,045,868

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
949,509

 
$
797,390

Non-interest bearing
24

 
24

Total deposits
949,533

 
797,414

 
 
 
 
Consolidated obligations (Note 8)
 
 
 
Discount notes
13,275,909

 
19,131,832

Bonds
20,195,376

 
16,078,700

Total consolidated obligations
33,471,285

 
35,210,532

 
 
 
 
Mandatorily redeemable capital stock
4,563

 
5,059

Accrued interest payable
39,272

 
39,726

Affordable Housing Program (Note 9)
26,901

 
25,998

Derivative liabilities (Notes 10 and 11)
15,747

 
21,521

Other liabilities (Note 4)
445,558

 
26,705

Total liabilities
34,952,859

 
36,126,955

 
 
 
 
Commitments and contingencies (Notes 7 and 15)


 


 
 
 
 
CAPITAL (Note 12)
 
 
 
Capital stock — Class B putable ($100 par value) issued and outstanding shares: 12,442,537 and 12,227,376 shares at March 31, 2015 and December 31, 2014, respectively
1,244,254

 
1,222,738

Retained earnings
 
 
 
Unrestricted
667,595

 
650,224

Restricted
54,169

 
49,552

Total retained earnings
721,764

 
699,776

Accumulated other comprehensive income (loss) (Note 18)
(2,319
)
 
(3,601
)
Total capital
1,963,699

 
1,918,913

TOTAL LIABILITIES AND CAPITAL
$
36,916,558

 
$
38,045,868

_____________________________
(a)
Fair values: $4,178,842 and $4,727,130 at March 31, 2015 and December 31, 2014, 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,
 
 
2015
 
2014
INTEREST INCOME
 
 
 
 
Advances
 
$
29,097

 
$
31,092

Prepayment fees on advances, net
 
2,720

 
550

Interest-bearing deposits
 
188

 
145

Securities purchased under agreements to resell
 
393

 
37

Federal funds sold
 
1,932

 
364

Trading securities
 
43

 
168

Available-for-sale securities
 
6,878

 
5,152

Held-to-maturity securities
 
8,172

 
10,889

Mortgage loans held for portfolio
 
991

 
1,260

Total interest income
 
50,414

 
49,657

INTEREST EXPENSE
 
 
 
 
Consolidated obligations
 
 
 
 
Bonds
 
17,160

 
19,136

Discount notes
 
4,139

 
1,776

Deposits
 
26

 
22

Mandatorily redeemable capital stock
 
5

 
4

Other borrowings
 

 
1

Total interest expense
 
21,330

 
20,939

NET INTEREST INCOME
 
29,084

 
28,718

 
 
 
 
 
OTHER INCOME (LOSS)
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
 
(39
)
 

Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income
 
33

 

Credit component of other-than-temporary impairment losses on held-to-maturity securities
 
(6
)
 

 
 
 
 
 
Net gains on trading securities
 
277

 
209

Net gains on derivatives and hedging activities
 
4,237

 
695

Realized gains on sales of held-to-maturity securities
 
6,226

 

Realized gains on sales of available-for-sale securities
 
2,345

 

Gains on early extinguishment of debt
 

 
321

Letter of credit fees
 
1,149

 
1,150

Other, net
 
472

 
473

Total other income
 
14,700

 
2,848

OTHER EXPENSE
 
 
 
 
Compensation and benefits
 
10,389

 
10,248

Other operating expenses
 
6,475

 
5,730

Finance Agency
 
631

 
663

Office of Finance
 
549

 
558

Other
 
86

 
20

Total other expense
 
18,130

 
17,219

INCOME BEFORE ASSESSMENTS
 
25,654

 
14,347

Affordable Housing Program assessment
 
2,566

 
1,435

NET INCOME
 
$
23,088

 
$
12,912

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,
 
 
2015
 
2014
NET INCOME
 
$
23,088

 
$
12,912

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
 
2,005

 
25,272

Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
 
(2,345
)
 

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
(33
)
 

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
1,674

 
1,859

Postretirement benefit plan
 
 
 
 
Amortization of prior service cost included in net periodic benefit cost
 
2

 

Amortization of net actuarial gain included in net periodic benefit cost
 
(21
)
 
(23
)
Total other comprehensive income
 
1,282

 
27,108

TOTAL COMPREHENSIVE INCOME
 
$
24,370

 
$
40,020


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, 2015 AND 2014
(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, 2015
12,227

 
$
1,222,738

 
$
650,224

 
$
49,552

 
$
699,776

 
$
(3,601
)
 
$
1,918,913

Proceeds from sale of capital stock
2,043

 
204,327

 

 

 

 

 
204,327

Repurchase/redemption of capital stock
(1,837
)
 
(183,743
)
 

 

 

 

 
(183,743
)
Shares reclassified to mandatorily redeemable capital stock
(1
)
 
(126
)
 

 

 

 

 
(126
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 
18,471

 
4,617

 
23,088

 

 
23,088

Other comprehensive income

 

 

 

 

 
1,282

 
1,282

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

 

 
(41
)
 

 
(41
)
 

 
(41
)
Mandatorily redeemable capital stock

 

 
(1
)
 

 
(1
)
 

 
(1
)
Stock
11

 
1,058

 
(1,058
)
 

 
(1,058
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, MARCH 31, 2015
12,443

 
$
1,244,254

 
$
667,595

 
$
54,169

 
$
721,764

 
$
(2,319
)
 
$
1,963,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


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,
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
23,088

 
$
12,912

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
25,508

 
11,556

Concessions on consolidated obligation bonds
929

 
296

Premises, equipment and computer software costs
1,021

 
926

Non-cash interest on mandatorily redeemable capital stock
4

 
6

Credit component of other-than-temporary impairment losses on held-to-maturity securities
6

 

Gains on early extinguishment of debt

 
(321
)
Gains on sales of held-to-maturity securities
(6,226
)
 

Gains on sales of available-for-sale securities
(2,345
)
 

Net increase in trading securities
(281
)
 
(178
)
Loss due to change in net fair value adjustment on derivative and hedging activities
18,885

 
31,307

Increase in accrued interest receivable
(9,718
)
 
(13,338
)
Decrease (increase) in other assets
(4,154
)
 
1,223

Increase (decrease) in Affordable Housing Program (AHP) liability
903

 
(1,587
)
Decrease in accrued interest payable
(454
)
 
(3,101
)
Decrease in other liabilities
(4,560
)
 
(5,144
)
Total adjustments
19,518

 
21,645

Net cash provided by operating activities
42,606

 
34,557

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease (increase) in interest-bearing deposits, including swap collateral pledged
(7,646
)
 
42,706

Net increase in securities purchased under agreements to resell
(4,900,000
)
 
(200,000
)
Net decrease (increase) in federal funds sold
2,369,000

 
(129,000
)
Net decrease in short-term trading securities held for investment
149,770

 

Purchases of available-for-sale securities
(225,671
)
 

Proceeds from maturities of available-for-sale securities
228

 

Proceeds from sales of available-for-sale securities
540,269

 

Proceeds from sales of held-to-maturity securities
350,474

 

Proceeds from maturities of long-term held-to-maturity securities
194,892

 
260,767

Purchases of long-term held-to-maturity securities

 
(175,226
)
Principal collected on advances
102,895,664

 
101,135,034

Advances made
(101,154,477
)
 
(100,503,193
)
Principal collected on mortgage loans held for portfolio
4,097

 
5,233

Purchases of premises, equipment and computer software
(1,745
)
 
(676
)
Net cash provided by investing activities
214,855

 
435,645

 
 
 
 

5


 
For the Three Months Ended
 
March 31,
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits, including swap collateral held
153,368

 
(47,033
)
Net payments on derivative contracts with financing elements
(65,846
)
 
(35,922
)
Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
250,266,476

 
24,172,000

Bonds
7,091,408

 
3,679,795

Debt issuance costs
(674
)
 
(1,024
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(256,121,807
)
 
(22,358,368
)
Bonds
(3,005,730
)
 
(5,056,771
)
Proceeds from issuance of capital stock
204,327

 
225,277

Payments for redemption of mandatorily redeemable capital stock
(626
)
 
(478
)
Payments for repurchase/redemption of capital stock
(183,743
)
 
(264,682
)
Cash dividends paid
(41
)
 
(41
)
Net cash provided by (used in) financing activities
(1,662,888
)
 
312,753

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(1,405,427
)
 
782,955

Cash and cash equivalents at beginning of the period
1,507,708

 
911,081

Cash and cash equivalents at end of the period
$
102,281

 
$
1,694,036

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
23,072

 
$
31,122

AHP payments, net
$
1,663

 
$
3,022

Stock dividends issued
$
1,058

 
$
976

Dividends paid through issuance of mandatorily redeemable capital stock
$
1

 
$
2

Net capital stock reclassified to mandatorily redeemable capital stock
$
126

 
$
1,367


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, 2014. 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, 2014 filed with the SEC on March 26, 2015 (the “2014 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2014 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 housing government-sponsored enterprises ("GSEs"), including 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 ("MBS") 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 was effective January 1, 2015, did not have a significant impact on the Bank's results of operations or financial condition.
Foreclosure of Residential Real Estate. On January 17, 2014, the Financial Accounting Standards board ("FASB") issued Accounting Standards Update ("ASU") 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), which clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or a similar legal agreement. Additionally, ASU 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
For public business entities, the guidance in ASU 2014-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 (January 1, 2015 for the Bank) and may be applied either retrospectively by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the guidance is effective or prospectively to all instances of an entity receiving

7


physical possession of residential real estate property collateralized by consumer mortgage loans that occur after the date of adoption. Early adoption was permitted. The Bank adopted this guidance effective January 1, 2015. The adoption of this guidance did not have a significant impact on the Bank's results of operations or financial condition.
Revenue from Contracts with Customers. On May 28, 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09"), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, ASU 2014-09 amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. ASU 2014-09 applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts. The guidance in ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (January 1, 2017 for the Bank). Early application is not permitted. The Bank has not yet determined the effect, if any, that the adoption of ASU 2014-09 will have on its results of operations or financial condition.
Repurchase-to-Maturity Transactions and Repurchase Financings. On June 12, 2014, the FASB issued ASU 2014-11 "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" ("ASU 2014-11"), which changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires disclosures about transfers accounted for as sales in transactions that are economically similar to repurchase agreements and about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 and the disclosures for certain transactions accounted for as a sale are effective for public business entities for the first interim or annual period beginning after December 15, 2014 (January 1, 2015 for the Bank). For public business entities, the disclosures for transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014 (January 1, 2015 for the Bank), and interim periods beginning after March 15, 2015 (April 1, 2015 for the Bank). Earlier application for a public business entity was prohibited. The adoption of this guidance did not have any impact on the Bank's results of operations or financial condition.
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the FASB issued ASU 2014-14 “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure” (“ASU 2014-14”), which requires that government-guaranteed mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure, (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. For public business entities, the guidance in ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014 (January 1, 2015 for the Bank) and may be applied using either the modified retrospective transition method or the prospective transition method. Early adoption was permitted. The Bank adopted this guidance effective January 1, 2015. The adoption of this guidance did not have a significant impact on the Bank's results of operations or financial condition.
Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the statement of condition as a direct deduction from that debt liability, consistent with the presentation of a debt discount. For public business entities, the guidance in ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). 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. The adoption of this guidance will not have a material impact on the Bank's financial condition and the adoption will not impact the Bank's results of operations.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. For public business entities, the guidance in ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). Early adoption is permitted. The Bank can elect to adopt ASU 2015-05 either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Bank has not yet determined the effect, if any, that the adoption of ASU 2015-05 will have on its results of operations or financial condition.



8


Note 3—Trading Securities
Trading securities as of March 31, 2015 and December 31, 2014 were as follows (in thousands):
 
March 31, 2015
 
December 31, 2014
U.S. Treasury Bills
$
199,927

 
$
399,794

GSE discount notes
49,971

 

Other
9,122

 
8,769

Total
$
259,020

 
$
408,563

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, 2015 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
50,062

 
$
398

 
$

 
$
50,460

GSE obligations
4,357,061

 
33,775

 
18

 
4,390,818

Other
412,009

 
561

 
402

 
412,168

 
4,819,132

 
34,734

 
420

 
4,853,446

GSE commercial MBS
1,686,991

 
520

 
12,762

 
1,674,749

Total
$
6,506,123

 
$
35,254

 
$
13,182

 
$
6,528,195

Included in the table above are GSE commercial MBS that were purchased but which had not yet settled as of March 31, 2015. The amount due of $423,393,000 is included in other liabilities on the statement of condition at that date.
Available-for-sale securities as of December 31, 2014 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
49,666

 
$
308

 
$

 
$
49,974

GSE obligations
4,890,484

 
31,066

 

 
4,921,550

Other
411,145

 
701

 
535

 
411,311

 
5,351,295

 
32,075

 
535

 
5,382,835

GSE commercial MBS
1,014,795

 
322

 
9,450

 
1,005,667

Total
$
6,366,090

 
$
32,397

 
$
9,985

 
$
6,388,502

Other debentures are comprised of securities issued by the Private Export Funding Corporation ("PEFCO"). These 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, 2015. 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
1

 
$
74,982

 
$
18

 

 
$

 
$

 
1

 
$
74,982

 
$
18

Other
21

 
173,249

 
402

 

 

 

 
21

 
173,249

 
402

GSE commercial MBS
41

 
1,483,512

 
12,762

 

 

 

 
41

 
1,483,512

 
12,762

Total
63

 
$
1,731,743

 
$
13,182

 

 
$

 
$

 
63

 
$
1,731,743

 
$
13,182


9



The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
18

 
$
163,153

 
$
535

 

 
$

 
$

 
18

 
$
163,153

 
$
535

GSE commercial MBS
29

 
863,159

 
9,450

 

 

 

 
29

 
863,159

 
9,450

Total
47

 
$
1,026,312

 
$
9,985

 

 
$

 
$

 
47

 
$
1,026,312

 
$
9,985


At March 31, 2015, the gross unrealized losses on the Bank’s available-for-sale securities were $13,182,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by GSEs, or fully secured by collateral that is guaranteed by the U.S government. As of March 31, 2015, the U.S. government and the issuers of the Bank’s holdings of GSE debentures and GSE MBS 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 PEFCO debentures were rated triple-A by Moody's and Fitch, and A+ by S&P at that date. Based upon the Bank’s assessment of the creditworthiness of the issuers of the GSE debentures, the strength of the GSEs' guarantees of the Bank's holdings of GSE MBS and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures and GSE MBS that were in an unrealized loss position at March 31, 2015 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Further, based on PEFCO's creditworthiness, the U.S. government's guaranty of the payment of principal and interest on the collateral securing the PEFCO 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 PEFCO debentures that were in an unrealized loss position at March 31, 2015 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, 2015.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at March 31, 2015 and December 31, 2014 are presented below (in thousands).
 
 
 
March 31, 2015
 
December 31, 2014
 
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
86,528

 
$
86,577

 
$
87,379

 
$
87,418

 
Due after one year through five years
 
3,719,971

 
3,741,305

 
4,224,231

 
4,245,122

 
Due after five years through ten years
 
1,012,633

 
1,025,564

 
1,039,685

 
1,050,295

 
 
 
4,819,132

 
4,853,446

 
5,351,295

 
5,382,835

 
GSE commercial MBS
 
1,686,991

 
1,674,749

 
1,014,795

 
1,005,667

 
Total
 
$
6,506,123

 
$
6,528,195

 
$
6,366,090

 
$
6,388,502

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Amortized cost of available-for-sale securities other than MBS
 
 
 
Fixed-rate
$
4,744,132

 
$
5,276,295

Variable-rate
75,000

 
75,000

 
4,819,132

 
5,351,295

Amortized cost of fixed-rate multi-family MBS
1,686,991

 
1,014,795

Total
$
6,506,123

 
$
6,366,090


10


At March 31, 2015 and December 31, 2014, all of the Bank's fixed-rate available-for-sale securities were swapped to a variable rate.
Sales of Securities. During the three months ended March 31, 2015, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $537,924,000. Proceeds from the sales totaled $540,269,000, resulting in realized gains of $2,345,000. There were no sales of available-for-sale securities during the three months ended March 31, 2014.

Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of March 31, 2015 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
$
25,017

 
$

 
$
25,017

 
$
104

 
$

 
$
25,121

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
6,219

 

 
6,219

 
30

 

 
6,249

GSE residential MBS
3,895,920

 

 
3,895,920

 
36,899

 
573

 
3,932,246

Non-agency residential MBS
162,718

 
25,708

 
137,010

 
20,121

 
3,554

 
153,577

GSE commercial MBS
61,819

 

 
61,819

 

 
170

 
61,649

 
4,126,676

 
25,708

 
4,100,968

 
57,050

 
4,297

 
4,153,721

Total
$
4,151,693

 
$
25,708

 
$
4,125,985

 
$
57,154

 
$
4,297

 
$
4,178,842


Held-to-maturity securities as of December 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
$
27,119

 
$

 
$
27,119

 
$
143

 
$

 
$
27,262

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
6,642

 

 
6,642

 
34

 

 
6,676

GSE residential MBS
4,424,542

 

 
4,424,542

 
46,767

 
398

 
4,470,911

Non-agency residential MBS
169,240

 
27,349

 
141,891

 
21,982

 
3,469

 
160,404

GSE commercial MBS
61,819

 

 
61,819

 
58

 

 
61,877

 
4,662,243

 
27,349

 
4,634,894

 
68,841

 
3,867

 
4,699,868

Total
$
4,689,362

 
$
27,349

 
$
4,662,013

 
$
68,984

 
$
3,867

 
$
4,727,130



11


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of March 31, 2015. 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
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
3

 
$
82,103

 
$
30

 
13

 
$
402,058

 
$
543

 
16

 
$
484,161

 
$
573

Non-agency residential MBS
1

 
6,586

 
213

 
24

 
125,698

 
9,946

 
25

 
132,284

 
10,159

GSE commercial MBS
3

 
61,649

 
170

 

 

 

 
3

 
61,649

 
170

Total
7

 
$
150,338

 
$
413

 
37

 
$
527,756

 
$
10,489

 
44

 
$
678,094

 
$
10,902


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 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
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
1

 
$
10,798

 
$
5

 
17

 
$
485,626

 
$
393

 
18

 
$
496,424

 
$
398

Non-agency residential MBS
1

 
6,874

 
223

 
24

 
131,265

 
9,917

 
25

 
138,139

 
10,140

Total
2

 
$
17,672

 
$
228

 
41

 
$
616,891

 
$
10,310

 
43

 
$
634,563

 
$
10,538


At March 31, 2015, the gross unrealized losses on the Bank’s held-to-maturity securities were $10,902,000, of which $10,159,000 was attributable to its holdings of non-agency (i.e., private-label) residential MBS and $743,000 was attributable to securities that are issued and guaranteed by GSEs.
As of March 31, 2015, the issuers of the Bank’s holdings of GSE MBS were rated triple-A by Moody’s and Fitch and AA+ by S&P. Based upon the credit ratings assigned by the NRSROs and the Bank's assessment of the strength of the GSEs’ guarantees of the Bank’s holdings of GSE MBS, the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at March 31, 2015 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, 2015.
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”), generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of March 31, 2015 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

12


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 27 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of March 31, 2015 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, 2015 assumed changes in home prices ranging from declines of 3 percent to increases of 8 percent over the 12-month period beginning January 1, 2015. For the vast majority of markets, the changes were projected to range from increases of 1 percent to 5 percent. Thereafter, home price changes for each market were projected to return (at varying rates and over varying transition periods based on historical housing price patterns) to their long-term historical equilibrium levels. Following these transition periods, the constant long-term annual rates of appreciation for the vast majority of markets were projected to range between 2 percent and 5 percent.
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 was not likely that it would fully recover the remaining amortized cost basis of one of its previously other-than-temporarily impaired non-agency RMBS and, accordingly, this security was deemed to be other-than-temporarily impaired as of March 31, 2015. The difference between the present value of the cash flows expected to be collected from this security and its amortized cost basis (i.e., the credit loss) totaled $6,000 at March 31, 2015. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its remaining amortized cost basis, only the amount related to the credit loss was recognized in earnings. None of the Bank's other non-agency RMBS were deemed to be other-than-temporarily impaired at March 31, 2015.
For the security for which an other-than-temporary impairment was determined to have occurred as of March 31, 2015, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings (dollars in thousands):
 
 
 
 
 
 
Significant Inputs(2)
 
 
Year of
Securitization
 
Collateral
Type(1)
 
Unpaid Principal Balance as of
March 31, 2015
 
Projected Prepayment
Rate
 
Projected Default Rate
 
Projected Loss
Severity
 
Current Credit Enhancement as of
 March 31, 2015(3)
2005
 
Alt-A/Option ARM
 
$
12,133

 
8.2
%
 
20.8
%
 
39.0
%
 
33.6
%
________________________________________
(1) 
Although the other-than-temporarily impaired security was not labeled as Alt-A at the time of issuance, based upon its current collateral and performance characteristics, it was analyzed using Alt-A assumptions.
(2) 
The prepayment rate reflects the weighted average of projected future voluntary prepayments. The default rate reflects the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. The loss severity reflects the total projected loan losses as a percentage of the total balance of loans that are projected to default.
(3) 
The current credit enhancement percentage reflects the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior class held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

13


In addition to the security that was determined to be other-than-temporarily impaired at March 31, 2015, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired in periods prior to 2013. The following table presents a rollforward for the three months ended March 31, 2015 and 2014 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,
 
2015
 
2014
Balance of credit losses, beginning of period
$
12,512

 
$
12,901

Credit losses on securities for which an other-than-temporary impairment was previously recognized
6

 

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(217
)
 
(65
)
Balance of credit losses, end of period
12,301

 
12,836

Cumulative principal shortfalls on securities held at end of period
(1,381
)
 
(870
)
Cumulative amortization of the time value of credit losses at end of period
307

 
248

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
11,227

 
$
12,214

     Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at March 31, 2015 and December 31, 2014 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, 2015
 
December 31, 2014
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
10,940

 
$
10,940

 
$
11,020

 
$
12,544

 
$
12,544

 
$
12,649

Due after five years through ten years
 
14,077

 
14,077

 
14,101

 
14,575

 
14,575

 
14,613

 
 
25,017

 
25,017

 
25,121

 
27,119

 
27,119

 
27,262

Mortgage-backed securities
 
4,126,676

 
4,100,968

 
4,153,721

 
4,662,243

 
4,634,894

 
4,699,868

Total
 
$
4,151,693

 
$
4,125,985

 
$
4,178,842

 
$
4,689,362

 
$
4,662,013

 
$
4,727,130


The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $19,764,000 and $26,510,000 at March 31, 2015 and December 31, 2014, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities
$
25,017

 
$
27,119

Amortized cost of held-to-maturity mortgage-backed securities
 
 
 
Fixed-rate pass-through securities
264

 
276

Collateralized mortgage obligations
 
 
 
Fixed-rate
592

 
624

Variable-rate
4,064,001

 
4,599,524

Variable-rate multi-family MBS
61,819

 
61,819

 
4,126,676

 
4,662,243

Total
$
4,151,693

 
$
4,689,362



14


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 2014 or the three months ended March 31, 2015.
Sales of Securities. During the three months ended March 31, 2015, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $344,248,000. Proceeds from the sales totaled $350,474,000, resulting in realized gains of $6,226,000. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. There were no sales of held-to-maturity securities during the three months ended March 31, 2014.

Note 6—Advances
     Redemption Terms. At March 31, 2015 and December 31, 2014, the Bank had advances outstanding at interest rates ranging from 0.07 percent to 8.36 percent and from 0.05 percent to 8.48 percent, respectively, as summarized below (dollars in thousands).
 
 
March 31, 2015
 
December 31, 2014
Contractual Maturity
 
Amount
 
Weighted Average
Interest Rate
 
Amount
 
Weighted Average
Interest Rate
Overdrawn demand deposit accounts
 
$
7

 
4.08
%
 
$
79,477

 
4.04
%
 
 
 
 
 
 
 
 
 
Due in one year or less
 
10,154,656

 
0.32

 
11,908,892

 
0.31

Due after one year through two years
 
1,212,130

 
1.47

 
1,085,057

 
1.46

Due after two years through three years
 
1,521,182

 
2.44

 
1,590,017

 
2.39

Due after three years through four years
 
1,009,953

 
2.37

 
1,085,640

 
2.40

Due after four years through five years
 
432,142

 
2.10

 
417,243

 
2.22

Due after five years
 
1,027,382

 
2.68

 
901,184

 
2.99

Amortizing advances
 
1,696,377

 
3.34

 
1,727,505

 
3.45

Total par value
 
17,053,829

 
1.20
%
 
18,795,015

 
1.14
%
 
 
 
 
 
 
 
 
 
Deferred prepayment fees
 
(19,283
)
 
 
 
(17,903
)
 
 
Commitment fees
 
(137
)
 
 
 
(139
)
 
 
Hedging adjustments
 
180,856

 
 
 
165,427

 
 
Total
 
$
17,215,265

 
 
 
$
18,942,400

 
 

The balances of overdrawn demand deposit accounts were fully collateralized at March 31, 2015 and December 31, 2014 and were repaid at the beginning of April 2015 and January 2015, 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, 2015 and December 31, 2014, the Bank had aggregate prepayable and callable advances totaling $317,566,000 and $487,699,000, respectively.

15


The following table summarizes advances outstanding at March 31, 2015 and December 31, 2014, by the earlier of contractual maturity or next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):
Contractual Maturity or Next Call Date
 
March 31, 2015
 
December 31, 2014
Overdrawn demand deposit accounts
 
$
7

 
$
79,477

 
 
 
 
 
Due in one year or less
 
10,359,526

 
11,993,262

Due after one year through two years
 
1,185,759

 
1,053,687

Due after two years through three years
 
1,521,182

 
1,590,017

Due after three years through four years
 
1,009,953

 
1,085,640

Due after four years through five years
 
424,142

 
414,243

Due after five years
 
856,883

 
851,184

Amortizing advances
 
1,696,377

 
1,727,505

 
 
 
 
 
Total par value
 
$
17,053,829

 
$
18,795,015


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, 2015 and December 31, 2014, the Bank had putable advances outstanding totaling $1,361,071,000 and $1,454,071,000, respectively.

The following table summarizes advances outstanding at March 31, 2015 and December 31, 2014, by the earlier of contractual maturity or next possible put date (in thousands):
Contractual Maturity or Next Put Date
 
March 31, 2015
 
December 31, 2014
Overdrawn demand deposit accounts
 
$
7

 
$
79,477

 
 
 
 
 
Due in one year or less
 
11,409,226

 
13,258,963

Due after one year through two years
 
1,187,130

 
1,062,557

Due after two years through three years
 
817,611

 
990,896

Due after three years through four years
 
493,953

 
397,190

Due after four years through five years
 
422,142

 
377,243

Due after five years
 
1,027,383

 
901,184

Amortizing advances
 
1,696,377

 
1,727,505

 
 
 
 
 
Total par value
 
$
17,053,829

 
$
18,795,015


     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Fixed-rate
 
 
 
Due in one year or less
$
10,111,854

 
$
11,573,066

Due after one year
6,668,898

 
6,694,902

Total fixed-rate
16,780,752

 
18,267,968

Variable-rate
 
 
 
Due in one year or less
52,007

 
426,477

Due after one year
221,070

 
100,570

Total variable-rate
273,077

 
527,047

Total par value
$
17,053,829

 
$
18,795,015



16


At March 31, 2015 and December 31, 2014, 30 percent and 27 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, 2015 and 2014, gross advance prepayment fees received from members/borrowers were $8,674,000 and $720,000, respectively, of which $3,831,000 and $214,000, respectively, were deferred.

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/borrowers, 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, 2015 and 2014, 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, 2015 or December 31, 2014.
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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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.

17


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 2014 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.
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 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 nonaccrual loans noted above.
The Bank evaluates whether to record a charge-off on a conventional mortgage loan when the loan becomes 180 days or more past due or upon the occurrence of a confirming event, whichever occurs first. 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.

18


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 March 31, 2015 and December 31, 2014 (dollars in thousands). The unpaid principal balance approximates the recorded investment in the loans.
 
March 31, 2015
 
December 31, 2014
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
30-59 days delinquent
$
1,075

 
$
1,871

 
$
2,946

 
$
1,409

 
$
2,276

 
$
3,685

60-89 days delinquent
326

 
211

 
537

 
531

 
400

 
931

90 days or more delinquent
539

 
106

 
645

 
316

 
299

 
615

Total past due
1,940

 
2,188

 
4,128

 
2,256

 
2,975

 
5,231

Total current loans
29,894

 
33,115

 
63,009

 
31,510

 
34,429

 
65,939