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EX-32.2 - CERTIFICATION 906 CFO - Federal Home Loan Bank of Bostonex322_q22015.htm
EX-31.2 - CERTIFICATION 302 CFO - Federal Home Loan Bank of Bostonex312_q22015.htm
EX-31.1 - CERTIFICATION 302 CEO - Federal Home Loan Bank of Bostonex311_q22015.htm
EX-32.1 - CERTIFICATION 906 CEO - Federal Home Loan Bank of Bostonex321_q22015.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
––––––––––––––––––––––––––––––––––––––––––––––––––––
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. employer identification number)
 
 
 
 
 
 
 
800 Boylston Street
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(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. x Yes  o No
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
 
Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding as of
July 31, 2015
Class A Stock, par value $100
 
zero
Class B Stock, par value $100
 
25,613,237



Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and due from banks
$
844,228

 
$
1,124,536

Interest-bearing deposits
267

 
163

Securities purchased under agreements to resell
5,050,000

 
5,250,000

Federal funds sold
3,530,000

 
2,550,000

Investment securities:
 
 
 

Trading securities
237,414

 
244,969

Available-for-sale securities - includes $21,817 and $641 pledged as collateral at June 30, 2015, and December 31, 2014, that may be repledged
6,011,270

 
5,481,978

Held-to-maturity securities - includes $64,334 and $66,279 pledged as collateral at June 30, 2015, and December 31, 2014, respectively that may be repledged (a)
2,939,093

 
3,352,189

Total investment securities
9,187,777

 
9,079,136

Advances
34,105,443

 
33,482,074

Mortgage loans held for portfolio, net of allowance for credit losses of $1,100 and $2,012 at June 30, 2015, and December 31, 2014, respectively
3,574,835

 
3,483,948

Accrued interest receivable
77,828

 
77,411

Premises, software, and equipment, net
3,693

 
3,951

Derivative assets, net
28,443

 
14,548

Other assets
47,351

 
40,910

Total Assets
$
56,449,865

 
$
55,106,677

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
371,616

 
$
345,561

Non-interest-bearing
30,450

 
23,770

Total deposits
402,066

 
369,331

Consolidated obligations (COs):
 
 
 

Bonds
26,075,429

 
25,505,774

Discount notes
25,972,593

 
25,309,608

Total consolidated obligations
52,048,022

 
50,815,382

Mandatorily redeemable capital stock
57,268

 
298,599

Accrued interest payable
79,508

 
91,225

Affordable Housing Program (AHP) payable
77,600

 
66,993

Derivative liabilities, net
476,415

 
558,889

Other liabilities
157,951

 
28,472

Total liabilities
53,298,830

 
52,228,891

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 24,822 shares and 24,131 shares issued and outstanding at June 30, 2015, and December 31, 2014, respectively
2,482,244

 
2,413,114

Retained earnings:
 
 
 
Unrestricted
890,443

 
764,888

Restricted
173,411

 
136,770

Total retained earnings
1,063,854

 
901,658

Accumulated other comprehensive loss
(395,063
)
 
(436,986
)
Total capital
3,151,035

 
2,877,786

Total Liabilities and Capital
$
56,449,865

 
$
55,106,677

_______________________________________
(a) Fair values of held-to-maturity securities were $3,260,144 and $3,710,815 at June 30, 2015, and December 31, 2014, respectively.

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


3


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
58,441

 
$
56,821

 
$
115,849

 
$
112,692

Prepayment fees on advances, net
279

 
768

 
4,021

 
3,262

Securities purchased under agreements to resell
1,104

 
788

 
1,907

 
1,381

Federal funds sold
1,223

 
904

 
2,850

 
1,389

Trading securities
2,296

 
2,351

 
4,614

 
4,705

Available-for-sale securities
23,603

 
14,333

 
44,175

 
27,284

Held-to-maturity securities
24,264

 
28,455

 
49,135

 
58,470

Prepayment fees on investments
94

 
931

 
257

 
1,110

Mortgage loans held for portfolio
30,190

 
31,459

 
61,241

 
63,218

Other
14

 
2

 
25

 
2

Total interest income
141,508

 
136,812

 
284,074

 
273,513

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations - bonds
79,923

 
80,193

 
162,164

 
155,704

Consolidated obligations - discount notes
4,909

 
3,873

 
10,422

 
6,895

Deposits
19

 
14

 
33

 
21

Mandatorily redeemable capital stock
468

 
2,683

 
803

 
6,274

Other borrowings
2

 
2

 
2

 
3

Total interest expense
85,321

 
86,765

 
173,424

 
168,897

NET INTEREST INCOME
56,187

 
50,047

 
110,650

 
104,616

(Reduction of) provision for credit losses
(223
)
 
243

 
(283
)
 
(79
)
NET INTEREST INCOME AFTER (REDUCTION OF) PROVISION FOR CREDIT LOSSES
56,410

 
49,804

 
110,933

 
104,695

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(356
)
 

 
(580
)
 

Net amount of impairment losses reclassified from accumulated other comprehensive loss
(1,073
)
 
(399
)
 
(1,195
)
 
(857
)
Net other-than-temporary impairment losses on investment securities, credit portion
(1,429
)
 
(399
)
 
(1,775
)
 
(857
)
Litigation settlements
134,690

 
159

 
134,713

 
4,469

Loss on early extinguishment of debt
(129
)
 
(369
)
 
(129
)
 
(2,592
)
Service fees
2,089

 
1,615

 
4,008

 
3,285

Net unrealized (losses) gains on trading securities
(2,393
)
 
2,209

 
(1,112
)
 
2,963

Net losses on derivatives and hedging activities
(1,142
)
 
(1,292
)
 
(4,501
)
 
(2,675
)
Other
(333
)
 
(263
)
 
(452
)
 
(399
)
Total other income
131,353

 
1,660

 
130,752

 
4,194

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
13,865

 
9,066

 
23,298

 
18,857

Other operating expenses
5,303

 
5,243

 
10,156

 
10,312

Federal Housing Finance Agency (the FHFA)
883

 
576

 
1,903

 
1,384

Office of Finance
836

 
758

 
1,527

 
1,409

Other
563

 
730

 
1,150

 
1,365

Total other expense
21,450

 
16,373

 
38,034

 
33,327

INCOME BEFORE ASSESSMENTS
166,313

 
35,091

 
203,651

 
75,562

AHP
16,678

 
3,778

 
20,445

 
8,184

NET INCOME
$
149,635

 
$
31,313

 
$
183,206

 
$
67,378

 

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

4


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
149,635

 
$
31,313

 
$
183,206

 
$
67,378

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(14,793
)
 
24,842

 
5,796

 
29,671

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 
 
 
 
 
 
 
Net amount of impairment losses reclassified to non-interest income
 
1,073

 
399

 
1,195

 
857

Accretion of noncredit portion
 
11,990

 
12,612

 
23,453

 
24,747

Total net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
13,063

 
13,011

 
24,648

 
25,604

Net unrealized (losses) gains relating to hedging activities
 
 
 
 
 
 
 
 
Unrealized gains (losses)
 
12,773

 
(13,726
)
 
630

 
(19,740
)
Reclassification adjustment for previously deferred hedging gains and losses included in net income
 
5,631

 
724

 
10,527

 
729

Total net unrealized gains (losses) relating to hedging activities
 
18,404

 
(13,002
)
 
11,157

 
(19,011
)
Pension and postretirement benefits
 
92

 
(247
)
 
322

 
(135
)
Total other comprehensive income
 
16,766

 
24,604

 
41,923

 
36,129

Total comprehensive income
 
$
166,401

 
$
55,917

 
$
225,129

 
$
103,507


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

5



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
SIX MONTHS ENDED JUNE 30, 2015 and 2014
(dollars and shares in thousands)
(unaudited)

 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2013
25,305

 
$
2,530,471

 
$
681,978

 
$
106,812

 
$
788,790

 
$
(481,516
)
 
$
2,837,745

Proceeds from sale of capital stock
860

 
86,021

 
 
 
 
 
 
 
 
 
86,021

Repurchase of capital stock
(1,263
)
 
(126,296
)
 
 
 
 
 
 
 
 
 
(126,296
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(337
)
 
 
 
 
 
 
 
 
 
(337
)
Comprehensive income
 
 
 
 
53,902

 
13,476

 
67,378

 
36,129

 
103,507

Cash dividends on capital stock
 
 
 
 
(18,609
)
 
 
 
(18,609
)
 
 
 
(18,609
)
BALANCE, JUNE 30, 2014
24,899

 
$
2,489,859

 
$
717,271

 
$
120,288

 
$
837,559

 
$
(445,387
)
 
$
2,882,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
24,131

 
$
2,413,114

 
$
764,888

 
$
136,770

 
$
901,658

 
$
(436,986
)
 
$
2,877,786

Proceeds from sale of capital stock
987

 
98,708

 
 
 
 
 
 
 
 
 
98,708

Repurchase of capital stock
(295
)
 
(29,524
)
 
 
 
 
 
 
 
 
 
(29,524
)
Shares reclassified to mandatorily redeemable capital stock
(1
)
 
(54
)
 
 
 
 
 
 
 
 
 
(54
)
Comprehensive income
 
 
 
 
146,565

 
36,641

 
183,206

 
41,923

 
225,129

Cash dividends on capital stock
 
 
 
 
(21,010
)
 
 
 
(21,010
)
 
 
 
(21,010
)
BALANCE, JUNE 30, 2015
24,822

 
$
2,482,244

 
$
890,443

 
$
173,411

 
$
1,063,854

 
$
(395,063
)
 
$
3,151,035


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


6



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

 
For the Six Months Ended June 30,
 
2015
 
2014
OPERATING ACTIVITIES
 

 
 

Net income
$
183,206

 
$
67,378

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
(29,823
)
 
(38,070
)
Reduction of provision for credit losses
(283
)
 
(79
)
Change in net fair-value adjustments on derivatives and hedging activities
3,124

 
(24,262
)
Net other-than-temporary impairment losses on investment securities, credit portion
1,775

 
857

Loss on early extinguishment of debt
129

 
2,592

Other adjustments
(202
)
 
305

Net change in:
 

 
 
Market value of trading securities
1,112

 
(2,963
)
Accrued interest receivable
(417
)
 
8,803

Other assets
(2,412
)
 
4,333

Accrued interest payable
(11,717
)
 
7,391

Other liabilities
10,515

 
129

Total adjustments
(28,199
)
 
(40,964
)
Net cash provided by operating activities
155,007

 
26,414

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(15,297
)
 
(16,491
)
Securities purchased under agreements to resell
200,000

 
(4,050,000
)
Federal funds sold
(980,000
)
 
(1,100,000
)
Premises, software, and equipment
(551
)
 
(396
)
Trading securities:
 

 
 

Proceeds from long-term
6,443

 
1,640

Available-for-sale securities:
 

 
 

Proceeds from long-term
441,729

 
974,949

Purchases of long-term
(873,647
)
 
(1,680,449
)
Held-to-maturity securities:
 

 
 

Proceeds from long-term
452,744

 
421,568

Advances to members:
 

 
 

Proceeds
160,347,563

 
143,670,518

Disbursements
(161,008,371
)
 
(148,487,199
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
286,838

 
183,591

Purchases
(388,956
)
 
(177,407
)
Proceeds from sale of foreclosed assets
4,273

 
4,293

Net cash used in investing activities
(1,527,232
)
 
(10,255,383
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
34,724

 
(49,419
)
Net payments on derivatives with a financing element
(7,996
)
 
(8,816
)
Net proceeds from issuance of consolidated obligations:
 

 
 

Discount notes
72,190,118

 
65,226,706


7


Bonds
5,262,645

 
5,827,667

Bonds transferred from other Federal Home Loan Banks (the FHLBanks)
87,782

 

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(71,527,562
)
 
(55,226,237
)
Bonds
(4,754,583
)
 
(5,482,099
)
Proceeds from issuance of capital stock
98,708

 
86,021

Payments for redemption of mandatorily redeemable capital stock
(241,385
)
 
(373,698
)
Payments for repurchase of capital stock
(29,524
)
 
(126,296
)
Cash dividends paid
(21,010
)
 
(18,553
)
Net cash provided by financing activities
1,091,917

 
9,855,276

Net decrease in cash and due from banks
(280,308
)
 
(373,693
)
Cash and due from banks at beginning of the year
1,124,536

 
641,033

Cash and due from banks at end of the period
$
844,228

 
$
267,340

Supplemental disclosures:
 
 
 
Interest paid
$
218,112

 
$
201,627

AHP payments
$
9,233

 
$
5,758

Noncash transfers of mortgage loans held for portfolio to real-estate-owned (REO)
$
3,698

 
$
5,468


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


8



FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
(unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2015. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (the SEC) on March 23, 2015 (the 2014 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Recently Issued and Adopted Accounting Guidance
 
Accounting for Cloud Computing Arrangements. On April 15, 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. This guidance becomes effective for us for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. We are in the process of evaluating this guidance and its effect on our financial condition, results of operations, and cash flows.

Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance intended to simplify the presentation of debt issuance costs. This guidance requires a reclassification on the statement of condition of debt issuance costs related to a recognized debt liability from other assets to a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance becomes effective for us for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for the financial statements that have not been previously issued. The period-specific effects as a result of applying this guidance are required to be adjusted retrospectively to each individual period presented on the statement of condition. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to COs on our statement of condition. We do not expect that this guidance will have a material impact on our financial condition, results of operations, and cash flows.

Framework for Adversely Classifying Loans, Other REO, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the FHFA issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other REO, and Other Assets and Listing Assets for Special Mention (AB 2012-02). AB 2012-02 establishes a standard and uniform methodology for adversely classifying loans, other REO, and certain other assets (excluding investment securities), and prescribes the timing of asset charge-offs based on these classifications. The guidance is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. The adverse classification requirements were implemented as of January 1, 2014, and did not have a material effect on our results of operations or financial condition. The charge-off requirements were implemented on January 1, 2015, and did not have a material effect on our results of operations or financial condition.

Note 3 — Trading Securities
 
Major Security Types. Our trading securities as of June 30, 2015, and December 31, 2014, were (dollars in thousands):

9


 
June 30, 2015
 
December 31, 2014
Mortgage-backed securities (MBS)
 

 
 
U.S. government-guaranteed – single-family
$
11,254

 
$
12,235

Government-sponsored enterprise (GSE) – single-family
1,859

 
2,300

GSEs – multifamily
224,301

 
230,434

Total
$
237,414

 
$
244,969


Net unrealized losses or gains on trading securities for the six months ended June 30, 2015 and 2014, amounted to losses of $1.1 million and gains of $3.0 million for securities held on June 30, 2015 and 2014, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 4 — Available-for-Sale Securities
 
Major Security Types. Our available-for-sale securities as of June 30, 2015, were (dollars in thousands):
 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
461,402

 
$

 
$
(22,571
)
 
$
438,831

U.S. government-owned corporations
311,311

 

 
(41,408
)
 
269,903

GSEs
129,544

 

 
(11,838
)
 
117,706

 
902,257

 

 
(75,817
)
 
826,440

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
180,356

 
246

 
(1,692
)
 
178,910

U.S. government guaranteed – multifamily
823,275

 
1,492

 
(904
)
 
823,863

GSEs – single-family
4,173,209

 
19,945

 
(11,097
)
 
4,182,057

 
5,176,840

 
21,683

 
(13,693
)
 
5,184,830

Total
$
6,079,097

 
$
21,683

 
$
(89,510
)
 
$
6,011,270

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

Our available-for-sale securities as of December 31, 2014, were (dollars in thousands):
 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
472,440

 
$

 
$
(24,755
)
 
$
447,685

U.S. government-owned corporations
322,436

 

 
(37,439
)
 
284,997

GSEs
133,748

 

 
(10,295
)
 
123,453

 
928,624

 

 
(72,489
)
 
856,135

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
207,090

 
375

 
(1,437
)
 
206,028

U.S. government guaranteed – multifamily
874,817

 
204

 
(3,598
)
 
871,423

GSEs – single-family
3,545,070

 
14,742

 
(11,420
)
 
3,548,392

 
4,626,977

 
15,321

 
(16,455
)
 
4,625,843

Total
$
5,555,601

 
$
15,321

 
$
(88,944
)
 
$
5,481,978


10


_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

The following table summarizes our available-for-sale securities with unrealized losses as of June 30, 2015, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands): 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
438,831

 
$
(22,571
)
 
$
438,831

 
$
(22,571
)
U.S. government-owned corporations

 

 
269,903

 
(41,408
)
 
269,903

 
(41,408
)
GSEs

 

 
117,706

 
(11,838
)
 
117,706

 
(11,838
)
 

 

 
826,440

 
(75,817
)
 
826,440

 
(75,817
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
131,472

 
(1,692
)
 
131,472

 
(1,692
)
U.S. government guaranteed – multifamily
155,776

 
(244
)
 
203,264

 
(660
)
 
359,040

 
(904
)
GSEs – single-family
1,277,232

 
(5,061
)
 
415,932

 
(6,036
)
 
1,693,164

 
(11,097
)
 
1,433,008

 
(5,305
)
 
750,668

 
(8,388
)
 
2,183,676

 
(13,693
)
Total temporarily impaired
$
1,433,008

 
$
(5,305
)
 
$
1,577,108


$
(84,205
)

$
3,010,116


$
(89,510
)

The following table summarizes our available-for-sale securities with unrealized losses as of December 31, 2014, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
447,685

 
$
(24,755
)
 
$
447,685

 
$
(24,755
)
U.S. government-owned corporations

 

 
284,997

 
(37,439
)
 
284,997

 
(37,439
)
GSEs

 

 
123,453

 
(10,295
)
 
123,453

 
(10,295
)
 

 

 
856,135

 
(72,489
)
 
856,135

 
(72,489
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
154,665

 
(1,437
)
 
154,665

 
(1,437
)
U.S. government guaranteed – multifamily
610,470

 
(3,497
)
 
23,567

 
(101
)
 
634,037

 
(3,598
)
GSEs – single-family
453,043

 
(888
)
 
915,354

 
(10,532
)
 
1,368,397

 
(11,420
)
 
1,063,513

 
(4,385
)
 
1,093,586

 
(12,070
)
 
2,157,099

 
(16,455
)
Total temporarily impaired
$
1,063,513

 
$
(4,385
)
 
$
1,949,721

 
$
(84,559
)
 
$
3,013,234

 
$
(88,944
)
 
Redemption Terms. The amortized cost and fair value of our available-for-sale securities by contractual maturity at June 30, 2015, and December 31, 2014, were (dollars in thousands):

11


 
June 30, 2015
 
December 31, 2014
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$

 
$

 
$

 
$

Due after one year through five years

 

 

 

Due after five years through 10 years
16,988

 
16,378

 

 

Due after 10 years
885,269

 
810,062

 
928,624

 
856,135

 
902,257

 
826,440

 
928,624

 
856,135

MBS (1)
5,176,840

 
5,184,830

 
4,626,977

 
4,625,843

Total
$
6,079,097

 
$
6,011,270

 
$
5,555,601

 
$
5,481,978

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 5 — Held-to-Maturity Securities
 
Major Security Types. Our held-to-maturity securities as of June 30, 2015, were (dollars in thousands):
 
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
4,739

 
$

 
$
4,739

 
$
286

 
$

 
$
5,025

State or local housing-finance-agency obligations (HFA securities)
175,692

 

 
175,692

 
30

 
(18,748
)
 
156,974

 
180,431

 

 
180,431

 
316

 
(18,748
)
 
161,999

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
17,965

 

 
17,965

 
413

 

 
18,378

U.S. government guaranteed – multifamily
39,755

 

 
39,755

 
92

 

 
39,847

GSEs – single-family
1,256,108

 

 
1,256,108

 
36,320

 
(137
)
 
1,292,291

GSEs – multifamily
418,302

 

 
418,302

 
24,710

 

 
443,012

Private-label – residential
1,261,450

 
(250,575
)
 
1,010,875

 
291,252

 
(12,990
)
 
1,289,137

Asset-backed securities (ABS) backed by home equity loans
16,376

 
(719
)
 
15,657

 
775

 
(952
)
 
15,480

 
3,009,956

 
(251,294
)
 
2,758,662

 
353,562

 
(14,079
)
 
3,098,145

Total
$
3,190,387

 
$
(251,294
)
 
$
2,939,093

 
$
353,878

 
$
(32,827
)
 
$
3,260,144


Our held-to-maturity securities as of December 31, 2014, were (dollars in thousands):

12


 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
5,777

 
$

 
$
5,777

 
$
360

 
$

 
$
6,137

HFA securities
178,387

 

 
178,387

 
30

 
(18,136
)
 
160,281

 
184,164

 

 
184,164

 
390

 
(18,136
)
 
166,418

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
20,399

 

 
20,399

 
487

 

 
20,886

U.S. government guaranteed – multifamily
115,712

 

 
115,712

 
298

 
(6
)
 
116,004

GSEs – single-family
1,420,801

 

 
1,420,801

 
40,518

 
(157
)
 
1,461,162

GSEs – multifamily
542,130

 

 
542,130

 
29,949

 

 
572,079

Private-label – residential
1,327,967

 
(275,158
)
 
1,052,809

 
319,306

 
(13,957
)
 
1,358,158

ABS backed by home equity loans
16,958

 
(784
)
 
16,174

 
856

 
(922
)
 
16,108

 
3,443,967

 
(275,942
)
 
3,168,025

 
391,414

 
(15,042
)
 
3,544,397

Total
$
3,628,131

 
$
(275,942
)
 
$
3,352,189

 
$
391,804

 
$
(33,178
)
 
$
3,710,815


The following table summarizes our held-to-maturity securities with unrealized losses as of June 30, 2015, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
14,916

 
$
(84
)
 
$
136,316

 
$
(18,664
)
 
$
151,232

 
$
(18,748
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family

 

 
17,469

 
(137
)
 
17,469

 
(137
)
Private-label – residential
87,923

 
(1,636
)
 
490,916

 
(41,992
)
 
578,839

 
(43,628
)
ABS backed by home equity loans

 

 
14,054

 
(1,107
)
 
14,054

 
(1,107
)
 
87,923

 
(1,636
)
 
522,439

 
(43,236
)
 
610,362

 
(44,872
)
Total
$
102,839

 
$
(1,720
)
 
$
658,755

 
$
(61,900
)
 
$
761,594

 
$
(63,620
)

The following table summarizes our held-to-maturity securities with unrealized losses as of December 31, 2014, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 

13


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
14,850

 
$
(150
)
 
$
139,544

 
$
(17,986
)
 
$
154,394

 
$
(18,136
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government guaranteed – multifamily
9,282

 
(6
)
 

 

 
9,282

 
(6
)
GSEs – single-family

 

 
38,121

 
(157
)
 
38,121

 
(157
)
Private-label – residential
80,439

 
(1,028
)
 
544,369

 
(45,104
)
 
624,808

 
(46,132
)
ABS backed by home equity loans
206

 
(3
)
 
14,641

 
(1,074
)
 
14,847

 
(1,077
)
 
89,927

 
(1,037
)
 
597,131

 
(46,335
)
 
687,058

 
(47,372
)
Total
$
104,777

 
$
(1,187
)
 
$
736,675

 
$
(64,321
)
 
$
841,452

 
$
(65,508
)

Redemption Terms. The amortized cost and fair value of our held-to-maturity securities by contractual maturity at June 30, 2015, and December 31, 2014, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.
 
June 30, 2015
 
December 31, 2014
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
100

 
$
100

 
$
100

 
$
150

 
$
150

 
$
150

Due after one year through five years
8,331

 
8,331

 
8,639

 
9,369

 
9,369

 
9,751

Due after five years through 10 years
17,020

 
17,020

 
16,944

 
17,115

 
17,115

 
16,973

Due after 10 years
154,980

 
154,980

 
136,316

 
157,530

 
157,530

 
139,544

 
180,431

 
180,431

 
161,999

 
184,164

 
184,164

 
166,418

MBS (2)
3,009,956

 
2,758,662

 
3,098,145

 
3,443,967

 
3,168,025

 
3,544,397

Total
$
3,190,387

 
$
2,939,093

 
$
3,260,144

 
$
3,628,131

 
$
3,352,189

 
$
3,710,815

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 6 — Other-Than-Temporary Impairment

We evaluate our available-for-sale and held-to-maturity securities on an individual basis for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at June 30, 2015. At June 30, 2015, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security. Regarding securities that were in an unrealized loss position as of June 30, 2015:
 
We expect debentures issued by a supranational institution that were in an unrealized loss position as of June 30, 2015, to return contractual principal and interest based on our review and analysis of independent third-party credit reports on the

14


supranational institution, and the supranational institution's triple-A (or equivalent) rating by each of the nationally recognized statistical rating organizations (NRSROs) that rates it.
 
Debentures issued by U.S. government-owned corporations are not obligations of the U.S. government and not guaranteed by the U.S. government. However, these securities are rated at the same level as the U.S. government by the NRSROs. These ratings reflect the U.S. government's implicit support of the government-owned corporation as well as the entity's underlying business and financial risk.

The probability of default on debt issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) is remote given their status as GSEs and their support from the U.S. government.

The U.S. government-guaranteed securities that we hold are MBS issued by the Government National Mortgage Association (Ginnie Mae). The strength of Ginnie Mae's guarantees as a direct obligation from the U.S. government is sufficient to protect us from losses based on current expectations.

For MBS issued by Fannie Mae and Freddie Mac, which we sometimes refer to as agency MBS in this report, the strength of the issuers' guarantees through direct obligation or support from the U.S. government is sufficient to protect us from losses based on current expectations.

Held-to-Maturity Securities

HFA Securities. We have reviewed our investments in HFA securities and have determined that unrealized losses reflect the impact of normal market yield and spread fluctuations and illiquidity in the credit markets. We have determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral, including an assessment of past payment history (no shortfalls of principal or interest), property vacancy rates, debt service ratios, over-collateralization and other credit enhancement, and third-party bond insurance as applicable. As of June 30, 2015, none of our held-to-maturity investments in HFA securities that are in an unrealized loss position were rated below investment grade by an NRSRO. Because the decline in market value is attributable to changes in interest rates, credit spreads, and illiquidity in this market and not to a significant deterioration in the fundamental credit quality of these obligations, and because we do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider these investments to be other-than-temporarily impaired at June 30, 2015.
 
Agency MBS. For agency MBS, we determined that the strength of the issuers' guarantees through direct obligation or support from the U.S. government is sufficient to protect us from losses based on current expectations. Additionally, there have been no shortfalls of principal or interest on any such security. As a result, we have determined that, as of June 30, 2015, all of the gross unrealized losses on such MBS are temporary. We do not believe that the declines in market value of these securities are attributable to credit quality, and because we do not intend to sell the investments, nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. To ensure consistency when determining the other-than-temporary impairment for private-label residential MBS and certain home equity loan investments (including home equity ABS) among all FHLBanks, the FHLBanks use an FHLBank System governance committee (the OTTI Governance Committee) and a formal process to ensure consistency in key other-than-temporary impairment modeling assumptions used for purposes of their cash-flow analyses for the majority of these securities. We use the FHLBanks' uniform framework and approved assumptions for purposes of our other-than-temporary impairment cash-flow analyses of our private-label residential MBS and certain home equity loan investments. For additional information see Item 8 — Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment in the 2014 Annual Report.
 
To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of our private-label residential MBS were performed. These analyses use two third-party models.
 
The first third-party model considers borrower characteristics and the particular attributes of the loans underlying our securities, in conjunction with assumptions about current home prices and future changes in home prices and interest rates, producing monthly projections of prepayments, defaults, loan modifications, and loss severities. A significant input to the first model is the forecast of future housing-price changes, based on an assessment of individual housing markets for the relevant states and core-based statistical areas (CBSA), as defined by the United States Office of Management and Budget. The OTTI Governance Committee developed a short-term housing-price forecast, with projected changes ranging from a decrease of 2.0 percent to an

15


increase of 8.0 percent over the 12-month period beginning April 1, 2015. For the vast majority of markets, the projected short-term housing-price changes range from an increase of 2.0 percent to an increase of 5.0 percent. Thereafter, we have projected a unique recovery path for each relevant geographic area based on an internally developed framework derived from historical data.

The month-by-month projections of future loan level performance are derived from the first model to determine projected prepayments, defaults, loan modifications, and loss severities. These projections are then input into a second model that allocates the cash flows and losses among the various classes in the securitization structure in accordance with the cash-flow and loss-allocation rules prescribed by the securitization structure. 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. The projected cash flows are based on a number of assumptions and expectations and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path described in the prior paragraph.

For those securities for which an other-than-temporary impairment was determined to have occurred during the three months ended June 30, 2015, the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS and home equity loan investments in each category shown (dollars in thousands).
 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Year of Securitization
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A Private-label residential MBS (1)
 
 
 
 
 
 
 
 
 
 
2007
 
$
50,731

 
6.3
%
 
44.1
%
 
37.5
%
 
%
2006
 
60,688

 
10.3

 
27.8

 
38.5

 

2005
 
23,273

 
7.0

 
26.8

 
38.0

 
30.6

2004 and prior
 
2,584

 
13.1

 
16.2

 
5.0

 
3.8

Total
 
$
137,276

 
8.3
%
 
33.4
%
 
37.4
%
 
5.3
%
_______________________
(1)
Securities are classified in the table above based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.
 
The following table sets forth our securities for which other-than-temporary impairment credit losses were recognized during the life of the security through June 30, 2015 (dollars in thousands). Securities are classified in the table below based on their classifications at the time of issuance. 
 
June 30, 2015
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
54,384

 
$
46,936

 
$
37,272

 
$
47,621

Private-label residential MBS – Alt-A
1,369,762

 
1,007,710

 
766,799

 
1,047,631

ABS backed by home equity loans – Subprime
4,101

 
3,680

 
2,961

 
3,735

Total other-than-temporarily impaired securities
$
1,428,247

 
$
1,058,326

 
$
807,032

 
$
1,098,987

_______________________
(1)
We have instituted litigation in relation to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.


16


The following table presents a roll-forward of the amounts related to credit losses recognized in earnings. The roll-forward is the amount of credit losses on investment securities on which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss (dollars in thousands).
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of year
$
559,725

 
$
595,560

 
$
568,652

 
$
603,786

Additions:
 
 
 
 
 
 
 
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
1,429

 
399

 
1,775

 
857

Reductions:
 
 
 
 
 
 
 
Increase in cash flows expected to be collected which are recognized over the remaining life of the security(2)
(9,813
)
 
(8,625
)
 
(19,086
)
 
(17,309
)
Balance at end of period
$
551,341

 
$
587,334

 
$
551,341

 
$
587,334

_______________________
(1)
For the three months ended June 30, 2015 and 2014, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to April 1, 2015 and 2014. For the six months ended June 30, 2015 and 2014, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2015 and 2014.
(2)
Represents amounts accreted as interest income during the current period.

Note 7 — Advances
 
General Terms. At June 30, 2015, and December 31, 2014, we had advances outstanding with interest rates ranging from (0.17) percent to 7.72 percent and (0.22) percent to 8.37 percent, respectively, as summarized below (dollars in thousands). Advances with negative interest rates contain embedded interest-rate features that have met the requirements to be separated from the host contract and are recorded as stand-alone derivatives, and which we economically hedge with derivatives containing offsetting interest-rate features.
 
June 30, 2015
 
December 31, 2014
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
8,879

 
0.45
%
 
$
19,863

 
0.44
%
Due in one year or less
21,799,346

 
0.45

 
20,561,912

 
0.41

Due after one year through two years
3,718,382

 
2.17

 
4,114,587

 
1.63

Due after two years through three years
3,327,720

 
2.27

 
3,564,747

 
2.68

Due after three years through four years
1,801,212

 
2.09

 
2,299,457

 
2.16

Due after four years through five years
1,555,863

 
1.95

 
1,087,673

 
2.11

Thereafter
1,721,263

 
2.91

 
1,626,475

 
2.98

Total par value
33,932,665

 
1.10
%
 
33,274,714

 
1.11
%
Premiums
30,128

 
 

 
32,887

 
 

Discounts
(17,980
)
 
 

 
(18,549
)
 
 

Market value of bifurcated derivatives (1)
1,953

 
 
 
1,467

 
 
Hedging adjustments
158,677

 
 

 
191,555

 
 

Total
$
34,105,443

 
 

 
$
33,482,074

 
 

_________________________
(1)
At June 30, 2015, and December 31, 2014, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as a stand-alone derivative.

At June 30, 2015, and December 31, 2014, we had putable advances outstanding totaling $2.2 billion and $2.3 billion, respectively.


17


The following table sets forth our advances outstanding by the year of contractual maturity or next put date for putable advances (dollars in thousands):
Year of Contractual Maturity or Next Put Date, Par Value
June 30, 2015
 
December 31, 2014
Overdrawn demand-deposit accounts
$
8,879

 
$
19,863

Due in one year or less
23,765,671

 
22,737,137

Due after one year through two years
2,883,357

 
3,767,187

Due after two years through three years
2,355,670

 
2,155,922

Due after three years through four years
1,661,962

 
1,931,707

Due after four years through five years
1,535,863

 
1,036,423

Thereafter
1,721,263

 
1,626,475

Total par value
$
33,932,665

 
$
33,274,714


At both June 30, 2015, and December 31, 2014, we had callable advances outstanding totaling $30.0 million.

Interest-Rate-Payment Terms. The following table details interest-rate-payment types for our outstanding advances (dollars in thousands):
Par value of advances
June 30, 2015
 
December 31, 2014
Fixed-rate
$
28,097,886

 
$
27,236,551

Variable-rate
5,834,779

 
6,038,163

Total par value
$
33,932,665

 
$
33,274,714

 
Credit-Risk Exposure and Security Terms. At June 30, 2015, and December 31, 2014, we had $11.6 billion and $10.7 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to four borrowers at June 30, 2015, and three borrowers at December 31, 2014, representing 34.1 percent and 32.0 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Prepayment Fees. For the three and six months ended June 30, 2015 and 2014, net advance prepayment fees recognized in income are reflected in the following table (dollars in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Prepayment fees received from borrowers
 
$
279

 
$
1,127

 
$
3,896

 
$
7,822

Less: hedging fair-value adjustments on prepaid advances
 

 
(359
)
 
(2,731
)
 
(552
)
Less: net premiums associated with prepaid advances
 

 

 

 
(3,928
)
Less: deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 

 

 
(246
)
 
(80
)
Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 

 

 
3,102

 

Net prepayment fees recognized in income
 
$
279

 
$
768

 
$
4,021

 
$
3,262


Note 8 — Mortgage Loans Held for Portfolio

We invest in mortgage loans through the Mortgage Partnership Finance® (MPF® program). These investments (MPF loans) are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio.

The following table presents certain characteristics of these investments (dollars in thousands):

18


 
June 30, 2015
 
December 31, 2014
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
587,679

 
$
570,663

Fixed-rate 20- and 30-year single-family mortgages
2,924,304

 
2,852,669

Premiums
63,971

 
62,554

Discounts
(2,442
)
 
(2,761
)
Deferred derivative gains, net
2,423

 
2,835

Total mortgage loans held for portfolio
3,575,935

 
3,485,960

Less: allowance for credit losses
(1,100
)
 
(2,012
)
Total mortgage loans, net of allowance for credit losses
$
3,574,835

 
$
3,483,948

 
The following table details the par value of mortgage loans held for portfolio (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
Conventional mortgage loans
$
3,091,973

 
$
2,997,669

Government mortgage loans
420,010

 
425,663

Total par value
$
3,511,983

 
$
3,423,332

 
See Note 9 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF," are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 9 — Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2014 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower, an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

At June 30, 2015, and December 31, 2014, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the three months ended June 30, 2015 and 2014.

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at June 30, 2015, and December 31, 2014. At June 30, 2015, and December 31, 2014, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2014 Annual Report.

Government Mortgage Loans Held for Portfolio

Based on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of June 30, 2015, and December 31, 2014. In addition, these mortgage loans are not placed on

19


nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2014 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on our conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2014 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below set forth certain key credit quality indicators for our investments in mortgage loans at June 30, 2015, and December 31, 2014 (dollars in thousands):
 
June 30, 2015
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
23,477

 
$
17,516

 
$
40,993

Past due 60-89 days delinquent
9,177

 
4,700

 
13,877

Past due 90 days or more delinquent
26,684

 
7,095

 
33,779

Total past due
59,338

 
29,311

 
88,649

Total current loans
3,103,513

 
402,429

 
3,505,942

Total mortgage loans
$
3,162,851

 
$
431,740

 
$
3,594,591

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
13,968

 
$
2,393

 
$
16,361

Serious delinquency rate (2)
0.89
%
 
1.64
%
 
0.98
%
Past due 90 days or more still accruing interest
$

 
$
7,095

 
$
7,095

Loans on nonaccrual status (3)
$
27,313

 
$

 
$
27,313

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.


20


 
December 31, 2014
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
32,068

 
$
19,811

 
$
51,879

Past due 60-89 days delinquent
9,834

 
4,591

 
14,425

Past due 90 days or more delinquent
37,927

 
7,467

 
45,394

Total past due
79,829

 
31,869

 
111,698

Total current loans
2,986,749

 
405,808

 
3,392,557

Total mortgage loans
$
3,066,578

 
$
437,677

 
$
3,504,255

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
13,709

 
$
2,786

 
$
16,495

Serious delinquency rate (2)
1.27
%
 
1.71
%
 
1.32
%
Past due 90 days or more still accruing interest
$

 
$
7,467

 
$
7,467

Loans on nonaccrual status (3)
$
38,832

 
$

 
$
38,832

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Collectively Evaluated Mortgage Loans. We evaluate the credit risk of our investments in conventional mortgage loans for impairment on a collective basis that considers loan-pool-specific attribute data at the master commitment pool level, applies estimated loss severities, and incorporates available credit enhancements to establish our best estimate of probable incurred losses at the reporting date. We do not consider credit-enhancement cash flows that are projected and assessed as not probable of receipt in reducing estimated losses. Migration analysis is a methodology for estimating the rate of default experienced on pools of similar loans based on our historical experience. We apply migration analysis to conventional loans that are currently not past due, loans that are 30 to 59 days past due, 60 to 89 days past due, and 90 to 179 days past due. We then estimate the dollar amount of loans in these categories that we believe are likely to migrate to a realized loss position and apply a loss severity factor to estimate losses that would be incurred at the statement of condition date. Additionally, for our investments in loans modified under our temporary loan modification plan, we measure the present value of expected future cash flows discounted at the loan's effective interest rate on the effective date of a loan modification and reduce the carrying value of the loan accordingly.

Individually Evaluated Mortgage Loans. Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no credit enhancement from a participating financial institution to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss on these loans on an individual loan basis. Loans that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. The resulting incurred loss is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs.

Charge-Off Policy. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. As discussed in Note 2 — Recently Issued and Adopted Accounting Guidance, the charge-off requirements of AB 2012-02 were implemented on January 1, 2015. We now record a charge-off when a conventional mortgage loan is 180 or more days past due, when the borrower has filed for bankruptcy protection and the loan is at least 30 days past due, or when there is evidence of fraud. Confirming events also 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 we determine that the recorded investment in the loan is not likely to be recovered.


21


Individually Evaluated Impaired Loans. The following tables present the recorded investment, par value, and any related allowance for impaired conventional loans individually assessed for impairment at June 30, 2015, and December 31, 2014, and the average recorded investment and interest income recognized on these loans during the three and six months ended June 30, 2015 and 2014 (dollars in thousands).
 
 
As of June 30, 2015
 
As of December 31, 2014
 
 
Recorded Investment
 
Par Value
 
Related Allowance
 
Recorded Investment
 
Par Value
 
Related Allowance
Individually evaluated impaired mortgage loans with no related allowance
 
$
31,153

 
$
31,116

 
$

 
$
6,679

 
$
6,654

 
$

Individually evaluated impaired mortgage loans with a related allowance
 

 

 

 
3,097

 
3,073

 
544

Total individually evaluated impaired mortgage loans
 
$
31,153

 
$
31,116

 
$

 
$
9,776

 
$
9,727

 
$
544


 
 
For the Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
31,759

 
$
129

 
$
3,637

 
$
44

Individually evaluated impaired mortgage loans with a related allowance
 

 

 
2,538

 
2

Total individually evaluated impaired mortgage loans
 
$
31,759

 
$
129

 
$
6,175

 
$
46

 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
32,557

 
$
249

 
$
3,676

 
$
92

Individually evaluated impaired mortgage loans with a related allowance
 

 

 
2,839

 
13

Total individually evaluated impaired mortgage loans
 
$
32,557

 
$
249

 
$
6,515

 
$
105


Roll-Forward of Allowance for Credit Losses on Mortgage Loans. The following table presents a roll-forward of the allowance for credit losses on conventional mortgage loans for the three and six months ended June 30, 2015 and 2014, as well as the recorded investment in mortgage loans by impairment methodology at June 30, 2015 and 2014 (dollars in thousands). The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.

22


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
1,350

 
$
1,812

 
$
2,012

 
$
2,221

Charge-offs, net of recoveries
(27
)
 
(13
)
 
(629
)
 
(100
)
(Reduction of) provision for credit losses
(223
)
 
243

 
(283
)
 
(79
)
Balance, end of period
$
1,100

 
$
2,042

 
$
1,100

 
$
2,042

Ending balance, individually evaluated for impairment
$

 
$
605

 
$

 
$
605

Ending balance, collectively evaluated for impairment
$
1,100

 
$
1,437

 
$
1,100

 
$
1,437

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
31,153

 
$
6,142

 
$
31,153

 
$
6,142

Collectively evaluated for impairment
$
3,131,698

 
$
2,918,633

 
$
3,131,698

 
$
2,918,633

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

REO. At June 30, 2015, and December 31, 2014, we had $4.1 million and $4.3 million, respectively, in assets classified as REO. During the six months ended June 30, 2015 and 2014, we sold REO assets with a recorded carrying value of $3.6 million and $4.4 million, respectively. Upon the sale of REO properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, we recognized net gains totaling $321,000 and net losses totaling $387,000 during the six months ended June 30, 2015 and 2014, respectively. Gains and losses on the sale of REO assets are recorded in other income.

Note 10 — Derivatives and Hedging Activities     

The following table presents the fair value of derivatives, including the effect of netting adjustments and cash collateral as of June 30, 2015, and December 31, 2014 (dollars in thousands):


23


 
June 30, 2015
 
December 31, 2014
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
14,534,641

 
$
36,333

 
$
(493,603
)
 
$
12,579,525

 
$
26,381

 
$
(553,967
)
Forward-start interest-rate swaps
752,800

 
169

 
(29,652
)
 
1,096,800

 

 
(42,209
)
Total derivatives designated as hedging instruments
15,287,441

 
36,502

 
(523,255
)
 
13,676,325

 
26,381

 
(596,176
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
454,000

 
78

 
(19,653
)
 
423,000

 
31

 
(19,849
)
Interest-rate caps or floors
300,000

 

 

 
300,000

 

 

Mortgage-delivery commitments (1)
26,986

 
29

 
(85
)
 
26,927

 
71

 
(8
)
Total derivatives not designated as hedging instruments
780,986

 
107

 
(19,738
)
 
749,927

 
102

 
(19,857
)
Total notional amount of derivatives
$
16,068,427

 
 

 
 

 
$
14,426,252

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
36,609

 
(542,993
)
 
 
 
26,483

 
(616,033
)
Netting adjustments and cash collateral including related accrued interest (2)
 

 
(8,166
)
 
66,578

 
 
 
(11,935
)
 
57,144

Derivative assets and derivative liabilities
 

 
$
28,443

 
$
(476,415
)
 
 
 
$
14,548

 
$
(558,889
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $60.7 million and $45.5 million at June 30, 2015, and December 31, 2014, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $2.3 million and $290,000 at June 30, 2015, and December 31, 2014, respectively.

Net losses on derivatives and hedging activities recorded in other (loss) income for the three and six months ended June 30, 2015 and 2014 were as follows (dollars in thousands):


24


 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$
(1,087
)
 
$
965

 
$
(1,715
)
 
$
1,459

Cash flow hedge ineffectiveness
 
184

 
(35
)
 
104

 
(170
)
Total net (losses) gains related to derivatives designated as hedging instruments
 
(903
)
 
930

 
(1,611
)
 
1,289

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
403

 
(2,807
)
 
(2,675
)
 
(4,643
)
Interest-rate caps or floors
 

 
(25
)
 

 
(42
)
Mortgage-delivery commitments
 
(642
)
 
610

 
(215
)
 
721

Total net losses related to derivatives not designated as hedging instruments
 
(239
)
 
(2,222
)
 
(2,890
)
 
(3,964
)
Net losses on derivatives and hedging activities
 
$
(1,142
)
 
$
(1,292
)
 
$
(4,501
)
 
$
(2,675
)

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedge relationships and the impact of those derivatives on our net interest income for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):
 
For the Three Months Ended June 30, 2015
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
39,168

 
$
(38,764
)
 
$
404

 
$
(32,611
)
Investments
54,244

 
(53,694
)
 
550

 
(9,439
)
COs – bonds
(11,130
)
 
9,089

 
(2,041
)
 
15,265

Total
$
82,282

 
$
(83,369
)
 
$
(1,087
)
 
$
(26,785
)
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
8,124

 
$
(8,040
)
 
$
84

 
$
(33,019
)
Investments
(21,709
)
 
21,994

 
285

 
(9,504
)
Deposits
(391
)
 
391

 

 
397

COs – bonds
12,869

 
(12,273
)
 
596

 
13,136

 Total
$
(1,107
)
 
$
2,072

 
$
965

 
$
(28,990
)


25


 
For the Six Months Ended June 30, 2015
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
33,311

 
$
(32,878
)
 
$
433

 
$
(64,510
)
Investments
27,245

 
(26,368
)
 
877

 
(18,921
)
COs – bonds
4,269

 
(7,294
)
 
(3,025
)
 
30,963

Total
$
64,825

 
$
(66,540
)
 
$
(1,715
)
 
$
(52,468
)
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
30,109

 
$
(29,881
)
 
$
228

 
$
(66,430
)
Investments
(53,269
)
 
53,785

 
516

 
(18,998
)
Deposits
(781
)
 
781

 

 
794

COs – bonds
20,755

 
(20,040
)
 
715

 
23,773

 Total
$
(3,186
)
 
$
4,645

 
$
1,459

 
$
(60,861
)
____________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

The following table presents the losses recognized in accumulated other comprehensive loss, the losses reclassified from accumulated other comprehensive loss into income, and the effect of our hedging activities on our net losses on derivatives and hedging activities in the statement of income for our forward-start interest-rate swaps associated with CO bond hedged items in cash-flow hedge relationships (dollars in thousands).
Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Gains (Losses) Recognized in Other Comprehensive Loss on Derivatives (Effective Portion)
 
Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)
 
(Losses) Gains Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)
 
Gains (Losses) Recognized in Net Losses on Derivatives and Hedging Activities (Ineffective Portion)
Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2015
 
$
12,773

 
Interest expense
 
$
(5,628
)
 
$
184

For the Three Months Ended June 30, 2014
 
(13,726
)
 
Interest expense
 
(720
)
 
(35
)
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2015
 
630

 
Interest expense
 
(10,520
)
 
104

For the Six Months Ended June 30, 2014
 
(19,740
)
 
Interest expense
 
(720
)
 
(170
)

For the six months ended June 30, 2015 and 2014, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of June 30, 2015, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is nine years.

As of June 30, 2015, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $27.1 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a derivatives clearing organization (DCO), our counterparty for such derivatives. We also enter into derivatives that are not cleared (bilateral derivatives). Certain of our bilateral derivatives master-netting agreements contain provisions that require us to post additional collateral with our bilateral derivatives counterparties if our credit ratings are lowered. Under the terms that govern such

26


agreements, if our credit rating is lowered by Moody's Investor Services (Moody's) or Standard and Poor's Rating Service (S&P) to a certain level, we are required to deliver additional collateral on bilateral derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all bilateral derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at June 30, 2015, was $495.6 million, for which we had delivered collateral with a post-haircut value of $403.8 million in accordance with the terms of the master-netting agreements. The following table sets forth the post-haircut value of incremental collateral that certain bilateral derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at June 30, 2015 (dollars in thousands).

Post-Haircut Value of Incremental Collateral to be Delivered
 as of June 30, 2015

Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral(2)
AA+
 
AA or AA-
 
$
30,282

AA-
 
A+, A or A-
 
35,320

A-
 
below A-
 
36,673

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.
(2)
Additional collateral of $1.1 million could be called by counterparties as of June 30, 2015, at our current credit rating of AA+ (based on the lower of our credit ratings from S&P and Moody's) and is not included in the table.

For cleared derivatives, the DCO determines initial margin requirements. We note that we clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are futures commission merchants registered with the U.S. Commodity Futures Trading Commission (the CFTC). Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at June 30, 2015.

Offsetting of Certain Derivatives. We present derivatives, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing member and/or by counterparty.

The following table presents separately the fair value of derivatives meeting or not meeting netting requirements, with and without the legal right of offset, including the related collateral received from or pledged to counterparties, based on the terms of our master netting arrangements or similar agreements as of June 30, 2015, and December 31, 2014 (dollars in thousands).


27


 
 
June 30, 2015
 
December 31, 2014
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivatives meeting netting requirements
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
12,919

 
$
(507,233
)
 
$
20,083

 
$
(578,073
)
Cleared derivatives
 
23,661

 
(35,675
)
 
6,329

 
(37,952
)
Total gross recognized amount
 
36,580

 
(542,908
)
 
26,412

 
(616,025
)
Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
(12,622
)
 
30,903

 
(19,481
)
 
19,191

Cleared derivatives
 
4,456

 
35,675

 
7,546

 
37,953

Total gross amounts of netting adjustments and cash collateral
 
(8,166
)
 
66,578

 
(11,935
)
 
57,144

Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
297

 
(476,330
)
 
602

 
(558,882
)
Cleared derivatives
 
28,117

 

 
13,875

 
1

Total net amounts after netting adjustments and cash collateral
 
28,414

 
(476,330
)
 
14,477

 
(558,881
)
Derivatives not meeting netting requirements
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
29

 
(85
)
 
71

 
(8
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
 
Bilateral derivatives
 
297

 
(476,330
)
 
602

 
(558,882
)
Cleared derivatives
 
28,117

 

 
13,875

 
1

Mortgage delivery commitments
 
29

 
(85
)
 
71

 
(8
)
Total derivative assets and total derivative liabilities presented in the statement of condition
 
28,443

 
(476,415
)
 
14,548

 
(558,889
)
 
 
 
 
 
 
 
 
 
Non-cash collateral received or pledged not offset (1)
 
 
 
 
 
 
 
 
Can be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 

 
86,821

 

 
66,056

Cannot be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 

 
313,635

 

 
392,944

Total non-cash collateral received or pledged, not offset
 

 
400,456

 

 
459,000

 Net amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
297

 
(75,874
)
 
602

 
(99,882
)
Cleared derivatives
 
28,117

 

 
13,875

 
2

Mortgage delivery commitments
 
29

 
(85
)
 
71

 
(8
)
Total net amount
 
$
28,443

 
$
(75,959
)
 
$
14,548

 
$
(99,888
)
_______________________
(1)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At June 30, 2015, and December 31, 2014, we had additional net credit exposure of $2.9 million and $4.0 million, respectively, due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

We offer demand and overnight deposits for members and qualifying nonmembers. In addition, we offer short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans. We classify these items as "other" in the following table.


28


The following table details interest- and noninterest-bearing deposits (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
Interest-bearing
 

 
 
Demand and overnight
$
367,032

 
$
340,441

Other
4,584

 
5,120

Noninterest-bearing
 

 
 

Other
30,450

 
23,770

Total deposits
$
402,066

 
$
369,331


Note 12 — Consolidated Obligations

COs - Bonds. The following table sets forth the outstanding CO bonds for which we were primarily liable at June 30, 2015, and December 31, 2014, by year of contractual maturity (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
 
 

 
 

 
 

 
 

Due in one year or less
$
7,751,955

 
1.17
%
 
$
6,675,745

 
1.41
%
Due after one year through two years
5,921,530

 
1.36

 
5,573,745

 
1.46

Due after two years through three years
4,510,140

 
1.91

 
4,842,570

 
1.91

Due after three years through four years
2,198,780

 
1.67

 
2,392,380

 
1.77

Due after four years through five years
2,221,455

 
2.09

 
2,244,815

 
1.95

Thereafter
3,305,000

 
2.92

 
3,599,085

 
2.79

Total par value
25,908,860

 
1.69
%
 
25,328,340

 
1.79
%
Premiums
178,846

 
 

 
199,628

 
 

Discounts
(16,763
)
 
 

 
(19,386
)
 
 

Hedging adjustments
4,486

 
 

 
(2,808
)
 
 

 
$
26,075,429

 
 

 
$
25,505,774

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.

Our CO bonds outstanding at June 30, 2015, and December 31, 2014, included (dollars in thousands):

 
June 30, 2015
 
December 31, 2014
Par value of CO bonds
 

 
 

Noncallable and nonputable
$
21,331,860

 
$
20,853,340

Callable
4,577,000

 
4,475,000

Total par value
$
25,908,860

 
$
25,328,340


The following is a summary of the CO bonds for which we were primarily liable at June 30, 2015, and December 31, 2014, by year of contractual maturity or next call date for callable CO bonds (dollars in thousands):

29


Year of Contractual Maturity or Next Call Date
 
June 30, 2015
 
December 31, 2014
Due in one year or less
 
$
12,043,955

 
$
10,805,745

Due after one year through two years
 
5,266,530

 
4,928,745

Due after two years through three years
 
3,440,140

 
4,252,570

Due after three years through four years
 
1,948,780

 
2,027,380

Due after four years through five years
 
1,646,455

 
1,619,815

Thereafter
 
1,563,000

 
1,694,085

Total par value
 
$
25,908,860

 
$
25,328,340


The following table sets forth the CO bonds for which we were primarily liable by interest-rate-payment type at June 30, 2015, and December 31, 2014 (dollars in thousands):

 
June 30, 2015
 
December 31, 2014
Par value of CO bonds
 

 
 

Fixed-rate
$
22,911,860

 
$
22,513,340

Simple variable-rate
2,170,000

 
1,970,000

Step-up
827,000

 
845,000

Total par value
$
25,908,860

 
$
25,328,340


COs – Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
June 30, 2015
$
25,972,593

 
$
25,974,666

 
0.08
%
December 31, 2014
$
25,309,608

 
$
25,312,040

 
0.08
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 13 — Affordable Housing Program

The following table presents a roll-forward of the AHP liability for the six months ended June 30, 2015, and year ended December 31, 2014 (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
Balance at beginning of year
$
66,993

 
$
62,591

AHP expense for the period
20,445

 
17,623

AHP direct grant disbursements
(9,233
)
 
(12,012
)
AHP subsidy for AHP advance disbursements
(625
)
 
(1,321
)
Return of previously disbursed grants and subsidies
20

 
112

Balance at end of period
$
77,600

 
$
66,993


Note 14 — Capital

We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), and FHFA regulations:
 
1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.

30


 
2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.
 
3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.
 
The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

The following tables demonstrate our compliance with our regulatory capital requirements at June 30, 2015, and December 31, 2014 (dollars in thousands):
Risk-Based Capital Requirements
June 30,
2015
 
December 31,
2014
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,482,244

 
$
2,413,114

Mandatorily redeemable capital stock
57,268

 
298,599

Retained earnings
1,063,854

 
901,658

Total permanent capital
$
3,603,366

 
$
3,613,371

Risk-based capital requirement
 

 
 

Credit-risk capital
$
399,363

 
$
414,765

Market-risk capital
93,498

 
75,560

Operations-risk capital
147,858

 
147,097

Total risk-based capital requirement
$
640,719

 
$
637,422

Permanent capital in excess of risk-based capital requirement
$
2,962,647

 
$
2,975,949

 
 
June 30, 2015
 
December 31, 2014
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
640,719

 
$
3,603,366

 
$
637,422

 
$
3,613,371

Total regulatory capital
 
$
2,257,995

 
$
3,603,366

 
$
2,204,267

 
$
3,613,371

Total capital-to-asset ratio
 
4.0
%
 
6.4
%
 
4.0
%
 
6.6
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
2,822,493

 
$
5,405,049

 
$
2,755,334

 
$
5,420,057

Leverage capital-to-assets ratio
 
5.0
%
 
9.6
%
 
5.0
%
 
9.8
%

Note 15 — Accumulated Other Comprehensive Loss

The following table presents a summary of changes in accumulated other comprehensive loss for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):


31


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, March 31, 2014
 
$
(96,936
)
 
$
(312,335
)
 
$
(57,603
)
 
$
(3,117
)
 
$
(469,991
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
24,842

 

 
(13,726
)
 

 
11,116

Accretion of noncredit loss
 

 
12,612

 

 

 
12,612

Net actuarial loss
 

 

 

 
(373
)
 
(373
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
399

 

 

 
399

Amortization - hedging activities (2)
 

 

 
724

 

 
724

Amortization - pension and postretirement benefits (3)
 

 

 

 
126

 
126

Other comprehensive income (loss)
 
24,842

 
13,011

 
(13,002
)
 
(247
)
 
24,604

Balance, June 30, 2014
 
$
(72,094
)
 
$
(299,324
)
 
$
(70,605
)
 
$
(3,364
)
 
$
(445,387
)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2015
 
$
(53,034
)
 
$
(264,357
)
 
$
(88,675
)
 
$
(5,763
)
 
$
(411,829
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(14,793
)
 

 
12,773

 

 
(2,020
)
Accretion of noncredit loss
 

 
11,990

 

 

 
11,990

Net actuarial loss
 

 

 

 
(8
)
 
(8
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
1,073

 

 

 
1,073

Amortization - hedging activities (4)
 

 

 
5,631

 

 
5,631

Amortization - pension and postretirement benefits (3)
 

 

 

 
100

 
100

Other comprehensive (loss) income
 
(14,793
)
 
13,063

 
18,404

 
92

 
16,766

Balance, June 30, 2015
 
$
(67,827
)
 
$
(251,294
)
 
$
(70,271
)
 
$
(5,671
)
 
$
(395,063
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified from accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $720,000 recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $5.6 million recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

32


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2013
 
$
(101,765
)
 
$
(324,928
)
 
$
(51,594
)
 
$
(3,229
)
 
$
(481,516
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
29,671

 

 
(19,740
)
 

 
9,931

Accretion of noncredit loss
 

 
24,747

 

 

 
24,747

Net actuarial loss
 
 
 
 
 
 
 
(373
)
 
(373
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
857

 

 

 
857

Amortization - hedging activities (2)
 

 

 
729

 

 
729

Amortization - pension and postretirement benefits (3)
 

 

 

 
238

 
238

Other comprehensive income (loss)
 
29,671

 
25,604

 
(19,011
)
 
(135
)
 
36,129

Balance, June 30, 2014
 
$
(72,094
)
 
$
(299,324
)
 
$
(70,605
)
 
$
(3,364
)
 
$
(445,387
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$
(73,623
)
 
$
(275,942
)
 
$
(81,428
)
 
$
(5,993
)
 
$
(436,986
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
5,796

 

 
630

 

 
6,426

Accretion of noncredit loss
 

 
23,453

 

 

 
23,453

Net actuarial loss
 

 

 

 
(8
)
 
(8
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
1,195

 

 

 
1,195

Amortization - hedging activities (4)
 

 

 
10,527

 

 
10,527

Amortization - pension and postretirement benefits (3)
 

 

 

 
330

 
330

Other comprehensive income
 
5,796

 
24,648

 
11,157

 
322

 
41,923

Balance, June 30, 2015
 
$
(67,827
)
 
$
(251,294
)
 
$
(70,271
)
 
$
(5,671
)
 
$
(395,063
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified from accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $720,000 recorded in CO bond interest expense and $9,000 recorded in net losses on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $10.5 million recorded in CO bond interest expense and $7,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

Note 16 — Employee Retirement Plans

Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. The plan covers substantially all of our officers and employees. During the quarter ending June 30, 2015, in addition to our required contribution, we made a voluntary contribution of $5.0 million to the Pentegra Defined Benefit Plan.


33


Qualified Defined Contribution Plan. We also participate in the Pentegra Defined Contribution Plan for Financial
Institutions, a tax-qualified defined contribution plan. The plan covers substantially all of our officers and employees. We contribute a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. Our matching contributions are charged to compensation and benefits expense.

Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals.

The following table sets forth our net pension costs under our defined benefit plan and expenses relating to our defined contribution plans (dollars in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Qualified Defined Benefit Multiemployer Plan - Pentegra Defined Benefit Plan
$
5,102

 
$
763

 
$
5,205

 
$
1,526

Qualified Defined Contribution Plan - Pentegra Defined Contribution Plan
280

 
268

 
528

 
504

Nonqualified Defined Contribution Plan - Thrift Benefit Equalization Plan
9

 
7

 
119

 
106


Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust intended to meet future benefit obligations.

Postretirement Benefits. We sponsor a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. We provide life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.

The following table presents the components of net periodic benefit cost for our nonqualified supplemental defined benefit retirement plan and postretirement benefits for the three and six months ended June 30, 2015 and 2014 (dollars in thousands):

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Three Months Ended June 30,
 
Postretirement Benefits For the Three Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
172

 
$
151

 
$
12

 
$
5

Interest cost
 
121

 
123

 
9

 
8

Amortization of net actuarial loss
 
97

 
125

 
3

 
1

Net periodic benefit cost
 
$
390

 
$
399

 
$
24

 
$
14

 
 
 
 
 
 
 
 
 
 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Six Months Ended June 30,
 
Postretirement Benefits For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
343

 
$
276

 
$
19

 
$
12

Interest cost
 
242

 
231

 
16

 
16

Amortization of net actuarial loss
 
326

 
237

 
4

 
1

Net periodic benefit cost
 
$
911

 
$
744

 
$
39

 
$
29


Note 17 — Fair Values

34



A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 1 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2014 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the six months ended June 30, 2015, other than the following:

Impaired Mortgage Loans. The fair value of impaired conventional mortgage loans is based on the lower of the carrying value of the loans or fair value of the collateral less estimated costs to sell. The fair value of impaired government mortgage loans is equal to the unpaid principal balance.

The carrying values, fair values, and fair-value hierarchy of our financial instruments at June 30, 2015, and December 31, 2014, were as follows (dollars in thousands). These fair values do not represent an estimate of our overall market value as a going concern, which would take into account, among other things, our future business opportunities and the net profitability of our assets and liabilities.
 
June 30, 2015
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
844,228

 
$
844,228

 
$
844,228

 
$

 
$

 
$

Interest-bearing deposits
267

 
267

 
267

 

 

 

Securities purchased under agreements to resell
5,050,000

 
5,049,902

 

 
5,049,902

 

 

Federal funds sold
3,530,000

 
3,529,987

 

 
3,529,987

 

 

Trading securities(1)
237,414

 
237,414

 

 
237,414

 

 

Available-for-sale securities(1)
6,011,270

 
6,011,270

 

 
6,011,270

 

 

Held-to-maturity securities
2,939,093

 
3,260,144

 

 
1,798,553

 
1,461,591

 

Advances
34,105,443

 
34,240,643

 

 
34,240,643

 

 

Mortgage loans, net
3,574,835

 
3,664,424

 

 
3,628,001

 
36,423

 

Accrued interest receivable
77,828

 
77,828

 

 
77,828

 

 

Derivative assets(1)
28,443

 
28,443

 

 
36,609

 

 
(8,166
)
Other assets (1)
15,312

 
15,312

 
6,965

 
8,347

 

 

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(402,066
)
 
(402,066
)
 

 
(402,066
)
 

 

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(26,075,429
)
 
(26,293,950
)
 

 
(26,293,950
)
 

 

Discount notes
(25,972,593
)
 
(25,973,298
)
 

 
(25,973,298
)
 

 

Mandatorily redeemable capital stock
(57,268
)
 
(57,268
)
 
(57,268
)
 

 

 

Accrued interest payable
(79,508
)
 
(79,508
)
 

 
(79,508
)
 

 

Derivative liabilities(1)
(476,415
)
 
(476,415
)
 

 
(542,993
)
 

 
66,578

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
(157
)
 

 
(157
)
 

 

Standby letters of credit
(891
)
 
(891
)
 

 
(891
)
 

 

_______________________
(1)
Carried at fair value on a recurring basis.


35


 
December 31, 2014
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
1,124,536

 
$
1,124,536

 
$
1,124,536

 
$

 
$

 
$

Interest-bearing deposits
163

 
163

 
163

 

 

 

Securities purchased under agreements to resell
5,250,000

 
5,249,941

 

 
5,249,941

 

 

Federal funds sold
2,550,000

 
2,549,982

 

 
2,549,982

 

 

Trading securities(1)
244,969

 
244,969

 

 
244,969

 

 

Available-for-sale securities(1)
5,481,978

 
5,481,978

 

 
5,481,978

 

 

Held-to-maturity securities
3,352,189

 
3,710,815

 

 
2,176,268

 
1,534,547

 

Advances
33,482,074

 
33,618,345

 

 
33,618,345

 

 

Mortgage loans, net
3,483,948

 
3,612,078

 

 
3,612,078

 

 

Accrued interest receivable
77,411

 
77,411

 

 
77,411

 

 

Derivative assets(1)
14,548

 
14,548

 

 
26,483

 

 
(11,935
)
Other assets(1)
11,200

 
11,200

 
5,682

 
5,518

 

 

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(369,331
)
 
(369,330
)
 

 
(369,330
)
 

 

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(25,505,774
)
 
(25,741,697
)
 

 
(25,741,697
)
 

 

Discount notes
(25,309,608
)
 
(25,310,307
)
 

 
(25,310,307
)
 

 

Mandatorily redeemable capital stock
(298,599
)
 
(298,599
)
 
(298,599
)
 

 

 

Accrued interest payable
(91,225
)
 
(91,225
)
 

 
(91,225
)
 

 

Derivative liabilities(1)
(558,889
)
 
(558,889
)
 

 
(616,033
)
 

 
57,144

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
430

 

 
430

 

 

Standby letters of credit
(745
)
 
(745
)
 

 
(745
)
 

 

_______________________
(1)
Carried at fair value on a recurring basis.

Fair Value Measured on a Recurring Basis

The following tables present our assets and liabilities that are measured at fair value on the statement of condition, which are recorded on a recurring basis at June 30, 2015, and December 31, 2014, by fair-value hierarchy level (dollars in thousands):
 

36


 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed – single-family MBS
$

 
$
11,254

 
$

 
$

 
$
11,254

GSEs – single-family MBS

 
1,859

 

 

 
1,859

GSEs – multifamily MBS

 
224,301

 

 

 
224,301

Total trading securities

 
237,414

 

 

 
237,414

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
438,831

 

 

 
438,831

U.S. government-owned corporations

 
269,903

 

 

 
269,903

GSEs

 
117,706

 

 

 
117,706

U.S. government guaranteed – single-family MBS

 
178,910

 

 

 
178,910

U.S. government guaranteed – multifamily MBS

 
823,863

 

 

 
823,863

GSEs – single-family MBS

 
4,182,057

 

 

 
4,182,057

Total available-for-sale securities

 
6,011,270

 

 

 
6,011,270

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
36,580

 

 
(8,166
)
 
28,414

Mortgage delivery commitments

 
29

 

 

 
29

Total derivative assets

 
36,609

 

 
(8,166
)
 
28,443

Other assets
6,965

 
8,347

 

 

 
15,312

Total assets at fair value
$
6,965

 
$
6,293,640

 
$

 
$
(8,166
)
 
$
6,292,439

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(542,908
)
 
$

 
$
66,578

 
$
(476,330
)
Mortgage delivery commitments

 
(85
)
 

 

 
(85
)
Total liabilities at fair value
$

 
$
(542,993
)
 
$

 
$
66,578

 
$
(476,415
)
_______________________
(1)
These amounts represent the application of the netting requirements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


37


 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed – single-family MBS
$

 
$
12,235

 
$

 
$

 
$
12,235

GSEs – single-family MBS

 
2,300

 

 

 
2,300

GSEs – multifamily MBS

 
230,434

 

 

 
230,434

Total trading securities

 
244,969

 

 

 
244,969

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
447,685

 

 

 
447,685

U.S. government-owned corporations

 
284,997

 

 

 
284,997

GSEs

 
123,453

 

 

 
123,453

U.S. government guaranteed – single-family MBS

 
206,028

 

 

 
206,028

U.S. government guaranteed – multifamily MBS

 
871,423

 

 

 
871,423

GSEs – single-family MBS

 
3,548,392

 

 

 
3,548,392

Total available-for-sale securities

 
5,481,978

 

 

 
5,481,978

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
26,412

 

 
(11,935
)
 
14,477

Mortgage delivery commitments

 
71

 

 

 
71

Total derivative assets

 
26,483

 

 
(11,935
)
 
14,548

Other assets
5,682

 
5,518

 

 

 
11,200

Total assets at fair value
$
5,682

 
$
5,758,948

 
$

 
$
(11,935
)
 
$
5,752,695

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(616,025
)
 
$

 
$
57,144

 
$
(558,881
)
Mortgage delivery commitments

 
(8
)
 

 

 
(8
)
Total liabilities at fair value
$

 
$
(616,033
)
 
$

 
$
57,144

 
$
(558,889
)
_______________________
(1)
These amounts represent the application of the netting requirements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).
 
The following tables present financial assets by level within the fair-value hierarchy which are recorded at fair value on a nonrecurring basis during the six months ended June 30, 2015, and at December 31, 2014 (dollars in thousands).
 
 
For the Six Months Ended June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$

 
$

 
$
10,724

 
$
10,724

Mortgage loans held for portfolio

 

 
8,052

 
8,052

REO

 

 
1,637

 
1,637

Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
20,413

 
$
20,413


38



 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$

 
$

 
$
23,259

 
$
23,259

REO

 

 
843

 
843

Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
24,102

 
$
24,102


Note 18 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of June 30, 2015, and through the filing of this report, we believe there is a remote likelihood that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by FHFA regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at June 30, 2015, and December 31, 2014. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $800.9 billion and $796.4 billion at June 30, 2015, and December 31, 2014, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

The following table sets forth our off-balance-sheet commitments as of June 30, 2015, and December 31, 2014 (dollars in thousands):
 
 
June 30, 2015
 
December 31, 2014
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
4,454,029

 
$
127,845

 
$
4,581,874

 
$
4,065,555

 
$
125,381

 
$
4,190,936

Commitments for unused lines of credit - advances (2)
 
1,262,441

 

 
1,262,441

 
1,255,445

 

 
1,255,445

Commitments to make additional advances
 
668,876

 
39,341

 
708,217

 
592,430

 
63,185

 
655,615

Commitments to invest in mortgage loans
 
26,986

 

 
26,986

 
26,927

 

 
26,927

Unsettled CO bonds, at par (3)
 
83,750

 

 
83,750

 
15,000

 

 
15,000

Unsettled CO discount notes, at par
 

 

 

 
500,000

 

 
500,000

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At June 30, 2015, and December 31, 2014, these amounts totaled $16.9 million and $26.2 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $4.0 million at June 30, 2015.

39


(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.
(3)
We had $70.0 million and $15.0 million in unsettled CO bonds that were hedged with associated interest-rate swaps at June 30, 2015, and December 31, 2014, respectively.

Standby Letters of Credit. A standby letter of credit is a financing arrangement pursuant to which we agree for a fee to fund the associated obligation to a third-party beneficiary should the primary obligor fail to fund such obligation. If we are required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized advance to the primary obligor. Standby letters of credit are fully collateralized at the time of issuance. Based on our credit analyses and collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.

The original terms of these standby letters of credit range from final expiries in 20 days to 20 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $891,000 and $745,000 at June 30, 2015, and December 31, 2014, respectively.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.
 
Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 10 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Note 19 — Transactions with Shareholders
 
Related Parties. We define related parties as members with 10 percent or more of the voting interests of our capital stock outstanding. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of our stock that is required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At June 30, 2015, and December 31, 2014, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding. The following tables present transactions with shareholders whose holdings of capital stock exceed 10 percent or more of total capital stock outstanding at June 30, 2015, and December 31, 2014 (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
317,502

 
12.5
%
 
$
5,516,467

 
16.3
%
 
$
612

 
2.1
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
317,502

 
11.7
%
 
$
5,768,096

 
17.3
%
 
$
283

 
1.0
%


40


We held sufficient collateral to support the advances to the above institutions such that we do not expect to incur any credit losses on these advances.

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three and six months ended June 30, 2015 and 2014 as follows (dollars in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Citizens Bank, N.A.
 
2015
 
2014
 
2015
 
2014
Interest income on advances
 
$
3,447

 
$
3,592

 
$
7,163

 
$
5,750

Fees on letters of credit
 
1,050

 
868

 
2,039

 
1,658


Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member. 

The following table presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of June 30, 2015
$
88,897

 
3.5
%
 
$
1,198,088

 
3.5
%
 
$
1,244

 
4.2
%
As of December 31, 2014
79,386

 
2.9

 
918,127

 
2.8

 
1,227

 
4.2


Note 20 — Subsequent Events

On July 24, 2015, the board of directors declared a cash dividend at an annualized rate of 3.28 percent based on capital stock balances outstanding during the second quarter of 2015. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $20.6 million and was paid on August 4, 2015.

41


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are “forward-looking statements.” These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2014 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report, and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. We do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
 
Forward-looking statements in this report may include, among others, our expectations for:

income, retained earnings, and dividend payouts;
repurchases of stock in excess of a shareholder’s total stock investment requirement (excess stock);
credit losses on advances and investments in mortgage loans and ABS, particularly private-label MBS;
balance-sheet changes and components thereof, such as changes in advances balances and the size of our portfolio of investments in mortgage loans;
our minimum retained earnings target; and
the interest-rate environment in which we do business.

Actual results may differ from forward-looking statements for many reasons, including, but not limited to:
 
changes in interest rates, the rate of inflation (or deflation), housing prices, employment rates, and the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government;
changes in demand for our advances and other products;
the willingness of our members to do business with us;
changes in the financial health of our members;
changes in borrower defaults on mortgage loans;
changes in the credit performance and loss severities of our investments;
changes in prepayment rates on advances and investments;
the value of collateral we hold as security for obligations of our members and counterparties;
issues and events across the FHLBank System and in the political arena that may lead to legislative, regulatory, judicial, or other developments impacting demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, the manner in which we operate, or the organization and structure of the FHLBank System;
competitive forces including, without limitation, other sources of funding available to our members, other entities borrowing funds in the capital markets, and our ability to attract and retain skilled employees;
the pace of technological change and our ability to develop and support technology and information systems sufficient to manage the risks of our business effectively;
the loss of members due to, among other ways, member withdrawals, mergers and acquisitions;
changes in investor demand for COs;
changes in the terms or availability of derivatives and other agreements we enter into in support of our business operations;
the timing and volume of market activity;
the volatility of reported results due to changes in the fair value of certain assets and liabilities, including, but not limited to, private-label MBS;
our ability to introduce new (or adequately adapt current) products and services and successfully manage the risks associated with our products and services, including new types of collateral used to secure advances;
losses arising from litigation filed against us or one or more of the other FHLBanks;

42


gains resulting from legal claims we have;
losses arising from our joint and several liability on COs;
significant business disruptions resulting from vendor or third-party failure, natural or other disasters, cyberincidents, acts of war, or terrorism; and
new accounting standards.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2014 Annual Report.

EXECUTIVE SUMMARY

We experienced record quarterly net income.

We had a record quarterly net income of $149.6 million for the three months ended June 30, 2015, an increase of $118.3 million from $31.3 million for the three months ended June 30, 2014. The increase was driven by $134.7 million in litigation settlement income related to certain of our investments in private-label MBS. Our retained earnings grew to $1.1 billion at June 30, 2015, from $901.7 million at December 31, 2014. We continue to satisfy all regulatory capital requirements as of June 30, 2015.

The board of directors has increased the dividend payout formula.

On July 24, 2015, our board of directors declared a cash dividend that was equivalent to an annual yield of 3.28 percent, the approximate daily average three-month LIBOR yield for the first quarter of 2015 plus 300 basis points. This represents an increase in the dividend payout formula by 150 basis points. In declaring this dividend, the board stated that it expects to declare cash dividends at a spread over three-month LIBOR of this level prospectively, though a quarterly loss or a significant, adverse event or trend could cause the dividend to be altered or suspended and in all events the dividend remains at the board’s sole discretion, subject to applicable regulatory requirements. We believe our retained earnings level is appropriate to support our business objectives and expect to use retained earnings to support a stable dividend in lieu of intentionally continuing to grow our retained earnings balance.

The board of directors has authorized management to implement an excess stock management program.

We expect to use this program to make unilateral repurchases of excess stock from shareholders on a pro rata basis as a tool to optimize our capital level. For additional information on the program, see — Liquidity and Capital Resources — Internal Capital Practices and Policies — Excess Stock Management Program.

Advances balances continue to be stable.

Advances balances increased $623.4 million to $34.1 billion at June 30, 2015, from $33.5 billion at December 31, 2014. The increase was concentrated primarily in long-term advances.

Accretable yields from investments in private-label MBS continue to contribute strongly to net income.

For the three months ended June 30, 2015 and 2014, we recognized $9.8 million and $8.6 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2014 Annual Report.

The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $1.3 billion at June 30, 2015, compared with $6.4 billion at its peak in September 30, 2007, and other-than-temporary impairment credit losses recognized in recent periods have, on average, dropped significantly from those of earlier periods.

ECONOMIC CONDITIONS

Economic Environment


43


After a slow start at the beginning of 2015, the US economy grew moderately at 2.3 percent during the second quarter of 2015, benefiting from labor market gains and housing market recovery. Consistent with trends over the past two years, we expect data to show that the New England region continues to trail the pace of the national recovery in the second quarter of 2015.

Both the New England region and the United States experienced continued payroll employment growth and year-over-year unemployment rate declines during the second quarter of 2015. The pace of job creation accelerated in the second quarter of 2015 and the national unemployment rate declined to 5.3 percent during June 2015.

The United States and New England housing markets continued to improve in 2015. Looking ahead, we would expect that the recent strengthening in the broader economy, accompanied by meaningful income growth, should increase housing market activity, amid historically low mortgage rates and a gradual easing of lending standards.

Interest-Rate Environment

We note that on July 29, 2015, the Federal Open Market Committee issued a press release providing that an accommodative stance of monetary policy remains appropriate and that when it decides to take a less accommodative stance, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two percent.

The following chart illustrates the interest-rate environment.


The federal funds target rate has remained constant at zero to 0.25 percent during the time periods displayed in the chart above.

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition for December 31, 2014, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.

44


SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
 (dollars in thousands)
 
 
 
 
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
56,449,865

 
$
53,065,843

 
$
55,106,677

 
$
51,904,866

 
$
54,582,707

Investments(1)
 
17,768,044

 
17,501,603

 
16,879,299

 
15,165,427

 
18,533,830

Advances
 
34,105,443

 
31,179,231

 
33,482,074

 
31,409,529

 
32,299,253

Mortgage loans held for portfolio, net(2)
 
3,574,835

 
3,537,841

 
3,483,948

 
3,403,883

 
3,353,946

Deposits and other borrowings
 
402,066

 
429,343

 
369,331

 
520,864

 
466,755

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Bonds
 
26,075,429

 
25,416,779

 
25,505,774

 
25,011,037

 
23,796,134

Discount notes
 
25,972,593

 
23,451,068

 
25,309,608

 
22,559,486

 
26,062,381

Total consolidated obligations
 
52,048,022

 
48,867,847

 
50,815,382

 
47,570,523

 
49,858,515

Mandatorily redeemable capital stock
 
57,268

 
57,281

 
298,599

 
244,045

 
603,987

Class B capital stock outstanding-putable(3)
 
2,482,244

 
2,440,386

 
2,413,114

 
2,393,508

 
2,489,859

Unrestricted retained earnings
 
890,443

 
781,261

 
764,888

 
746,329

 
717,271

Restricted retained earnings
 
173,411

 
143,484

 
136,770

 
129,863

 
120,288

Total retained earnings
 
1,063,854

 
924,745

 
901,658

 
876,192

 
837,559

Accumulated other comprehensive loss
 
(395,063
)
 
(411,829
)
 
(436,986
)
 
(440,462
)
 
(445,387
)
Total capital
 
3,151,035

 
2,953,302

 
2,877,786

 
2,829,238

 
2,882,031

Other Information
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio(4)
 
6.38
%
 
6.45
%
 
6.56
%
 
6.77
%
 
7.20
%
_____________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold.
(2)
The allowance for credit losses amounted to $1.1 million, $1.4 million, $2.0 million, $2.4 million, and $2.0 million, for the quarters ended June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, and June 30, 2014, respectively.
(3)
Capital stock is putable at the option of a member, subject to applicable restrictions.
(4)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to the Financial Statements — Note 14 — Capital.


45


SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
 (dollars in thousands)
 
 
 
 
 
Results of Operations for the Three Months Ended
 
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
Net interest income
 
$
56,187

 
$
54,463

 
$
57,072

 
$
51,604

 
$
50,047

(Reduction of) provision for credit losses
 
(223
)
 
(60
)
 
(233
)
 
373

 
243

Net impairment losses on held-to-maturity securities recognized in earnings
 
(1,429
)
 
(346
)
 
(411
)
 
(311
)
 
(399
)
Litigation settlements
 
134,690

 
23

 
(12
)
 
17,543

 
159

Other (loss) income
 
(1,908
)
 
(278
)
 
(1,721
)
 
553

 
1,900

Other expense
 
21,450

 
16,584

 
16,655

 
15,673

 
16,373

AHP assessments
 
16,678

 
3,767

 
3,969

 
5,470

 
3,778

Net income
 
$
149,635

 
$
33,571

 
$
34,537

 
$
47,873

 
$
31,313

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
10,525

 
$
10,484

 
$
9,071

 
$
9,240

 
$
9,347

Dividend payout ratio
 
7.03
%
 
31.23
%
 
26.26
%
 
19.30
%
 
29.85
%
Weighted-average dividend rate(1)
 
1.76

 
1.74

 
1.49

 
1.48

 
1.49

Return on average equity(2)
 
19.57

 
4.67

 
4.80

 
6.70

 
4.38

Return on average assets
 
1.11

 
0.24

 
0.26

 
0.35

 
0.24

Net interest margin(3)
 
0.42

 
0.40

 
0.43

 
0.38

 
0.38

Average equity to average assets
 
5.66

 
5.20

 
5.40

 
5.24

 
5.44

_______________________
(1)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends during the preceding quarter.
(2)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss, and total retained earnings.
(3)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

RESULTS OF OPERATIONS

Second Quarter of 2015 Compared with Second Quarter of 2014

Net income for the quarter ending June 30, 2015, was $149.6 million, compared with net income of $31.3 million for the same period in 2014. The increase was primarily impacted by the $134.7 million in litigation settlement income, and, to a lesser, extent an increase of $6.1 million in net interest income. See Part II Other Information — Item 1 — Legal Proceedings for additional information on our litigation settlements. The increases to net income were partially offset by a $12.9 million increase in AHP assessments, a $4.8 million increase in compensation and benefits expense resulting from a voluntary contribution of $5.0 million to our qualified defined benefit multiemployer pension plan, and an increase of $4.6 million in unrealized losses on trading securities.

Six Months Ended June 30, 2015, Compared with Six Months Ended June 30, 2014

Net income for the six months ended June 30, 2015, was $183.2 million, compared with net income of $67.4 million for the same period in 2014. The increase was primarily impacted by the $134.7 million in litigation settlement income, and, to a lesser extent, an increase of $6.0 million in net interest income. The increases to net income were partially offset by a $12.3 million increase in AHP assessments, a $4.4 million increase in compensation and benefits expense resulting from the voluntary contribution of $5.0 million to our qualified defined benefit multiemployer pension plan, and an increase of $4.1 million in unrealized losses on trading securities.

Net Interest Income


46


Second Quarter of 2015 Compared with Second Quarter of 2014

Net interest income for the quarter ending June 30, 2015, was $56.2 million, compared with $50.1 million for the same period in 2014. The $6.1 million increase in net interest income was primarily due to an increase in average earning assets of $1.2 billion, from $52.6 billion for 2014 to $53.8 billion for 2015, driven by a $1.4 billion increase in average advances balances.

Additionally, $9.8 million of the second quarter 2015 interest income represented the accretion of discount from private-label MBS that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $1.2 million from $8.6 million recorded in the second quarter of 2014.

Net interest spread was 0.38 percent for the quarter ended June 30, 2015, a five basis point increase from the same period in 2014, and net interest margin was 0.42 percent, a four basis point increase from the same period in 2014. The average yield on earning assets increased two basis points resulting primarily from the increased accretion of discounts on securities attributable to significant improvement in projected cash flows described above as well as reduced amortization of premiums on agency MBS. The average yield on interest-bearing liabilities decreased three basis points due to a significant reduction in the average balance of mandatorily-redeemable capital stock and to otherwise favorable funding costs experienced during the period.

Six Months Ended June 30, 2015, Compared with Six Months Ended June 30, 2014

Net interest income for the six months ended June 30, 2015, was $110.7 million, compared with $104.6 million for the same period in 2014. The $6.0 million increase in net interest income was primarily due to an increase in average earning assets, which increased $4.5 billion from $50.2 billion for 2014, to $54.7 billion for 2015. The increase in average earning assets was driven by a $2.4 billion increase in average advance balances and a $1.9 billion increase in average investments balances. For additional information see — Rate and Volume Analysis.

Additionally, $19.1 million of our interest income for the six months ended June 30, 2015, was from the accretion of discount on private-label MBS that were other-than-temporarily impaired in prior periods, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $1.8 million from $17.3 million of accretion recorded in the six months ended June 30, 2014.

Net interest spread was 0.37 percent for the six months ended June 30, 2015, unchanged from the same period in 2014, and net interest margin was 0.41 percent, a one basis point decrease from the same period in 2014.

The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.


47


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
32,105,867

 
$
58,720

 
0.73
%
 
$
30,725,579

 
$
57,589

 
0.75
%
Securities purchased under agreements to resell
 
4,774,451

 
1,104

 
0.09

 
5,422,528

 
788

 
0.06

Federal funds sold
 
4,371,154

 
1,223

 
0.11

 
4,747,055

 
904

 
0.08

Investment securities(2)
 
8,902,458

 
50,257

 
2.26

 
8,323,185

 
46,070

 
2.22

Mortgage loans
 
3,560,480

 
30,190

 
3.40

 
3,349,335

 
31,459

 
3.77

Other earning assets
 
38,959

 
14

 
0.14

 
5,155

 
2

 
0.16

Total interest-earning assets
 
53,753,369

 
141,508

 
1.06

 
52,572,837

 
136,812

 
1.04

Other non-interest-earning assets
 
418,826

 
 
 
 
 
373,003

 
 
 
 
Fair-value adjustments on investment securities
 
(17,687
)
 
 
 
 
 
(164,500
)
 
 
 
 
Total assets
 
$
54,154,508

 
$
141,508

 
1.05
%
 
$
52,781,340

 
$
136,812

 
1.04
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
24,180,863

 
$
4,909

 
0.08
%
 
$
23,590,387

 
$
3,873

 
0.07
%
Bonds
 
25,588,252

 
79,923

 
1.25

 
24,202,163

 
80,193

 
1.33

Deposits
 
405,273

 
19

 
0.02

 
519,253

 
14

 
0.01

Mandatorily redeemable capital stock
 
57,264

 
468

 
3.28

 
727,184

 
2,683

 
1.48

Other borrowings
 
6,458

 
2

 
0.12

 
7,352

 
2

 
0.11

Total interest-bearing liabilities
 
50,238,110

 
85,321

 
0.68

 
49,046,339

 
86,765

 
0.71

Other non-interest-bearing liabilities
 
849,485

 
 
 
 
 
864,683

 
 
 
 
Total capital
 
3,066,913

 
 
 
 
 
2,870,318

 
 
 
 
Total liabilities and capital
 
$
54,154,508

 
$
85,321

 
0.63
%
 
$
52,781,340

 
$
86,765

 
0.66
%
Net interest income
 
 

 
$
56,187

 
 
 
 

 
$
50,047

 
 
Net interest spread
 
 

 
 

 
0.38
%
 
 

 
 

 
0.33
%
Net interest margin
 
 

 
 

 
0.42
%
 
 

 
 

 
0.38
%
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.


48


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1) 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1) 
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Advances
 
$
31,865,531

 
$
119,870

 
0.76
%
 
$
29,455,060

 
$
115,954

 
0.79
%
Securities purchased under agreements to resell
 
4,833,608

 
1,907

 
0.08

 
5,172,928

 
1,381

 
0.05

Federal funds sold
 
5,475,823

 
2,850

 
0.10

 
3,935,425

 
1,389

 
0.07

Investment securities(2)
 
8,962,171

 
98,181

 
2.21

 
8,253,141

 
91,569

 
2.24

Mortgage loans
 
3,530,607

 
61,241

 
3.50

 
3,351,662

 
63,218

 
3.80

Other earning assets
 
31,210

 
25

 
0.16

 
3,292

 
2

 
0.12

Total interest-earning assets
 
54,698,950

 
284,074

 
1.05
%
 
50,171,508

 
273,513

 
1.10
%
Other non-interest-earning assets
 
414,654

 
 
 
 
 
362,804

 
 
 
 
Fair-value adjustments on investment securities
 
(21,490
)
 
 
 
 
 
(187,657
)
 
 
 
 
Total assets
 
$
55,092,114

 
$
284,074

 
1.04
%
 
$
50,346,655

 
$
273,513

 
1.10
%
Liabilities and capital
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
$
25,148,007

 
$
10,422

 
0.08
%
 
$
21,038,638

 
$
6,895

 
0.07
%
Bonds
 
25,629,431

 
162,164

 
1.28

 
24,192,297

 
155,704

 
1.30

Deposits
 
399,770

 
33

 
0.02

 
523,484

 
21

 
0.01

Mandatorily redeemable capital stock
 
67,181

 
803

 
2.41

 
851,598

 
6,274

 
1.49

Other borrowings
 
3,523

 
2

 
0.11

 
4,611

 
3

 
0.13

Total interest-bearing liabilities
 
51,247,912

 
173,424

 
0.68
%
 
46,610,628

 
168,897

 
0.73
%
Other non-interest-bearing liabilities
 
853,831

 
 
 
 
 
865,968

 
 
 
 
Total capital
 
2,990,371

 
 
 
 
 
2,870,059

 
 
 
 
Total liabilities and capital
 
$
55,092,114

 
$
173,424

 
0.63
%
 
$
50,346,655

 
$
168,897

 
0.68
%
Net interest income
 
 

 
$
110,650

 
 
 
 

 
$
104,616

 
 
Net interest spread
 
 

 
 

 
0.37
%
 
 

 
 

 
0.37
%
Net interest margin
 
 

 
 

 
0.41
%
 
 

 
 

 
0.42
%
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense for the three and six months ended June 30, 2015 and 2014. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
 

49


Rate and Volume Analysis
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 June 30, 2015 vs. 2014
 
For the Six Months Ended
June 30, 2015 vs. 2014
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
2,547

 
$
(1,416
)
 
$
1,131

 
$
9,217

 
$
(5,301
)
 
$
3,916

Securities purchased under agreements to resell
 
(104
)
 
420

 
316

 
(96
)
 
622

 
526

Federal funds sold
 
(76
)
 
395

 
319

 
660

 
801

 
1,461

Investment securities
 
3,256

 
931

 
4,187

 
7,780

 
(1,168
)
 
6,612

Mortgage loans
 
1,907

 
(3,176
)
 
(1,269
)
 
3,267

 
(5,244
)
 
(1,977
)
Other earning assets
 
12

 

 
12

 
22

 
1

 
23

Total interest income
 
7,542

 
(2,846
)
 
4,696

 
20,850

 
(10,289
)
 
10,561

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
99

 
937

 
1,036

 
1,498

 
2,029

 
3,527

Bonds
 
4,462

 
(4,732
)
 
(270
)
 
9,129

 
(2,669
)
 
6,460

Deposits
 
(4
)
 
9

 
5

 
(6
)
 
18

 
12

Mandatorily redeemable capital stock
 
(3,767
)
 
1,552

 
(2,215
)
 
(7,926
)
 
2,455

 
(5,471
)
Other borrowings
 

 

 

 
(1
)
 

 
(1
)
Total interest expense
 
790

 
(2,234
)
 
(1,444
)
 
2,694

 
1,833

 
4,527

Change in net interest income
 
$
6,752

 
$
(612
)
 
$
6,140

 
$
18,156

 
$
(12,122
)
 
$
6,034


Average Balance of Advances Outstanding

The average balance of total advances increased $2.4 billion, or 8.2 percent, for the six months ended June 30, 2015, compared with the same period in 2014. We experienced a rise in average advances balances during the year concentrated in floating-rate and long-term fixed-rate advances, as discussed under — Executive Summary — Advances Balances Continue to be Stable. We cannot predict whether this trend will continue. The following table summarizes average balances of advances outstanding during the six months ended June 30, 2015 and 2014, by product type.


50


Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
For the Six Months Ended June 30,
 
 
2015
 
2014
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
12,708,066

 
$
10,420,776

Short-term
 
9,229,553

 
10,029,968

Putable
 
2,121,081

 
2,433,175

Overnight
 
896,539

 
803,091

Amortizing
 
863,908

 
869,315

All other fixed-rate advances
 
72,000

 
72,000

 
 
25,891,147

 
24,628,325

Variable-rate indexed advances—par value
 
 
 
 
Simple variable
 
5,666,553

 
4,396,271

Putable
 
52,448

 
101,039

All other variable-rate indexed advances
 
45,085

 
35,569

 
 
5,764,086

 
4,532,879

Total average par value
 
31,655,233

 
29,161,204

 
 
 
 
 
Net premiums
 
14,102

 
23,971

Market value of bifurcated derivatives
 
2,114

 
1,354

Hedging adjustments
 
194,082

 
268,531

Total average balance of advances
 
$
31,865,531

 
$
29,455,060


In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $5.2 billion for the six months ended June 30, 2015. Therefore, a significant portion of our advances, including overnight, short-term fixed-rate, fixed-rate putable, certain fixed-rate bullet, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $21.1 billion for the six months ended June 30, 2015, representing 66.3 percent of the total average balance of advances outstanding during the six months ended June 30, 2015. The average balance of all such advances totaled $19.8 billion for the six months ended June 30, 2014, representing 67.4 percent of the total average balance of advances outstanding during the six months ended June 30, 2014.

For the six months ended June 30, 2015 and 2014, net prepayment fee income on advances and investments were $4.3 million and $4.4 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $1.2 billion, or 13.5 percent, for the six months ended June 30, 2015, compared with the same period in 2014. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. We have increased these investments principally in response to growth in our advances balances to maintain our contingency liquidity in the event that we are unable to refinance debt used to fund advances. For the six months ended June 30, 2015, average balances of federal funds sold increased $1.5 billion and average balances of securities purchased under agreements to resell decreased $339.3 million in comparison to the six months ended June 30, 2014.

Average investment-securities balances increased $709.0 million, or 8.6 percent for the six months ended June 30, 2015, compared with the same period in 2014, an increase consisting primarily of a $962.3 million increase in MBS offset by a $245.7 million decline in agency and supranational institutions' debentures.


51


Average Balance of COs

Average CO balances increased $5.5 billion, or 12.3 percent, for the six months ended June 30, 2015, compared with the same period in 2014, resulting from our increased funding needs principally due to the increase in our average advances balances and short-term money-market investment balances. This overall increase consisted of increases of $4.1 billion in CO discount notes and $1.4 billion in CO bonds.

The average balance of CO discount notes represented approximately 49.5 percent of total average COs during the six months ended June 30, 2015, as compared with 46.5 percent of total average COs during the six months ended June 30, 2014. The average balance of CO bonds represented 50.5 percent and 53.5 percent of total average COs outstanding during the six months ended June 30, 2015 and 2014, respectively. The growth in average CO discount notes is commensurate with our asset growth, which has been primarily in short-term or short-term-indexed floating rate assets.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy. The following tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities, and net unrealized gains (losses) on trading securities for the three and six months ended June 30, 2015 and 2014, (dollars in thousands).

 
 
For the Three Months Ended June 30, 2015
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,170
)
 
$

 
$
(184
)
 
$
(1,147
)
 
$
(2,501
)
 
Net interest settlements included in net interest income (2)
 
(32,611
)
 
(9,439
)
 

 
15,265

 
(26,785
)
 
Total net interest income
 
(33,781
)
 
(9,439
)
 
(184
)
 
14,118

 
(29,286
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
404

 
550

 

 
(2,041
)
 
(1,087
)
 
Gains on cash-flow hedges
 

 

 

 
184

 
184

 
(Losses) gains on derivatives not receiving hedge accounting
 
(1
)
 
366

 

 
38

 
403

 
Mortgage delivery commitments
 

 

 
(642
)
 

 
(642
)
 
Net gains (losses) on derivatives and hedging activities
 
403

 
916

 
(642
)
 
(1,819
)
 
(1,142
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(33,378
)
 
(8,523
)
 
(826
)
 
12,299

 
(30,428
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(2,393
)
 

 

 
(2,393
)
 
Total net effect of derivatives and hedging activities
 
$
(33,378
)
 
$
(10,916
)
 
$
(826
)
 
$
12,299

 
$
(32,821
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.


52


 
 
For the Three Months Ended June 30, 2014
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,327
)
 
$

 
$
(47
)
 
$

 
$
4,273

 
$
2,899

Net interest settlements included in net interest income (2)
 
(33,019
)
 
(9,504
)
 

 
397

 
13,136

 
(28,990
)
Total net interest income
 
(34,346
)
 
(9,504
)
 
(47
)
 
397

 
17,409

 
(26,091
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
84

 
286

 

 

 
595

 
965

Losses on cash-flow hedges
 

 

 

 

 
(35
)
 
(35
)
(Losses) gains on derivatives not receiving hedge accounting
 

 
(2,901
)
 

 

 
69

 
(2,832
)
Mortgage delivery commitments
 

 

 
610

 

 

 
610

Net gains (losses) on derivatives and hedging activities
 
84

 
(2,615
)
 
610

 

 
629

 
(1,292
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(34,262
)
 
(12,119
)
 
563

 
397

 
18,038

 
(27,383
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
2,209

 

 

 

 
2,209

Total net effect of derivatives and hedging activities
 
$
(34,262
)
 
$
(9,910
)
 
$
563

 
$
397

 
$
18,038

 
$
(25,174
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.
 
 
 
For the Six Months Ended June 30, 2015
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(2,461
)
 
$

 
$
(309
)
 
$
(1,655
)
 
$
(4,425
)
 
Net interest settlements included in net interest income (2)
 
(64,510
)
 
(18,921
)
 

 
30,963

 
(52,468
)
 
Total net interest income
 
(66,971
)
 
(18,921
)
 
(309
)
 
29,308

 
(56,893
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
433

 
877

 

 
(3,025
)
 
(1,715
)
 
Gains on cash-flow hedges
 

 

 

 
104

 
104

 
Gains (losses) on derivatives not receiving hedge accounting
 
1

 
(2,773
)
 

 
97

 
(2,675
)
 
Mortgage delivery commitments
 

 

 
(215
)
 

 
(215
)
 
Net gains (losses) on derivatives and hedging activities
 
434

 
(1,896
)
 
(215
)
 
(2,824
)
 
(4,501
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(66,537
)
 
(20,817
)
 
(524
)
 
26,484

 
(61,394
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(1,112
)
 

 

 
(1,112
)
 
Total net effect of derivatives and hedging activities
 
$
(66,537
)
 
$
(21,929
)
 
$
(524
)
 
$
26,484

 
$
(62,506
)
 
_____________________

53


(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

 
 
For the Six Months Ended June 30, 2014
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(3,381
)
 
$

 
$
(106
)
 
$

 
$
9,455

 
$
5,968

Net interest settlements included in net interest income (2)
 
(66,430
)
 
(18,998
)
 

 
794

 
23,773

 
(60,861
)
Total net interest income
 
(69,811
)
 
(18,998
)
 
(106
)
 
794

 
33,228

 
(54,893
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
228

 
517

 

 

 
714

 
1,459

Losses on cash-flow hedges
 

 

 

 

 
(170
)
 
(170
)
(Losses) Gains on derivatives not receiving hedge accounting
 

 
(4,737
)
 

 

 
52

 
(4,685
)
Mortgage delivery commitments
 

 

 
721

 

 

 
721

Net gains (losses) on derivatives and hedging activities
 
228

 
(4,220
)
 
721

 

 
596

 
(2,675
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(69,583
)
 
(23,218
)
 
615

 
794

 
33,824

 
(57,568
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
2,963

 

 

 

 
2,963

Total net effect of derivatives and hedging activities
 
$
(69,583
)
 
$
(20,255
)
 
$
615

 
$
794

 
$
33,824

 
$
(54,605
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

Net interest margin for the three months ended June 30, 2015 and 2014, was 0.42 percent and 0.38 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.62 percent and 0.60 percent, respectively.

Net interest margin for the six months ended June 30, 2015 and 2014, was 0.41 percent and 0.42 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.60 percent and 0.67 percent, respectively.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $1.7 million for both the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015 and 2014 interest accruals on derivatives classified as economic hedges totaled a net expense of $3.5 million and $3.4 million, respectively.

Other Income (Loss)
 
The following table presents a summary of other income (loss) for the three and six months ended June 30, 2015 and 2014. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.
 

54


Other Income (Loss)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Net (losses) gains related to fair-value hedge ineffectiveness
 
$
(1,087
)
 
$
965

 
$
(1,715
)
 
$
1,459

Net gains (losses) related to cash-flow hedge ineffectiveness
 
184

 
(35
)
 
104

 
(170
)
Net unrealized (losses) gains related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
 
 
Advances
 
6

 
(33
)
 
48

 
(154
)
Trading securities
 
2,130

 
(1,092
)
 
771

 
(1,109
)
Mortgage delivery commitments
 
(642
)
 
610

 
(215
)
 
721

Net interest-accruals related to derivatives not receiving hedge accounting
 
(1,733
)
 
(1,707
)
 
(3,494
)
 
(3,422
)
Net losses on derivatives and hedging activities
 
(1,142
)
 
(1,292
)
 
(4,501
)
 
(2,675
)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(1,429
)
 
(399
)
 
(1,775
)
 
(857
)
Litigation settlements
 
134,690

 
159

 
134,713

 
4,469

Loss on early extinguishment of debt
 
(129
)
 
(369
)
 
(129
)
 
(2,592
)
Service-fee income
 
2,089

 
1,615

 
4,008

 
3,285

Net unrealized (losses) gains on trading securities
 
(2,393
)
 
2,209

 
(1,112
)
 
2,963

Other
 
(333
)
 
(263
)
 
(452
)
 
(399
)
Total other income
 
$
131,353

 
$
1,660

 
$
130,752

 
$
4,194


As noted in the Other Income (Loss) table above, accounting for derivatives and hedged items results in the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.

FINANCIAL CONDITION

Advances

At June 30, 2015, the advances portfolio totaled $34.1 billion, an increase of $623.4 million compared with $33.5 billion at December 31, 2014. For additional information on advances balances trends see Executive Summary — Advances Balances Continue to be Stable.

The following table summarizes advances outstanding by product type at June 30, 2015 and December 31, 2014.

55


 
Advances Outstanding by Product Type
(dollars in thousands)

 
June 30, 2015
 
December 31, 2014
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Long-term
$
13,050,437

 
38.5
%
 
$
12,029,059

 
36.2
%
Short-term
11,070,700

 
32.6

 
10,526,292

 
31.6

Putable
2,080,725

 
6.1

 
2,180,225

 
6.6

Overnight
963,830

 
2.9

 
1,545,869

 
4.6

Amortizing
860,194

 
2.5

 
883,106

 
2.7

All other fixed-rate advances
72,000

 
0.2

 
72,000

 
0.2

 
28,097,886

 
82.8

 
27,236,551

 
81.9

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable
5,711,900

 
16.8

 
5,915,000

 
17.8

Putable
73,000

 
0.2

 
74,000

 
0.2

All other variable-rate indexed advances
49,879

 
0.2

 
49,163

 
0.1

 
5,834,779

 
17.2

 
6,038,163

 
18.1

Total par value
$
33,932,665

 
100.0
%
 
$
33,274,714

 
100.0
%
 
See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.

At June 30, 2015, we had advances outstanding to 315, or 70.5 percent of our 447 members. At December 31, 2014, we had advances outstanding to 314, or 69.9 percent of our 449 members.

Advances Credit Risk

We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to haircuts assigned based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

Category-1: members that are generally in satisfactory financial condition;
Category-2: members that show weakening financial trends in key financial indices and/or regulatory findings; and
Category-3: members with financial weaknesses that present an elevated level of concern. We also place housing associates and non-member borrowers in Category-3.

We lend to insurance company members upon a review of an updated statement of their financial condition and their pledge of sufficient amounts of eligible collateral.

The following table provides information regarding advances outstanding with our borrowers in Category-1, Category-2, Category-3, and insurance company members at June 30, 2015, along with their corresponding collateral balances.


56


Advances Outstanding by Borrower Credit Status Category
As of June 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
268

 
$
25,157,158

 
$
59,882,017

 
238.0
%
Category-2
21

 
6,102,197

 
10,478,441

 
171.7

Category-3
14

 
456,324

 
701,351

 
153.7

Insurance companies
17

 
2,216,985

 
2,386,125

 
107.6

Total
320

 
$
33,932,664

 
$
73,447,934

 
216.5
%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. However, members that are not required to specifically list or deliver collateral may do so nonetheless to reduce the haircut we would otherwise apply to their collateral. Based upon the method by which borrowers pledge collateral to us, the following table shows the total potential lending value of the collateral that borrowers have pledged to us, net of our collateral valuation discounts as of June 30, 2015.

Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
32,637,067

Collateral specifically listed and identified
36,085,304

Collateral delivered to us
9,105,503


We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk in the 2014 Annual Report. At both June 30, 2015, and December 31, 2014, the amount of pledged nontraditional and subprime loan collateral was nine percent of total member borrowing capacity.

We have not recorded any allowance for credit losses on credit products at June 30, 2015, and December 31, 2014, for the reasons discussed in Item 1 Notes to the Financial Statements Note 9 Allowance for Credit Losses.

The following table presents the top five advance-borrowing institutions at June 30, 2015, and the interest earned on outstanding advances to such institutions for the three and six months ended June 30, 2015.

Top Five Advance-Borrowing Institutions
(dollars in thousands)
 
 
June 30, 2015
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended June 30, 2015
Advances Interest Income for the
Six Months Ended June 30, 2015
Citizens Bank, N.A.
 
$
5,516,467

 
16.3
%
 
0.25
%
 
$
3,447

$
7,163

Webster Bank, N.A.
 
2,509,255

 
7.4

 
0.57

 
3,347

6,215

People's United Bank, N.A.
 
2,355,325

 
6.9

 
0.23

 
1,254

2,317

Berkshire Bank
 
1,174,265

 
3.5

 
0.41

 
1,289

2,486

Digital Federal Credit Union
 
715,000

 
2.1

 
1.98

 
3,514

6,707

Total of top five advance-borrowing institutions
 
$
12,270,312

 
36.2
%
 
 
 
$
12,851

$
24,888


57


_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments
 
At June 30, 2015, investment securities and short-term money-market instruments totaled $17.8 billion, compared with $16.9 billion at December 31, 2014.

Short-term money-market investments increased $780.1 million to $8.6 billion at June 30, 2015, compared with December 31, 2014. The increase was comprised of a $980.0 million increase in federal funds sold and a $200.0 million decrease in securities purchased under agreements to resell.

Investment securities increased $108.6 million to $9.2 billion at June 30, 2015, compared with December 31, 2014. The increase was attributable to a $142.1 million increase in MBS offset by a decrease of $29.7 million in agency and supranational institutions' debentures.

Our MBS investment portfolio consists of the following categories of securities as of June 30, 2015, and December 31, 2014. The percentages in the table below are based on carrying value.

Mortgage-Backed Securities
 
June 30, 2015
 
December 31, 2014
Single-family MBS - U.S. government-guaranteed and GSE
69.0
%
 
64.8
%
Multifamily MBS - U.S. government-guaranteed and GSE
18.4

 
21.9

Private-label residential MBS
12.4

 
13.1

ABS backed by home-equity loans
0.2

 
0.2

Total MBS
100.0
%
 
100.0
%

See Item 1 — Notes to the Financial Statements — Note 3 — Trading Securities, Note 4 — Available-for-Sale Securities, Note 5 — Held-to-Maturity Securities, and Note 6 — Other-Than-Temporary Impairment for additional information on our investment securities.

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently consisting of overnight risk only) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. We place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis; currently all such placements expire within one day.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals. We endeavor to reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.

Credit ratings of our investments are provided in the following table.


58


Credit Ratings of Investments at Carrying Value
As of June 30, 2015
(dollars in thousands)
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$

 
$
267

 
$

 
$

 
$

 
$

Securities purchased under agreements to resell
 

 
750,000

 
1,500,000

 
2,800,000

 

 

Federal funds sold
 

 
1,820,000

 
1,710,000

 

 

 

Total money-market instruments
 

 
2,570,267

 
3,210,000

 
2,800,000

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 

 
4,739

 

 

 

 

U.S. government-owned corporations
 

 
269,903

 

 

 

 

GSEs
 

 
117,706

 

 

 

 

Supranational institutions
 
438,831

 

 

 

 

 

HFA securities
 
21,355

 
39,960

 
112,357

 

 

 
2,020

Total non-MBS
 
460,186

 
432,308

 
112,357

 

 

 
2,020

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family (2)
 

 
208,129

 

 

 

 

U.S. government guaranteed - multifamily(2)
 

 
863,618

 

 

 

 

GSE – single-family (2)
 

 
5,440,024

 

 

 

 

GSE – multifamily (2)
 

 
642,603

 

 

 

 

Private-label – residential
 

 
253

 
46,110

 
67,089

 
897,417

 
6

ABS backed by home-equity loans
 
572

 
1,136

 
7,590

 
2,209

 
4,150

 

Total MBS
 
572

 
7,155,763

 
53,700

 
69,298

 
901,567

 
6


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
460,758

 
7,588,071

 
166,057

 
69,298

 
901,567

 
2,026

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
460,758

 
$
10,158,338

 
$
3,376,057

 
$
2,869,298

 
$
901,567

 
$
2,026

_______________________
(1)
Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of June 30, 2015. If there is a split rating, the lowest rating is used.
(2)
The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

At June 30, 2015, our unsecured credit exposure related to money-market instruments and debentures, including accrued interest, was $4.4 billion to ten counterparties and issuers, of which $3.5 billion was for federal funds sold, and $845.0 million was for debentures issued by GSEs and supranational institutions. The following issuers/counterparties individually accounted for greater than 10 percent of total unsecured credit exposure as of June 30, 2015:


59


Issuers / Counterparties Representing Greater Than
10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures
As of June 30, 2015

Issuer / counterparty
 
Percent
Royal Bank of Canada (1)
 
14.9
%
Commonwealth Bank of Australia (1)
 
13.7

Rabobank Nederland (1)
 
13.0

Nordea Bank Finland PLC (1)
 
13.0

Landesbank Baden-Wuerttemberg (1)
 
13.0

Bank of Nova Scotia (1)
 
13.0

Inter-American Development Bank (a supranational institution)
 
10.2

_______________________
(1)
Overnight federal funds sold. We sold federal funds to either the U.S. branch or agency office of the named foreign commercial bank.

Private-Label MBS

Of our $8.7 billion in par value of MBS and ABS investments at June 30, 2015, $1.6 billion in par value are private-label MBS and ABS backed by home equity loans, as set forth in the table below:

Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans
by Fixed Rate or Variable Rate
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
Private-label MBS
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
 
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
Private-label residential MBS
 

 
 

 
 

 
 

 
 

 
 

Prime
$
11,772

 
$
140,393

 
$
152,165

 
$
12,334

 
$
152,296

 
$
164,630

Alt-A
25,427

 
1,453,547

 
1,478,974

 
27,447

 
1,532,827

 
1,560,274

Total private-label residential MBS
37,199

 
1,593,940

 
1,631,139

 
39,781

 
1,685,123

 
1,724,904

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime

 
16,824

 
16,824

 

 
17,440

 
17,440

Total par value of private-label MBS
$
37,199

 
$
1,610,764

 
$
1,647,963

 
$
39,781

 
$
1,702,563

 
$
1,742,344

_______________________
 (1)
The determination of fixed or variable rate is based upon the contractual coupon type of the security.

The following table provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The amounts outstanding as of June 30, 2015, are stratified by year of issuance of the security. The table also sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS, stratified by year of securitization. Average current credit enhancements as of June 30, 2015, reflect the percentage of subordinated class outstanding balances as of June 30, 2015, to our senior class outstanding balances as of June 30, 2015, weighted by the par value of our respective senior class securities, and shown by year of securitization. Average current credit enhancements as of June 30, 2015, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


60


Private-Label MBS and ABS Backed by Home Equity Loans
by Year of Securitization
At June 30, 2015
(dollars in thousands)
 
 
 
Year of Securitization
 
Total
 
2007
 
2006
 
2005
 
2004 and prior
Par value by credit rating
 

 
 

 
 

 
 

 
 

Triple-A
$
598

 
$

 
$

 
$

 
$
598

Double-A
1,389

 

 

 

 
1,389

Single-A
53,701

 

 

 
35,162

 
18,539

Triple-B
69,466

 

 

 
12,954

 
56,512

Below Investment Grade
 
 
 
 
 
 
 
 
 
Double-B
68,325

 

 

 
33,803

 
34,522

Single-B
60,611

 
15,483

 

 
38,973

 
6,155

Triple-C
812,689

 
183,512

 
459,145

 
155,518

 
14,514

Double-C
286,328

 
119,672

 
121,174

 
45,482

 

Single-C
66,881

 
7,077

 
29,157

 
30,647

 

Single-D
227,969

 
59,852

 
60,996

 
106,411

 
710

Unrated
6

 

 

 

 
6

Total
$
1,647,963

 
$
385,596

 
$
670,472

 
$
458,950

 
$
132,945

 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,277,826

 
$
272,171

 
$
474,017

 
$
399,781

 
$
131,857

Gross unrealized gains
71,526

 
27,938

 
30,837

 
12,470

 
281

Gross unrealized losses
(44,735
)
 
(7,113
)
 
(10,378
)
 
(20,378
)
 
(6,866
)
Fair value
$
1,304,617

 
$
292,996

 
$
494,476

 
$
391,873

 
$
125,272

Other-than-temporary impairment for the six months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
$
(580
)
 
$
(550
)
 
$

 
$

 
$
(30
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(1,195
)
 
(407
)
 
(708
)
 
(80
)
 

Net impairment losses on held-to-maturity securities recognized in income
$
(1,775
)
 
$
(957
)
 
$
(708
)
 
$
(80
)
 
$
(30
)
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to par value
79.17
%
 
75.99
%
 
73.75
%
 
85.38
%
 
94.23
%
Original weighted average credit support
26.64

 
28.82

 
28.91

 
26.17

 
10.49

Weighted average credit support
9.49

 
5.15

 
5.30

 
15.57

 
22.27

Weighted average collateral delinquency (1)
24.81

 
29.73

 
27.62

 
19.75

 
13.83

_______________________
 (1)
Represents loans that are 60 days or more delinquent.

Mortgage Loans

We participate in the MPF program. The MPF program is described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2014 Annual Report and in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 8, 2015. As of June 30, 2015, our mortgage loan investment portfolio totaled $3.6 billion, an increase of $90.9 million from December 31, 2014.

Mortgage Loans Credit Risk


61


We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2014 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in the following table:

State Concentrations by Outstanding Principal Balance
 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
June 30, 2015
 
December 31, 2014
 
 

 
 

Massachusetts
44
%
 
44
%
Maine
12

 
11

Wisconsin
12

 
10

Connecticut
6

 
7

New Hampshire
5

 
5

All others
21

 
23

Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $1.1 million at June 30, 2015, compared with $2.0 million at December 31, 2014.

For information on the determination of the allowance at June 30, 2015, see Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses, and for information on our methodology for estimating the allowance, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Allowance for Loan Losses in the 2014 Annual Report.

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis. Our investments in conventional mortgage loans that are delinquent are shown in the following table:

Delinquent Mortgage Loans
(dollars in thousands)
 
June 30, 2015
 
December 31, 2014
Total par value past due 90 days or more and still accruing interest
$
6,822

 
$
7,191

Nonaccrual loans, par value
27,236

 
38,658

Troubled debt restructurings (not included above)
5,986

 
3,045


Mortgage Insurance Companies. We are exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of June 30, 2015, we were the beneficiary of primary mortgage insurance coverage of $65.0 million on $261.2 million of conventional mortgage loans, and supplemental mortgage insurance coverage of $21.7 million on mortgage pools with a total unpaid principal balance of $288.9 million.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments
 

62


All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Derivatives outstanding with counterparties with which we have an enforceable master-netting agreement are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivatives that have been cleared through a clearing member with a DCO are classified as assets or liabilities according to the net fair value of those derivatives that have been transacted through a particular clearing member with a particular DCO. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $28.4 million and $14.5 million as of June 30, 2015, and December 31, 2014, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $476.4 million and $558.9 million as of June 30, 2015, and December 31, 2014, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of June 30, 2015, and December 31, 2014. The notional amount is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount does not represent actual amounts exchanged or our overall exposure to credit and market risk. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under our risk-management policy.
Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
6,082,776

 
$
(159,562
)
 
$
4,771,265

 
$
(192,873
)
 
 
Swaps
 
Economic
 
225,500

 
(1,958
)
 
190,500

 
(1,473
)
Total associated with advances
 
 
 
 
 
6,308,276

 
(161,520
)
 
4,961,765

 
(194,346
)
Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(292,358
)
 
611,915

 
(318,895
)
 
 
Caps
 
Economic
 
300,000

 

 
300,000

 

Total associated with available-for-sale securities
 
 
 
 
 
911,915

 
(292,358
)
 
911,915

 
(318,895
)
Trading securities
 
Swaps
 
Economic
 
210,000

 
(16,995
)
 
210,000

 
(17,766
)
COs
 
Swaps
 
Fair value
 
7,839,950

 
17,590

 
7,196,345

 
3,736

 
 
Swaps
 
Economic
 
18,500

 
14

 
22,500

 
(33
)
 
 
Forward starting swaps
 
Cash Flow
 
752,800

 
(29,482
)
 
1,096,800

 
(42,209
)
Total associated with COs
 
 
 
 
 
8,611,250

 
(11,878
)
 
8,315,645

 
(38,506
)
Total
 
 
 
 
 
16,041,441

 
(482,751
)
 
14,399,325

 
(569,513
)
Mortgage delivery commitments
 
 
 
 
 
26,986

 
(56
)
 
26,927

 
63

Total derivatives
 
 
 
 
 
$
16,068,427

 
(482,807
)
 
$
14,426,252

 
(569,450
)
Accrued interest
 
 
 
 
 
 

 
(23,578
)
 
 

 
(20,100
)
Cash collateral and accrued interest
 
 
 
 
 
 
 
58,413

 
 
 
45,209

Net derivatives
 
 
 
 
 
 

 
$
(447,972
)
 
 

 
$
(544,341
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset
 
 
 
 
 
 

 
$
28,443

 
 

 
$
14,548

Derivative liability
 
 
 
 
 
 

 
(476,415
)
 
 

 
(558,889
)
Net derivatives
 
 
 
 
 
 

 
$
(447,972
)
 
 

 
$
(544,341
)
 _______________________
(1)
As of June 30, 2015, and December 31, 2014, embedded derivatives separated from the advance contract with notional amounts of $225.5 million and $190.5 million, respectively, and fair values of $2.0 million and $1.5 million, respectively, are not included in the table.

63



The following tables provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $13.9 billion, representing 86.6 percent of all derivatives outstanding as of June 30, 2015. Economic hedges and cash-flow hedges are not included within the two tables below.

Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of June 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
Advances(1)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value
 
Hedged
Amount
 
Fair-Value
Adjustment(2)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
803,695

 
$
(8,448
)
 
$
803,695

 
$
8,446

 
2.18
%
 
0.28
%
 
1.98
%
 
0.48
%
Due after one year through two years
1,711,630

 
(55,983
)
 
1,711,630

 
55,446

 
2.89

 
0.28

 
2.67

 
0.50

Due after two years through three years
1,490,375

 
(67,071
)
 
1,490,375

 
66,677

 
3.11

 
0.28

 
2.98

 
0.41

Due after three years through four years
638,250

 
(21,018
)
 
638,250

 
21,014

 
2.76

 
0.28

 
2.39

 
0.65

Due after four years through five years
794,526

 
(952
)
 
794,526

 
1,007

 
1.95

 
0.28

 
1.70

 
0.53

Thereafter
644,300

 
(6,090
)
 
644,300

 
6,087

 
2.57

 
0.28

 
2.14

 
0.71

Total
$
6,082,776

 
$
(159,562
)
 
$
6,082,776

 
$
158,677

 
2.68
%
 
0.28
%
 
2.44
%
 
0.52
%
_______________________
(1)
Included in the advances hedged amount are $2.1 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(2)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of June 30, 2015.
 
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of June 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
CO Bonds (1)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(2)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
1,909,000

 
$
3,877

 
$
1,909,000

 
$
(3,902
)
 
0.68
%
 
0.72
%
 
0.20
%
 
0.16
%
Due after one year through two years
2,639,245

 
3,028

 
2,639,245

 
(3,092
)
 
0.82

 
0.87

 
0.20

 
0.15

Due after two years through three years
1,707,000

 
9,220

 
1,707,000

 
(9,346
)
 
1.27

 
1.29

 
0.15

 
0.13

Due after three years through four years
435,405

 
2,236

 
435,405

 
(2,289
)
 
1.56

 
1.56

 
0.19

 
0.19

Due after four years through five years
622,300

 
1,176

 
622,300

 
(1,352
)
 
1.60

 
1.60

 
0.11

 
0.11

Thereafter
527,000

 
(1,947
)
 
527,000

 
2,179

 
1.78

 
1.78

 
0.06

 
0.06

Total
$
7,839,950

 
$
17,590

 
$
7,839,950

 
$
(17,802
)
 
1.05
%
 
1.08
%
 
0.17
%
 
0.14
%
_______________________
(1)
Included in the CO bonds hedged amount are $3.2 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(2) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of June 30, 2015.

64



We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives arising from the risk of counterparty default on the derivative. The amount of loss created by default is the replacement cost of the defaulted contract, net of any collateral held by us or pledged by us to counterparties (unsecured derivatives exposure). We currently are receiving only cash collateral from counterparties with whom we are in a current positive fair-value position (i.e., we are in the money). The resulting net exposure at fair value is reflected in the derivatives table below. We presently pledge securities or cash collateral for bilateral derivatives (principal-to-principal derivatives that are not centrally cleared) to counterparties with whom we are in a current negative fair-value position (i.e., we are out-of-the-money) by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. We presently pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member. From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value exceeds the current negative fair-value positions with them. The table below details our counterparty credit exposure as of June 30, 2015.

Derivatives Counterparty Current Credit Exposure
As of June 30, 2015
(dollars in thousands)

Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To /(From) Counterparty
 
Non-cash Collateral Pledged To Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
40,000

 
$
31

 
$

 
$

 
$
31

Single-A
 
105,000

 
266

 

 

 
266

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
1,956,000

 
(56,610
)
 

 
59,535

 
2,925

Cleared derivatives
 
6,806,011

 
(12,014
)
 
40,131

 

 
28,117

Total derivative positions with nonmember counterparties to which we had credit exposure
 
8,907,011

 
(68,327
)
 
40,131

 
59,535

 
31,339

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
26,986

 
29

 

 

 
29

Total
 
$
8,933,997

 
$
(68,298
)
 
$
40,131

 
$
59,535

 
$
31,368

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
809,000

 
 
 
 
 
 
 
 
Single-A
 
4,651,975

 
 
 
 
 
 
 
 
Triple-B
 
1,673,455

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
7,134,430

 

 
 
 
 
 
 
_______________________
(1)
Bilateral derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.

65


(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
These represent derivatives positions with counterparties for which we are in a net liability position and for which we have delivered securities collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risks in the 2014 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES
 
Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations in the 2014 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

Internal Liquidity Sources / Liquidity Management

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed asset and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:
all maturing advances are renewed;
member overnight deposits are withdrawn at a rate of 50 percent per day;
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
MPF master commitments are funded at a rate of 10 percent of the previous days' total amount on the first day and at a rate of one percent on each day thereafter.

The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.

This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, and to help ensure that we meet all of our obligations as they come due and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:
if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and
if projected net cash flow falls below zero on or before the 21st day following the measurement date.


66


We did not breach either of these thresholds at any time during the quarter ended June 30, 2015. Senior management is notified if either liquidity threshold is breached and is required to determine whether or not any corrective action is necessary as a result.

The following table presents our projected net cash flow and structural liquidity as of June 30, 2015.

Projected Net Cash Flow and Structural Liquidity
As of June 30, 2015
(dollars in thousands)

 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
1,178

 
$
20,220

Maturing liabilities and expected exercise of bond call options
 
2,206,447

 
6,818,278

Committed asset settlements
 
632,910

 
632,910

Capital outflow
 
405,000

 
405,000

MPF delivery commitments
 
26,986

 
26,986

Other
 
118

 
118

Gross uses of funds
 
3,272,639

 
7,903,512

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
28,634

 
54,749

Maturing or projected amortization of assets
 
8,399,146

 
14,028,489

Committed liability settlements
 
18,754

 
53,724

Cash and due from banks
 
844,228

 
844,228

Gross sources of funds
 
9,290,762

 
14,981,190

 
 
 
 
 
Projected net cash flow
 
6,018,123

 
7,077,678

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
342,294

 
353,325

Drawdown of standby letters of credit and lines of credit
 
648,949

 
1,399,716

Rollover of all maturing advances
 
2,303,118

 
5,300,057

Projected funding of MPF master commitments
 
166,001

 
267,302

Total secondary uses of funds
 
3,460,362

 
7,320,400

 
 
 
 
 
Structural liquidity
 
$
2,557,761

 
$
(242,722
)

Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:
marketable securities with a maturity greater than one week and less than one year that can be sold;
self-liquidating assets with a maturity of seven days or less;
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.


67


We complied with this regulatory requirement at all times during the quarter ended June 30, 2015. As of June 30, 2015, and December 31, 2014, we held a surplus of $12.7 billion and $12.4 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO debt issuance.

The following table presents our contingency liquidity as of June 30, 2015.

Contingency Liquidity
As of June 30, 2015
(dollars in thousands)

 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
1,178

Maturing liabilities
 
2,206,447

Committed asset settlements
 
632,910

Drawdown of standby letters of credit
 
133,194

Other
 
118

Gross uses of funds
 
2,973,847

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
28,634

Maturing or amortizing advances
 
2,303,118

Committed liability settlements
 
18,754

Gross sources of funds
 
2,350,506

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
2,500,000

Self-liquidating assets
 
6,080,000

Cash and due from banks
 
844,228

Marketable securities available for repo
 
3,892,150

Total sources of contingency liquidity
 
13,316,378

 
 
 
Net contingency liquidity
 
$
12,693,037


Additional Liquidity Requirements. In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot raise funds in the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the three months ended June 30, 2015.
 
Balance Sheet Gap Policy. Further, we are sensitive to maintaining an appropriate funding balance between our assets and liabilities and maintain a policy that limits the potential gap between assets inclusive of projected prepayments, funded by liabilities, inclusive of projected calls, maturing in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets. We maintained compliance with this limit at all times during the six months ended June 30, 2015. During the three months ended June 30, 2015, this gap averaged 1.9 percent (maximum level 2.1 percent and minimum level 1.6 percent). As of June 30, 2015, this gap was 1.9 percent, compared with 0.4 percent at December 31, 2014.

External Sources of Liquidity


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FHLBank P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the FHLBank P&I Funding Contingency Plan Agreement as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — External Sources of Liquidity in the 2014 Annual Report. We have never drawn funding under this agreement.

Debt Financing Consolidated Obligations
 
At June 30, 2015, and December 31, 2014, outstanding COs, including both CO bonds and CO discount notes, totaled $52.0 billion and $50.8 billion, respectively.

CO bonds outstanding for which we are primarily liable at June 30, 2015, and December 31, 2014, include issued callable bonds totaling $4.6 billion and $4.5 billion, respectively.

CO discount notes comprised 49.9 percent and 49.8 percent of the outstanding COs for which we are primarily liable at June 30, 2015, and December 31, 2014, respectively, but accounted for 93.1 percent and 91.8 percent of the proceeds from the issuance of such COs during the six months ended June 30, 2015 and 2014, respectively, due, in particular, to our frequent overnight CO discount note issuances.

See Item 1 — Notes to the Financial Statements — Note 12 — Consolidated Obligations for additional information on the COs for which we are primarily liable.

Financial Conditions for Consolidated Obligations

We have experienced relatively favorable CO issuance costs and stable investor demand for COs during the period covered by this report. We note that capacity among our CO underwriters has been occasionally somewhat constrained as a result of the imposition of new capital requirements on underwriters, however this development has neither impeded our ability to meet our funding needs nor has it adversely impacted our funding costs.
 
Capital

Total capital at June 30, 2015, was $3.2 billion compared with $2.9 billion at December 31, 2014.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at June 30, 2015, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital.

Subject to applicable law following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $57.3 million and $298.6 million at June 30, 2015, and December 31, 2014, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2014 Annual Report.

The following table sets forth the amount of mandatorily redeemable capital stock by year of expiry of redemption period at June 30, 2015, and December 31, 2014 (dollars in thousands).


69


Expiry of Redemption Period
 
June 30, 2015
 
December 31, 2014
Past redemption date (1)
 
$
629

 
$
697

Due in one year or less
 

 

Due after one year through two years
 
207

 
25,383

Due after two years through three years
 
5,164

 
207

Due after three years through four years
 
338

 
217,420

Due after four years through five years
 
50,930

 
54,892

Total
 
$
57,268

 
$
298,599

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption period but the member-related activity remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.

Mandatorily redeemable capital stock declined from $298.6 million at December 31, 2014, to $57.3 million at June 30, 2015, as we repurchased shares from non-members that exceeded their total stock investment requirement. Dividend payments on mandatorily redeemable capital stock are classified as interest expense, so the repurchase of this stock has reduced our interest expense. For the three months ended June 30, 2015, interest expense on mandatorily redeemable capital stock amounted to $468,000 compared with $2.7 million for the three months ended June 30, 2014.

Members without excess stock are required to increase their capital-stock investment as their outstanding advances increase, as described in Item 1 — Business — Capital Resources in the 2014 Annual Report. As discussed in that Item, we may repurchase excess stock at our sole discretion. We repurchased $270.9 million of excess stock (including mandatorily redeemable excess stock) during the six months ended June 30, 2015.

At June 30, 2015, and December 31, 2014, excess capital stock totaled $405.5 million and $633.0 million, respectively, as set forth in the following table (dollars in thousands):

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
June 30, 2015
$
651,815

 
$
1,482,169

 
$
2,134,007

 
$
2,539,512

 
$
405,505

December 31, 2014
632,454

 
1,446,248

 
2,078,725

 
2,711,713

 
632,988

_______________________
(1)
Total stock-investment requirement is rounded up to the nearest $100 on an individual member basis.
(2) 
Class B capital stock outstanding includes mandatorily redeemable capital stock.

Capital Rule

The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated June 24, 2015, the Director of the FHFA notified us that, based on March 31, 2015, financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2014 Annual Report.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

70



We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.4 percent at June 30, 2015.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must exceed 4 percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model. As of June 30, 2015, this internal minimum capital requirement equaled $2.8 billion, which was satisfied by our actual regulatory capital of $3.6 billion.

Excess Stock Management Program

On July 24, 2015, our board of directors authorized management to implement an excess stock management program. Under the new program, we have the discretion to maintain excess stock within a range defined by the board and may, from time to time, unilaterally repurchase excess shares from shareholders on a pro rata basis. The board established the initial excess stock range at between zero and $200 million. As of June 30, 2015, our shareholders held $405.5 million in excess stock. We expect to make our first repurchase of excess stock under the program in September 2015.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
 
Our significant off-balance-sheet arrangements consist of the following:
 
commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Commitments and Contingencies in the 2014 Annual Report.

CRITICAL ACCOUNTING ESTIMATES
 
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
 
We have identified five accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2014 Annual Report.

As of June 30, 2015, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.
 
RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS


71


FHFA Core Mission Achievement Advisory Bulletin 2015-05

On July 14, 2015, the FHFA issued an advisory bulletin establishing a core mission asset ratio by which the FHFA will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. The core mission asset ratio will be determined at year-end and calculated using annual average par values.
 
The advisory bulletin provides the FHFA’s expectations for each FHLBank’s strategic plan based on its ratio, which are:
when the ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining at least this level;
when the ratio is between 55 percent and 70 percent, the strategic plan should explain the FHLBank’s plan to increase its mission focus; and
when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives.

Our core mission activities primarily include the issuance of advances. In addition, we acquire member assets through the MPF program.

We do not anticipate that conforming to the guidance in this advisory bulletin is likely to materially impact our financial condition or results of operations.

Stress Test Disclosure

On July 23, 2015, we posted the results of our 2015 stress test as required by FHFA regulations, which results can be found at the following address: http://www.fhlbboston.com/aboutus/thebank/06_01_14_financial_reports.jsp

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk
 
Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Sources and Types of Market and Interest-Rate Risk in the 2014 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

General
 
We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:

the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at June 30, 2015, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.5 billion, compared with $14.6 billion at December 31, 2014);
the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at June 30, 2015, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.5 billion compared with $1.6 billion at December 31, 2014);
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements, was $7.8 billion, or 30.1 percent of our total outstanding CO bonds at June 30, 2015, compared with $7.2 billion, or 28.4 percent of total outstanding CO bonds, at December 31, 2014);
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

72



Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Strategies to Manage Market and Interest Rate Risk in the 2014 Annual Report.

Measurement of Market and Interest-Rate Risk

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure Value at Risk (VaR), duration of equity, convexity, and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities, net of the estimated market value of all derivatives.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. BVE is equal to our permanent capital, which consists of the par value of capital stock including mandatorily redeemable capital stock, plus retained earnings. However, we caution that care must be taken to properly interpret the results of the MVE analysis as the basis for these valuations may not be fully representative of future realized prices. Further, valuations are based on market curves and prices respective of individual assets, liabilities, and derivatives, and therefore are not representative of future net income to be earned by us through the spread between asset market curves and the market curves for funding costs. MVE should not be considered indicative of our market value as a going concern because it does not consider future new business activities, risk-management strategies, or the net profitability of assets after funding costs are subtracted. 

We measure our exposure to market and interest-rate risk using several metrics, including:

the ratio of MVE to BVE;
the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;
the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;
VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;
duration of equity, which measures percentage change to market value for a 100 basis point shift in rates;
MVE sensitivity, which is the percent change in MVE in various shocked interest rate scenarios vs. base case MVE;
the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched;
targeted metrics for our investments in mortgage loans; and
the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR.

We maintain limits and management action triggers in connection with each of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risks — Measurement of Market and Interest-Rate Risk in the 2014 Annual Report.

The following table sets forth each of the foregoing metrics together with any targets, associated limits and management actions triggers at June 30, 2015, and December 31, 2014.


73


Interest/Market-Rate Risk Metric
 
At June 30, 2015
 
At December 31, 2014
 
Target, Limit or Management Action Trigger at December 31, 2014
MVE
 
$3.5 billion
 
$3.5 billion
 
None
MVE/BVE
 
96.4%
 
97.1%
 
None
MVE/Par Stock
 
136.8%
 
129.3%
 
102% (management action trigger) and 100% or higher (target)
Economic Capital Ratio
 
6.1%
 
6.3%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$93.5 million
 
$75.6 million
 
Maintain below $225.0 million (management action trigger) and maintain below $275.0 million (limit)
Duration of Equity
 
+1.43 years
 
+0.01 years
 
Maintain between +/- 3.5 years (management action trigger) and maintain between +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(5.7)%
 
(3.1)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
+1.1 months
 
+0.01 months
 
None
MPF Portfolio VaR
 
$68.8 million
 
$49.6 million
 
Maintain below 25% of the VaR limit (management action trigger)
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 181 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 184 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

We exceeded the MPF Portfolio VaR management action trigger at June 30, 2015. The breach is largely the result of the impact of higher interest rates on the projected value of our portfolio of MPF loans versus specific debt used to fund the portfolio. As a result of the breach, management reviewed the risk exposure in the MPF portfolio and the risk exposure of the entire balance sheet as required by the management action trigger. Although we found the MPF risk exposure to correlate with the risk exposure of the entire balance sheet, because this is not a perfect correlation and the risk of the overall balance sheet as measured by VaR remains well below both its management action trigger and limit, no reduction to the MPF risk profile was required. Should the MPF VaR management action trigger continue to be breached, and should our VaR increase closer to its management action trigger and limit, management expects to take steps intended to reduce our risk exposure by making changes to the balance sheet including adding long-term debt or pay-fixed interest-rate swaps.

Value at Risk. The table below presents the historical simulation VaR estimate as of June 30, 2015, and December 31, 2014, which represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 120-business-day time horizon.
 
 
 
Value-at-Risk
(Gain) Loss Exposure
 
 
June 30, 2015
 
December 31, 2014
Confidence Level
 
% of
MVE (1)
 
$ million
 
% of
MVE (1)
 
$ million
50%
 
0.01
%
 
$
0.2

 
0.09
%
 
$
3.2

75%
 
0.30

 
10.3

 
0.32

 
11.1

95%
 
1.17

 
40.7

 
1.10

 
38.5

99%
 
2.69

 
93.5

 
2.15

 
75.6

_______________________
(1)
Loss exposure is expressed as a percentage of base MVE.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios


74


We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions).

 
 
June 30, 2015
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,408
 
$3,453
 
$3,501
 
$3,473
 
$3,401
 
$3,275
 
$3,125
Percent change in MVE from base
 
(1.9)%
 
(0.6)%
 
0.8%
 
—%
 
(2.1)%
 
(5.7)%
 
(10.0)%
MVE/BVE
 
94.6%
 
95.8%
 
97.1%
 
96.4%
 
94.4%
 
90.9%
 
86.7%
MVE/Par Stock
 
134.2%
 
136.0%
 
137.8%
 
136.8%
 
133.9%
 
128.9%
 
123.1%
Duration of Equity
 
+0.20 years
 
-1.34 years
 
+0.07 years
 
+1.43 years
 
+3.05 years
 
+4.21 years
 
+4.91 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
3.0%
 
3.0%
 
3.1%
 
3.1%
 
2.8%
 
2.3%
 
1.8%
Net income percent change from base
 
(21.1)%
 
(21.2)%
 
(17.4)%
 
—%
 
17.2%
 
32.6%
 
46.3%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored at zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for June 30, 2015, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; and d) changes in fair values from trading securities and hedging activities.

 
 
December 31, 2014
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,512
 
$3,465
 
$3,486
 
$3,507
 
$3,487
 
$3,400
 
$3,273
Percent change in MVE from base
 
0.1%
 
(1.2)%
 
(0.6)%
 
—%
 
(0.6)%
 
(3.1)%
 
(6.7)%
MVE/BVE
 
97.2%
 
95.9%
 
96.5%
 
97.1%
 
96.5%
 
94.1%
 
90.6%
MVE/Par Stock
 
129.5%
 
127.8%
 
128.6%
 
129.3%
 
128.6%
 
125.4%
 
120.7%
Duration of Equity
 
+1.39 years
 
+0.37 years
 
-0.67 years
 
+0.01 years
 
+1.63 years
 
+3.15 years
 
+4.11 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
3.1%
 
2.9%
 
3.0%
 
3.2%
 
2.8%
 
2.4%
 
1.8%
Net Income percent change from base
 
(16.3)%
 
(21.0)%
 
(19.2)%
 
—%
 
19.0%
 
34.8%
 
47.4%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored at zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for December 31, 2014, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; and d) changes in fair values from trading securities and hedging activities.

Convexity Management Action Trigger and Limit. We measure the convexity of our MVE and have established a management action trigger at a decline of 10 percent and a limit at a decline of 15 percent in an up or down 200 basis point parallel rate shock scenario. Our policies require management to notify the board of directors' Risk Committee if the limit is breached. As per the percent change in MVE lines in the above tables, we satisfied the limit at each of June 30, 2015, and December 31, 2014.


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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer, and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2015, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the quarter covered by this report, we settled our private-label MBS claims with certain defendants for an aggregate amount of $134.7 million, which amount is net of legal fees and expenses. We describe our private-label MBS litigation in Item 3 Legal Proceedings in the 2014 Annual Report.

We continue our private-label MBS litigation against the following entities and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Barclays Capital Inc.; Credit Suisse (USA), Inc.; DB Structured Products, Inc.; DB U.S. Financial Market Holding Corporation; Impac Mortgage Holdings, Inc.; Morgan Stanley; Nomura Holding America, Inc.; RBS Holdings USA Inc.; and UBS Americas Inc. We also continue to pursue our appeal of the dismissal of our claims against Moody’s Investors Service, Inc. and Moody’s Corporation.

Also, during the period covered by this report, we voluntarily dismissed the class action complaint described in Item 3 Legal Proceedings Class Action Complaint in the 2014 Annual Report.

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2014 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Number
Exhibit Description
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
August 7, 2015
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
August 7, 2015
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

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