10-Q 1 a930201810q.htm 10-Q Document

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 September 30, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated
filer o
 
Accelerated
filer o
 
Non-accelerated
filer þ
 
Smaller reporting
company o
 
Emerging growth
company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
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 October 31, 2018, the registrant had outstanding 25,814,781 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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and due from banks
$
55,409

 
$
87,965

Interest-bearing deposits
1,800,287

 
299

Securities purchased under agreements to resell (Note 11)
4,240,000

 
6,700,000

Federal funds sold
4,785,000

 
7,780,000

Trading securities (Note 3)
1,539,265

 
114,230

Available-for-sale securities (Notes 4, 11 and 16) ($719,152 and $747,230 pledged at September 30, 2018 and December 31, 2017, respectively, which could be rehypothecated)
15,488,136

 
14,402,398

Held-to-maturity securities (a) (Note 5)
1,581,011

 
1,944,537

Advances (Notes 6 and 8)
42,241,727

 
36,460,524

Mortgage loans held for portfolio, net of allowance for credit losses of $382 and $271 at
September 30, 2018 and December 31, 2017, respectively (Notes 7 and 8)
1,795,194

 
877,852

Accrued interest receivable
138,561

 
110,957

Premises and equipment, net
16,725

 
17,099

Derivative assets (Notes 11 and 12)
4,237

 
17,225

Other assets (including $14,104 of securities held at fair value at September 30, 2018)
24,547

 
11,215

TOTAL ASSETS
$
73,710,099

 
$
68,524,301

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
1,016,019

 
$
843,690

Non-interest bearing
19

 
19

Total deposits
1,016,038

 
843,709

Consolidated obligations (Note 9)
 
 
 
Discount notes
33,996,816

 
32,510,758

Bonds
34,382,344

 
31,376,858

Total consolidated obligations
68,379,160

 
63,887,616

 
 
 
 
Mandatorily redeemable capital stock
6,877

 
5,941

Accrued interest payable
111,186

 
69,756

Affordable Housing Program (Note 10)
38,750

 
31,246

Derivative liabilities (Notes 11 and 12)
18,501

 
10,960

Other liabilities (Note 4)
209,042

 
195,047

Total liabilities
69,779,554

 
65,044,275

 
 
 
 
Commitments and contingencies (Notes 8 and 16)


 


 
 
 
 
CAPITAL (Note 13)
 
 
 
Capital stock
 
 
 
Capital stock — Class B-1 putable ($100 par value) issued and outstanding shares: 9,066,472 and 8,534,625 shares at September 30, 2018 and December 31, 2017, respectively
906,647

 
853,462

Capital stock — Class B-2 putable ($100 par value) issued and outstanding shares: 17,021,517 and 14,644,748 shares at September 30, 2018 and December 31, 2017, respectively
1,702,152

 
1,464,475

Total Class B Capital Stock
2,608,799

 
2,317,937

Retained earnings
 
 
 
Unrestricted
904,525

 
832,826

Restricted
137,066

 
108,937

Total retained earnings
1,041,591

 
941,763

Accumulated other comprehensive income (Note 19)
280,155

 
220,326

Total capital
3,930,545

 
3,480,026

TOTAL LIABILITIES AND CAPITAL
$
73,710,099

 
$
68,524,301

_____________________________
(a) 
Fair values: $1,604,233 and $1,971,038 at September 30, 2018 and December 31, 2017, 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
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
236,372

 
$
123,268

 
$
590,387

 
$
294,405

Prepayment fees on advances, net
 
42

 
366

 
2,611

 
1,310

Interest-bearing deposits
 
6,222

 
697

 
7,930

 
1,635

Securities purchased under agreements to resell
 
19,583

 
1,963

 
42,507

 
3,685

Federal funds sold
 
23,085

 
25,748

 
69,490

 
56,073

Trading securities
 
6,369

 
581

 
9,535

 
1,729

Available-for-sale securities
 
112,670

 
64,171

 
297,030

 
169,756

Held-to-maturity securities
 
11,742

 
9,557

 
33,666

 
27,220

Mortgage loans held for portfolio
 
14,865

 
4,502

 
33,953

 
8,462

Total interest income
 
430,950

 
230,853

 
1,087,109

 
564,275

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
Bonds
 
177,308

 
88,201

 
467,179

 
226,548

Discount notes
 
168,634

 
77,612

 
384,130

 
153,947

Deposits
 
3,945

 
2,463

 
10,524

 
6,838

Mandatorily redeemable capital stock
 
20

 
40

 
51

 
91

Other borrowings
 
2

 
45

 
79

 
99

Total interest expense
 
349,909

 
168,361

 
861,963

 
387,523

NET INTEREST INCOME
 
81,041

 
62,492

 
225,146

 
176,752

Provision for mortgage loan losses
 
104

 

 
111

 

 
 
 
 
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
80,937

 
62,492

 
225,035

 
176,752

 
 
 
 
 
 
 
 
 
OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
(1,583
)
 
296

 
(4,473
)
 
2,344

Net gains (losses) on derivatives and hedging activities
 
(5,573
)
 
345

 
(6,097
)
 
5,974

Net gains on other assets carried at fair value
 
312

 

 
527

 

Realized gains on sales of held-to-maturity securities
 
1,065

 
2,093

 
1,065

 
3,983

Realized gains on sales of available-for-sale securities
 

 

 

 
1,837

Letter of credit fees
 
2,440

 
2,061

 
6,851

 
5,454

Other, net
 
836

 
668

 
2,323

 
2,318

Total other income (loss)
 
(2,503
)
 
5,463

 
196

 
21,910

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
12,523

 
12,551

 
36,758

 
38,722

Other operating expenses
 
7,620

 
6,640

 
23,735

 
18,352

Finance Agency
 
877

 
834

 
2,716

 
2,554

Office of Finance
 
1,099

 
1,088

 
2,867

 
2,693

Discretionary grants and donations
 
373

 
2,065

 
1,956

 
3,277

Derivative clearing fees
 
306

 
313

 
926

 
927

Total other expense
 
22,798

 
23,491

 
68,958

 
66,525

INCOME BEFORE ASSESSMENTS
 
55,636

 
44,464

 
156,273

 
132,137

Affordable Housing Program assessment
 
5,565

 
4,451

 
15,632

 
13,223

NET INCOME
 
$
50,071

 
$
40,013

 
$
140,641

 
$
118,914

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
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
NET INCOME
 
$
50,071

 
$
40,013

 
$
140,641

 
$
118,914

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
 
26,598

 
27,278

 
30,735

 
101,518

Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
 

 

 

 
(1,837
)
Unrealized gains (losses) on cash flow hedges
 
8,749

 
(917
)
 
27,315

 
(6,668
)
Reclassification adjustment for (gains) losses on cash flow hedges included in net income
 
(464
)
 
491

 
(427
)
 
1,927

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
717

 
822

 
2,270

 
2,752

Postretirement benefit plan
 
 
 
 
 
 
 
 
Amortization of prior service cost included in net periodic benefit credit
 
5

 
5

 
15

 
15

Amortization of net actuarial gain included in net periodic benefit credit
 
(26
)
 
(9
)
 
(79
)
 
(61
)
Total other comprehensive income
 
35,579

 
27,670

 
59,829

 
97,646

TOTAL COMPREHENSIVE INCOME
 
$
85,650

 
$
67,683

 
$
200,470

 
$
216,560


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

3




FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited, in thousands)

 
Capital Stock
Class B-1 - Putable
(Membership/Excess)
 
Capital Stock
Class B-2 - Putable
(Activity)
 
 
 
 
 
 
 
Accumulated
 Other
Comprehensive
 Income
 
 
 
 
 
Retained Earnings
 
 
Total
 Capital
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2018
8,534

 
$
853,462

 
14,645

 
$
1,464,475

 
$
832,826

 
$
108,937

 
$
941,763

 
$
220,326

 
$
3,480,026

Net transfers of shares between Class B-1 and Class B-2 Stock
12,658

 
1,265,790

 
(12,658
)
 
(1,265,790
)
 

 

 

 

 

Proceeds from sale of capital stock
115

 
11,527

 
15,035

 
1,503,467

 

 

 

 

 
1,514,994

Repurchase/redemption of capital stock
(12,583
)
 
(1,258,289
)
 

 

 

 

 

 

 
(1,258,289
)
Shares reclassified to mandatorily redeemable capital stock
(64
)
 
(6,421
)
 

 

 

 

 

 

 
(6,421
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
112,512

 
28,129

 
140,641

 

 
140,641

Other comprehensive income

 

 

 

 

 

 

 
59,829

 
59,829

Dividends on capital stock (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
(198
)
 

 
(198
)
 

 
(198
)
Mandatorily redeemable capital stock

 

 

 

 
(37
)
 

 
(37
)
 

 
(37
)
Stock
406

 
40,578

 

 

 
(40,578
)
 

 
(40,578
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, SEPTEMBER 30, 2018
9,066

 
$
906,647

 
17,022

 
$
1,702,152

 
$
904,525

 
$
137,066

 
$
1,041,591

 
$
280,155

 
$
3,930,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2017
6,904

 
$
690,411

 
12,397

 
$
1,239,737

 
$
745,104

 
$
78,880

 
$
823,984

 
$
63,210

 
$
2,817,342

Net transfers of shares between Class B-1 and Class B-2 Stock
8,252

 
825,222

 
(8,252
)
 
(825,222
)
 

 

 

 

 

Proceeds from sale of capital stock
72

 
7,225

 
9,984

 
998,353

 

 

 

 

 
1,005,578

Repurchase/redemption of capital stock
(7,303
)
 
(730,329
)
 

 

 

 

 

 

 
(730,329
)
Shares reclassified to mandatorily redeemable capital stock
(79
)
 
(7,963
)
 
(123
)
 
(12,267
)
 

 

 

 

 
(20,230
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 

 

 
95,131

 
23,783

 
118,914

 

 
118,914

Other comprehensive income

 

 

 

 

 

 

 
97,646

 
97,646

Dividends on capital stock (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 
(198
)
 

 
(198
)
 

 
(198
)
Mandatorily redeemable capital stock

 

 

 

 
(138
)
 

 
(138
)
 

 
(138
)
Stock
216

 
21,648

 

 

 
(21,648
)
 

 
(21,648
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, SEPTEMBER 30, 2017
8,062

 
$
806,214

 
14,006

 
$
1,400,601

 
$
818,251

 
$
102,663

 
$
920,914

 
$
160,856

 
$
3,288,585


(a) Dividends were paid at annualized rates of 1.33 percent and 2.33 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2018; at 1.65 percent and 2.65 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2018 and at 1.97 percent and 2.97 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the third quarter of 2018.

(b) Dividends were paid at annualized rates of 0.599 percent and 1.599 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2017; at 0.83 percent and 1.83 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2017 and at 1.06 percent and 2.06 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the third quarter of 2017.

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 Nine Months Ended
 
September 30,
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
140,641

 
$
118,914

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
79,461

 
69,451

Concessions on consolidated obligations
3,864

 
3,233

Premises, equipment and computer software costs
2,797

 
2,770

Non-cash interest on mandatorily redeemable capital stock
52

 
61

Provision for mortgage loan losses
111

 

Gains on sales of held-to-maturity securities
(1,065
)
 
(3,983
)
Gains on sales of available-for-sale securities

 
(1,837
)
Net gains on other assets carried at fair value
(527
)
 

Net decrease (increase) in trading securities
4,473

 
(2,751
)
Loss due to changes in net fair value adjustment on derivative and hedging activities
348,923

 
32,759

Increase in accrued interest receivable
(27,779
)
 
(24,600
)
Decrease in other assets
559

 
4,486

Increase in Affordable Housing Program (AHP) liability
7,504

 
6,685

Increase in accrued interest payable
41,414

 
24,402

Increase (decrease) in other liabilities
(270
)
 
2,246

Total adjustments
459,517

 
112,922

Net cash provided by operating activities
600,158

 
231,836

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease (increase) in interest-bearing deposits, including swap collateral pledged
(1,874,062
)
 
80,051

Net decrease in securities purchased under agreements to resell
2,460,000

 
800,000

Net decrease (increase) in federal funds sold
2,995,000

 
(3,588,000
)
Decrease in loan to other FHLBank

 
290,000

Purchases of trading securities
(1,436,111
)
 

Purchases of available-for-sale securities
(1,873,531
)
 
(2,380,099
)
Proceeds from maturities of available-for-sale securities
225,837

 
412,625

Proceeds from sales of available-for-sale securities

 
250,262

Proceeds from sales of held-to-maturity securities
42,563

 
162,789

Proceeds from maturities of held-to-maturity securities
326,011

 
438,128

Purchases of held-to-maturity securities

 
(125,000
)
Principal collected on advances
636,391,818

 
408,582,680

Advances made
(642,233,887
)
 
(412,379,559
)
Principal collected on mortgage loans held for portfolio
67,403

 
17,268

Purchases of mortgage loans held for portfolio
(985,489
)
 
(468,033
)
Purchases of premises, equipment and computer software
(3,699
)
 
(2,695
)
Net cash used in investing activities
(5,898,147
)
 
(7,909,583
)
 
 
 
 

5


 
For the Nine Months Ended
 
September 30,
 
2018
 
2017
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits, including swap collateral held
284,519

 
(138,458
)
Net receipts (payments) on derivative contracts with financing elements
103,849

 
(65,707
)
Increase in loan from other FHLBank

 
250,000

Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
195,558,661

 
267,181,998

Bonds
17,441,601

 
16,764,354

Debt issuance costs
(4,525
)
 
(3,854
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(194,129,075
)
 
(262,710,106
)
Bonds
(14,240,530
)
 
(13,738,885
)
Proceeds from issuance of capital stock
1,514,994

 
1,005,578

Payments for redemption of mandatorily redeemable capital stock
(5,574
)
 
(16,814
)
Payments for repurchase/redemption of capital stock
(1,258,289
)
 
(730,329
)
Cash dividends paid
(198
)
 
(198
)
Net cash provided by financing activities
5,265,433

 
7,797,579

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(32,556
)
 
119,832

Cash and cash equivalents at beginning of the period
87,965

 
27,696

Cash and cash equivalents at end of the period
$
55,409

 
$
147,528

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
763,507

 
$
341,792

AHP payments, net
$
8,128

 
$
6,538

Stock dividends issued
$
40,578

 
$
21,648

Dividends paid through issuance of mandatorily redeemable capital stock
$
37

 
$
138

Variation margin recharacterized as settlement payments on derivative contracts (Note 11)
$
250,468

 
$
72,053

Net capital stock reclassified to mandatorily redeemable capital stock
$
6,421

 
$
20,230


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, 2017. 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, 2017 filed with the SEC on March 22, 2018 (the “2017 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2017 10-K.
The Bank is one of 11 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 and Assumptions. 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 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
Revenue from Contracts with Customers. On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (January 1, 2017 for the Bank). Early application was not permitted. On August 12, 2015, the FASB issued ASU 2015-14 "Deferral of Effective Date," which deferred the effective date of ASU 2014-09 by one year. Earlier application was permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Bank adopted ASU 2014-09 effective January 1, 2018. The adoption of this guidance did not have a material impact on the Bank's results of operations or financial condition.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which makes targeted improvements to existing U.S. GAAP by: (i) requiring certain equity investments to be measured at fair value with changes in fair value recognized in earnings, (ii) simplifying the impairment assessment of equity investments without readily determinable fair values, (iii) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iv) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or in the accompanying notes to the financial statements, (v) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities, (vi) eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition, (vii) requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has

7


elected to measure the liability at fair value in accordance with the fair value option for financial instruments, and (viii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. For public business entities, the guidance in ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption was permitted for certain provisions. The Bank adopted ASU 2016-01 effective January 1, 2018. In conjunction with the adoption of ASU 2016-01, the Bank reclassified $12,082,000 of marketable equity securities (which consist solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans) from trading securities to other assets on January 1, 2018. Other than this reclassification, the adoption of ASU 2016-01 did not have any impact on the Bank's results of operations or financial condition.
Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which clarifies the guidance for classifying certain cash receipts and cash payments in the statement of cash flows. The guidance is intended to reduce existing diversity in practice regarding eight specific cash flow presentation issues. For public business entities, the guidance in ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. The guidance is to be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied as if the change was made prospectively as of the earliest date practicable. The Bank adopted ASU 2016-15 on January 1, 2018. The adoption of this guidance did not have any impact on the Bank's statement of cash flows, nor did it have any impact on the Bank's results of operations or financial condition.
Restricted Cash. On November 17, 2016, the FASB issued ASU 2016-18, "Restricted Cash" ("ASU 2016-18"), which clarifies the guidance for classifying and presenting certain cash transfers, cash receipts and cash payments in the statement of cash flows. The guidance is intended to reduce existing diversity in practice regarding restricted cash and restricted cash equivalents. For public business entities, the guidance in ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. The guidance is to be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-18 on January 1, 2018 did not have any impact on the Bank's statement of cash flows, nor did it have any impact on the Bank's results of operations or financial condition.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 requires an employer to disaggregate the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost (net benefit cost). ASU 2017-07 requires an employer to report the service cost component in the same income statement line item as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. Further, ASU 2017-07 allows only the service cost component of net benefit cost to be eligible for capitalization. For public business entities, the guidance in ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2017-07 are to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net benefit cost in assets. Subsequent to the adoption of ASU 2017-07 on January 1, 2018, the Bank continues to report the service cost component of its net periodic postretirement benefit cost in compensation and benefits expense. On and after January 1, 2018, the Bank reports the other components of net periodic postretirement benefit cost (which in aggregate were credits of $17,000 and $50,000 for the three and nine months ended September 30, 2018, respectively) in "other, net" in the other income (loss) section of the statement of income. Because the components of the Bank's net periodic postretirement benefit cost other than the service cost component were insignificant for the nine months ended September 30, 2017 (see Note 14), such amounts were not reclassified and are reported in compensation and benefits expense for that period. The adoption of ASU 2017-07 did not have any impact on the Bank's financial condition.
Derivatives and Hedging. On August 28, 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the guidance provides for, but does not require, the use of a qualitative method of assessing hedge effectiveness. Among other things, the guidance also permits, but does not require, the following:

8


For fair value hedges, measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
Partial-term fair value hedges of interest-rate risk, in which it can be assumed that the hedged item has a term that reflects only the designated cash flows being hedged.
For prepayable financial instruments, consideration only of how changes in the benchmark interest rate affect a decision to settle a debt instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk.
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, designation of the variability in cash flows attributable to the contractually specified interest rate as the hedged risk (when the contractually specified variable rate is not a benchmark rate).
For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, designation of an amount that is not expected to be affected by prepayments, defaults and other events affecting the timing and amount of cash flows as a hedged item (commonly referred to as the "last-of-layer" method).
For public business entities, the guidance in ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts ASU 2017-12 in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. For cash flow hedges existing on the date of adoption, an entity is required to eliminate the separate measurement of ineffectiveness in earnings by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings. Among other things, an entity may elect at transition to modify the measurement methodology for hedged items in existing fair value hedges to the benchmark rate component of the contractual coupon cash flows. The cumulative effect of applying this election is recognized as an adjustment to the basis adjustment of the hedged item recognized on the balance sheet with a corresponding adjustment to the opening balance of retained earnings. The amended presentation and disclosure guidance is required only prospectively.
The Bank will adopt ASU 2017-12 effective January 1, 2019. At adoption, the Bank does not intend to modify any of its then existing fair value or cash flow hedging relationships. Because the Bank has not had any ineffectiveness associated with its cash flow hedges, it does not currently expect that a cumulative effect adjustment relating to such hedges will be required. ASU 2017-12 will prospectively affect the Bank’s income statement presentation for fair value hedge ineffectiveness and, consequently, will result in more variability in the Bank's net interest income and, correspondingly, its total net gains (losses) on derivatives and hedging activities. This required change in presentation will not have any impact on the Bank's net income. For some of its fair value hedging relationships entered into after January 1, 2019, the Bank may elect to use the benchmark rate component of the coupon cash flows to measure the hedged item. Following adoption, the Bank does not expect to change the way in which it assesses the effectiveness of its hedging relationships. Finally, the Bank is continuing to assess other opportunities that are available under the new guidance including, but not limited to, the potential reclassification at adoption of certain debt securities from held-to-maturity to available-for-sale and the post adoption use of the last-of-layer method.
Fair Value Measurement Disclosures. On August 28, 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which modifies the disclosure requirements on fair value measurements in an effort to improve disclosure effectiveness. ASU 2018-13 removes or modifies certain existing disclosure requirements regarding fair value measurements, including a clarification that the measurement uncertainty disclosure is intended to communicate information about the uncertainty in measurement as of the reporting date. In addition to the limited removals and modifications, the guidance requires public business entities to disclose: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (together, the "new disclosure requirements").
The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (January 1, 2020 for the Bank). The new disclosure requirements and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. In addition, an entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. The adoption of ASU 2018-13 will not have any impact on the Bank's results of operations or financial condition.
Defined Benefit Plan Disclosures. On August 28, 2018, the FASB issued ASU 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"), which modifies the disclosure requirements for

9


defined benefit pension and other postretirement benefit plans in an effort to improve disclosure effectiveness. ASU 2018-14 removes specified disclosures that no longer are considered cost beneficial, clarifies the specific requirements of certain other disclosures, and requires new disclosures regarding (i) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and (ii) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
For public business entities, ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The guidance is to be applied on a retrospective basis to all periods presented. The adoption of ASU 2018-14 is expected to have a minimal impact on the Bank's disclosures and it will not have any impact on the Bank's results of operations or financial condition.
Implementation Costs Associated with Cloud Computing Arrangements. On August 29, 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"), which clarifies the accounting for implementation costs associated with a hosting arrangement that is a service contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 also addresses the term over which these capitalized implementation costs should be expensed. ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract.
For public business entities, ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (January 1, 2020 for the Bank). Early adoption is permitted, including adoption in any interim period. The guidance is to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of this guidance is not expected to have a material impact on the Bank's results of operations or financial condition.
Inclusion of the Secured Overnight Financing Rate Overnight Index Swap Rate as a Benchmark Interest Rate. On October 25, 2018, the FASB issued ASU 2018-16, "Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" ("ASU 2018-16"). ASU 2018-16 adds the OIS rate based on SOFR (a swap rate based on the underlying overnight SOFR rate) as an eligible benchmark interest rate for purposes of applying hedge accounting. SOFR is a volume-weighted median interest rate that is calculated daily based on overnight transactions from the prior day's trading activity in specified segments of the U.S. Treasury repo market. SOFR was selected by the Alternative Reference Rates Committee as its preferred alternative reference rate to LIBOR.
For entities that have not already adopted ASU 2017-12, the guidance in ASU 2018-16 is required to be adopted concurrently with the adoption of ASU 2017-12 (January 1, 2019 for the Bank). The guidance is to be applied prospectively to qualifying new or redesignated hedging relationships entered into on and after the date of adoption.

Note 3—Trading Securities
Trading securities as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
U.S. Treasury Notes
$
844,413

 
$
102,148

U.S. Treasury Bills
694,852

 

Other

 
12,082

Total
$
1,539,265

 
$
114,230

Other trading securities consisted solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans. As discussed in Note 2, these investments were reclassified to other assets effective January 1, 2018.



10


Note 4—Available-for-Sale Securities
 Major Security Types. Available-for-sale securities as of September 30, 2018 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
438,814

 
$
8,979

 
$

 
$
447,793

GSE obligations
5,549,359

 
100,916

 
909

 
5,649,366

Other
170,227

 
780

 

 
171,007

 
6,158,400

 
110,675

 
909

 
6,268,166

GSE commercial mortgage-backed securities
9,086,776

 
136,742

 
3,548

 
9,219,970

Total
$
15,245,176

 
$
247,417

 
$
4,457

 
$
15,488,136

Included in the table above are GSE commercial mortgage-backed securities ("MBS") that were purchased but which had not yet settled as of September 30, 2018. The aggregate amount due of $172,201,000 is included in other liabilities on the statement of condition at that date.
Available-for-sale securities as of December 31, 2017 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
470,436

 
$
8,602

 
$

 
$
479,038

GSE obligations
5,911,841

 
90,938

 
107

 
6,002,672

Other
173,920

 
975

 

 
174,895

 
6,556,197

 
100,515

 
107

 
6,656,605

GSE commercial MBS
7,633,976

 
113,073

 
1,256

 
7,745,793

Total
$
14,190,173

 
$
213,588

 
$
1,363

 
$
14,402,398

Included in the table above are GSE commercial MBS that were purchased but which had not yet settled as of December 31, 2017. The aggregate amount due of $157,980,000 is included in other liabilities on the statement of condition at that date.
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 September 30, 2018. 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
GSE debentures
3

 
$
196,060

 
$
909

 

 
$

 
$

 
3

 
$
196,060

 
$
909

GSE commercial MBS
36

 
982,073

 
3,477

 
3

 
1,055

 
71

 
39

 
983,128

 
3,548

Total
39

 
$
1,178,133

 
$
4,386

 
3

 
$
1,055

 
$
71

 
42

 
$
1,179,188

 
$
4,457



11


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2017. 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
GSE debentures
1

 
$
50,374

 
$
107

 

 
$

 
$

 
1

 
$
50,374

 
$
107

GSE commercial MBS
8

 
163,594

 
593

 
16

 
299,511

 
663

 
24

 
463,105

 
1,256

Total
9

 
$
213,968

 
$
700

 
16

 
$
299,511

 
$
663

 
25

 
$
513,479

 
$
1,363


At September 30, 2018, the gross unrealized losses on the Bank’s available-for-sale securities were $4,457,000. 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 September 30, 2018, 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 S&P Global Ratings (“S&P”). The Bank's holdings of PEFCO debentures are rated triple-A by Moody's and Fitch, and are not rated by S&P. Based upon the Bank's assessment of the creditworthiness of the issuers of the GSE debentures that were in an unrealized loss position at September 30, 2018 and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that these debentures would not be settled at an amount less than the Bank's amortized cost bases in the investments. In addition, based upon the Bank's assessment of the strength of the GSEs' guarantees of the Bank's holdings of GSE commercial MBS and the credit ratings assigned by each of the NRSROs, the Bank expects that its holdings of GSE commercial MBS that were in an unrealized loss position at September 30, 2018 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 September 30, 2018.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at September 30, 2018 and December 31, 2017 are presented below (in thousands).
 
 
 
September 30, 2018
 
December 31, 2017
 
Maturity
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
389,392

 
$
389,886

 
$
238,017

 
$
238,292

 
Due after one year through five years
 
2,396,125

 
2,422,930

 
2,756,755

 
2,786,327

 
Due after five years through ten years
 
3,240,405

 
3,318,685

 
3,341,470

 
3,407,595

 
Due after ten years
 
132,478

 
136,665

 
219,955

 
224,391

 
 
 
6,158,400

 
6,268,166

 
6,556,197

 
6,656,605

 
GSE commercial MBS
 
9,086,776

 
9,219,970

 
7,633,976

 
7,745,793

 
Total
 
$
15,245,176

 
$
15,488,136

 
$
14,190,173

 
$
14,402,398

Interest Rate Payment Terms. At September 30, 2018 and December 31, 2017, all of the Bank's available-for-sale securities were fixed rate securities which were swapped to a variable rate.
Sales of Securities. There were no sales of available-for-sale securities during the nine months ended September 30, 2018 or the three months ended September 30, 2017. During the nine months ended September 30, 2017, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $248,425,000. Proceeds from the sales totaled $250,262,000, resulting in realized gains of $1,837,000.



12


Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of September 30, 2018 were as follows (in thousands):
 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
7,977

 
$

 
$
7,977

 
$
24

 
$

 
$
8,001

State housing agency obligations
135,000

 

 
135,000

 
10

 
1,474

 
133,536

 
142,977

 

 
142,977

 
34

 
1,474

 
141,537

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
491

 

 
491

 
3

 

 
494

GSE residential MBS
1,369,107

 

 
1,369,107

 
9,384

 
203

 
1,378,288

Non-agency residential MBS
79,767

 
11,331

 
68,436

 
15,693

 
215

 
83,914

 
1,449,365

 
11,331

 
1,438,034

 
25,080

 
418

 
1,462,696

Total
$
1,592,342

 
$
11,331

 
$
1,581,011

 
$
25,114

 
$
1,892

 
$
1,604,233


Held-to-maturity securities as of December 31, 2017 were as follows (in thousands):
 
Amortized
Cost
 
OTTI Recorded in
 Accumulated Other
Comprehensive
Income
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
10,774

 
$

 
$
10,774

 
$
7

 
$
20

 
$
10,761

State housing agency obligations
160,000

 

 
160,000

 
537

 
304

 
160,233

 
170,774

 

 
170,774

 
544

 
324

 
170,994

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
1,909

 

 
1,909

 
4

 

 
1,913

GSE residential MBS
1,655,625

 

 
1,655,625

 
12,336

 
1,630

 
1,666,331

Non-agency residential MBS
94,565

 
13,601

 
80,964

 
16,198

 
629

 
96,533

GSE commercial MBS
35,265

 

 
35,265

 
2

 

 
35,267

 
1,787,364

 
13,601

 
1,773,763

 
28,540

 
2,259

 
1,800,044

Total
$
1,958,138

 
$
13,601

 
$
1,944,537

 
$
29,084

 
$
2,583

 
$
1,971,038



13


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of September 30, 2018. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income ("AOCI") and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State housing agency obligations

 
$

 
$

 
1

 
$
33,527

 
$
1,474

 
1

 
$
33,527

 
$
1,474

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
5

 
47,739

 
43

 
5

 
75,870

 
160

 
10

 
123,609

 
203

Non-agency residential MBS

 

 

 
10

 
31,061

 
797

 
10

 
31,061

 
797

Total
5

 
$
47,739

 
$
43

 
16

 
$
140,458

 
$
2,431

 
21

 
$
188,197

 
$
2,474


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2017. The unrealized losses include other-than-temporary impairments recorded in AOCI and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, 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
1

 
$
4,834

 
$
20

 

 
$

 
$

 
1

 
$
4,834

 
$
20

State housing agency obligations
1

 
34,696

 
304

 

 

 

 
1

 
34,696

 
304

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
16

 
146,146

 
177

 
17

 
415,080

 
1,453

 
33

 
561,226

 
1,630

Non-agency residential MBS

 

 

 
13

 
48,403

 
1,980

 
13

 
48,403

 
1,980

Total
18

 
$
185,676

 
$
501

 
30

 
$
463,483

 
$
3,433

 
48

 
$
649,159

 
$
3,934


At September 30, 2018, the gross unrealized losses on the Bank’s held-to-maturity securities were $2,474,000, of which $797,000 were attributable to its holdings of non-agency (i.e., private-label) residential MBS, $203,000 were attributable to securities that are issued and guaranteed by GSEs and $1,474,000 were attributable to a security issued by a state housing agency.
As of September 30, 2018, the U.S. government and 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 September 30, 2018 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. In addition, based upon the Bank's assessment of the creditworthiness of the state housing agency and the triple-A credit ratings assigned by Moody's and S&P, the Bank expects that the state housing agency debenture that was in an unrealized loss position at September 30, 2018 would not be settled at an amount less than the Bank’s amortized cost basis in this investment. 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 September 30, 2018.
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 upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of

14


September 30, 2018 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 22 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of September 30, 2018 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 September 30, 2018 assumed changes in home prices ranging from declines of 10 percent to increases of 15 percent over the 12-month period beginning July 1, 2018. For the vast majority of markets, the changes were projected to range from increases of 3 percent to 7 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 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 the Bank's non-agency RMBS were deemed to be other-than-temporarily impaired at September 30, 2018.
During the year ended December 31, 2016, one of the Bank's non-agency RMBS was determined to be other-than-temporarily impaired. In addition, 14 of the Bank's 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 and nine months ended September 30, 2018 and 2017 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 (in thousands).
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Balance of credit losses, beginning of period
$
8,974

 
$
9,961

 
$
9,443

 
$
10,515

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(218
)
 
(263
)
 
(687
)
 
(817
)
Balance of credit losses, end of period
8,756

 
9,698

 
8,756

 
9,698

Cumulative principal shortfalls on securities held at end of period
(2,073
)
 
(1,973
)
 
(2,073
)
 
(1,973
)
Cumulative amortization of the time value of credit losses at end of period
745

 
550

 
745

 
550

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
7,428

 
$
8,275

 
$
7,428

 
$
8,275


15


Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at September 30, 2018 and December 31, 2017 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.
 
 
September 30, 2018
 
December 31, 2017
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$

 
$

 
$

 
$
1,425

 
$
1,425

 
$
1,427

Due after one year through five years
 
3,496

 
3,496

 
3,500

 
4,495

 
4,495

 
4,500

Due after five years through ten years
 
4,481

 
4,481

 
4,500

 
4,854

 
4,854

 
4,834

Due after ten years
 
135,000

 
135,000

 
133,537

 
160,000

 
160,000

 
160,233

 
 
142,977

 
142,977

 
141,537

 
170,774

 
170,774

 
170,994

Mortgage-backed securities
 
1,449,365

 
1,438,034

 
1,462,696

 
1,787,364

 
1,773,763

 
1,800,044

Total
 
$
1,592,342

 
$
1,581,011

 
$
1,604,233

 
$
1,958,138

 
$
1,944,537

 
$
1,971,038


The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $2,796,0