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EX-31.2 - CERTIFICATION 302 CFO - Federal Home Loan Bank of Bostonex312_q32015.htm
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EX-31.1 - CERTIFICATION 302 CEO - Federal Home Loan Bank of Bostonex311_q32015.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
––––––––––––––––––––––––––––––––––––––––––––––––––––
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. employer identification number)
 
 
 
 
 
 
 
800 Boylston Street
Boston, MA
(Address of principal executive offices)
 
02199
(Zip code)
 
 (617) 292-9600
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
 
Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding as of
October 31, 2015
Class A Stock, par value $100
 
zero
Class B Stock, par value $100
 
22,973,912



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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and due from banks
$
320,281

 
$
1,124,536

Interest-bearing deposits
238

 
163

Securities purchased under agreements to resell
7,650,000

 
5,250,000

Federal funds sold
2,425,000

 
2,550,000

Investment securities:
 
 
 

Trading securities
236,322

 
244,969

Available-for-sale securities - includes $26,744 and $641 pledged as collateral at September 30, 2015, and December 31, 2014, respectively that may be repledged
6,272,640

 
5,481,978

Held-to-maturity securities - includes $51,646 and $66,279 pledged as collateral at September 30, 2015, and December 31, 2014, respectively that may be repledged (a)
2,792,023

 
3,352,189

Total investment securities
9,300,985

 
9,079,136

Advances
33,954,689

 
33,482,074

Mortgage loans held for portfolio, net of allowance for credit losses of $1,000 and $2,012 at September 30, 2015, and December 31, 2014, respectively
3,580,269

 
3,483,948

Accrued interest receivable
74,881

 
77,411

Premises, software, and equipment, net
3,496

 
3,951

Derivative assets, net
41,238

 
14,548

Other assets
46,295

 
40,910

Total Assets
$
57,397,372

 
$
55,106,677

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
474,274

 
$
345,561

Non-interest-bearing
21,597

 
23,770

Total deposits
495,871

 
369,331

Consolidated obligations (COs):
 
 
 

Bonds
26,412,714

 
25,505,774

Discount notes
26,538,537

 
25,309,608

Total consolidated obligations
52,951,251

 
50,815,382

Mandatorily redeemable capital stock
42,643

 
298,599

Accrued interest payable
99,382

 
91,225

Affordable Housing Program (AHP) payable
76,249

 
66,993

Derivative liabilities, net
480,197

 
558,889

Other liabilities
30,699

 
28,472

Total liabilities
54,176,292

 
52,228,891

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 25,426 shares and 24,131 shares issued and outstanding at September 30, 2015, and December 31, 2014, respectively
2,542,598

 
2,413,114

Retained earnings:
 
 
 
Unrestricted
894,676

 
764,888

Restricted
179,502

 
136,770

Total retained earnings
1,074,178

 
901,658

Accumulated other comprehensive loss
(395,696
)
 
(436,986
)
Total capital
3,221,080

 
2,877,786

Total Liabilities and Capital
$
57,397,372

 
$
55,106,677

_______________________________________
(a) Fair values of held-to-maturity securities were $3,090,905 and $3,710,815 at September 30, 2015, and December 31, 2014, respectively.

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


3


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
59,163

 
$
57,456

 
$
175,012

 
$
170,148

Prepayment fees on advances, net
1,506

 
1,179

 
5,527

 
4,441

Securities purchased under agreements to resell
1,366

 
886

 
3,273

 
2,267

Federal funds sold
1,669

 
1,027

 
4,519

 
2,416

Trading securities
2,274

 
2,346

 
6,888

 
7,051

Available-for-sale securities
24,313

 
18,911

 
68,488

 
46,195

Held-to-maturity securities
22,997

 
27,245

 
72,132

 
85,715

Prepayment fees on investments
29

 
130

 
286

 
1,240

Mortgage loans held for portfolio
30,392

 
30,918

 
91,633

 
94,136

Other
18

 
3

 
43

 
5

Total interest income
143,727

 
140,101

 
427,801

 
413,614

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations - bonds
80,695

 
82,489

 
242,859

 
238,193

Consolidated obligations - discount notes
6,391

 
4,620

 
16,813

 
11,515

Deposits
13

 
29

 
46

 
50

Mandatorily redeemable capital stock
472

 
1,358

 
1,275

 
7,632

Other borrowings

 
1

 
2

 
4

Total interest expense
87,571

 
88,497

 
260,995

 
257,394

NET INTEREST INCOME
56,156

 
51,604

 
166,806

 
156,220

(Reduction of) provision for credit losses
(159
)
 
373

 
(442
)
 
294

NET INTEREST INCOME AFTER (REDUCTION OF) PROVISION FOR CREDIT LOSSES
56,315

 
51,231

 
167,248

 
155,926

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(230
)
 
(243
)
 
(810
)
 
(243
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(823
)
 
(68
)
 
(2,018
)
 
(925
)
Net other-than-temporary impairment losses on investment securities, credit portion
(1,053
)
 
(311
)
 
(2,828
)
 
(1,168
)
Litigation settlements

 
17,543

 
134,713

 
22,012

Loss on early extinguishment of debt
(82
)
 
(163
)
 
(211
)
 
(2,755
)
Service fees
2,094

 
1,874

 
6,102

 
5,159

Net unrealized gains (losses) on trading securities
780

 
(2,387
)
 
(332
)
 
576

Net (losses) gains on derivatives and hedging activities
(7,653
)
 
1,411

 
(12,154
)
 
(1,264
)
Other
123

 
(182
)
 
(329
)
 
(581
)
Total other (loss) income
(5,791
)
 
17,785

 
124,961

 
21,979

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
9,419

 
8,990

 
32,717

 
27,847

Other operating expenses
4,973

 
4,961

 
15,129

 
15,273

Federal Housing Finance Agency (the FHFA)
884

 
576

 
2,787

 
1,960

Office of Finance
666

 
654

 
2,193

 
2,063

Other
689

 
492

 
1,839

 
1,857

Total other expense
16,631

 
15,673

 
54,665

 
49,000

INCOME BEFORE ASSESSMENTS
33,893

 
53,343

 
237,544

 
128,905

AHP
3,437

 
5,470

 
23,882

 
13,654

NET INCOME
$
30,456

 
$
47,873

 
$
213,662

 
$
115,251

 

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

4


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

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
30,456

 
$
47,873

 
$
213,662

 
$
115,251

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(1,962
)
 
(9,274
)
 
3,834

 
20,397

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 
 
 
 
 
 
 
Net amount of impairment losses reclassified to non-interest income
 
823

 
68

 
2,018

 
925

Accretion of noncredit portion
 
10,072

 
12,531

 
33,525

 
37,278

Total net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
10,895

 
12,599

 
35,543

 
38,203

Net unrealized (losses) gains relating to hedging activities
 
 
 
 
 
 
 
 
Unrealized losses
 
(15,959
)
 
(1,482
)
 
(15,329
)
 
(21,222
)
Reclassification adjustment for previously deferred hedging gains and losses included in net income
 
6,231

 
3,149

 
16,758

 
3,878

Total net unrealized (losses) gains relating to hedging activities
 
(9,728
)
 
1,667

 
1,429

 
(17,344
)
Pension and postretirement benefits
 
162

 
(67
)
 
484

 
(202
)
Total other comprehensive (loss) income
 
(633
)
 
4,925

 
41,290

 
41,054

Total comprehensive income
 
$
29,823

 
$
52,798

 
$
254,952

 
$
156,305


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

5



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

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

 
$
2,530,471

 
$
681,978

 
$
106,812

 
$
788,790

 
$
(481,516
)
 
$
2,837,745

Proceeds from sale of capital stock
1,297

 
129,721

 
 
 
 
 
 
 
 
 
129,721

Repurchase of capital stock
(2,664
)
 
(266,346
)
 
 
 
 
 
 
 
 
 
(266,346
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(338
)
 
 
 
 
 
 
 
 
 
(338
)
Comprehensive income
 
 
 
 
92,200

 
23,051

 
115,251

 
41,054

 
156,305

Cash dividends on capital stock
 
 
 
 
(27,849
)
 
 
 
(27,849
)
 
 
 
(27,849
)
BALANCE, SEPTEMBER 30, 2014
23,935

 
$
2,393,508

 
$
746,329

 
$
129,863

 
$
876,192

 
$
(440,462
)
 
$
2,829,238

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014
24,131

 
$
2,413,114

 
$
764,888

 
$
136,770

 
$
901,658

 
$
(436,986
)
 
$
2,877,786

Proceeds from sale of capital stock
1,631

 
163,063

 
 
 
 
 
 
 
 
 
163,063

Repurchase of capital stock
(335
)
 
(33,525
)
 
 
 
 
 
 
 
 
 
(33,525
)
Shares reclassified to mandatorily redeemable capital stock
(1
)
 
(54
)
 
 
 
 
 
 
 
 
 
(54
)
Comprehensive income
 
 
 
 
170,930

 
42,732

 
213,662

 
41,290

 
254,952

Cash dividends on capital stock
 
 
 
 
(41,142
)
 
 
 
(41,142
)
 
 
 
(41,142
)
BALANCE, SEPTEMBER 30, 2015
25,426

 
$
2,542,598

 
$
894,676

 
$
179,502

 
$
1,074,178

 
$
(395,696
)
 
$
3,221,080


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


6



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

 
For the Nine Months Ended September 30,
 
2015
 
2014
OPERATING ACTIVITIES
 

 
 

Net income
$
213,662

 
$
115,251

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

 
 
Depreciation and amortization
(43,968
)
 
(53,714
)
(Reduction of) provision for credit losses
(442
)
 
294

Change in net fair-value adjustments on derivatives and hedging activities
1,317

 
(61,402
)
Net other-than-temporary impairment losses on investment securities, credit portion
2,828

 
1,168

Loss on early extinguishment of debt
211

 
2,755

Other adjustments
(442
)
 
153

Net change in:
 

 
 
Market value of trading securities
332

 
(576
)
Accrued interest receivable
2,530

 
11,896

Other assets
(64
)
 
5,237

Accrued interest payable
8,157

 
16,978

Other liabilities
10,113

 
1,856

Total adjustments
(19,428
)
 
(75,355
)
Net cash provided by operating activities
194,234

 
39,896

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(70,426
)
 
(26,875
)
Securities purchased under agreements to resell
(2,400,000
)
 
250,000

Federal funds sold
125,000

 
(1,600,000
)
Premises, software, and equipment
(794
)
 
(716
)
Trading securities:
 

 
 

Proceeds from long-term
8,314

 
2,413

Available-for-sale securities:
 

 
 

Proceeds from long-term
739,421

 
1,123,129

Purchases of long-term
(1,529,058
)
 
(2,452,584
)
Held-to-maturity securities:
 

 
 

Proceeds from long-term
617,803

 
653,616

Advances to members:
 

 
 

Proceeds
258,113,231

 
210,734,280

Disbursements
(258,602,004
)
 
(214,711,518
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
439,681

 
311,167

Purchases
(551,753
)
 
(358,866
)
Proceeds from sale of foreclosed assets
6,189

 
7,455

Net cash used in investing activities
(3,104,396
)
 
(6,068,499
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
128,400

 
4,821

Net payments on derivatives with a financing element
(14,302
)
 
(13,294
)
Net proceeds from issuance of consolidated obligations:
 

 
 

Discount notes
110,227,338

 
97,204,190


7


Bonds
8,525,179

 
9,192,605

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

 

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(108,999,969
)
 
(90,706,106
)
Bonds
(7,680,907
)
 
(7,596,332
)
Proceeds from issuance of capital stock
163,063

 
129,721

Payments for redemption of mandatorily redeemable capital stock
(256,010
)
 
(733,641
)
Payments for repurchase of capital stock
(33,525
)
 
(266,346
)
Cash dividends paid
(41,142
)
 
(27,860
)
Net cash provided by financing activities
2,105,907

 
7,187,758

Net (decrease) increase in cash and due from banks
(804,255
)
 
1,159,155

Cash and due from banks at beginning of the year
1,124,536

 
641,033

Cash and due from banks at end of the period
$
320,281

 
$
1,800,188

Supplemental disclosures:
 
 
 
Interest paid
$
307,832

 
$
303,643

AHP payments
$
14,080

 
$
10,170

Noncash transfers of mortgage loans held for portfolio to real-estate-owned (REO)
$
5,611

 
$
7,141


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


8



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

Note 1 — Basis of Presentation

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

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

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

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

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

9


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

 
 
U.S. government-guaranteed – single-family
$
10,765

 
$
12,235

Government-sponsored enterprise (GSE) – single-family
1,651

 
2,300

GSEs – multifamily
223,906

 
230,434

Total
$
236,322

 
$
244,969


Net unrealized losses or gains on trading securities for the nine months ended September 30, 2015 and 2014, amounted to net losses of $332,000 and net gains of $576,000 for securities held on September 30, 2015 and 2014, respectively.

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

Note 4 — Available-for-Sale Securities
 
Major Security Types. Our available-for-sale securities as of September 30, 2015, were (dollars in thousands):
 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
476,597

 
$

 
$
(28,337
)
 
$
448,260

U.S. government-owned corporations
329,620

 

 
(53,111
)
 
276,509

GSEs
136,266

 

 
(15,921
)
 
120,345

 
942,483

 

 
(97,369
)
 
845,114

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
168,729

 
241

 
(1,994
)
 
166,976

U.S. government guaranteed – multifamily
758,333

 
3,303

 
(262
)
 
761,374

GSEs – single-family
4,472,884

 
30,778

 
(4,486
)
 
4,499,176

 
5,399,946

 
34,322

 
(6,742
)
 
5,427,526

Total
$
6,342,429

 
$
34,322

 
$
(104,111
)
 
$
6,272,640

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

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

 
$

 
$
(24,755
)
 
$
447,685

U.S. government-owned corporations
322,436

 

 
(37,439
)
 
284,997

GSEs
133,748

 

 
(10,295
)
 
123,453

 
928,624

 

 
(72,489
)
 
856,135

MBS
 

 
 

 
 

 
 

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

 
375

 
(1,437
)
 
206,028

U.S. government guaranteed – multifamily
874,817

 
204

 
(3,598
)
 
871,423

GSEs – single-family
3,545,070

 
14,742

 
(11,420
)
 
3,548,392

 
4,626,977

 
15,321

 
(16,455
)
 
4,625,843

Total
$
5,555,601

 
$
15,321

 
$
(88,944
)
 
$
5,481,978


10


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

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

 
$

 
$
448,260

 
$
(28,337
)
 
$
448,260

 
$
(28,337
)
U.S. government-owned corporations

 

 
276,509

 
(53,111
)
 
276,509

 
(53,111
)
GSEs

 

 
120,345

 
(15,921
)
 
120,345

 
(15,921
)
 

 

 
845,114

 
(97,369
)
 
845,114

 
(97,369
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
121,814

 
(1,994
)
 
121,814

 
(1,994
)
U.S. government guaranteed – multifamily

 

 
111,128

 
(262
)
 
111,128

 
(262
)
GSEs – single-family
651,699

 
(2,403
)
 
398,759

 
(2,083
)
 
1,050,458

 
(4,486
)
 
651,699

 
(2,403
)
 
631,701

 
(4,339
)
 
1,283,400

 
(6,742
)
Total temporarily impaired
$
651,699

 
$
(2,403
)
 
$
1,476,815


$
(101,708
)

$
2,128,514


$
(104,111
)

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

 
$

 
$
447,685

 
$
(24,755
)
 
$
447,685

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

 

 
284,997

 
(37,439
)
 
284,997

 
(37,439
)
GSEs

 

 
123,453

 
(10,295
)
 
123,453

 
(10,295
)
 

 

 
856,135

 
(72,489
)
 
856,135

 
(72,489
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
154,665

 
(1,437
)
 
154,665

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

 
(3,497
)
 
23,567

 
(101
)
 
634,037

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

 
(888
)
 
915,354

 
(10,532
)
 
1,368,397

 
(11,420
)
 
1,063,513

 
(4,385
)
 
1,093,586

 
(12,070
)
 
2,157,099

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

 
$
(4,385
)
 
$
1,949,721

 
$
(84,559
)
 
$
3,013,234

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

11


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

 
$

 
$

 
$

Due after one year through five years

 

 

 

Due after five years through 10 years
17,465

 
16,601

 

 

Due after 10 years
925,018

 
828,513

 
928,624

 
856,135

 
942,483

 
845,114

 
928,624

 
856,135

MBS (1)
5,399,946

 
5,427,526

 
4,626,977

 
4,625,843

Total
$
6,342,429

 
$
6,272,640

 
$
5,555,601

 
$
5,481,978

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

Note 5 — Held-to-Maturity Securities
 
Major Security Types. Our held-to-maturity securities as of September 30, 2015, were (dollars in thousands):
 
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
4,235

 
$

 
$
4,235

 
$
249

 
$

 
$
4,484

State or local housing-finance-agency obligations (HFA securities)
173,784

 

 
173,784

 
41

 
(24,434
)
 
149,391

 
178,019

 

 
178,019

 
290

 
(24,434
)
 
153,875

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
16,936

 

 
16,936

 
389

 

 
17,325

U.S. government guaranteed – multifamily
26,275

 

 
26,275

 
72

 

 
26,347

GSEs – single-family
1,174,680

 

 
1,174,680

 
35,597

 
(107
)
 
1,210,170

GSEs – multifamily
400,305

 

 
400,305

 
25,321

 

 
425,626

Private-label – residential
1,220,336

 
(239,706
)
 
980,630

 
275,163

 
(13,132
)
 
1,242,661

Asset-backed securities (ABS) backed by home equity loans
15,871

 
(693
)
 
15,178

 
698

 
(975
)
 
14,901

 
2,854,403

 
(240,399
)
 
2,614,004

 
337,240

 
(14,214
)
 
2,937,030

Total
$
3,032,422

 
$
(240,399
)
 
$
2,792,023

 
$
337,530

 
$
(38,648
)
 
$
3,090,905


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

12


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

 
$

 
$
5,777

 
$
360

 
$

 
$
6,137

HFA securities
178,387

 

 
178,387

 
30

 
(18,136
)
 
160,281

 
184,164

 

 
184,164

 
390

 
(18,136
)
 
166,418

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

 

 
20,399

 
487

 

 
20,886

U.S. government guaranteed – multifamily
115,712

 

 
115,712

 
298

 
(6
)
 
116,004

GSEs – single-family
1,420,801

 

 
1,420,801

 
40,518

 
(157
)
 
1,461,162

GSEs – multifamily
542,130

 

 
542,130

 
29,949

 

 
572,079

Private-label – residential
1,327,967

 
(275,158
)
 
1,052,809

 
319,306

 
(13,957
)
 
1,358,158

ABS backed by home equity loans
16,958

 
(784
)
 
16,174

 
856

 
(922
)
 
16,108

 
3,443,967

 
(275,942
)
 
3,168,025

 
391,414

 
(15,042
)
 
3,544,397

Total
$
3,628,131

 
$
(275,942
)
 
$
3,352,189

 
$
391,804

 
$
(33,178
)
 
$
3,710,815


The following table summarizes our held-to-maturity securities with unrealized losses as of September 30, 2015, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands). 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
14,821

 
$
(178
)
 
$
129,529

 
$
(24,256
)
 
$
144,350

 
$
(24,434
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family

 

 
16,950

 
(107
)
 
16,950

 
(107
)
Private-label – residential
105,919

 
(2,113
)
 
485,188

 
(43,035
)
 
591,107

 
(45,148
)
ABS backed by home equity loans
203

 
(7
)
 
13,518

 
(1,146
)
 
13,721

 
(1,153
)
 
106,122

 
(2,120
)
 
515,656

 
(44,288
)
 
621,778

 
(46,408
)
Total
$
120,943

 
$
(2,298
)
 
$
645,185

 
$
(68,544
)
 
$
766,128

 
$
(70,842
)

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

13


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

 
$
(150
)
 
$
139,544

 
$
(17,986
)
 
$
154,394

 
$
(18,136
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government guaranteed – multifamily
9,282

 
(6
)
 

 

 
9,282

 
(6
)
GSEs – single-family

 

 
38,121

 
(157
)
 
38,121

 
(157
)
Private-label – residential
80,439

 
(1,028
)
 
544,369

 
(45,104
)
 
624,808

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

 
(3
)
 
14,641

 
(1,074
)
 
14,847

 
(1,077
)
 
89,927

 
(1,037
)
 
597,131

 
(46,335
)
 
687,058

 
(47,372
)
Total
$
104,777

 
$
(1,187
)
 
$
736,675

 
$
(64,321
)
 
$
841,452

 
$
(65,508
)

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

 
$

 
$

 
$
150

 
$
150

 
$
150

Due after one year through five years
7,213

 
7,213

 
7,494

 
9,369

 
9,369

 
9,751

Due after five years through 10 years
17,021

 
17,021

 
16,852

 
17,115

 
17,115

 
16,973

Due after 10 years
153,785

 
153,785

 
129,529

 
157,530

 
157,530

 
139,544

 
178,019

 
178,019

 
153,875

 
184,164

 
184,164

 
166,418

MBS (2)
2,854,403

 
2,614,004

 
2,937,030

 
3,443,967

 
3,168,025

 
3,544,397

Total
$
3,032,422

 
$
2,792,023

 
$
3,090,905

 
$
3,628,131

 
$
3,352,189

 
$
3,710,815

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

Note 6 — Other-Than-Temporary Impairment

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

Available-for-Sale Securities

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

14


We expect debentures issued by a supranational institution that were in an unrealized loss position as of September 30, 2015, to return contractual principal and interest based on our review and analysis of independent third-party credit reports on the supranational institution, and the supranational institution's triple-A (or equivalent) rating by each of the nationally recognized statistical rating organizations (NRSROs) that rates it.
 
Debentures issued by U.S. government-owned corporations are not obligations of the U.S. government and not guaranteed by the U.S. government. However, these securities are rated at the same level as the U.S. government by the NRSROs. These ratings reflect the U.S. government's implicit support of the government-owned corporation as well as the entity's underlying business and financial risk.

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

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

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

Held-to-Maturity Securities

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

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

15


core-based statistical areas (CBSA), as defined by the United States Office of Management and Budget. The OTTI Governance Committee developed a short-term housing-price forecast, with projected changes ranging from a decrease of 3.0 percent to an increase of 8.0 percent over the 12-month period beginning July 1, 2015. For the vast majority of markets, the projected short-term housing-price changes range from an increase of 2.0 percent to an increase of 5.0 percent. Thereafter, we have projected a unique recovery path for each relevant geographic area based on an internally developed framework derived from historical data.

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

For those securities for which an other-than-temporary impairment was determined to have occurred during the three months ended September 30, 2015, the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS and home equity loan investments in each category shown (dollars in thousands).
 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Year of Securitization
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A Private-label residential MBS (1)
 
 
 
 
 
 
 
 
 
 
2007
 
$
47,097

 
6.3
%
 
42.3
%
 
36.9
%
 
%
2006
 
81,774

 
9.2

 
31.9

 
38.9

 
0.4

2005
 
21,963

 
8.0

 
22.2

 
35.8

 
22.7

2004 and prior
 
2,556

 
13.4

 
15.5

 
5.0

 
3.3

Total
 
$
153,390

 
8.2
%
 
33.4
%
 
37.3
%
 
3.5
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.
 
The following table sets forth our securities for which other-than-temporary impairment credit losses were recognized during the life of the security through September 30, 2015 (dollars in thousands). Securities are classified in the table below based on their classifications at the time of issuance. 
 
September 30, 2015
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
51,669

 
$
44,541

 
$
35,355

 
$
45,139

Private-label residential MBS – Alt-A
1,327,714

 
978,983

 
748,463

 
1,013,804

ABS backed by home equity loans – Subprime
4,071

 
3,667

 
2,974

 
3,672

Total other-than-temporarily impaired securities
$
1,383,454

 
$
1,027,191

 
$
786,792

 
$
1,062,615

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


16


The following table presents a roll-forward of the amounts related to credit losses recognized in earnings. The roll-forward is the amount of credit losses on investment securities on which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss (dollars in thousands).
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
551,341

 
$
587,334

 
$
568,652

 
$
603,786

Additions:
 
 
 
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized

 
31

 

 
31

Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
1,053

 
280

 
2,828

 
1,137

Reductions:
 
 
 
 
 
 
 
Securities matured during the period

 
(173
)
 

 
(173
)
Increase in cash flows expected to be collected which are recognized over the remaining life of the security(2)
(9,585
)
 
(8,991
)
 
(28,671
)
 
(26,300
)
Balance at end of period
$
542,809

 
$
578,481

 
$
542,809

 
$
578,481

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

Note 7 — Advances
 
General Terms. At September 30, 2015, and December 31, 2014, we had advances outstanding with interest rates ranging from 0.00 percent to 7.72 percent and (0.22) percent to 8.37 percent, respectively, as summarized below (dollars in thousands). Advances with negative interest rates contain embedded interest-rate features that have met the requirements to be separated from the host contract and are recorded as stand-alone derivatives, and which we economically hedge with derivatives containing offsetting interest-rate features.
 
September 30, 2015
 
December 31, 2014
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
8,021

 
0.46
%
 
$
19,863

 
0.44
%
Due in one year or less
20,818,140

 
0.52

 
20,561,912

 
0.41

Due after one year through two years
4,117,223

 
2.21

 
4,114,587

 
1.63

Due after two years through three years
3,173,238

 
2.10

 
3,564,747

 
2.68

Due after three years through four years
1,662,577

 
1.84

 
2,299,457

 
2.16

Due after four years through five years
1,819,083

 
1.78

 
1,087,673

 
2.11

Thereafter
2,163,542

 
2.71

 
1,626,475

 
2.98

Total par value
33,761,824

 
1.15
%
 
33,274,714

 
1.11
%
Premiums
27,289

 
 

 
32,887

 
 

Discounts
(17,575
)
 
 

 
(18,549
)
 
 

Market value of bifurcated derivatives (1)
3,053

 
 
 
1,467

 
 
Hedging adjustments
180,098

 
 

 
191,555

 
 

Total
$
33,954,689

 
 

 
$
33,482,074

 
 

_________________________

17


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

At September 30, 2015, and December 31, 2014, we had putable advances outstanding totaling $2.0 billion and $2.3 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next put date for putable advances (dollars in thousands):
Year of Contractual Maturity or Next Put Date, Par Value
September 30, 2015
 
December 31, 2014
Overdrawn demand-deposit accounts
$
8,021

 
$
19,863

Due in one year or less
22,557,440

 
22,737,137

Due after one year through two years
3,029,423

 
3,767,187

Due after two years through three years
2,678,988

 
2,155,922

Due after three years through four years
1,562,327

 
1,931,707

Due after four years through five years
1,810,083

 
1,036,423

Thereafter
2,115,542

 
1,626,475

Total par value
$
33,761,824

 
$
33,274,714


At September 30, 2015, and December 31, 2014, we had callable advances outstanding totaling $52.0 million and $30.0 million, respectively.

Interest-Rate-Payment Terms. The following table details interest-rate-payment types for our outstanding advances (dollars in thousands):
Par value of advances
September 30, 2015
 
December 31, 2014
Fixed-rate
$
27,633,428

 
$
27,236,551

Variable-rate
6,128,396

 
6,038,163

Total par value
$
33,761,824

 
$
33,274,714

 
Credit-Risk Exposure and Security Terms. At September 30, 2015, and December 31, 2014, we had $12.3 billion and $10.7 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five borrowers at September 30, 2015, and three borrowers at December 31, 2014, representing 36.6 percent and 32.0 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Prepayment Fees. For the three and nine months ended September 30, 2015 and 2014, net advance prepayment fees recognized in income are reflected in the following table (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Prepayment fees received from borrowers
 
$
15,377

 
$
2,864

 
$
19,273

 
$
10,687

Less: hedging fair-value adjustments on prepaid advances
 
(12,674
)
 

 
(15,405
)
 
(552
)
Less: net discounts (premiums) associated with prepaid advances
 

 
110

 

 
(3,819
)
Less: deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 
(1,197
)
 
(1,795
)
 
(1,443
)
 
(1,875
)
Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 

 

 
3,102

 

Net prepayment fees recognized in income
 
$
1,506

 
$
1,179

 
$
5,527

 
$
4,441


Note 8 — Mortgage Loans Held for Portfolio


18


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

The following table presents certain characteristics of these investments (dollars in thousands):
 
September 30, 2015
 
December 31, 2014
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
577,671

 
$
570,663

Fixed-rate 20- and 30-year single-family mortgages
2,939,339

 
2,852,669

Premiums
63,911

 
62,554

Discounts
(2,285
)
 
(2,761
)
Deferred derivative gains, net
2,633

 
2,835

Total mortgage loans held for portfolio
3,581,269

 
3,485,960

Less: allowance for credit losses
(1,000
)
 
(2,012
)
Total mortgage loans, net of allowance for credit losses
$
3,580,269

 
$
3,483,948

 
The following table details the par value of mortgage loans held for portfolio (dollars in thousands):
 
September 30, 2015
 
December 31, 2014
Conventional mortgage loans
$
3,096,483

 
$
2,997,669

Government mortgage loans
420,527

 
425,663

Total par value
$
3,517,010

 
$
3,423,332

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

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

Note 9 — Allowance for Credit Losses

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

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

Secured Member Credit Products

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

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

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


19


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

Government Mortgage Loans Held for Portfolio

Based on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of September 30, 2015, and December 31, 2014. In addition, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

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

Conventional Mortgage Loans Held for Portfolio

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

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below set forth certain key credit quality indicators for our investments in mortgage loans at September 30, 2015, and December 31, 2014 (dollars in thousands):
 
September 30, 2015
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
22,754

 
$
14,277

 
$
37,031

Past due 60-89 days delinquent
9,914

 
4,679

 
14,593

Past due 90 days or more delinquent
23,582

 
9,116

 
32,698

Total past due
56,250

 
28,072

 
84,322

Total current loans
3,111,048

 
404,084

 
3,515,132

Total mortgage loans
$
3,167,298

 
$
432,156

 
$
3,599,454

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
11,457

 
$
3,046

 
$
14,503

Serious delinquency rate (2)
0.79
%
 
2.11
%
 
0.95
%
Past due 90 days or more still accruing interest
$

 
$
9,116

 
$
9,116

Loans on nonaccrual status (3)
$
24,092

 
$

 
$
24,092

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


20


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

 
$
19,811

 
$
51,879

Past due 60-89 days delinquent
9,834

 
4,591

 
14,425

Past due 90 days or more delinquent
37,927

 
7,467

 
45,394

Total past due
79,829

 
31,869

 
111,698

Total current loans
2,986,749

 
405,808

 
3,392,557

Total mortgage loans
$
3,066,578

 
$
437,677

 
$
3,504,255

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

 
$
2,786

 
$
16,495

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

 
$
7,467

 
$
7,467

Loans on nonaccrual status (3)
$
38,832

 
$

 
$
38,832

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

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

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

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


21


Individually Evaluated Impaired Loans. The following tables present the recorded investment, par value, and any related allowance for impaired conventional loans individually assessed for impairment at September 30, 2015, and December 31, 2014, and the average recorded investment and interest income recognized on these loans during the three and nine months ended September 30, 2015 and 2014 (dollars in thousands).
 
 
As of September 30, 2015
 
As of December 31, 2014
 
 
Recorded Investment
 
Par Value
 
Related Allowance
 
Recorded Investment
 
Par Value
 
Related Allowance
Individually evaluated impaired mortgage loans with no related allowance
 
$
29,050

 
$
29,010

 
$

 
$
6,679

 
$
6,654

 
$

Individually evaluated impaired mortgage loans with a related allowance
 

 

 

 
3,097

 
3,073

 
544

Total individually evaluated impaired mortgage loans
 
$
29,050

 
$
29,010

 
$

 
$
9,776

 
$
9,727

 
$
544


 
 
For the Three Months Ended September 30,
 
 
2015
 
2014
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
30,295

 
$
105

 
$
4,930

 
$
38

Individually evaluated impaired mortgage loans with a related allowance
 

 

 
2,760

 
2

Total individually evaluated impaired mortgage loans
 
$
30,295

 
$
105

 
$
7,690

 
$
40

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance
 
$
31,907

 
$
354

 
$
4,304

 
$
130

Individually evaluated impaired mortgage loans with a related allowance
 

 

 
2,868

 
15

Total individually evaluated impaired mortgage loans
 
$
31,907

 
$
354

 
$
7,172

 
$
145


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

22


 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
1,100

 
$
2,042

 
$
2,012

 
$
2,221

Charge-offs, net of recoveries
59

 
(48
)
 
(570
)
 
(148
)
(Reduction of) provision for credit losses
(159
)
 
373

 
(442
)
 
294

Balance, end of period
$
1,000

 
$
2,367

 
$
1,000

 
$
2,367

Ending balance, individually evaluated for impairment
$

 
$
490

 
$

 
$
490

Ending balance, collectively evaluated for impairment
$
1,000

 
$
1,877

 
$
1,000

 
$
1,877

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
29,050

 
$
7,944

 
$
29,050

 
$
7,944

Collectively evaluated for impairment
$
3,138,248

 
$
2,977,650

 
$
3,138,248

 
$
2,977,650

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

REO. At September 30, 2015, and December 31, 2014, we had $3.8 million and $4.3 million, respectively, in assets classified as REO. During the nine months ended September 30, 2015 and 2014, we sold REO assets with a recorded carrying value of $5.1 million and $7.6 million, respectively. Upon the sale of REO properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, we recognized net gains totaling $600,000 and net losses totaling $335,000 during the nine months ended September 30, 2015 and 2014, respectively. Gains and losses on the sale of REO assets are recorded in other income.

Note 10 — Derivatives and Hedging Activities     

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


23


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

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
15,529,877

 
$
50,087

 
$
(541,949
)
 
$
12,579,525

 
$
26,381

 
$
(553,967
)
Forward-start interest-rate swaps
552,800

 

 
(38,592
)
 
1,096,800

 

 
(42,209
)
Total derivatives designated as hedging instruments
16,082,677

 
50,087

 
(580,541
)
 
13,676,325

 
26,381

 
(596,176
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
488,000

 
30

 
(22,372
)
 
423,000

 
31

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

 

 

 
300,000

 

 

Mortgage-delivery commitments (1)
27,796

 
135

 

 
26,927

 
71

 
(8
)
Total derivatives not designated as hedging instruments
815,796

 
165

 
(22,372
)
 
749,927

 
102

 
(19,857
)
Total notional amount of derivatives
$
16,898,473

 
 

 
 

 
$
14,426,252

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
50,252

 
(602,913
)
 
 
 
26,483

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

 
(9,014
)
 
122,716

 
 
 
(11,935
)
 
57,144

Derivative assets and derivative liabilities
 

 
$
41,238

 
$
(480,197
)
 
 
 
$
14,548

 
$
(558,889
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $115.9 million and $45.5 million at September 30, 2015, and December 31, 2014, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $2.2 million and $290,000 at September 30, 2015, and December 31, 2014, respectively.

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


24


 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$
(4,690
)
 
$
334

 
$
(6,405
)
 
$
1,793

 Forward-start interest-rate swaps
 
(205
)
 
(78
)
 
(101
)
 
(248
)
Total net (losses) gains related to derivatives designated as hedging instruments
 
(4,895
)
 
256

 
(6,506
)
 
1,545

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
(3,313
)
 
1,062

 
(5,988
)
 
(3,581
)
Interest-rate caps or floors
 

 
(1
)
 

 
(43
)
Mortgage-delivery commitments
 
555

 
94

 
340

 
815

Total net (losses) gains related to derivatives not designated as hedging instruments
 
(2,758
)
 
1,155

 
(5,648
)
 
(2,809
)
Net (losses) gains on derivatives and hedging activities
 
$
(7,653
)
 
$
1,411

 
$
(12,154
)
 
$
(1,264
)

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

 
 

 
 

 
 

Advances
$
(21,993
)
 
$
21,422

 
$
(571
)
 
$
(32,932
)
Investments
(39,947
)
 
40,227

 
280

 
(9,405
)
COs – bonds
13,107

 
(17,506
)
 
(4,399
)
 
18,475

Total
$
(48,833
)
 
$
44,143

 
$
(4,690
)
 
$
(23,862
)
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
48,280

 
$
(48,158
)
 
$
122

 
$
(32,487
)
Investments
(2,683
)
 
3,040

 
357

 
(9,496
)
Deposits
(362
)
 
362

 

 
357

COs – bonds
(17,834
)
 
17,689

 
(145
)
 
14,856

 Total
$
27,401

 
$
(27,067
)
 
$
334

 
$
(26,770
)


25


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

 
 

 
 

 
 

Advances
$
11,318

 
$
(11,456
)
 
$
(138
)
 
$
(97,442
)
Investments
(12,702
)
 
13,859

 
1,157

 
(28,326
)
COs – bonds
17,376

 
(24,800
)
 
(7,424
)
 
49,438

Total
$
15,992

 
$
(22,397
)
 
$
(6,405
)
 
$
(76,330
)
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2014
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
78,389

 
$
(78,039
)
 
$
350

 
$
(98,917
)
Investments
(55,952
)
 
56,825

 
873

 
(28,494
)
Deposits
(1,143
)
 
1,143

 

 
1,151

COs – bonds
2,921

 
(2,351
)
 
570

 
38,629

 Total
$
24,215

 
$
(22,422
)
 
$
1,793

 
$
(87,631
)
____________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

The following table presents the losses recognized in accumulated other comprehensive loss, the losses reclassified from accumulated other comprehensive loss into income, and the effect of our hedging activities on our net losses on derivatives and hedging activities in the statement of income for our forward-start interest-rate swaps associated with CO bond hedged items in cash-flow hedge relationships (dollars in thousands).
Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Losses Recognized in Other Comprehensive Loss on Derivatives (Effective Portion)
 
Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)
 
Losses Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)
 
Losses Recognized in Net Losses on Derivatives and Hedging Activities (Ineffective Portion)
Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2015
 
$
(15,959
)
 
Interest expense
 
$
(6,227
)
 
$
(205
)
For the Three Months Ended September 30, 2014
 
(1,482
)
 
Interest expense
 
(3,145
)
 
(78
)
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
(15,329
)
 
Interest expense
 
(16,747
)
 
(101
)
For the Nine Months Ended September 30, 2014
 
(21,222
)
 
Interest expense
 
(3,865
)
 
(248
)

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

As of September 30, 2015, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $26.6 million.

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

26


agreements, if our credit rating is lowered by Moody's Investor Services (Moody's) or Standard and Poor's Rating Service (S&P) to a certain level, we are required to deliver additional collateral on bilateral derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all bilateral derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at September 30, 2015, was $500.0 million, for which we had delivered collateral with a post-haircut value of $421.3 million in accordance with the terms of the master-netting agreements. The following table sets forth the post-haircut value of incremental collateral that certain bilateral derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at September 30, 2015 (dollars in thousands).

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

Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral(2)
AA+
 
AA or AA-
 
$
31,372

AA-
 
A+, A or A-
 
26,313

A-
 
below A-
 
32,548

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

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

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

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


27


 
 
September 30, 2015
 
December 31, 2014
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivatives meeting netting requirements
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
19,552

 
$
(515,834
)
 
$
20,083

 
$
(578,073
)
Cleared derivatives
 
30,565

 
(87,079
)
 
6,329

 
(37,952
)
Total gross recognized amount
 
50,117

 
(602,913
)
 
26,412

 
(616,025
)
Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
(17,895
)
 
35,637

 
(19,481
)
 
19,191

Cleared derivatives
 
8,881

 
87,079

 
7,546

 
37,953

Total gross amounts of netting adjustments and cash collateral
 
(9,014
)
 
122,716

 
(11,935
)
 
57,144

Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Bilateral derivatives
 
1,657

 
(480,197
)
 
602

 
(558,882
)
Cleared derivatives
 
39,446

 

 
13,875

 
1

Total net amounts after netting adjustments and cash collateral
 
41,103

 
(480,197
)
 
14,477

 
(558,881
)
Derivatives not meeting netting requirements
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
135

 

 
71

 
(8
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
 
Bilateral derivatives
 
1,657

 
(480,197
)
 
602

 
(558,882
)
Cleared derivatives
 
39,446

 

 
13,875

 
1

Mortgage delivery commitments
 
135

 

 
71

 
(8
)
Total derivative assets and total derivative liabilities presented in the statement of condition
 
41,238

 
(480,197
)
 
14,548

 
(558,889
)
 
 
 
 
 
 
 
 
 
Non-cash collateral received or pledged not offset (1)
 
 
 
 
 
 
 
 
Can be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 
(231
)
 
78,000

 

 
66,056

Cannot be sold or repledged
 
 
 
 
 
 
 
 
Bilateral derivatives
 

 
341,366

 

 
392,944

Total non-cash collateral received or pledged, not offset
 
(231
)
 
419,366

 

 
459,000

 Net amount
 
 
 
 
 
 
 
 
Bilateral derivatives
 
1,426

 
(60,831
)
 
602

 
(99,882
)
Cleared derivatives
 
39,446

 

 
13,875

 
2

Mortgage delivery commitments
 
135

 

 
71

 
(8
)
Total net amount
 
$
41,007

 
$
(60,831
)
 
$
14,548

 
$
(99,888
)
_______________________
(1)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At September 30, 2015, and December 31, 2014, we had additional net credit exposure of $3.2 million and $4.0 million, respectively, due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

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


28


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

 
 
Demand and overnight
$
470,983

 
$
340,441

Other
3,291

 
5,120

Noninterest-bearing
 

 
 

Other
21,597

 
23,770

Total deposits
$
495,871

 
$
369,331


Note 12 — Consolidated Obligations

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

 
 

 
 

 
 

Due in one year or less
$
8,330,130

 
1.19
%
 
$
6,675,745

 
1.41
%
Due after one year through two years
5,757,005

 
1.40

 
5,573,745

 
1.46

Due after two years through three years
4,299,915

 
1.84

 
4,842,570

 
1.91

Due after three years through four years
2,493,480

 
1.73

 
2,392,380

 
1.77

Due after four years through five years
1,879,590

 
2.15

 
2,244,815

 
1.95

Thereafter
3,483,920

 
2.88

 
3,599,085

 
2.79

Total par value
26,244,040

 
1.69
%
 
25,328,340

 
1.79
%
Premiums
162,312

 
 

 
199,628

 
 

Discounts
(15,630
)
 
 

 
(19,386
)
 
 

Hedging adjustments
21,992

 
 

 
(2,808
)
 
 

 
$
26,412,714

 
 

 
$
25,505,774

 
 

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

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

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

 
 

Noncallable and nonputable
$
21,709,040

 
$
20,853,340

Callable
4,535,000

 
4,475,000

Total par value
$
26,244,040

 
$
25,328,340


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

29


Year of Contractual Maturity or Next Call Date
 
September 30, 2015
 
December 31, 2014
Due in one year or less
 
$
12,542,130

 
$
10,805,745

Due after one year through two years
 
5,365,005

 
4,928,745

Due after two years through three years
 
3,174,915

 
4,252,570

Due after three years through four years
 
2,028,480

 
2,027,380

Due after four years through five years
 
1,326,590

 
1,619,815

Thereafter
 
1,806,920

 
1,694,085

Total par value
 
$
26,244,040

 
$
25,328,340


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

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

 
 

Fixed-rate
$
22,967,040

 
$
22,513,340

Simple variable-rate
2,445,000

 
1,970,000

Step-up
832,000

 
845,000

Total par value
$
26,244,040

 
$
25,328,340


COs – Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
September 30, 2015
$
26,538,537

 
$
26,542,724

 
0.15
%
December 31, 2014
$
25,309,608

 
$
25,312,040

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

Note 13 — Affordable Housing Program

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

 
$
62,591

AHP expense for the period
23,882

 
17,623

AHP direct grant disbursements
(14,080
)
 
(12,012
)
AHP subsidy for AHP advance disbursements
(625
)
 
(1,321
)
Return of previously disbursed grants and subsidies
79

 
112

Balance at end of period
$
76,249

 
$
66,993


Note 14 — Capital

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

30


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

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

 
 

Class B capital stock
$
2,542,598

 
$
2,413,114

Mandatorily redeemable capital stock
42,643

 
298,599

Retained earnings
1,074,178

 
901,658

Total permanent capital
$
3,659,419

 
$
3,613,371

Risk-based capital requirement
 

 
 

Credit-risk capital
$
394,271

 
$
414,765

Market-risk capital
57,167

 
75,560

Operations-risk capital
135,431

 
147,097

Total risk-based capital requirement
$
586,869

 
$
637,422

Permanent capital in excess of risk-based capital requirement
$
3,072,550

 
$
2,975,949

 
 
September 30, 2015
 
December 31, 2014
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
586,869

 
$
3,659,419

 
$
637,422

 
$
3,613,371

Total regulatory capital
 
$
2,295,895

 
$
3,659,419

 
$
2,204,267

 
$
3,613,371

Total capital-to-asset ratio
 
4.00
%
 
6.38
%
 
4.00
%
 
6.56
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
2,869,869

 
$
5,489,129

 
$
2,755,334

 
$
5,420,057

Leverage capital-to-assets ratio
 
5.00
%
 
9.56
%
 
5.00
%
 
9.84
%

Note 15 — Accumulated Other Comprehensive Loss

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


31


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, June 30, 2014
 
$
(72,094
)
 
$
(299,324
)
 
$
(70,605
)
 
$
(3,364
)
 
$
(445,387
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized losses
 
(9,274
)
 

 
(1,482
)
 

 
(10,756
)
Accretion of noncredit loss
 

 
12,531

 

 

 
12,531

Net actuarial loss
 

 

 

 
(185
)
 
(185
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
68

 

 

 
68

Amortization - hedging activities (2)
 

 

 
3,149

 

 
3,149

Amortization - pension and postretirement benefits (3)
 

 

 

 
118

 
118

Other comprehensive (loss) income
 
(9,274
)
 
12,599

 
1,667

 
(67
)
 
4,925

Balance, September 30, 2014
 
$
(81,368
)
 
$
(286,725
)
 
$
(68,938
)
 
$
(3,431
)
 
$
(440,462
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015
 
$
(67,827
)
 
$
(251,294
)
 
$
(70,271
)
 
$
(5,671
)
 
$
(395,063
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized losses
 
(1,962
)
 

 
(15,959
)
 

 
(17,921
)
Accretion of noncredit loss
 

 
10,072

 

 

 
10,072

Net actuarial loss
 

 

 

 
(4
)
 
(4
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
823

 

 

 
823

Amortization - hedging activities (4)
 

 

 
6,231

 

 
6,231

Amortization - pension and postretirement benefits (3)
 

 

 

 
166

 
166

Other comprehensive (loss) income
 
(1,962
)
 
10,895

 
(9,728
)
 
162

 
(633
)
Balance, September 30, 2015
 
$
(69,789
)
 
$
(240,399
)
 
$
(79,999
)
 
$
(5,509
)
 
$
(395,696
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified from accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $3.1 million recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $6.2 million recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

32


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2013
 
$
(101,765
)
 
$
(324,928
)
 
$
(51,594
)
 
$
(3,229
)
 
$
(481,516
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
20,397

 

 
(21,222
)
 

 
(825
)
Accretion of noncredit loss
 

 
37,278

 

 

 
37,278

Net actuarial loss
 

 

 

 
(558
)
 
(558
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
925

 

 

 
925

Amortization - hedging activities (2)
 

 

 
3,878

 

 
3,878

Amortization - pension and postretirement benefits (3)
 

 

 

 
356

 
356

Other comprehensive income (loss)
 
20,397

 
38,203

 
(17,344
)
 
(202
)
 
41,054

Balance, September 30, 2014
 
$
(81,368
)
 
$
(286,725
)
 
$
(68,938
)
 
$
(3,431
)
 
$
(440,462
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$
(73,623
)
 
$
(275,942
)
 
$
(81,428
)
 
$
(5,993
)
 
$
(436,986
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
3,834

 

 
(15,329
)
 

 
(11,495
)
Accretion of noncredit loss
 

 
33,525

 

 

 
33,525

Net actuarial loss
 

 

 

 
(12
)
 
(12
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
2,018

 

 

 
2,018

Amortization - hedging activities (4)
 

 

 
16,758

 

 
16,758

Amortization - pension and postretirement benefits (3)
 

 

 

 
496

 
496

Other comprehensive income
 
3,834

 
35,543

 
1,429

 
484

 
41,290

Balance, September 30, 2015
 
$
(69,789
)
 
$
(240,399
)
 
$
(79,999
)
 
$
(5,509
)
 
$
(395,696
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified from accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $3.9 million recorded in CO bond interest expense and $11,000 recorded in net losses on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $16.7 million recorded in CO bond interest expense and $11,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

Note 16 — Employee Retirement Plans

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


33


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

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

The following table sets forth our net pension costs under our defined benefit plan and expenses relating to our defined contribution plans (dollars in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Qualified Defined Benefit Multiemployer Plan - Pentegra Defined Benefit Plan
$
122

 
$
871

 
$
5,327

 
$
2,397

Qualified Defined Contribution Plan - Pentegra Defined Contribution Plan
237

 
222

 
765

 
726

Nonqualified Defined Contribution Plan - Thrift Benefit Equalization Plan
12

 
18

 
131

 
124


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

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

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

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan for the Three Months Ended September 30,
 
Postretirement Benefits for the Three Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
171

 
$
138

 
$
9

 
$
6

Interest cost
 
121

 
116

 
7

 
8

Amortization of net actuarial loss
 
163

 
118

 
3

 

Net periodic benefit cost
 
$
455

 
$
372

 
$
19

 
$
14

 
 
 
 
 
 
 
 
 
 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Nine Months Ended September 30,
 
Postretirement Benefits for the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
514

 
$
414

 
$
28

 
$
18

Interest cost
 
363

 
347

 
23

 
24

Amortization of net actuarial loss
 
489

 
355

 
7

 
1

Net periodic benefit cost
 
$
1,366

 
$
1,116

 
$
58

 
$
43



34


Note 17 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2014 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the nine months ended September 30, 2015, other than the following:

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

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

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
320,281

 
$
320,281

 
$
320,281

 
$

 
$

 
$

Interest-bearing deposits
238

 
238

 
238

 

 

 

Securities purchased under agreements to resell
7,650,000

 
7,649,890

 

 
7,649,890

 

 

Federal funds sold
2,425,000

 
2,424,991

 

 
2,424,991

 

 

Trading securities(1)
236,322

 
236,322

 

 
236,322

 

 

Available-for-sale securities(1)
6,272,640

 
6,272,640

 

 
6,272,640

 

 

Held-to-maturity securities
2,792,023

 
3,090,905

 

 
1,683,952

 
1,406,953

 

Advances
33,954,689

 
34,137,678

 

 
34,137,678

 

 

Mortgage loans, net
3,580,269

 
3,686,333

 

 
3,652,029

 
34,304

 

Accrued interest receivable
74,881

 
74,881

 

 
74,881

 

 

Derivative assets(1)
41,238

 
41,238

 

 
50,252

 

 
(9,014
)
Other assets (1)
14,935

 
14,935

 
6,097

 
8,838

 

 

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(495,871
)
 
(495,870
)
 

 
(495,870
)
 

 

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(26,412,714
)
 
(26,700,582
)
 

 
(26,700,582
)
 

 

Discount notes
(26,538,537
)
 
(26,540,444
)
 

 
(26,540,444
)
 

 

Mandatorily redeemable capital stock
(42,643
)
 
(42,643
)
 
(42,643
)
 

 

 

Accrued interest payable
(99,382
)
 
(99,381
)
 

 
(99,381
)
 

 

Derivative liabilities(1)
(480,197
)
 
(480,197
)
 

 
(602,913
)
 

 
122,716

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
518

 

 
518

 

 

Standby letters of credit
(882
)
 
(882
)
 

 
(882
)
 

 

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


35


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

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
1,124,536

 
$
1,124,536

 
$
1,124,536

 
$

 
$

 
$

Interest-bearing deposits
163

 
163

 
163

 

 

 

Securities purchased under agreements to resell
5,250,000

 
5,249,941

 

 
5,249,941

 

 

Federal funds sold
2,550,000

 
2,549,982

 

 
2,549,982

 

 

Trading securities(1)
244,969

 
244,969

 

 
244,969

 

 

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

 
5,481,978

 

 
5,481,978

 

 

Held-to-maturity securities
3,352,189

 
3,710,815

 

 
2,176,268

 
1,534,547

 

Advances
33,482,074

 
33,618,345

 

 
33,618,345

 

 

Mortgage loans, net
3,483,948

 
3,612,078

 

 
3,612,078

 

 

Accrued interest receivable
77,411

 
77,411

 

 
77,411

 

 

Derivative assets(1)
14,548

 
14,548

 

 
26,483

 

 
(11,935
)
Other assets(1)
11,200

 
11,200

 
5,682

 
5,518

 

 

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(369,331
)
 
(369,330
)
 

 
(369,330
)
 

 

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

 
(25,741,697
)
 

 

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

 
(25,310,307
)
 

 

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

 

 

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

 
(91,225
)
 

 

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

 
(616,033
)
 

 
57,144

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
430

 

 
430

 

 

Standby letters of credit
(745
)
 
(745
)
 

 
(745
)
 

 

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

Fair Value Measured on a Recurring Basis

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

36


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

 
 

 
 

 
 

 
 

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

 
$
10,765

 
$

 
$

 
$
10,765

GSEs – single-family MBS

 
1,651

 

 

 
1,651

GSEs – multifamily MBS

 
223,906

 

 

 
223,906

Total trading securities

 
236,322

 

 

 
236,322

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
448,260

 

 

 
448,260

U.S. government-owned corporations

 
276,509

 

 

 
276,509

GSEs

 
120,345

 

 

 
120,345

U.S. government guaranteed – single-family MBS

 
166,976

 

 

 
166,976

U.S. government guaranteed – multifamily MBS

 
761,374

 

 

 
761,374

GSEs – single-family MBS

 
4,499,176

 

 

 
4,499,176

Total available-for-sale securities

 
6,272,640

 

 

 
6,272,640

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
50,117

 

 
(9,014
)
 
41,103

Mortgage delivery commitments

 
135

 

 

 
135

Total derivative assets

 
50,252

 

 
(9,014
)
 
41,238

Other assets
6,097

 
8,838

 

 

 
14,935

Total assets at fair value
$
6,097

 
$
6,568,052

 
$

 
$
(9,014
)
 
$
6,565,135

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(602,913
)
 
$

 
$
122,716

 
$
(480,197
)
Total liabilities at fair value
$

 
$
(602,913
)
 
$

 
$
122,716

 
$
(480,197
)
_______________________
(1)
These amounts represent the application of the netting requirements that allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


37


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

 
 

 
 

 
 

 
 

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

 
$
12,235

 
$

 
$

 
$
12,235

GSEs – single-family MBS

 
2,300

 

 

 
2,300

GSEs – multifamily MBS

 
230,434

 

 

 
230,434

Total trading securities

 
244,969

 

 

 
244,969

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
447,685

 

 

 
447,685

U.S. government-owned corporations

 
284,997

 

 

 
284,997

GSEs

 
123,453

 

 

 
123,453

U.S. government guaranteed – single-family MBS

 
206,028

 

 

 
206,028

U.S. government guaranteed – multifamily MBS

 
871,423

 

 

 
871,423

GSEs – single-family MBS

 
3,548,392

 

 

 
3,548,392

Total available-for-sale securities

 
5,481,978

 

 

 
5,481,978

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
26,412

 

 
(11,935
)
 
14,477

Mortgage delivery commitments

 
71

 

 

 
71

Total derivative assets

 
26,483

 

 
(11,935
)
 
14,548

Other assets
5,682

 
5,518

 

 

 
11,200

Total assets at fair value
$
5,682

 
$
5,758,948

 
$

 
$
(11,935
)
 
$
5,752,695

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(616,025
)
 
$

 
$
57,144

 
$
(558,881
)
Mortgage delivery commitments

 
(8
)
 

 

 
(8
)
Total liabilities at fair value
$

 
$
(616,033
)
 
$

 
$
57,144

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

Fair Value on a Nonrecurring Basis

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

 
$

 
$
8,977

 
$
8,977

Mortgage loans held for portfolio

 

 
6,638

 
6,638

REO

 

 
1,803

 
1,803

Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
17,418

 
$
17,418


38



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

 
$

 
$
23,259

 
$
23,259

REO

 

 
843

 
843

Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
24,102

 
$
24,102


Note 18 — Commitments and Contingencies

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

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by FHFA regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at September 30, 2015, and December 31, 2014. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $803.7 billion and $796.4 billion at September 30, 2015, and December 31, 2014, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

The following table sets forth our off-balance-sheet commitments as of September 30, 2015, and December 31, 2014 (dollars in thousands):
 
 
September 30, 2015
 
December 31, 2014
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
4,161,362

 
$
138,331

 
$
4,299,693

 
$
4,065,555

 
$
125,381

 
$
4,190,936

Commitments for unused lines of credit - advances (2)
 
1,267,399

 

 
1,267,399

 
1,255,445

 

 
1,255,445

Commitments to make additional advances
 
79,766

 
36,741

 
116,507

 
592,430

 
63,185

 
655,615

Commitments to invest in mortgage loans
 
27,796

 

 
27,796

 
26,927

 

 
26,927

Unsettled CO bonds, at par (3)
 
30,500

 

 
30,500

 
15,000

 

 
15,000

Unsettled CO discount notes, at par
 
142,044

 

 
142,044

 
500,000

 

 
500,000

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At September 30, 2015, and December 31, 2014, these amounts totaled $10.1 million and $26.2 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $736,000 at September 30, 2015.

39


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

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

The original terms of these standby letters of credit range from final expiries in 30 days to 20 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $882,000 and $745,000 at September 30, 2015, and December 31, 2014, respectively.

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

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

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

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

 
12.3
%
 
$
5,516,317

 
16.3
%
 
$
608

 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
317,502

 
11.7
%
 
$
5,768,096

 
17.3
%
 
$
283

 
1.0
%


40


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

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three and nine months ended September 30, 2015 and 2014 as follows (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Citizens Bank, N.A.
 
2015
 
2014
 
2015
 
2014
Interest income on advances
 
$
2,802

 
$
3,755

 
$
9,965

 
$
9,505

Fees on letters of credit
 
862

 
1,133

 
2,901

 
2,791


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

The following table presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2015
$
89,706

 
3.5
%
 
$
1,043,591

 
3.1
%
 
$
1,200

 
3.6
%
As of December 31, 2014
79,386

 
2.9

 
918,127

 
2.8

 
1,227

 
4.2


Note 20 — Subsequent Events

On October 1, 2015, we conducted a partial repurchase of excess capital stock under the Excess Stock Management Program in the amount of $310.2 million. Of this amount, $654,000 was repurchased from mandatorily redeemable capital stock.

On October 16, 2015, we agreed with certain defendants to settle our claims against them arising out of certain investments in private-label mortgage-backed securities, for an aggregate amount of $50.2 million (which amount is net of legal fees and expenses).

On October 23, 2015, the board of directors declared a cash dividend at an annualized rate of 3.32 percent based on capital stock balances outstanding during the third quarter of 2015. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $21.5 million and was paid on November 3, 2015.




41


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

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

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

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

42


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

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

EXECUTIVE SUMMARY

We experienced a solid quarter with consistent earnings and retained earnings growth.

Net income for the quarter ended September 30, 2015, was $30.5 million, compared with net income of $47.9 million for the same period in 2014, and the decrease was primarily due to a decrease of $17.5 million in litigation settlement income as well as a $9.1 million increase in losses on derivatives and hedging activities (which resulted in a net loss in derivatives and hedging activities of $7.7 million in the quarter ended September 30, 2015). Our retained earnings grew to $1.1 billion at September 30, 2015, from $901.7 million at December 31, 2014. We continue to satisfy all regulatory capital requirements as of September 30, 2015.

On October 23, 2015, our board of directors declared a cash dividend that was equivalent to an annual yield of 3.32 percent, the approximate daily average three-month LIBOR yield for the third quarter of 2015 plus 300 basis points.

Advances balances are stable while long-term advances continue to grow.

Advances balances increased $472.6 million to $34.0 billion at September 30, 2015, from $33.5 billion at December 31, 2014. The increase was concentrated primarily in long-term fixed-rate advances which grew by $1.3 billion to $13.3 billion at September 30, 2015, from $12.0 billion at December 31, 2014.

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

For the three months ended September 30, 2015 and 2014, we recognized $9.6 million and $9.0 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2014 Annual Report.

The amortized cost of our total investments in private-label MBS and ABS backed by home equity loans has declined to $1.2 billion at September 30, 2015, compared with $6.4 billion at its peak in September 30, 2007, and other-than-temporary impairment credit losses recognized in recent periods have, on average, dropped significantly from those of earlier periods.

We used our excess stock management program to improve our capital efficiency.

Under this program, we repurchased $310.2 million in excess stock on October 1, 2015. For additional information, see — Liquidity and Capital Resources — Internal Capital Practices and Policies — Excess Stock Management Program and Item 1 Notes to the Financial Statements Note 20 Subsequent Events.

ECONOMIC CONDITIONS

Economic Environment

The U.S. economy’s momentum moderated during the third quarter of 2015, hampered by global economic slowdown and a strong U.S. dollar. We expect the New England region’s growth trajectory to be similar to the national trend. Inflation remained low, partly reflecting declines in energy prices and import prices.

The U.S. labor market decelerated in the third quarter of 2015 after a long stretch of job creation. However, job creation was enough to keep the unemployment rate at a seven-year low of 5.1 percent during August and September of 2015. The New

43


England region experienced modest payroll employment growth and steady declines in the unemployment rate during the third quarter of 2015.

Interest-Rate Environment

We note that on October 28, 2015, the Federal Open Market Committee (the FOMC) issued a press release providing that an accommodative stance of monetary policy remains appropriate and that when it decides to take a less accommodative stance, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two percent.

The following chart illustrates the interest-rate environment.

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

SELECTED FINANCIAL DATA

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

44


SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
 (dollars in thousands)
 
 
 
 
 
September 30, 2015
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
57,397,372

 
$
56,449,865

 
$
53,065,843

 
$
55,106,677

 
$
51,904,866

Investments(1)
 
19,376,223

 
17,768,044

 
17,501,603

 
16,879,299

 
15,165,427

Advances
 
33,954,689

 
34,105,443

 
31,179,231

 
33,482,074

 
31,409,529

Mortgage loans held for portfolio, net(2)
 
3,580,269

 
3,574,835

 
3,537,841

 
3,483,948

 
3,403,883

Deposits and other borrowings
 
495,871

 
402,066

 
429,343

 
369,331

 
520,864

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Bonds
 
26,412,714

 
26,075,429

 
25,416,779

 
25,505,774

 
25,011,037

Discount notes
 
26,538,537

 
25,972,593

 
23,451,068

 
25,309,608

 
22,559,486

Total consolidated obligations
 
52,951,251

 
52,048,022

 
48,867,847

 
50,815,382

 
47,570,523

Mandatorily redeemable capital stock
 
42,643

 
57,268

 
57,281

 
298,599

 
244,045

Class B capital stock outstanding-putable(3)
 
2,542,598

 
2,482,244

 
2,440,386

 
2,413,114

 
2,393,508

Unrestricted retained earnings
 
894,676

 
890,443

 
781,261

 
764,888

 
746,329

Restricted retained earnings
 
179,502

 
173,411

 
143,484

 
136,770

 
129,863

Total retained earnings
 
1,074,178

 
1,063,854

 
924,745

 
901,658

 
876,192

Accumulated other comprehensive loss
 
(395,696
)
 
(395,063
)
 
(411,829
)
 
(436,986
)
 
(440,462
)
Total capital
 
3,221,080

 
3,151,035

 
2,953,302

 
2,877,786

 
2,829,238

Other Information
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio(4)
 
6.38
%
 
6.38
%
 
6.45
%
 
6.56
%
 
6.77
%
_____________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold.
(2)
The allowance for credit losses amounted to $1.0 million, $1.1 million, $1.4 million, $2.0 million, and $2.4 million, for the quarters ended September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively.
(3)
Capital stock is putable at the option of a member, subject to applicable restrictions.
(4)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to the Financial Statements — Note 14 — Capital.


45


SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
 (dollars in thousands)
 
 
 
 
 
Results of Operations for the Three Months Ended
 
 
September 30, 2015
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
Net interest income
 
$
56,156

 
$
56,187

 
$
54,463

 
$
57,072

 
$
51,604

(Reduction of) provision for credit losses
 
(159
)
 
(223
)
 
(60
)
 
(233
)
 
373

Net impairment losses on held-to-maturity securities recognized in earnings
 
(1,053
)
 
(1,429
)
 
(346
)
 
(411
)
 
(311
)
Litigation settlements
 

 
134,690

 
23

 
(12
)
 
17,543

Other (loss) income
 
(4,738
)
 
(1,908
)
 
(278
)
 
(1,721
)
 
553

Other expense
 
16,631

 
21,450

 
16,584

 
16,655

 
15,673

AHP assessments
 
3,437

 
16,678

 
3,767

 
3,969

 
5,470

Net income
 
$
30,456

 
$
149,635

 
$
33,571

 
$
34,537

 
$
47,873

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
20,132

 
$
10,525

 
$
10,484

 
$
9,071

 
$
9,240

Dividend payout ratio
 
66.10
%
 
7.03
%
 
31.23
%
 
26.26
%
 
19.30
%
Weighted-average dividend rate(1)
 
3.28

 
1.76

 
1.74

 
1.49

 
1.48

Return on average equity(2)
 
3.80

 
19.57

 
4.67

 
4.80

 
6.70

Return on average assets
 
0.22

 
1.11

 
0.24

 
0.26

 
0.35

Net interest margin(3)
 
0.41

 
0.42

 
0.40

 
0.43

 
0.38

Average equity to average assets
 
5.79

 
5.66

 
5.20

 
5.40

 
5.24

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

RESULTS OF OPERATIONS

Third Quarter of 2015 Compared with Third Quarter of 2014

Net income for the quarter ended September 30, 2015, was $30.5 million, compared with net income of $47.9 million for the same period in 2014. The decrease was primarily due to the $17.5 million decrease in litigation settlement income as well as a $9.1 million increase in losses on derivatives and hedging activities (which resulted in a net loss in derivatives and hedging activities of $7.7 million in the quarter ended September 30, 2015). These decreases to net income were offset by an increase of $4.6 million in net interest income and an increase of $3.2 million in unrealized gains on trading securities.

Nine Months Ended September 30, 2015, Compared with Nine Months Ended September 30, 2014

Net income for the nine months ended September 30, 2015, was $213.7 million, compared with net income of $115.3 million for the same period in 2014. The increase was primarily due to the $112.7 million increase in litigation settlement income, and, to a lesser extent, an increase of $10.6 million in net interest income. The increases to net income were partially offset by an increase of $10.9 million in losses on derivatives and hedging activities, a $10.2 million increase in AHP assessments, and a $4.9 million increase in compensation and benefits expense resulting from the voluntary contribution of $5.0 million to our qualified defined benefit multiemployer pension plan.

Net Interest Income

Third Quarter of 2015 Compared with Third Quarter of 2014


46


Net interest income for the quarter ended September 30, 2015, was $56.2 million, compared with $51.6 million for the same period in 2014. The $4.6 million increase in net interest income was primarily due to a net increase of $688.0 million in the average balance of earning assets that was concentrated in certain long-term assets, including long-term advances, agency MBS, and mortgage loans held-for-portfolio, which tend to have higher net interest margins than short-term assets; an $886,000 reduction of interest expense on mandatorily redeemable capital stock; and a $594,000 increase in the accretion of significant improvement in projected cash flows of certain private-label MBS that were other-than-temporarily impaired in prior periods. The increase in net interest income was also aided by a $2.9 million one-time gain on called CO bonds that was recognized into net interest income, while the offsetting losses on the swaps hedging these CO bonds are recorded to net (losses) gains on derivatives and hedging activities.

Net interest spread was 0.36 percent for the quarter ended September 30, 2015, a three basis point increase from the same period in 2014, and net interest margin was 0.41 percent, a three basis point increase from the same period in 2014.

Nine Months Ended September 30, 2015, Compared with Nine Months Ended September 30, 2014

Net interest income for the nine months ended September 30, 2015, was $166.8 million, compared with $156.2 million for the same period in 2014. The $10.6 million increase in net interest income was primarily due to an increase in average earning assets, which increased $3.2 billion from $51.4 billion for 2014, to $54.7 billion for 2015. The increase in average earning assets was driven by a $2.0 billion increase in average advance balances, the majority of which was long-term fixed rate advances, and a $1.1 billion increase in average investments balances. For additional information see — Rate and Volume Analysis.

Additionally, $28.7 million of our interest income for the nine months ended September 30, 2015, was from the accretion of discount on private-label MBS that were other-than-temporarily impaired in prior periods, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $2.4 million from $26.3 million of accretion recorded in the nine months ended September 30, 2014.

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

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


47


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended September 30,
 
 
2015
 
2014
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
31,731,983

 
$
60,669

 
0.76
%
 
$
30,637,647

 
$
58,635

 
0.76
%
Securities purchased under agreements to resell
 
4,679,891

 
1,366

 
0.12

 
5,526,087

 
886

 
0.06

Federal funds sold
 
5,331,685

 
1,669

 
0.12

 
5,368,696

 
1,027

 
0.08

Investment securities(2)
 
9,232,488

 
49,613

 
2.13

 
8,976,404

 
48,632

 
2.15

Mortgage loans
 
3,579,328

 
30,392

 
3.37

 
3,376,618

 
30,918

 
3.63

Other earning assets
 
27,831

 
18

 
0.26

 
9,792

 
3

 
0.12

Total interest-earning assets
 
54,583,206

 
143,727

 
1.04

 
53,895,244

 
140,101

 
1.03

Other non-interest-earning assets
 
441,780

 
 
 
 
 
381,364

 
 
 
 
Fair-value adjustments on investment securities
 
(45,997
)
 
 
 
 
 
(126,308
)
 
 
 
 
Total assets
 
$
54,978,989

 
$
143,727

 
1.04
%
 
$
54,150,300

 
$
140,101

 
1.03
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
23,910,270

 
$
6,391

 
0.11
%
 
$
25,300,156

 
$
4,620

 
0.07
%
Bonds
 
26,666,807

 
80,695

 
1.20

 
24,397,442

 
82,489

 
1.34

Deposits
 
404,010

 
13

 
0.01

 
427,861

 
29

 
0.03

Mandatorily redeemable capital stock
 
56,314

 
472

 
3.33

 
361,418

 
1,358

 
1.49

Other borrowings
 
653

 

 
0.24

 
1,840

 
1

 
0.22

Total interest-bearing liabilities
 
51,038,054

 
87,571

 
0.68

 
50,488,717

 
88,497

 
0.70

Other non-interest-bearing liabilities
 
759,257

 
 
 
 
 
826,799

 
 
 
 
Total capital
 
3,181,678

 
 
 
 
 
2,834,784

 
 
 
 
Total liabilities and capital
 
$
54,978,989

 
$
87,571

 
0.63
%
 
$
54,150,300

 
$
88,497

 
0.65
%
Net interest income
 
 

 
$
56,156

 
 
 
 

 
$
51,604

 
 
Net interest spread
 
 

 
 

 
0.36
%
 
 

 
 

 
0.33
%
Net interest margin
 
 

 
 

 
0.41
%
 
 

 
 

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


48


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

 
 

 
 

 
 

 
 

 
 

Advances
 
$
31,820,526

 
$
180,539

 
0.76
%
 
$
29,853,588

 
$
174,589

 
0.78
%
Securities purchased under agreements to resell
 
4,781,806

 
3,273

 
0.09

 
5,291,941

 
2,267

 
0.06

Federal funds sold
 
5,427,249

 
4,519

 
0.11

 
4,418,432

 
2,416

 
0.07

Investment securities(2)
 
9,053,267

 
147,794

 
2.18

 
8,496,878

 
140,201

 
2.21

Mortgage loans
 
3,547,026

 
91,633

 
3.45

 
3,360,072

 
94,136

 
3.75

Other earning assets
 
30,071

 
43

 
0.19

 
5,483

 
5

 
0.12

Total interest-earning assets
 
54,659,945

 
427,801

 
1.05
%
 
51,426,394

 
413,614

 
1.08
%
Other non-interest-earning assets
 
423,795

 
 
 
 
 
369,058

 
 
 
 
Fair-value adjustments on investment securities
 
(29,749
)
 
 
 
 
 
(166,983
)
 
 
 
 
Total assets
 
$
55,053,991

 
$
427,801

 
1.04
%
 
$
51,628,469

 
$
413,614

 
1.07
%
Liabilities and capital
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
$
24,730,894

 
$
16,813

 
0.09
%
 
$
22,474,754

 
$
11,515

 
0.07
%
Bonds
 
25,979,023

 
242,859

 
1.25

 
24,261,430

 
238,193

 
1.31

Deposits
 
401,199

 
46

 
0.02

 
491,259

 
50

 
0.01

Mandatorily redeemable capital stock
 
63,519

 
1,275

 
2.68

 
686,409

 
7,632

 
1.49

Other borrowings
 
2,556

 
2

 
0.10

 
3,677

 
4

 
0.15

Total interest-bearing liabilities
 
51,177,191

 
260,995

 
0.68
%
 
47,917,529

 
257,394

 
0.72
%
Other non-interest-bearing liabilities
 
821,959

 
 
 
 
 
852,769

 
 
 
 
Total capital
 
3,054,841

 
 
 
 
 
2,858,171

 
 
 
 
Total liabilities and capital
 
$
55,053,991

 
$
260,995

 
0.63
%
 
$
51,628,469

 
$
257,394

 
0.67
%
Net interest income
 
 

 
$
166,806

 
 
 
 

 
$
156,220

 
 
Net interest spread
 
 

 
 

 
0.37
%
 
 

 
 

 
0.36
%
Net interest margin
 
 

 
 

 
0.41
%
 
 

 
 

 
0.41
%
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

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

49


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

 
 

 
 

Advances
 
$
2,092

 
$
(58
)
 
$
2,034

 
$
11,267

 
$
(5,317
)
 
$
5,950

Securities purchased under agreements to resell
 
(153
)
 
633

 
480

 
(237
)
 
1,243

 
1,006

Federal funds sold
 
(7
)
 
649

 
642

 
639

 
1,464

 
2,103

Investment securities
 
1,379

 
(398
)
 
981

 
9,097

 
(1,504
)
 
7,593

Mortgage loans
 
1,795

 
(2,321
)
 
(526
)
 
5,068

 
(7,571
)
 
(2,503
)
Other earning assets
 
9

 
6

 
15

 
34

 
4

 
38

Total interest income
 
5,115

 
(1,489
)
 
3,626

 
25,868

 
(11,681
)
 
14,187

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
(266
)
 
2,037

 
1,771

 
1,245

 
4,053

 
5,298

Bonds
 
7,294

 
(9,088
)
 
(1,794
)
 
16,382

 
(11,716
)
 
4,666

Deposits
 
(2
)
 
(14
)
 
(16
)
 
(10
)
 
6

 
(4
)
Mandatorily redeemable capital stock
 
(1,720
)
 
834

 
(886
)
 
(9,881
)
 
3,524

 
(6,357
)
Other borrowings
 
(1
)
 

 
(1
)
 
(1
)
 
(1
)
 
(2
)
Total interest expense
 
5,305

 
(6,231
)
 
(926
)
 
7,735

 
(4,134
)
 
3,601

Change in net interest income
 
$
(190
)
 
$
4,742

 
$
4,552

 
$
18,133

 
$
(7,547
)
 
$
10,586


Average Balance of Advances Outstanding

The average balance of total advances increased $2.0 billion, or 6.6 percent, for the nine months ended September 30, 2015, compared with the same period in 2014. We experienced a rise in average advances balances during the year concentrated in floating-rate and long-term fixed-rate advances. We cannot predict whether this trend will continue. The following table summarizes average balances of advances outstanding during the nine months ended September 30, 2015 and 2014, by product type.


50


Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
12,831,168

 
$
10,594,690

Short-term
 
9,619,496

 
9,996,162

Putable
 
2,090,742

 
2,357,067

Overnight
 
935,806

 
757,572

Amortizing
 
869,974

 
871,378

All other fixed-rate advances
 
72,483

 
72,000

 
 
26,419,669

 
24,648,869

Variable-rate indexed advances—par value
 
 
 
 
Simple variable
 
5,107,421

 
4,819,799

Putable
 
49,392

 
68,385

All other variable-rate indexed advances
 
48,267

 
38,393

 
 
5,205,080

 
4,926,577

Total average par value
 
31,624,749

 
29,575,446

 
 
 
 
 
Net premiums
 
13,016

 
22,184

Market value of bifurcated derivatives
 
2,117

 
1,373

Hedging adjustments
 
180,644

 
254,585

Total average balance of advances
 
$
31,820,526

 
$
29,853,588


In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $5.7 billion for the nine months ended September 30, 2015. Therefore, a significant portion of our advances, including overnight, short-term fixed-rate, fixed-rate putable, certain fixed-rate bullet, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $21.4 billion for the nine months ended September 30, 2015, representing 67.3 percent of the total average balance of advances outstanding during the nine months ended September 30, 2015. The average balance of all such advances totaled $20.1 billion for the nine months ended September 30, 2014, representing 67.2 percent of the total average balance of advances outstanding during the nine months ended September 30, 2014.

For the nine months ended September 30, 2015 and 2014, net prepayment fee income on advances and investments were $5.8 million and $5.7 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $519.1 million, or 5.3 percent, for the nine months ended September 30, 2015, compared with the same period in 2014. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. We have increased these investments principally in response to growth in our advances balances to maintain the level of our contingency liquidity. For the nine months ended September 30, 2015, average balances of federal funds sold increased $1.0 billion and average balances of securities purchased under agreements to resell decreased $510.1 million in comparison to the nine months ended September 30, 2014.

Average investment-securities balances increased $556.4 million, or 6.5 percent for the nine months ended September 30, 2015, compared with the same period in 2014, an increase consisting primarily of a $727.4 million increase in MBS offset by a $163.4 million decline in agency and supranational institutions' debentures.

51



Average Balance of COs

Average CO balances increased $4.0 billion, or 8.5 percent, for the nine months ended September 30, 2015, compared with the same period in 2014, resulting from our increased funding needs principally due to the increase in our average advances balances and short-term money-market investment balances. This overall increase consisted of increases of $2.3 billion in CO discount notes and $1.7 billion in CO bonds.

The average balance of CO discount notes represented approximately 48.8 percent of total average COs during the nine months ended September 30, 2015, as compared with 48.1 percent of total average COs during the nine months ended September 30, 2014. The average balance of CO bonds represented 51.2 percent and 51.9 percent of total average COs outstanding during the nine months ended September 30, 2015 and 2014, respectively. The growth in average CO discount notes is commensurate with our asset growth, which has been primarily in short-term or short-term-indexed floating rate assets.

Impact of Derivatives and Hedging Activities

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

 
 
For the Three Months Ended September 30, 2015
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,124
)
 
$

 
$
(152
)
 
$
(1,478
)
 
$
(2,754
)
 
Net interest settlements included in net interest income (2)
 
(32,932
)
 
(9,405
)
 

 
18,475

 
(23,862
)
 
Total net interest income
 
(34,056
)
 
(9,405
)
 
(152
)
 
16,997

 
(26,616
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(571
)
 
280

 

 
(4,399
)
 
(4,690
)
 
Losses on cash-flow hedges
 

 

 

 
(205
)
 
(205
)
 
(Losses) gains on derivatives not receiving hedge accounting
 
(5
)
 
(3,342
)
 

 
34

 
(3,313
)
 
Mortgage delivery commitments
 

 

 
555

 

 
555

 
Net (losses) gains on derivatives and hedging activities
 
(576
)
 
(3,062
)
 
555

 
(4,570
)
 
(7,653
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(34,632
)
 
(12,467
)
 
403

 
12,427

 
(34,269
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
780

 

 

 
780

 
Total net effect of derivatives and hedging activities
 
$
(34,632
)
 
$
(11,687
)
 
$
403

 
$
12,427

 
$
(33,489
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.


52


 
 
For the Three Months Ended September 30, 2014
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,331
)
 
$

 
$
(68
)
 
$

 
$
1,383

 
$
(16
)
Net interest settlements included in net interest income (2)
 
(32,487
)
 
(9,496
)
 

 
357

 
14,856

 
(26,770
)
Total net interest income
 
(33,818
)
 
(9,496
)
 
(68
)
 
357

 
16,239

 
(26,786
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
122

 
356

 

 

 
(144
)
 
334

Losses on cash-flow hedges
 

 

 

 

 
(78
)
 
(78
)
Gains (losses) on derivatives not receiving hedge accounting
 

 
1,091

 

 

 
(30
)
 
1,061

Mortgage delivery commitments
 

 

 
94

 

 

 
94

Net gains (losses) on derivatives and hedging activities
 
122

 
1,447

 
94

 

 
(252
)
 
1,411

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(33,696
)
 
(8,049
)
 
26

 
357

 
15,987

 
(25,375
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(2,387
)
 

 

 

 
(2,387
)
Total net effect of derivatives and hedging activities
 
$
(33,696
)
 
$
(10,436
)
 
$
26

 
$
357

 
$
15,987

 
$
(27,762
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.
 
 
 
For the Nine Months Ended September 30, 2015
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(3,585
)
 
$

 
$
(461
)
 
$
(3,133
)
 
$
(7,179
)
 
Net interest settlements included in net interest income (2)
 
(97,442
)
 
(28,326
)
 

 
49,438

 
(76,330
)
 
Total net interest income
 
(101,027
)
 
(28,326
)
 
(461
)
 
46,305

 
(83,509
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(138
)
 
1,157

 

 
(7,424
)
 
(6,405
)
 
Losses on cash-flow hedges
 

 

 

 
(101
)
 
(101
)
 
(Losses) gains on derivatives not receiving hedge accounting
 
(4
)
 
(6,115
)
 

 
131

 
(5,988
)
 
Mortgage delivery commitments
 

 

 
340

 

 
340

 
Net (losses) gains on derivatives and hedging activities
 
(142
)
 
(4,958
)
 
340

 
(7,394
)
 
(12,154
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(101,169
)
 
(33,284
)
 
(121
)
 
38,911

 
(95,663
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(332
)
 

 

 
(332
)
 
Total net effect of derivatives and hedging activities
 
$
(101,169
)
 
$
(33,616
)
 
$
(121
)
 
$
38,911

 
$
(95,995
)
 
_____________________

53


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

 
 
For the Nine Months Ended September 30, 2014
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
Deposits
 
CO Bonds
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(4,712
)
 
$

 
$
(174
)
 
$

 
$
10,838

 
$
5,952

Net interest settlements included in net interest income (2)
 
(98,917
)
 
(28,494
)
 

 
1,151

 
38,629

 
(87,631
)
Total net interest income
 
(103,629
)
 
(28,494
)
 
(174
)
 
1,151

 
49,467

 
(81,679
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains on fair-value hedges
 
350

 
873

 

 

 
570

 
1,793

Losses on cash-flow hedges
 

 

 

 

 
(248
)
 
(248
)
(Losses) gains on derivatives not receiving hedge accounting
 

 
(3,646
)
 

 

 
22

 
(3,624
)
Mortgage delivery commitments
 

 

 
815

 

 

 
815

Net gains (losses) on derivatives and hedging activities
 
350

 
(2,773
)
 
815

 

 
344

 
(1,264
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(103,279
)
 
(31,267
)
 
641

 
1,151

 
49,811

 
(82,943
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
576

 

 

 

 
576

Total net effect of derivatives and hedging activities
 
$
(103,279
)
 
$
(30,691
)
 
$
641

 
$
1,151

 
$
49,811

 
$
(82,367
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

Net interest margin for the three months ended September 30, 2015 and 2014, was 0.41 percent and 0.38 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.58 percent for each period.

Net interest margin for the nine months ended September 30, 2015 and 2014, was 0.41 percent for each period. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.59 percent and 0.63 percent, respectively.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $1.7 million for both the three months ended September 30, 2015 and 2014. For each of the nine months ended September 30, 2015 and 2014, interest accruals on derivatives classified as economic hedges totaled a net expense of $5.2 million.

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

54


Other Income (Loss)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Net (losses) gains related to fair-value hedge ineffectiveness
 
$
(4,690
)
 
$
334

 
$
(6,405
)
 
$
1,793

Net losses related to cash-flow hedge ineffectiveness
 
(205
)
 
(78
)
 
(101
)
 
(248
)
Net unrealized (losses) gains related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
 
 
Advances
 
8

 
(61
)
 
56

 
(215
)
Trading securities
 
(1,593
)
 
2,869

 
(822
)
 
1,760

Mortgage delivery commitments
 
555

 
94

 
340

 
815

Net interest-accruals related to derivatives not receiving hedge accounting
 
(1,728
)
 
(1,747
)
 
(5,222
)
 
(5,169
)
Net (losses) gains on derivatives and hedging activities
 
(7,653
)
 
1,411

 
(12,154
)
 
(1,264
)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(1,053
)
 
(311
)
 
(2,828
)
 
(1,168
)
Litigation settlements
 

 
17,543

 
134,713

 
22,012

Loss on early extinguishment of debt
 
(82
)
 
(163
)
 
(211
)
 
(2,755
)
Service-fee income
 
2,094

 
1,874

 
6,102

 
5,159

Net unrealized gains (losses) on trading securities
 
780

 
(2,387
)
 
(332
)
 
576

Other
 
123

 
(182
)
 
(329
)
 
(581
)
Total other (losses) income
 
$
(5,791
)
 
$
17,785

 
$
124,961

 
$
21,979


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

FINANCIAL CONDITION

Advances

At September 30, 2015, the advances portfolio totaled $34.0 billion, an increase of $472.6 million compared with $33.5 billion at December 31, 2014. For additional information on advances balances trends see Executive Summary — Advances balance are stable while long-term advances continue to grow.

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

55


 
Advances Outstanding by Product Type
(dollars in thousands)

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

 
 

 
 

 
 

Long-term
$
13,337,972

 
39.5
%
 
$
12,029,059

 
36.2
%
Short-term
10,125,962

 
30.0

 
10,526,292

 
31.6

Putable
1,919,700

 
5.6

 
2,180,225

 
6.6

Overnight
1,245,986

 
3.7

 
1,545,869

 
4.6

Amortizing
909,808

 
2.7

 
883,106

 
2.7

All other fixed-rate advances
94,000

 
0.3

 
72,000

 
0.2

 
27,633,428

 
81.8

 
27,236,551

 
81.9

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable
5,979,375

 
17.7

 
5,915,000

 
17.8

Putable
95,000

 
0.3

 
74,000

 
0.2

All other variable-rate indexed advances
54,021

 
0.2

 
49,163

 
0.1

 
6,128,396

 
18.2

 
6,038,163

 
18.1

Total par value
$
33,761,824

 
100.0
%
 
$
33,274,714

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

At September 30, 2015, we had advances outstanding to 329, or 73.3 percent of our 449 members. At December 31, 2014, we had advances outstanding to 314, or 69.9 percent of our 449 members.

Advances Credit Risk

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

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

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

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

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


56


Advances Outstanding by Borrower Credit Status Category
As of September 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
278

 
$
30,257,917

 
$
71,795,423

 
237.3
%
Category-2
19

 
611,812

 
1,138,720

 
186.1

Category-3
17

 
735,859

 
1,004,004

 
136.4

Insurance companies
20

 
2,156,236

 
2,301,667

 
106.7

Total
334

 
$
33,761,824

 
$
76,239,814

 
225.8
%

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

Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
31,951,519

Collateral specifically listed and identified
39,062,194

Collateral delivered to us
9,139,507


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

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

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

Top Five Advance-Borrowing Institutions
(dollars in thousands)
 
 
September 30, 2015
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended September 30, 2015
Advances Interest Income for the
Nine Months Ended September 30, 2015
Citizens Bank, N.A.
 
$
5,516,317

 
16.3
%
 
0.30
%
 
$
2,802

$
9,965

Webster Bank, N.A.
 
2,609,185

 
7.7

 
0.66

 
3,865

10,080

People's United Bank, N.A.
 
1,905,275

 
5.7

 
0.30

 
1,387

3,704

Berkshire Bank
 
1,209,951

 
3.6

 
0.46

 
1,287

3,773

Massachusetts Mutual Life Insurance Company
 
1,100,000

 
3.3

 
2.22

 
4,245

12,174

Total of top five advance-borrowing institutions
 
$
12,340,728

 
36.6
%
 
 
 
$
13,586

$
39,696


57


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

Investments
 
At September 30, 2015, investment securities and short-term money-market instruments totaled $19.4 billion, compared with $16.9 billion at December 31, 2014.

Short-term money-market investments increased $2.3 billion to $10.1 billion at September 30, 2015, compared with December 31, 2014. The increase was comprised of a $2.4 billion increase in securities purchased under agreements to resell and a decrease of $125.0 million in federal funds sold.

Investment securities increased $221.8 million to $9.3 billion at September 30, 2015, compared with December 31, 2014. The increase was attributable to a $239.0 million increase in MBS offset by a decrease of $11.0 million in agency and supranational institutions' debentures.

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

Mortgage-Backed Securities
 
September 30, 2015
 
December 31, 2014
Single-family MBS - U.S. government-guaranteed and GSE
70.9
%
 
64.8
%
Multifamily MBS - U.S. government-guaranteed and GSE
17.1

 
21.9

Private-label residential MBS
11.8

 
13.1

ABS backed by home-equity loans
0.2

 
0.2

Total MBS
100.0
%
 
100.0
%

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

Investments Credit Risk

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

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

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

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


58


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

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$

 
$
238

 
$

 
$

 
$

 
$

Securities purchased under agreements to resell
 

 
3,250,000

 
1,500,000

 
2,900,000

 

 

Federal funds sold
 

 
700,000

 
1,725,000

 

 

 

Total money-market instruments
 

 
3,950,238

 
3,225,000

 
2,900,000

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 

 
4,235

 

 

 

 

U.S. government-owned corporations
 

 
276,509

 

 

 

 

GSEs
 

 
120,345

 

 

 

 

Supranational institutions
 
448,260

 

 

 

 

 

HFA securities
 
21,355

 
39,860

 
110,548

 

 

 
2,021

Total non-MBS
 
469,615

 
440,949

 
110,548

 

 

 
2,021

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

 
194,677

 

 

 

 

U.S. government guaranteed - multifamily(2)
 

 
787,649

 

 

 

 

GSE – single-family (2)
 

 
5,675,507

 

 

 

 

GSE – multifamily (2)
 

 
624,211

 

 

 

 

Private-label – residential
 

 
250

 
46,800

 
60,581

 
872,993

 
6

ABS backed by home-equity loans
 
572

 
1,136

 
7,149

 
2,209

 
4,112

 

Total MBS
 
572

 
7,283,430

 
53,949

 
62,790

 
877,105

 
6


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
470,187

 
7,724,379

 
164,497

 
62,790

 
877,105

 
2,027

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
470,187

 
$
11,674,617

 
$
3,389,497

 
$
2,962,790

 
$
877,105

 
$
2,027

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

At September 30, 2015, our unsecured credit exposure related to money-market instruments and debentures, including accrued interest, was $3.3 billion to eight counterparties and issuers, of which $2.4 billion was for federal funds sold, and $856.4 million was for debentures issued by GSEs and supranational institutions. The following issuers/counterparties individually accounted for greater than 10 percent of total unsecured credit exposure as of September 30, 2015:


59


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

Issuer / counterparty
 
Percent
Nordea Bank Finland PLC (1)
 
21.3
%
Rabobank Nederland (1)
 
17.5

Landesbank Baden-Wuerttemberg (1)
 
17.5

Bank of Nova Scotia (1)
 
17.5

Inter-American Development Bank (a supranational institution)
 
13.8

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

Private-Label MBS

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

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

 
 

 
 

 
 

 
 

 
 

Prime
$
10,858

 
$
133,295

 
$
144,153

 
$
12,334

 
$
152,296

 
$
164,630

Alt-A
24,318

 
1,407,912

 
1,432,230

 
27,447

 
1,532,827

 
1,560,274

Total private-label residential MBS
35,176

 
1,541,207

 
1,576,383

 
39,781

 
1,685,123

 
1,724,904

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime

 
16,302

 
16,302

 

 
17,440

 
17,440

Total par value of private-label MBS
$
35,176

 
$
1,557,509

 
$
1,592,685

 
$
39,781

 
$
1,702,563

 
$
1,742,344

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

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


60


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

 
 

 
 

 
 

 
 

Triple-A
$
598

 
$

 
$

 
$

 
$
598

Double-A
1,386

 

 

 

 
1,386

Single-A
53,949

 

 

 
34,267

 
19,682

Triple-B
62,958

 

 

 
12,558

 
50,400

Below Investment Grade
 
 
 
 
 
 
 
 
 
Double-B
65,137

 

 

 
32,437

 
32,700

Single-B
48,191

 
15,050

 

 
27,077

 
6,064

Triple-C
726,288

 
136,255

 
410,936

 
165,258

 
13,839

Double-C
315,030

 
115,940

 
154,712

 
43,679

 
699

Single-C
52,871

 
6,961

 
16,490

 
29,420

 

Single-D
266,271

 
98,107

 
70,959

 
97,205

 

Unrated
6

 

 

 

 
6

Total
$
1,592,685

 
$
372,313

 
$
653,097

 
$
441,901

 
$
125,374

 
 
 
 
 
 
 
 
 
 
Amortized cost
$
1,236,207

 
$
264,264

 
$
462,481

 
$
385,171

 
$
124,291

Gross unrealized gains
67,656

 
26,151

 
29,761

 
11,552

 
192

Gross unrealized losses
(46,301
)
 
(7,996
)
 
(10,819
)
 
(20,631
)
 
(6,855
)
Fair value
$
1,257,562

 
$
282,419

 
$
481,423

 
$
376,092

 
$
117,628

Other-than-temporary impairment for the nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
$
(810
)
 
$
(769
)
 
$

 
$

 
$
(41
)
Net amount of impairment losses reclassified from accumulated other comprehensive loss
(2,018
)
 
(579
)
 
(1,270
)
 
(169
)
 

Net impairment losses on held-to-maturity securities recognized in income
$
(2,828
)
 
$
(1,348
)
 
$
(1,270
)
 
$
(169
)
 
$
(41
)
 
 
 
 
 
 
 
 
 
 
Weighted average percentage of fair value to par value
78.96
%
 
75.86
%
 
73.71
%
 
85.11
%
 
93.82
%
Original weighted average credit support
26.71

 
28.85

 
28.92

 
26.24

 
10.48

Weighted average credit support
9.25

 
4.89

 
5.00

 
15.45

 
22.48

Weighted average collateral delinquency (1)
25.81

 
29.56

 
28.32

 
21.94

 
15.18

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

Mortgage Loans

We participate in the MPF program. The MPF program is described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2014 Annual Report and in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 8, 2015. As of September 30, 2015, our mortgage loan investment portfolio totaled $3.6 billion, an increase of $96.3 million from December 31, 2014.

Mortgage Loans Credit Risk


61


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

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

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

 
 

Massachusetts
45
%
 
44
%
Maine
12

 
11

Wisconsin
11

 
10

Connecticut
7

 
7

New Hampshire
5

 
5

All others
20

 
23

Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $1.0 million at September 30, 2015, compared with $2.0 million at December 31, 2014.

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

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

Delinquent Mortgage Loans
(dollars in thousands)
 
September 30, 2015
 
December 31, 2014
Total par value past due 90 days or more and still accruing interest
$
8,783

 
$
7,191

Nonaccrual loans, par value
24,045

 
38,658

Troubled debt restructurings (not included above)
6,361

 
3,045


Mortgage Insurance Companies. We are exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of September 30, 2015, we were the beneficiary of primary mortgage insurance coverage of $68.3 million on $273.0 million of conventional mortgage loans, and supplemental mortgage insurance coverage of $18.3 million on mortgage pools with a total unpaid principal balance of $272.1 million.

Consolidated Obligations

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

Derivative Instruments
 

62


All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Derivatives outstanding with counterparties with which we have an enforceable master-netting agreement are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivatives that have been cleared through a clearing member with a DCO are classified as assets or liabilities according to the net fair value of those derivatives that have been transacted through a particular clearing member with a particular DCO. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $41.2 million and $14.5 million as of September 30, 2015, and December 31, 2014, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $480.2 million and $558.9 million as of September 30, 2015, and December 31, 2014, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of September 30, 2015, and December 31, 2014. The notional amount is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount does not represent actual amounts exchanged or our overall exposure to credit and market risk. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under our risk-management policy.
Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
7,227,127

 
$
(181,539
)
 
$
4,771,265

 
$
(192,873
)
 
 
Swaps
 
Economic
 
259,500

 
(3,062
)
 
190,500

 
(1,473
)
Total associated with advances
 
 
 
 
 
7,486,627

 
(184,601
)
 
4,961,765

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

 
(332,659
)
 
611,915

 
(318,895
)
 
 
Caps
 
Economic
 
300,000

 

 
300,000

 

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

 
(332,659
)
 
911,915

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

 
(18,589
)
 
210,000

 
(17,766
)
COs
 
Swaps
 
Fair value
 
7,690,835

 
32,599

 
7,196,345

 
3,736

 
 
Swaps
 
Economic
 
18,500

 
26

 
22,500

 
(33
)
 
 
Forward starting swaps
 
Cash Flow
 
552,800

 
(38,592
)
 
1,096,800

 
(42,209
)
Total associated with COs
 
 
 
 
 
8,262,135

 
(5,967
)
 
8,315,645

 
(38,506
)
Total
 
 
 
 
 
16,870,677

 
(541,816
)
 
14,399,325

 
(569,513
)
Mortgage delivery commitments
 
 
 
 
 
27,796

 
135

 
26,927

 
63

Total derivatives
 
 
 
 
 
$
16,898,473

 
(541,681
)
 
$
14,426,252

 
(569,450
)
Accrued interest
 
 
 
 
 
 

 
(10,980
)
 
 

 
(20,100
)
Cash collateral and accrued interest
 
 
 
 
 
 
 
113,702

 
 
 
45,209

Net derivatives
 
 
 
 
 
 

 
$
(438,959
)
 
 

 
$
(544,341
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset
 
 
 
 
 
 

 
$
41,238

 
 

 
$
14,548

Derivative liability
 
 
 
 
 
 

 
(480,197
)
 
 

 
(558,889
)
Net derivatives
 
 
 
 
 
 

 
$
(438,959
)
 
 

 
$
(544,341
)
 _______________________
(1)
As of September 30, 2015, and December 31, 2014, embedded derivatives separated from the advance contract with notional amounts of $259.5 million and $190.5 million, respectively, and fair values of $3.1 million and $1.5 million, respectively, are not included in the table.

63



The following tables provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $14.9 billion, representing 88.3 percent of all derivatives outstanding as of September 30, 2015. Economic hedges and cash-flow hedges are not included within the two tables below.

Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of September 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
Advances(1)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value
 
Hedged
Amount
 
Fair-Value
Adjustment(2)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
1,106,795

 
$
(7,258
)
 
$
1,106,795

 
$
7,256

 
1.71
%
 
0.32
%
 
1.53
%
 
0.50
%
Due after one year through two years
2,074,905

 
(71,060
)
 
2,074,905

 
70,388

 
2.93

 
0.31

 
2.75

 
0.49

Due after two years through three years
1,519,435

 
(53,079
)
 
1,519,435

 
52,968

 
2.51

 
0.31

 
2.31

 
0.51

Due after three years through four years
601,861

 
(13,611
)
 
601,861

 
13,564

 
2.22

 
0.33

 
1.79

 
0.76

Due after four years through five years
1,041,540

 
(15,117
)
 
1,041,540

 
14,881

 
1.88

 
0.31

 
1.62

 
0.57

Thereafter
882,590

 
(21,414
)
 
882,590

 
21,041

 
2.39

 
0.32

 
1.94

 
0.77

Total
$
7,227,126

 
$
(181,539
)
 
$
7,227,126

 
$
180,098

 
2.38
%
 
0.32
%
 
2.13
%
 
0.57
%
_______________________
(1)
Included in the advances hedged amount are $2.0 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(2)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2015.
 
Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of September 30, 2015
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
CO Bonds (1)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(2)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
2,123,000

 
$
2,963

 
$
2,123,000

 
$
(3,020
)
 
0.69
%
 
0.76
%
 
0.25
%
 
0.18
%
Due after one year through two years
2,501,745

 
9,719

 
2,501,745

 
(9,838
)
 
0.84

 
0.88

 
0.24

 
0.20

Due after two years through three years
1,543,200

 
14,102

 
1,543,200

 
(14,162
)
 
1.34

 
1.35

 
0.18

 
0.17

Due after three years through four years
470,405

 
2,258

 
470,405

 
(2,291
)
 
1.38

 
1.38

 
0.16

 
0.16

Due after four years through five years
604,485

 
3,624

 
604,485

 
(4,098
)
 
1.73

 
1.74

 
0.15

 
0.14

Thereafter
448,000

 
(67
)
 
448,000

 
157

 
1.67

 
1.67

 
0.10

 
0.10

Total
$
7,690,835

 
$
32,599

 
$
7,690,835

 
$
(33,252
)
 
1.05
%
 
1.08
%
 
0.21
%
 
0.18
%
_______________________
(1)
Included in the CO bonds hedged amount are $3.1 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(2) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2015.

64



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

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


65


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

Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To /(From) Counterparty
 
Non-cash Collateral Pledged To Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
25,000

 
$
94

 
$

 
$

 
$
94

Single-A
 
1,043,500

 
3,382

 
(2,130
)
 

 
1,252

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
3,168,855

 
(76,489
)
 
3,850

 
75,924

 
3,285

Cleared derivatives
 
8,228,272

 
(56,514
)
 
95,960

 

 
39,446

Total derivative positions with nonmember counterparties to which we had credit exposure
 
12,465,627

 
(129,527
)
 
97,680

 
75,924

 
44,077

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
27,796

 
135

 

 

 
135

Total
 
$
12,493,423

 
$
(129,392
)
 
$
97,680

 
$
75,924

 
$
44,212

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
703,000

 
 
 
 
 
 
 
 
Single-A
 
2,134,595

 
 
 
 
 
 
 
 
Triple-B
 
1,567,455

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
4,405,050

 

 
 
 
 
 
 
_______________________
(1)
Bilateral derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
These represent derivatives positions with counterparties for which we are in a net liability position and for which we have delivered securities collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

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

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

66


Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

Internal Liquidity Sources / Liquidity Management

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

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

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

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

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

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

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

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


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

 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
4,607

 
$
18,738

Maturing liabilities and expected exercise of bond call options
 
2,221,065

 
8,206,715

Committed asset settlements
 
47,220

 
47,220

Capital outflow
 
148,000

 
148,000

MPF delivery commitments
 
27,796

 
27,796

Gross uses of funds
 
2,448,688

 
8,448,469

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
29,242

 
51,328

Maturing or projected amortization of assets
 
10,399,830

 
17,387,901

Committed liability settlements
 
157,556

 
172,556

Cash and due from banks
 
320,281

 
320,281

Other
 
711

 
711

Gross sources of funds
 
10,907,620

 
17,932,777

 
 
 
 
 
Projected net cash flow
 
8,458,932

 
9,484,308

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
442,268

 
456,521

Drawdown of standby letters of credit and lines of credit
 
644,002

 
1,381,424

Rollover of all maturing advances
 
2,658,252

 
7,168,362

Projected funding of MPF master commitments
 
196,250

 
316,009

Total secondary uses of funds
 
3,940,772

 
9,322,316

 
 
 
 
 
Structural liquidity
 
$
4,518,160

 
$
161,992


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

We complied with this regulatory requirement at all times during the quarter ended September 30, 2015. As of September 30, 2015, and December 31, 2014, we held a surplus of $14.9 billion and $12.4 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO debt issuance.

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


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

 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
4,607

Maturing liabilities
 
2,221,065

Committed asset settlements
 
47,220

Drawdown of standby letters of credit
 
124,992

Gross uses of funds
 
2,397,884

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
29,242

Maturing or amortizing advances
 
2,658,252

Committed liability settlements
 
157,556

Other
 
711

Gross sources of funds
 
2,845,761

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
2,350,000

Self-liquidating assets
 
7,725,000

Cash and due from banks
 
320,281

Marketable securities available for repo
 
4,037,650

Total sources of contingency liquidity
 
14,432,931

 
 
 
Net contingency liquidity
 
$
14,880,808


Additional Liquidity Requirements. In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot raise funds in the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the three months ended September 30, 2015.
 
Balance Sheet Gap Policy. Further, we are sensitive to maintaining an appropriate funding balance between our assets and liabilities and maintain a policy that limits the potential gap between assets inclusive of projected prepayments, funded by liabilities, inclusive of projected calls, maturing in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets. We maintained compliance with this limit at all times during the nine months ended September 30, 2015. During the three months ended September 30, 2015, this gap averaged 1.4 percent (maximum level 4.0 percent and minimum level 0.1 percent). As of September 30, 2015, this gap was 4.0 percent, compared with 0.4 percent at December 31, 2014.

External Sources of Liquidity

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

Debt Financing Consolidated Obligations

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At September 30, 2015, and December 31, 2014, outstanding COs, including both CO bonds and CO discount notes, totaled $53.0 billion and $50.8 billion, respectively.

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

CO discount notes comprised 50.1 percent and 49.8 percent of the outstanding COs for which we are primarily liable at September 30, 2015, and December 31, 2014, respectively, but accounted for 92.8 percent and 91.4 percent of the proceeds from the issuance of such COs during the nine months ended September 30, 2015 and 2014, respectively.

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

Financial Conditions for Consolidated Obligations

During the period covered by this report, we experienced some increase in relative CO issuance costs as compared to yields in U.S. dollar interest rate swaps, particularly during a period of global market turbulence. However, investor demand for COs during the period remained strong and stable impacted in part by growing institutional investor demand for COs. We note that capacity among our CO underwriters has been occasionally somewhat constrained as a result of the imposition of new capital requirements on underwriters. So far, this development has not impeded our ability to meet our funding needs. During the quarter, we also experienced increases in the issuance costs of some CO discount notes with maturities beyond the FOMC’s September meeting as the yield on these discount notes priced in potential rate hikes by the FOMC that ultimately did not materialize. The issuance costs of CO discount notes subsided following the meeting because the FOMC decided to continue its accommodative monetary policy. We expect the uncertainty regarding the timing of the end of the FOMC’s accommodative monetary policy (as discussed under — Economic Conditions — Interest-Rate Environment) to cause some fluctuations in the issuance costs of our CO discount notes.

Capital

Total capital at September 30, 2015, was $3.2 billion compared with $2.9 billion at December 31, 2014. The increase was largely attributable to a $172.5 million increase in retained earnings from $901.7 million at December 31, 2014 to $1.1 billion million at September 30, 2015.

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

Subject to applicable law following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $42.6 million and $298.6 million at September 30, 2015, and December 31, 2014, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2014 Annual Report.

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


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

 
$
697

Due in one year or less
 

 

Due after one year through two years
 
207

 
25,383

Due after two years through three years
 
5,164

 
207

Due after three years through four years
 
338

 
217,420

Due after four years through five years
 
36,305

 
54,892

Total
 
$
42,643

 
$
298,599

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

Mandatorily redeemable capital stock declined from $298.6 million at December 31, 2014, to $42.6 million at September 30, 2015, as we repurchased shares from non-members that exceeded their total stock investment requirement. Dividend payments on mandatorily redeemable capital stock are classified as interest expense, so the repurchase of this stock has reduced our interest expense. For the three months ended September 30, 2015, interest expense on mandatorily redeemable capital stock amounted to $472,000 compared with $1.4 million for the three months ended September 30, 2014.

Members without excess stock are required to increase their capital-stock investment as their outstanding advances increase, as described in Item 1 — Business — Capital Resources in the 2014 Annual Report. As discussed in that Item, we may repurchase excess stock at our sole discretion. We repurchased $289.5 million of excess stock (including mandatorily redeemable excess stock) during the nine months ended September 30, 2015.

At September 30, 2015, and December 31, 2014, excess capital stock totaled $458.3 million and $633.0 million, respectively, as set forth in the following table (dollars in thousands):

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
September 30, 2015
$
653,477

 
$
1,473,446

 
$
2,126,946

 
$
2,585,241

 
$
458,295

December 31, 2014
632,454

 
1,446,248

 
2,078,725

 
2,711,713

 
632,988

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

Capital Rule

The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated September 16, 2015, the Director of the FHFA notified us that, based on June 30, 2015, financial information, we met the definition of adequately capitalized under the Capital Rule.

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

Internal Capital Practices and Policies

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

Targeted Capital Ratio Operating Range

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

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must exceed four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model. As of September 30, 2015, this internal minimum capital requirement equaled $2.9 billion, which was satisfied by our actual regulatory capital of $3.7 billion.

Excess Stock Management Program

On July 24, 2015, our board of directors authorized management to implement an excess stock management program, under which we are authorized to repurchase excess stock to target a range for excess stock between zero and $200 million. As of September 30, 2015, our shareholders held $458.3 million in excess stock. We used the Excess Stock Management program on October 1, 2015, to unilaterally repurchase $310.2 million of excess stock from shareholders on a pro rata basis.

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

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

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

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

LEGISLATIVE AND REGULATORY DEVELOPMENTS

FHFA Core Mission Achievement Advisory Bulletin 2015-05

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

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

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

Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities.

In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the FHFA (each an Agency and, collectively, the Agencies) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (Swap Entities) that are subject to the jurisdiction of one of the Agencies (such entities, Covered Swap Entities, and the joint final rules, the Final Margin Rules).

When they take effect, the Final Margin Rules will subject non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and financial end users that have material swaps exposure (i.e., an average daily aggregate notional amount of $8 billion or more in non-cleared swaps), to a mandatory two-way initial margin requirement. The amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin (generally, cash, certain government securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and sets forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances. As a result, we expect to be subject to the mandatory two-way initial margin requirement.

The Final Margin Rules will require variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial end-user). The variation margin amount is the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously paid or collected. For non-cleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be paid or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

The variation margin requirement under the Final Margin Rules will become effective for us on March 1, 2017, and the initial margin requirement under the Final Margin Rules will come into effect on September 1, 2020.


73


We are not a Covered Swap Entity under the Final Margin Rules. Rather, we are a financial end-user under the Final Margin Rules, and will likely have material swaps exposure when the initial margin requirements under the Final Margin Rules become effective.

Since we are currently posting and collecting variation margin on non-cleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on our costs. However, when the initial margin requirements under the Final Margin Rules become effective, we anticipate that our cost of engaging in non-cleared swaps may increase.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Strategies to Manage Market and Interest-Rate Risk

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

the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at both September 30, 2015 and December 31, 2014, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.6 billion.
the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at September 30, 2015, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.5 billion compared with $1.6 billion at December 31, 2014);
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements, was $7.7 billion, or 29.3 percent of our total outstanding CO bonds at September 30, 2015, compared with $7.2 billion, or 28.4 percent of total outstanding CO bonds, at December 31, 2014);
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

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

Measurement of Market and Interest-Rate Risk

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

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

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. BVE is equal to our permanent capital, which consists of the par value of capital stock including mandatorily redeemable capital stock, plus retained earnings. However, we caution that care must be taken to properly interpret the results of the MVE analysis as the basis for these

74


valuations may not be fully representative of future realized prices. Further, valuations are based on market curves and prices respective of individual assets, liabilities, and derivatives, and therefore are not representative of future net income to be earned by us through the spread between asset market curves and the market curves for funding costs. MVE should not be considered indicative of our market value as a going concern because it does not consider future new business activities, risk-management strategies, or the net profitability of assets after funding costs are subtracted. 

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

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

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

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


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Interest/Market-Rate Risk Metric
 
At September 30, 2015
 
At December 31, 2014
 
Target, Limit or Management Action Trigger at December 31, 2014
MVE
 
$3.4 billion
 
$3.5 billion
 
None
MVE/BVE
 
94.0%
 
97.1%
 
None
MVE/Par Stock
 
133.1%
 
129.3%
 
102% (management action trigger) and 100% or higher (limit)
Economic Capital Ratio
 
5.9%
 
6.3%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$57.2 million
 
$75.6 million
 
Maintain below $225.0 million (management action trigger) and $275.0 million (limit)
Duration of Equity
 
+0.03 years
 
+0.01 years
 
Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(4.4)%
 
(3.1)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
+0.02 months
 
+0.01 months
 
None
MPF Portfolio VaR
 
$51.9 million
 
$49.6 million
 
Maintain below 25% of the VaR limit (management action trigger)
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 185 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 184 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

Value at Risk. The table below presents the historical simulation VaR estimate as of September 30, 2015, and December 31, 2014, which represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 120-business-day time horizon.
 
 
 
Value-at-Risk
(Gain) Loss Exposure
 
 
September 30, 2015
 
December 31, 2014
Confidence Level
 
% of
MVE (1)
 
$ million
 
% of
MVE (1)
 
$ million
50%
 
0.08
%
 
$
2.9

 
0.09
%
 
$
3.2

75%
 
0.20

 
6.9

 
0.32

 
11.1

95%
 
0.84

 
28.9

 
1.10

 
38.5

99%
 
1.66

 
57.2

 
2.15

 
75.6

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

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

We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions). The return on regulatory capital less 3-month LIBOR metric is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; and d) changes in fair values from trading securities and hedging activities.


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September 30, 2015
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,341
 
$3,316
 
$3,418
 
$3,441
 
$3,399
 
$3,291
 
$3,151
Percent change in MVE from base
 
(2.9)%
 
(3.6)%
 
(0.7)%
 
—%
 
(1.2)%
 
(4.4)%
 
(8.4)%
MVE/BVE
 
91.3%
 
90.6%
 
93.4%
 
94.0%
 
92.9%
 
89.9%
 
86.1%
MVE/Par Stock
 
129.2%
 
128.3%
 
132.2%
 
133.1%
 
131.5%
 
127.3%
 
121.9%
Duration of Equity
 
+1.00 years
 
-1.15 years
 
-1.82 years
 
+0.03 years
 
+2.32 years
 
+3.77 years
 
+4.61 years
Return on Regulatory Capital less 3-month LIBOR
 
3.0%
 
2.9%
 
3.1%
 
2.9%
 
2.8%
 
2.4%
 
1.9%
Net income percent change from base
 
(12.8)%
 
(15.5)%
 
(10.8)%
 
—%
 
24.5%
 
42.1%
 
56.7%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored at zero, and therefore may not be fully representative of the indicated rate shock.

 
 
December 31, 2014
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,512
 
$3,465
 
$3,486
 
$3,507
 
$3,487
 
$3,400
 
$3,273
Percent change in MVE from base
 
0.1%
 
(1.2)%
 
(0.6)%
 
—%
 
(0.6)%
 
(3.1)%
 
(6.7)%
MVE/BVE
 
97.2%
 
95.9%
 
96.5%
 
97.1%
 
96.5%
 
94.1%
 
90.6%
MVE/Par Stock
 
129.5%
 
127.8%
 
128.6%
 
129.3%
 
128.6%
 
125.4%
 
120.7%
Duration of Equity
 
+1.39 years
 
+0.37 years
 
-0.67 years
 
+0.01 years
 
+1.63 years
 
+3.15 years
 
+4.11 years
Return on Regulatory Capital less 3-month LIBOR
 
3.1%
 
2.9%
 
3.0%
 
3.2%
 
2.8%
 
2.4%
 
1.8%
Net Income percent change from base
 
(16.3)%
 
(21.0)%
 
(19.2)%
 
—%
 
19.0%
 
34.8%
 
47.4%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored at zero, and therefore may not be fully representative of the indicated rate shock.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

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Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Subsequent to the quarter covered by this report, we settled our private-label MBS claims with certain defendants for an aggregate amount of $50.2 million, which amount is net of legal fees and expenses. We describe our private-label MBS litigation in Item 3 — Legal Proceedings in the 2014 Annual Report.

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

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

ITEM 1A. RISK FACTORS

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

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


78


Number
Exhibit Description
10.1
 
The Federal Home Loan Bank of Boston 2016 Director Compensation Policy * (incorporated by reference to Exhibit 10.1 to our Form 8-K/A filed with the SEC on October 28, 2015)
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
November 10, 2015
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
November 10, 2015
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

79