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EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Dallasfhlbdallas-63015xex_32.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Dallasfhlbdallas-63015xex_312.htm
EX-10.2 - EXHIBIT 10.2 - Federal Home Loan Bank of Dallasfhlbdallas-63015xex_102.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Dallasfhlbdallas-63015xex_311.htm
EX-10.1 - EXHIBIT 10.1 - Federal Home Loan Bank of Dallasfhlbdallas-63015xex_101ltip.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
 
71-6013989
(I.R.S. Employer
Identification Number)
 
 
 
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
 
75063-2547
(Zip code)
(214) 441-8500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At August 7, 2015, the registrant had outstanding 13,121,941 shares of its Class B Capital Stock, $100 par value per share.
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.1
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)
 
June 30,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and due from banks
$
386,966

 
$
1,507,708

Interest-bearing deposits
308

 
266

Securities purchased under agreements to resell (Note 10)
5,700,000

 
350,000

Federal funds sold
3,666,000

 
5,613,000

Trading securities (Notes 3, 10 and 15) ($99,998 and $35,985 pledged at June 30, 2015 and December 31, 2014, respectively, which can be rehypothecated)
218,877

 
408,563

Available-for-sale securities (Note 4)
7,044,582

 
6,388,502

Held-to-maturity securities (a) (Note 5)
3,709,934

 
4,662,013

Advances (Notes 6 and 7)
21,647,725

 
18,942,400

Mortgage loans held for portfolio, net of allowance for credit losses of $141 and $143 at
June 30, 2015 and December 31, 2014, respectively (Note 7)
63,095

 
71,411

Accrued interest receivable
57,302

 
65,168

Premises and equipment, net
19,520

 
18,368

Derivative assets (Notes 10 and 11)
28,830

 
10,454

Other assets
8,646

 
8,015

TOTAL ASSETS
$
42,551,785

 
$
38,045,868

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
948,904

 
$
797,390

Non-interest bearing
24

 
24

Total deposits
948,928

 
797,414

 
 
 
 
Consolidated obligations (Note 8)
 
 
 
Discount notes
18,633,731

 
19,131,832

Bonds
20,618,393

 
16,078,700

Total consolidated obligations
39,252,124

 
35,210,532

 
 
 
 
Mandatorily redeemable capital stock
4,415

 
5,059

Accrued interest payable
45,797

 
39,726

Affordable Housing Program (Note 9)
26,853

 
25,998

Derivative liabilities (Notes 10 and 11)
16,370

 
21,521

Other liabilities (Note 4)
108,218

 
26,705

Total liabilities
40,402,705

 
36,126,955

 
 
 
 
Commitments and contingencies (Notes 7 and 15)


 


 
 
 
 
CAPITAL (Note 12)
 
 
 
Capital stock — Class B putable ($100 par value) issued and outstanding shares: 14,022,861 and 12,227,376 shares at June 30, 2015 and December 31, 2014, respectively
1,402,286

 
1,222,738

Retained earnings
 
 
 
Unrestricted
685,571

 
650,224

Restricted
58,944

 
49,552

Total retained earnings
744,515

 
699,776

Accumulated other comprehensive income (loss) (Note 18)
2,279

 
(3,601
)
Total capital
2,149,080

 
1,918,913

TOTAL LIABILITIES AND CAPITAL
$
42,551,785

 
$
38,045,868

_____________________________
(a)
Fair values: $3,755,636 and $4,727,130 at June 30, 2015 and December 31, 2014, respectively.
The accompanying notes are an integral part of these financial statements.

1


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

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
29,556

 
$
30,702

 
$
58,653

 
$
61,794

Prepayment fees on advances, net
 
4,419

 
4,313

 
7,139

 
4,863

Interest-bearing deposits
 
177

 
171

 
365

 
316

Securities purchased under agreements to resell
 
825

 
154

 
1,218

 
191

Federal funds sold
 
2,263

 
387

 
4,195

 
751

Trading securities
 
48

 
110

 
91

 
278

Available-for-sale securities
 
8,569

 
5,111

 
15,447

 
10,263

Held-to-maturity securities
 
7,326

 
10,429

 
15,498

 
21,318

Mortgage loans held for portfolio
 
930

 
1,188

 
1,921

 
2,448

Total interest income
 
54,113

 
52,565

 
104,527

 
102,222

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
Bonds
 
19,453

 
18,640

 
36,613

 
37,776

Discount notes
 
3,212

 
2,012

 
7,351

 
3,788

Deposits
 
40

 
21

 
66

 
43

Mandatorily redeemable capital stock
 
3

 
4

 
8

 
8

Other borrowings
 
8

 
3

 
8

 
4

Total interest expense
 
22,716

 
20,680

 
44,046

 
41,619

NET INTEREST INCOME
 
31,397

 
31,885

 
60,481

 
60,603

 
 
 
 
 
 
 
 
 
OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
 
(61
)
 

 
(100
)
 

Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income
 
42

 

 
75

 

Credit component of other-than-temporary impairment losses on held-to-maturity securities
 
(19
)
 

 
(25
)
 

 
 
 
 
 
 
 
 
 
Net gains on trading securities
 
62

 
350

 
339

 
559

Net gains on derivatives and hedging activities
 
8,449

 
273

 
12,686

 
968

Realized gains on sales of held-to-maturity securities
 
3,887

 

 
10,113

 

Realized gains on sales of available-for-sale securities
 

 

 
2,345

 

Gains on early extinguishment of debt
 

 
402

 

 
723

Letter of credit fees
 
1,070

 
1,191

 
2,219

 
2,341

Other, net
 
524

 
614

 
996

 
1,087

Total other income
 
13,973

 
2,830

 
28,673

 
5,678

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
10,070

 
9,907

 
20,459

 
20,155

Other operating expenses
 
7,433

 
8,148

 
13,908

 
13,878

Finance Agency
 
520

 
502

 
1,151

 
1,165

Office of Finance
 
744

 
585

 
1,293

 
1,143

Other
 
76

 
13

 
162

 
33

Total other expense
 
18,843

 
19,155

 
36,973

 
36,374

INCOME BEFORE ASSESSMENTS
 
26,527

 
15,560

 
52,181

 
29,907

Affordable Housing Program assessment
 
2,653

 
1,556

 
5,219

 
2,991

NET INCOME
 
$
23,874

 
$
14,004

 
$
46,962

 
$
26,916

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

2


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

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
NET INCOME
 
$
23,874

 
$
14,004

 
$
46,962

 
$
26,916

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income
 
3,031

 
5,096

 
5,036

 
30,368

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

 

 
(2,345
)
 

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
(42
)
 

 
(75
)
 

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
1,627

 
1,848

 
3,301

 
3,707

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

 
1

 
4

 
1

Amortization of net actuarial gain included in net periodic benefit cost
 
(20
)
 
(24
)
 
(41
)
 
(47
)
Total other comprehensive income
 
4,598

 
6,921

 
5,880

 
34,029

TOTAL COMPREHENSIVE INCOME
 
$
28,472

 
$
20,925

 
$
52,842

 
$
60,945


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

3




FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(Unaudited, in thousands)

 
 
 
 
 
 
 
 
 
 
 
Accumulated
 Other
Comprehensive
 Income (Loss)
 
 
 
Capital Stock
Class B - Putable
 
Retained Earnings
 
 
Total
 Capital
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2015
12,227

 
$
1,222,738

 
$
650,224

 
$
49,552

 
$
699,776

 
$
(3,601
)
 
$
1,918,913

Proceeds from sale of capital stock
5,776

 
577,596

 

 

 

 

 
577,596

Repurchase/redemption of capital stock
(3,989
)
 
(398,874
)
 

 

 

 

 
(398,874
)
Shares reclassified to mandatorily redeemable capital stock
(13
)
 
(1,312
)
 

 

 

 

 
(1,312
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 
37,570

 
9,392

 
46,962

 

 
46,962

Other comprehensive income

 

 

 

 

 
5,880

 
5,880

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

 

 
(83
)
 

 
(83
)
 

 
(83
)
Mandatorily redeemable capital stock

 

 
(2
)
 

 
(2
)
 

 
(2
)
Stock
21

 
2,138

 
(2,138
)
 

 
(2,138
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2015
14,022

 
$
1,402,286

 
$
685,571

 
$
58,944

 
$
744,515

 
$
2,279

 
$
2,149,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2014
11,237

 
$
1,123,675

 
$
615,620

 
$
39,850

 
$
655,470

 
$
(32,641
)
 
$
1,746,504

Proceeds from sale of capital stock
5,662

 
566,149

 

 

 

 

 
566,149

Repurchase/redemption of capital stock
(4,629
)
 
(462,860
)
 

 

 

 

 
(462,860
)
Shares reclassified to mandatorily redeemable capital stock
(14
)
 
(1,367
)
 

 

 

 

 
(1,367
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income

 

 
21,533

 
5,383

 
26,916

 

 
26,916

Other comprehensive income

 

 

 

 

 
34,029

 
34,029

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

 

 
(85
)
 

 
(85
)
 

 
(85
)
Mandatorily redeemable capital stock

 

 
(2
)
 

 
(2
)
 

 
(2
)
Stock
19

 
1,916

 
(1,916
)
 

 
(1,916
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2014
12,275

 
$
1,227,513

 
$
635,150

 
$
45,233

 
$
680,383

 
$
1,388

 
$
1,909,284


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



4


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
For the Six Months Ended
 
June 30,
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
46,962

 
$
26,916

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
 
 
 
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
46,800

 
29,245

Concessions on consolidated obligation bonds
1,555

 
842

Premises, equipment and computer software costs
1,909

 
1,788

Non-cash interest on mandatorily redeemable capital stock
8

 
9

Credit component of other-than-temporary impairment losses on held-to-maturity securities
25

 

Gains on early extinguishment of debt

 
(723
)
Gains on sales of held-to-maturity securities
(10,113
)
 

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

Net loss on disposition of premises, equipment and computer software

 
67

Net increase in trading securities
(101
)
 
(465
)
Loss due to change in net fair value adjustment on derivative and hedging activities
16,807

 
43,232

Decrease in accrued interest receivable
7,890

 
569

Decrease (increase) in other assets
(665
)
 
2,288

Increase (decrease) in Affordable Housing Program (AHP) liability
855

 
(2,328
)
Increase (decrease) in accrued interest payable
6,071

 
(4,134
)
Decrease in other liabilities
(2,913
)
 
(2,948
)
Total adjustments
65,783

 
67,442

Net cash provided by operating activities
112,745

 
94,358

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease in interest-bearing deposits, including swap collateral pledged
148,893

 
119,766

Net increase in securities purchased under agreements to resell
(5,350,000
)
 
(750,000
)
Net decrease (increase) in federal funds sold
1,947,000

 
(21,000
)
Net decrease (increase) in short-term trading securities held for investment
189,705

 
(33
)
Purchases of available-for-sale securities
(1,220,043
)
 
(40,788
)
Proceeds from maturities of available-for-sale securities
16,024

 

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

 

Proceeds from sales of held-to-maturity securities
598,551

 

Proceeds from maturities of long-term held-to-maturity securities
404,562

 
515,734

Purchases of long-term held-to-maturity securities
(35,000
)
 
(391,638
)
Principal collected on advances
265,409,868

 
226,382,257

Advances made
(268,138,403
)
 
(228,651,901
)
Principal collected on mortgage loans held for portfolio
8,349

 
10,179

Purchases of premises, equipment and computer software
(3,410
)
 
(976
)
Net cash used in investing activities
(5,483,635
)
 
(2,828,400
)
 
 
 
 

5


 
For the Six Months Ended
 
June 30,
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits, including swap collateral held
153,333

 
(267,063
)
Net payments on derivative contracts with financing elements
(120,577
)
 
(92,933
)
Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
585,043,279

 
88,944,067

Bonds
10,960,752

 
6,844,098

Debt issuance costs
(1,258
)
 
(1,358
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(585,540,120
)
 
(82,976,626
)
Bonds
(6,421,935
)
 
(9,443,010
)
Proceeds from issuance of capital stock
577,596

 
566,149

Proceeds from issuance of mandatorily redeemable capital stock

 
8

Payments for redemption of mandatorily redeemable capital stock
(1,965
)
 
(669
)
Payments for repurchase/redemption of capital stock
(398,874
)
 
(462,860
)
Cash dividends paid
(83
)
 
(85
)
Net cash provided by financing activities
4,250,148

 
3,109,718

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(1,120,742
)
 
375,676

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

 
911,081

Cash and cash equivalents at end of the period
$
386,966

 
$
1,286,757

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
50,747

 
$
64,443

AHP payments, net
$
4,364

 
$
5,319

Stock dividends issued
$
2,138

 
$
1,916

Dividends paid through issuance of mandatorily redeemable capital stock
$
2

 
$
2

Net capital stock reclassified to mandatorily redeemable capital stock
$
1,312

 
$
1,367


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

6


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

Note 1—Basis of Presentation
The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2014. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 26, 2015 (the “2014 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2014 10-K.
The Bank is one of 11 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the housing government-sponsored enterprises ("GSEs"), including the FHLBanks and the Office of Finance.
     Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant assumptions include those that are used by the Bank in its periodic evaluation of its holdings of non-agency residential mortgage-backed securities ("MBS") for other-than-temporary impairment (“OTTI”). Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Note 2—Recently Issued Accounting Guidance
    Asset Classification and Charge-offs. On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02 "Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention" ("AB 2012-02"). The guidance establishes a standard and uniform methodology for classifying assets and prescribes the timing of asset charge-offs, excluding investment securities. The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. The adoption of the accounting guidance in AB 2012-02, which was effective January 1, 2015, did not have a significant impact on the Bank's results of operations or financial condition.
Foreclosure of Residential Real Estate. On January 17, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), which clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or a similar legal agreement. Additionally, ASU 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
For public business entities, the guidance in ASU 2014-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 (January 1, 2015 for the Bank) and may be applied either retrospectively by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the guidance is effective or prospectively to all instances of an entity receiving

7


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



8


Note 3—Trading Securities
Trading securities as of June 30, 2015 and December 31, 2014 were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
U.S. Treasury Bills
$
109,998

 
$
399,794

GSE discount notes
99,986

 

Other
8,893

 
8,769

Total
$
218,877

 
$
408,563

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

Note 4—Available-for-Sale Securities
 Major Security Types. Available-for-sale securities as of June 30, 2015 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
49,800

 
$
382

 
$

 
$
50,182

GSE obligations
4,311,129

 
29,806

 

 
4,340,935

Other
393,180

 
421

 
248

 
393,353

 
4,754,109

 
30,609

 
248

 
4,784,470

GSE commercial MBS
2,265,370

 
3,704

 
8,962

 
2,260,112

Total
$
7,019,479

 
$
34,313

 
$
9,210

 
$
7,044,582

Included in the table above are GSE commercial MBS that were purchased but which had not yet settled as of June 30, 2015. The amount due of $84,389,000 is included in other liabilities on the statement of condition at that date.
Available-for-sale securities as of December 31, 2014 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
49,666

 
$
308

 
$

 
$
49,974

GSE obligations
4,890,484

 
31,066

 

 
4,921,550

Other
411,145

 
701

 
535

 
411,311

 
5,351,295

 
32,075

 
535

 
5,382,835

GSE commercial MBS
1,014,795

 
322

 
9,450

 
1,005,667

Total
$
6,366,090

 
$
32,397

 
$
9,985

 
$
6,388,502

Other debentures are comprised of securities issued by the Private Export Funding Corporation ("PEFCO"). These debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments. The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of June 30, 2015. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
13

 
$
108,843

 
$
248

 

 
$

 
$

 
13

 
$
108,843

 
$
248

GSE commercial MBS
33

 
1,258,709

 
7,987

 
4

 
97,622

 
975

 
37

 
1,356,331

 
8,962

Total
46

 
$
1,367,552

 
$
8,235

 
4

 
$
97,622

 
$
975

 
50

 
$
1,465,174

 
$
9,210



9


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
18

 
$
163,153

 
$
535

 

 
$

 
$

 
18

 
$
163,153

 
$
535

GSE commercial MBS
29

 
863,159

 
9,450

 

 

 

 
29

 
863,159

 
9,450

Total
47

 
$
1,026,312

 
$
9,985

 

 
$

 
$

 
47

 
$
1,026,312

 
$
9,985


At June 30, 2015, the gross unrealized losses on the Bank’s available-for-sale securities were $9,210,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by GSEs, or fully secured by collateral that is guaranteed by the U.S government. As of June 30, 2015, the U.S. government and the issuers of the Bank’s holdings of GSE debentures and GSE MBS were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by Standard and Poor’s (“S&P”). The Bank's holdings of PEFCO debentures were rated triple-A by Moody's and Fitch, and A+ by S&P at that date. Based upon the strength of the GSEs' guarantees of the Bank's holdings of GSE MBS and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at June 30, 2015 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Further, based upon PEFCO's creditworthiness, the U.S. government's guaranty of the payment of principal and interest on the collateral securing the PEFCO debentures, and the guaranty of the payment of interest on the debentures by an agency of the U.S. government, the Bank expects that its holdings of PEFCO debentures that were in an unrealized loss position at June 30, 2015 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2015 and December 31, 2014 are presented below (in thousands).
 
 
 
June 30, 2015
 
December 31, 2014
 
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
70,417

 
$
70,438

 
$
87,379

 
$
87,418

 
Due after one year through five years
 
3,743,330

 
3,761,571

 
4,224,231

 
4,245,122

 
Due after five years through ten years
 
940,362

 
952,461

 
1,039,685

 
1,050,295

 
 
 
4,754,109

 
4,784,470

 
5,351,295

 
5,382,835

 
GSE commercial MBS
 
2,265,370

 
2,260,112

 
1,014,795

 
1,005,667

 
Total
 
$
7,019,479

 
$
7,044,582

 
$
6,366,090

 
$
6,388,502

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
Amortized cost of available-for-sale securities other than MBS
 
 
 
Fixed-rate
$
4,679,109

 
$
5,276,295

Variable-rate
75,000

 
75,000

 
4,754,109

 
5,351,295

Amortized cost of fixed-rate multi-family MBS
2,265,370

 
1,014,795

Total
$
7,019,479

 
$
6,366,090

At June 30, 2015 and December 31, 2014, all of the Bank's fixed-rate available-for-sale securities were swapped to a variable rate.

10


Sales of Securities. During the three months ended March 31, 2015, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $537,924,000. Proceeds from the sales totaled $540,269,000, resulting in realized gains of $2,345,000. There were no sales of available-for-sale securities during the three months ended June 30, 2015 or the six months ended June 30, 2014.
                                                                
Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of June 30, 2015 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
24,333

 
$

 
$
24,333

 
$
34

 
$
87

 
$
24,280

State housing agency obligation
35,000

 

 
35,000

 

 

 
35,000

 
59,333

 

 
59,333

 
34

 
87

 
59,280

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
5,765

 

 
5,765

 
27

 

 
5,792

GSE residential MBS
3,450,129

 

 
3,450,129

 
31,636

 
784

 
3,480,981

Non-agency residential MBS
157,013

 
24,123

 
132,890

 
18,565

 
3,524

 
147,931

GSE commercial MBS
61,817

 

 
61,817

 

 
165

 
61,652

 
3,674,724

 
24,123

 
3,650,601

 
50,228

 
4,473

 
3,696,356

Total
$
3,734,057

 
$
24,123

 
$
3,709,934

 
$
50,262

 
$
4,560

 
$
3,755,636


Held-to-maturity securities as of December 31, 2014 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
27,119

 
$

 
$
27,119

 
$
143

 
$

 
$
27,262

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

 

 
6,642

 
34

 

 
6,676

GSE residential MBS
4,424,542

 

 
4,424,542

 
46,767

 
398

 
4,470,911

Non-agency residential MBS
169,240

 
27,349

 
141,891

 
21,982

 
3,469

 
160,404

GSE commercial MBS
61,819

 

 
61,819

 
58

 

 
61,877

 
4,662,243

 
27,349

 
4,634,894

 
68,841

 
3,867

 
4,699,868

Total
$
4,689,362

 
$
27,349

 
$
4,662,013

 
$
68,984

 
$
3,867

 
$
4,727,130



11


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2015. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income (loss) and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential mortgage-backed securities, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
2

 
$
13,618

 
$
87

 

 
$

 
$

 
2

 
$
13,618

 
$
87

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
4

 
160,107

 
86

 
11

 
366,324

 
698

 
15

 
526,431

 
784

Non-agency residential MBS
1

 
6,433

 
139

 
24

 
121,103

 
9,821

 
25

 
127,536

 
9,960

GSE commercial MBS
3

 
61,652

 
165

 

 

 

 
3

 
61,652

 
165

Total
10

 
$
241,810

 
$
477

 
35

 
$
487,427

 
$
10,519

 
45

 
$
729,237

 
$
10,996


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

 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
1

 
$
10,798

 
$
5

 
17

 
$
485,626

 
$
393

 
18

 
$
496,424

 
$
398

Non-agency residential MBS
1

 
6,874

 
223

 
24

 
131,265

 
9,917

 
25

 
138,139

 
10,140

Total
2

 
$
17,672

 
$
228

 
41

 
$
616,891

 
$
10,310

 
43

 
$
634,563

 
$
10,538


At June 30, 2015, the gross unrealized losses on the Bank’s held-to-maturity securities were $10,996,000, of which $9,960,000 were attributable to its holdings of non-agency (i.e., private-label) residential MBS and $1,036,000 were attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs.
As of June 30, 2015, the U.S. government and the issuers of the Bank’s holdings of GSE MBS were rated triple-A by Moody’s and Fitch and AA+ by S&P. Based upon the credit ratings assigned by the NRSROs and the Bank's assessment of the strength of the GSEs’ guarantees of the Bank’s holdings of GSE MBS, the Bank expects that its holdings of U.S. government-guaranteed debentures and GSE MBS that were in an unrealized loss position at June 30, 2015 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS (“RMBS”), generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2015 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit

12


enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its 27 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of June 30, 2015 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of June 30, 2015 assumed changes in home prices ranging from declines of 2 percent to increases of 8 percent over the 12-month period beginning April 1, 2015. For the vast majority of markets, the changes were projected to range from increases of 2 percent to 5 percent. Thereafter, home price changes for each market were projected to return (at varying rates and over varying transition periods based on historical housing price patterns) to their long-term historical equilibrium levels. Following these transition periods, the constant long-term annual rates of appreciation for the vast majority of markets were projected to range between 2 percent and 5 percent.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
Based on the results of its cash flow analyses, the Bank determined it was not likely that it would fully recover the remaining amortized cost basis of one of its previously other-than-temporarily impaired non-agency RMBS and, accordingly, this security was deemed to be other-than-temporarily impaired as of June 30, 2015. The difference between the present value of the cash flows expected to be collected from this security and its amortized cost basis (i.e., the credit loss) totaled $19,000 at June 30, 2015. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its remaining amortized cost basis, only the amount related to the credit loss was recognized in earnings. None of the Bank's other non-agency RMBS were deemed to be other-than-temporarily impaired at June 30, 2015.
For the security for which an other-than-temporary impairment was determined to have occurred as of June 30, 2015, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings (dollars in thousands):
 
 
 
 
 
 
Significant Inputs(2)
 
 
Year of
Securitization
 
Collateral
Type(1)
 
Unpaid Principal Balance as of
June 30, 2015
 
Projected Prepayment
Rate
 
Projected Default Rate
 
Projected Loss
Severity
 
Current Credit Enhancement as of
 June 30, 2015(3)
2005
 
Alt-A/Option ARM
 
$
11,716

 
7.3
%
 
22.0
%
 
34.9
%
 
32.7
%
________________________________________
(1) 
Although the other-than-temporarily impaired security was not labeled as Alt-A at the time of issuance, based upon its current collateral and performance characteristics, it was analyzed using Alt-A assumptions.
(2) 
The prepayment rate reflects the weighted average of projected future voluntary prepayments. The default rate reflects the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. The loss severity reflects the total projected loan losses as a percentage of the total balance of loans that are projected to default.
(3) 
The current credit enhancement percentage reflects the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior class held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

13


In addition to the security that was determined to be other-than-temporarily impaired at June 30, 2015, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired in periods prior to 2013. The following table presents a rollforward for the three and six months ended June 30, 2015 and 2014 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss) (in thousands).
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Balance of credit losses, beginning of period
$
12,301

 
$
12,836

 
$
12,512

 
$
12,901

Credit losses on securities for which an other-than-temporary impairment was previously recognized
19

 

 
25

 

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(220
)
 
(66
)
 
(437
)
 
(131
)
Balance of credit losses, end of period
12,100

 
12,770

 
12,100

 
12,770

Cumulative principal shortfalls on securities held at end of period
(1,469
)
 
(1,061
)
 
(1,469
)
 
(1,061
)
Cumulative amortization of the time value of credit losses at end of period
321

 
264

 
321

 
264

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
10,952

 
$
11,973

 
$
10,952

 
$
11,973

     Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2015 and December 31, 2014 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.
 
 
June 30, 2015
 
December 31, 2014
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
10,628

 
$
10,628

 
$
10,662

 
$
12,544

 
$
12,544

 
$
12,649

Due after five years through ten years
 
13,705

 
13,705

 
13,618

 
14,575

 
14,575

 
14,613

Due after ten years
 
35,000

 
35,000

 
35,000

 

 

 

 
 
59,333

 
59,333

 
59,280

 
27,119

 
27,119

 
27,262

Mortgage-backed securities
 
3,674,724

 
3,650,601

 
3,696,356

 
4,662,243

 
4,634,894

 
4,699,868

Total
 
$
3,734,057

 
$
3,709,934

 
$
3,755,636

 
$
4,689,362

 
$
4,662,013

 
$
4,727,130


The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $17,672,000 and $26,510,000 at June 30, 2015 and December 31, 2014, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities
$
59,333

 
$
27,119

Amortized cost of held-to-maturity mortgage-backed securities
 
 
 
Fixed-rate pass-through securities
251

 
276

Collateralized mortgage obligations
 
 
 
Fixed-rate
545

 
624

Variable-rate
3,612,111

 
4,599,524

Variable-rate multi-family MBS
61,817

 
61,819

 
3,674,724

 
4,662,243

Total
$
3,734,057

 
$
4,689,362


14



All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2014 or the six months ended June 30, 2015.
Sales of Securities. During the three and six months ended June 30, 2015, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $244,190,000 and $588,438,000, respectively. Proceeds from the sales totaled $248,077,000 and $598,551,000, respectively, resulting in realized gains of $3,887,000 and $10,113,000, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. There were no sales of held-to-maturity securities during the six months ended June 30, 2014.

Note 6—Advances
     Redemption Terms. At June 30, 2015 and December 31, 2014, the Bank had advances outstanding at interest rates ranging from 0.08 percent to 8.27 percent and from 0.05 percent to 8.48 percent, respectively, as summarized below (dollars in thousands).
 
 
June 30, 2015
 
December 31, 2014
Contractual Maturity
 
Amount
 
Weighted Average
Interest Rate
 
Amount
 
Weighted Average
Interest Rate
Overdrawn demand deposit accounts
 
$

 
%
 
$
79,477

 
4.04
%
 
 
 
 
 
 
 
 
 
Due in one year or less
 
14,040,988

 
0.26

 
11,908,892

 
0.31

Due after one year through two years
 
2,055,146

 
1.03

 
1,085,057

 
1.46

Due after two years through three years
 
1,491,089

 
2.57

 
1,590,017

 
2.39

Due after three years through four years
 
854,749

 
2.25

 
1,085,640

 
2.40

Due after four years through five years
 
494,655

 
2.60

 
417,243

 
2.22

Due after five years
 
965,142

 
2.32

 
901,184

 
2.99

Amortizing advances
 
1,621,781

 
3.28

 
1,727,505

 
3.45

Total par value
 
21,523,550

 
0.95
%
 
18,795,015

 
1.14
%
 
 
 
 
 
 
 
 
 
Deferred prepayment fees
 
(17,038
)
 
 
 
(17,903
)
 
 
Commitment fees
 
(135
)
 
 
 
(139
)
 
 
Hedging adjustments
 
141,348

 
 
 
165,427

 
 
Total
 
$
21,647,725

 
 
 
$
18,942,400

 
 

The balances of overdrawn demand deposit accounts were fully collateralized at December 31, 2014 and were repaid at the beginning of January 2015. Amortizing advances require repayment according to predetermined amortization schedules.
The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At June 30, 2015 and December 31, 2014, the Bank had aggregate prepayable and callable advances totaling $1,099,331,000 and $487,699,000, respectively.

15


The following table summarizes advances outstanding at June 30, 2015 and December 31, 2014, by the earlier of contractual maturity or next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):
Contractual Maturity or Next Call Date
 
June 30, 2015
 
December 31, 2014
Overdrawn demand deposit accounts
 
$

 
$
79,477

 
 
 
 
 
Due in one year or less
 
15,030,858

 
11,993,262

Due after one year through two years
 
1,313,776

 
1,053,687

Due after two years through three years
 
1,491,089

 
1,590,017

Due after three years through four years
 
854,749

 
1,085,640

Due after four years through five years
 
486,655

 
414,243

Due after five years
 
724,642

 
851,184

Amortizing advances
 
1,621,781

 
1,727,505

 
 
 
 
 
Total par value
 
$
21,523,550

 
$
18,795,015


The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed-rate advance on specified dates and offer, subject to certain conditions, replacement funding at prevailing market rates. At June 30, 2015 and December 31, 2014, the Bank had putable advances outstanding totaling $1,310,071,000 and $1,454,071,000, respectively.

The following table summarizes advances outstanding at June 30, 2015 and December 31, 2014, by the earlier of contractual maturity or next possible put date (in thousands):
Contractual Maturity or Next Put Date
 
June 30, 2015
 
December 31, 2014
Overdrawn demand deposit accounts
 
$

 
$
79,477

 
 
 
 
 
Due in one year or less
 
15,290,559

 
13,258,963

Due after one year through two years
 
2,015,146

 
1,062,557

Due after two years through three years
 
707,019

 
990,896

Due after three years through four years
 
434,249

 
397,190

Due after four years through five years
 
489,655

 
377,243

Due after five years
 
965,141

 
901,184

Amortizing advances
 
1,621,781

 
1,727,505

 
 
 
 
 
Total par value
 
$
21,523,550

 
$
18,795,015


     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
Fixed-rate
 
 
 
Due in one year or less
$
13,974,213

 
$
11,573,066

Due after one year
6,461,547

 
6,694,902

Total fixed-rate
20,435,760

 
18,267,968

Variable-rate
 
 
 
Due in one year or less
78,720

 
426,477

Due after one year
1,009,070

 
100,570

Total variable-rate
1,087,790

 
527,047

Total par value
$
21,523,550

 
$
18,795,015



16


At June 30, 2015 and December 31, 2014, 30 percent and 27 percent, respectively, of the Bank’s fixed-rate advances were swapped to a variable rate.
     Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income on advances over the life of the modified advance using the level-yield method. During the three months ended June 30, 2015 and 2014, gross advance prepayment fees received from members/borrowers were $5,855,000 and $7,904,000, respectively, of which $658,000 and $78,000, respectively, were deferred. During the six months ended June 30, 2015 and 2014, gross advance prepayment fees received from members/borrowers were $14,529,000 and $8,624,000, respectively, of which $4,489,000 and $292,000, respectively, were deferred.

Note 7—Allowance for Credit Losses
An allowance for credit losses is separately established for each of the Bank’s identified portfolio segments, if necessary, to provide for probable losses inherent in its financing receivables portfolio and other off-balance sheet credit exposures as of the balance sheet date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.
A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments: (1) advances and other extensions of credit to members/borrowers, collectively referred to as “extensions of credit to members”; (2) government-guaranteed/insured mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.
Classes of financing receivables are generally a disaggregation of a portfolio segment and are determined on the basis of their initial measurement attribute, the risk characteristics of the financing receivable and an entity’s method for monitoring and assessing credit risk. Because the credit risk arising from the Bank’s financing receivables is assessed and measured at the portfolio segment level, the Bank does not have separate classes of financing receivables within each of its portfolio segments.
During the six months ended June 30, 2015 and 2014, there were no purchases or sales of financing receivables, nor were any financing receivables reclassified to held for sale.
     Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”), the Bank lends to financial institutions within its five-state district that are involved in housing finance. The FHLB Act requires the Bank to obtain and maintain sufficient collateral for advances and other extensions of credit to protect against losses. The Bank makes advances and otherwise extends credit only against eligible collateral, as defined by regulation. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances and other extensions of credit, the Bank applies various haircuts, or discounts, to the collateral to determine the value against which borrowers may borrow. As additional security, the Bank has a statutory lien on each borrower’s capital stock in the Bank.
On at least a quarterly basis, the Bank evaluates all outstanding extensions of credit to members/borrowers for potential credit losses. These evaluations include a review of: (1) the amount, type and performance of collateral available to secure the outstanding obligations; (2) metrics that may be indicative of changes in the financial condition and general creditworthiness of the member/borrower; and (3) the payment status of the obligations. Any outstanding extensions of credit that exhibit a potential credit weakness that could jeopardize the full collection of the outstanding obligations would be classified as substandard, doubtful or loss. The Bank did not have any advances or other extensions of credit to members/borrowers that were classified as substandard, doubtful or loss at June 30, 2015 or December 31, 2014.
The Bank considers the amount, type and performance of collateral to be the primary indicator of credit quality with respect to its extensions of credit to members/borrowers. At June 30, 2015 and December 31, 2014, the Bank had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of each borrower’s outstanding extensions of credit.
The Bank continues to evaluate and, as necessary, modify its credit extension and collateral policies based on market conditions. At June 30, 2015 and December 31, 2014, the Bank did not have any advances that were past due, on nonaccrual status, or considered impaired. There have been no troubled debt restructurings related to advances.

17


The Bank has never experienced a credit loss on an advance or any other extension of credit to a member/borrower and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on its extensions of credit to members/borrowers. Accordingly, the Bank has not provided any allowance for credit losses on advances, nor has it recorded any liabilities to reflect an allowance for credit losses related to its off-balance sheet credit exposures.
 Mortgage Loans — Government-guaranteed/Insured. The Bank’s government-guaranteed/insured fixed-rate mortgage loans are insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. Any losses from these loans are expected to be recovered from those entities. Any losses from these loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank has not established an allowance for credit losses on government-guaranteed/insured mortgage loans. Government-guaranteed/insured loans are not placed on nonaccrual status.
Mortgage Loans — Conventional Mortgage Loans. The Bank’s conventional mortgage loans were acquired through the Mortgage Partnership Finance® (“MPF”®) program, as more fully described in the Bank’s 2014 10-K. The allowance for losses on conventional mortgage loans is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, and prevailing economic conditions. The allowance for losses on conventional mortgage loans also factors in the credit enhancement under the MPF program. Any incurred losses that are expected to be recovered from the credit enhancements are not reserved as part of the Bank’s allowance for loan losses.
The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on nonaccrual status is restored to accrual status when none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans that are on nonaccrual status are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A collateral-dependent loan is impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal and interest on the loan. Interest income on impaired loans is recognized in the same manner as it is for nonaccrual loans noted above.
The Bank evaluates whether to record a charge-off on a conventional mortgage loan when the loan becomes 180 days or more past due or upon the occurrence of a confirming event, whichever occurs first. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.

18


The Bank considers the key credit quality indicator for conventional mortgage loans to be the payment status of each loan. The table below summarizes the unpaid principal balance by payment status for mortgage loans at June 30, 2015 and December 31, 2014 (dollars in thousands). The unpaid principal balance approximates the recorded investment in the loans.
 
June 30, 2015
 
December 31, 2014
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
30-59 days delinquent
$
885

 
$
1,923

 
$
2,808

 
$
1,409

 
$
2,276

 
$
3,685

60-89 days delinquent
228

 
362

 
590

 
531

 
400

 
931

90 days or more delinquent
736

 
87

 
823

 
316

 
299

 
615

Total past due
1,849

 
2,372

 
4,221

 
2,256

 
2,975

 
5,231

Total current loans
27,679

 
31,006

 
58,685

 
31,510

 
34,429

 
65,939

Total mortgage loans
$
29,528

 
$
33,378

 
$
62,906

 
$
33,766

 
$
37,404

 
$
71,170

 
 
 
 
 
 
 
 
 
 
 
 
Other delinquency statistics:
 
 
 
 
 
 
 
 
 
 
 
In process of foreclosure (1)
$
193

 
$
58

 
$
251

 
$
79

 
$

 
$
79

Serious delinquency rate (2)
2.5
%
 
0.3
%
 
1.3
%
 
0.9
%
 
0.8
%
 
0.9
%
Past due 90 days or more and still accruing interest (3)
$

 
$
87

 
$
87

 
$

 
$
299

 
$
299

Nonaccrual loans
$
736

 
$

 
$
736

 
$
316

 
$

 
$
316

Troubled debt restructurings
$
114

 
$

 
$
114

 
$
116

 
$

 
$
116

_____________________________
(1) 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been made.
(2) 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the loan portfolio.
(3) 
Only government-guaranteed/insured mortgage loans continue to accrue interest after they become 90 days or more past due.
At June 30, 2015 and December 31, 2014, the Bank’s other assets included $113,000 and $193,000, respectively, of real estate owned.
Mortgage loans are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. Each nonaccrual mortgage loan and each troubled debt restructuring is specifically reviewed for impairment. At June 30, 2015 and December 31, 2014, the estimated value of the collateral securing each of these loans was in excess of the outstanding loan amount. Therefore, no specific reserve was established for any of these mortgage loans. The remaining conventional mortgage loans were evaluated for impairment on a pool basis. Based upon the current and past performance of these loans, the underwriting standards in place at the time the loans were acquired, and current economic conditions, the Bank determined that an allowance for loan losses of $141,000 was adequate to reserve for credit losses in its conventional mortgage loan portfolio at June 30, 2015. The following table presents the activity in the allowance for credit losses on conventional mortgage loans held for portfolio during the three and six months ended June 30, 2015 and 2014 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
143

 
$
165

 
$
143

 
$
165

Chargeoffs
(2
)
 
(17
)
 
(2
)
 
(17
)
Balance, end of period
$
141

 
$
148

 
$
141

 
$
148



19


The following table presents information regarding the balances of the Bank's conventional mortgage loans held for portfolio that were individually or collectively evaluated for impairment as well as information regarding the ending balance of the allowance for credit losses as of June 30, 2015 and December 31, 2014 (in thousands).

 
June 30, 2015
 
December 31, 2014
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment
$
141

 
$
143

 
 
 
 
Unpaid principal balance
 
 
 
Individually evaluated for impairment
$
757

 
$
432

Collectively evaluated for impairment
28,771

 
33,334

 
$
29,528

 
$
33,766


Note 8—Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 11 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the U.S. government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds of only the debt issued on its behalf and records on its statements of condition only that portion of the consolidated obligations for which it has received the proceeds. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are generally issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 15.
The par amounts of the 11 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $853 billion and $847 billion at June 30, 2015 and December 31, 2014, respectively. The Bank was the primary obligor on $39.3 billion and $35.2 billion (at par value), respectively, of these consolidated obligations.
    Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at June 30, 2015 and December 31, 2014 (in thousands, at par value).

 
June 30, 2015
 
December 31, 2014
Fixed-rate
$
11,925,605

 
$
8,377,640

Variable-rate
4,336,000

 
4,471,000

Step-up
4,210,000

 
3,112,500

Step-down
150,000

 
150,000

Step-up/step-down
15,000

 

Total par value
$
20,636,605

 
$
16,111,140


At June 30, 2015 and December 31, 2014, 91 percent and 86 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped to a variable rate.

20


Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at June 30, 2015 and December 31, 2014, by contractual maturity (dollars in thousands):
 
 
June 30, 2015
 
December 31, 2014
Contractual Maturity
 
Amount
 
Weighted Average
Interest Rate
 
Amount
 
Weighted Average
Interest Rate
Due in one year or less
 
$
6,512,855

 
0.59
%
 
$
6,225,840

 
0.58
%
Due after one year through two years
 
4,280,865

 
0.82

 
2,790,080

 
1.19

Due after two years through three years
 
3,061,850

 
1.53

 
1,537,000

 
0.95

Due after three years through four years
 
2,111,765

 
1.23

 
1,847,000

 
1.94

Due after four years through five years
 
2,274,000

 
1.42

 
1,172,500

 
1.49

Due after five years
 
2,395,270

 
2.00

 
2,538,720

 
2.06

Total par value
 
20,636,605

 
1.10
%
 
16,111,140

 
1.18
%
 
 
 
 
 
 
 
 
 
Premiums
 
14,845

 
 
 
6,345

 
 
Discounts
 
(2,928
)
 
 
 
(3,486
)
 
 
Hedging adjustments
 
(30,129
)
 
 
 
(35,299
)
 
 
Total
 
$
20,618,393

 
 
 
$
16,078,700

 
 

At June 30, 2015 and December 31, 2014, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):
 
June 30, 2015
 
December 31, 2014
Non-callable bonds
$
12,231,335

 
$
8,504,920

Callable bonds
8,405,270

 
7,606,220

Total par value
$
20,636,605

 
$
16,111,140


The following table summarizes the Bank’s consolidated obligation bonds outstanding at June 30, 2015 and December 31, 2014, by the earlier of contractual maturity or next possible call date (in thousands, at par value):
Contractual Maturity or Next Call Date
 
June 30, 2015
 
December 31, 2014
Due in one year or less
 
$
14,711,125

 
$
13,772,060

Due after one year through two years
 
3,755,865

 
1,645,080

Due after two years through three years
 
1,358,850

 
152,000

Due after three years through four years
 
655,765

 
437,000

Due after four years through five years
 
75,000

 
25,000

Due after five years
 
80,000

 
80,000

Total par value
 
$
20,636,605

 
$
16,111,140


     Discount Notes. At June 30, 2015 and December 31, 2014, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted
Average Implied
Interest Rate
 
 
 
 
 
 
June 30, 2015
$
18,633,731

 
$
18,635,100

 
0.07
%
 
 
 
 
 
 
December 31, 2014
$
19,131,832

 
$
19,134,303

 
0.09
%

At June 30, 2015, 1 percent of the Bank's consolidated obligation discount notes were swapped to a variable rate. None of the Bank's consolidated obligation discount notes were swapped at December 31, 2014.


21


Note 9—Affordable Housing Program (“AHP”)
The following table summarizes the changes in the Bank’s AHP liability during the six months ended June 30, 2015 and 2014 (in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
Balance, beginning of period
$
25,998

 
$
31,864

AHP assessment
5,219

 
2,991

Grants funded, net of recaptured amounts
(4,364
)
 
(5,319
)
Balance, end of period
$
26,853

 
$
29,536


Note 10—Assets and Liabilities Subject to Offsetting
The Bank has derivatives and securities purchased under agreements to resell that are subject to enforceable master netting agreements or similar arrangements. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists. The Bank did not have any liabilities that were eligible to offset its securities purchased under agreements to resell (i.e., securities sold under agreements to repurchase) as of June 30, 2015 or December 31, 2014.
The Bank's derivative transactions are executed either bilaterally or, if required, cleared through a third-party central clearinghouse. The Bank has entered into master agreements with each of its bilateral derivative counterparties that provide for the netting of all transactions with each of these counterparties. Under its master agreements with its non-member bilateral derivative counterparties, collateral is delivered (or returned) daily when certain thresholds (ranging from $100,000 to $500,000) are met. The Bank offsets the fair value amounts recognized for bilaterally traded derivatives executed with the same counterparty, including any cash collateral remitted to or received from the counterparty. When entering into derivative transactions with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions with members consists of collateral that is eligible to secure advances and other obligations under the member's Advances and Security Agreement with the Bank. The Bank is not required to pledge collateral to its members to secure derivative positions. For cleared derivatives, all transactions with each clearing member of each clearinghouse are netted pursuant to legally enforceable setoff rights. Cleared derivatives are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral associated with cleared derivatives (i.e., initial and variation margin) is delivered (or returned) daily and is not subject to any maximum unsecured thresholds. The Bank offsets the fair value amounts recognized for cleared derivatives transacted with each clearing member of each clearinghouse, including cash collateral pledged or received.
The following table presents derivative instruments and securities purchased under agreements to resell with the legal right of offset, including the related collateral received from or pledged to counterparties as of June 30, 2015 and December 31, 2014 (in thousands).

22


 
 
Gross Amounts of Recognized Financial Instruments
 
Gross Amounts Offset in the Statement of Condition
 
Net Amounts Presented in the Statement of Condition
 
Collateral Not Offset in the Statement of Condition (1)
 
Net Unsecured Amount
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
 
Bilateral derivatives
 
$
31,863

 
$
(21,524
)
 
$
10,339

 
$
(9,348
)
(2) 
$
991

 
Cleared derivatives
 
53,281

 
(34,790
)
 
18,491

 

 
18,491

(3) 
Total derivatives
 
85,144

 
(56,314
)
 
28,830

 
(9,348
)
 
19,482

 
Securities purchased under agreements to resell
 
5,700,000

 

 
5,700,000

 
(5,700,000
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
5,785,144

 
$
(56,314
)
 
$
5,728,830

 
$
(5,709,348
)
 
$
19,482

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
 
Bilateral derivatives
 
$
398,336

 
$
(381,966
)
 
$
16,370

 
$

 
$
16,370

 
Cleared derivatives
 
162,835

 
(162,835
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
561,171

 
$
(544,801
)
 
$
16,370

 
$

 
$
16,370

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
31,666

 
$
(21,212
)
 
$
10,454

 
$
(9,746
)
(4) 
$
708

 
Cleared derivatives
 
6,574

 
(6,574
)
 

 

 

 
Total derivatives
 
38,240

 
(27,786
)
 
10,454

 
(9,746
)
 
708

 
Securities purchased under agreements to resell
 
350,000

 

 
350,000

 
(350,000
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
388,240

 
$
(27,786
)
 
$
360,454

 
$
(359,746
)
 
$
708

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
629,920

 
$
(611,348
)
 
$
18,572

 
$

 
$
18,572

 
Cleared derivatives
 
58,653

 
(55,704
)
 
2,949

 
(2,949
)
(5) 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
688,573

 
$
(667,052
)
 
$
21,521

 
$
(2,949
)
 
$
18,572

 
_____________________________
(1) 
Any overcollateralization at an individual clearinghouse/clearing member or bilateral counterparty level is not included in the determination of the net unsecured amount.
(2) 
Consists of $9,348,000 of collateral pledged by member counterparties.
(3) 
In addition to this amount, the Bank had pledged securities with a fair value of $99,998,000 to secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.
(4) 
Consists of $9,746,000 of collateral pledged by member counterparties.
(5) 
In addition to this amount, the Bank had pledged securities with a fair value of $33,036,000 to secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.


23


Note 11—Derivatives and Hedging Activities
     Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank has not entered into any credit default swaps or foreign exchange-related derivatives and, as of June 30, 2015, it was not a party to any swaptions or forward rate agreements.
The Bank uses interest rate exchange agreements in two ways: either by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment or by designating the agreement as a hedge of some defined risk in the course of its balance sheet management (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.
The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or to act as an intermediary between its members and the Bank’s non-member derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.
At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. This process includes linking all derivatives that are designated as fair value hedges to: (1) specific assets and liabilities on the statements of condition or (2) firm commitments. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.
     Investments — The Bank has invested in agency and non-agency MBS. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps.
A substantial portion of the Bank’s held-to-maturity securities are variable-rate MBS that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank has entered into interest rate cap agreements. These derivatives are treated as economic hedges.
Substantially all of the Bank's available-for-sale securities are fixed-rate agency and other highly rated debentures and agency commercial MBS. To hedge the interest rate risk associated with these fixed-rate investment securities, the Bank has entered into fixed-for-floating interest rate exchange agreements, which are designated as fair value hedges.
Advances — The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to approximate more closely the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed coupon and receives a variable coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.
A small portion of the Bank’s variable-rate advances are subject to interest rate caps that would limit the variable-rate coupons if short-term interest rates rise above a predetermined level. To hedge the cap risk embedded in these advances, the Bank generally enters into interest rate cap agreements. This type of hedge is treated as a fair value hedge.

24


The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
The Bank enters into optional advance commitments with its members. In an optional advance commitment, the Bank sells an option to the member that provides the member with the right to enter into an advance at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. Optional advance commitments involving Community Investment Program and Economic Development Program advances with a commitment period of three months or less are currently provided at no cost to members. The Bank may hedge an optional advance commitment through the use of an interest rate swaption. In this case, the swaption will function as the hedging instrument for both the commitment and, if the option is exercised by the member, the subsequent advance. These swaptions are treated as economic hedges.
     Consolidated Obligations While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank is the primary obligor for the consolidated obligations it has issued or assumed from another FHLBank. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.
To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. These transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily effective federal funds rate) to another index rate (e.g., one-month or three-month LIBOR); these transactions are treated as economic hedges.
The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.
     Balance Sheet Management — From time to time, the Bank may enter into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements. These derivatives are treated as economic hedges.
     Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.
     Accounting for Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the FASB’s Accounting Standards Codification (“ASC”) entitled “Derivatives and Hedging” (“ASC 815”). All derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists.
Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item attributable to the hedged risk) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under ASC 815 is recorded as a component of net interest income. An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under ASC 815, but is an acceptable hedging strategy under the Bank’s Enterprise Market Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value changes associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Cash flows associated with derivatives are reported as cash

25


flows from operating activities in the statements of cash flows, unless the derivatives contain an other-than-insignificant financing element, in which case the cash flows are reported as cash flows from financing activities.
If hedging relationships meet certain criteria specified in ASC 815, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of hedge accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of committed advances to be eligible for the shortcut method of accounting as long as the settlement of the committed advance occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for shortcut accounting specified in ASC 815. The Bank has defined the market settlement convention to be five business days or less for advances. The Bank records the changes in fair value of the derivative and the hedged item beginning on the trade date.
The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.
The Bank discontinues hedge accounting prospectively when: (1) management determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designating the derivative as a hedging instrument in accordance with ASC 815 is no longer appropriate.
When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for hedge accounting treatment, the Bank will continue to carry the derivative on the statement of condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method. In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing changes in the fair value of the derivative in current period earnings.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
    

26


 Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at June 30, 2015 and December 31, 2014 (in thousands).
 
 
June 30, 2015
 
December 31, 2014
 
 
Notional Amount of
Derivatives
 
Estimated Fair Value
 
Notional Amount of
Derivatives
 
Estimated Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
4,859,448

 
$
3,967

 
$
156,118

 
$
4,936,984

 
$
4,641

 
$
183,285

Available-for-sale securities
 
6,641,496

 
30,541

 
367,324

 
5,877,601

 
401

 
462,501

Consolidated obligation bonds
 
14,856,935

 
35,149

 
24,904

 
10,102,140

 
15,610

 
28,046

Interest rate caps related to advances
 

 

 

 
25,000

 

 

Total derivatives designated as hedging
   instruments under ASC 815
 
26,357,879

 
69,657

 
548,346

 
20,941,725

 
20,652

 
673,832

Derivatives not designated as hedging
   instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
1,500

 

 
1

 
1,500

 
4

 

Available-for-sale securities
 
2,613

 
71

 
18

 
1,000

 

 
32

Consolidated obligation discount notes
 
249,823

 
25

 

 

 

 

Intermediary transactions
 
1,116,347

 
13,537

 
11,737

 
950,000

 
14,864

 
13,413

Interest rate caps
 

 

 

 
 
 

 
 
Held-to-maturity securities
 
2,500,000

 
785

 

 
2,900,000

 
1,424

 

Intermediary transactions
 
80,000

 
1,069

 
1,069

 
80,000

 
1,296

 
1,296

Total derivatives not designated as
    hedging instruments under ASC 815
 
3,950,283

 
15,487

 
12,825

 
3,932,500

 
17,588

 
14,741

Total derivatives before collateral and netting adjustments
 
$
30,308,162

 
85,144

 
561,171

 
$
24,874,225

 
38,240

 
688,573

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash collateral and related accrued interest
 
 
 
(2,070
)
 
(490,557
)
 
 
 
(251
)
 
(639,517
)
Netting adjustments
 
 
 
(54,244
)
 
(54,244
)
 
 
 
(27,535
)
 
(27,535
)
Total collateral and netting adjustments(1)
 
 
 
(56,314
)
 
(544,801
)
 
 
 
(27,786
)
 
(667,052
)
Net derivative balances reported in statements of condition
 
 
 
$
28,830

 
$
16,370

 
 
 
$
10,454

 
$
21,521

_____________________________
(1) 
Amounts represent the effect of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

27


The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and six months ended June 30, 2015 and 2014 (in thousands).

 
Gain (Loss) Recognized in Earnings for the
 
Gain (Loss) Recognized in Earnings for the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Derivatives and hedged items in ASC 815 fair value hedging relationships
 
 
 
 
 
 
 
Interest rate swaps
$
7,999

 
$
143

 
$
10,230

 
$
(263
)
Interest rate caps

 

 

 
(2
)
Total net gain (loss) related to fair value hedge ineffectiveness
7,999

 
143

 
10,230

 
(265
)
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
Net interest income on interest rate swaps
69

 
419

 
101

 
944

Interest rate swaps
 

 
 

 
 

 
 

Advances

 
(25
)
 
(5
)
 
(25
)
Available-for-sale securities
140

 

 
94

 

Consolidated obligation bonds
329

 

 
1,915

 

Consolidated obligation discount notes
(27
)
 

 
13

 

Basis swaps

 
412

 

 
672

Intermediary transactions
613

 
53

 
977

 
825

Interest rate caps
 
 
 
 
 
 
 
Held-to-maturity securities
(674
)
 
(729
)
 
(639
)
 
(1,183
)
Total net gain related to derivatives not designated as hedging instruments under ASC 815
450

 
130

 
2,456

 
1,233

Net gains on derivatives and hedging activities reported in the statements of income
$
8,449

 
$
273

 
$
12,686

 
$
968

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in ASC 815 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and six months ended June 30, 2015 and 2014 (in thousands).

28


Hedged Item
 
Gain (Loss) on
Derivatives
 
Gain (Loss) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness (1)
 
Derivative Net
Interest Income
 (Expense)(2)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 

 
 

 
 

 
 

Advances
 
$
36,433

 
$
(36,060
)
 
$
373

 
$
(24,396
)
Available-for-sale securities
 
108,399

 
(102,238
)
 
6,161

 
(78,235
)
Consolidated obligation bonds
 
(27,419
)
 
28,884

 
1,465

 
37,310

Total
 
$
117,413

 
$
(109,414
)
 
$
7,999

 
$
(65,321
)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 

 
 

 
 

 
 

Advances
 
$
(7,651
)
 
$
7,306

 
$
(345
)
 
$
(26,982
)
Available-for-sale securities
 
(28,049
)
 
28,300

 
251

 
(20,318
)
Consolidated obligation bonds
 
43,176

 
(42,939
)
 
237

 
29,825

Total
 
$
7,476

 
$
(7,333
)
 
$
143

 
$
(17,475
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 

 
 

 
 

 
 

Advances
 
$
17,098

 
$
(16,302
)
 
$
796

 
$
(48,494
)
Available-for-sale securities
 
58,861

 
(50,966
)
 
7,895

 
(103,772
)
Consolidated obligation bonds
 
6,644

 
(5,105
)
 
1,539

 
66,263

Total
 
$
82,603

 
$
(72,373
)
 
$
10,230

 
$
(86,003
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 

 
 

 
 

 
 

Advances
 
$
(1,724
)
 
$
1,329

 
$
(395
)
 
$
(53,769
)
Available-for-sale securities
 
(38,225
)
 
38,791

 
566

 
(40,701
)
Consolidated obligation bonds
 
92,699

 
(93,135
)
 
(436
)
 
57,241

Total
 
$
52,750

 
$
(53,015
)
 
$
(265
)
 
$
(37,229
)
_____________________________
(1) 
Reported as net gains (losses) on derivatives and hedging activities in the statements of income.
(2) 
The net interest income (expense) associated with derivatives in ASC 815 fair value hedging relationships is reported in the statements of income in the interest income/expense line item for the indicated hedged item.
     Credit Risk Related to Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. The Bank manages derivative counterparty credit risk through the use of master netting agreements or other similar collateral exchange arrangements, credit analysis, and adherence to the requirements set forth in the Bank’s Enterprise Market Risk Management Policy and Finance Agency regulations. The Bank has transacted a majority of its interest rate exchange agreements bilaterally with large financial institutions under master netting agreements (as of June 30, 2015, the notional balance of outstanding transactions with bilateral counterparties totaled $18.4 billion). Some of these institutions (or their affiliates) buy, sell, and distribute consolidated obligations. The remainder of the Bank's interest rate exchange agreements have been cleared through third-party central clearinghouses (as of June 30, 2015, the notional balance of cleared transactions outstanding totaled $11.9 billion). With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank.
The notional amount of the Bank's interest rate exchange agreements does not reflect its credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position. The net exposure on derivative agreements is presented in Note 10. Based on the netting provisions and collateral requirements associated with its derivative agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.


29


Note 12—Capital
At all times during the six months ended June 30, 2015, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of June 30, 2015 and December 31, 2014 (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 
 
 
 
 
 
 
Risk-based capital
$
410,532

 
$
2,151,216

 
$
347,402

 
$
1,927,573

Total capital
$
1,702,071

 
$
2,151,216

 
$
1,521,835

 
$
1,927,573

Total capital-to-assets ratio
4.00
%
 
5.06
%
 
4.00
%
 
5.07
%
Leverage capital
$
2,127,589

 
$
3,226,824

 
$
1,902,293

 
$
2,891,360

Leverage capital-to-assets ratio
5.00
%
 
7.58
%
 
5.00
%
 
7.60
%
Shareholders are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. The membership investment requirement is currently 0.04 percent of each member's total assets as of December 31, 2014, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.10 percent of outstanding advances.
The Bank generally repurchases surplus stock on or about the last business day of the month following the end of each calendar quarter. For the repurchases that occurred on January 30, 2015, April 30, 2015 and August 7, 2015, surplus stock was defined as the amount of stock held by a member in excess of 102.5 percent of the member’s minimum investment requirement. For the repurchases that occurred on each of these dates, a member's surplus stock was not repurchased if the amount of that member's surplus stock was $100,000 or less, if the member elected to opt-out of the repurchase, or if, subject to certain exceptions, the member was on restricted collateral status. On January 30, 2015, April 30, 2015 and August 7, 2015, the Bank repurchased surplus stock totaling $134,747,000, $158,722,000 and $175,771,000, respectively, none of which was classified as mandatorily redeemable capital stock at those dates.

Note 13—Employee Retirement Plans
The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost (credit) related to this program for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
5

 
$
5

 
$
10

 
$
9

Interest cost
12

 
15

 
24

 
30

Amortization of prior service cost
2

 
1

 
4

 
1

Amortization of net actuarial gain
(20
)
 
(24
)
 
(41
)
 
(47
)
Net periodic benefit credit
$
(1
)
 
$
(3
)
 
$
(3
)
 
$
(7
)

Note 14—Estimated Fair Values
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. U.S. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP also requires an entity to disclose the level within the fair value hierarchy in which each measurement is classified. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
     Level 1 Inputs — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
     Level 2 Inputs — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or

30


liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).
     Level 3 Inputs — Unobservable inputs for the asset or liability that are supported by little or no market activity. None of the Bank’s assets or liabilities that are recorded at fair value on a recurring basis were measured using significant Level 3 inputs.
For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. Reclassifications, if any, would be reported as transfers as of the beginning of the quarter in which the changes occurred. For the six months ended June 30, 2015 and 2014, the Bank did not reclassify any fair value measurements.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2015 and December 31, 2014. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Tables may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, the fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.
The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.
     Cash and due from banks. The estimated fair value equals the carrying value.
     Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.
     Securities purchased under agreements to resell and federal funds sold. All federal funds sold represent overnight balances. All securities purchased under agreements to resell mature within one week. The estimated fair values approximate the carrying values.
     Trading, available-for-sale and held-to-maturity securities. To value its holdings of U.S. Treasury Bills and GSE discount notes classified as trading securities, all of its available-for-sale securities and its held-to-maturity MBS holdings, the Bank obtains prices from four designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.
A "median" price is first established for each security using a formula that is based upon the number of prices received. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to some type of validation similar to the evaluation of outliers described below. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
As of June 30, 2015, four vendor prices were received for substantially all of the Bank’s trading, available-for-sale and held-to-maturity securities referred to above and the final prices for substantially all of those securities were computed by averaging the four prices. Based on the Bank's understanding of the pricing methods employed by the third-party pricing vendors and the

31


relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the Bank's additional analyses), the Bank believes its final prices result in reasonable estimates of the fair values and that the fair value measurements are classified appropriately in the fair value hierarchy.
The Bank estimates the fair values of its held-to-maturity debentures using a pricing model and observable market data (i.e., the U.S. Government Agency Fair Value curve and, for debentures containing call features, swaption volatility).
To value its mutual fund investments classified as trading securities, the Bank obtains quoted prices for identical securities.
     Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances using the replacement advance rates for advances with similar terms and, for advances containing options, swaption volatility. This amount is then reduced for accrued interest receivable. Each FHLBank prices advances at a spread to its cost of funds. Each FHLBank's cost of funds approximates the "CO curve," which is derived by adding to the U.S. Treasury curve indicative spreads obtained from market-observable sources. The indicative spreads are generally derived from dealer pricing indications, recent trades, secondary market activity and historical pricing relationships.
     Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based on observed market prices for agency MBS. Individual mortgage loans are pooled based on certain criteria such as loan type, weighted average coupon, and origination year and matched to reference securities with a similar collateral composition to derive benchmark pricing. The prices for agency MBS used as a benchmark are subject to certain market conditions including, but not limited to, the market’s expectations of future prepayments, the current and expected level of interest rates, and investor demand.
     Accrued interest receivable and payable. The estimated fair value of accrued interest receivable and payable approximates the carrying value due to their short-term nature.
     Derivative assets/liabilities. The fair values of the Bank’s interest rate swap agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate curves (that is, the relevant LIBOR swap curve and, for purposes of discounting, the overnight index swap ("OIS") curve) and, for agreements containing options, swaption volatility). The fair values of the Bank’s interest rate caps are also estimated using a pricing model with inputs that are observable in the market (that is, cap volatility, the relevant LIBOR swap curve and, for purposes of discounting, the OIS curve).
As the collateral and netting provisions of the Bank’s arrangements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 10), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to non-binding dealer estimates (in the case of bilateral derivatives) and clearinghouse valuations (in the case of cleared derivatives) and may also compare its fair values to those of similar instruments to ensure that the fair values are reasonable.
The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; the estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of the Bank's bilateral derivatives are netted by counterparty pursuant to the provisions of the credit support annexes to the Bank’s master netting agreements with its non-member bilateral derivative counterparties. The Bank's cleared derivative transactions with each clearing member of each clearinghouse are netted pursuant to the Bank's arrangements with those parties. In each case, if the netted amounts are positive, they are classified as an asset and, if negative, as a liability.
     Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on replacement funding rates for liabilities with similar terms. The estimated fair value approximates the carrying value for deposits with variable rates and fixed rates with three months or less to their maturity or repricing date.
     Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and reducing this amount for accrued interest payable. The inputs to the valuation are the CO curve and, for consolidated obligations containing options, swaption volatility.
     Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.

32


     Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, was not material at June 30, 2015 or December 31, 2014.
In May 2015, the Bank replaced its third-party pricing/risk model with a new third-party pricing/risk model. Among other things, the third-party pricing/risk model is used to estimate the fair values of the Bank's interest rate exchange agreements, advances, consolidated obligations, deposits and held-to-maturity debentures. In addition, this model is used to calculate the periodic changes in the fair values of hedged items (e.g., certain advances, available-for-sale securities and consolidated obligations) that are attributable to changes in LIBOR, the designated benchmark interest rate ("the benchmark fair values"). The implementation of the new model did not have a significant impact on the estimated fair values and, where applicable, the benchmark fair values of the financial instruments referred to above. On the date the new model was implemented, there was an increase of approximately $3,100,000 in the computed amount of the Bank's net hedge ineffectiveness gains (including both fair value and economic hedges) relating to the Bank's entire derivatives portfolio. The derivatives portfolio approximated $30.4 billion (notional balance) at that time.
The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at June 30, 2015 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
386,966

 
$
386,966

 
$
386,966

 
$

 
$

 
$

Interest-bearing deposits
 
308

 
308

 

 
308

 

 

Securities purchased under agreements to resell
 
5,700,000

 
5,700,000

 

 
5,700,000

 

 

Federal funds sold
 
3,666,000

 
3,666,000

 

 
3,666,000

 

 

Trading securities (1)
 
218,877

 
218,877

 
8,893

 
209,984

 

 

Available-for-sale securities (1)
 
7,044,582

 
7,044,582

 

 
7,044,582

 

 

Held-to-maturity securities
 
3,709,934

 
3,755,636

 

 
3,607,705

(2) 
147,931

(3) 

Advances
 
21,647,725

 
21,724,702

 

 
21,724,702

 

 

Mortgage loans held for portfolio, net
 
63,095

 
69,870

 

 
69,870

 

 

Accrued interest receivable
 
57,302

 
57,302

 

 
57,302

 

 

Derivative assets (1)
 
28,830

 
28,830

 

 
85,144

 

 
(56,314
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
948,928

 
948,927

 

 
948,927

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
18,633,731

 
18,633,650

 

 
18,633,650

 

 

Bonds
 
20,618,393

 
20,614,618

 

 
20,614,618

 

 

Mandatorily redeemable capital stock
 
4,415

 
4,415

 
4,415

 

 

 

Accrued interest payable
 
45,797

 
45,797

 

 
45,797

 

 

Derivative liabilities (1)
 
16,370

 
16,370

 

 
561,171

 

 
(544,801
)
___________________________
(1) 
Financial instruments measured at fair value on a recurring basis as of June 30, 2015.
(2) 
Consists of the Bank's holdings of U.S. government-guaranteed debentures, state housing agency obligations, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3) 
Consists of the Bank's holdings of non-agency RMBS.
(4) 
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

33


The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2014 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
1,507,708

 
$
1,507,708

 
$
1,507,708

 
$

 
$

 
$

Interest-bearing deposits
 
266

 
266

 

 
266

 

 

Securities purchased under agreements to resell
 
350,000

 
350,000

 

 
350,000

 

 

Federal funds sold
 
5,613,000

 
5,613,000

 

 
5,613,000

 

 

Trading securities (1)
 
408,563

 
408,563

 
8,769

 
399,794

 

 

Available-for-sale securities (1)
 
6,388,502

 
6,388,502

 

 
6,388,502

 

 

Held-to-maturity securities
 
4,662,013

 
4,727,130

 

 
4,566,726

(2) 
160,404

(3) 

Advances
 
18,942,400

 
19,060,638

 

 
19,060,638

 

 

Mortgage loans held for portfolio, net
 
71,411

 
79,331

 

 
79,331

 

 

Accrued interest receivable
 
65,168

 
65,168

 

 
65,168

 

 

Derivative assets (1)
 
10,454

 
10,454

 

 
38,240

 

 
(27,786
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
797,414

 
797,408

 

 
797,408

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
19,131,832

 
19,131,732

 

 
19,131,732

 

 

Bonds
 
16,078,700

 
16,110,291

 

 
16,110,291

 

 

Mandatorily redeemable capital stock
 
5,059

 
5,059

 
5,059

 

 

 

Accrued interest payable
 
39,726

 
39,726

 

 
39,726

 

 

Derivative liabilities (1)
 
21,521

 
21,521

 

 
688,573

 

 
(667,052
)
___________________________
(1) 
Financial instruments measured at fair value on a recurring basis as of December 31, 2014.
(2) 
Consists of the Bank's holdings of U.S. government-guaranteed debentures, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3) 
Consists of the Bank's holdings of non-agency RMBS.
(4) 
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.
During the three months ended June 30, 2015, the Bank recorded total OTTI losses on one of its non-agency RMBS classified as held-to-maturity (see Note 5). Based on the lack of significant market activity for non-agency RMBS, the nonrecurring fair value measurement for this impaired security was classified as a Level 3 measurement in the fair value hierarchy. Four third-party vendor prices were received for this security and the average of the four prices was used to determine the final fair value measurement.



34


Note 15—Commitments and Contingencies
Joint and several liability. The Bank is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. At June 30, 2015, the par amount of the other 10 FHLBanks’ outstanding consolidated obligations was approximately $814 billion. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank expected that it would be required to pay any amounts on behalf of its co-obligors under its joint and several liability, the Bank would charge to income the amount of the expected payment. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood that it would have to pay any amounts beyond those for which it is primarily liable is remote.
Other commitments and contingencies. At June 30, 2015 and December 31, 2014, the Bank had commitments to make additional advances totaling approximately $25,615,000 and $14,065,000, respectively. In addition, outstanding standby letters of credit totaled $5,069,076,000 and $4,330,557,000 at June 30, 2015 and December 31, 2014, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these letters of credit (see Note 7).
At June 30, 2015 and December 31, 2014, the Bank had commitments to issue $145,330,000 and $60,000,000 of consolidated obligation bonds, respectively, all of which were hedged with interest rate swaps. At June 30, 2015 and December 31, 2014, the Bank had commitments to issue $160,000,000 and $750,000,000, respectively, of consolidated obligation discount notes, none of which were hedged.
The Bank has transacted interest rate exchange agreements with large financial institutions and third-party clearinghouses that are subject to collateral exchange arrangements. As of June 30, 2015 and December 31, 2014, the Bank had pledged cash collateral of $490,517,000 and $639,452,000, respectively, to those parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in the statements of condition. In addition, as of June 30, 2015 and December 31, 2014, the Bank had pledged securities with carrying values (and fair values) of $99,998,000 and $35,985,000, respectively, to parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged securities may be rehypothecated and are not netted against derivative assets and liabilities in the statement of condition.
In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.

Note 16— Transactions with Shareholders
Affiliates of two of the Bank’s derivative counterparties (Citigroup and Wells Fargo) acquired member institutions on March 31, 2005 and October 1, 2006, respectively. Since the acquisitions were completed, the Bank has continued to enter into interest rate exchange agreements with Citigroup and Wells Fargo in the normal course of business and under the same terms and conditions as before. Effective October 1, 2006, Citigroup terminated the Ninth District charter of the affiliate that acquired the member institution and, as a result, an affiliate of Citigroup became a non-member shareholder of the Bank.


35


Note 17 — Transactions with Other FHLBanks
Occasionally, the Bank loans (or borrows) short-term federal funds to (or from) other FHLBanks. During the six months ended June 30, 2015 and 2014, interest income from loans to other FHLBanks totaled $4,013 and $558, respectively. The following table summarizes the Bank’s loans to other FHLBanks during the six months ended June 30, 2015 and 2014 (in thousands).
 
Six Months Ended June 30,
 
2015
 
2014
Balance at January 1,
$

 
$

Loans made to:
 
 
 
FHLBank of San Francisco
840,000

 
390,000

FHLBank of Des Moines
200,000

 

FHLBank of Boston
200,000

 

FHLBank of Topeka
55,000

 

Collections from:

 

FHLBank of San Francisco
(840,000
)
 
(390,000
)
FHLBank of Des Moines
(200,000
)
 

FHLBank of Boston
(200,000
)
 

FHLBank of Topeka
(55,000
)
 

Balance at June 30,
$

 
$

During the six months ended June 30, 2015 and 2014, interest expense on borrowings from other FHLBanks totaled $3,686 and $1,486, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the six months ended June 30, 2015 and 2014 (in thousands).
 
Six Months Ended June 30,
 
2015
 
2014
Balance at January 1,
$

 
$

Borrowings from:
 
 
 
FHLBank of San Francisco
255,000

 
365,000

FHLBank of Indianapolis

 
90,000

 FHLBank of Chicago

 
90,000

 FHLBank of Topeka
360,000

 
40,000

FHLBank of Atlanta
250,000

 
20,000

FHLBank of Boston
475,000

 

Repayments to:
 
 
 
FHLBank of San Francisco
(255,000
)
 
(365,000
)
FHLBank of Indianapolis

 
(90,000
)
 FHLBank of Chicago

 
(90,000
)
 FHLBank of Topeka
(360,000
)
 
(40,000
)
FHLBank of Atlanta
(250,000
)
 
(20,000
)
FHLBank of Boston
(475,000
)
 

Balance at June 30,
$

 
$

The Bank has, from time to time, assumed the outstanding debt of another FHLBank rather than issue new debt. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt. The Bank did not assume any debt from other FHLBanks during the six months ended June 30, 2015 or 2014.
Occasionally, the Bank transfers debt that it no longer needs to other FHLBanks. In connection with these transactions, the assuming FHLBanks become the primary obligors for the transferred debt. The Bank did not transfer any debt to other FHLBanks during the six months ended June 30, 2015 or 2014.


36


 
Note 18 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 (in thousands).
 
Net Unrealized
 Gains (Losses) on
 Available-for-Sale
 Securities (1)
 
Non-Credit Portion of
 Other-than-Temporary
 Impairment Losses on
 Held-to-Maturity Securities
 
Postretirement
 Benefits
 
Total
 Accumulated
 Other
 Comprehensive
 Income (Loss)
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
Balance at April 1, 2015
$
22,072

 
$
(25,708
)
 
$
1,317

 
$
(2,319
)
Reclassifications from accumulated other comprehensive income (loss) to net income
 
 
 
 
 
 
 
Reclassification adjustment for amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 
(18
)
 
(18
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
3,031

 

 

 
3,031

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

 
(42
)
 

 
(42
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities

 
1,627

 

 
1,627

Total other comprehensive income (loss)
3,031

 
1,585

 
(18
)
 
4,598

Balance at June 30, 2015
$
25,103

 
$
(24,123
)
 
$
1,299

 
$
2,279

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
Balance at April 1, 2014
$
24,404

 
$
(31,341
)
 
$
1,404

 
$
(5,533
)
Reclassifications from accumulated other comprehensive income (loss) to net income
 
 
 
 
 
 
 
Reclassification adjustment for amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 
(23
)
 
(23
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
5,096

 

 

 
5,096

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

 
1,848

 

 
1,848

Total other comprehensive income (loss)
5,096

 
1,848

 
(23
)
 
6,921

Balance at June 30, 2014
$
29,500

 
$
(29,493
)
 
$
1,381

 
$
1,388

_____________________________
(1) Net unrealized gains (losses) on available-for-sale securities are net of unrealized gains and losses relating to hedged interest rate risk included in net income.
 
 
 
 
 
 
 
 

37


 
Net Unrealized
 Gains (Losses) on
 Available-for-Sale
 Securities (1)
 
Non-Credit Portion of
 Other-than-Temporary
 Impairment Losses on
 Held-to-Maturity Securities
 
Postretirement
 Benefits
 
Total
 Accumulated
 Other
 Comprehensive
 Income (Loss)
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
Balance at January 1, 2015
$
22,412

 
$
(27,349
)
 
$
1,336

 
$
(3,601
)
Reclassifications from accumulated other comprehensive income (loss) to net income
 
 
 
 
 
 
 
Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
(2,345
)
 

 

 
(2,345
)
Reclassification adjustment for amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 
(37
)
 
(37
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
5,036

 

 

 
5,036

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

 
(75
)
 

 
(75
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities

 
3,301

 

 
3,301

Total other comprehensive income (loss)
2,691

 
3,226

 
(37
)
 
5,880

Balance at June 30, 2015
$
25,103

 
$
(24,123
)
 
$
1,299

 
$
2,279

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
Balance at January 1, 2014
$
(868
)
 
$
(33,200
)
 
$
1,427

 
$
(32,641
)
Reclassifications from accumulated other comprehensive income (loss) to net income
 
 
 
 
 
 
 
Reclassification adjustment for amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 
(46
)
 
(46
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
30,368

 

 

 
30,368

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

 
3,707

 

 
3,707

Total other comprehensive income (loss)
30,368

 
3,707

 
(46
)
 
34,029

Balance at June 30, 2014
$
29,500

 
$
(29,493
)
 
$
1,381

 
$
1,388

_____________________________
(1) Net unrealized gains (losses) on available-for-sale securities are net of unrealized gains and losses relating to hedged interest rate risk included in net income.

38


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included in “Item 1. Financial Statements.”
Forward-Looking Information
This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (the “Bank”) about its future results, performance, liquidity, financial condition, prospects and opportunities, as well as its current beliefs and expectations with respect to future events and transactions between the Bank and its members. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual results to differ materially from those expressed or implied in these forward-looking statements, or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on these statements.
These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, changes in the ratings on the Bank’s debt, adverse consequences resulting from a significant regional, national or global economic downturn (including, but not limited to, reduced demand for the Bank's products and services), credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a government-sponsored enterprise (“GSE”), or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of a significant amount of member borrowings through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see “Item 1A — Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on March 26, 2015 (the “2014 10-K”). The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
Overview
Business
The Bank is one of 11 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Federal Home Loan Banks Office of Finance ("Office of Finance"), a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932. The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending, and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s stated mission is to ensure that the housing GSEs, including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.
The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies, credit unions, and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994. While not members of the Bank, housing associates, including state and local housing authorities, that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of investments, the vast majority of which are highly rated, for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a small portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired during the period from 1998 to mid-2003 through the Mortgage Partnership Finance® (“MPF”®) Program offered by the FHLBank of Chicago. In the second half of 2015, the Bank intends to resume acquiring conventional mortgage loans through the MPF Program. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments

39


available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.
The Bank’s capital stock is not publicly traded and can be held only by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank's stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, that transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.
The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 11 FHLBanks. Consolidated obligations are issued through the Office of Finance (acting as agent for the FHLBanks) and generally are publicly traded in the over-the-counter market. The Bank records on its statements of condition only those consolidated obligations for which it receives the proceeds. Consolidated obligations are not obligations of the U.S. government and the U.S. government does not guarantee them. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by Standard & Poor’s (“S&P”). These ratings indicate that each of these nationally recognized statistical rating organizations ("NRSROs") has concluded that the FHLBanks have a very strong capacity to meet their commitments to pay principal and interest on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks’ GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members are also sources of funds for the Bank.
In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of June 30, 2015, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks and S&P had rated each of the FHLBanks AA+/A-1+.
Shareholders, bondholders and prospective shareholders and bondholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.
The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging.”
The Bank’s profitability objective is to generate sufficient earnings to allow the Bank to continue to increase its retained earnings and pay dividends on capital stock at rates that are at least equal to or slightly above the average federal funds rate. The Bank’s quarterly dividends are based upon its operating results, shareholders’ average capital stock holdings and, currently, the upper end of the targeted range for the federal funds rate for the immediately preceding quarter. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.
The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.

40


The following table summarizes the Bank’s membership, by type of institution, as of June 30, 2015 and December 31, 2014.
MEMBERSHIP SUMMARY
 
June 30, 2015
 
December 31, 2014
Commercial banks
641

 
655

Thrifts
62

 
68

Credit unions
104

 
103

Insurance companies
32

 
31

Community Development Financial Institutions
5

 
4

Total members
844

 
861

Housing associates
8

 
8

Non-member borrowers
10

 
10

Total
862

 
879

Community Financial Institutions (“CFIs”) (1)
645

 
670

_____________________________
(1) 
The figures presented above reflect the number of members that were Community Financial Institutions as of June 30, 2015 and December 31, 2014 based upon the definitions of Community Financial Institutions that applied as of those dates.
For 2015, Community Financial Institutions (“CFIs”) are defined to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets as of December 31, 2014, 2013 and 2012 of less than $1.123 billion. For 2014, CFIs were defined as FDIC-insured institutions with average total assets as of December 31, 2013, 2012 and 2011 of less than $1.108 billion.
The decline in the Bank's membership during the six months ended June 30, 2015 was largely attributable to merger activity within the Bank's district.
Merger of Des Moines and Seattle FHLBanks
On September 25, 2014, the FHLBank of Des Moines and the FHLBank of Seattle announced that they had entered into a definitive agreement to merge the two FHLBanks. On December 19, 2014, the Finance Agency approved the merger application, subject to the satisfaction of certain closing conditions set forth in its approval letter, including the ratification of the merger agreement by members of both the Des Moines and Seattle FHLBanks. On February 27, 2015, the FHLBanks of Des Moines and Seattle announced that the merger agreement had been ratified by members of both FHLBanks. The merger was consummated effective May 31, 2015. At closing, the FHLBank of Seattle merged with and into the FHLBank of Des Moines, with the FHLBank of Des Moines surviving the merger as the continuing FHLBank. Headquartered in Des Moines, Iowa, the first day of operations for the combined FHLBank was June 1, 2015.
Financial Market Conditions
Economic growth in the United States expanded moderately during the second quarter of 2015. The gross domestic product increased at an annual rate of 2.3 percent during the second quarter of 2015, after increasing at an annual rate of 0.6 percent during the first quarter of 2015 and 2.4 percent during 2014. The nationwide unemployment rate fell from 5.6 percent at December 31, 2014 to 5.5 percent at March 31, 2015 and 5.3 percent at June 30, 2015. Housing prices continued to improve in most major metropolitan areas.
During 2014, the Federal Open Market Committee ("FOMC") concluded its asset purchase program. The Federal Reserve is maintaining its existing policy of reinvesting the principal payments from its holdings of agency debt and agency mortgage-backed securities ("MBS") in agency MBS and of rolling over maturing treasury securities at auction.
The FOMC maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout the first six months of 2015. The Federal Reserve stated at its July 2015 FOMC meeting that the FOMC anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and it is reasonably confident that inflation will move back to its 2 percent objective over the medium term. The FOMC also stated that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run.
One-month and three-month LIBOR rates increased slightly during the first six months of 2015, with one-month and three-month LIBOR ending the second quarter at 0.19 percent and 0.28 percent, respectively, as compared to 0.17 percent and 0.26

41


percent, respectively, at the end of 2014. The following table presents information on various market interest rates at June 30, 2015 and December 31, 2014 and various average market interest rates for the six-month periods ended June 30, 2015 and 2014.
 
Ending Rate
 
Average Rate
 
Average Rate
 
June 30, 2015
 
December 31, 2014
 
Second Quarter 2015
 
Second Quarter 2014
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
Federal Funds Target (1)
0.25%
 
0.25%
 
0.25%
 
0.25%
 
0.25%
 
0.25%
Average Effective Federal Funds Rate (2)
0.08%
 
0.06%
 
0.13%
 
0.09%
 
0.12%
 
0.08%
1-month LIBOR (1)
0.19%
 
0.17%
 
0.18%
 
0.15%
 
0.18%
 
0.15%
3-month LIBOR (1)
0.28%
 
0.26%
 
0.28%
 
0.23%
 
0.27%
 
0.23%
2-year LIBOR (1)
0.90%
 
0.90%
 
0.86%
 
0.54%
 
0.85%
 
0.52%
5-year LIBOR (1)
1.79%
 
1.77%
 
1.66%
 
1.74%
 
1.63%
 
1.71%
10-year LIBOR (1)
2.46%
 
2.28%
 
2.24%
 
2.72%
 
2.16%
 
2.79%
3-month U.S. Treasury (1)
0.01%
 
0.04%
 
0.02%
 
0.03%
 
0.02%
 
0.04%
2-year U.S. Treasury (1)
0.64%
 
0.67%
 
0.61%
 
0.42%
 
0.61%
 
0.40%
5-year U.S. Treasury (1)
1.63%
 
1.65%
 
1.53%
 
1.66%
 
1.49%
 
1.63%
10-year U.S. Treasury (1)
2.35%
 
2.17%
 
2.16%
 
2.62%
 
2.07%
 
2.69%
_____________________________
(1) 
Source: Bloomberg
(2) 
Source: Federal Reserve Statistical Release
Year-to-Date 2015 Summary
The Bank ended the second quarter of 2015 with total assets of $42.6 billion compared with $38.0 billion at the end of 2014. The $4.6 billion increase in total assets during the six-month period was attributable primarily to a $2.7 billion increase in advances and a $2.1 billion increase in the Bank's short-term liquidity portfolio.
Total advances increased from $18.9 billion at December 31, 2014 to $21.6 billion at June 30, 2015. During the six-month period, the Bank's lending activities expanded due to increased demand from some of its larger borrowers, which the Bank attributes to increased loan demand and a decrease in liquidity levels at those institutions.
The Bank’s net income for the three and six months ended June 30, 2015 was $23.9 million and $47.0 million, respectively, as compared to $14.0 million and $26.9 million during the corresponding periods in 2014. The increases of $9.9 million and $20.1 million, respectively, were due for the most part to gains realized on the sales of long-term investment securities and increases in gains on derivatives and hedging activities. For additional discussion, see the section entitled "Results of Operations" beginning on page 60 of this report.
At all times during the first six months of 2015, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $744.5 million (1.75 percent of total assets) at June 30, 2015 from $699.8 million (1.84 percent of total assets) at December 31, 2014.
During the first six months of 2015, the Bank paid dividends totaling $2.2 million; the Bank’s first and second quarter dividends were each paid at an annualized rate of 0.375 percent, which exceeded the upper end of the Federal Reserve’s target range for the federal funds rate of 0.25 percent for each of the preceding quarters by 12.5 basis points.
While the Bank cannot predict future economic conditions or future levels of advances demand from its members, based on its current expectations the Bank anticipates that its earnings will be sufficient both to continue paying quarterly dividends at a rate at least equal to or slightly above the upper end of the Federal Reserve's target range for the federal funds rate and to continue building retained earnings for the foreseeable future. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

42





Selected Financial Data
SELECTED FINANCIAL DATA
(dollars in thousands)
 
2015
 
2014
 
Second
 Quarter
 
First
 Quarter
 
Fourth
 Quarter
 
Third
 Quarter
 
Second
 Quarter
Balance sheet (at quarter end)
 
 
 
 
 
 
 
 
 

Advances
$
21,647,725

 
$
17,215,265

 
$
18,942,400

 
$
18,758,139

 
$
18,245,870

Investments (1)
20,339,701

 
19,407,543

 
17,422,344

 
15,218,258

 
13,938,090

Mortgage loans
63,236

 
67,493

 
71,554

 
75,840

 
80,939

Allowance for credit losses on mortgage loans
141

 
143

 
143

 
148

 
148

Total assets
42,551,785

 
36,916,558

 
38,045,868

 
37,484,602

 
33,651,300

Consolidated obligations — discount notes
18,633,731

 
13,275,909

 
19,131,832

 
17,433,491

 
11,952,899

Consolidated obligations — bonds
20,618,393

 
20,195,376

 
16,078,700

 
17,356,431

 
18,958,906

Total consolidated obligations(2)
39,252,124

 
33,471,285

 
35,210,532

 
34,789,922

 
30,911,805

Mandatorily redeemable capital stock(3)
4,415

 
4,563

 
5,059

 
4,655

 
3,779

Capital stock — putable
1,402,286

 
1,244,254

 
1,222,738

 
1,241,398

 
1,227,513

Unrestricted retained earnings
685,571

 
667,595

 
650,224

 
642,747

 
635,150

Restricted retained earnings
58,944

 
54,169

 
49,552

 
47,399

 
45,233

Total retained earnings
744,515

 
721,764

 
699,776

 
690,146

 
680,383

Accumulated other comprehensive income (loss)
2,279

 
(2,319
)
 
(3,601
)
 
8,001

 
1,388

Total capital
2,149,080

 
1,963,699

 
1,918,913

 
1,939,545

 
1,909,284

Dividends paid(3)
1,123

 
1,100

 
1,135

 
1,065

 
984

Income statement (for the quarter)
 
 
 
 
 
 
 
 
 
Net interest income
$
31,397

 
$
29,084

 
$
32,453

 
$
27,527

 
$
31,885

Other income (loss)
13,973

 
14,700

 
(805
)
 
3,169

 
2,830

Other expense
18,843

 
18,130

 
19,687

 
18,664

 
19,155

AHP assessment
2,653

 
2,566

 
1,196

 
1,204

 
1,556

Net income
23,874

 
23,088

 
10,765

 
10,828

 
14,004

Performance ratios
 
 
 
 
 
 
 
 
 
Net interest margin(4)
0.28
%
 
0.29
%
 
0.34
%
 
0.31
%
 
0.39
%
Return on average assets
0.22

 
0.23

 
0.11

 
0.12

 
0.17

Return on average equity
4.75

 
4.88

 
2.29

 
2.27

 
3.10

Return on average capital stock (5)
7.45

 
7.71

 
3.67

 
3.97

 
4.93

Total average equity to average assets
4.61

 
4.74

 
4.87

 
5.35

 
5.53

Regulatory capital ratio(6)
5.06

 
5.34

 
5.07

 
5.17

 
5.68

Dividend payout ratio (3)(7)
4.70

 
4.76

 
10.54

 
9.84

 
7.03

Average effective federal funds rate(8)
0.13
%
 
0.11
%
 
0.10
%
 
0.09
%
 
0.09
%

43


_____________________________
(1) 
Investments consist of federal funds sold, interest-bearing deposits, securities purchased under agreements to resell and securities classified as held-to-maturity, available-for-sale, and trading.
(2) 
The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, and June 30, 2014, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $853 billion, $812 billion, $847 billion, $817 billion, and $800 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $39 billion, $33 billion, $35 billion, $35 billion, and $31 billion, respectively.
(3) 
Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $5 thousand, $4 thousand, $4 thousand, $4 thousand, and $4 thousand for the quarters ended June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, and June 30, 2014, respectively.
(4) 
Net interest margin is net interest income as a percentage of average earning assets.
(5) 
Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(6) 
The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each quarter-end.
(7) 
Dividend payout ratio is computed by dividing dividends paid by net income for each quarter.
(8) 
Rates obtained from the Federal Reserve Statistical Release.

Regulatory Developments
On July 14, 2015, the Finance Agency issued an Advisory Bulletin which provides guidance to the FHLBanks regarding core mission achievement. As stipulated in the Advisory Bulletin, the Finance Agency will assess each FHLBank’s core mission achievement by calculating the ratio of a FHLBank's primary mission assets (defined for this purpose as advances and mortgage loans held for portfolio) relative to its consolidated obligations (hereinafter referred to as the core mission asset or "CMA" ratio). The CMA ratio will be calculated for each calendar year (beginning with the year ending December 31, 2015) using annual average par values.
The Advisory Bulletin also provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on the FHLBank's CMA ratio, which are:
when the CMA ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining that level of core mission achievement;
when the CMA ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plans to increase its mission focus; and
when the CMA ratio is below 55 percent, the strategic plan should include a robust explanation of the circumstances that caused the CMA ratio to be below that level, as well as a detailed description of the FHLBank's plans to increase the ratio. The Advisory Bulletin provides that if a FHLBank has a CMA ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives as part of its strategic planning.
Currently, the Bank's core mission assets are comprised almost entirely of advances. For the first six months of 2015, the Bank's CMA ratio was 51.4 percent. During that period, the amount of the Bank's short-term liquidity holdings was maintained at a level beyond that which was needed to satisfy Finance Agency liquidity requirements in order to generate additional earnings. In response to this Advisory Bulletin, the Bank will reduce the amount of its short-term liquidity holdings during the second half of 2015 and in so doing will reduce the amount of its outstanding consolidated obligations, thereby increasing its CMA ratio (all other things being equal). The reduction in its short-term liquidity holdings is not expected to have a significant impact on the Bank's earnings for the remainder of 2015. In addition, as noted previously in the Overview section (and for reasons unrelated to the Advisory Bulletin), the Bank intends to resume acquiring mortgage loans through the MPF Program in the second half of 2015, which will increase the Bank's core mission assets over time. Further, while the Bank cannot predict future demand for advances, it currently expects that average outstanding advances during the last six months of 2015 will remain at a level at least equal to the average outstanding advances during the first six months of 2015. Although there can be no assurances, the Bank currently expects that its CMA ratio will likely be between 55 percent and 60 percent for the year ending December 31, 2015.

44




Financial Condition
The following table provides selected period-end balances as of June 30, 2015 and December 31, 2014, as well as selected average balances for the six-month period ended June 30, 2015 and the year ended December 31, 2014. As shown in the table, the Bank’s total assets increased by 11.8 percent between December 31, 2014 and June 30, 2015, due primarily to a $2.7 billion increase in advances and a $2.1 billion increase in the Bank's short-term liquidity holdings. As the Bank’s assets increased, the funding for those assets also increased. During the six months ended June 30, 2015, total consolidated obligations increased by $4.0 billion as consolidated obligation bonds increased by $4.5 billion and consolidated obligation discount notes decreased by $0.5 billion.
The activity in each of the major balance sheet captions is discussed in the sections following the table.
SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)

 
 
June 30, 2015
 
 
 
 
 
 
Increase (Decrease)
 
Balance at
 
 
Balance
 
Amount
 
Percentage
 
December 31, 2014
Advances
 
$
21,648

 
$
2,706

 
14.3
 %
 
$
18,942

Short-term liquidity holdings
 
 
 
 
 
 
 
 
Non-interest bearing excess cash balances (1)
 
350

 
(1,130
)
 
(76.4
)%
 
1,480

Securities purchased under agreements to resell
 
5,700

 
5,350

 
1,528.6
 %
 
350

Federal funds sold
 
3,666

 
(1,947
)
 
(34.7
)%
 
5,613

U.S. Treasury Bills
 
110

 
(290
)
 
(72.5
)%
 
400

GSE discount notes
 
100

 
100

 
*

 

Long-term investments
 
 
 
 
 
 
 
 
Available-for-sale securities
 
7,045

 
656

 
10.3
 %
 
6,389

Held-to-maturity securities
 
3,710

 
(952
)
 
(20.4
)%
 
4,662

Mortgage loans, net
 
63

 
(8
)
 
(11.3
)%
 
71

Total assets
 
42,552

 
4,506

 
11.8
 %
 
38,046

Consolidated obligations — bonds
 
20,618

 
4,539

 
28.2
 %
 
16,079

Consolidated obligations — discount notes
 
18,634

 
(498
)
 
(2.6
)%
 
19,132

Total consolidated obligations
 
39,252

 
4,041

 
11.5
 %
 
35,211

Mandatorily redeemable capital stock
 
4

 
(1
)
 
(20.0
)%
 
5

Capital stock
 
1,402

 
179

 
14.6
 %
 
1,223

Retained earnings
 
745

 
45

 
6.4
 %
 
700

Average total assets
 
42,109

 
7,699

 
22.4
 %
 
34,410

Average capital stock
 
1,250

 
108

 
9.5
 %
 
1,142

Average mandatorily redeemable capital stock
 
4

 

 
 %
 
4

_____________________________
*
The percentage increase is not meaningful.
(1) 
Represents excess cash held by the Bank. These amounts are classified as “Cash and due from banks” in the Bank’s statements of condition.



45


Advances
The Bank's advances balances (at par value) increased by $2.7 billion during the first six months of 2015. The Bank's lending activities expanded due to increased demand from some of its larger borrowers, which the Bank attributes to increased loan demand and a decrease in liquidity levels at those institutions. The following table presents advances outstanding, by type of institution, as of June 30, 2015 and December 31, 2014.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)

 
June 30, 2015
 
December 31, 2014
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
16,009

 
74
%
 
$
13,608

 
72
%
Thrifts
2,498

 
12

 
2,399

 
13

Credit unions
1,991

 
9

 
1,968

 
11

Insurance companies
1,004

 
5

 
799

 
4

Community Development Financial Institutions
7

 

 
4

 

Total member advances
21,509

 
100

 
18,778

 
100

Housing associates
2

 

 
2

 

Non-member borrowers
13

 

 
15

 

Total par value of advances
$
21,524

 
100
%
 
$
18,795

 
100
%
Total par value of advances outstanding to CFIs (1)
$
6,976

 
32
%
 
$
6,362

 
34
%
_____________________________
(1) 
The figures presented above reflect the advances outstanding to CFIs as of June 30, 2015 and December 31, 2014 based upon the definitions of CFIs that applied as of those dates.
At June 30, 2015, advances outstanding to the Bank’s five largest borrowers totaled $5.2 billion, representing 24.3 percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s five largest borrowers as of December 31, 2014 totaled $4.5 billion, representing 23.8 percent of the total outstanding advances at that date. The following table presents the Bank’s five largest borrowers as of June 30, 2015.
FIVE LARGEST BORROWERS AS OF JUNE 30, 2015
(par value, dollars in millions)

Name
 
Par Value of Advances
 
Percent of Total
Par Value of Advances
Texas Capital Bank, N.A.
 
$
1,400

 
6.5
%
LegacyTexas Bank
 
1,218

 
5.7

Prosperity Bank
 
887

 
4.1

Centennial Bank
 
860

 
4.0

Southside Bank
 
855

 
4.0

 
 
$
5,220

 
24.3
%


46


The following table presents information regarding the composition of the Bank’s advances by product type as of June 30, 2015 and December 31, 2014.
ADVANCES OUTSTANDING BY PRODUCT TYPE
(par value, dollars in millions)

 
June 30, 2015
 
December 31, 2014
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
$
18,814

 
87.4
%
 
$
16,540

 
88.0
%
Adjustable/variable-rate indexed
1,088

 
5.1

 
527

 
2.8

Amortizing
1,622

 
7.5

 
1,728

 
9.2

Total par value
$
21,524

 
100.0
%
 
$
18,795

 
100.0
%
The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in the 2014 10-K. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances.
In addition, as described in the 2014 10-K, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.
Short-Term Liquidity Holdings
At June 30, 2015, the Bank’s short-term liquidity holdings were comprised of $5.7 billion of reverse repurchase agreements (all of which were overnight transactions except for $0.5 billion, which was transacted with the Federal Reserve Bank of New York on June 29, 2015 for a 2-day term), $3.7 billion of overnight federal funds sold, $350 million of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas, $110 million of U.S. Treasury Bills and $100 million of GSE discount notes. At December 31, 2014, the Bank’s short-term liquidity holdings were comprised of $5.6 billion of overnight federal funds sold, $1.5 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas, $0.4 billion of U.S. Treasury Bills and $0.4 billion of overnight reverse repurchase agreements. All of the Bank's federal funds sold during the six months ended June 30, 2015 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. As of June 30, 2015, the Bank’s overnight federal funds sold consisted of $2.8 billion sold to counterparties rated single-A and $0.9 billion sold to counterparties rated triple-B. The credit ratings presented in the preceding sentence represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”). The amount of the Bank’s short-term liquidity holdings fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and, on and after July 14, 2015, the Finance Agency's expectations with regard to the Bank's core mission achievement. For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.” For a discussion of the Finance Agency's guidance regarding core mission achievement, see the section above entitled "Regulatory Developments."

47


Long-Term Investments
The composition of the Bank's long-term investment portfolio at June 30, 2015 and December 31, 2014 is set forth in the table below.
COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(in millions)
 
 
Balance Sheet Classification
 
Total Long-Term
 
 
 
 
Held-to-Maturity
 
Available-for-Sale
 
Investments
 
Held-to-Maturity
June 30, 2015
 
 (at carrying value)
 
 (at fair value)
 
(at carrying value)
 
 (at fair value)
Debentures
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
24

 
$
50

 
$
74

 
$
24

GSE obligations
 

 
4,341

 
4,341

 

State housing agency obligation
 
35

 

 
35

 
35

Other
 

 
394

 
394

 

Total debentures
 
59

 
4,785

 
4,844

 
59

 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
U.S. government-guaranteed
    residential MBS
 
6

 

 
6

 
6

GSE residential MBS
 
3,450

 

 
3,450

 
3,481

GSE commercial MBS
 
62

 
2,260

 
2,322

 
62

Non-agency residential MBS
 
133

 

 
133

 
148

Total MBS
 
3,651

 
2,260

 
5,911

 
3,697

Total long-term investments
 
$
3,710

 
$
7,045

 
$
10,755

 
$
3,756

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Total Long-Term
 
 
 
 
Held-to-Maturity
 
Available-for-Sale
 
Investments
 
Held-to-Maturity
December 31, 2014
 
 (at carrying value)
 
 (at fair value)
 
(at carrying value)
 
 (at fair value)
Debentures
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
27

 
$
50

 
$
77

 
$
27

GSE obligations
 

 
4,922

 
4,922

 

Other
 

 
411

 
411

 

Total debentures
 
27

 
5,383

 
5,410

 
27

 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
U.S. government-guaranteed
    residential MBS
 
7

 

 
7

 
7

GSE residential MBS
 
4,424

 

 
4,424

 
4,471

GSE commercial MBS
 
62

 
1,006

 
1,068

 
62

Non-agency residential MBS
 
142

 

 
142

 
160

Total MBS
 
4,635

 
1,006

 
5,641

 
4,700

Total long-term investments
 
$
4,662

 
$
6,389

 
$
11,051

 
$
4,727



48


As of June 30, 2015, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. The Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation, were rated triple-A by Moody's and Fitch and A+ by S&P. The credit ratings associated with the Bank's holdings of non-agency residential MBS ("RMBS") are presented in the table below.
During the six months ended June 30, 2015, the Bank acquired $1.3 billion of GSE commercial MBS ("CMBS") (based on trade date), all of which was classified as available-for-sale and backed by multi-family loans. During this same six-month period, the proceeds from maturities and paydowns of held-to-maturity securities and available-for-sale securities totaled approximately $404.6 million and $16.0 million, respectively.
In addition, during the six months ended June 30, 2015, the Bank sold approximately $595 million (par value) of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $10.1 million. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. The proceeds from these sales were reinvested in GSE CMBS. During this same six-month period, the Bank sold approximately $507 million (par value) of GSE debentures classified as available-for-sale. The aggregate gains recognized on these sales totaled $2.3 million.
The Bank is precluded by regulation from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock, mandatorily redeemable capital stock and retained earnings). At June 30, 2015, the Bank held $5.9 billion (amortized cost) of MBS, which represented 276 percent of its total regulatory capital as of that date. In July 2015, the Bank purchased an additional $549 million of GSE CMBS, all of which are backed by multi-family loans. The Bank intends to continue to purchase additional GSE MBS if securities with adequate returns are available when the Bank has the regulatory capacity to increase its MBS portfolio.
In addition to MBS, the Bank is also permitted under applicable policies and regulations to purchase certain other types of highly rated, long-term, non-MBS investments (including but not limited to the non-MBS debt obligations of other GSEs, subject to certain limits). Subject to applicable regulatory limits, the Bank may add these types of securities to its long-term investment portfolio in amounts that are commensurate with the growth in the other components of the Bank's balance sheet if attractive opportunities to do so are available.
Gross unrealized losses on the Bank’s MBS investments decreased from $20.0 million at December 31, 2014 to $19.9 million at June 30, 2015. As of June 30, 2015, $10.0 million of the gross unrealized losses related to the Bank’s holdings of non-agency RMBS.
The Bank evaluates all outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each calendar quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. For a summary of the Bank’s OTTI evaluation, see “Item 1. Financial Statements” (specifically, Notes 4 and 5 beginning on pages 9 and 11, respectively, of this report).
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2015 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
All of the Bank’s non-agency RMBS are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of June 30, 2015. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.

49




NON-AGENCY RMBS CREDIT RATINGS
(dollars in thousands)

Credit Rating
 
Number of Securities
 
Unpaid Principal Balance
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Unrealized Losses
Single-A
 
1

 
$
1,615

 
$
1,615

 
$
1,615

 
$
1,586

 
$
29

Triple-B
 
5

 
27,283

 
27,284

 
27,284

 
25,536

 
1,748

Double-B
 
4

 
4,967

 
4,968

 
4,968

 
4,694

 
274

Single-B
 
5

 
34,678

 
34,510

 
30,855

 
30,963

 
3,547

Triple-C
 
11

 
85,862

 
78,061

 
60,063

 
74,139

 
4,362

Single-D
 
1

 
13,555

 
10,575

 
8,105

 
11,013

 

Total
 
27

 
$
167,960

 
$
157,013

 
$
132,890

 
$
147,931

 
$
9,960

At June 30, 2015, the Bank’s portfolio of non-agency RMBS was comprised of 8 securities with an aggregate unpaid principal balance of $29 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $139 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2014, the Bank’s portfolio of non-agency RMBS was comprised of 8 securities backed by fixed-rate loans with an aggregate unpaid principal balance of $33 million and 19 securities backed by option ARM loans with an aggregate unpaid principal balance of $148 million. A summary of the Bank’s non-agency RMBS as of December 31, 2014 by classification by the originator at the time of issuance, collateral type and year of securitization is presented in the 2014 10-K; there were no material changes to this information during the six months ended June 30, 2015.
The geographic concentration by state of the loans underlying the Bank’s non-agency RMBS as of December 31, 2014 is provided in the 2014 10-K. There were no material changes in these concentrations during the six months ended June 30, 2015.
To assess whether the entire amortized cost bases of its non-agency RMBS are likely to be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of June 30, 2015 under a base case (or best estimate) scenario. The procedures used in this analysis, together with the results thereof, are summarized in “Item 1. Financial Statements” (specifically, Note 5 beginning on page 11 of this report). A summary of the significant inputs that were used in the Bank’s analysis of its entire non-agency RMBS portfolio as of June 30, 2015 is set forth in the table below.
SUMMARY OF SIGNIFICANT INPUTS FOR ALL NON-AGENCY RMBS
(dollars in thousands)

 
 
Unpaid Principal Balance at
June 30, 2015
 
Projected
Prepayment Rates(2)
 
Projected
Default Rates(2)
 
Projected
Loss Severities(2)
 
 
 
Weighted Average
 
Range
 
Weighted Average
 
Range
 
Weighted Average
 
Range
Year of Securitization
 
 
 
Low
 
High
 
 
Low
 
High
 
 
Low
 
High
Prime (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2003
 
$
5,571

 
19.97
%
 
11.24
%
 
23.52
%
 
0.84
%
 
0.28
%
 
1.41
%
 
21.13
%
 
20.36
%
 
22.09
%
Alt-A(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2006
 
13,555

 
14.22
%
 
14.22
%
 
14.22
%
 
20.61
%
 
20.61
%
 
20.61
%
 
37.54
%
 
37.54
%
 
37.54
%
2005
 
139,845

 
7.49
%
 
6.19
%
 
15.70
%
 
24.08
%
 
9.83
%
 
36.48
%
 
36.30
%
 
30.85
%
 
48.10
%
2004
 
7,858

 
8.09
%
 
7.48
%
 
8.63
%
 
23.71
%
 
22.85
%
 
24.70
%
 
31.64
%
 
31.40
%
 
31.90
%
2002
 
1,131

 
16.16
%
 
16.16
%
 
16.16
%
 
6.86
%
 
6.86
%
 
6.86
%
 
33.02
%
 
33.02
%
 
33.02
%
Total Alt-A collateral
 
162,389

 
8.14
%
 
6.19
%
 
16.16
%
 
23.65
%
 
6.86
%
 
36.48
%
 
36.16
%
 
30.85
%
 
48.10
%
Total non-agency RMBS
 
$
167,960

 
8.53
%
 
6.19
%
 
23.52
%
 
22.89
%
 
0.28
%
 
36.48
%
 
35.66
%
 
20.36
%
 
48.10
%
_____________________________
(1) 
The Bank’s non-agency RMBS holdings are classified as prime or Alt-A in the table above based upon the assumptions that were used to analyze the securities.
(2) 
Prepayment rates reflect the weighted average of projected future voluntary prepayments. Default rates reflect the total balance of loans projected to default as a percentage of the current unpaid principal balance of each of the underlying loan pools. Loss severities reflect the total projected loan losses as a percentage of the total balance of loans that are projected to default.


50


Since 2009, the Bank has recorded credit impairments totaling $13.1 million on 15 of its non-agency RMBS. Through June 30, 2015, actual principal shortfalls on these securities have totaled $1.5 million. Based on the cash flow analyses performed as of June 30, 2015, the Bank currently expects to recover in future periods approximately $9.3 million of the previously recorded losses. These anticipated recoveries (i.e., increases in cash flows expected to be collected) will be accreted as interest income over the remaining lives of the applicable securities.
In addition to evaluating its non-agency RMBS under a best estimate scenario, the Bank also performed a cash flow analysis for each of these securities as of June 30, 2015 under a more stressful housing price scenario. This more stressful scenario was based on a housing price forecast that assumed home price changes for the 12-month period beginning April 1, 2015 were 5 percentage points lower than the base case scenario followed by home price changes that are 33 percent lower than those used in the base case scenario. Under the more stressful housing price scenario, an additional $1,000 of credit impairment would have been recorded as of June 30, 2015 on the one security that was deemed to be other-than-temporarily impaired at that date under the best estimate scenario. None of the Bank’s other non-agency RMBS would have been deemed to be other-than-temporarily impaired under the more stressful housing price scenario.
While substantially all of the Bank's RMBS portfolio is comprised of collateralized mortgage obligations ("CMOs") with variable-rate coupons ($3.6 billion par value at June 30, 2015) that do not expose it to interest rate risk if interest rates rise moderately, these securities include caps that would limit increases in the variable-rate coupons if short-term interest rates rise above the caps. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of June 30, 2015, one-month LIBOR was 0.19 percent and the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 5.95 percent to 15.29 percent. The largest concentration of embedded effective caps ($3.3 billion) was between 6.00 percent and 7.00 percent. As of June 30, 2015, one-month LIBOR rates were 576 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held $2.5 billion of interest rate caps with remaining maturities ranging from 3 months to 74 months as of June 30, 2015, and strike rates ranging from 6.00 percent to 7.00 percent. If interest rates rise above the strike rates specified in these interest rate cap agreements, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. These payments would be based upon the notional amounts of those agreements and the difference between the specified strike rate and either one-month or three-month LIBOR.
The following table provides a summary of the notional amounts, strike rates and expiration periods of the Bank’s portfolio of stand-alone CMO-related interest rate cap agreements as of June 30, 2015.
SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS
(dollars in millions)

Expiration
 
Notional Amount
 
Strike Rate
Third quarter 2015
 
$
150

 
6.75
%
Third quarter 2015
 
200

 
6.50
%
Fourth quarter 2015
 
250

 
6.00
%
Fourth quarter 2015
 
250

 
7.00
%
Second quarter 2016
 
200

 
6.50
%
Second quarter 2016
 
250

 
7.00
%
Third quarter 2018
 
200

 
6.50
%
First quarter 2019
 
250

 
6.50
%
Third quarter 2021 (1)
 
750

 
6.50
%
 
 
$
2,500

 
 
 
 
 
 
 
(1)  This cap is effective beginning in August 2018 and its notional balance declines by $250 million in August 2019 and again in August 2020, to $500 million and $250 million, respectively.


51



Consolidated Obligations and Deposits
During the six months ended June 30, 2015, the Bank’s outstanding consolidated obligation bonds (at par value) increased by $4.5 billion while its outstanding consolidated obligation discount notes decreased by $0.5 billion. The following table presents the composition of the Bank’s outstanding bonds at June 30, 2015 and December 31, 2014.
COMPOSITION OF CONSOLIDATED OBLIGATION BONDS OUTSTANDING
(par value, dollars in millions)
 
June 30, 2015
 
December 31, 2014
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
 
 
 
 
 
 
 
Non-callable
$
7,895

 
38.3
%
 
$
4,169

 
25.9
%
Callable
4,030

 
19.5

 
4,209

 
26.1

Variable-rate
4,336

 
21.0

 
4,471

 
27.8

Callable step-up
4,210

 
20.4

 
3,112

 
19.3

Callable step-up/step-down
15

 
0.1

 

 

Callable step-down
150

 
0.7

 
150

 
0.9

Total par value
$
20,636

 
100.0
%
 
$
16,111

 
100.0
%

During the first six months of 2015, the Bank issued $11.0 billion of consolidated obligation bonds and approximately $48.8 billion of consolidated obligation discount notes (excluding those with overnight terms), the proceeds of which were used primarily to replace maturing or called consolidated obligation discount notes and bonds, as well as to fund the increase in the Bank's advances. At June 30, 2015 and December 31, 2014, discount notes comprised approximately 47 percent and 54 percent, respectively, of the Bank's total outstanding consolidated obligations. The majority of the consolidated obligation bonds issued during the six months ended June 30, 2015 (based on par value) were fixed-rate non-callable bonds (a large portion of which were swapped) and swapped fixed-rate callable bonds, including step-up bonds.
The weighted average cost of swapped and variable-rate consolidated obligation bonds issued by the Bank approximated LIBOR minus 17 basis points during the three months ended June 30, 2015, as compared to LIBOR minus 16 basis points during the three months ended March 31, 2015 and LIBOR minus 15 basis points during the year ended December 31, 2014.
Demand and term deposits were $0.9 billion and $0.8 billion at June 30, 2015 and December 31, 2014, respectively. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.
Capital
The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was $1.40 billion and $1.22 billion at June 30, 2015 and December 31, 2014, respectively. The Bank’s average outstanding capital stock (excluding mandatorily redeemable capital stock) increased from $1.14 billion for the year ended December 31, 2014 to $1.25 billion for the six months ended June 30, 2015.
Mandatorily redeemable capital stock outstanding at June 30, 2015 and December 31, 2014 was $4.4 million and $5.1 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, it is considered capital for regulatory purposes.

52


At June 30, 2015 and December 31, 2014, the Bank’s five largest shareholders collectively held $275 million and $204 million, respectively, of capital stock, which represented 19.5 percent and 16.6 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s five largest shareholders as of June 30, 2015.
FIVE LARGEST SHAREHOLDERS AS OF JUNE 30, 2015
(par value, dollars in thousands)
Name
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
Texas Capital Bank, N.A.
 
$
80,203

 
5.7
%
Prosperity Bank
 
58,132

 
4.1

LegacyTexas Bank
 
50,737

 
3.6

Centennial Bank
 
43,995

 
3.1

International Bank of Commerce
 
41,871

 
3.0

 
 
$
274,938

 
19.5
%
As of June 30, 2015, all of the stock held by the five institutions shown in the table above was classified as capital in the statement of condition.
Members are currently required to maintain an investment in Class B stock (hereinafter referred to as "Existing Class B Stock") equal to the sum of a membership investment requirement and an activity-based investment requirement. Currently, the membership investment requirement is 0.04 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $7,000,000, and the activity-based investment requirement is 4.10 percent of outstanding advances.
Periodically, the Bank repurchases a portion of members’ excess capital stock. Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. The Bank generally repurchases surplus stock on or about the last business day of the month following the end of each calendar quarter. For the quarterly repurchases that occurred on January 30, 2015, April 30, 2015 and August 7, 2015, surplus stock was defined as the amount of stock held by a member in excess of 102.5 percent of the member’s minimum investment requirement. For the repurchases that occurred on those dates, a member’s surplus stock was not repurchased if the amount of that member’s surplus stock was $100,000 or less or if, subject to certain exceptions, the member was on restricted collateral status. For each of these repurchases, members were given the opportunity to opt-out of the repurchase if they chose to do so. Based on member elections, surplus stock totaling $107.4 million, $60.0 million and $44.7 million that otherwise would have been repurchased on January 30, 2015, April 30, 2015 and August 7, 2015, respectively, was not repurchased. In the future, the Bank may continue this practice or, alternatively, it may modify its practices for repurchasing and managing excess stock in other ways that would allow members to hold larger amounts of excess stock.
The following table sets forth the repurchases of surplus stock that have occurred since December 31, 2014.
SURPLUS STOCK REPURCHASED UNDER QUARTERLY REPURCHASE PROGRAM
(dollars in thousands)
Date of Repurchase by the Bank
 
Shares Repurchased
 
Amount of Repurchase
 
Amount Classified as Mandatorily Redeemable Capital Stock at Date of Repurchase
January 30, 2015
 
1,347,470

 
$
134,747

 
$

April 30, 2015
 
1,587,217

 
158,722

 

August 7, 2015
 
1,757,714

 
175,771

 


At June 30, 2015, the Bank’s excess stock totaled $250.8 million, which represented 0.6% percent of the Bank’s total assets as of that date.



53


The following table presents outstanding capital stock, by type of institution, as of June 30, 2015 and December 31, 2014.
CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE
(par value, dollars in millions)
 
June 30, 2015
 
December 31, 2014
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
Commercial banks
$
1,000

 
71
%
 
$
844

 
69
%
Thrifts
126

 
9

 
126

 
10

Credit unions
201

 
14

 
189

 
16

Insurance companies
75

 
6

 
64

 
5

Total capital stock classified as capital
1,402

 
100

 
1,223

 
100

Mandatorily redeemable capital stock
5

 

 
5

 

Total regulatory capital stock
$
1,407

 
100
%
 
$
1,228

 
100
%
During the six months ended June 30, 2015, the Bank’s retained earnings increased by $44.7 million, from $699.8 million to $744.5 million. During this same period, the Bank paid dividends on capital stock totaling $2.2 million, which represented an annualized dividend rate of 0.375 percent. The Bank’s first and second quarter 2015 dividend rates exceeded the upper end of the Federal Reserve’s target range for the federal funds rate for the quarters ended December 31, 2014 and March 31, 2015, respectively, by 12.5 basis points. The first quarter dividend, applied to average capital stock held during the period from October 1, 2014 through December 31, 2014, was paid on March 31, 2015. The second quarter dividend, applied to average capital stock held during the period from January 1, 2015 through March 31, 2015, was paid on June 30, 2015.
The Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average federal funds rate. Consistent with that practice, the Bank manages its balance sheet so that its returns generally track short-term interest rates.
While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends for the remainder of 2015 at an annualized rate at least equal to the upper end of the Federal Reserve’s target range for the federal funds rate for the applicable dividend period (i.e., for each calendar quarter during this period, the upper end of the Federal Reserve's target range for the federal funds rate for the preceding quarter). Consistent with its long-standing practice, the Bank expects to pay these dividends in the form of capital stock with any fractional shares paid in cash.
The Bank is required to maintain at all times permanent capital (defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described in the 2014 10-K. At June 30, 2015, the Bank’s total risk-based capital requirement was $410.5 million, comprised of credit risk, market risk and operations risk capital requirements of $241.5 million, $74.3 million and $94.7 million, respectively, and its permanent capital was $2.2 billion.
In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general allowance for losses at June 30, 2015 or December 31, 2014. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the six months ended June 30, 2015, the Bank was in compliance with all of its regulatory capital requirements. At June 30, 2015, the Bank's total capital-to-assets and leverage capital-to-assets ratios were 5.06% and 7.58%, respectively. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of June 30, 2015 and December 31, 2014, see “Item 1. Financial Statements” (specifically, Note 12 on page 30 of this report).

54


The Bank recently amended its capital plan to, among other things, allow for the creation of two sub-classes of the Bank’s Class B Capital Stock (Class B-1 Stock and Class B-2 Stock). As further described below, the Bank must take additional actions in order to implement these amendments and those actions have not yet occurred.
If the amendments are ultimately implemented, Class B-1 Stock would be eligible to meet the membership investment requirement and Class B-2 Stock would be eligible to meet the activity-based investment requirement. The creation of the two sub-classes of stock would be implemented on the first day of the calendar quarter designated by the Bank that begins at least 30 days following the Bank’s notification to its members that such implementation will occur (hereinafter referred to as the "Sub-Class Amendment Implementation Date"). While there can be no assurances, the Bank currently expects to provide this notification on or before August 31, 2015. If the notification is provided on or before that date, the Sub-Class Amendment Implementation Date would be October 1, 2015.
On the Sub-Class Amendment Implementation Date, the Bank would exchange all shares of Existing Class B Stock at the open of business on such date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each member, (i) a number of shares of Existing Class B Stock in an amount sufficient to meet such member’s activity-based investment requirement would be exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of Existing Class B Stock held by such member would be exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of Existing Class B Stock would be retired.
Subject to the limitations in the capital plan, the Bank would subsequently convert shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a member in excess of its activity-based investment requirement would be converted into Class B-1 Stock, if necessary, to meet that member’s membership investment requirement and (ii) shares of Class B-1 Stock held by a member in excess of the amount required to meet its membership investment requirement would be converted into Class B-2 Stock as needed in order to satisfy that member’s activity-based investment requirement.
If, following the Sub-Class Amendment Implementation Date, the Bank was to initiate the repurchase of an amount of all members’ excess stock, then, for each member, the Bank would repurchase shares of Class B-2 Stock that were excess stock first, after which, if necessary, it would repurchase shares of Class B-1 Stock that were excess stock until the designated total repurchase amount was repurchased.
Following the Sub-Class Implementation Date, the Bank’s Board of Directors could declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event could the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividend payments could be made in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors. While there can be no assurances, the Bank currently anticipates that the dividend rates on Class B-2 Stock would likely be higher than the dividend rates on Class B-1 Stock.
For purposes of voting rights, all shares of Class B Stock regardless of sub-class would be treated the same.
The Bank also amended its capital plan to modify the permissible range for the advances-based component of the activity-based investment requirement. On the Sub-Class Amendment Implementation Date, the permissible range for the advances-based component of the activity-based investment requirement would change from a range of 3.0 percent to 5.0 percent of members’ advances outstanding to a range of 2.0 percent to 5.0 percent of members’ advances outstanding. The amendments did not alter the permissible ranges for the membership investment requirement or the Acquired Member Asset component of the activity-based investment requirement.
Further, on and after the Sub-Class Amendment Implementation Date, the Bank’s Board of Directors could also establish one or more separate advances investment requirement percentages (each an "advance type specific percentage") within the range described above to be applied to a specific category of advances in lieu of the generally applicable advances-related investment requirement percentage in effect at the time. Such category of advances could be defined as a particular advances product offering, advances with particular maturities or other features, advances that represent an increase in member borrowing, or such other criteria as the Bank’s Board of Directors might determine. Any advance type specific percentage could be established for an indefinite period of time, or for a specific time period, at the discretion of the Bank’s Board of Directors. While there can be no assurances, the Bank currently anticipates that it would establish one or more separate advances investment requirement percentages that would be less than the current requirement, although the categories of advances and the applicable percentages have not yet been determined.



55


Derivatives and Hedging Activities
The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 11 beginning on page 24 of this report). The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category and accounting designation, as of June 30, 2015 and December 31, 2014.
COMPOSITION OF DERIVATIVES BY BALANCE SHEET CATEGORY AND ACCOUNTING DESIGNATION
(in millions)
 
Shortcut
Method
 
Long-Haul
Method
 
Economic
Hedges
 
Total
June 30, 2015
 
 
 
 
 
 
 
Advances
$
3,471

 
$
1,389

 
$
2

 
$
4,862

Investments

 
6,641

 
2,502

 
9,143

Consolidated obligation bonds

 
14,857

 

 
14,857

Consolidated obligation discount notes

 

 
250

 
250

Intermediary positions

 

 
1,196

 
1,196

Total notional balance
$
3,471

 
$
22,887

 
$
3,950

 
$
30,308

December 31, 2014
 
 
 
 
 
 
 
Advances
$
3,593

 
$
1,369

 
$
2

 
$
4,964

Investments

 
5,878

 
2,901

 
8,779

Consolidated obligation bonds

 
10,102

 

 
10,102

Intermediary positions

 

 
1,030

 
1,030

Total notional balance
$
3,593

 
$
17,349

 
$
3,933

 
$
24,875



56


The following table presents the earnings impact of derivatives and hedging activities during the three and six months ended June 30, 2015 and 2014.

NET EARNINGS IMPACT OF DERIVATIVES AND HEDGING ACTIVITIES
(in millions)
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Intermediary Transactions
 
Balance
Sheet
 
Total
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(2
)
 
$
24

 
$

 
$

 
$

 
$
22

Net interest settlements included in net interest income (2)
(23
)
 
(52
)
 
38

 

 

 
(37
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Net gains on fair value hedges

 
6

 
2

 

 

 
8

Net gains (losses) on economic hedges

 
(1
)
 

 
1

 

 

Total net gains on derivatives and hedging activities

 
5

 
2

 
1

 

 
8

Net impact of derivatives and hedging activities
$
(25
)
 
$
(23
)
 
$
40

 
$
1

 
$

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$

 
$
27

 
$

 
$

 
$

 
$
27

Net interest settlements included in net interest income (2)
(28
)
 
(47
)
 
30

 

 

 
(45
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Net gains on fair value hedges

 

 
1

 

 

 
1

Net losses on economic hedges

 
(1
)
 

 

 

 
(1
)
Total net gains (losses) on derivatives and hedging activities

 
(1
)
 
1

 

 

 

Net impact of derivatives and hedging activities
$
(28
)
 
$
(21
)
 
$
31

 
$

 
$

 
$
(18
)
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(5
)
 
$
51

 
$
1

 
$

 
$

 
$
47

Net interest settlements included in net interest income (2)
(48
)
 
(104
)
 
66

 

 

 
(86
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Net gains on fair value hedges

 
8

 
2

 

 

 
10

Net gains (losses) on economic hedges

 
(1
)
 
2

 
1

 

 
2

Total net gains on derivatives and hedging activities

 
7

 
4

 
1

 

 
12

Net impact of derivatives and hedging activities
$
(53
)
 
$
(46
)
 
$
71

 
$
1

 
$

 
$
(27
)
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$

 
$
54

 
$
(1
)
 
$

 
$

 
$
53

Net interest settlements included in net interest income (2)
(56
)
 
(95
)
 
59

 

 

 
(92
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on economic hedges

 
(1
)
 

 
1

 

 

Net interest settlements on economic hedges

 

 

 

 
1

 
1

Total net gains (losses) on derivatives and hedging activities

 
(1
)
 

 
1

 
1

 
1

Net impact of derivatives and hedging activities
$
(56
)
 
$
(42
)
 
$
58

 
$
1

 
$
1

 
$
(38
)
_____________________________
(1) 
Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income/expense on derivatives included in net interest income.

57


The Bank has transacted a majority of its interest rate exchange agreements bilaterally with large financial institutions (with which it has in place master agreements). In doing so, the Bank has generally exchanged a defined market risk for the risk that the counterparty will not be able to fulfill its obligations in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into master agreements with each of its non-member bilateral counterparties that include maximum unsecured credit exposure thresholds ranging from $100,000 to $500,000, and by monitoring its exposure to each counterparty on a daily basis. In addition, all of the Bank’s master agreements with its bilateral counterparties include netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. As of June 30, 2015, the notional balance of outstanding interest rate exchange agreements transacted with bilateral counterparties totaled $18.4 billion.
Under the Bank’s master agreements with its non-member bilateral counterparties, the unsecured credit exposure thresholds must be met before collateral is required to be delivered by one party to the other party. Once the counterparties agree to the valuations of the interest rate exchange agreements, and if it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral (or return a sufficient amount of previously remitted collateral) to reduce the unsecured credit exposure to zero (or, in the case of pledged securities, to an amount equal to the discount applied to the securities under the terms of the master agreement). Collateral is delivered (or returned) daily when these thresholds are met. The master agreements with the Bank's non-member bilateral counterparties require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government-guaranteed or agency debt securities) if credit risk exposures rise above the thresholds.
As a result of new statutory and regulatory requirements emanating from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), certain derivative transactions that the Bank enters into are required to be cleared through a third-party central clearinghouse. As of June 30, 2015, the Bank had cleared trades outstanding with notional amounts totaling $11.9 billion. Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral is delivered (or returned) daily and, unlike bilateral derivatives, is not subject to any maximum unsecured credit exposure thresholds. The fair values of all interest rate derivatives (including accrued interest receivables and payables) with each clearing member of each clearinghouse are offset for purposes of measuring credit exposure and determining initial and variation margin requirements. With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank. The Bank has determined that the exercise by a non-defaulting party of the setoff rights incorporated in its cleared derivative transactions should be upheld in the event of a default, including a bankruptcy, insolvency or similar proceeding involving the clearinghouse or any of its clearing members or both.
The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position.

58


The following table provides information regarding the Bank’s derivative counterparty credit exposure as of June 30, 2015.
DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(dollars in millions)
Credit Rating(1)
 
Number of Bilateral Counterparties
 
Notional Principal(2)
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To (From) Counterparty
 
Net Credit Exposure
Non-member counterparties
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Single-A
 
1

 
$
450.0

 
$
1.5

 
$
(1.1
)
 
$

 
$
0.4

Liability positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Single-A 
 
2

 
1,499.7

 
(14.9
)
 
15.4

 

 
0.5

Triple-B (3)
 
1

 
2,997.9

 
(157.8
)
 
157.9

 

 
0.1

Cleared derivatives (4)
 

 
11,891.3

 
(109.5
)
 
128.0

 
99.9

 
118.4

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
4

 
16,838.9

 
(280.7
)
 
300.2

 
99.9

 
119.4

Liability positions without credit exposure (5)
 
12

 
12,871.1

 
(200.9
)
 
188.2

 

 

Total non-member counterparties
 
16

 
29,710.0

 
(481.6
)
 
$
488.4

 
$
99.9

 
$
119.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Member institutions (6)
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions
 
9

 
120.4

 
9.3

 
 
 
 
 
 
Liability positions
 
3

 
477.8

 
(3.7
)
 
 
 
 
 
 
Total member institutions
 
12

 
598.2

 
5.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
28

 
$
30,308.2

 
$
(476.0
)
 
 
 
 
 
 
_____________________________
(1) 
Credit ratings shown in the table reflect the lowest rating from Moody’s, S&P or Fitch and are as of June 30, 2015.
(2) 
Includes amounts that had not settled as of June 30, 2015.
(3) 
The figures for the liability position with credit exposure to the triple-B rated counterparty consisted of transactions with a counterparty that is affiliated with a non-member shareholder of the Bank.
(4) 
The counterparties to the Bank's cleared derivatives transactions are unrated.
(5) 
The figures for the liability positions without credit exposure as of June 30, 2015 included transactions with one counterparty that is affiliated with a member of the Bank and one other counterparty that is affiliated with a non-member shareholder of the Bank; transactions with these counterparties had an aggregate notional principal of $1.5 billion as of June 30, 2015.
(6) 
This product offering and the collateral provisions associated therewith are discussed in the paragraph below.
The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s non-member derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.
The Dodd-Frank Act changed the regulatory framework for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able in certain instances to continue to enter into uncleared trades on a bilateral basis, those transactions will be subject to new (but not yet finalized) regulatory requirements, including minimum margin requirements imposed by regulators. For additional discussion, see Item 1 - Business - Legislative and Regulatory Developments in the 2014 10-K.


59


Market Value of Equity
The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 106 percent and 109 percent at June 30, 2015 and December 31, 2014, respectively. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk.”

Results of Operations
Net Income
Net income for the three months ended June 30, 2015 and 2014 was $23.9 million and $14.0 million, respectively. The Bank’s net income for the three months ended June 30, 2015 represented an annualized return on average capital stock (“ROCS”) of 7.45 percent, which was 732 basis points above the average effective federal funds rate for the quarter. In comparison, the Bank’s ROCS was 4.93 percent for the three months ended June 30, 2014, which exceeded the average effective federal funds rate for that quarter by 484 basis points. Net income for the six months ended June 30, 2015 and 2014 was $47.0 million and $26.9 million, respectively. The Bank’s net income for the six months ended June 30, 2015 represented an annualized return on average capital stock of 7.58 percent, which was 746 basis points above the average effective federal funds rate for the six-month period. In comparison, the Bank’s ROCS was 4.93 percent for the six months ended June 30, 2014, which exceeded the average effective federal funds rate for that period by 485 basis points. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in ROCS compared to the average effective federal funds rate are discussed below.
Income Before Assessments
During the three months ended June 30, 2015 and 2014, the Bank’s income before assessments was $26.5 million and $15.6 million, respectively. As discussed in more detail below, the $10.9 million increase in income before assessments from period to period was attributable to an $11.1 million increase in other income and a $0.3 million decrease in other expense, offset by a $0.5 million decrease in net interest income.
During the six months ended June 30, 2015 and 2014, the Bank’s income before assessments was $52.2 million and $29.9 million, respectively. As discussed in more detail below, the $22.3 million increase in income before assessments from period to period was attributable to a $23.0 million increase in other income, offset by a $0.6 million increase in other expense and a $0.1 million decrease in net interest income.
The components of income before assessments (net interest income, other income/loss and other expense) are discussed in more detail in the following sections.
Net Interest Income
For the three months ended June 30, 2015 and 2014, the Bank’s net interest income was $31.4 million and $31.9 million, respectively. The Bank’s net interest income was $60.5 million and $60.6 million for the six months ended June 30, 2015 and 2014, respectively.
For the three months ended June 30, 2015 and 2014, the Bank’s net interest margin was 28 basis points and 39 basis points, respectively. The Bank’s net interest margin was 29 basis points and 38 basis points for the six months ended June 30, 2015 and 2014, respectively. Net interest margin, or net interest income as a percentage of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank’s net interest spread decreased from 36 basis points and 35 basis points for the three and six months ended June 30, 2014, respectively, to 27 basis points for both the three and six months ended June 30, 2015, due largely to an increase in the Bank's short-term liquidity portfolio and lower yields on the Bank's advances and agency CMO portfolio, offset in the six-month period by an increase in net prepayment fees on advances.
A significant portion of the Bank's recent lending activities have been comprised of short-term advances, which have lower yields than the Bank's longer term assets. In addition, the yields on the Bank's agency CMO portfolio were lower due in part to lower discount accretion associated with these securities. Discount accretion associated with the Bank's agency CMO portfolio decreased by $1.5 million (from $2.6 million to $1.1 million) and $3.1 million (from $5.6 million to $2.5 million) for the three and six months ended June 30, 2015, respectively, as compared to the corresponding periods in 2014, due in part to the sales of some of these securities in 2015, as further discussed below.
The contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) was 1 basis point and 2 basis points during the three and six months ended June 30, 2015, respectively, as compared to 3 basis points during both the three and six months ended June 30, 2014.

60


The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended June 30, 2015 and 2014.
YIELD AND SPREAD ANALYSIS
(dollars in millions)
 
For the Three Months Ended June 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
587

 
$

 
0.12
%
 
$
746

 
$

 
0.09
%
Securities purchased under agreements to resell
3,648

 
1

 
0.09
%
 
1,002

 

 
0.06
%
Federal funds sold
8,034

 
2

 
0.11
%
 
1,695

 

 
0.09
%
Investments
 
 
 
 
 
 
 
 
 
 
 
Trading
282

 

 
0.07
%
 
955

 

 
0.05
%
 Available-for-sale (3)
6,821

 
8

 
0.50
%
 
5,459

 
5

 
0.37
%
Held-to-maturity (3)
3,921

 
8

 
0.75
%
 
5,196

 
11

 
0.80
%
Advances (4)
20,830

 
34

 
0.65
%
 
18,265

 
35

 
0.77
%
Mortgage loans held for portfolio
65

 
1

 
5.70
%
 
83

 
1

 
5.71
%
Total earning assets
44,188

 
54

 
0.49
%
 
33,401

 
52

 
0.63
%
Cash and due from banks
37

 
 
 
 
 
46

 
 
 
 
Other assets
128

 
 
 
 
 
115

 
 
 
 
Derivatives netting adjustment (2)
(589
)
 
 
 
 
 
(746
)
 
 
 
 
Fair value adjustment on available-for-sale securities (3)
19

 
 
 
 
 
25

 
 
 
 
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (3)
(25
)
 
 
 
 
 
(31
)
 
 
 
 
Total assets
$
43,758

 
54

 
0.49
%
 
$
32,810

 
52

 
0.64
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
991

 

 
0.02
%
 
$
794

 

 
0.01
%
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
21,266

 
20

 
0.37
%
 
20,738

 
18

 
0.36
%
Discount notes
19,132

 
3

 
0.07
%
 
9,296

 
2

 
0.09
%
Mandatorily redeemable capital stock and other borrowings
23

 

 
0.20
%
 
15

 

 
0.18
%
Total interest-bearing liabilities
41,412

 
23

 
0.22
%
 
30,843

 
20

 
0.27
%
Other liabilities
917

 
 
 
 
 
898

 
 
 
 
Derivatives netting adjustment (2)
(589
)
 
 
 
 
 
(746
)
 
 
 
 
Total liabilities
41,740

 
23

 
0.22
%
 
30,995

 
20

 
0.27
%
Total capital
2,018

 
 
 
 
 
1,815

 
 
 
 
Total liabilities and capital
$
43,758

 
 
 
0.21
%
 
$
32,810

 
 
 
0.25
%
Net interest income
 
 
$
31

 
 
 
 
 
$
32

 
 
Net interest margin
 
 
 
 
0.28
%
 
 
 
 
 
0.39
%
Net interest spread
 
 
 
 
0.27
%
 
 
 
 
 
0.36
%
Impact of non-interest bearing funds
 
 
 
 
0.01
%
 
 
 
 
 
0.03
%

61


_____________________________
(1) 
Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(2) 
The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments transacted under a master netting agreement or other similar arrangement. The average balances of interest-bearing deposit assets for the three months ended June 30, 2015 and 2014 in the table above include $587 million and $746 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balances of interest-bearing deposit liabilities for the three months ended June 30, 2015 and 2014 in the table above include $2.3 million and $0.1 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
(3) 
Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
(4) 
Interest income and average rates include net prepayment fees on advances.

62


The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the six months ended June 30, 2015 and 2014.
YIELD AND SPREAD ANALYSIS
(dollars in millions)
 
For the Six Months Ended June 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
637

 
$

 
0.12
%
 
$
781

 
$

 
0.08
%
Securities purchased under agreements to resell
2,871

 
1

 
0.09
%
 
647

 

 
0.06
%
Federal funds sold
7,795

 
4

 
0.11
%
 
1,756

 
1

 
0.09
%
Investments
 
 
 
 
 
 
 
 
 
 
 
Trading
262

 

 
0.07
%
 
981

 

 
0.06
%
 Available-for-sale (3)
6,770

 
15

 
0.46
%
 
5,467

 
10

 
0.38
%
Held-to-maturity (3)
4,126

 
16

 
0.75
%
 
5,220

 
22

 
0.82
%
Advances (4)
20,056

 
66

 
0.66
%
 
17,458

 
67

 
0.76
%
Mortgage loans held for portfolio
67

 
2

 
5.71
%
 
86

 
2

 
5.70
%
Total earning assets
42,584

 
104

 
0.49
%
 
32,396

 
102

 
0.63
%
Cash and due from banks
49

 
 
 
 
 
215

 
 
 
 
Other assets
125

 
 
 
 
 
115

 
 
 
 
Derivatives netting adjustment (2)
(639
)
 
 
 
 
 
(781
)
 
 
 
 
Fair value adjustment on available-for-sale securities (3)
16

 
 
 
 
 
13

 
 
 
 
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (3)
(26
)
 
 
 
 
 
(32
)
 
 
 
 
Total assets
$
42,109

 
104

 
0.50
%
 
$
31,926

 
102

 
0.64
%
Liabilities and Capital
 
 
 
 
 
 
 

 
 
 
 
Interest-bearing deposits (2)
$
887

 

 
0.02
%
 
$
820

 

 
0.01
%
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
19,117

 
37

 
0.38
%
 
20,644

 
37

 
0.37
%
Discount notes
19,721

 
7

 
0.07
%
 
8,548

 
4

 
0.09
%
Mandatorily redeemable capital stock and other borrowings
14

 

 
0.23
%
 
12

 

 
0.20
%
Total interest-bearing liabilities
39,739

 
44

 
0.22
%
 
30,024

 
41

 
0.28
%
Other liabilities
1,041

 
 
 
 
 
925

 
 
 
 
Derivatives netting adjustment (2)
(639
)
 
 
 
 
 
(781
)
 
 
 
 
Total liabilities
40,141

 
44

 
0.22
%
 
30,168

 
41

 
0.28
%
Total capital
1,968

 
 
 
 
 
1,758

 
 
 
 
Total liabilities and capital
$
42,109

 
 
 
0.21
%
 
$
31,926

 
 
 
0.26
%
Net interest income
 
 
$
60

 
 
 
 
 
$
61

 
 
Net interest margin
 
 
 
 
0.29
%
 
 
 
 
 
0.38
%
Net interest spread
 
 
 
 
0.27
%
 
 
 
 
 
0.35
%
Impact of non-interest bearing funds
 
 
 
 
0.02
%
 
 
 
 
 
0.03
%
 
 
 
 
 
 
 
 
 
 
 
 

63


_____________________________
(1) 
Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(2) 
The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments transacted under a master netting agreement or other similar arrangement. The average balances of interest-bearing deposit assets for the six months ended June 30, 2015 and 2014 in the table above include $637 million and $780 million respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balances of interest-bearing deposit liabilities for the six months ended June 30, 2015 and 2014 in the table above include $1.6 million and $0.7 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
(3) 
Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
(4) 
Interest income and average rates include net prepayment fees on advances.
Changes in both volume (i.e., average balances) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three-month and six-month periods in 2015 and 2014. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
RATE AND VOLUME ANALYSIS
(in millions)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015 vs. 2014
 
June 30, 2015 vs. 2014
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$

 
$

 
$

 
$

 
$

 
$

Securities purchased under agreements to resell
1

 

 
1

 
1

 

 
1

Federal funds sold
2

 

 
2

 
3

 

 
3

Investments
 
 
 
 
 
 
 
 
 
 
 
Trading

 

 

 

 

 

Available-for-sale
1

 
2

 
3

 
3

 
2

 
5

Held-to-maturity
(2
)
 
(1
)
 
(3
)
 
(4
)
 
(2
)
 
(6
)
Advances
5

 
(6
)
 
(1
)
 
9

 
(10
)
 
(1
)
Mortgage loans held for portfolio

 

 

 
(1
)
 
1

 

Total interest income
7

 
(5
)
 
2

 
11

 
(9
)
 
2

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 

 

 

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
1

 
1

 
2

 
(3
)
 
3

 

Discount notes
2

 
(1
)
 
1

 
4

 
(1
)
 
3

Mandatorily redeemable capital stock and other borrowings

 

 

 

 

 

Total interest expense
3

 

 
3

 
1

 
2

 
3

Changes in net interest income
$
4

 
$
(5
)
 
$
(1
)
 
$
10

 
$
(11
)
 
$
(1
)

64


Other Income (Loss)
The following table presents the various components of other income (loss) for the three and six months ended June 30, 2015 and 2014.
OTHER INCOME (LOSS)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net interest income (expense) associated with:
 
 
 
 
 
 
 
Economic hedge derivatives related to consolidated obligation bonds
$

 
$
13

 
$

 
$
13

Stand-alone economic hedge derivatives (basis swaps)

 
398

 

 
914

Member/offsetting swaps
47

 
25

 
70

 
34

Economic hedge derivatives related to advances
(2
)
 
(17
)
 
(4
)
 
(17
)
Economic hedge derivatives related to available-for-sale securities
(8
)
 

 
(14
)
 

Economic hedge derivatives related to consolidated obligation discount notes
32

 

 
49

 

Total net interest income associated with economic hedge derivatives
69

 
419

 
101

 
944

Gains (losses) related to economic hedge derivatives
 
 
 
 
 
 
 
Stand-alone derivatives (basis swaps)

 
412

 

 
672

Interest rate caps related to held-to-maturity securities
(674
)
 
(729
)
 
(639
)
 
(1,183
)
Advance swaps

 
(25
)
 
(5
)
 
(25
)
Available-for-sale securities swaps
140

 

 
94

 

Consolidated obligation bond swaps
329

 

 
1,915

 

Consolidated obligation discount note swaps
(27
)
 

 
13

 

Member/offsetting swaps and caps
613

 
53

 
977

 
825

Total fair value gains (losses) related to economic hedge derivatives
381

 
(289
)
 
2,355

 
289

Gains (losses) related to fair value hedge ineffectiveness
 
 
 
 
 
 
 
Advances and associated hedges
373

 
(345
)
 
796

 
(395
)
Available-for-sale securities and associated hedges
6,161

 
251

 
7,895

 
566

Consolidated obligation bonds and associated hedges
1,465

 
237

 
1,539

 
(436
)
Total fair value hedge ineffectiveness
7,999

 
143

 
10,230

 
(265
)
Total net gains on derivatives and hedging activities
8,449

 
273

 
12,686

 
968

Net gains on unhedged trading securities
62

 
350

 
339

 
559

Credit component of other-than-temporary impairment losses on held-to-maturity securities
(19
)
 

 
(25
)
 

Gains on early extinguishment of debt

 
402

 

 
723

Gains on sales of held-to-maturity securities
3,887

 

 
10,113

 

Gains on sales of available-for-sale securities

 

 
2,345

 

Service fees
520

 
674

 
988

 
1,143

Letter of credit fees
1,070

 
1,191

 
2,219

 
2,341

Other, net
4

 
(60
)
 
8

 
(56
)
Total other
5,524

 
2,557

 
15,987

 
4,710

Total other income
$
13,973

 
$
2,830

 
$
28,673

 
$
5,678



65


Economic Hedge Derivatives
From time to time, the Bank enters into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. Under these agreements, the Bank generally receives three-month LIBOR and pays one-month LIBOR. The Bank accounts for interest rate basis swaps as stand-alone derivatives and, as such, the fair value changes associated with these instruments can be a source of volatility in the Bank’s earnings, particularly when one-month and/or three-month LIBOR, or the spreads between these two indices, are or are projected to be volatile. The fair values of one-month LIBOR to three-month LIBOR basis swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between one-month LIBOR and three-month LIBOR at the time of measurement, the projected relationship between one-month LIBOR and three-month LIBOR for the remaining term of the interest rate basis swap, the projected overnight index swap rates over the remaining term of the interest rate basis swap and the relationship between the current coupons for the interest rate swap and the prevailing LIBOR rates at the valuation date. The Bank was not a party to any interest rate basis swaps during the six months ended June 30, 2015. During 2014, in response to changing balance sheet conditions, the Bank terminated four interest rate basis swaps prior to their scheduled maturities. In addition, one interest rate basis swap matured in 2014.
As discussed previously in the section entitled “Financial Condition — Long-Term Investments,” to hedge a portion of the risk associated with a significant increase in short-term interest rates, the Bank held, as of June 30, 2015, 10 interest rate cap agreements having a total notional amount of $2.5 billion. The premiums paid for these caps totaled $13.9 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged CMO LIBOR floaters with embedded caps and therefore can also be a source of volatility in the Bank’s earnings. At June 30, 2015, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $0.8 million.
From time to time, the Bank hedges some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can also be a source of volatility in the Bank’s earnings. At June 30, 2015, the carrying values of the Bank’s discount note swaps totaled $25,000.
Hedge Ineffectiveness
The Bank uses interest rate swaps to hedge the risk of changes in the fair value of some of its advances and consolidated obligation bonds and substantially all of its available-for-sale securities. These hedging relationships are designated as fair value hedges. To the extent these relationships qualify for hedge accounting, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For those relationships that qualified for hedge accounting, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net gains (losses) of $8.0 million and $0.1 million for the three months ended June 30, 2015 and 2014, respectively, and $10.2 million and $(0.3) million for the six months ended June 30, 2015 and 2014, respectively. To the extent these hedges do not qualify for hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item).
The increase in fair value hedge ineffectiveness during the three- and six-month periods ended June 30, 2015 as compared to the three- and six-month periods ended June 30, 2014, respectively, was due in large part to the addition of over $2 billion of higher yielding, longer duration GSE CMBS to the Bank’s available-for-sale securities portfolio during the last six months of 2014 and the first six months of 2015. All of the Bank’s GSE CMBS classified as available-for-sale are hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships. These hedging relationships have been, and are expected to continue to be, highly effective in achieving offsetting changes in fair values attributable to the hedged risk. While relatively small when expressed as prices, ineffectiveness-related gains and losses can be significant when evaluated in the context of the Bank’s net income. Because the Bank expects to hold these interest rate swaps to maturity, the unrealized ineffectiveness-related gains associated with its GSE CMBS holdings are expected to be transitory, meaning that they will reverse in future periods in the form of ineffectiveness-related losses.

66



Other
During the six months ended June 30, 2015, the Bank sold approximately $595 million (par value) of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $10.1 million. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. During this same six-month period, the Bank sold approximately $507 million (par value) of GSE debentures classified as available-for-sale. The aggregate gains recognized on these sales totaled $2.3 million. There were no other sales of long-term investment securities during the six months ended June 30, 2015 or 2014.
During the six months ended June 30, 2014, market conditions were such that the Bank was able to extinguish certain consolidated obligation bonds and simultaneously terminate the associated interest rate exchange agreements at net amounts that were profitable for the Bank, while new consolidated obligations could be issued and then converted (through the use of interest rate exchange agreements) to a variable rate that approximated the cost of the extinguished debt including any associated interest rate exchange agreements. Specifically, during the six months ended June 30, 2014, the Bank repurchased $21.4 million (par value) of its consolidated obligations in the secondary market and terminated the related interest rate exchange agreements; the gains on these debt extinguishments totaled $0.4 million and $0.7 million for the three and six months ended June 30, 2014. The Bank did not early extinguish any other debt during the six months ended June 30, 2015 or 2014.
For a discussion of the other-than-temporary impairment loss on one of the Bank's held-to-maturity securities, see “Item 1. Financial Statements” (specifically, Note 5 beginning on page 11 of this report).
Other Expense
Total other expense, which includes the Bank’s compensation and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $18.8 million and $37.0 million for the three and six months ended June 30, 2015, respectively, compared to $19.2 million and $36.4 million for the corresponding periods in 2014.
Compensation and benefits were $10.1 million and $20.5 million for the three and six months ended June 30, 2015, respectively, compared to $9.9 million and $20.2 million for the corresponding periods in 2014. Compensation and benefits were relatively unchanged, as headcount, employee separation costs and cost-of-living and merit increases were largely offset by period-to-period decreases in the costs associated with the Bank's participation in the Pentegra Defined Benefit Plan for Financial Institutions and lower employee medical costs and hiring incentives. Average headcount increased from 179 and 180 employees for the three and six months ended June 30, 2014, respectively, to 201 and 199 employees in the corresponding periods in 2015.
Other operating expenses for the three and six months ended June 30, 2015 were $7.4 million and $13.9 million, respectively, compared to $8.1 million and $13.9 million for the corresponding period in 2014. The decrease in other operating expenses for the three months ended June 30, 2015, as compared to the corresponding period in 2014, was attributable primarily to a decrease in legal fees, which was partially offset by the costs of using independent contractors to support various initiatives within the Bank.
The Bank, together with the other FHLBanks, is assessed for the costs of operating the Finance Agency and the Office of Finance. The Bank’s share of these expenses totaled $1.3 million and $2.4 million for the three and six months ended June 30, 2015, respectively, compared to $1.1 million and $2.3 million for the corresponding periods in 2014.
AHP Assessments
While the Bank is exempt from all federal, state and local income taxes, it is obligated to set aside amounts for its Affordable Housing Program (“AHP”).
As required by statute, each year the Bank contributes 10 percent of its earnings (as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments; the result of this calculation is then multiplied by 10 percent. The Bank’s AHP assessments totaled $2.7 million and $1.6 million for the three months ended June 30, 2015 and 2014, respectively. The Bank’s AHP assessments totaled $5.2 million and $3.0 million for the six months ended June 30, 2015 and 2014, respectively.

67




Critical Accounting Policies and Estimates
A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the 2014 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the six months ended June 30, 2015.
The Bank evaluates its non-agency RMBS holdings for other-than-temporary impairment on a quarterly basis. The procedures used in this analysis, together with the results thereof as of June 30, 2015, are summarized in “Item 1. Financial Statements” (specifically, Note 5 beginning on page 11 of this report). In addition to evaluating its non-agency RMBS holdings under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of these securities under a more stressful housing price scenario to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended June 30, 2015 if the more stressful housing price scenario had been used in the Bank's OTTI assessment as of June 30, 2015. The results of that more stressful analysis are presented on page 49 of this report.

Liquidity and Capital Resources
In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments typically consisting of overnight federal funds and overnight reverse repurchase agreements. From time to time, the Bank may also invest in short-term commercial paper, U.S. Treasury Bills and GSE discount notes. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes, and as the level of liquidity needed to satisfy Finance Agency requirements changes. At June 30, 2015, the Bank’s short-term liquidity portfolio was comprised of $5.7 billion of reverse repurchase agreements (all of which were overnight transactions except for $0.5 billion, which was transacted with the Federal Reserve Bank of New York on June 29, 2015 for a 2-day term), $3.7 billion of overnight federal funds sold, $350 million of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas, $110 million of U.S. Treasury Bills and $100 million of GSE discount notes.
The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to the capital markets as needed during the business day to acquire funds to meet its needs.
In addition to the liquidity provided from the proceeds of the issuance of consolidated obligations, the Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its investments in MBS and/or agency debentures). Furthermore, the Bank has access to borrowings (typically short-term) from the other FHLBanks.
The 11 FHLBanks and the Office of Finance are parties to the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (the “Contingency Agreement”). The Contingency Agreement and related procedures are designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations ("Plan COs") directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. The direct placement by a FHLBank of consolidated obligations with another FHLBank is permitted only in those instances when direct placement of consolidated obligations is necessary to ensure that sufficient funds are available to timely pay all principal and interest on FHLBank System consolidated obligations due on a particular day. Through the date of this report, no Plan COs have ever been issued pursuant to the terms of the Contingency Agreement.
On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds.

68


The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the six months ended June 30, 2015 or 2014.
The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet operational and contingent liquidity requirements. When measuring its liquidity for these purposes, the Bank includes only contractual cash flows and the amount of funds it estimates would be available in the event the Bank were to use securities held in its long-term investment portfolio as collateral for repurchase agreements. While it believes purchased federal funds might be available as a source of funds, it does not include this potential source of funds in its calculations of available liquidity.
The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day during a stress period of elevated advances demand without accessing the capital markets for the sale of consolidated obligations. As of June 30, 2015, the Bank’s estimated operational liquidity requirement was $3.7 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $16.7 billion.
The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days during a stress period of elevated advances demand. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of June 30, 2015, the Bank’s estimated contingent liquidity requirement was $5.7 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $14.8 billion.
In addition to the liquidity measures described above, the Bank is required, pursuant to guidance issued by the Finance Agency, to meet two daily liquidity standards, each of which assumes that the Bank is unable to access the market for consolidated obligations during a prescribed period. The first standard requires the Bank to maintain sufficient funds to meet its obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing, prepaid or called advances. The second standard requires the Bank to maintain sufficient funds to meet its obligations for 5 days under a scenario in which it is assumed that members renew all maturing and called advances, with certain exceptions for very large, highly rated members. These requirements are more stringent than the 5-day contingent liquidity requirement discussed above. The Bank was in compliance with both of these liquidity requirements at all times during the six months ended June 30, 2015.
The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank does not currently believe that its ability to issue consolidated obligations will be impeded to that extent in the future. If, however, the Bank were unable to issue consolidated obligations for an extended period of time, the Bank would eventually exhaust the availability of purchased federal funds (including borrowings from other FHLBanks) and repurchase agreements as sources of funds. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements.
Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank’s ability to conduct its operations would be compromised even earlier than if this funding source was available.
A summary of the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2014 is provided in the 2014 10-K. There have been no material changes in the Bank’s contractual obligations outside the normal course of business during the six months ended June 30, 2015.

Recently Issued Accounting Guidance
For a discussion of recently issued accounting guidance, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 7 of this report).

69



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the 2014 10-K. The information provided in this item is intended to update the disclosures made in the 2014 10-K.
As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.
The terms of member advances, investment securities, and consolidated obligations may present interest rate risk and/or embedded option risk. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank makes extensive use of interest rate derivative instruments, primarily interest rate swaps and caps, to manage the risk arising from these sources.
The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a much smaller extent, MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the effective maturities of these mortgage-based assets relatively more sensitive to changes in interest rates and other factors that affect the mortgagors’ decisions to repay their mortgages as compared to other long-term investment securities that do not have prepayment features. A decline in interest rates generally accelerates mortgage refinancing activity, thus increasing prepayments and thereby shortening the effective maturity of the mortgage-related assets. Conversely, rising rates generally slow prepayment activity and lengthen a mortgage-related asset’s effective maturity.
The Bank has managed the potential prepayment risk embedded in mortgage assets by purchasing floating rate securities, by purchasing securities that maintain their original principal balance for a fixed number of years, by purchasing highly structured tranches of mortgage securities that substantially limit the effects of prepayment risk, by issuing debt with features similar to the mortgage assets, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio.
The Bank’s Enterprise Market Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Bank develops its funding and hedging strategies to manage its interest rate risk within the risk limits established in its Enterprise Market Risk Management Policy.
The Enterprise Market Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As reflected in the table below, the Bank was in compliance with this limit at each month-end during the six months ended June 30, 2015.
As part of its ongoing risk management process, the Bank calculates an estimated market value of equity for a base case interest rate scenario and for interest rate scenarios that reflect parallel interest rate shocks. The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are determined using vendor prices or a pricing model. For those instruments for which a pricing model is used, the calculations are based upon parameters derived from market conditions existing at the time of measurement, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP, and other liabilities at their recorded carrying amounts.
For purposes of compliance with the Bank’s Enterprise Market Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month-end during the period from December 2014 through June 2015. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.

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MARKET VALUE OF EQUITY
(dollars in billions)
 
 
 
Up 200 Basis Points(1)
 
Down 200 Basis Points(2)
 
Up 100 Basis Points(1)
 
Down 100 Basis Points(2)
 
Base Case
Market
Value of Equity
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
December 2014
$
2.087

 
$
2.005

 
(3.93
)%
 
$
2.177

 
4.31
%
 
$
2.059

 
(1.34
)%
 
$
2.120

 
1.58
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2015
1.962

 
1.908

 
(2.75
)%
 
2.037

 
3.82
%
 
1.946

 
(0.82
)%
 
2.010

 
2.45
%
February 2015
2.055

 
1.982

 
(3.55
)%
 
2.132

 
3.75
%
 
2.030

 
(1.22
)%
 
2.090

 
1.70
%
March 2015
2.105

 
2.020

 
(4.04
)%
 
2.187

 
3.90
%
 
2.073

 
(1.52
)%
 
2.149

 
2.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2015
2.000

 
1.925

 
(3.75
)%
 
2.068

 
3.40
%
 
1.973

 
(1.35
)%
 
2.035

 
1.75
%
May 2015
2.166

 
2.093

 
(3.37
)%
 
2.269

 
4.76
%
 
2.146

 
(0.92
)%
 
2.201

 
1.62
%
June 2015
2.281

 
2.207

 
(3.24
)%
 
2.359

 
3.42
%
 
2.261

 
(0.88
)%
 
2.306

 
1.10
%
_____________________________
(1) 
In the up 100 and up 200 basis point scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
Pursuant to guidance issued by the Finance Agency, the estimated market value of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.10 percent from December 2014 through April 2015 and 0.01 percent in May and June 2015.
A related measure of interest rate risk is duration of equity. Duration is the weighted average maturity (typically measured in months or years) of an instrument’s cash flows, weighted by the present value of those cash flows. As such, duration provides an estimate of an instrument’s sensitivity to small changes in market interest rates. The duration of assets is generally expressed as a positive figure, while the duration of liabilities is generally expressed as a negative number. The change in value of a specific instrument for given changes in interest rates will generally vary in inverse proportion to the instrument’s duration. As market interest rates decline, instruments with a positive duration are expected to increase in value, while instruments with a negative duration are expected to decrease in value. Conversely, as interest rates rise, instruments with a positive duration are expected to decline in value, while instruments with a negative duration are expected to increase in value.
The values of instruments having relatively longer (or higher) durations are more sensitive to a given interest rate movement than instruments having shorter durations; that is, risk increases as the absolute value of duration lengthens. For instance, the value of an instrument with a duration of three years will theoretically change by three percent for every one percentage point (100 basis point) change in interest rates, while the value of an instrument with a duration of five years will theoretically change by five percent for every one percentage point change in interest rates.
The duration of individual instruments may be easily combined to determine the duration of a portfolio of assets or liabilities by calculating a weighted average duration of the instruments in the portfolio. These combinations provide a single straightforward metric that describes the portfolio’s sensitivity to interest rate movements. These additive properties can be applied to the assets and liabilities on the Bank’s balance sheet. The difference between the combined durations of the Bank’s assets and the combined durations of its liabilities is sometimes referred to as duration gap and provides a measure of the relative interest rate sensitivities of the Bank’s assets and liabilities.
Duration gap is a useful measure of interest rate sensitivity but does not account for the effect of leverage, or the effect of the absolute duration of the Bank’s assets and liabilities, on the sensitivity of its estimated market value of equity to changes in interest rates. The inclusion of these factors results in a measure of the sensitivity of the value of the Bank’s equity to changes in market interest rates referred to as the duration of equity. Duration of equity is the market value weighted duration of assets minus the market value weighted duration of liabilities divided by the market value of equity.
The significance of an entity’s duration of equity is that it can be used to describe the sensitivity of the entity’s market value of equity to movements in interest rates. A duration of equity equal to zero would mean, within a narrow range of interest rate movements, that the Bank had neutralized the impact of changes in interest rates on the market value of its equity.
A positive duration of equity would mean, within a narrow range of interest rate movements, that for each one year of duration the estimated market value of the Bank’s equity would be expected to decline by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A positive duration generally indicates that the value of the Bank’s assets is

71


more sensitive to changes in interest rates than the value of its liabilities (i.e., that the duration of its assets is greater than the duration of its liabilities).
Conversely, a negative duration of equity would mean, within a narrow range of interest rate movements, that for each one year of negative duration the estimated market value of the Bank’s equity would be expected to increase by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A negative duration generally indicates that the value of the Bank’s liabilities is more sensitive to changes in interest rates than the value of its assets (i.e., that the duration of its liabilities is greater than the duration of its assets).
The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month-end during the period from December 2014 through June 2015.
DURATION ANALYSIS
(expressed in years)
 
Base Case Interest Rates
 
Duration of Equity
 
Asset Duration
 
Liability Duration
 
Duration Gap
 
Duration of Equity
 
Up 100(1)
 
Up 200(1)
 
Down 100(2)
 
Down 200(2)
December 2014
0.38
 
(0.37)
 
0.01
 
0.57
 
2.22
 
3.60
 
3.93
 
4.38
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2015
0.38
 
(0.38)
 
 
0.43
 
1.63
 
2.75
 
4.02
 
4.12
February 2015
0.36
 
(0.33)
 
0.03
 
0.72
 
2.04
 
3.28
 
3.68
 
4.07
March 2015
0.29
 
(0.34)
 
(0.05)
 
1.02
 
2.04
 
3.35
 
3.97
 
4.16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2015
0.32
 
(0.29)
 
0.03
 
0.93
 
2.11
 
3.26
 
3.64
 
3.88
May 2015
0.31
 
(0.32)
 
(0.01)
 
0.10
 
1.78
 
3.07
 
2.82
 
5.19
June 2015
0.30
 
(0.32)
 
(0.02)
 
0.04
 
1.74
 
2.99
 
2.01
 
4.44
_____________________________
(1) 
In the up 100 and up 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
Pursuant to guidance issued by the Finance Agency, the duration of equity was calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.10 percent from December 2014 through April 2015 and 0.01 percent in May and June 2015.
Duration of equity measures the impact of a parallel shift in interest rates on an entity’s market value of equity but may not be a good metric for measuring changes in value related to non-parallel rate shifts. An alternative measure for that purpose uses key rate durations, which measure portfolio sensitivity to changes in interest rates at particular points on a yield curve. Key rate duration is a specialized form of duration. It is calculated by estimating the change in value due to changing the market rate for one specific maturity point on the yield curve while holding all other variables constant. The sum of the key rate durations across an applicable yield curve is approximately equal to the overall portfolio duration.
The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank has a key rate duration limit of 5 years, measured as the difference between the maximum and minimum key rate durations calculated for nine defined individual maturity points on the yield curve. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month-end during the six months ended June 30, 2015.
As discussed on page 33, in May 2015, the Bank replaced its third-party pricing/risk model with a new third-party pricing/risk model. In addition to pricing certain individual financial instruments, the model is used to calculate the Bank's market value of equity and its duration measures. On the date of implementation, the change to the new model did not have a significant impact on any of the Bank's risk measurements.

72




ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Bank’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Bank’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Bank’s disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

10.1
 
Form of 2015 Long-Term Incentive Plan.
 
 
 
10.2
 
Separation and Release Agreement between the Registrant and Scott Trapani, entered into effective April 10, 2015.
 
 
 
31.1
 
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2015, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2015 and December 31, 2014; (ii) Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014; (iii) Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014; (iv) Statements of Capital for the Six Months Ended June 30, 2015 and 2014; (v) Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014; and (vi) Notes to the Financial Statements for the quarter ended June 30, 2015.
 
 
 


73


SIGNATURES
Pursuant to the requirements 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.

August 12, 2015
By 
/s/ Tom Lewis
Date
 
Tom Lewis 
 
 
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 


74


EXHIBIT INDEX

10.1
 
Form of 2015 Long-Term Incentive Plan.
 
 
 
10.2
 
Separation and Release Agreement between the Registrant and Scott Trapani, entered into effective April 10, 2015.
 
 
 
31.1
 
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2015, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2015 and December 31, 2014; (ii) Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014; (iii) Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014; (iv) Statements of Capital for the Six Months Ended June 30, 2015 and 2014; (v) Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014; and (vi) Notes to the Financial Statements for the quarter ended June 30, 2015.