Federal Home Loan Bank of Dallas - FORM 10-Q - August 12, 2016

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EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Dallasfhlbdallas-63016xex_311.htm
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Dallasfhlbdallas-63016xex_321.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Dallasfhlbdallas-63016xex_312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
 
71-6013989
(I.R.S. Employer
Identification Number)
 
 
 
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
 
75063-2547
(Zip code)
(214) 441-8500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At August 5, 2016, the registrant had outstanding 18,589,281 shares of its Class B Capital Stock, $100 par value per share.
 


FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

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



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)
 
June 30,
2016
 
December 31,
2015
ASSETS
 

 
 

Cash and due from banks
$
123,907

 
$
837,202

Interest-bearing deposits
300

 
260

Securities purchased under agreements to resell (Note 10)
3,250,000

 
1,000,000

Federal funds sold
3,944,000

 
2,171,000

Trading securities (Note 3)
118,886

 
211,056

Available-for-sale securities (Notes 4, 10 and 15) ($643,922 and $300,184 pledged at June 30, 2016 and December 31, 2015, respectively, which could be rehypothecated)
12,827,358

 
9,713,191

Held-to-maturity securities (a) (Note 5)
2,841,724

 
3,228,011

Advances (Notes 6 and 7)
31,122,698

 
24,746,802

Mortgage loans held for portfolio, net of allowance for credit losses of $141 at both
June 30, 2016 and December 31, 2015, respectively (Note 7)
66,868

 
55,117

Accrued interest receivable
82,527

 
69,676

Premises and equipment, net
18,756

 
18,520

Derivative assets (Notes 10 and 11)
32,856

 
23,080

Other assets
8,330

 
8,112

TOTAL ASSETS
$
54,438,210

 
$
42,082,027

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits
 
 
 
Interest-bearing
$
850,643

 
$
1,045,939

Non-interest bearing
19

 
19

Total deposits
850,662

 
1,045,958

Consolidated obligations (Note 8)
 
 
 
Discount notes
30,047,547

 
20,541,329

Bonds
20,747,687

 
18,024,692

Total consolidated obligations
50,795,234

 
38,566,021

Mandatorily redeemable capital stock
3,251

 
8,929

Accrued interest payable
33,223

 
38,972

Affordable Housing Program (Note 9)
21,295

 
22,710

Derivative liabilities (Notes 10 and 11)
5,867

 
6,964

Other liabilities (Note 4)
257,903

 
193,161

Total liabilities
51,967,435

 
39,882,715

 
 
 
 
Commitments and contingencies (Notes 7 and 15)


 


 
 
 
 
CAPITAL (Note 12)
 
 
 
Capital stock
 
 
 
Capital stock — Class B-1 putable ($100 par value) issued and outstanding shares: 6,351,474 and 6,324,540 shares at June 30, 2016 and December 31, 2015, respectively
635,147

 
632,454

Capital stock — Class B-2 putable ($100 par value) issued and outstanding shares: 11,756,216 and 9,076,781 shares at June 30, 2016 and December 31, 2015, respectively
1,175,622

 
907,678

Total Class B Capital Stock
1,810,769

 
1,540,132

Retained earnings
 
 
 
Unrestricted
715,278

 
699,213

Restricted
68,885

 
62,990

Total retained earnings
784,163

 
762,203

Accumulated other comprehensive income (loss) (Note 18)
(124,157
)
 
(103,023
)
Total capital
2,470,775

 
2,199,312

TOTAL LIABILITIES AND CAPITAL
$
54,438,210

 
$
42,082,027

_____________________________
(a) 
Fair values: $2,859,952 and $3,262,283 at June 30, 2016 and December 31, 2015, respectively.
The accompanying notes are an integral part of these financial statements.

1

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

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
50,928

 
$
29,556

 
$
95,350

 
$
58,653

Prepayment fees on advances, net
 
558

 
4,419

 
1,342

 
7,139

Interest-bearing deposits
 
800

 
177

 
1,519

 
365

Securities purchased under agreements to resell
 
1,271

 
825

 
2,165

 
1,218

Federal funds sold
 
4,983

 
2,263

 
9,202

 
4,195

Trading securities
 
864

 
48

 
1,757

 
91

Available-for-sale securities
 
31,170

 
8,569

 
55,823

 
15,447

Held-to-maturity securities
 
7,505

 
7,326

 
15,328

 
15,498

Mortgage loans held for portfolio
 
777

 
930

 
1,564

 
1,921

Total interest income
 
98,856

 
54,113

 
184,050

 
104,527

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
Bonds
 
31,924

 
19,453

 
60,595

 
36,613

Discount notes
 
28,613

 
3,212

 
48,836

 
7,351

Deposits
 
500

 
40

 
1,055

 
66

Mandatorily redeemable capital stock and other borrowings
 
6

 
11

 
17

 
16

Total interest expense
 
61,043

 
22,716

 
110,503

 
44,046

NET INTEREST INCOME
 
37,813

 
31,397

 
73,547

 
60,481

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

 
(61
)
 
(310
)
 
(100
)
Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income
 
(4
)
 
42

 
298

 
75

Credit component of other-than-temporary impairment losses on held-to-maturity securities
 
(4
)
 
(19
)
 
(12
)
 
(25
)
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 
3,013

 
62

 
9,930

 
339

Net gains (losses) on derivatives and hedging activities
 
(3,821
)
 
8,449

 
(20,760
)
 
12,686

Realized gains on sales of held-to-maturity securities
 
259

 
3,887

 
729

 
10,113

Realized gains on sales of available-for-sale securities
 
3,564

 
—

 
4,215

 
2,345

Letter of credit fees
 
1,573

 
1,070

 
2,845

 
2,219

Other, net
 
809

 
524

 
1,350

 
996

Total other income (loss)
 
5,393

 
13,973

 
(1,703
)
 
28,673

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
11,971

 
10,070

 
23,601

 
20,459

Other operating expenses
 
5,638

 
7,001

 
11,182

 
13,172

Finance Agency
 
630

 
520

 
1,374

 
1,151

Office of Finance
 
735

 
744

 
1,480

 
1,293

Discretionary grant programs
 
413

 
432

 
949

 
736

Derivative clearing fees
 
275

 
76

 
506

 
162

Total other expense
 
19,662

 
18,843

 
39,092

 
36,973

INCOME BEFORE ASSESSMENTS
 
23,544

 
26,527

 
32,752

 
52,181

Affordable Housing Program assessment
 
2,355

 
2,653

 
3,277

 
5,219

NET INCOME
 
$
21,189

 
$
23,874

 
$
29,475

 
$
46,962

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

2

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

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
NET INCOME
 
$
21,189

 
$
23,874

 
$
29,475

 
$
46,962

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income
 
(11,129
)
 
3,031

 
(5,464
)
 
5,036

Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
 
(3,564
)
 
—

 
(4,215
)
 
(2,345
)
Unrealized losses on cash flow hedges
 
(9,768
)
 
—

 
(15,127
)
 
—

Reclassification adjustment for losses on cash flow hedges included in net income
 
941

 
—

 
1,580

 
—

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

 
(42
)
 
(302
)
 
(75
)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income
 
4

 
—

 
4

 
—

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
1,183

 
1,627

 
2,429

 
3,301

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

 
2

 
10

 
4

Amortization of net actuarial gain included in net periodic benefit cost
 
(25
)
 
(20
)
 
(49
)
 
(41
)
Total other comprehensive income (loss)
 
(22,353
)
 
4,598

 
(21,134
)
 
5,880

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
(1,164
)
 
$
28,472

 
$
8,341

 
$
52,842


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

3



FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited, in thousands)

 
Capital Stock
Class B-1 - Putable
(Membership/Excess)
 
Capital Stock
Class B-2 - Putable
(Activity)
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 Other
Comprehensive
 Income (Loss)
 
 
 
 
 
Capital Stock
Class B - Putable
 
Retained Earnings
 
 
Total
 Capital
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2016
6,325

 
$
632,454

 
9,077

 
$
907,678

 
—

 
$
—

 
$
699,213

 
$
62,990

 
$
762,203

 
$
(103,023
)
 
$
2,199,312

Net transfers of shares between Class B-1 and Class B-2 Stock
3,805

 
380,542

 
(3,805
)
 
(380,542
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Proceeds from sale of capital stock
46

 
4,663

 
6,484

 
648,486

 
—

 
—

 
—

 
—

 
—

 
—

 
653,149

Repurchase/redemption of capital stock
(3,898
)
 
(389,846
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(389,846
)
Shares reclassified to mandatorily redeemable capital stock
—

 
(43
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(43
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
—

 
23,580

 
5,895

 
29,475

 
—

 
29,475

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(21,134
)
 
(21,134
)
Dividends on capital stock (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
—

 
—

 
—

 
—

 
—

 
—

 
(133
)
 
—

 
(133
)
 
—

 
(133
)
Mandatorily redeemable capital stock
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
(5
)
 
—

 
(5
)
Stock
73

 
7,377

 
—

 
—

 
—

 
—

 
(7,377
)
 
—

 
(7,377
)
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2016
6,351

 
$
635,147

 
11,756

 
$
1,175,622

 
—

 
$
—

 
$
715,278

 
$
68,885

 
$
784,163

 
$
(124,157
)
 
$
2,470,775

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JANUARY 1, 2015
—

 
$
—

 
—

 
$
—

 
12,227

 
$
1,222,738

 
$
650,224

 
$
49,552

 
$
699,776

 
$
(3,601
)
 
$
1,918,913

Proceeds from sale of capital stock
—

 
—

 
—

 
—

 
5,776

 
577,596

 
—

 
—

 
—

 
—

 
577,596

Repurchase/redemption of capital stock
—

 
—

 
—

 
—

 
(3,989
)
 
(398,874
)
 
—

 
—

 
—

 
—

 
(398,874
)
Shares reclassified to mandatorily redeemable capital stock
—

 
—

 
—

 
—

 
(13
)
 
(1,312
)
 
—

 
—

 
—

 
—

 
(1,312
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net income
—

 
—

 
—

 
—

 
—

 
—

 
37,570

 
9,392

 
46,962

 
—

 
46,962

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,880

 
5,880

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

 
—

 
—

 
—

 
—

 
—

 
(83
)
 
—

 
(83
)
 
—

 
(83
)
Mandatorily redeemable capital stock
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
 
—

 
(2
)
Stock
—

 
—

 
—

 
—

 
21

 
2,138

 
(2,138
)
 
—

 
(2,138
)
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2015
—

 
$
—

 
—

 
$
—

 
14,022

 
$
1,402,286

 
$
685,571

 
$
58,944

 
$
744,515

 
$
2,279

 
$
2,149,080


(a) Dividends were paid at annualized rates of 0.375 percent and 1.251 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2016 and 0.431 percent and 1.431 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2016.

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



4

FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
For the Six Months Ended
 
June 30,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
29,475

 
$
46,962

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
 
 
 
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
42,928

 
46,800

Concessions on consolidated obligations
2,247

 
1,555

Premises, equipment and computer software costs
1,902

 
1,909

Non-cash interest on mandatorily redeemable capital stock
14

 
8

Credit component of other-than-temporary impairment losses on held-to-maturity securities
12

 
25

Gains on sales of held-to-maturity securities
(729
)
 
(10,113
)
Gains on sales of available-for-sale securities
(4,215
)
 
(2,345
)
Net increase in trading securities
(10,106
)
 
(101
)
Loss due to change in net fair value adjustment on derivative and hedging activities
44,499

 
16,807

Decrease (increase) in accrued interest receivable
(12,878
)
 
7,890

Decrease in other assets
(52
)
 
(665
)
Increase (decrease) in Affordable Housing Program (AHP) liability
(1,415
)
 
855

Increase (decrease) in accrued interest payable
(5,749
)
 
6,071

Decrease in other liabilities
(3,675
)
 
(2,913
)
Total adjustments
52,783

 
65,783

Net cash provided by operating activities
82,258

 
112,745

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Net decrease (increase) in interest-bearing deposits, including swap collateral pledged
(557,025
)
 
148,893

Net increase in securities purchased under agreements to resell
(2,250,000
)
 
(5,350,000
)
Net decrease (increase) in federal funds sold
(1,773,000
)
 
1,947,000

Net decrease in short-term trading securities held for investment
102,215

 
189,705

Purchases of available-for-sale securities
(5,030,544
)
 
(1,220,043
)
Proceeds from maturities of available-for-sale securities
3,030

 
16,024

Proceeds from sales of available-for-sale securities
2,454,292

 
540,269

Proceeds from sales of held-to-maturity securities
114,950

 
598,551

Proceeds from maturities of long-term held-to-maturity securities
276,129

 
404,562

Purchases of long-term held-to-maturity securities
—

 
(35,000
)
Principal collected on advances
328,938,105

 
265,409,868

Advances made
(335,250,133
)
 
(268,138,403
)
Principal collected on mortgage loans held for portfolio
6,981

 
8,349

Purchases of mortgage loans held for portfolio
(18,797
)
 
—

Purchases of premises, equipment and computer software
(2,278
)
 
(3,410
)
Net cash used in investing activities
(12,986,075
)
 
(5,483,635
)
 
 
 
 

5

 
For the Six Months Ended
 
June 30,
 
2016
 
2015
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits, including swap collateral held
(194,153
)
 
153,333

Net payments on derivative contracts with financing elements
(31,885
)
 
(120,577
)
Net proceeds from issuance of consolidated obligations
 

 
 
Discount notes
159,471,548

 
585,043,279

Bonds
11,372,371

 
10,960,752

Debt issuance costs
(2,021
)
 
(1,258
)
Payments for maturing and retiring consolidated obligations
 
 
 
Discount notes
(149,977,168
)
 
(585,540,120
)
Bonds
(8,705,600
)
 
(6,421,935
)
Proceeds from issuance of capital stock
653,149

 
577,596

Payments for redemption of mandatorily redeemable capital stock
(5,740
)
 
(1,965
)
Payments for repurchase/redemption of capital stock
(389,846
)
 
(398,874
)
Cash dividends paid
(133
)
 
(83
)
Net cash provided by financing activities
12,190,522

 
4,250,148

 
 
 
 
Net decrease in cash and cash equivalents
(713,295
)
 
(1,120,742
)
Cash and cash equivalents at beginning of the period
837,202

 
1,507,708

Cash and cash equivalents at end of the period
$
123,907

 
$
386,966

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest paid
$
98,680

 
$
50,747

AHP payments, net
$
4,692

 
$
4,364

Stock dividends issued
$
7,377

 
$
2,138

Dividends paid through issuance of mandatorily redeemable capital stock
$
5

 
$
2

Net capital stock reclassified to mandatorily redeemable capital stock
$
43

 
$
1,312


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

6

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

Note 1—Basis of Presentation
The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2015. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 22, 2016 (the “2015 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2015 10-K.
The Bank is one of 11 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the housing government-sponsored enterprises ("GSEs"), including the FHLBanks and the Office of Finance.
     Use of Estimates and Assumptions. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Note 2—Recently Issued Accounting Guidance
   Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03 "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the statement of condition as a direct deduction from that debt liability, consistent with the presentation of a debt discount. For public business entities, the guidance in ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of condition. Accordingly, $1,267,000 of unamortized debt issuance costs were reclassified as a reduction of consolidated obligation bonds in the accompanying statement of condition as of December 31, 2015. Previously, these unamortized debt issuance costs were included in other assets. The adoption of this guidance did not have any impact on the Bank's results of operations.
On August 18, 2015, the FASB issued ASU 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" ("ASU 2015-15"). ASU 2015-15 clarifies that, given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not
object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and
subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of this guidance on January 1, 2016 did not have any impact on the Bank's results of operations or financial condition.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. For public business entities, the guidance in ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). Early adoption was permitted. The Bank could elect to adopt ASU 2015-05 either (i) prospectively to all arrangements entered into or materially modified after the effective date or (ii) retrospectively. The Bank elected to adopt this guidance prospectively. The adoption of this guidance has not had any impact on the Bank's results of operations or financial condition.

7

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. On March 10, 2016, the FASB issued ASU 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" ("ASU 2016-05"), which clarifies the hedge accounting impact when there is a change in one of the counterparties to the derivative contract (i.e., a novation). ASU 2016-05 clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. For public business entities, the guidance in ASU 2016-05 is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the Bank), and interim periods within those fiscal years. Early adoption is permitted. Entities have the option to adopt ASU 2016-05 on a prospective basis to new derivative contract novations or on a modified retrospective basis. The Bank elected to adopt this guidance on a prospective basis beginning January 1, 2016. The adoption of ASU 2016-05 has not had any impact on the Bank's results of operations or financial condition.
Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued ASU 2016-06, "Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"), which clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call or put option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call or put option is related to interest rates or credit risks. For public business entities, the guidance in ASU 2016-06 is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the Bank), and interim periods within those fiscal years. Early adoption is permitted. The guidance is to be applied on a modified retrospective basis to existing debt instruments as of the beginning of the period for which the amendments are effective. The Bank has not yet determined the effect, if any, that the adoption of ASU 2016-06 will have on its results of operations or financial condition.
Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which amends the guidance for the accounting for credit losses on financial instruments by replacing the current incurred loss methodology with an expected credit loss methodology. Among other things, ASU 2016-13 requires:
• entities to present financial assets, or groups of financial assets, measured at amortized cost at the net amount expected to be collected, which is computed by deducting an allowance for credit losses from the amortized cost basis of the financial asset(s);
• the measurement of expected credit losses to be based upon relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount;
• the statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases in expected credit losses that have taken place during the period;
• entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination ("PCD assets") that are measured at amortized cost in a manner similar to other financial assets measured at amortized cost (the initial allowance for credit losses on PCD assets is added to the purchase price rather than being reported as a credit loss expense);
• credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses, the amount of which is limited to the amount by which fair value is below amortized cost; and
• public business entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by year of origination.
For public business entities that are SEC filers, the guidance in ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for the Bank), and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the amendments are adopted. However, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the date of adoption. The Bank has not yet determined the effect that the adoption of ASU 2016-13 will have on its results of operations or financial condition.




8

Note 3—Trading Securities
Trading securities as of June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
U.S. Treasury Notes
$
109,566

 
$
202,199

Other
9,320

 
8,857

Total
$
118,886

 
$
211,056

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

            
Note 4—Available-for-Sale Securities
 Major Security Types. Available-for-sale securities as of June 30, 2016 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
521,340

 
$
254

 
$
2,018

 
$
519,576

GSE obligations
6,687,878

 
16,977

 
3,814

 
6,701,041

Other
373,812

 
487

 
236

 
374,063

 
7,583,030

 
17,718

 
6,068

 
7,594,680

GSE commercial mortgage-backed securities
5,336,285

 
2,172

 
105,779

 
5,232,678

Total
$
12,919,315

 
$
19,890

 
$
111,847

 
$
12,827,358

Available-for-sale securities as of December 31, 2015 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
498,185

 
$
1,315

 
$
1,748

 
$
497,752

GSE obligations
5,328,125

 
12,597

 
1,775

 
5,338,947

Other
372,532

 
10

 
1,002

 
371,540

 
6,198,842

 
13,922

 
4,525

 
6,208,239

GSE commercial mortgage-backed securities
3,596,627

 
766

 
92,441

 
3,504,952

Total
$
9,795,469

 
$
14,688

 
$
96,966

 
$
9,713,191

Included in the tables above are GSE debentures and GSE commercial mortgage-backed securities ("MBS") that were purchased but which had not yet settled as of June 30, 2016 and December 31, 2015. The aggregate amounts due of $233,268,000 and $164,889,000, respectively, are included in other liabilities on the statements of condition at those dates.
Other debentures are comprised of securities issued by the Private Export Funding Corporation ("PEFCO"). These debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments.

9

The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of June 30, 2016. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number
 of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
8

 
$
465,399

 
$
2,018

 
—

 
$
—

 
$
—

 
8

 
$
465,399

 
$
2,018

GSE obligations
24

 
1,605,395

 
3,814

 
—

 
—

 
—

 
24

 
1,605,395

 
3,814

Other
4

 
38,268

 
10

 
8

 
50,408

 
226

 
12

 
88,676

 
236

GSE commercial MBS
65

 
2,347,412

 
27,202

 
75

 
2,494,877

 
78,577

 
140

 
4,842,289

 
105,779

Total
101

 
$
4,456,474

 
$
33,044

 
83

 
$
2,545,285

 
$
78,803

 
184

 
$
7,001,759

 
$
111,847


The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2015. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
7

 
$
229,793

 
$
1,748

 
—

 
$
—

 
$
—

 
7

 
$
229,793

 
$
1,748

GSE obligations
28

 
802,283

 
1,775

 
—

 
—

 
—

 
28

 
802,283

 
1,775

Other
22

 
279,138

 
522

 
8

 
48,567

 
480

 
30

 
327,705

 
1,002

GSE commercial MBS
80

 
2,401,148

 
63,602

 
29

 
849,297

 
28,839

 
109

 
3,250,445

 
92,441

Total
137

 
$
3,712,362

 
$
67,647

 
37

 
$
897,864

 
$
29,319

 
174

 
$
4,610,226

 
$
96,966


At June 30, 2016, the gross unrealized losses on the Bank’s available-for-sale securities were $111,847,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by GSEs, or fully secured by collateral that is guaranteed by the U.S government. As of June 30, 2016, the U.S. government and the issuers of the Bank’s holdings of GSE debentures and GSE MBS were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by Standard and Poor’s (“S&P”). The Bank's holdings of PEFCO debentures are rated triple-A by Moody's and Fitch, and are not rated by S&P. Based upon the Bank's assessment of the strength of the government guaranty, the Bank expects that the U.S. government-guaranteed debentures that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank's amortized cost bases in the investments. In addition, based upon the Bank's assessment of the creditworthiness of the issuers of the GSE debentures and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank's amortized cost bases in these investments. Further, based upon the Bank's assessment of the strength of the GSEs' guarantees of the Bank's holdings of GSE commercial MBS and the credit ratings assigned by each of the NRSROs, the Bank expects that its holdings of GSE commercial MBS that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Finally, based upon PEFCO's creditworthiness, the U.S. government's guaranty of the payment of principal and interest on the collateral securing the PEFCO debentures, and the guaranty of the payment of interest on the debentures by an agency of the U.S. government, the Bank expects that its holdings of PEFCO debentures that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2016.

10

Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2016 and December 31, 2015 are presented below (in thousands).
 
 
 
June 30, 2016
 
December 31, 2015
 
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
Debentures
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
332,723

 
$
333,055

 
$
133,117

 
$
133,077

 
Due after one year through five years
 
2,701,142

 
2,708,921

 
3,637,966

 
3,643,909

 
Due after five years through ten years
 
4,284,240

 
4,286,700

 
2,313,112

 
2,316,854

 
Due after ten years
 
264,925

 
266,004

 
114,647

 
114,399

 
 
 
7,583,030

 
7,594,680

 
6,198,842

 
6,208,239

 
GSE commercial MBS
 
5,336,285

 
5,232,678

 
3,596,627

 
3,504,952

 
Total
 
$
12,919,315

 
$
12,827,358

 
$
9,795,469

 
$
9,713,191

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
Amortized cost of available-for-sale securities other than MBS
 
 
 
Fixed-rate
$
7,583,030

 
$
6,123,842

Variable-rate
—

 
75,000

 
7,583,030

 
6,198,842

Amortized cost of fixed-rate multi-family MBS
5,336,285

 
3,596,627

Total
$
12,919,315

 
$
9,795,469

At June 30, 2016 and December 31, 2015, substantially all of the Bank's fixed-rate available-for-sale securities were swapped to a variable rate.
Sales of Securities. During the three and six months ended June 30, 2016, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $1,576,267,000 and $2,450,077,000, respectively. Proceeds from the sales totaled $1,579,831,000 and $2,454,292,000, respectively, resulting in realized gains of $3,564,000 and $4,215,000, respectively. During the six months ended June 30, 2015, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $537,924,000. Proceeds from the sales totaled $540,269,000, resulting in realized gains of $2,345,000. There were no sales of available-for-sale securities during the three months ended June 30, 2015.
                                                                

11

Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of June 30, 2016 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in
Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
18,760

 
$
—

 
$
18,760

 
$
7

 
$
137

 
$
18,630

State housing agency obligations
110,000

 
—

 
110,000

 
32

 
—

 
110,032

 
128,760

 
—

 
128,760

 
39

 
137

 
128,662

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
3,549

 
—

 
3,549

 
5

 
—

 
3,554

GSE residential MBS
2,540,329

 
—

 
2,540,329

 
14,792

 
5,857

 
2,549,264

Non-agency residential MBS
126,517

 
19,245

 
107,272

 
12,832

 
3,199

 
116,905

GSE commercial MBS
61,814

 
—

 
61,814

 
—

 
247

 
61,567

 
2,732,209

 
19,245

 
2,712,964

 
27,629

 
9,303

 
2,731,290

Total
$
2,860,969

 
$
19,245

 
$
2,841,724

 
$
27,668

 
$
9,440

 
$
2,859,952


Held-to-maturity securities as of December 31, 2015 were as follows (in thousands):

 
Amortized
Cost
 
OTTI Recorded in Accumulated Other
Comprehensive
Income (Loss)
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
21,546

 
$
—

 
$
21,546

 
$
15

 
$
151

 
$
21,410

State housing agency obligations
110,000

 
—

 
110,000

 
—

 
—

 
110,000

 
131,546

 
—

 
131,546

 
15

 
151

 
131,410

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
4,040

 
—

 
4,040

 
11

 
—

 
4,051

GSE residential MBS
2,909,065

 
—

 
2,909,065

 
22,457

 
766

 
2,930,756

Non-agency residential MBS
142,920

 
21,376

 
121,544

 
16,118

 
2,963

 
134,699

GSE commercial MBS
61,816

 
—

 
61,816

 
—

 
449

 
61,367

 
3,117,841

 
21,376

 
3,096,465

 
38,586

 
4,178

 
3,130,873

Total
$
3,249,387

 
$
21,376

 
$
3,228,011

 
$
38,601

 
$
4,329

 
$
3,262,283



12

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2016. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income (loss) ("AOCI") and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

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

 
$
11,827

 
$
137

 
—

 
$
—

 
$
—

 
2

 
$
11,827

 
$
137

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
51

 
1,136,782

 
5,424

 
2

 
73,458

 
433

 
53

 
1,210,240

 
5,857

Non-agency residential MBS
3

 
17,181

 
535

 
20

 
92,858

 
9,536

 
23

 
110,039

 
10,071

GSE commercial MBS
—

 
—

 
—

 
3

 
61,567

 
247

 
3

 
61,567

 
247

Total
56

 
$
1,165,790

 
$
6,096

 
25

 
$
227,883

 
$
10,216

 
81

 
$
1,393,673

 
$
16,312


The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2015. The unrealized losses include other-than-temporary impairments recorded in AOCI and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

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

 
$
12,683

 
$
151

 
—

 
$
—

 
$
—

 
2

 
$
12,683

 
$
151

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
19

 
503,000

 
697

 
1

 
44,782

 
69

 
20

 
547,782

 
766

Non-agency residential MBS
—

 
—

 
—

 
24

 
107,302

 
9,060

 
24

 
107,302

 
9,060

  GSE commercial MBS
—

 
—

 
—

 
3

 
61,366

 
449

 
3

 
61,366

 
449

Total
21

 
$
515,683

 
$
848

 
28

 
$
213,450

 
$
9,578

 
49

 
$
729,133

 
$
10,426


At June 30, 2016, the gross unrealized losses on the Bank’s held-to-maturity securities were $16,312,000, of which $10,071,000 were attributable to its holdings of non-agency (i.e., private-label) residential MBS and $6,241,000 were attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs.
As of June 30, 2016, the U.S. government and the issuers of the Bank’s holdings of GSE MBS were rated triple-A by Moody’s and Fitch and AA+ by S&P. Based upon the Bank's assessment of the strength of the government guaranty, the Bank expects that the U.S. government-guaranteed debentures that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank's amortized cost bases in these investments. In addition, based upon the credit ratings assigned by the NRSROs and the Bank's assessment of the strength of the GSEs’ guarantees of the Bank’s holdings of GSE MBS, the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at June 30, 2016 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2016.
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS (“RMBS”), generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS.

13

However, based upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2016 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its 24 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of June 30, 2016 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of June 30, 2016 assumed changes in home prices ranging from declines of 2 percent to increases of 10 percent over the 12-month period beginning April 1, 2016. For the vast majority of markets, the changes were projected to range from increases of 2 percent to 6 percent. Thereafter, home price changes for each market were projected to return (at varying rates and over varying transition periods based on historical housing price patterns) to their long-term historical equilibrium levels. Following these transition periods, the constant long-term annual rates of appreciation for the vast majority of markets were projected to range between 2 percent and 5 percent.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
Based on the results of its cash flow analyses, the Bank determined it was not likely that it would fully recover the remaining amortized cost basis of one of its previously other-than-temporarily impaired non-agency RMBS and, accordingly, this security was deemed to be other-than-temporarily impaired as of June 30, 2016. The difference between the present value of the cash flows expected to be collected from this security and its amortized cost basis (i.e., the credit loss) totaled $4,000 at June 30, 2016. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its remaining amortized cost basis, only the amount related to the credit loss was recognized in earnings. The credit loss associated with this security was reclassified from AOCI to earnings during the three months ended June 30, 2016 as the estimated fair value of the security was greater than its carrying value at that date. None of the Bank's other non-agency RMBS were deemed to be other-than-temporarily impaired at June 30, 2016.

14

For the security for which an other-than-temporary impairment was determined to have occurred as of June 30, 2016, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings (dollars in thousands):
 
 
 
 
 
 
Significant Inputs(2)
 
 
Year of
Securitization
 
Collateral
Type(1)
 
Unpaid Principal Balance as of
June 30, 2016
 
Projected
 Prepayment Rate
 
Projected
 Default Rate
 
Projected
 Loss Severity
 
Current Credit Enhancement as of
 June 30, 2016(3)
2005
 
Alt-A/Option ARM
 
$
10,129

 
8.0
%
 
17.8
%
 
33.9
%
 
31.5
%
________________________________________
(1) 
Although the other-than-temporarily impaired security was not labeled as Alt-A at the time of issuance, based upon its current collateral and performance characteristics, it was analyzed using Alt-A assumptions.
(2) 
The prepayment rate reflects the weighted average of projected future voluntary prepayments. The default rate reflects the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. The loss severity reflects the total projected loan losses as a percentage of the total balance of loans that are projected to default.
(3) 
The current credit enhancement percentage reflects the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior class held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
In addition to the security that was determined to be other-than-temporarily impaired at June 30, 2016, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired in periods prior to 2013. The following table presents a rollforward for the three and six months ended June 30, 2016 and 2015 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss) (in thousands).
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Balance of credit losses, beginning of period
$
11,423

 
$
12,301

 
$
11,696

 
$
12,512

Credit losses on securities for which an other-than-temporary impairment was previously recognized
4

 
19

 
12

 
25

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(307
)
 
(220
)
 
(588
)
 
(437
)
Balance of credit losses, end of period
11,120

 
12,100

 
11,120

 
12,100

Cumulative principal shortfalls on securities held at end of period
(1,738
)
 
(1,469
)
 
(1,738
)
 
(1,469
)
Cumulative amortization of the time value of credit losses at end of period
395

 
321

 
395

 
321

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period
$
9,777

 
$
10,952

 
$
9,777

 
$
10,952

     Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2016 and December 31, 2015 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.
 
 
June 30, 2016
 
December 31, 2015
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
750

 
$
750

 
$
750

 
$
—

 
$
—

 
$
—

Due after one year through five years
 
6,046

 
6,046

 
6,053

 
8,712

 
8,712

 
8,727

Due after five years through ten years
 
11,964

 
11,964

 
11,827

 
12,834

 
12,834

 
12,683

Due after ten years
 
110,000

 
110,000

 
110,032

 
110,000

 
110,000

 
110,000

 
 
128,760

 
128,760

 
128,662

 
131,546

 
131,546

 
131,410

Mortgage-backed securities
 
2,732,209

 
2,712,964

 
2,731,290

 
3,117,841

 
3,096,465

 
3,130,873

Total
 
$
2,860,969

 
$
2,841,724

 
$
2,859,952

 
$
3,249,387

 
$
3,228,011

 
$
3,262,283


15


The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $10,871,000 and $13,139,000 at June 30, 2016 and December 31, 2015, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
Amortized cost of variable-rate held-to-maturity securities other than MBS
$
128,760

 
$
131,546

Amortized cost of held-to-maturity MBS
 
 
 
Fixed-rate pass-through securities
163

 
228

Collateralized mortgage obligations
 
 
 
Fixed-rate
395

 
453

Variable-rate
2,669,837

 
3,055,344

Variable-rate multi-family MBS
61,814

 
61,816

 
2,732,209

 
3,117,841

Total
$
2,860,969

 
$
3,249,387


All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2015 or the six months ended June 30, 2016.
Sales of Securities. During the three and six months ended June 30, 2016, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $66,763,000 and $114,221,000, respectively. Proceeds from the sales totaled $67,022,000 and $114,950,000, respectively, resulting in realized gains of $259,000 and $729,000, respectively. During the three and six months ended June 30, 2015, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $244,190,000 and $588,438,000, respectively. Proceeds from these sales totaled $248,077,000 and $598,551,000, respectively, resulting in realized gains of $3,887,000 and $10,113,000, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification.

16


Note 6—Advances
     Redemption Terms. At June 30, 2016 and December 31, 2015, the Bank had advances outstanding at interest rates ranging from 0.31 percent to 8.27 percent and from 0.21 percent to 8.27 percent, respectively, as summarized below (dollars in thousands).
 
 
June 30, 2016
 
December 31, 2015
Contractual Maturity
 
Amount
 
Weighted Average
Interest Rate
 
Amount
 
Weighted Average
Interest Rate
Overdrawn demand deposit accounts
 
$
262

 
4.41
%
 
$
—

 
—
%
 
 
 
 
 
 
 
 
 
Due in one year or less
 
13,302,180

 
0.58

 
12,431,831

 
0.44

Due after one year through two years
 
7,744,356

 
0.78

 
5,886,049

 
0.77

Due after two years through three years
 
1,365,909

 
1.83

 
1,375,560

 
2.11

Due after three years through four years
 
759,322

 
2.20

 
613,243

 
2.01

Due after four years through five years
 
1,285,051

 
1.29

 
1,129,859

 
1.53

Due after five years
 
4,950,828

 
0.75

 
1,732,577

 
1.44

Amortizing advances
 
1,553,728

 
2.92

 
1,480,532

 
3.15

Total par value
 
30,961,636

 
0.90
%
 
24,649,651

 
0.93
%
 
 
 
 
 
 
 
 
 
Premiums
 
59

 
 
 
22

 
 
Deferred net prepayment fees
 
(14,606
)
 
 
 
(16,113
)
 
 
Commitment fees
 
(127
)
 
 
 
(131
)
 
 
Hedging adjustments
 
175,736

 
 
 
113,373

 
 
Total
 
$
31,122,698

 
 
 
$
24,746,802

 
 

Amortizing advances require repayment according to predetermined amortization schedules.
The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At June 30, 2016 and December 31, 2015, the Bank had aggregate prepayable and callable advances totaling $12,151,804,000 and $5,895,751,000, respectively.
The following table summarizes advances outstanding at June 30, 2016 and December 31, 2015, by the earlier of contractual maturity or next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):
Contractual Maturity or Next Call Date
 
June 30, 2016
 
December 31, 2015
Overdrawn demand deposit accounts
 
$
262

 
$
—

 
 
 
 
 
Due in one year or less
 
23,871,334

 
18,135,949

Due after one year through two years
 
2,242,681

 
1,727,927

Due after two years through three years
 
1,352,909

 
1,375,559

Due after three years through four years
 
707,822

 
605,243

Due after four years through five years
 
645,951

 
613,459

Due after five years
 
586,949

 
710,982

Amortizing advances
 
1,553,728

 
1,480,532

Total par value
 
$
30,961,636

 
$
24,649,651


The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed-rate advance on specified dates and offer, subject to certain conditions, replacement

17

funding at prevailing market rates. At June 30, 2016 and December 31, 2015, the Bank had putable advances outstanding totaling $1,077,071,000 and $1,097,071,000, respectively.

The following table summarizes advances outstanding at June 30, 2016 and December 31, 2015, by the earlier of contractual maturity or next possible put date (in thousands):
Contractual Maturity or Next Put Date
 
June 30, 2016
 
December 31, 2015
Overdrawn demand deposit accounts
 
$
262

 
$
—

 
 
 
 
 
Due in one year or less
 
14,359,251

 
13,523,902

Due after one year through two years
 
7,097,785

 
5,489,429

Due after two years through three years
 
960,409

 
715,109

Due after three years through four years
 
754,322

 
578,243

Due after four years through five years
 
1,285,051

 
1,129,859

Due after five years
 
4,950,828

 
1,732,577

Amortizing advances
 
1,553,728

 
1,480,532

Total par value
 
$
30,961,636

 
$
24,649,651

    
 Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
Fixed-rate
 
 
 
Due in one year or less
$
11,859,395

 
$
12,236,879

Due after one year
6,741,038

 
6,463,464

Total fixed-rate
18,600,433

 
18,700,343

Variable-rate
 
 
 
Due in one year or less
1,535,262

 
208,590

Due after one year
10,825,941

 
5,740,718

Total variable-rate
12,361,203

 
5,949,308

Total par value
$
30,961,636

 
$
24,649,651


At June 30, 2016 and December 31, 2015, 28 percent and 26 percent, respectively, of the Bank’s fixed-rate advances were swapped to a variable rate.
     Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income on advances over the life of the modified advance using the level-yield method. During the three months ended June 30, 2016 and 2015, gross advance prepayment fees received from members/borrowers were $1,391,000 and $5,855,000, respectively, of which $284,000 and $658,000, respectively, were deferred. During the six months ended June 30, 2016 and 2015, gross advance prepayment fees received from members/borrowers were $2,735,000 and $14,529,000, respectively, of which $284,000 and $4,489,000, respectively, were deferred.


18

Note 7—Allowance for Credit Losses
An allowance for credit losses is separately established for each of the Bank’s identified portfolio segments, if necessary, to provide for probable losses inherent in its financing receivables portfolio and other off-balance sheet credit exposures as of the balance sheet date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.
A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments: (1) advances and other extensions of credit to members/borrowers, collectively referred to as “extensions of credit to members”; (2) government-guaranteed/insured mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.
Classes of financing receivables are generally a disaggregation of a portfolio segment and are determined on the basis of their initial measurement attribute, the risk characteristics of the financing receivable and an entity’s method for monitoring and assessing credit risk. Because the credit risk arising from the Bank’s financing receivables is assessed and measured at the portfolio segment level, the Bank does not have separate classes of financing receivables within each of its portfolio segments.
During the six months ended June 30, 2016 and 2015, there were no significant purchases or sales of financing receivables, nor were any financing receivables reclassified to held for sale.
     Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”), the Bank lends to financial institutions within its five-state district that are involved in housing finance. The FHLB Act requires the Bank to obtain and maintain sufficient collateral for advances and other extensions of credit to protect against losses. The Bank makes advances and otherwise extends credit only against eligible collateral, as defined by regulation. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances and other extensions of credit, the Bank applies various haircuts, or discounts, to the collateral to determine the value against which borrowers may borrow. As additional security, the Bank has a statutory lien on each borrower’s capital stock in the Bank.
On at least a quarterly basis, the Bank evaluates all outstanding extensions of credit to members/borrowers for potential credit losses. These evaluations include a review of: (1) the amount, type and performance of collateral available to secure the outstanding obligations; (2) metrics that may be indicative of changes in the financial condition and general creditworthiness of the member/borrower; and (3) the payment status of the obligations. Any outstanding extensions of credit that exhibit a potential credit weakness that could jeopardize the full collection of the outstanding obligations would be classified as substandard, doubtful or loss. The Bank did not have any advances or other extensions of credit to members/borrowers that were classified as substandard, doubtful or loss at June 30, 2016 or December 31, 2015.
The Bank considers the amount, type and performance of collateral to be the primary indicator of credit quality with respect to its extensions of credit to members/borrowers. At June 30, 2016 and December 31, 2015, the Bank had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of each borrower’s outstanding extensions of credit.
The Bank continues to evaluate and, as necessary, modify its credit extension and collateral policies based on market conditions. At June 30, 2016 and December 31, 2015, the Bank did not have any advances that were past due, on nonaccrual status, or considered impaired. There have been no troubled debt restructurings related to advances.
The Bank has never experienced a credit loss on an advance or any other extension of credit to a member/borrower and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on its extensions of credit to members/borrowers. Accordingly, the Bank has not provided any allowance for credit losses on advances, nor has it recorded any liabilities to reflect an allowance for credit losses related to its off-balance sheet credit exposures.
 Mortgage Loans — Government-guaranteed/Insured. The Bank’s government-guaranteed/insured fixed-rate mortgage loans are insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. Any losses from these loans are expected to be recovered from those entities. Any losses from these loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank has not established an allowance for credit losses on government-guaranteed/insured mortgage loans. Government-guaranteed/insured loans are not placed on nonaccrual status.
Mortgage Loans — Conventional Mortgage Loans. The Bank’s conventional mortgage loans were acquired through the Mortgage Partnership Finance® (“MPF”®) program, as more fully described in the Bank’s 2015 10-K. The allowance for losses on conventional mortgage loans is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, and prevailing economic conditions. The allowance for losses on conventional mortgage loans also factors in the credit enhancement under the MPF program. Any incurred losses that are expected to be recovered from the credit enhancements are not reserved as part of the Bank’s allowance for loan losses.

19

The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on nonaccrual status is restored to accrual status when none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans that are on nonaccrual status are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A collateral-dependent loan is impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal and interest on the loan. Interest income on impaired loans is recognized in the same manner as it is for nonaccrual loans noted above.
The Bank evaluates whether to record a charge-off on a conventional mortgage loan when the loan becomes 180 days or more past due or upon the occurrence of a confirming event, whichever occurs first. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.
The Bank considers the key credit quality indicator for conventional mortgage loans to be the payment status of each loan. The table below summarizes the recorded investment by payment status for mortgage loans at June 30, 2016 and December 31, 2015 (dollars in thousands).
 
June 30, 2016
 
December 31, 2015
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
30-59 days delinquent
$
836

 
$
953

 
$
1,789

 
$
920

 
$
1,180

 
$
2,100

60-89 days delinquent
371

 
261

 
632

 
348

 
337

 
685

90 days or more delinquent
196

 
89

 
285

 
387

 
202

 
589

Total past due
1,403

 
1,303

 
2,706

 
1,655

 
1,719

 
3,374

Total current loans
39,278

 
25,261

 
64,539

 
23,844

 
28,340

 
52,184

Total mortgage loans
$
40,681

 
$
26,564

 
$
67,245

 
$
25,499

 
$
30,059

 
$
55,558

 
 
 
 
 
 
 
 
 
 
 
 
Other delinquency statistics:
 
 
 
 
 
 
 
 
 
 
 
In process of foreclosure (1)
$
77

 
$
19

 
$
96

 
$
329

 
$
77

 
$
406

Serious delinquency rate (2)
0.5
%
 
0.3
%
 
0.4
%
 
1.5
%
 
0.7
%
 
1.1
%
Past due 90 days or more and still accruing interest (3)
$
—

 
$
89

 
$
89

 
$
—

 
$
202

 
$
202

Nonaccrual loans
$
196

 
$
—

 
$
196

 
$
387

 
$
—

 
$
387

Troubled debt restructurings
$
20

 
$
—

 
$
20

 
$
118

 
$
—

 
$
118

_____________________________
(1) 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been made.
(2) 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the loan portfolio.
(3) 
Only government-guaranteed/insured mortgage loans continue to accrue interest after they become 90 days or more past due.
At June 30, 2016 and December 31, 2015, the Bank’s other assets included $145,000 and $49,000, respectively, of real estate owned.
Mortgage loans are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. Each nonaccrual mortgage loan and each troubled debt restructuring is specifically reviewed for impairment. At June 30, 2016 and December 31, 2015, the estimated value of the collateral securing each of these loans, plus the estimated amount that can be recovered through credit enhancements and mortgage insurance, if any, exceeded the outstanding loan amount. Therefore, no specific reserve was established for any of these mortgage loans. The remaining conventional mortgage loans were evaluated for impairment on a pool basis. Based upon the current and past performance of these loans, the underwriting

20

standards in place at the time the loans were acquired, and current economic conditions, the Bank determined that an allowance for loan losses of $141,000 was adequate to reserve for credit losses in its conventional mortgage loan portfolio at June 30, 2016. The following table presents the activity in the allowance for credit losses on conventional mortgage loans held for portfolio during the three and six months ended June 30, 2016 and 2015 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
$
141

 
$
143

 
$
141

 
$
143

Chargeoffs
—

 
(2
)
 
—

 
(2
)
Balance, end of period
$
141

 
$
141

 
$
141

 
$
141

            
The following table presents information regarding the balances of the Bank's conventional mortgage loans held for portfolio that were individually or collectively evaluated for impairment as well as information regarding the ending balance of the allowance for credit losses as of June 30, 2016 and December 31, 2015 (in thousands).

 
June 30, 2016
 
December 31, 2015
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment
$
141

 
$
141

 
 
 
 
Recorded investment
 
 
 
Individually evaluated for impairment
$
216

 
$
407

Collectively evaluated for impairment
40,465

 
25,092

 
$
40,681

 
$
25,499


Note 8—Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 11 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the U.S. government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds of only the debt issued on its behalf and records on its statements of condition only that portion of the consolidated obligations for which it has received the proceeds. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are generally issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 15.
The par amounts of the 11 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $964 billion and $905 billion at June 30, 2016 and December 31, 2015, respectively. The Bank was the primary obligor on $50.8 billion and $38.6 billion (at par value), respectively, of these consolidated obligations.
    Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at June 30, 2016 and December 31, 2015 (in thousands, at par value).

 
June 30, 2016
 
December 31, 2015
Fixed-rate
$
12,208,600

 
$
11,759,035

Variable-rate
6,350,000

 
3,625,000

Step-up
1,902,000

 
2,510,000

Step-down
250,000

 
150,000

Total par value
$
20,710,600

 
$
18,044,035



21

At June 30, 2016 and December 31, 2015, 95 percent and 90 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped to a variable rate.
Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at June 30, 2016 and December 31, 2015, by contractual maturity (dollars in thousands):
 
 
June 30, 2016
 
December 31, 2015
Contractual Maturity
 
Amount
 
Weighted Average
Interest Rate
 
Amount
 
Weighted Average
Interest Rate
Due in one year or less
 
$
12,175,865

 
0.58
%
 
$
5,811,410

 
0.75
%
Due after one year through two years
 
3,636,920

 
1.20

 
5,383,590

 
0.77

Due after two years through three years
 
1,635,095

 
1.30

 
3,313,585

 
1.54

Due after three years through four years
 
316,720

 
1.46

 
585,180

 
1.41

Due after four years through five years
 
1,907,000

 
1.59

 
1,275,000

 
1.56

Due after five years
 
1,039,000

 
1.85

 
1,675,270

 
2.00

Total par value
 
20,710,600

 
0.92
%
 
18,044,035

 
1.09
%
 
 
 
 
 
 
 
 
 
Premiums
 
4,862

 
 
 
11,612

 
 
Discounts
 
(1,997
)
 
 
 
(2,708
)
 
 
Debt issuance costs
 
(1,041
)
 
 
 
(1,267
)
 
 
Hedging adjustments
 
35,263

 
 
 
(26,980
)
 
 
Total
 
$
20,747,687

 
 
 
$
18,024,692

 
 

At June 30, 2016 and December 31, 2015, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):
 
June 30, 2016
 
December 31, 2015
Non-callable bonds
$
16,589,600

 
$
12,868,765

Callable bonds
4,121,000

 
5,175,270

Total par value
$
20,710,600

 
$
18,044,035


The following table summarizes the Bank’s consolidated obligation bonds outstanding at June 30, 2016 and December 31, 2015, by the earlier of contractual maturity or next possible call date (in thousands, at par value):
Contractual Maturity or Next Call Date
 
June 30, 2016
 
December 31, 2015
Due in one year or less
 
$
16,144,865

 
$
10,774,680

Due after one year through two years
 
3,338,920

 
4,888,590

Due after two years through three years
 
1,035,095

 
2,005,585

Due after three years through four years
 
111,720

 
245,180

Due after four years through five years
 
80,000

 
130,000

Total par value
 
$
20,710,600

 
$
18,044,035


     Discount Notes. At June 30, 2016 and December 31, 2015, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted
Average Implied
Interest Rate
 
 
 
 
 
 
June 30, 2016
$
30,047,547

 
$
30,068,618

 
0.37
%
 
 
 
 
 
 
December 31, 2015
$
20,541,329

 
$
20,544,821

 
0.18
%



22

Note 9—Affordable Housing Program (“AHP”)
The following table summarizes the changes in the Bank’s AHP liability during the six months ended June 30, 2016 and 2015 (in thousands):
 
Six Months Ended June 30,
 
2016
 
2015
Balance, beginning of period
$
22,710

 
$
25,998

AHP assessment
3,277

 
5,219

Grants funded, net of recaptured amounts
(4,692
)
 
(4,364
)
Balance, end of period
$
21,295

 
$
26,853


Note 10—Assets and Liabilities Subject to Offsetting
The Bank has derivatives and securities purchased under agreements to resell that are subject to enforceable master netting agreements or similar arrangements. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists. The Bank did not have any liabilities that were eligible to offset its securities purchased under agreements to resell (i.e., securities sold under agreements to repurchase) as of June 30, 2016 or December 31, 2015.
The Bank's derivative transactions are executed either bilaterally or, if required, cleared through a third-party central clearinghouse. The Bank has entered into master agreements with each of its bilateral derivative counterparties that provide for the netting of all transactions with each of these counterparties. Under its master agreements with its non-member bilateral derivative counterparties, collateral is delivered (or returned) daily when certain thresholds (ranging from $100,000 to $500,000) are met. The Bank offsets the fair value amounts recognized for bilaterally traded derivatives executed with the same counterparty, including any cash collateral remitted to or received from the counterparty. When entering into derivative transactions with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions with members consists of collateral that is eligible to secure advances and other obligations under the member's Advances and Security Agreement with the Bank. The Bank is not required to pledge collateral to its members to secure derivative positions. For cleared derivatives, all transactions with each clearing member of each clearinghouse are netted pursuant to legally enforceable setoff rights. Cleared derivatives are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral associated with cleared derivatives (i.e., initial and variation margin) is delivered (or returned) daily and is not subject to any maximum unsecured thresholds. The Bank offsets the fair value amounts recognized for cleared derivatives transacted with each clearing member of each clearinghouse, including cash collateral pledged or received.
The following table presents derivative instruments and securities purchased under agreements to resell with the legal right of offset, including the related collateral received from or pledged to counterparties as of June 30, 2016 and December 31, 2015 (in thousands).

23

 
 
Gross Amounts of Recognized Financial Instruments
 
Gross Amounts Offset in the Statement of Condition
 
Net Amounts Presented in the Statement of Condition
 
Collateral Not Offset in the Statement of Condition (1)
 
Net Unsecured Amount
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
Bilateral derivatives
 
$
33,676

 
$
(11,876
)
 
$
21,800

 
$
(21,310
)
(2) 
$
490

Cleared derivatives
 
50,809

 
(39,753
)
 
11,056

 
—

 
11,056

Total derivatives
 
84,485

 
(51,629
)
 
32,856

 
(21,310
)
 
11,546

Securities purchased under agreements to resell
 
3,250,000

 
—

 
3,250,000

 
(3,250,000
)
 
—

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,334,485

 
$
(51,629
)
 
$
3,282,856

 
$
(3,271,310
)
 
$
11,546

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
Bilateral derivatives
 
$
290,753

 
$
(284,886
)
 
$
5,867

 
$
—

 
$
5,867

Cleared derivatives
 
844,931

 
(844,931
)
 
—

 
—

(4) 
—

 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
1,135,684

 
$
(1,129,817
)
 
$
5,867

 
$
—

 
$
5,867

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
25,809

 
$
(8,110
)
 
$
17,699

 
$
(13,214
)
(3) 
$
4,485

Cleared derivatives
 
25,962

 
(20,581
)
 
5,381

 
—

 
5,381

Total derivatives
 
51,771

 
(28,691
)
 
23,080

 
(13,214
)
 
9,866

Securities purchased under agreements to resell
 
1,000,000

 
—

 
1,000,000

 
(1,000,000
)
 
—

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,051,771

 
$
(28,691
)
 
$
1,023,080

 
$
(1,013,214
)
 
$
9,866

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
300,494

 
$
(293,530
)
 
$
6,964

 
$
—

 
$
6,964

Cleared derivatives
 
257,480

 
(257,480
)
 
—

 
—

(4) 
—

 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
557,974

 
$
(551,010
)
 
$
6,964

 
$
—

 
$
6,964

_____________________________
(1) 
Any overcollateralization at an individual clearinghouse/clearing member or bilateral counterparty level is not included in the determination of the net unsecured amount.
(2) 
Consists of $19,601,000 of collateral pledged by member counterparties and $1,709,000 of securities pledged by non-member counterparties.
(3) 
Consists of collateral pledged by member counterparties.
(4) 
The Bank had pledged securities with an aggregate fair value of $643,922,000 and $300,184,000 at June 30, 2016 and December 31, 2015, respectively, to further secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.



24

Note 11—Derivatives and Hedging Activities
     Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. In addition, the Bank may use these instruments to hedge the variable cash flows associated with forecasted transactions. The Bank has not entered into any credit default swaps or foreign exchange-related derivatives and, as of June 30, 2016, it was not a party to any forward rate agreements.
The Bank uses interest rate exchange agreements in three ways: (1) by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment; (2) by designating the agreement as a cash flow hedge of a forecasted transaction; or (3) by designating the agreement as a hedge of some other defined risk (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to, among other things, manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to hedge the variable cash flows associated with forecasted transactions, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.
The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or anticipated transactions, or to act as an intermediary between its members and the Bank’s non-member derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.
At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. For fair value hedges, this process includes linking the derivatives to: (1) specific assets and liabilities on the statements of condition or (2) firm commitments. For cash flow hedges, this process includes linking the derivatives to forecasted transactions. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items or the cash flows associated with forecasted transactions and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.
     Investments — The Bank has invested in agency and non-agency MBS. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps.
A substantial portion of the Bank’s held-to-maturity securities are variable-rate MBS that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank has entered into interest rate cap agreements. These derivatives are treated as economic hedges.
Substantially all of the Bank's available-for-sale securities are fixed-rate agency and other highly rated debentures and agency commercial MBS. To hedge the interest rate risk associated with these fixed-rate investment securities, the Bank has entered into fixed-for-floating interest rate exchange agreements, which are designated as fair value hedges.
Advances — The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to approximate more closely the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.

25

A small portion of the Bank’s variable-rate advances are subject to interest rate caps that would limit the variable-rate coupons if short-term interest rates rise above a predetermined level. To hedge the cap risk embedded in these advances, the Bank generally enters into interest rate cap agreements. This type of hedge is treated as a fair value hedge.
The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
The Bank enters into optional advance commitments with its members. In an optional advance commitment, the Bank sells an option to the member that provides the member with the right to enter into an advance at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. Optional advance commitments involving Community Investment Program and Economic Development Program advances with a commitment period of three months or less are currently provided at no cost to members. The Bank may hedge an optional advance commitment through the use of an interest rate swaption. In this case, the swaption will function as the hedging instrument for both the commitment and, if the option is exercised by the member, the subsequent advance. These swaptions are treated as economic hedges.
     Consolidated Obligations — While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank is the primary obligor for the consolidated obligations it has issued or assumed from another FHLBank. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.
To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. These transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s fair value discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily effective federal funds rate) to another index rate (e.g., one-month or three-month LIBOR). These transactions are treated as economic hedges.
The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.
Forecasted Issuances of Consolidated Obligations — The Bank uses derivatives to hedge the variability of cash flows over a specified period of time as a result of the forecasted issuances and maturities of short-term, fixed-rate instruments, such as three-month consolidated obligation discount notes. Although each short-term consolidated obligation discount note has a fixed rate of interest, a portfolio of rolling consolidated obligation discount notes effectively has a variable interest rate. The variable cash flows associated with these liabilities are converted to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. The maturity dates of the cash flow streams are closely matched to the interest rate reset dates of the derivatives. These derivatives are treated as cash flow hedges.
     Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.
Other — From time to time, the Bank may enter into derivatives to hedge risks to its earnings that are not directly linked to specific assets, liabilities or forecasted transactions. These derivatives are treated as economic hedges.
     Accounting for Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the FASB’s Accounting Standards Codification (“ASC”) entitled “Derivatives and Hedging” (“ASC 815”). All derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists.
Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the

26

hedged item attributable to the hedged risk) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under ASC 815 is recorded as a component of net interest income.
If fair value hedging relationships meet certain criteria specified in ASC 815, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the fair value hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of hedge accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of committed advances to be eligible for the shortcut method of accounting as long as the settlement of the committed advance occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for shortcut accounting specified in ASC 815. The Bank has defined the market settlement convention to be five business days or less for advances.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in AOCI until earnings are affected by the variability of the cash flows of the hedged transaction. Any ineffective portion of a cash flow hedge (which represents the amount by which the change in the fair value of the derivative differs from the change in fair value of a hypothetical derivative having terms that match identically the critical terms of the hedged forecasted transaction) is recognized in other income (loss) as “net gains (losses) on derivatives and hedging activities.”
An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under ASC 815, but is an acceptable hedging strategy under the Bank’s Enterprise Market Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value changes associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.”
The Bank records the changes in fair value of all derivatives (and, in the case of fair value hedges, the hedged item) beginning on the trade date.
Cash flows associated with all derivatives are reported as cash flows from operating activities in the statements of cash flows, unless the derivative contains an other-than-insignificant financing element, in which case its cash flows are reported as cash flows from financing activities.
The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.
The Bank discontinues hedge accounting prospectively when: (1) management determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) it is no longer probable that a forecasted transaction will occur within the originally specified time frame; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument in accordance with ASC 815 is no longer appropriate.
In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing any additional changes in the fair value of the derivative in current period earnings.

27

When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for hedge accounting treatment or because the derivative is terminated, the Bank will cease to adjust the hedged asset or liability for changes in fair value and amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
When cash flow hedge accounting for a specific derivative is discontinued due to the Bank's determination that such derivative no longer qualifies for hedge accounting treatment or because the derivative is terminated, the Bank will reclassify the cumulative fair value gains or losses recorded in AOCI as of the discontinuance date from AOCI into earnings when earnings are affected by the original forecasted transaction, except in cases where the cash flow hedge is discontinued because the forecasted transaction is no longer probable (i.e., the forecasted transaction will not occur in the originally expected period or within an additional two-month period of time thereafter). In such cases, any fair value gains or losses recorded in AOCI as of the determination date are immediately reclassified to earnings as a component of "gains (losses) on derivatives and hedging activities." Similarly, if the Bank expects at any time that continued reporting of a net loss in AOCI would lead to recognizing a net loss on the combination of the hedging instrument and hedged transaction in one or more future periods, the amount that is not expected to be recovered is immediately reclassified to earnings as a component of "gains (losses) on derivatives and hedging activities."


28

 Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at June 30, 2016 and December 31, 2015 (in thousands).
 
 
June 30, 2016
 
December 31, 2015
 
 
Notional Amount of
Derivatives
 
Estimated Fair Value
 
Notional Amount of
Derivatives
 
Estimated Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
5,197,614

 
$
12

 
$
184,915

 
$
4,800,307

 
$
3,176

 
$
126,161

Available-for-sale securities
 
12,077,118

 
—

 
913,061

 
9,375,109

 
11,109

 
401,543

Consolidated obligation bonds
 
13,623,965

 
53,792

 
2,377

 
12,988,035

 
21,319

 
16,273

Consolidated obligation discount notes
 
375,000

 
—

 
16,110

 
100,000

 
—

 
1,508

Interest rate swaptions related to advances
 
5,000

 
10

 
1

 
4,000

 
17

 
—

Total derivatives designated as hedging
   instruments under ASC 815
 
31,278,697

 
53,814

 
1,116,464

 
27,267,451

 
35,621

 
545,485

Derivatives not designated as hedging
   instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
64,500

 
—

 
267

 
1,500

 
2

 
—

Available-for-sale securities
 
2,624

 
—

 
219

 
2,625

 
21

 
40

Trading securities
 
—

 
—

 
—

 
100,000

 
1,270

 
—

Consolidated obligation discount notes
 
4,708,935

 
2,996

 
60

 
—

 
—

 
—

Intermediary transactions
 
320,372

 
19,601

 
18,453

 
1,925,960

 
13,480

 
11,810

Other
 
275,000

 
7,638

 
—

 
—

 
—

 
—

Mortgage delivery commitments
 
580

 
3

 
—

 
—

 
—

 
—

Interest rate caps
 

 

 

 

 

 

Held-to-maturity securities
 
1,200,000

 
212

 
—

 
1,650,000

 
738

 
—

Intermediary transactions
 
80,000

 
221

 
221

 
80,000

 
639

 
639

Total derivatives not designated as
    hedging instruments under ASC 815
 
6,652,011

 
30,671

 
19,220

 
3,760,085

 
16,150

 
12,489

Total derivatives before collateral and netting adjustments
 
$
37,930,708

 
84,485

 
1,135,684

 
$
31,027,536

 
51,771

 
557,974

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash collateral and related accrued interest
 
 
 
(2,761
)
 
(1,080,949
)
 
 
 
(1,617
)
 
(523,936
)
Netting adjustments
 
 
 
(48,868
)
 
(48,868
)
 
 
 
(27,074
)
 
(27,074
)
Total collateral and netting adjustments(1)
 
 
 
(51,629
)
 
(1,129,817
)
 
 
 
(28,691
)
 
(551,010
)
Net derivative balances reported in statements of condition
 
 
 
$
32,856

 
$
5,867

 
 
 
$
23,080

 
$
6,964

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

29

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and six months ended June 30, 2016 and 2015 (in thousands).

 
Gain (Loss) Recognized in Earnings for the
 
Gain (Loss) Recognized in Earnings for the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Derivatives and hedged items in ASC 815 fair value hedging relationships
 
 
 
 
 
 
 
Interest rate swaps
$
(11,911
)
 
$
7,999

 
$
(25,219
)
 
$
10,230

Interest rate swaptions
1

 
—

 
(7
)
 
—

Total net gain (loss) related to fair value hedge ineffectiveness
(11,910
)
 
7,999

 
(25,226
)
 
10,230

Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
Interest rate swaps
7,313

 
1,055

 
3,929

 
2,994

Net interest income on interest rate swaps
813

 
69

 
981

 
101

Interest rate caps
(119
)
 
(674
)
 
(526
)
 
(639
)
Mortgage delivery commitments
82

 
—

 
82

 
—

Total net gain related to derivatives not designated as hedging instruments under ASC 815
8,089

 
450

 
4,466

 
2,456

Net gains (losses) on derivatives and hedging activities reported in the statements of income
$
(3,821
)
 
$
8,449

 
$
(20,760
)
 
$
12,686

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in ASC 815 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and six months ended June 30, 2016 and 2015 (in thousands).
Hedged Item
 
Gain (Loss) on
Derivatives
 
Gain (Loss) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness (1)
 
Derivative Net
Interest Income
 (Expense)(2)
Three Months Ended June 30, 2016
 
 

 
 

 
 

 
 

Advances
 
$
(14,392
)
 
$
14,134

 
$
(258
)
 
$
(16,555
)
Available-for-sale securities
 
(222,847
)
 
212,135

 
(10,712
)
 
(37,057
)
Consolidated obligation bonds
 
8,091

 
(9,031
)
 
(940
)
 
15,592

Total
 
$
(229,148
)
 
$
217,238

 
$
(11,910
)
 
$
(38,020
)
Three Months Ended June 30, 2015
 
 

 
 

 
 

 
 

Advances
 
$
36,433

 
$
(36,060
)
 
$
373

 
$
(22,884
)
Available-for-sale securities
 
108,399

 
(102,238
)
 
6,161

 
(27,393
)
Consolidated obligation bonds
 
(27,419
)
 
28,884

 
1,465

 
38,177

Total
 
$
117,413

 
$
(109,414
)
 
$
7,999

 
$
(12,100
)
Six Months Ended June 30, 2016
 
 

 
 

 
 

 
 

Advances
 
$
(65,559
)
 
$
65,226

 
$
(333
)
 
$
(34,404
)
Available-for-sale securities
 
(537,446
)
 
516,095

 
(21,351
)
 
(75,195
)
Consolidated obligation bonds
 
57,835

 
(61,377
)
 
(3,542
)
 
33,345

Total
 
$
(545,170
)
 
$
519,944

 
$
(25,226
)
 
$
(76,254
)
Six Months Ended June 30, 2015
 
 

 
 

 
 

 
 

Advances
 
$
17,098

 
$
(16,302
)
 
$
796

 
$
(46,982
)
Available-for-sale securities
 
58,861

 
(50,966
)
 
7,895

 
(52,930
)
Consolidated obligation bonds
 
6,644

 
(5,105
)
 
1,539

 
67,130

Total
 
$
82,603

 
$
(72,373
)
 
$
10,230

 
$
(32,782
)
_____________________________
(1) 
Reported as net gains (losses) on derivatives and hedging activities in the statements of income.
(2) 
The net interest income (expense) associated with derivatives in ASC 815 fair value hedging relationships is reported in the statements of income in the interest income/expense line item for the indicated hedged item.

30

The following table presents, by type of hedged item in ASC 815 cash flow hedging relationships, the gains (losses) on derivatives recognized in other comprehensive income and the gains (losses) reclassified from AOCI into earnings for the three and six months ended June 30, 2016 (in thousands). The Bank did not have any derivatives designated in cash flow hedging relationships during the six months ended June 30, 2015.
Derivatives in Cash Flow Hedging Relationships
 
Amount of Losses Recognized in Other Comprehensive Income on Derivatives
(Effective Portion)
 
Amount of Losses Reclassified from AOCI into Interest Expense
(Effective Portion) (1)
 
Amount of Gains (Losses) Recognized in Net Gains (Losses) on Derivatives and Hedging Activities
 (Ineffective Portion)
Three Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swaps related to anticipated issuances of consolidated obligation discount notes
 
$
9,768

 
$
941

 
$
—

Six Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swaps related to anticipated issuances of consolidated obligation discount notes
 
$
15,127

 
$
1,580

 
$
—

_____________________________
(1) 
Represents net interest expense associated with the derivatives.

For the three and six months ended June 30, 2016, there were no amounts reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time periods or within two-month periods thereafter. At June 30, 2016, $4,111,000 of deferred net losses on derivative instruments in AOCI are expected to be reclassified to earnings during the next 12 months. At June 30, 2016, the maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions is 10 years.
Credit Risk Related to Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. The Bank manages derivative counterparty credit risk through the use of master netting agreements or other similar collateral exchange arrangements, credit analysis, and adherence to the requirements set forth in the Bank’s Enterprise Market Risk Management Policy, Enterprise Credit Risk Management Policy, and Finance Agency regulations. The Bank has transacted some of its interest rate exchange agreements bilaterally with large financial institutions under master netting agreements (as of June 30, 2016, the notional balance of outstanding transactions with non-member bilateral counterparties and member counterparties totaled $10.2 billion and $0.2 billion, respectively). Some of these institutions (or their affiliates) buy, sell, and distribute consolidated obligations. The remainder of the Bank's interest rate exchange agreements have been cleared through third-party central clearinghouses (as of June 30, 2016, the notional balance of cleared transactions outstanding totaled $27.5 billion). With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank.
The notional amount of the Bank's interest rate exchange agreements does not reflect its credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position. The net exposure on derivative agreements is presented in Note 10. Based on the netting provisions and collateral requirements associated with its derivative agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.


31

Note 12—Capital
At all times during the six months ended June 30, 2016, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30, 2016
 
December 31, 2015
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 
 
 
 
 
 
 
Risk-based capital
$
658,720

 
$
2,598,183

 
$
493,617

 
$
2,311,264

Total capital
$
2,177,528

 
$
2,598,183

 
$
1,683,332

 
$
2,311,264

Total capital-to-assets ratio
4.00
%
 
4.77
%
 
4.00
%
 
5.49
%
Leverage capital
$
2,721,910

 
$
3,897,275

 
$
2,104,165

 
$
3,466,896

Leverage capital-to-assets ratio
5.00
%
 
7.16
%
 
5.00
%
 
8.24
%
Members are required to maintain an investment in Class B Capital Stock equal to the sum of a membership investment requirement and an activity-based investment requirement. The membership investment requirement is currently 0.04 percent of each member’s total assets as of December 31, 2015, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.1 percent of outstanding advances, except as described below.
On September 21, 2015, the Bank announced a Board-authorized reduction in the activity-based stock investment
requirement from 4.1 percent to 2.0 percent for certain advances that were funded during the period from October 21, 2015
through December 31, 2015. To be eligible for the reduced activity-based investment requirement, advances funded during this
period had to have a minimum maturity of one year or greater, among other things. The standard activity-based stock investment requirement of 4.1 percent continued to apply to all other advances that were funded during the period from October 21, 2015 through December 31, 2015.
The Bank generally repurchases surplus stock quarterly. For the repurchases that occurred during the six months ended June 30, 2016, surplus stock was defined as the amount of stock held by a shareholder in excess of 125 percent of the shareholder’s minimum investment requirement. For those repurchases, which occurred on June 27, 2016 and February 25, 2016, a shareholder's surplus stock was not repurchased if: (1) the amount of that shareholder's surplus stock was $2,500,000 or less, (2) the shareholder elected to opt-out of the repurchase, or (3) the shareholder was on restricted collateral status (subject to certain exceptions). On June 27, 2016 and February 25, 2016, the Bank repurchased surplus stock totaling $60,999,000 and $103,707,000, respectively, none of which was classified as mandatorily redeemable capital stock at those dates. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

Note 13—Employee Retirement Plans
The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost (credit) related to this program for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
5

 
$
5

 
$
11

 
$
10

Interest cost
8

 
12

 
15

 
24

Amortization of prior service cost
5

 
2

 
10

 
4

Amortization of net actuarial gain
(25
)
 
(20
)
 
(49
)
 
(41
)
Net periodic benefit credit
$
(7
)
 
$
(1
)
 
$
(13
)
 
$
(3
)

Note 14—Estimated Fair Values
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. U.S. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S.

32

GAAP also requires an entity to disclose the level within the fair value hierarchy in which each measurement is classified. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
     Level 1 Inputs — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
     Level 2 Inputs — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).
     Level 3 Inputs — Unobservable inputs for the asset or liability that are supported by little or no market activity. None of the Bank’s assets or liabilities that are recorded at fair value on a recurring basis were measured using significant Level 3 inputs.
For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. Reclassifications, if any, would be reported as transfers as of the beginning of the quarter in which the changes occurred. For the six months ended June 30, 2016 and 2015, the Bank did not reclassify any fair value measurements.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2016 and December 31, 2015. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Tables may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, the fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.
The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.
     Cash and due from banks. The estimated fair value equals the carrying value.
     Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.
     Securities purchased under agreements to resell and federal funds sold. All federal funds sold and securities purchased under agreements to resell represent overnight balances. The estimated fair values approximate the carrying values.
     Trading, available-for-sale and held-to-maturity securities. To value its holdings of U.S. Treasury Notes classified as trading securities, all of its available-for-sale securities, and its held-to-maturity MBS holdings and state housing agency debentures, the Bank obtains prices from three designated third-party pricing vendors when available.
The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.
A "median" price is first established for each security using a formula that is based upon the number of prices received. If three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to some type of validation similar to the evaluation of outliers described below. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the

33

default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
As of June 30, 2016, three vendor prices were received for substantially all of the Bank’s trading, available-for-sale and held-to-maturity securities referred to above and the final prices for substantially all of those securities were computed by averaging the three prices. Based on the Bank's understanding of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the Bank's additional analyses), the Bank believes its final prices result in reasonable estimates of the fair values and that the fair value measurements are classified appropriately in the fair value hierarchy.
The Bank estimates the fair values of its held-to-maturity government-guaranteed debentures using a pricing model and observable market data (i.e., the U.S. Government Agency Fair Value curve and, for debentures containing call features, swaption volatility).
To value its mutual fund investments classified as trading securities, the Bank obtains quoted prices for identical securities.
     Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances using the replacement advance rates for advances with similar terms and, for advances containing options, swaption volatility. This amount is then reduced for accrued interest receivable. Each FHLBank prices advances at a spread to its cost of funds. Each FHLBank's cost of funds approximates the "CO curve," which is derived by adding to the U.S. Treasury curve indicative spreads obtained from market-observable sources. The indicative spreads are generally derived from dealer pricing indications, recent trades, secondary market activity and historical pricing relationships.
     Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based upon the prices for to-be-announced ("TBA") securities, which represent quoted market prices for forward-settling agency MBS. The prices are adjusted for differences in coupon, cost to carry, vintage, remittance type and product type between the Bank's mortgage loans and the referenced TBA MBS. The prices of the referenced TBA MBS and the Bank's mortgage loans are highly dependent upon current mortgage rates and the market's expectations of future mortgage rates and prepayments.
     Accrued interest receivable and payable. The estimated fair value of accrued interest receivable and payable approximates the carrying value due to their short-term nature.
     Derivative assets/liabilities. The fair values of the Bank’s interest rate swap and swaption agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate curves (that is, the relevant LIBOR swap curve and, for purposes of discounting, the overnight index swap ("OIS") curve) and, for agreements containing options, swaption volatility). The fair values of the Bank’s interest rate caps are also estimated using a pricing model with inputs that are observable in the market (that is, cap volatility, the relevant LIBOR swap curve and, for purposes of discounting, the OIS curve).
As the collateral and netting provisions of the Bank’s arrangements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 10), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to non-binding dealer estimates (in the case of bilateral derivatives) and clearinghouse valuations (in the case of cleared derivatives) and may also compare its fair values to those of similar instruments to ensure that the fair values are reasonable.
The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; the estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of the Bank's bilateral derivatives are netted by counterparty pursuant to the provisions of the credit support annexes to the Bank’s master netting agreements with its non-member bilateral derivative counterparties. The Bank's cleared derivative transactions with each clearing member of each clearinghouse are netted pursuant to the Bank's arrangements with those parties. In each case, if the netted amounts are positive, they are classified as an asset and, if negative, as a liability.
     Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on replacement funding rates for liabilities with similar terms. The estimated fair value approximates the carrying value for deposits with variable rates and fixed rates with three months or less to their maturity or repricing date.
     Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and

34

reducing this amount for accrued interest payable. The inputs to the valuation are the CO curve and, for consolidated obligations containing options, swaption volatility.
     Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.
     Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, was not material at June 30, 2016 or December 31, 2015.
The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at June 30, 2016 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
123,907

 
$
123,907

 
$
123,907

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
 
300

 
300

 
—

 
300

 
—

 
—

Securities purchased under agreements to resell
 
3,250,000

 
3,250,000

 
—

 
3,250,000

 
—

 
—

Federal funds sold
 
3,944,000

 
3,944,000

 
—

 
3,944,000

 
—

 
—

Trading securities (1)
 
118,886

 
118,886

 
9,320

 
109,566

 
—

 
—

Available-for-sale securities (1)
 
12,827,358

 
12,827,358

 
—

 
12,827,358

 
—

 
—

Held-to-maturity securities
 
2,841,724

 
2,859,952

 
—

 
2,743,047

(2) 
116,905

(3) 
—

Advances
 
31,122,698

 
31,169,545

 
—

 
31,169,545

 
—

 
—

Mortgage loans held for portfolio, net
 
66,868

 
72,201

 
—

 
72,201

 
—

 
—

Accrued interest receivable
 
82,527

 
82,527

 
—

 
82,527

 
—

 
—

Derivative assets (1)
 
32,856

 
32,856

 
—

 
84,485

 
—

 
(51,629
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
850,662

 
850,640

 
—

 
850,640

 
—

 
—

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
30,047,547

 
30,049,473

 
—

 
30,049,473

 
—

 
—

Bonds
 
20,747,687

 
20,768,116

 
—

 
20,768,116

 
—

 
—

Mandatorily redeemable capital stock
 
3,251

 
3,251

 
3,251

 
—

 
—

 
—

Accrued interest payable
 
33,223

 
33,223

 
—

 
33,223

 
—

 
—

Derivative liabilities (1)
 
5,867

 
5,867

 
—

 
1,135,684

 
—

 
(1,129,817
)
___________________________
(1) 
Financial instruments measured at fair value on a recurring basis as of June 30, 2016.
(2) 
Consists of the Bank's holdings of U.S. government-guaranteed debentures, state housing agency obligations, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3) 
Consists of the Bank's holdings of non-agency RMBS.
(4) 
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

35

The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2015 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
837,202

 
$
837,202

 
$
837,202

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
 
260

 
260

 
—

 
260

 
—

 
—

Security purchased under agreement to resell
 
1,000,000

 
1,000,000

 
—

 
1,000,000

 
—

 
—

Federal funds sold
 
2,171,000

 
2,171,000

 
—

 
2,171,000

 
—

 
—

Trading securities (1)
 
211,056

 
211,056

 
8,857

 
202,199

 
—

 
—

Available-for-sale securities (1)
 
9,713,191

 
9,713,191

 
—

 
9,713,191

 
—

 
—

Held-to-maturity securities
 
3,228,011

 
3,262,283

 
—

 
3,127,584

(2) 
134,699

(3) 
—

Advances
 
24,746,802

 
24,795,949

 
—

 
24,795,949

 
—

 
—

Mortgage loans held for portfolio, net
 
55,117

 
60,756

 
—

 
60,756

 
—

 
—

Accrued interest receivable
 
69,676

 
69,676

 
—

 
69,676

 
—

 
—

Derivative assets (1)
 
23,080

 
23,080

 
—

 
51,771

 
—

 
(28,691
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,045,958

 
1,045,956

 
—

 
1,045,956

 
—

 
—

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
20,541,329

 
20,539,576

 
—

 
20,539,576

 
—

 
—

Bonds
 
18,024,692

 
17,994,494

 
—

 
17,994,494

 
—

 
—

Mandatorily redeemable capital stock
 
8,929

 
8,929

 
8,929

 
—

 
—

 
—

Accrued interest payable
 
38,972

 
38,972

 
—

 
38,972

 
—

 
—

Derivative liabilities (1)
 
6,964

 
6,964

 
—

 
557,974

 
—

 
(551,010
)
___________________________
(1) 
Financial instruments measured at fair value on a recurring basis as of December 31, 2015.
(2) 
Consists of the Bank's holdings of U.S. government-guaranteed debentures, state housing agency obligations, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3) 
Consists of the Bank's holdings of non-agency RMBS.
(4) 
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.
The Bank did not record any non-credit other-than-temporary impairment losses during the three months ended June 30, 2016. During the three months ended March 31, 2016, the Bank recorded non-credit other-than-temporary impairment losses on one of its non-agency RMBS classified as held-to-maturity. Based on the lack of significant market activity for non-agency RMBS, the nonrecurring fair value measurement for this impaired security was classified as a Level 3 measurement in the fair value hierarchy. Three third-party vendor prices were received for this security and the average of the three prices was used to determine the final fair value measurement.



36

Note 15—Commitments and Contingencies
Joint and several liability. The Bank is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. At June 30, 2016, the par amount of the other 10 FHLBanks’ outstanding consolidated obligations was approximately $913 billion. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank expected that it would be required to pay any amounts on behalf of its co-obligors under its joint and several liability, the Bank would charge to income the amount of the expected payment. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood that it would have to pay any amounts beyond those for which it is primarily liable is remote.
Other commitments and contingencies. At June 30, 2016 and December 31, 2015, the Bank had commitments to make additional advances totaling approximately $25,089,000 and $36,892,000, respectively. In addition, outstanding standby letters of credit totaled $8,916,992,000 and $7,180,763,000 at June 30, 2016 and December 31, 2015, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these letters of credit (see Note 7).
At June 30, 2016 and December 31, 2015, the Bank had commitments to issue $261,365,000 and $90,000,000, respectively, of consolidated obligation bonds, all of which were hedged with interest rate swaps. At June 30, 2016 and December 31, 2015, the Bank had commitments to issue $6,000,000 and $750,000,000, respectively, of consolidated obligation discount notes, none of which were hedged.
The Bank has transacted interest rate exchange agreements with large financial institutions and third-party clearinghouses that are subject to collateral exchange arrangements. As of June 30, 2016 and December 31, 2015, the Bank had pledged cash collateral of $1,080,856,000 and $523,871,000, respectively, to those parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in the statements of condition. In addition, as of June 30, 2016 and December 31, 2015, the Bank had pledged securities with carrying values (and fair values) of $643,922,000 and $300,184,000, respectively, to parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged securities may be rehypothecated and are not netted against derivative assets and liabilities in the statements of condition.
In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.

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


37

Note 17 — Transactions with Other FHLBanks
Occasionally, the Bank loans (or borrows) short-term federal funds to (or from) other FHLBanks. During the six months ended June 30, 2016 and 2015, interest income from loans to other FHLBanks totaled $971 and $4,013, respectively. The following table summarizes the Bank’s loans to other FHLBanks during the six months ended June 30, 2016 and 2015 (in thousands).
 
Six Months Ended June 30,
 
2016
 
2015
Balance at January 1,
$
—

 
$
—

Loans made to:
 
 
 
FHLBank of San Francisco
—

 
840,000

FHLBank of Des Moines
—

 
200,000

FHLBank of Boston
—

 
200,000

FHLBank of Topeka
92,000

 
55,000

Collections from:
 
 
 
FHLBank of San Francisco
—

 
(840,000
)
FHLBank of Des Moines
—

 
(200,000
)
FHLBank of Boston
—

 
(200,000
)
FHLBank of Topeka
(92,000
)
 
(55,000
)
Balance at June 30,
$
—

 
$
—

During the six months ended June 30, 2016 and 2015, interest expense on borrowings from other FHLBanks totaled $1,021 and $3,686, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the six months ended June 30, 2016 and 2015 (in thousands).
 
Six Months Ended June 30,
 
2016
 
2015
Balance at January 1,
$
—

 
$
—

Borrowings from:
 
 
 
FHLBank of San Francisco
—

 
255,000

FHLBank of Topeka
105,000

 
360,000

FHLBank of Atlanta
—

 
250,000

FHLBank of Boston
—

 
475,000

Repayments to:
 
 
 
FHLBank of San Francisco
—

 
(255,000
)
FHLBank of Topeka
(105,000
)
 
(360,000
)
FHLBank of Atlanta
—

 
(250,000
)
FHLBank of Boston
—

 
(475,000
)
Balance at June 30,
$
—

 
$
—


 

38

Note 18 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of AOCI for the three and six months ended June 30, 2016 and 2015 (in thousands).
 
Net Unrealized
 Gains (Losses) on
 Available-for-Sale
 Securities (1)
 
Net Unrealized Losses on Cash Flow Hedges
 
Non-Credit Portion of
 Other-than-Temporary
 Impairment Losses on
 Held-to-Maturity Securities
 
Postretirement
 Benefits
 
Total
 AOCI
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Balance at April 1, 2016
$
(77,264
)
 
$
(5,567
)
 
$
(20,432
)
 
$
1,459

 
$
(101,804
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Realized gains on sales of available-for-sale securities included in net income
(3,564
)
 
—

 
—

 
—

 
(3,564
)
Losses on cash flow hedges included in interest expense
—

 
941

 
—

 
—

 
941

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities recognized as credit losses in net income
—

 
—

 
4

 
—

 
4

Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense
—

 
—

 
—

 
(20
)
 
(20
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net unrealized losses on available-for-sale securities
(11,129
)
 
—

 
—

 
—

 
(11,129
)
Unrealized losses on cash flow hedges
—

 
(9,768
)
 
—

 
—

 
(9,768
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
—

 
—

 
1,183

 
—

 
1,183

Total other comprehensive income (loss)
(14,693
)
 
(8,827
)
 
1,187

 
(20
)
 
(22,353
)
Balance at June 30, 2016
$
(91,957
)
 
$
(14,394
)
 
$
(19,245
)
 
$
1,439

 
$
(124,157
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Balance at April 1, 2015
$
22,072

 
$
—

 
$
(25,708
)
 
$
1,317

 
$
(2,319
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense
—

 
—

 
—

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

 
—

 
—

 
—

 
3,031

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

 
—

 
(42
)
 
—

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

 
—

 
1,627

 
—

 
1,627

Total other comprehensive income (loss)
3,031

 
—

 
1,585

 
(18
)
 
4,598

Balance at June 30, 2015
$
25,103

 
$
—

 
$
(24,123
)
 
$
1,299

 
$
2,279

 
 
 
 
 
 
 
 
 
 

39

 
Net Unrealized
 Gains (Losses) on
 Available-for-Sale
 Securities (1)
 
Net Unrealized Loss on Cash Flow Hedge
 
Non-Credit Portion of
 Other-than-Temporary
 Impairment Losses on
 Held-to-Maturity Securities
 
Postretirement
 Benefits
 
Total
 AOCI
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
(82,278
)
 
$
(847
)
 
$
(21,376
)
 
$
1,478

 
$
(103,023
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Realized gains on sales of available-for-sale securities included in net income
(4,215
)
 
—

 
—

 
—

 
(4,215
)
Losses on cash flow hedges included in interest expense
—

 
1,580

 
—

 
—

 
1,580

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities recognized as credit losses in net income
—

 
—

 
4

 
—

 
4

Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense
—

 
—

 
—

 
(39
)
 
(39
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net unrealized losses on available-for-sale securities
(5,464
)
 
—

 
—

 
—

 
(5,464
)
Unrealized losses on cash flow hedges
—

 
(15,127
)
 
—

 
—

 
(15,127
)
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
—

 
—

 
(302
)
 
—

 
(302
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
—

 
—

 
2,429

 
—

 
2,429

Total other comprehensive income (loss)
(9,679
)
 
(13,547
)
 
2,131

 
(39
)
 
(21,134
)
Balance at June 30, 2016
$
(91,957
)
 
$
(14,394
)
 
$
(19,245
)
 
$
1,439

 
$
(124,157
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
22,412

 
$
—

 
$
(27,349
)
 
$
1,336

 
$
(3,601
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Realized gains on sales of available-for-sale securities included in net income
(2,345
)
 
—

 
—

 
—

 
(2,345
)
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense
—

 
—

 
—

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

 
—

 
—

 
—

 
5,036

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

 
 
 
(75
)
 
—

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

 
—

 
3,301

 
—

 
3,301

Total other comprehensive income (loss)
2,691

 
—

 
3,226

 
(37
)
 
5,880

Balance at June 30, 2015
$
25,103

 
$
—

 
$
(24,123
)
 
$
1,299

 
$
2,279

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

40

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included in “Item 1. Financial Statements.”
Forward-Looking Information
This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (the “Bank”) about its future results, performance, liquidity, financial condition, prospects and opportunities. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual results to differ materially from those expressed or implied in these forward-looking statements, or could affect the extent to which a particular objective, projection, estimate or prediction is realized. As a result, undue reliance should not be placed on these statements.
These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, changes in the ratings on the Bank’s debt, adverse consequences resulting from a significant regional, national or global economic downturn (including, but not limited to, reduced demand for the Bank's products and services), credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a government-sponsored enterprise (“GSE”), or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of a significant amount of member borrowings through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see “Item 1A — Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on March 22, 2016 (the “2015 10-K”). The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
Overview
Business
The Bank is one of 11 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Federal Home Loan Banks Office of Finance ("Office of Finance"), a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932. The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s stated mission is to ensure that the housing GSEs, including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.
The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies, credit unions, and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994. While not members of the Bank, housing associates, including state and local housing authorities, that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of investments, substantially all of which are highly rated, for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a small portfolio of government-guaranteed/insured and conventional mortgage loans, the majority of which were acquired during the period from 1998 to mid-2003 through the Mortgage Partnership Finance® (“MPF”®) Program offered by the FHLBank of Chicago. During the first half of 2016, the Bank resumed acquiring conventional mortgage loans through the MPF Program; during the period, $18.8 million of mortgage loans were acquired. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend

41

that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.
The Bank’s capital stock is not publicly traded and can be held only by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank's stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, that transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.
The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 11 FHLBanks. Consolidated obligations are issued through the Office of Finance (acting as agent for the FHLBanks) and generally are publicly traded in the over-the-counter market. The Bank records on its statements of condition only those consolidated obligations for which it receives the proceeds. Consolidated obligations are not obligations of the U.S. government and the U.S. government does not guarantee them. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by Standard & Poor’s (“S&P”). These ratings indicate that each of these nationally recognized statistical rating organizations ("NRSROs") has concluded that the FHLBanks have a very strong capacity to meet their commitments to pay principal and interest on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks’ GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members are also sources of funds for the Bank.
In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits and letters of credit. As of June 30, 2016, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks and S&P had rated each of the FHLBanks AA+/A-1+.
Shareholders, bondholders and prospective shareholders and bondholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.
The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps, swaptions and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging.”
The Bank’s profitability objective is to generate sufficient earnings to allow the Bank to continue to increase its retained earnings and pay dividends on capital stock at rates that meet the Bank's dividend targets. The Bank's target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter, with the expectation that dividend rates on Class B-1 Stock will not be lower than an annualized rate of 0.375 percent (the rate paid on previously outstanding Class B shares during the period from 2010 through 2015). The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates the average one-month LIBOR rate for the preceding quarter plus 0.5 - 1.0 percent. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.
The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.

42

The following table summarizes the Bank’s membership, by type of institution, as of June 30, 2016 and December 31, 2015.
MEMBERSHIP SUMMARY
 
June 30, 2016
 
December 31, 2015
Commercial banks
628

 
631

Thrifts
60

 
59

Credit unions
106

 
104

Insurance companies
36

 
36

Community Development Financial Institutions
5

 
5

Total members
835

 
835

Housing associates
8

 
8

Non-member borrowers
9

 
11

Total
852

 
854

Community Financial Institutions (“CFIs”) (1)
626

 
636

_____________________________
(1) 
The figures shown reflect the number of members that were Community Financial Institutions as of June 30, 2016 and December 31, 2015 based upon the definitions of Community Financial Institutions that applied as of those dates.
For 2016, Community Financial Institutions (“CFIs”) are defined to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets as of December 31, 2015, 2014 and 2013 of less than $1.128 billion. For 2015, CFIs were defined as FDIC-insured institutions with average total assets as of December 31, 2014, 2013 and 2012 of less than $1.123 billion.
Financial Market Conditions
Economic growth in the United States expanded moderately during the second quarter of 2016. The gross domestic product increased at an annual rate of 1.2 percent during the second quarter of 2016, after increasing at an annual rate of 0.8 percent during the first quarter of 2016 and 2.6 percent during 2015. The nationwide unemployment rate fell to 4.9 percent at June 30, 2016, down from 5.0 percent at both March 31, 2016 and December 31, 2015. Housing prices continued to improve in most major metropolitan areas.
The Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0.25 percent and 0.50 percent throughout the first six months of 2016. At its July 2016 meeting, the FOMC stated that it expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
One-month and three-month LIBOR increased slightly during the first six months of 2016, with one-month and three-month LIBOR ending the second quarter at 0.47 percent and 0.65 percent, respectively, as compared to 0.43 percent and 0.61 percent, respectively, at the end of 2015.

43

The following table presents information on various market interest rates at June 30, 2016 and December 31, 2015 and various average market interest rates for the three-month and six-month periods ended June 30, 2016 and 2015.
 
Ending Rate
 
Average Rate
 
Average Rate
 
June 30, 2016
 
December 31, 2015
 
Second Quarter 2016
 
Second Quarter 2015
 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
Federal Funds Target (1)
0.50%
 
0.50%
 
0.50%
 
0.25%
 
0.50%
 
0.25%
Average Effective Federal Funds Rate (2)
0.30%
 
0.20%
 
0.37%
 
0.13%
 
0.36%
 
0.12%
1-month LIBOR (1)
0.47%
 
0.43%
 
0.44%
 
0.18%
 
0.44%
 
0.18%
3-month LIBOR (1)
0.65%
 
0.61%
 
0.64%
 
0.28%
 
0.63%
 
0.27%
2-year LIBOR (1)
0.73%
 
1.18%
 
0.91%
 
0.86%
 
0.90%
 
0.85%
5-year LIBOR (1)
0.98%
 
1.74%
 
1.21%
 
1.66%
 
1.25%
 
1.63%
10-year LIBOR (1)
1.36%
 
2.19%
 
1.61%
 
2.24%
 
1.69%
 
2.16%
3-month U.S. Treasury (1)
0.26%
 
0.16%
 
0.26%
 
0.02%
 
0.27%
 
0.02%
2-year U.S. Treasury (1)
0.58%
 
1.06%
 
0.77%
 
0.61%
 
0.80%
 
0.61%
5-year U.S. Treasury (1)
1.01%
 
1.76%
 
1.24%
 
1.53%
 
1.30%
 
1.49%
10-year U.S. Treasury (1)
1.49%
 
2.27%
 
1.75%
 
2.16%
 
1.83%
 
2.07%
_____________________________
(1) 
Source: Bloomberg
(2) 
Source: Federal Reserve Statistical Release
Year-to-Date 2016 Summary
•
The Bank ended the second quarter of 2016 with total assets of $54.4 billion compared with $42.1 billion at the end of 2015. The $12.3 billion increase in total assets during the six-month period was attributable primarily to increases in the Bank's advances ($6.4 billion), short-term liquidity portfolio ($3.2 billion) and long-term investments ($2.6 billion).
•
Total advances increased from $24.7 billion at December 31, 2015 to $31.1 billion at June 30, 2016.
•
The Bank’s net income for the three and six months ended June 30, 2016 was $21.2 million and $29.5 million, respectively, as compared to $23.9 million and $47.0 million, respectively, during the corresponding periods in 2015. The decrease of $2.7 million for the three months ended June 30, 2016 compared to the corresponding period in 2015 was due primarily to a $12.3 million unfavorable change in gains and losses on derivatives and hedging activities (most of which are expected to be transitory in nature), offset by a $3.0 million increase in gains on trading securities and a $6.4 million increase in net interest income. The decrease of $17.5 million for the six months ended June 30, 2016 compared to the corresponding period in 2015 was due primarily to a $33.4 million unfavorable change in gains and losses on derivatives and hedging activities (most of which are expected to be transitory in nature) and a $7.5 million decrease in realized gains on the sales of long-term investment securities, offset by a $9.6 million increase in gains on trading securities and a $13.1 million increase in net interest income. For additional discussion, see the section entitled "Results of Operations" beginning on page 60 of this report.
•
At all times during the first six months of 2016, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $784.2 million (1.44 percent of total assets) at June 30, 2016 from $762.2 million (1.81 percent of total assets) at December 31, 2015.
•
During the first six months of 2016, the Bank paid dividends totaling $7.5 million. The Bank’s first quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.375 percent (as average one-month LIBOR for the fourth quarter of 2015 was 0.251 percent) and 1.251 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2015 plus 1.0 percent), respectively. The Bank’s second quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016) and 1.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016 plus 1.0 percent), respectively.

44




Selected Financial Data
SELECTED FINANCIAL DATA
(dollars in thousands)
 
2016
 
2015
 
Second
 Quarter
 
First
 Quarter
 
Fourth
 Quarter
 
Third
 Quarter
 
Second
 Quarter
Balance sheet (at quarter end)
 
 
 
 
 
 
 
 
 

Advances
$
31,122,698

 
$
24,294,953

 
$
24,746,802

 
$
22,769,525

 
$
21,647,725

Investments (1)
22,982,268

 
24,989,577

 
16,323,518

 
18,773,335

 
20,339,701

Mortgage loans
67,009

 
54,051

 
55,258

 
59,234

 
63,236

Allowance for credit losses on mortgage loans
141

 
141

 
141

 
141

 
141

Total assets
54,438,210

 
49,503,208

 
42,082,027

 
42,990,088

 
42,551,785

Consolidated obligations — discount notes
30,047,547

 
27,023,718

 
20,541,329

 
20,253,360

 
18,633,731

Consolidated obligations — bonds
20,747,687

 
19,006,826

 
18,024,692

 
19,130,108

 
20,618,393

Total consolidated obligations(2)
50,795,234

 
46,030,544

 
38,566,021

 
39,383,468

 
39,252,124

Mandatorily redeemable capital stock(3)
3,251

 
8,936

 
8,929

 
4,358

 
4,415

Capital stock — putable
1,810,769

 
1,583,434

 
1,540,132

 
1,464,306

 
1,402,286

Unrestricted retained earnings
715,278

 
702,374

 
699,213

 
688,811

 
685,571

Restricted retained earnings
68,885

 
64,648

 
62,990

 
60,054

 
58,944

Total retained earnings
784,163

 
767,022

 
762,203

 
748,865

 
744,515

Accumulated other comprehensive income (loss)
(124,157
)
 
(101,804
)
 
(103,023
)
 
(69,031
)
 
2,279

Total capital
2,470,775

 
2,248,652

 
2,199,312

 
2,144,140

 
2,149,080

Dividends paid(3)
4,048

 
3,467

 
1,343

 
1,200

 
1,123

Income statement (for the quarter)
 
 
 
 
 
 
 
 
 
Net interest income
$
37,813

 
$
35,734

 
$
32,759

 
$
28,349

 
$
31,397

Other income (loss)
5,393

 
(7,096
)
 
4,411

 
(3,310
)
 
13,973

Other expense
19,662

 
19,430

 
20,857

 
18,872

 
18,843

AHP assessment
2,355

 
922

 
1,632

 
617

 
2,653

Net income
21,189

 
8,286

 
14,681

 
5,550

 
23,874

Performance ratios
 
 
 
 
 
 
 
 
 
Net interest margin(4)
0.30
%
 
0.31
%
 
0.31
%
 
0.27
%
 
0.28
%
Return on average assets
0.17

 
0.07

 
0.14

 
0.05

 
0.22

Return on average equity
3.46

 
1.51

 
2.72

 
1.02

 
4.75

Return on average capital stock (5)
4.88

 
2.10

 
3.95

 
1.55

 
7.45

Total average equity to average assets
4.79

 
4.83

 
5.16

 
5.02

 
4.61

Regulatory capital ratio(6)
4.77

 
4.77

 
5.49

 
5.16

 
5.06

Dividend payout ratio (3)(7)
19.10

 
41.84

 
9.15

 
21.62

 
4.70

Average effective federal funds rate(8)
0.37
%
 
0.36
%
 
0.16
%
 
0.14
%
 
0.13
%

45

_____________________________
(1) 
Investments consist of federal funds sold, interest-bearing deposits, securities purchased under agreements to resell and securities classified as held-to-maturity, available-for-sale, and trading.
(2) 
The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015 and June 30, 2015, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $964 billion, $897 billion, $905 billion, $857 billion and $853 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $51 billion, $46 billion, $39 billion, $39 billion and $39 billion, respectively.
(3) 
Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $11 thousand, $4 thousand, $4 thousand, $4 thousand and $5 thousand for the quarters ended June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015 and June 30, 2015, respectively.
(4) 
Net interest margin is net interest income as a percentage of average earning assets.
(5) 
Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(6) 
The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each quarter-end.
(7) 
Dividend payout ratio is computed by dividing dividends paid by net income for each quarter.
(8) 
Rates obtained from the Federal Reserve Statistical Release.

Regulatory Developments
Joint Proposed Rule on Incentive-Based Compensation Arrangements
On April 26, 2016, the Finance Agency, jointly with five other federal regulators, published a proposed rule in response to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which requires implementation of regulations or guidelines to: (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.
The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule, the Bank would fall into the middle category (Level 2). The proposed rule would supplement existing Finance Agency executive compensation rules.
The proposed rule would prohibit the Bank from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risks by “senior executive officers” and “significant risk-takers” (each as defined in the proposed rule, and together, “covered persons”) that could lead to a material financial loss at the Bank.
If adopted in its current form, the proposed rule would, among other things, impose requirements relating to the Bank’s incentive-based compensation arrangements for covered persons, including the following:
•
mandatory deferrals of 50 percent and 40 percent of annual and long-term incentive-based compensation payments for senior executive officers and significant risk takers, respectively, over no less than three years for annual incentive-based compensation and one year for compensation awarded under a long-term incentive plan;
•
risk of downward adjustment and forfeiture of awards;
•
clawbacks of vested compensation; and
•
limits on the maximum incentive-based compensation opportunities.

Comments on the proposed rule were due by July 22, 2016.
Joint Proposed Rule Regarding Net Stable Funding Ratio
On May 3, 2016, the Federal Reserve Board ("FRB"), the Department of Treasury and the FDIC jointly issued a proposed rule that would implement a stable funding requirement for large and internationally active banking organizations. The net stable funding ratio ("NSFR") would require institutions to maintain liquidity to match their assets over a one-year time horizon. The FRB is proposing a modified NSFR requirement for bank holding companies and certain savings and loan holding companies that, in each case, have more than $50 billion but less than $250 billion in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. If adopted in its current form, the proposed rule would provide that secured funding

46

with maturities between six months and one year, including FHLBank advances, would be assigned 50 percent liquidity credit for purposes of calculating compliance with the NSFR, which could affect demand for the Bank’s advances.
Comments on the proposed rule were due by August 5, 2016.
Financial Condition
The following table provides selected period-end balances as of June 30, 2016 and December 31, 2015, as well as selected average balances for the six-month period ended June 30, 2016 and the year ended December 31, 2015. As shown in the table, the Bank’s total assets increased by 29.4 percent between December 31, 2015 and June 30, 2016, due primarily to increases in the Bank's advances, short-term liquidity portfolio and long-term investments of $6.4 billion, $3.2 billion and $2.6 billion, respectively. As the Bank’s assets increased, the funding for those assets also increased. During the six months ended June 30, 2016, total consolidated obligations increased by $12.2 billion as consolidated obligation bonds and consolidated obligation discount notes increased by $2.7 billion and $9.5 billion, respectively.
The activity in each of the major balance sheet captions is discussed in the sections following the table.
SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)

 
 
June 30, 2016
 
 
 
 
 
 
Increase (Decrease)
 
Balance at
 
 
Balance
 
Amount
 
Percentage
 
December 31, 2015
Advances
 
$
31,123

 
$
6,376

 
25.8
 %
 
$
24,747

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

 
(800
)
 
(100.0
)%
 
800

Securities purchased under agreements to resell
 
3,250

 
2,250

 
225.0
 %
 
1,000

Federal funds sold
 
3,944

 
1,773

 
81.7
 %
 
2,171

Long-term investments
 
 
 
 
 
 
 
 
Trading securities
 
110

 
(92
)
 
(45.5
)%
 
202

Available-for-sale securities
 
12,827

 
3,114

 
32.1
 %
 
9,713

Held-to-maturity securities
 
2,842

 
(386
)
 
(12.0
)%
 
3,228

Mortgage loans, net
 
67

 
12

 
21.8
 %
 
55

Total assets
 
54,438

 
12,356

 
29.4
 %
 
42,082

Consolidated obligations — bonds
 
20,748

 
2,723

 
15.1
 %
 
18,025

Consolidated obligations — discount notes
 
30,047

 
9,506

 
46.3
 %
 
20,541

Total consolidated obligations
 
50,795

 
12,229

 
31.7
 %
 
38,566

Mandatorily redeemable capital stock
 
3

 
(6
)
 
(66.7
)%
 
9

Capital stock
 
1,811

 
271

 
17.6
 %
 
1,540

Retained earnings
 
784

 
22

 
2.9
 %
 
762

Average total assets
 
48,605

 
6,419

 
15.2
 %
 
42,186

Average capital stock
 
1,668

 
318

 
23.6
 %
 
1,350

Average mandatorily redeemable capital stock
 
8

 
4

 
100.0
 %
 
4

_____________________________

(1) 
Represents excess cash held by the Bank. These amounts are classified as “Cash and due from banks” in the Bank’s statements of condition.



47

Advances
The Bank's advances balances (at par value) increased by $6.3 billion (25.6 percent) during the first six months of 2016. The increase in the Bank's advances was due largely to increased demand for loans from its larger members. The following table presents advances outstanding, by type of institution, as of June 30, 2016 and December 31, 2015.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)

 
June 30, 2016
 
December 31, 2015
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
23,020

 
74
%
 
$
17,726

 
72
%
Thrifts
2,821

 
9

 
2,590

 
11

Credit unions
2,619

 
9

 
2,763

 
11

Insurance companies
2,475

 
8

 
1,546

 
6

Community Development Financial Institutions
14

 
—

 
11

 
—

Total member advances
30,949

 
100

 
24,636

 
100

Housing associates
2

 
—

 
2

 
—

Non-member borrowers
11

 
—

 
12

 
—

Total par value of advances
$
30,962

 
100
%
 
$
24,650

 
100
%
Total par value of advances outstanding to CFIs (1)
$
7,183

 
23
%
 
$
6,559

 
27
%
_____________________________
(1) 
The figures shown reflect the advances outstanding to CFIs as of June 30, 2016 and December 31, 2015 based upon the definitions of CFIs that applied as of those dates.
At June 30, 2016, advances outstanding to the Bank’s five largest borrowers totaled $8.6 billion, representing 27.7 percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s five largest borrowers as of December 31, 2015 totaled $6.5 billion, representing 26.2 percent of the total outstanding advances at that date. The following table presents the Bank’s five largest borrowers as of June 30, 2016.
FIVE LARGEST BORROWERS AS OF JUNE 30, 2016
(par value, dollars in millions)

Name
 
Par Value of Advances
 
Percent of Total
Par Value of Advances
Comerica Bank
 
$
2,800

 
9.1
%
Texas Capital Bank, N.A.
 
2,012

 
6.5

Centennial Bank
 
1,370

 
4.4

LegacyTexas Bank
 
1,334

 
4.3

Trustmark National Bank
 
1,050

 
3.4

 
 
$
8,566

 
27.7
%


48

The following table presents information regarding the composition of the Bank’s advances by product type as of June 30, 2016 and December 31, 2015.
ADVANCES OUTSTANDING BY PRODUCT TYPE
(par value, dollars in millions)

 
June 30, 2016
 
December 31, 2015
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
$
17,047

 
55.1
%
 
$
17,220

 
69.9
%
Adjustable/variable-rate indexed
12,361

 
39.9

 
5,949

 
24.1

Amortizing
1,554

 
5.0

 
1,481

 
6.0

Total par value
$
30,962

 
100.0
%
 
$
24,650

 
100.0
%
The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in the 2015 10-K. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances.
In addition, as described in the 2015 10-K, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.
Short-Term Liquidity Holdings
At June 30, 2016, the Bank’s short-term liquidity holdings were comprised of $3.9 billion of overnight federal funds sold and $3.3 billion of overnight reverse repurchase agreements. At December 31, 2015, the Bank’s short-term liquidity holdings were comprised of $2.2 billion of overnight federal funds sold, a $1.0 billion overnight reverse repurchase agreement and $0.8 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. All of the Bank's federal funds sold during the six months ended June 30, 2016 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. As of June 30, 2016, the Bank’s overnight federal funds sold consisted of $0.5 billion sold to counterparties rated double-A, $2.9 billion sold to counterparties rated single-A and $0.5 billion sold to counterparties rated triple-B. The credit ratings presented in the preceding sentence represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”).
The amount of the Bank’s short-term liquidity holdings fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, prevailing conditions (or anticipated changes in conditions) in the short-term debt markets, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and, on and after July 14, 2015, the Finance Agency's expectations with regard to the Bank's core mission achievement. For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.” For a discussion of the Finance Agency's guidance regarding core mission achievement, see Item 1 - Business - Legislative and Regulatory Developments in the 2015 10-K. For the six months ended June 30, 2016, the Bank's core mission asset ("CMA") ratio was 60.40 percent. In comparison, the Bank's CMA ratio was 55.96 percent for the year ended December 31, 2015.

49

Long-Term Investments
The composition of the Bank's long-term investment portfolio at June 30, 2016 and December 31, 2015 is set forth in the table below.
COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(in millions)
 
 
Balance Sheet Classification
 
Total Long-Term
 
 
 
 
Held-to-Maturity
 
Available-for-Sale
 
Trading
 
Investments
 
Held-to-Maturity
June 30, 2016
 
(at carrying value)
 
 (at fair value)
 
 (at fair value)
 
(at carrying value)
 
 (at fair value)
Debentures
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
19

 
$
520

 
$
110

 
$
649

 
$
19

GSE obligations
 
—

 
6,701

 
—

 
6,701

 
—

State housing agency obligations
 
110

 
—

 
—

 
110

 
110

Other
 
—

 
374

 
—

 
374

 
—

Total debentures
 
129

 
7,595

 
110

 
7,834

 
129

 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed
    residential MBS
 
4

 
—

 
—

 
4

 
4

GSE residential MBS
 
2,540

 
—

 
—

 
2,540

 
2,549

GSE commercial MBS
 
62

 
5,232

 
—

 
5,294

 
61

Non-agency residential MBS
 
107

 
—

 
—

 
107

 
117

Total MBS
 
2,713

 
5,232

 
—

 
7,945

 
2,731

Total long-term investments
 
$
2,842

 
$
12,827

 
$
110

 
$
15,779

 
$
2,860

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Total Long-Term
 
 
 
 
Held-to-Maturity
 
Available-for-Sale
 
Trading
 
Investments
 
Held-to-Maturity
December 31, 2015
 
(at carrying value)
 
 (at fair value)
 
 (at fair value)
 
(at carrying value)
 
 (at fair value)
Debentures
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
22

 
$
498

 
$
202

 
$
722

 
$
21

GSE obligations
 
—

 
5,339

 
—

 
5,339

 
—

State housing agency obligations
 
110

 
—

 
—

 
110

 
110

Other
 
—

 
371

 
—

 
371

 
—

Total debentures
 
132

 
6,208

 
202

 
6,542

 
131

 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed
    residential MBS
 
4

 
—

 
—

 
4

 
4

GSE residential MBS
 
2,909

 
—

 
—

 
2,909

 
2,931

GSE commercial MBS
 
62

 
3,505

 
—

 
3,567

 
61

Non-agency residential MBS
 
121

 
—

 
—

 
121

 
135

Total MBS
 
3,096

 
3,505

 
—

 
6,601

 
3,131

Total long-term investments
 
$
3,228

 
$
9,713

 
$
202

 
$
13,143

 
$
3,262


As of June 30, 2016, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. The Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation ("PEFCO"), are currently rated triple-A by Moody's and Fitch. The PEFCO debentures are not currently rated by S&P. The credit ratings associated with the Bank's holdings of non-agency residential MBS ("RMBS") are presented in the table below.

50

During the six months ended June 30, 2016, the Bank acquired (based on trade date) $1.5 billion of GSE commercial MBS ("CMBS"), $3.3 billion of GSE debentures and $0.3 billion of U.S. Treasury Notes, all of which were classified as available-for-sale. All of the Bank's CMBS holdings are backed by multi-family loans. During this same six-month period, the proceeds from maturities and paydowns of held-to-maturity securities and available-for-sale securities totaled approximately $276.1 million and $3.0 million, respectively.
During the six months ended June 30, 2016, the Bank sold approximately $114 million (par value) of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $0.7 million. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. The proceeds from these sales were reinvested in higher yielding GSE CMBS. During this same six-month period, the Bank sold approximately $2.4 billion (par value) of non-MBS securities classified as available-for-sale. The aggregate gains recognized on these sales totaled $4.2 million. The non-MBS securities that were sold were largely replaced with longer-dated, higher yielding GSE debentures.
The Bank is precluded by regulation from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock, mandatorily redeemable capital stock and retained earnings). However, the Bank is not required to sell any mortgage securities that it purchased at a time when it was in compliance with this ratio. At June 30, 2016, the Bank held $8.1 billion (amortized cost) of MBS, which represented 311 percent of its total regulatory capital as of that date. The Bank intends to continue to purchase additional GSE MBS if securities with adequate returns are available when the Bank has the regulatory capacity to increase its MBS portfolio.
In addition to MBS, the Bank is also permitted under applicable policies and regulations to purchase certain other types of highly rated, long-term, non-MBS investments (including but not limited to the non-MBS debt obligations of other GSEs, subject to certain limits). In July 2016, the Bank purchased an additional $63 million of GSE debentures. Subject to applicable regulatory limits and the constraints imposed by the Finance Agency's guidance regarding core mission achievement, the Bank may continue to add these types of securities to its long-term investment portfolio if attractive opportunities to do so are available.
Gross unrealized losses on the Bank’s MBS investments increased from $102.7 million at December 31, 2015 to $122.0 million at June 30, 2016. As of June 30, 2016, $106.0 million of the gross unrealized losses related to the Bank’s holdings of GSE CMBS, $10.1 million related to non-agency RMBS and $5.9 million related to GSE RMBS.
The Bank evaluates all outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each calendar quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. For a summary of the Bank’s OTTI evaluation, see “Item 1. Financial Statements” (specifically, Notes 4 and 5 beginning on pages 9 and 12, respectively, of this report).
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2016 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.

51

All but one of the Bank’s non-agency RMBS are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of June 30, 2016. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.

NON-AGENCY RMBS CREDIT RATINGS
(dollars in thousands)

Credit Rating
 
Number of Securities
 
Unpaid Principal Balance
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Unrealized Losses
Triple-B
 
4

 
$
21,817

 
$
21,817

 
$
21,817

 
$
20,203

 
$
1,614

Double-B
 
2

 
2,972

 
2,972

 
2,972

 
2,760

 
212

Single-B
 
4

 
19,253

 
19,146

 
17,197

 
16,854

 
2,292

Triple-C
 
12

 
81,172

 
73,689

 
58,209

 
68,290

 
5,858

Single-D
 
1

 
10,974

 
8,791

 
6,975

 
8,704

 
87

Not Rated
 
1

 
101

 
102

 
102

 
94

 
8

Total
 
24

 
$
136,289

 
$
126,517

 
$
107,272

 
$
116,905

 
$
10,071

At June 30, 2016, the Bank’s portfolio of non-agency RMBS was comprised of 5 securities with an aggregate unpaid principal balance of $20 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $116 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2015, the Bank’s portfolio of non-agency RMBS was comprised of 8 securities backed by fixed-rate loans with an aggregate unpaid principal balance of $25 million and 19 securities backed by option ARM loans with an aggregate unpaid principal balance of $128 million. Three of the Bank's unimpaired non-agency RMBS were paid in full during the six months ended June 30, 2016. A summary of the Bank’s non-agency RMBS as of December 31, 2015 by classification by the originator at the time of issuance and collateral type is presented in the 2015 10-K; there were no material changes to this information during the six months ended June 30, 2016.
To assess whether the entire amortized cost bases of its non-agency RMBS are likely to be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of June 30, 2016 under a base case (or best estimate) scenario. The procedures used in this analysis, together with the results thereof, are summarized in “Item 1. Financial Statements” (specifically, Note 5 beginning on page 12 of this report).
Since 2009, the Bank has recorded credit impairments totaling $13.1 million on 15 of its non-agency RMBS. The vast majority of these credit impairments were recorded in 2009, 2010 and 2011. Through June 30, 2016, the Bank has amortized $0.4 million of the time value associated with these credit losses. Through this same date, actual principal shortfalls on these securities have totaled $1.7 million and the Bank has recognized recoveries (i.e., increases in cash flows expected to be collected) totaling $2.0 million. Based on the cash flow analyses performed as of June 30, 2016, the Bank currently expects to recover in future periods an additional $8.9 million of the previously recorded losses. These anticipated recoveries will be accreted as interest income over the remaining lives of the applicable securities in the same manner as the recoveries that have been recorded through June 30, 2016.
In addition to evaluating its non-agency RMBS under a best estimate scenario, the Bank also performed a cash flow analysis for each of these securities as of June 30, 2016 under a more stressful housing price scenario. This more stressful scenario was based on a housing price forecast that assumed home price changes for the 12-month period beginning April 1, 2016 were 5 percentage points lower than the base case scenario followed by home price changes that are 33 percent lower than those used in the base case scenario. Under the more stressful housing price scenario, an additional $1,000 of credit impairment would have been recorded as of June 30, 2016 on the one security that was deemed to be other-than-temporarily impaired at that date under the best estimate scenario. None of the Bank’s other non-agency RMBS would have been deemed to be other-than-temporarily impaired under the more stressful housing price scenario.
While substantially all of the Bank's RMBS portfolio is comprised of collateralized mortgage obligations ("CMOs") with variable-rate coupons ($2.7 billion par value at June 30, 2016) that do not expose it to interest rate risk if interest rates rise moderately, these securities include caps that would limit increases in the variable-rate coupons if short-term interest rates rise above the caps. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of June 30, 2016, one-month LIBOR was 0.47 percent and the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 5.95 percent to 15.29 percent. The largest concentration of embedded effective caps ($2.1 billion) was between 6.00 percent and 6.50 percent. As of June 30, 2016,

52

one-month LIBOR rates were 548 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held $1.2 billion of interest rate caps with remaining maturities ranging from 27 months to 62 months as of June 30, 2016, and strike rates of 6.50 percent. If interest rates rise above the strike rates specified in these interest rate cap agreements, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. These payments would be based upon the notional amounts of those agreements and the difference between 6.50 percent and three-month LIBOR.
The following table provides a summary of the notional amounts and expiration periods of the Bank’s portfolio of stand-alone CMO-related interest rate cap agreements as of June 30, 2016.
SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS
(dollars in millions)

Expiration
 
Notional Amount
Third quarter 2018
 
$
200

First quarter 2019
 
250

Third quarter 2021 (1)
 
750

 
 
$
1,200

 
 
 
(1)  This cap is effective beginning in August 2018 and its notional balance declines by $250 million in August 2019 and again in August 2020, to $500 million and $250 million, respectively.
Consolidated Obligations and Deposits
During the six months ended June 30, 2016, the Bank’s outstanding consolidated obligation bonds (at par value) increased by $2.7 billion and its outstanding consolidated obligation discount notes increased by $9.5 billion. The following table presents the composition of the Bank’s outstanding bonds at June 30, 2016 and December 31, 2015.
COMPOSITION OF CONSOLIDATED OBLIGATION BONDS OUTSTANDING
(par value, dollars in millions)
 
June 30, 2016
 
December 31, 2015
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
 
 
 
 
 
 
 
Non-callable
$
10,240

 
49.4
%
 
$
9,244

 
51.3
%
Callable
1,969

 
9.5

 
2,515

 
13.9

Variable-rate
6,350

 
30.7

 
3,625

 
20.1

Callable step-up
1,902

 
9.2

 
2,510

 
13.9

Callable step-down
250

 
1.2

 
150

 
0.8

Total par value
$
20,711

 
100.0
%
 
$
18,044

 
100.0
%

During the first six months of 2016, the Bank issued $11.4 billion of consolidated obligation bonds and approximately $69.6 billion of consolidated obligation discount notes (excluding those with overnight terms), the proceeds of which were used primarily to replace maturing or called consolidated obligation bonds and maturing discount notes, as well as to fund the increases in the Bank's investment and advances portfolios. At June 30, 2016 and December 31, 2015, discount notes comprised approximately 59 percent and 53 percent, respectively, of the Bank's total outstanding consolidated obligations. During the six months ended June 30, 2016, the Bank's bond issuance (based on par value) consisted of approximately $4.8 billion of variable-rate bonds, $3.3 billion of fixed-rate non-callable bonds (most of which were swapped), and $3.3 billion of swapped fixed-rate callable bonds (including step-up and step-down bonds).
The weighted average cost of swapped and variable-rate consolidated obligation bonds issued by the Bank approximated LIBOR minus 14 basis points during the three months ended June 30, 2016, compared to LIBOR minus 12 basis points during the three months ended March 31, 2016 and LIBOR minus 17 basis points during the three months ended June 30, 2015. The Bank's funding levels (relative to LIBOR) for consolidated obligation bonds deteriorated in the second half of 2015 due to a significant decrease in swap spreads during that period and an increase in competing debt issuance by other GSEs. Swap

53

spreads tightened relative to U.S. Treasury debt during the second half of 2015 due to several factors, including a large volume of swapped corporate debt issuance, a rise in repo rates and increased sales of U.S. Treasury debt by central banks. Swap spreads widened somewhat toward the end of the first quarter of 2016, resulting in a slight improvement in the Bank's funding levels (relative to LIBOR) for consolidated obligation bonds.
The cost of the Bank's consolidated obligation discount notes also increased during the second half of 2015 due to short term debt investors' desire to invest only in very short maturity instruments, which was attributable to the uncertainty at that time regarding potential interest rate increases by the FOMC at its September 2015 and December 2015 meetings. Dealers' reduced capacity to hold consolidated obligation discount notes (due to balance sheet constraints) also contributed to the increase in the Bank's discount note funding costs during the second half of 2015. While dealers' balance sheets were less constrained during the first quarter of 2016, the cost of discount notes increased commensurate with the increase in short-term interest rates during the first quarter of 2016. The cost of discount notes continued to increase early in the second quarter, primarily due to uncertainty regarding future rate increases by the FOMC. Toward the end of the second quarter, the Bank's discount note funding costs improved due in part to Great Britain's vote to exit the European Union and impending changes to the rules that govern money market funds, each of which contributed to increased demand for discount notes.
Demand and term deposits were $0.9 billion and $1.0 billion at June 30, 2016 and December 31, 2015, respectively. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.
Capital
The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was $1.8 billion and $1.5 billion at June 30, 2016 and December 31, 2015, respectively. The Bank’s average outstanding capital stock (excluding mandatorily redeemable capital stock) increased from $1.4 billion for the year ended December 31, 2015 to $1.7 billion for the six months ended June 30, 2016.
Mandatorily redeemable capital stock outstanding at June 30, 2016 and December 31, 2015 was $3.3 million and $8.9 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, it is considered capital for regulatory purposes.
At June 30, 2016 and December 31, 2015, the Bank’s five largest shareholders collectively held $356 million and $278 million, respectively, of capital stock, which represented 19.6 percent and 17.9 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s five largest shareholders as of June 30, 2016.
FIVE LARGEST SHAREHOLDERS AS OF JUNE 30, 2016
(par value, dollars in thousands)
Name
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
Comerica Bank
 
$
121,800

 
6.7
%
Texas Capital Bank, N.A.
 
72,711

 
4.0

Centennial Bank
 
66,074

 
3.7

Southside Bank
 
47,702

 
2.6

Iberiabank
 
47,380

 
2.6

 
 
$
355,667

 
19.6
%
As of June 30, 2016, all of the stock held by the five institutions shown in the table above was classified as capital in the statement of condition.

54

The following table presents outstanding capital stock, by type of institution, as of June 30, 2016 and December 31, 2015.
CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE
(par value, dollars in millions)
 
June 30, 2016
 
December 31, 2015
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
 
Par Value of Capital Stock
 
Percent of Total Par Value of Capital Stock
Commercial banks
$
1,307

 
72
%
 
$
1,065

 
69
%
Credit unions
224

 
12

 
226

 
15

Thrifts
144

 
9

 
152

 
10

Insurance companies
135

 
7

 
97

 
6

Community Development Financial Institutions
1

 
—

 
—

 
—

Total capital stock classified as capital
1,811

 
100

 
1,540

 
100

Mandatorily redeemable capital stock
3

 
—

 
9

 
—

Total regulatory capital stock
$
1,814

 
100
%
 
$
1,549

 
100
%
Members are required to maintain an investment in Class B Stock equal to the sum of a membership investment requirement and an activity-based investment requirement. The membership investment requirement is currently 0.04 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.1 percent of outstanding advances, except for advances that were funded under the Bank's special reduced stock advances offering that ran from October 21, 2015 through December 31, 2015. The activity-based investment requirement for those advances was (and continues to be) 2.0 percent of the outstanding advances. Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement.
Quarterly, the Bank generally repurchases a portion of members’ excess capital stock. Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. For the repurchases that occurred during the six months ended June 30, 2016, surplus stock was defined as the amount of stock held by a shareholder in excess of 125 percent of the shareholder’s minimum investment requirement. For those repurchases, which occurred on June 27, 2016 and February 25, 2016, a shareholder's surplus stock was not repurchased if: (1) the amount of that shareholder's surplus stock was $2,500,000 or less; (2) the shareholder elected to opt-out of the repurchase; or (3) the shareholder was on restricted collateral status (subject to certain exceptions). On June 27, 2016 and February 25, 2016, the Bank repurchased surplus stock totaling $60,999,000 and $103,707,000, none of which was classified as mandatorily redeemable capital stock at those dates.
At June 30, 2016, the Bank’s excess stock totaled $342.2 million, which represented 0.6 percent of the Bank’s total assets as of that date.
During the six months ended June 30, 2016, the Bank’s retained earnings increased by $22.0 million, from $762.2 million to $784.2 million. During this same period, the Bank paid dividends on capital stock totaling $7.5 million, which represented a weighted average annualized dividend rate of 0.98 percent. The Bank’s first quarter dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.375 percent (as average one-month LIBOR for the fourth quarter of 2015 was 0.251 percent) and 1.251 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2015 plus 1.0 percent), respectively. The first quarter dividends, which were applied to average Class B-1 Stock and average Class B-2 Stock held during the period from October 1, 2015 through December 31, 2015, were paid on March 31, 2016. The Bank’s second quarter dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016) and 1.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016 plus 1.0 percent), respectively. The second quarter dividends, which were applied to average Class B-1 Stock and average Class B-2 Stock held during the period from January 1, 2016 through March 31, 2016, were paid on June 28, 2016.
While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends on Class B-1 Stock during the remainder of 2016 at a rate at least equal to average one-month LIBOR for the applicable dividend period, with the expectation that annualized dividend rates for Class B-1 Stock will not be lower than 0.375 percent. Further, the Bank expects to pay dividends on Class B-2 Stock at an annualized rate that approximates average one-month LIBOR for the applicable dividend period plus 0.5 - 1.0 percent.

55

The Bank is required to maintain at all times permanent capital in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described in the 2015 10-K. Permanent capital is defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B stock (which for the Bank includes both Class B-1 Stock and Class B-2 Stock), regardless of its classification as equity or liabilities for financial reporting purposes. At June 30, 2016, the Bank’s total risk-based capital requirement was $659 million, comprised of credit risk, market risk and operations risk capital requirements of $347 million, $160 million and $152 million, respectively, and its permanent capital was $2.6 billion.
In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general allowance for losses at June 30, 2016 or December 31, 2015. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the six months ended June 30, 2016, the Bank was in compliance with all of its regulatory capital requirements. At June 30, 2016, the Bank's total capital-to-assets and leverage capital-to-assets ratios were 4.77 percent and 7.16 percent, respectively. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of June 30, 2016 and December 31, 2015, see “Item 1. Financial Statements” (specifically, Note 12 on page 32 of this report).

Derivatives and Hedging Activities
The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 11 beginning on page 25 of this report).
The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category and accounting designation, as of June 30, 2016 and December 31, 2015.
COMPOSITION OF DERIVATIVES BY BALANCE SHEET CATEGORY AND ACCOUNTING DESIGNATION
(in millions)
 
Fair Value Hedges
 
 
 
 
 
 
 
Shortcut
Method
 
Long-Haul
Method
 
Cash Flow Hedges
 
Economic
Hedges
 
Total
June 30, 2016
 
 
 
 
 
 
 
 
 
Advances
$
3,817

 
$
1,385

 
$
—

 
$
65

 
$
5,267

Investments
—

 
12,077

 
—

 
1,203

 
13,280

Consolidated obligation bonds
—

 
13,624

 
—

 
—

 
13,624

Consolidated obligation discount notes
—

 
—

 
375

 
4,709

 
5,084

Intermediary positions
—

 
—

 
—

 
400

 
400

Other
—

 
—

 
—

 
276

 
276

Total notional balance
$
3,817

 
$
27,086

 
$
375

 
$
6,653

 
$
37,931

December 31, 2015
 
 
 
 
 
 
 
 
 
Advances
$
3,361

 
$
1,443

 
$
—

 
$
2

 
$
4,806

Investments
—

 
9,375

 
—

 
1,753

 
11,128

Consolidated obligation bonds
—

 
12,988

 
—

 
—

 
12,988

Consolidated obligation discount notes
—

 
—

 
100

 
—

 
100

Intermediary positions
—

 
—

 
—

 
2,006

 
2,006

Total notional balance
$
3,361

 
$
23,806

 
$
100

 
$
3,761

 
$
31,028



56

The following table presents the earnings impact of derivatives and hedging activities during the three and six months ended June 30, 2016 and 2015.

NET EARNINGS IMPACT OF DERIVATIVES AND HEDGING ACTIVITIES
(in millions)
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount Notes
 
Intermediary Transactions
 
Other
 
Total
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
—

 
$
17

 
$
(2
)
 
$
—

 
$
—

 
$
—

 
$
15

Net interest settlements included in net interest income (2)
(17
)
 
(54
)
 
16

 
(1
)
 
—

 
—

 
(56
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on fair value hedges
—

 
(10
)
 
(2
)
 
—

 
—

 
—

 
(12
)
Net gains on economic hedges
—

 
—

 
—

 
1

 
—

 
7

 
8

Net interest settlements on economic hedges
—

 
—

 
—

 
—

 
—

 
1

 
1

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

 
(10
)
 
(2
)
 
1

 
—

 
8

 
(3
)
Net impact of derivatives and hedging activities
$
(17
)
 
$
(47
)
 
$
12

 
$
—

 
$
—

 
$
8

 
$
(44
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(2
)
 
$
24

 
$
—

 
$
—

 
$
—

 
$
—

 
$
22

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

 
—

 
—

 
—

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

 
6

 
2

 
—

 
—

 
—

 
8

Net gains (losses) on economic hedges
—

 
(1
)
 
—

 
—

 
1

 
—

 
—

Total net gains on derivatives and hedging activities
—

 
5

 
2

 
—

 
1

 
—

 
8

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

 
$
—

 
$
1

 
$
—

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(1
)
 
$
38

 
$
(5
)
 
$
—

 
$
—

 
$
—

 
$
32

Net interest settlements included in net interest income (2)
(35
)
 
(113
)
 
37

 
(2
)
 
—

 
—

 
(113
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on fair value hedges
—

 
(21
)
 
(4
)
 
—

 
—

 
—

 
(25
)
Net gains (losses) on economic hedges
—

 
(3
)
 
(2
)
 
2

 
—

 
7

 
4

Net interest settlements on economic hedges
—

 
—

 
—

 
—

 
—

 
1

 
1

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

 
(24
)
 
(6
)
 
2

 
—

 
8

 
(20
)
Net impact of derivatives and hedging activities
(36
)
 
(99
)
 
26

 
—

 
—

 
8

 
(101
)
Net gain on hedged financial instrument classified as trading
—

 
2

 
—

 
—

 
—

 
—

 
2

 
$
(36
)
 
$
(97
)
 
$
26

 
$
—

 
$
—

 
$
8

 
$
(99
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(5
)
 
$
51

 
$
1

 
$
—

 
$
—

 
$
—

 
$
47

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

 
—

 
—

 
—

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

 
8

 
2

 
—

 
—

 
—

 
10

Net gains (losses) on economic hedges
—

 
(1
)
 
2

 
—

 
1

 
—

 
2

Total net gains on derivatives and hedging activities
—

 
7

 
4

 
—

 
1

 
—

 
12

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

 
$
—

 
$
1

 
$
—

 
$
(27
)
_____________________________
(1) 
Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income/expense on derivatives included in net interest income.

57

The Bank has transacted some of its interest rate exchange agreements bilaterally with large financial institutions (with which it has in place master agreements). In doing so, the Bank has generally exchanged a defined market risk for the risk that the counterparty will not be able to fulfill its obligations in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into master agreements with each of its non-member bilateral counterparties that include maximum unsecured credit exposure thresholds ranging from $100,000 to $500,000, and by monitoring its exposure to each counterparty on a daily basis. In addition, all of the Bank’s master agreements with its bilateral counterparties include netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. As of June 30, 2016, the notional balances of outstanding interest rate exchange agreements transacted with non-member bilateral counterparties totaled $10.2 billion.
Under the Bank’s master agreements with its non-member bilateral counterparties, the unsecured credit exposure thresholds must be met before collateral is required to be delivered by one party to the other party. Once the counterparties agree to the valuations of the interest rate exchange agreements, and if it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral (or return a sufficient amount of previously remitted collateral) to reduce the unsecured credit exposure to zero (or, in the case of pledged securities, to an amount equal to the discount applied to the securities under the terms of the master agreement). Collateral is delivered (or returned) daily when these thresholds are met. The master agreements with the Bank's non-member bilateral counterparties require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government-guaranteed or agency debt securities) if credit risk exposures rise above the thresholds.
As a result of statutory and regulatory requirements emanating from the Dodd-Frank Act, certain derivative transactions that the Bank enters into are required to be cleared through a third-party central clearinghouse. As of June 30, 2016, the Bank had cleared trades outstanding with notional amounts totaling $27.5 billion. Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral is delivered (or returned) daily and, unlike bilateral derivatives, is not subject to any maximum unsecured credit exposure thresholds. The fair values of all interest rate derivatives (including accrued interest receivables and payables) with each clearing member of each clearinghouse are offset for purposes of measuring credit exposure and determining initial and variation margin requirements. With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank. The Bank has determined that the exercise by a non-defaulting party of the setoff rights incorporated in its cleared derivative transactions should be upheld in the event of a default, including a bankruptcy, insolvency or similar proceeding involving the clearinghouse or any of its clearing members or both.
The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position.

58

The following table provides information regarding the Bank’s derivative counterparty credit exposure as of June 30, 2016.
DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(dollars in millions)
Credit Rating(1)
 
Number of Bilateral Counterparties
 
Notional Principal(2)
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To (From) Counterparty
 
Net Credit Exposure
Non-member counterparties
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Double-A
 
1

 
$
550.0

 
$
1.6

 
$
—

 
$
(1.4
)
 
$
0.2

Single-A
 
2

 
270.0

 
0.3

 
0.1

 
(0.3
)
 
0.1

Liability positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Double-A (3)
 
1

 
282.2

 
(7.3
)
 
7.4

 
—

 
0.1

Single-A 
 
1

 
341.6

 
(20.1
)
 
20.2

 
—

 
0.1

Cleared derivatives (4)
 
 
 
27,536.6

 
(794.1
)
 
805.2

 
643.9

 
655.0

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
5

 
28,980.4

 
(819.6
)
 
832.9

 
642.2

 
655.5

Asset positions without credit exposure
 
2

 
247.0

 
2.3

 
(2.5
)
 
—

 
—

Liability positions without credit exposure (5)
 
11

 
8,502.5

 
(253.3
)
 
247.8

 
—

 
—

Total derivative positions with non-member counterparties to which the Bank did not have credit exposure
 
13

 
8,749.5

 
(251.0
)
 
245.3

 
—

 
—

Total non-member counterparties
 
18

 
37,729.9

 
(1,070.6
)
 
$
1,078.2

 
$
642.2

 
$
655.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Member institutions
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate exchange agreements (6)
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions
 
9

 
160.2

 
19.6

 
 
 
 
 
 
Liability positions
 
1

 
40.0

 
(0.2
)
 
 
 
 
 
 
Mortgage delivery commitments
 
 
 
0.6

 
—

 
 
 
 
 
 
Total member institutions
 
10

 
200.8

 
19.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
28

 
$
37,930.7

 
$
(1,051.2
)
 
 
 
 
 
 
_____________________________
(1) 
Credit ratings shown in the table reflect the lowest rating from Moody’s, S&P or Fitch and are as of June 30, 2016.
(2) 
Includes amounts that had not settled as of June 30, 2016.
(3) 
This position consists of transactions with a counterparty that is affiliated with a member of the Bank.
(4) 
The counterparties to the Bank's cleared derivatives transactions are unrated.
(5) 
The figures for the liability positions without credit exposure included transactions with two counterparties that are affiliated with a non-member shareholder of the Bank; transactions with these counterparties had an aggregate notional principal of $1.9 billion as of June 30, 2016.
(6) 
This product offering and the collateral provisions associated therewith are discussed in the paragraph below.
The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s non-member derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.

59

The Dodd-Frank Act changed the regulatory framework for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able in certain instances to continue to enter into uncleared trades on a bilateral basis, those transactions will be subject to new regulatory requirements, including minimum margin requirements imposed by regulators. For additional discussion, see Item 1 - Business - Legislative and Regulatory Developments in the 2015 10-K.
Market Value of Equity
The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 102 percent and 105 percent at June 30, 2016 and December 31, 2015, respectively. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk.”

Results of Operations
Net Income
Net income for the three months ended June 30, 2016 and 2015 was $21.2 million and $23.9 million, respectively. The Bank’s net income for the three months ended June 30, 2016 represented an annualized return on average capital stock (“ROCS”) of 4.88 percent. In comparison, the Bank’s ROCS was 7.45 percent for the three months ended June 30, 2015. Net income for the six months ended June 30, 2016 and 2015 was $29.5 million and $47.0 million, respectively. For the six months ended June 30, 2016, the Bank's ROCS was 3.55 percent. In comparison, the Bank’s ROCS was 7.58 percent for the six months ended June 30, 2015. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in the Bank's net income are discussed below.
Income Before Assessments
During the three months ended June 30, 2016 and 2015, the Bank’s income before assessments was $23.5 million and $26.5 million, respectively. As discussed in more detail below, the $3.0 million decrease in income before assessments from period to period was attributable to an $8.6 million unfavorable change in other income (loss) and a $0.8 million increase in other expense, offset by a $6.4 million increase in net interest income.
During the six months ended June 30, 2016 and 2015, the Bank’s income before assessments was $32.8 million and $52.2 million, respectively. As discussed in more detail below, the $19.4 million decrease in income before assessments from period to period was attributable to a $30.4 million unfavorable change in other income (loss) and a $2.1 million increase in other expense, offset by a $13.1 million increase in net interest income.
The components of income before assessments (net interest income, other income/loss and other expense) are discussed in more detail in the following sections.
Net Interest Income
For the three months ended June 30, 2016 and 2015, the Bank’s net interest income was $37.8 million and $31.4 million, respectively. The Bank’s net interest income was $73.5 million and $60.5 million for the six months ended June 30, 2016 and 2015, respectively.
For the three months ended June 30, 2016 and 2015, the Bank’s net interest margin was 30 basis points and 28 basis points, respectively. The Bank’s net interest margin was 31 basis points and 29 basis points for the six months ended June 30, 2016 and 2015, respectively. Net interest margin, or net interest income as a percentage of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank’s net interest spread was 26 basis points and 27 basis points for the three and six months ended June 30, 2016, respectively, compared to 27 basis points for both the three and six months ended June 30, 2015.
The contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) increased from 1 basis point and 2 basis points during the three and six months ended June 30, 2015, respectively, to 4 basis points during both the three and six months ended June 30, 2016, due to an increase in short-term interest rates.

60

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended June 30, 2016 and 2015.
YIELD AND SPREAD ANALYSIS
(dollars in millions)
 
For the Three Months Ended June 30,
 
2016
 
2015
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
878

 
$
1

 
0.37
%
 
$
587

 
$
—

 
0.12
%
Securities purchased under agreements to resell
1,398

 
1

 
0.37
%
 
3,648

 
1

 
0.09
%
Federal funds sold
5,232

 
5

 
0.38
%
 
8,034

 
2

 
0.11
%
Investments
 
 
 
 
 
 
 
 
 
 
 
Trading
208

 
1

 
1.66
%
 
282

 
—

 
0.07
%
 Available-for-sale (3)
12,300

 
31

 
1.01
%
 
6,821

 
8

 
0.50
%
Held-to-maturity (3)
2,973

 
7

 
1.01
%
 
3,921

 
8

 
0.75
%
Advances (4)
29,175

 
52

 
0.71
%
 
20,830

 
34

 
0.65
%
Mortgage loans held for portfolio
53

 
1

 
5.82
%
 
65

 
1

 
5.70
%
Total earning assets
52,217

 
99

 
0.76
%
 
44,188

 
54

 
0.49
%
Cash and due from banks
38

 
 
 
 
 
37

 
 
 
 
Other assets
143

 
 
 
 
 
128

 
 
 
 
Derivatives netting adjustment (2)
(881
)
 
 
 
 
 
(589
)
 
 
 
 
Fair value adjustment on available-for-sale securities (3)
(45
)
 
 
 
 
 
19

 
 
 
 
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (3)
(20
)
 
 
 
 
 
(25
)
 
 
 
 
Total assets
$
51,452

 
99

 
0.77
%
 
$
43,758

 
54

 
0.49
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
803

 
—

 
0.25
%
 
$
991

 
—

 
0.02
%
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
19,681

 
32

 
0.65
%
 
21,266

 
20

 
0.37
%
Discount notes
28,270

 
29

 
0.40
%
 
19,132

 
3

 
0.07
%
Mandatorily redeemable capital stock and other borrowings
50

 
—

 
0.05
%
 
23

 
—

 
0.20
%
Total interest-bearing liabilities
48,804

 
61

 
0.50
%
 
41,412

 
23

 
0.22
%
Other liabilities
1,067

 
 
 
 
 
917

 
 
 
 
Derivatives netting adjustment (2)
(881
)
 
 
 
 
 
(589
)
 
 
 
 
Total liabilities
48,990

 
61

 
0.50
%
 
41,740

 
23

 
0.22
%
Total capital
2,462

 
 
 
 
 
2,018

 
 
 
 
Total liabilities and capital
$
51,452

 
 
 
0.47
%
 
$
43,758

 
 
 
0.21
%
Net interest income
 
 
$
38

 
 
 
 
 
$
31

 
 
Net interest margin
 
 
 
 
0.30
%
 
 
 
 
 
0.28
%
Net interest spread
 
 
 
 
0.26
%
 
 
 
 
 
0.27
%
Impact of non-interest bearing funds
 
 
 
 
0.04
%
 
 
 
 
 
0.01
%

61

_____________________________
(1) 
Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(2) 
The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments transacted under a master netting agreement or other similar arrangement. The average balances of interest-bearing deposit assets for the three months ended June 30, 2016 and 2015 in the table above include $878 million and $587 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balance of interest-bearing deposit liabilities for the three months ended June 30, 2016 and 2015 in the table above includes $3 million and $2 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
(3) 
Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
(4) 
Interest income and average rates include net prepayment fees on advances.


62

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the six months ended June 30, 2016 and 2015.
YIELD AND SPREAD ANALYSIS
(dollars in millions)
 
For the Six Months Ended June 30,
 
2016
 
2015
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
837

 
$
2

 
0.36
%
 
$
637

 
$
—

 
0.12
%
Securities purchased under agreements to resell
1,247

 
2

 
0.35
%
 
2,871

 
1

 
0.09
%
Federal funds sold
4,929

 
9

 
0.38
%
 
7,795

 
4

 
0.11
%
Investments
 
 
 
 
 
 
 
 
 
 
 
Trading
211

 
2

 
1.66
%
 
262

 
—

 
0.07
%
 Available-for-sale (3)
11,671

 
56

 
0.96
%
 
6,770

 
15

 
0.46
%
Held-to-maturity (3)
3,065

 
15

 
1.00
%
 
4,126

 
16

 
0.75
%
Advances (4)
27,345

 
97

 
0.71
%
 
20,056

 
66

 
0.66
%
Mortgage loans held for portfolio
54

 
2

 
5.82
%
 
67

 
2

 
5.71
%
Total earning assets
49,359

 
185

 
0.75
%
 
42,584

 
104

 
0.49
%
Cash and due from banks
49

 
 
 
 
 
49

 
 
 
 
Other assets
143

 
 
 
 
 
125

 
 
 
 
Derivatives netting adjustment (2)
(841
)
 
 
 
 
 
(639
)
 
 
 
 
Fair value adjustment on available-for-sale securities (3)
(85
)
 
 
 
 
 
16

 
 
 
 
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (3)
(20
)
 
 
 
 
 
(26
)
 
 
 
 
Total assets
$
48,605

 
185

 
0.76
%
 
$
42,109

 
104

 
0.50
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (2)
$
891

 
1

 
0.24
%
 
$
887

 
—

 
0.02
%
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
19,090

 
61

 
0.63
%
 
19,117

 
37

 
0.38
%
Discount notes
26,047

 
49

 
0.37
%
 
19,721

 
7

 
0.07
%
Mandatorily redeemable capital stock and other borrowings
30

 
—

 
0.12
%
 
14

 
—

 
0.23
%
Total interest-bearing liabilities
46,058

 
111

 
0.48
%
 
39,739

 
44

 
0.22
%
Other liabilities
1,053

 
 
 
 
 
1,041

 
 
 
 
Derivatives netting adjustment (2)
(841
)
 
 
 
 
 
(639
)
 
 
 
 
Total liabilities
46,270

 
111

 
0.48
%
 
40,141

 
44

 
0.22
%
Total capital
2,335

 
 
 
 
 
1,968

 
 
 
 
Total liabilities and capital
$
48,605

 
 
 
0.45
%
 
$
42,109

 
 
 
0.21
%
Net interest income
 
 
$
74

 
 
 
 
 
$
60

 
 
Net interest margin
 
 
 
 
0.31
%
 
 
 
 
 
0.29
%
Net interest spread
 
 
 
 
0.27
%
 
 
 
 
 
0.27
%
Impact of non-interest bearing funds
 
 
 
 
0.04
%
 
 
 
 
 
0.02
%

63

_____________________________
(1) 
Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(2) 
The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments transacted under a master netting agreement or other similar arrangement. The average balances of interest-bearing deposit assets for the six months ended June 30, 2016 and 2015 in the table above include $837 million and $637 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balance of interest-bearing deposit liabilities for the six months ended June 30, 2016 and 2015 in the table above includes $4 million and $2 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
(3) 
Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
(4) 
Interest income and average rates include net prepayment fees on advances.
Changes in both volume (i.e., average balances) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three and six-month periods in 2016 and 2015. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
RATE AND VOLUME ANALYSIS
(in millions)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2016 vs. 2015
 
June 30, 2016 vs. 2015
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
—

 
$
1

 
$
1

 
$
—

 
$
2

 
$
2

Securities purchased under agreements to resell
(1
)
 
1

 
—

 
(1
)
 
2

 
1

Federal funds sold
(1
)
 
4

 
3

 
(3
)
 
8

 
5

Investments
 
 
 
 
 
 
 
 
 
 
 
Trading
—

 
1

 
1

 
—

 
2

 
2

Available-for-sale
10

 
13

 
23

 
16

 
25

 
41

Held-to-maturity
(2
)
 
1

 
(1
)
 
(6
)
 
5

 
(1
)
Advances
15

 
3

 
18

 
25

 
6

 
31

Mortgage loans held for portfolio
—

 
—

 
—

 
—

 
—

 
—

Total interest income
21

 
24

 
45

 
31

 
50

 
81

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
—

 
—

 
—

 
—

 
1

 
1

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
(2
)
 
14

 
12

 
—

 
24

 
24

Discount notes
3

 
23

 
26

 
3

 
39

 
42

Mandatorily redeemable capital stock and other borrowings
—

 
—

 
—

 
—

 
—

 
—

Total interest expense
1

 
37

 
38

 
3

 
64

 
67

Changes in net interest income
$
20

 
$
(13
)
 
$
7

 
$
28

 
$
(14
)
 
$
14


64

Other Income (Loss)
The following table presents the various components of other income (loss) for the three and six months ended June 30, 2016 and 2015.
OTHER INCOME (LOSS)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net interest income (expense) associated with:
 
 
 
 
 
 
 
Member/offsetting swaps
$
47

 
$
47

 
$
110

 
$
70

Economic hedge derivatives related to advances
(40
)
 
(2
)
 
(41
)
 
(4
)
Economic hedge derivatives related to trading securities
(138
)
 
—

 
(296
)
 
—

Economic hedge derivatives related to available-for-sale securities
(5
)
 
(8
)
 
(10
)
 
(14
)
Economic hedge derivatives related to consolidated obligation discount notes
403

 
32

 
460

 
49

Other stand-alone economic hedge derivatives
546

 
—

 
758

 
—

Total net interest income associated with economic hedge derivatives
813

 
69

 
981

 
101

Gains (losses) related to economic hedge derivatives
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
Advances
(1
)
 
—

 
(3
)
 
(5
)
Available-for-sale securities
(68
)
 
140

 
(204
)
 
94

Trading securities
(13
)
 
—

 
(2,067
)
 
—

Consolidated obligation bonds
—

 
329

 
(1,905
)
 
1,915

Consolidated obligation discount notes
603

 
(27
)
 
1,294

 
13

Other stand-alone economic hedge derivatives
6,520

 
—

 
6,566

 
—

Mortgage delivery commitments
82

 
—

 
82

 
—

Interest rate caps related to held-to-maturity securities
(119
)
 
(674
)
 
(526
)
 
(639
)
Member/offsetting swaps and caps
272

 
613

 
248

 
977

Total fair value gains related to economic hedge derivatives
7,276

 
381

 
3,485

 
2,355

Gains (losses) related to fair value hedge ineffectiveness
 
 
 
 
 
 
 
Advances and associated hedges
(258
)
 
373

 
(333
)
 
796

Available-for-sale securities and associated hedges
(10,712
)
 
6,161

 
(21,351
)
 
7,895

Consolidated obligation bonds and associated hedges
(940
)
 
1,465

 
(3,542
)
 
1,539

Total fair value hedge ineffectiveness
(11,910
)
 
7,999

 
(25,226
)
 
10,230

Total net gains (losses) on derivatives and hedging activities
(3,821
)
 
8,449

 
(20,760
)
 
12,686

Net gains on trading securities
3,013

 
62

 
9,930

 
339

Credit component of other-than-temporary impairment losses on held-to-maturity securities
(4
)
 
(19
)
 
(12
)
 
(25
)
Gains on sales of held-to-maturity securities
259

 
3,887

 
729

 
10,113

Gains on sales of available-for-sale securities
3,564

 
—

 
4,215

 
2,345

Service fees
506

 
520

 
1,021

 
988

Letter of credit fees
1,573

 
1,070

 
2,845

 
2,219

Other, net
303

 
4

 
329

 
8

Total other
9,214

 
5,524

 
19,057

 
15,987

Total other income (loss)
$
5,393

 
$
13,973

 
$
(1,703
)
 
$
28,673



65

Hedge Ineffectiveness
The Bank uses interest rate swaps to hedge the risk of changes in the fair value of some of its advances and consolidated obligation bonds and substantially all of its available-for-sale securities. These hedging relationships are designated as fair value hedges. To the extent these relationships qualify for hedge accounting, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For those relationships that qualified for hedge accounting, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net gains (losses) of $(11.9) million and $8.0 million for the three months ended June 30, 2016 and 2015, respectively, and $(25.2) million and $10.2 million for the six months ended June 30, 2016 and 2015, respectively. To the extent these hedges do not qualify for hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). For the three months ended June 30, 2016 and 2015, the change in the fair value of derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that were not in qualifying hedging relationships was $(0.1) million and $0.5 million, respectively. The change in the fair value of derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that were not in qualifying hedging relationships was $(2.1) million and $2.0 million for the six months ended June 30, 2016 and 2015, respectively.
The increase in fair value hedge ineffectiveness during the three- and six-month periods ended June 30, 2016 as compared to the three- and six-month periods ended June 30, 2015, was due in large part to the addition of higher yielding, longer duration GSE CMBS and GSE debentures to the Bank’s available-for-sale securities portfolio during the last nine months of 2015 and the first six months of 2016. Substantially all of the Bank’s GSE CMBS and GSE debentures classified as available-for-sale are hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships. The hedge ineffectiveness gains and losses associated with these particular relationships are attributable in large part to the use of different discount curves to value the interest rate swaps (OIS) and the GSE CMBS/GSE debentures (LIBOR plus a constant spread). Notwithstanding the hedge ineffectiveness gains and losses, these hedging relationships have been, and are expected to continue to be, highly effective in achieving offsetting changes in fair values attributable to the hedged risk. While the ineffectiveness-related gains and losses associated with these hedging relationships can be significant when evaluated in the context of the Bank’s net income, they are relatively small when expressed as a percentage of the values of the positions. Because the Bank expects to hold these interest rate swaps to maturity, the unrealized ineffectiveness-related gains (or losses) associated with its holdings of GSE CMBS and GSE debentures are expected to be transitory, meaning that they will reverse in future periods in the form of ineffectiveness-related losses (or gains).
Economic Hedge Derivatives
Notwithstanding the transitory nature of the ineffectiveness-related gains and losses associated with the Bank's available-for-sale securities portfolio (discussed above), the Bank has entered into several derivative transactions in an effort to mitigate a portion of the periodic earnings variability that can result from those fair value hedging relationships. For the three and six months ended June 30, 2016, the gains associated with stand-alone economic hedge derivatives used for this purpose were $6.5 million and $6.6 million, respectively.
As discussed previously in the section entitled “Financial Condition — Long-Term Investments,” to hedge a portion of the risk associated with a significant increase in short-term interest rates, the Bank held, as of June 30, 2016, 3 interest rate cap agreements having a total notional amount of $1.2 billion. The premiums paid for these caps totaled $4.3 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged CMO LIBOR floaters with embedded caps and therefore can be a source of volatility in the Bank’s earnings. At June 30, 2016, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $0.2 million.
From time to time, the Bank hedges the risk of changes in the fair value of some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. As of June 30, 2016, the aggregate notional balance of these swaps totaled $4.7 billion. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can also be a source of volatility in the Bank’s earnings.

66

Other
During the six months ended June 30, 2016 and 2015, the Bank sold approximately $114 million (par value) and $595 million (par value), respectively, of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $0.7 million and $10.1 million, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. During these same six-month periods, the Bank sold approximately $2.1 billion (par value) and $0.5 billion (par value), respectively, of shorter maturity GSE debentures classified as available-for-sale. In addition, the Bank sold $0.3 billion (par value) of U.S. Treasury Notes classified as available-for-sale during the six months ended June 30, 2016. The aggregate gains recognized on these sales totaled $4.2 million and $2.3 million, respectively.
During September and October, 2015, the Bank acquired U.S. Treasury Notes with par values of $104.8 million and $100.0 million, respectively. Each of these securities was classified as trading. Due to a decline in long-term interest rates, gains on these securities totaled $2.7 million and $0.2 million, respectively, for the three months ended June 30, 2016, and $7.3 million and $2.3 million, respectively, for the six months ended June 30, 2016. Prior to its sale in June 2016, the U.S. Treasury Note that was acquired in October 2015 was economically hedged with a fixed-for-floating interest rate swap; during both the three and six months ended June 30, 2016, this swap, which was terminated concurrent with the sale of the U.S. Treasury Note, produced losses of $2.1 million.
For a discussion of the other-than-temporary impairment loss on one of the Bank's held-to-maturity securities, see “Item 1. Financial Statements” (specifically, Note 5 beginning on page 12 of this report).
Other Expense
Total other expense, which includes the Bank’s compensation and benefits, other operating expenses, discretionary grant programs, derivative clearing fees and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $19.7 million and $39.1 million for the three and six months ended June 30, 2016, respectively, compared to $18.8 million and $37.0 million, respectively, for the corresponding periods in 2015.
Compensation and benefits were $12.0 million and $23.6 million for the three and six months ended June 30, 2016, respectively, compared to $10.1 million and $20.5 million, respectively, for the corresponding periods in 2015. The increase in compensation and benefits for the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015, was due largely to: (1) an increase in headcount; (2) increased costs associated with the Bank's participation in the Pentegra Defined Benefit Plan for Financial Institutions and (3) merit and cost-of-living adjustments, offset by a reduction in employee separation costs. Average headcount increased from 201 and 199 employees for the three and six months ended June 30, 2015, respectively, to 214 and 213 employees, respectively, for the corresponding periods in 2016.
Other operating expenses for the three and six months ended June 30, 2016 were $5.6 million and $11.2 million, respectively, compared to $7.0 million and $13.2 million, respectively, for the corresponding periods in 2015. The decrease in other operating expenses for the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015, resulted from offsetting increases and decreases in many of the Bank's other operating expenses, none of which were individually significant.
Derivative clearing fees were $0.3 million and $0.5 million for the three and six months ended June 30, 2016, respectively, compared to $0.1 million and $0.2 million, respectively, for the corresponding periods in 2015. The increase in derivative clearing fees was attributable to the higher volume of cleared trades in 2016 as compared to 2015.
The Bank, together with the other FHLBanks, is assessed for the costs of operating the Finance Agency and the Office of Finance. The Bank’s share of these expenses totaled $1.4 million and $2.9 million for the three and six months ended June 30, 2016, respectively, compared to $1.3 million and $2.4 million, respectively, for the corresponding periods in 2015.
AHP Assessments
While the Bank is exempt from all federal, state and local income taxes, it is obligated to set aside amounts for its Affordable Housing Program (“AHP”).
As required by statute, each year the Bank contributes 10 percent of its earnings (as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments; the result of this calculation is then multiplied by 10 percent. The Bank’s AHP assessments totaled $2.4 million and $2.7 million for the three months ended June 30, 2016 and 2015, respectively, and $3.3 million and $5.2 million for the six months ended June 30, 2016 and 2015, respectively.


67

Critical Accounting Policies and Estimates
A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the 2015 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the six months ended June 30, 2016.

Liquidity and Capital Resources
In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments typically consisting of overnight federal funds and overnight reverse repurchase agreements. From time to time, the Bank may also invest in short-term commercial paper, U.S. Treasury Bills and GSE discount notes. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes, and as the level of liquidity needed to satisfy Finance Agency requirements changes. At June 30, 2016, the Bank’s short-term liquidity portfolio was comprised of $3.9 billion of overnight federal funds sold and $3.3 billion of overnight reverse repurchase agreements.
The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to the capital markets as needed during the business day to acquire funds to meet its needs.
In addition to the liquidity provided from the proceeds of the issuance of consolidated obligations, the Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its investments in MBS and/or agency debentures). Furthermore, the Bank has access to borrowings (typically short-term) from the other FHLBanks.
The 11 FHLBanks and the Office of Finance are parties to the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (the “Contingency Agreement”). The Contingency Agreement and related procedures are designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations ("Plan COs") directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. The direct placement by a FHLBank of consolidated obligations with another FHLBank is permitted only in those instances when direct placement of consolidated obligations is necessary to ensure that sufficient funds are available to timely pay all principal and interest on FHLBank System consolidated obligations due on a particular day. Through the date of this report, no Plan COs have ever been issued pursuant to the terms of the Contingency Agreement.
On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds.
The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the six months ended June 30, 2016 or 2015.
The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet operational and contingent liquidity requirements. When measuring its liquidity for these purposes, the Bank includes only contractual cash flows and the amount of funds it estimates would be available in the event the Bank were to use securities held in its long-term investment portfolio as collateral for repurchase agreements. While it believes purchased federal funds might be available as a source of funds, it does not include this potential source of funds in its calculations of available liquidity.
The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day during a stress period of elevated advances demand without accessing the capital markets for the sale of consolidated obligations. As of June 30, 2016, the Bank’s estimated operational liquidity requirement was $4.3 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $17.2 billion.

68

The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days during a stress period of elevated advances demand. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of June 30, 2016, the Bank’s estimated contingent liquidity requirement was $7.9 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $13.8 billion.
In addition to the liquidity measures described above, the Bank is required, pursuant to guidance issued by the Finance Agency, to meet two daily liquidity standards, each of which assumes that the Bank is unable to access the market for consolidated obligations during a prescribed period. The first standard requires the Bank to maintain sufficient funds to meet its obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing, prepaid or called advances. The second standard requires the Bank to maintain sufficient funds to meet its obligations for 5 days under a scenario in which it is assumed that members renew all maturing and called advances, with certain exceptions for very large, highly rated members. These requirements are more stringent than the 5-day contingent liquidity requirement discussed above. The Bank was in compliance with both of these liquidity requirements at all times during the six months ended June 30, 2016.
The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank does not currently believe that its ability to issue consolidated obligations will be impeded to that extent in the future. If, however, the Bank were unable to issue consolidated obligations for an extended period of time, the Bank would eventually exhaust the availability of purchased federal funds (including borrowings from other FHLBanks) and repurchase agreements as sources of funds. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements.
Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank’s ability to conduct its operations would be compromised even earlier than if this funding source was available.
A summary of the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2015 is provided in the 2015 10-K. There have been no material changes in the Bank’s contractual obligations outside the normal course of business during the six months ended June 30, 2016.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the 2015 10-K. The information provided in this item is intended to update the disclosures made in the 2015 10-K.
As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.
The terms of member advances, investment securities, and consolidated obligations may present interest rate risk and/or embedded option risk. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank makes extensive use of interest rate derivative instruments, primarily interest rate swaps and caps, to manage the risk arising from these sources.
The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a much smaller extent, MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the effective maturities of these mortgage-based assets relatively more sensitive to changes in interest rates and other factors that affect the mortgagors’ decisions to repay their mortgages as compared to other long-term investment securities that do not have prepayment features. A decline in interest rates generally accelerates mortgage refinancing activity, thus increasing

69

prepayments and thereby shortening the effective maturity of the mortgage-related assets. Conversely, rising rates generally slow prepayment activity and lengthen a mortgage-related asset’s effective maturity.
The Bank has managed the potential prepayment risk embedded in mortgage assets by purchasing floating rate securities, by purchasing securities that maintain their original principal balance for a fixed number of years, by purchasing highly structured tranches of mortgage securities that substantially limit the effects of prepayment risk, by issuing debt with features similar to the mortgage assets, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio.
The Bank’s Enterprise Market Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Bank develops its funding and hedging strategies to manage its interest rate risk within the risk limits established in its Enterprise Market Risk Management Policy.
The Enterprise Market Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As reflected in the table below, the Bank was in compliance with this limit at each month-end during the six months ended June 30, 2016.
As part of its ongoing risk management process, the Bank calculates an estimated market value of equity for a base case interest rate scenario and for interest rate scenarios that reflect parallel interest rate shocks. The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are determined using vendor prices or a pricing model. For those instruments for which a pricing model is used, the calculations are based upon parameters derived from market conditions existing at the time of measurement, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP, and other liabilities at their recorded carrying amounts.
For purposes of compliance with the Bank’s Enterprise Market Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month-end during the period from December 2015 through June 2016. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.
MARKET VALUE OF EQUITY
(dollars in billions)
 
 
 
Up 200 Basis Points(1)
 
Down 200 Basis Points(2)
 
Up 100 Basis Points(1)
 
Down 100 Basis Points(2)
 
Base Case
Market
Value of Equity
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
 
Estimated
Market
Value of Equity
 
Percentage
Change
from Base Case
December 2015
$
2.318

 
$
2.271

 
(2.03
)%
 
$
2.389

 
3.06
%
 
$
2.310

 
(0.35
)%
 
$
2.313

 
(0.22
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2016
2.343

 
2.343

 
0.01
 %
 
2.495

 
6.49
%
 
2.359

 
0.68
 %
 
2.354

 
0.47
 %
February 2016
2.191

 
2.187

 
(0.18
)%
 
2.445

 
11.59
%
 
2.204

 
0.59
 %
 
2.212

 
0.96
 %
March 2016
2.332

 
2.315

 
(0.73
)%
 
2.560

 
9.78
%
 
2.337

 
0.21
 %
 
2.366

 
1.46
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2016
2.509

 
2.477

 
(1.28
)%
 
2.746

 
9.45
%
 
2.504

 
(0.20
)%
 
2.554

 
1.79
 %
May 2016
2.617

 
2.600

 
(0.65
)%
 
2.847

 
8.79
%
 
2.620

 
0.11
 %
 
2.640

 
0.88
 %
June 2016
2.519

 
2.530

 
0.44
 %
 
2.864

 
13.70
%
 
2.537

 
0.71
 %
 
2.581

 
2.46
 %
_____________________________
(1) 
In the up 100 and up 200 basis point scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
The estimated market value of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.01 percent.

70

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

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The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month-end during the period from December 2015 through June 2016.
DURATION ANALYSIS
(expressed in years)
 
Base Case Interest Rates
 
Duration of Equity
 
Asset Duration
 
Liability Duration
 
Duration Gap
 
Duration of Equity
 
Up 100(1)
 
Up 200(1)
 
Down 100(2)
 
Down 200(2)
December 2015
0.26
 
(0.31)
 
(0.05)
 
(0.53)
 
1.11
 
2.16
 
0.88
 
3.49
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2016
0.24
 
(0.33)
 
(0.09)
 
(1.36)
 
0.04
 
1.19
 
1.44
 
3.45
February 2016
0.27
 
(0.35)
 
(0.08)
 
(1.15)
 
0.10
 
1.32
 
1.79
 
4.23
March 2016
0.28
 
(0.33)
 
(0.05)
 
(0.79)
 
0.42
 
1.36
 
2.02
 
4.23
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2016
0.31
 
(0.34)
 
(0.03)
 
(0.20)
 
0.68
 
1.43
 
1.74
 
3.93
May 2016
0.26
 
(0.30)
 
(0.04)
 
(0.60)
 
0.36
 
1.07
 
0.77
 
4.54
June 2016
0.25
 
(0.31)
 
(0.06)
 
(0.97)
 
(0.21)
 
0.61
 
1.49
 
5.17
_____________________________
(1) 
In the up 100 and up 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
The duration of equity was calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates.
Duration of equity measures the impact of a parallel shift in interest rates on an entity’s market value of equity but may not be a good metric for measuring changes in value related to non-parallel rate shifts. An alternative measure for that purpose uses key rate durations, which measure portfolio sensitivity to changes in interest rates at particular points on a yield curve. Key rate duration is a specialized form of duration. It is calculated by estimating the change in value due to changing the market rate for one specific maturity point on the yield curve while holding all other variables constant. The sum of the key rate durations across an applicable yield curve is approximately equal to the overall portfolio duration.
The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank's key rate duration limit is 5 years, measured as the difference between the maximum and minimum key rate durations calculated for 11 defined individual maturity points on the yield curve. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month-end during the six months ended June 30, 2016.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Bank’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Bank’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Bank’s disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


72


PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

31.1
 
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2016, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2016 and December 31, 2015; (ii) Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015; (iii) Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015; (iv) Statements of Capital for the Six Months Ended June 30, 2016 and 2015; (v) Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015; and (vi) Notes to the Financial Statements for the quarter ended June 30, 2016.
 
 
 


73

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

August 12, 2016
By 
/s/ Tom Lewis
Date
 
Tom Lewis 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 


74

EXHIBIT INDEX

31.1
 
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2016, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2016 and December 31, 2015; (ii) Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015; (iii) Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015; (iv) Statements of Capital for the Six Months Ended June 30, 2016 and 2015; (v) Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015; and (vi) Notes to the Financial Statements for the quarter ended June 30, 2016.
 
 
 


Federal Home Loan Bank of Dallas Reports