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EX-32.2 - CERTIFICATION 906 CFO - Federal Home Loan Bank of Bostonex322_q32016.htm
EX-32.1 - CERTIFICATION 906 CEO - Federal Home Loan Bank of Bostonex321_q32016.htm
EX-31.2 - CERTIFICATION 302 CFO - Federal Home Loan Bank of Bostonex312_q32016.htm
EX-31.1 - CERTIFICATION 302 CEO - Federal Home Loan Bank of Bostonex311_q32016.htm
EX-10.1 - MPF CONSOLIDATED INTERBANK AGREEMENT - Federal Home Loan Bank of Bostonexhibit101mpfagreement.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
––––––––––––––––––––––––––––––––––––––––––––––––––––
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding as of
October 31, 2016
Class A Stock, par value $100
 
zero
Class B Stock, par value $100
 
24,144,469




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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Cash and due from banks
$
172,481

 
$
254,218

Interest-bearing deposits
249

 
197

Securities purchased under agreements to resell
3,749,000

 
6,700,000

Federal funds sold
5,500,000

 
2,120,000

Investment securities:
 
 
 

Trading securities
618,932

 
230,134

Available-for-sale securities - includes $11,169 and $22,822 pledged as collateral at September 30, 2016, and December 31, 2015, respectively that may be repledged
7,125,064

 
6,314,285

Held-to-maturity securities - includes $26,702 and $42,703 pledged as collateral at September 30, 2016, and December 31, 2015, respectively that may be repledged (a)
2,271,239

 
2,654,565

Total investment securities
10,015,235

 
9,198,984

Advances
37,195,148

 
36,076,167

Mortgage loans held for portfolio, net of allowance for credit losses of $800 and $1,025 at September 30, 2016, and December 31, 2015
3,714,283

 
3,581,788

Accrued interest receivable
77,045

 
84,442

Premises, software, and equipment, net
3,869

 
3,360

Derivative assets, net
62,947

 
40,117

Other assets
53,044

 
43,396

Total Assets
$
60,543,301

 
$
58,102,669

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
571,287

 
$
458,513

Non-interest-bearing
39,496

 
24,089

Total deposits
610,783

 
482,602

Consolidated obligations (COs):
 
 
 

Bonds
27,345,898

 
25,427,277

Discount notes
28,725,374

 
28,479,097

Total consolidated obligations
56,071,272

 
53,906,374

Mandatorily redeemable capital stock
33,812

 
41,989

Accrued interest payable
93,117

 
81,268

Affordable Housing Program (AHP) payable
81,271

 
82,081

Derivative liabilities, net
463,758

 
442,007

Other liabilities
36,529

 
43,435

Total liabilities
57,390,542

 
55,079,756

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 23,333 shares and 23,367 shares issued and outstanding at September 30, 2016, and December 31, 2015, respectively
2,333,262

 
2,336,662

Retained earnings:
 
 
 
Unrestricted
962,798

 
934,214

Restricted
217,343

 
194,634

Total retained earnings
1,180,141

 
1,128,848

Accumulated other comprehensive loss
(360,644
)
 
(442,597
)
Total capital
3,152,759

 
3,022,913

Total Liabilities and Capital
$
60,543,301

 
$
58,102,669

_______________________________________
(a)   Fair values of held-to-maturity securities were $2,512,030 and $2,923,124 at September 30, 2016, and December 31, 2015, respectively.

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


3


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
84,830

 
$
59,163

 
$
244,060

 
$
175,012

Prepayment fees on advances, net
(35
)
 
1,506

 
2,897

 
5,527

Securities purchased under agreements to resell
2,697

 
1,366

 
8,603

 
3,273

Federal funds sold
5,200

 
1,669

 
15,992

 
4,519

Investment securities:
 
 
 
 
 
 
 
Trading securities
2,182

 
2,274

 
6,623

 
6,888

Available-for-sale securities
28,452

 
24,313

 
76,767

 
68,488

Held-to-maturity securities
21,423

 
22,997

 
65,811

 
72,132

Prepayment fees on investments
85

 
29

 
416

 
286

Total investment securities
52,142

 
49,613

 
149,617

 
147,794

Mortgage loans held for portfolio
29,874

 
30,392

 
90,856

 
91,633

Other
171

 
18

 
414

 
43

Total interest income
174,879

 
143,727

 
512,439

 
427,801

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
Bonds
86,574

 
80,695

 
267,214

 
242,859

Discount notes
23,011

 
6,391

 
68,287

 
16,813

Total consolidated obligations
109,585

 
87,086

 
335,501

 
259,672

Deposits
180

 
13

 
441

 
46

Mandatorily redeemable capital stock
334

 
472

 
1,032

 
1,275

Other borrowings
1

 

 
3

 
2

Total interest expense
110,100

 
87,571

 
336,977

 
260,995

NET INTEREST INCOME
64,779

 
56,156

 
175,462

 
166,806

Reduction of provision for credit losses
(94
)
 
(159
)
 
(194
)
 
(442
)
NET INTEREST INCOME AFTER REDUCTION OF PROVISION FOR CREDIT LOSSES
64,873

 
56,315

 
175,656

 
167,248

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investment securities
(568
)
 
(230
)
 
(1,653
)
 
(810
)
Net amount of impairment losses reclassified to (from) accumulated other comprehensive loss
197

 
(823
)
 
(1,068
)
 
(2,018
)
Net other-than-temporary impairment losses on investment securities, credit portion
(371
)
 
(1,053
)
 
(2,721
)
 
(2,828
)
Litigation settlements

 

 
19,584

 
134,713

Loss on early extinguishment of debt
(184
)
 
(82
)
 
(1,484
)
 
(211
)
Service fees
1,948

 
2,094

 
5,850

 
6,102

Net unrealized (losses) gains on trading securities
(2,849
)
 
780

 
(892
)
 
(332
)
Net losses on derivatives and hedging activities
(1,922
)
 
(7,653
)
 
(11,120
)
 
(12,154
)
Other
(65
)
 
123

 
(203
)
 
(329
)
Total other (loss) income
(3,443
)
 
(5,791
)
 
9,014

 
124,961

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
10,396

 
9,419

 
30,746

 
32,717

Other operating expenses
5,792

 
4,973

 
16,939

 
15,129

Federal Housing Finance Agency (the FHFA)
819

 
884

 
2,640

 
2,787

Office of Finance
732

 
666

 
2,274

 
2,193

Other
3,034

 
689

 
5,796

 
1,839

Total other expense
20,773

 
16,631

 
58,395

 
54,665

INCOME BEFORE ASSESSMENTS
40,657

 
33,893

 
126,275

 
237,544

AHP
4,099

 
3,437

 
12,731

 
23,882

NET INCOME
$
36,558

 
$
30,456

 
$
113,544

 
$
213,662

 

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

4


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

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
36,558

 
$
30,456

 
$
113,544

 
$
213,662

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(17,325
)
 
(1,962
)
 
62,446

 
3,834

Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 
 
 
 
 
 
 
Net amount of impairment losses reclassified (from) to non-interest income
 
(196
)
 
823

 
1,068

 
2,018

Accretion of noncredit portion
 
8,586

 
10,072

 
26,938

 
33,525

Total net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities
 
8,390

 
10,895

 
28,006

 
35,543

Net unrealized gains (losses) relating to hedging activities
 
 
 
 
 
 
 
 
Unrealized gains (losses)
 
1,082

 
(15,959
)
 
(25,688
)
 
(15,329
)
Reclassification adjustment for previously deferred hedging gains and losses included in net income
 
5,341

 
6,231

 
19,445

 
16,758

Total net unrealized gains (losses) relating to hedging activities
 
6,423

 
(9,728
)
 
(6,243
)
 
1,429

Pension and postretirement benefits
 
210

 
162

 
(2,256
)
 
484

Total other comprehensive (loss) income
 
(2,302
)
 
(633
)
 
81,953

 
41,290

Comprehensive income
 
$
34,256

 
$
29,823

 
$
195,497

 
$
254,952


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

5



FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(dollars and shares in thousands)
(unaudited)


 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2014
24,131

 
$
2,413,114

 
$
764,888

 
$
136,770

 
$
901,658

 
$
(436,986
)
 
$
2,877,786

Proceeds from sale of capital stock
1,631

 
163,063

 
 
 
 
 
 
 
 
 
163,063

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

 
42,732

 
213,662

 
41,290

 
254,952

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

 
$
2,542,598

 
$
894,676

 
$
179,502

 
$
1,074,178

 
$
(395,696
)
 
$
3,221,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2015
23,367

 
$
2,336,662

 
$
934,214

 
$
194,634

 
$
1,128,848

 
$
(442,597
)
 
$
3,022,913

Proceeds from sale of capital stock
3,143

 
314,274

 
 
 
 
 
 
 
 
 
314,274

Repurchase of capital stock
(3,176
)
 
(317,634
)
 
 
 
 
 
 
 
 
 
(317,634
)
Shares reclassified to mandatorily redeemable capital stock
(1
)
 
(40
)
 
 
 
 
 
 
 
 
 
(40
)
Comprehensive income
 
 
 
 
90,835

 
22,709

 
113,544

 
81,953

 
195,497

Cash dividends on capital stock
 
 
 
 
(62,251
)
 
 
 
(62,251
)
 
 
 
(62,251
)
BALANCE, SEPTEMBER 30, 2016
23,333

 
$
2,333,262

 
$
962,798

 
$
217,343

 
$
1,180,141

 
$
(360,644
)
 
$
3,152,759


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

6



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


 
For the Nine Months Ended September 30,
 
2016
 
2015
OPERATING ACTIVITIES
 

 
 

Net income
$
113,544

 
$
213,662

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

 
 
Depreciation and amortization
(23,463
)
 
(43,968
)
Reduction of provision for credit losses
(194
)
 
(442
)
Change in net fair-value adjustments on derivatives and hedging activities
17,856

 
1,317

Net other-than-temporary impairment losses on investment securities, credit portion
2,721

 
2,828

Loss on early extinguishment of debt
1,484

 
211

Other adjustments
3,207

 
(442
)
Net change in:
 

 
 
Market value of trading securities
892

 
332

Accrued interest receivable
7,390

 
2,530

Other assets
(304
)
 
(64
)
Accrued interest payable
11,849

 
8,157

Other liabilities
(11,614
)
 
10,113

Total adjustments
9,824

 
(19,428
)
Net cash provided by operating activities
123,368

 
194,234

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
(111,135
)
 
(70,426
)
Securities purchased under agreements to resell
2,951,000

 
(2,400,000
)
Federal funds sold
(3,380,000
)
 
125,000

Premises, software, and equipment
(1,638
)
 
(794
)
Trading securities:
 

 
 

Proceeds from long-term
9,471

 
8,314

Purchases of long-term
(399,155
)
 

Available-for-sale securities:
 

 
 

Proceeds from long-term
901,082

 
739,421

Purchases of long-term
(1,608,830
)
 
(1,529,058
)
Held-to-maturity securities:
 

 
 

Proceeds from long-term
425,936

 
617,803

Advances to members:
 

 
 

Proceeds
255,534,514

 
258,113,231

Disbursements
(256,626,490
)
 
(258,602,004
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
408,128

 
439,681

Purchases
(550,511
)
 
(551,753
)
Proceeds from sale of foreclosed assets
4,368

 
6,189

Net cash used in investing activities
(2,443,260
)
 
(3,104,396
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
127,432

 
128,400

Net payments on derivatives with a financing element
(10,493
)
 
(14,302
)
Net proceeds from issuance of consolidated obligations:
 

 
 


7


Discount notes
114,582,795

 
110,227,338

Bonds
15,435,348

 
8,525,179

Bonds transferred from other Federal Home Loan Banks

 
87,782

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(114,339,603
)
 
(108,999,969
)
Bonds
(13,483,496
)
 
(7,680,907
)
Proceeds from issuance of capital stock
314,274

 
163,063

Payments for redemption of mandatorily redeemable capital stock
(8,217
)
 
(256,010
)
Payments for repurchase of capital stock
(317,634
)
 
(33,525
)
Cash dividends paid
(62,251
)
 
(41,142
)
Net cash provided by financing activities
2,238,155

 
2,105,907

Net decrease in cash and due from banks
(81,737
)
 
(804,255
)
Cash and due from banks at beginning of the year
254,218

 
1,124,536

Cash and due from banks at end of the period
$
172,481

 
$
320,281

Supplemental disclosures:
 
 
 
Interest paid
$
363,979

 
$
307,832

AHP payments
$
12,739

 
$
14,080

Noncash transfers of mortgage loans held for portfolio to real-estate-owned (REO)
$
2,657

 
$
5,611


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

8



FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The presentation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2016. The unaudited financial statements should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the SEC) on March 18, 2016 (the 2015 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Recently Issued and Adopted Accounting Guidance

Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the Financial Accounting Standards Board (FASB) issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the statement of cash flows. This guidance is effective for us for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. We are in the process of evaluating this guidance, and its effect on our cash flows has not yet been determined. The adoption of this guidance will have no effect on our financial condition or combined results of operations.

Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued new guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance applies to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The guidance is effective for us on January 1, 2020. Early application of the guidance is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating this guidance and its effect on our financial condition, results of operations, and cash flows.

Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force). On March 14, 2016, the FASB issued updated guidance to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Specifically, the updated guidance clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The guidance becomes effective for us for the interim and annual periods beginning on January 1, 2017, and early adoption is permitted. We are in the process of evaluating this guidance and its effect on our financial condition, results of operations, and cash flows.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force). On March 10, 2016, the FASB issued final guidance clarifying that the novation of a derivative contract (that is, a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require de-designation of that hedge accounting relationship. Hedge accounting relationships could continue as long as all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance becomes effective for us for the interim and annual periods beginning on January 1, 2017, and early adoption is permitted. We elected to early adopt the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on our financial condition, results of operations, and cash flows.


9


Leases. On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. The guidance becomes effective for us for the interim and annual periods beginning on January 1, 2019, and early application is permitted. We are in the process of evaluating this guidance and its effect on our financial condition, results of operations, and cash flows.

Revenue from Contracts with Customers. On May 28, 2014, the FASB issued its guidance on revenue from contracts with customers. This guidance outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In August of 2015, the FASB deferred the effective date for the new revenue recognition guidance until January 1, 2018. In March of 2016, the FASB issued additional guidance related to distinguishing when an entity is acting as a principal versus an agent in contracts with customers. The distinction is relevant to reporting revenue gross (as principal) or net (as agent). In April of 2016, the FASB issued additional guidance for identifying performance obligations and licensing agreements for purposes of revenue recognition. Financial instruments and other contractual rights within the scope of other GAAP guidance are excluded from the scope of this new revenue recognition guidance. This guidance will be effective for us beginning January 1, 2018, and is not expected to have a material impact on our financial condition, results of operations, and cash flows.

Accounting for Cloud Computing Arrangements. On April 15, 2015, the FASB issued amendments to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. We adopted this new guidance on January 1, 2016, using the prospective approach, for all arrangements entered into or materially modified after the adoption date. The adoption of this new guidance did not have a material impact on our financial condition, results of operations, and cash flows.

Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented on the statement of condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The guidance became effective for us for the interim and annual periods beginning on January 1, 2016, and was adopted retrospectively. The adoption of this guidance resulted in a $6.1 million reclassification of unamortized debt issuance costs from other assets to consolidated obligations on the statement of condition at December 31, 2015. The adoption of this guidance did not have any effect on our results of operations and cash flows.

Note 3 — Trading Securities

Major Security Types. Our trading securities as of September 30, 2016, and December 31, 2015, were (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
U.S. Treasury obligations
$
399,129

 
$

 
 
 
 
Mortgage-backed securities (MBS)
 

 
 
U.S. government-guaranteed – single-family
8,995

 
10,296

Government-sponsored enterprise (GSEs) – single-family
911

 
1,449

GSEs – multifamily
209,897

 
218,389

 
219,803

 
230,134

Total
$
618,932

 
$
230,134


Net unrealized losses on trading securities for the nine months ended September 30, 2016 and 2015, amounted to $892,000 and $332,000 for securities held on September 30, 2016 and 2015, respectively.

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

Note 4 — Available-for-Sale Securities

Major Security Types. Our available-for-sale securities as of September 30, 2016, were (dollars in thousands):

10



 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
487,018

 
$

 
$
(31,827
)
 
$
455,191

U.S. government-owned corporations
358,677

 

 
(57,339
)
 
301,338

GSEs
145,893

 

 
(16,933
)
 
128,960

 
991,588

 

 
(106,099
)
 
885,489

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
133,518

 
60

 
(1,815
)
 
131,763

U.S. government guaranteed – multifamily
650,353

 
1,267

 
(718
)
 
650,902

GSEs – single-family
4,743,432

 
33,843

 
(3,115
)
 
4,774,160

GSEs – multi-family
681,445

 
1,305

 

 
682,750

 
6,208,748

 
36,475

 
(5,648
)
 
6,239,575

Total
$
7,200,336

 
$
36,475

 
$
(111,747
)
 
$
7,125,064

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

Our available-for-sale securities as of December 31, 2015, were (dollars in thousands):
 
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
Supranational institutions
$
467,277

 
$

 
$
(28,364
)
 
$
438,913

U.S. government-owned corporations
323,404

 

 
(57,436
)
 
265,968

GSEs
133,691

 

 
(15,899
)
 
117,792

 
924,372

 

 
(101,699
)
 
822,673

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
159,232

 
181

 
(2,771
)
 
156,642

U.S. government guaranteed – multifamily
747,205

 
430

 
(2,873
)
 
744,762

GSEs – single-family
4,621,194

 
6,248

 
(37,234
)
 
4,590,208

 
5,527,631

 
6,859

 
(42,878
)
 
5,491,612

Total
$
6,452,003

 
$
6,859

 
$
(144,577
)
 
$
6,314,285

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

The following table summarizes our available-for-sale securities with unrealized losses as of September 30, 2016, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

11


 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
455,191

 
$
(31,827
)
 
$
455,191

 
$
(31,827
)
U.S. government-owned corporations

 

 
301,338

 
(57,339
)
 
301,338

 
(57,339
)
GSEs

 

 
128,960

 
(16,933
)
 
128,960

 
(16,933
)
 

 

 
885,489

 
(106,099
)
 
885,489

 
(106,099
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
95,287

 
(1,815
)
 
95,287

 
(1,815
)
U.S. government guaranteed – multifamily
197,057

 
(299
)
 
95,059

 
(419
)
 
292,116

 
(718
)
GSEs – single-family
921,794

 
(2,575
)
 
138,407

 
(540
)
 
1,060,201

 
(3,115
)
 
1,118,851

 
(2,874
)
 
328,753

 
(2,774
)
 
1,447,604

 
(5,648
)
Total temporarily impaired
$
1,118,851

 
$
(2,874
)
 
$
1,214,242


$
(108,873
)

$
2,333,093


$
(111,747
)

The following table summarizes our available-for-sale securities with unrealized losses as of December 31, 2015, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
Supranational institutions
$

 
$

 
$
438,913

 
$
(28,364
)
 
$
438,913

 
$
(28,364
)
U.S. government-owned corporations

 

 
265,968

 
(57,436
)
 
265,968

 
(57,436
)
GSEs

 

 
117,792

 
(15,899
)
 
117,792

 
(15,899
)
 

 

 
822,673

 
(101,699
)
 
822,673

 
(101,699
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family

 

 
113,626

 
(2,771
)
 
113,626

 
(2,771
)
U.S. government guaranteed – multifamily
537,059

 
(2,040
)
 
109,138

 
(833
)
 
646,197

 
(2,873
)
GSEs – single-family
3,113,057

 
(28,878
)
 
373,634

 
(8,356
)
 
3,486,691

 
(37,234
)
 
3,650,116

 
(30,918
)
 
596,398

 
(11,960
)
 
4,246,514

 
(42,878
)
Total temporarily impaired
$
3,650,116

 
$
(30,918
)
 
$
1,419,071

 
$
(113,659
)
 
$
5,069,187

 
$
(144,577
)

Redemption Terms. The amortized cost and fair value of our available-for-sale securities by contractual maturity at September 30, 2016, and December 31, 2015, were (dollars in thousands):

 
 
September 30, 2016
 
December 31, 2015
Year of Maturity
 
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
 
$

 
$

 
$

 
$

Due after one year through five years
 

 

 

 

Due after five years through 10 years
 
183,811

 
173,686

 
128,473

 
121,722

Due after 10 years
 
807,777

 
711,803

 
795,899

 
700,951

 
 
991,588

 
885,489

 
924,372

 
822,673

MBS (1)
 
6,208,748

 
6,239,575

 
5,527,631

 
5,491,612

Total
 
$
7,200,336

 
$
7,125,064

 
$
6,452,003

 
$
6,314,285

_______________________

12


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

Note 5 — Held-to-Maturity Securities

Major Security Types. Our held-to-maturity securities as of September 30, 2016, were (dollars in thousands):

 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
2,545

 
$

 
$
2,545

 
$
82

 
$

 
$
2,627

State or local housing-finance-agency obligations (HFA securities)
166,169

 

 
166,169

 
11

 
(22,064
)
 
144,116

 
168,714

 

 
168,714

 
93

 
(22,064
)
 
146,743

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
13,594

 

 
13,594

 
263

 

 
13,857

U.S. government guaranteed – multifamily
3,609

 

 
3,609

 
1

 

 
3,610

GSEs – single-family
884,287

 

 
884,287

 
22,195

 
(227
)
 
906,255

GSEs – multifamily
347,739

 

 
347,739

 
18,014

 

 
365,753

Private-label – residential
1,041,072

 
(201,181
)
 
839,891

 
233,117

 
(10,334
)
 
1,062,674

Asset-backed securities (ABS) backed by home equity loans
14,003

 
(598
)
 
13,405

 
548

 
(815
)
 
13,138

 
2,304,304

 
(201,779
)
 
2,102,525

 
274,138

 
(11,376
)
 
2,365,287

Total
$
2,473,018

 
$
(201,779
)
 
$
2,271,239

 
$
274,231

 
$
(33,440
)
 
$
2,512,030


Our held-to-maturity securities as of December 31, 2015, were (dollars in thousands):
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
3,605

 
$

 
$
3,605

 
$
180

 
$

 
$
3,785

HFA securities
170,928

 

 
170,928

 
18

 
(21,356
)
 
149,590

 
174,533

 

 
174,533

 
198

 
(21,356
)
 
153,375

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
15,999

 

 
15,999

 
354

 

 
16,353

U.S. government guaranteed – multifamily
17,794

 

 
17,794

 
21

 
(7
)
 
17,808

GSEs – single-family
1,093,124

 

 
1,093,124

 
26,562

 
(142
)
 
1,119,544

GSEs – multifamily
386,635

 

 
386,635

 
18,118

 

 
404,753

Private-label – residential
1,180,661

 
(229,117
)
 
951,544

 
257,312

 
(12,262
)
 
1,196,594

ABS backed by home equity loans
15,604

 
(668
)
 
14,936

 
682

 
(921
)
 
14,697

 
2,709,817

 
(229,785
)
 
2,480,032

 
303,049

 
(13,332
)
 
2,769,749

Total
$
2,884,350

 
$
(229,785
)
 
$
2,654,565

 
$
303,247

 
$
(34,688
)
 
$
2,923,124


13



The following table summarizes our held-to-maturity securities with unrealized losses as of September 30, 2016, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$

 
$

 
$
141,786

 
$
(22,064
)
 
$
141,786

 
$
(22,064
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
47,792

 
(70
)
 
14,341

 
(157
)
 
62,133

 
(227
)
Private-label – residential
30,379

 
(317
)
 
469,423

 
(41,023
)
 
499,802

 
(41,340
)
ABS backed by home equity loans

 

 
12,091

 
(1,000
)
 
12,091

 
(1,000
)
 
78,171

 
(387
)
 
495,855

 
(42,180
)
 
574,026

 
(42,567
)
Total
$
78,171

 
$
(387
)
 
$
637,641

 
$
(64,244
)
 
$
715,812

 
$
(64,631
)

The following table summarizes our held-to-maturity securities with unrealized losses as of December 31, 2015, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$

 
$

 
$
146,594

 
$
(21,356
)
 
$
146,594

 
$
(21,356
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government guaranteed - multifamily
5,842

 
(7
)
 

 

 
5,842

 
(7
)
GSEs – single-family
22,261

 
(6
)
 
16,417

 
(136
)
 
38,678

 
(142
)
Private-label – residential
105,318

 
(1,729
)
 
493,228

 
(45,051
)
 
598,546

 
(46,780
)
ABS backed by home equity loans
205

 
(16
)
 
13,348

 
(1,064
)
 
13,553

 
(1,080
)
 
133,626

 
(1,758
)
 
522,993

 
(46,251
)
 
656,619

 
(48,009
)
Total
$
133,626

 
$
(1,758
)
 
$
669,587

 
$
(67,607
)
 
$
803,213

 
$
(69,365
)

Redemption Terms. The amortized cost, carrying value, and fair value of our held-to-maturity securities by contractual maturity at September 30, 2016, and December 31, 2015, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.
 
 
September 30, 2016
 
December 31, 2015
Year of Maturity
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
 
$

 
$

 
$

 
$

 
$

 
$

Due after one year through five years
 
19,864

 
19,864

 
19,922

 
21,583

 
21,583

 
21,677

Due after five years through 10 years
 

 

 

 

 

 

Due after 10 years
 
148,850

 
148,850

 
126,821

 
152,950

 
152,950

 
131,698

 
 
168,714

 
168,714

 
146,743

 
174,533

 
174,533

 
153,375

MBS (2)
 
2,304,304

 
2,102,525

 
2,365,287

 
2,709,817

 
2,480,032

 
2,769,749

Total
 
$
2,473,018

 
$
2,271,239

 
$
2,512,030

 
$
2,884,350

 
$
2,654,565

 
$
2,923,124

_______________________

14


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

Note 6 — Other-Than-Temporary Impairment

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

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at September 30, 2016. At September 30, 2016, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security. Regarding available-for-sale securities that were in an unrealized loss position as of September 30, 2016:

Debentures issued by a supranational institution that were in an unrealized loss position as of September 30, 2016, are expected to return contractual principal and interest based on our review and analysis of independent third-party credit reports on the supranational institution, and the supranational institution's triple-A (or equivalent) rating by each of the nationally recognized statistical rating organizations (NRSROs) that rates it.

Debentures issued by U.S. government-owned corporations are not obligations of the U.S. government and not guaranteed by the U.S. government. However, these securities are rated at the same level as the U.S. government by the NRSROs. These ratings reflect the U.S. government's implicit support of the government-owned corporation as well as the entity's underlying business and financial risk.

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

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

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

Held-to-Maturity Securities

HFA Securities. We have reviewed our investments in HFA securities and have determined that unrealized losses reflect the impact of normal market yield and spread fluctuations and illiquidity in the credit markets. We have determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral, including an assessment of past payment history (no shortfalls of principal or interest), property vacancy rates, debt service ratios, over-collateralization and other credit enhancement, and third-party bond insurance as applicable. As of September 30, 2016, none of our held-to-maturity investments in HFA securities that are in an unrealized loss position were rated below investment grade by an NRSRO. Because the decline in market value is attributable to changes in interest rates, credit spreads, and illiquidity in this market and not to a significant deterioration in the fundamental credit quality of these obligations, and because we do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider these investments to be other-than-temporarily impaired at September 30, 2016.

Agency MBS. For agency MBS, we determined that the strength of the issuers' guarantees through direct obligation or support from the U.S. government is sufficient to protect us from losses based on current expectations. Additionally, there have been no

15


shortfalls of principal or interest on any such security. As a result, we have determined that, as of September 30, 2016, all of the gross unrealized losses on such MBS are temporary. We do not believe that the declines in market value of these securities are attributable to credit quality, and because we do not intend to sell the investments, nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, we do not consider any of these investments to be other-than-temporarily impaired at September 30, 2016.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. To ensure consistency in determination of the other-than-temporary impairment for private-label residential MBS and certain home equity loan investments (including home equity ABS) among all FHLBanks, the FHLBanks use an FHLBank System governance committee (the OTTI Governance Committee) and a formal process to ensure consistency in key other-than-temporary impairment modeling assumptions used for purposes of their cash-flow analyses for the majority of these securities. We use the FHLBanks' uniform framework and approved assumptions for purposes of our other-than-temporary impairment cash-flow analyses of our private-label residential MBS and certain home equity loan investments. For additional information see Item 8 — Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment in the 2015 Annual Report

To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of our private-label residential MBS were performed. These analyses use two third-party models.

The first third-party model considers borrower characteristics and the particular attributes of the loans underlying our securities, in conjunction with assumptions about current home prices and future changes in home prices and interest rates, producing monthly projections of prepayments, defaults, loan modifications, and loss severities. A significant input to the first model is the forecast of future housing-price changes, based on an assessment of individual housing markets for the relevant states and core-based statistical areas (CBSA), as defined by the United States Office of Management and Budget. The OTTI Governance Committee developed a short-term housing price forecast, with projected changes ranging from a decrease of 1.0 percent to an increase of 10.0 percent over the 12- month period beginning July 1, 2016. For the vast majority of markets, the projected short-term housing price changes range from an increase of 3.0 percent to an increase of 6.0 percent. Thereafter, we have projected a unique recovery path for each relevant geographic area based on an internally developed framework derived from historical data.

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

For those securities for which a credit loss was recognized during the three months ended September 30, 2016, the following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS (dollars in thousands).
 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A - Private-label residential MBS (1)
 
$
61,461

 
9.8
%
 
26.4
%
 
40.2
%
 
8.3
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.


16


The following table sets forth our securities for which other-than-temporary impairment credit losses were recognized during the life of the security through September 30, 2016 (dollars in thousands). Securities are classified in the table below based on their classifications at the time of issuance.
 
 
September 30, 2016
Other-Than-Temporarily Impaired Investment (1)
 
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
 
$
41,212

 
$
35,774

 
$
28,288

 
$
36,406

Private-label residential MBS – Alt-A
 
1,146,687

 
849,232

 
655,536

 
880,398

ABS backed by home equity loans – Subprime
 
3,884

 
3,545

 
2,948

 
3,496

Total other-than-temporarily impaired securities
 
$
1,191,783

 
$
888,551

 
$
686,772

 
$
920,300

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

The following table presents a roll-forward of the amounts related to credit losses recognized in earnings. The roll-forward is the amount of credit losses on investment securities for which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss (dollars in thousands).
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
516,922

 
$
551,341

 
$
533,888

 
$
568,652

Additions:
 
 
 
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized
6

 

 
6

 

Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)
365

 
1,053

 
2,715

 
2,828

Reductions:
 
 
 
 
 
 
 
Increase in cash flows expected to be collected which are recognized over the remaining life of the security(2)
(9,613
)
 
(9,585
)
 
(28,929
)
 
(28,671
)
Balance at end of period
$
507,680

 
$
542,809

 
$
507,680

 
$
542,809

_______________________
(1)
For the three months ended September 30, 2016 and 2015, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to July 1, 2016 and 2015. For the nine months ended September 30, 2016 and 2015, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2016 and 2015.
(2)
Represents amounts accreted as interest income during the current period.

Note 7 — Advances

General Terms. At both September 30, 2016, and December 31, 2015, we had advances outstanding with interest rates ranging from zero percent to 7.72 percent, as summarized below (dollars in thousands).

17


 
 
September 30, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
 
$
2,816

 
0.69
%
 
$
7,546

 
0.65
%
Due in one year or less
 
18,305,745

 
0.89

 
18,282,139

 
0.72

Due after one year through two years
 
9,152,992

 
1.09

 
8,970,109

 
1.31

Due after two years through three years
 
2,471,819

 
1.67

 
3,170,267

 
1.94

Due after three years through four years
 
2,213,426

 
1.64

 
1,495,494

 
1.89

Due after four years through five years
 
1,548,385

 
1.52

 
1,845,396

 
1.71

Thereafter
 
3,368,092

 
1.84

 
2,196,832

 
2.70

Total par value
 
37,063,275

 
1.15
%
 
35,967,783

 
1.20
%
Premiums
 
24,626

 
 

 
24,183

 
 

Discounts
 
(20,809
)
 
 

 
(17,437
)
 
 

Fair value of bifurcated derivatives (1)
 
5,629

 
 
 
1,241

 
 
Hedging adjustments
 
122,427

 
 

 
100,397

 
 

Total
 
$
37,195,148

 
 

 
$
36,076,167

 
 

_________________________
(1)
At September 30, 2016, and December 31, 2015, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.

At September 30, 2016, and December 31, 2015, we had callable advances and floating-rate advances that may be prepaid on a floating-rate reset date without prepayment or termination fees outstanding totaling $7.3 billion and $6.5 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next call date for callable advances (dollars in thousands):

Year of Contractual Maturity or Next Call Date (1), Par Value
 
September 30, 2016
 
December 31, 2015
Overdrawn demand-deposit accounts
 
$
2,816

 
$
7,546

Due in one year or less
 
24,264,920

 
23,728,314

Due after one year through two years
 
3,597,992

 
3,983,109

Due after two years through three years
 
2,458,819

 
3,130,267

Due after three years through four years
 
2,038,226

 
1,455,494

Due after four years through five years
 
1,548,385

 
1,670,196

Thereafter
 
3,152,117

 
1,992,857

Total par value
 
$
37,063,275

 
$
35,967,783

_______________________
(1)
Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

At September 30, 2016, and December 31, 2015, we had putable advances outstanding totaling $3.5 billion and $2.2 billion, respectively.

The following table sets forth our advances outstanding by the year of contractual maturity or next put date for putable advances (dollars in thousands):

18


Year of Contractual Maturity or Next Put Date, Par Value
 
September 30, 2016
 
December 31, 2015
Overdrawn demand-deposit accounts
 
$
2,816

 
$
7,546

Due in one year or less
 
20,350,745

 
19,924,939

Due after one year through two years
 
9,026,742

 
7,909,809

Due after two years through three years
 
2,462,069

 
2,870,517

Due after three years through four years
 
2,028,426

 
1,383,244

Due after four years through five years
 
1,191,385

 
1,783,896

Thereafter
 
2,001,092

 
2,087,832

Total par value
 
$
37,063,275

 
$
35,967,783


Interest-Rate-Payment Terms. The following table details interest-rate-payment types for our outstanding advances (dollars in thousands):
Par value of advances
September 30, 2016
 
December 31, 2015
Fixed-rate
$
29,007,364

 
$
29,257,362

Variable-rate
8,055,911

 
6,710,421

Total par value
$
37,063,275

 
$
35,967,783


Credit-Risk Exposure and Security Terms. At September 30, 2016, and December 31, 2015, we had $14.3 billion and $14.2 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five borrowers at each of September 30, 2016, and December 31, 2015, representing 38.5 percent and 39.4 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Prepayment Fees. For the three and nine months ended September 30, 2016 and 2015, net advance prepayment fees recognized in income are reflected in the following table (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Prepayment fees received from borrowers
 
$
2,983

 
$
15,377

 
$
9,647

 
$
19,273

Less: hedging fair-value adjustments on prepaid advances
 
(1,009
)
 
(12,674
)
 
(3,235
)
 
(15,405
)
Less: net premiums associated with prepaid advances
 
(317
)
 

 
(2,091
)
 

Less: deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 
(1,692
)
 
(1,197
)
 
(3,100
)
 
(1,443
)
Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 

 

 
1,676

 
3,102

    Net prepayment fees recognized in income
 
$
(35
)
 
$
1,506

 
$
2,897

 
$
5,527


Note 8 — Mortgage Loans Held for Portfolio

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

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

19


 
September 30, 2016
 
December 31, 2015
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
545,986

 
$
568,786

Fixed-rate 20- and 30-year single-family mortgages
3,098,790

 
2,949,589

Premiums
68,408

 
63,994

Discounts
(1,759
)
 
(2,141
)
Deferred derivative gains, net
3,658

 
2,585

Total mortgage loans held for portfolio
3,715,083

 
3,582,813

Less: allowance for credit losses
(800
)
 
(1,025
)
Total mortgage loans, net of allowance for credit losses
$
3,714,283

 
$
3,581,788


The following table details the par value of mortgage loans held for portfolio (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Conventional mortgage loans
$
3,242,305

 
$
3,107,415

Government mortgage loans
402,471

 
410,960

Total par value
$
3,644,776

 
$
3,518,375


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

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

Note 9 — Allowance for Credit Losses

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

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2015 Annual Report.

Secured Member Credit Products

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

At September 30, 2016, and December 31, 2015, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the three months ended September 30, 2016 and 2015.

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at September 30, 2016, and December 31, 2015. At September 30, 2016, and December 31, 2015, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2015 Annual Report.

Government Mortgage Loans Held for Portfolio


20


Based on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of September 30, 2016, and December 31, 2015. In addition, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2015 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on our conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2015 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below set forth certain key credit quality indicators for our investments in mortgage loans at September 30, 2016, and December 31, 2015 (dollars in thousands):
 
September 30, 2016
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
25,623

 
$
13,419

 
$
39,042

Past due 60-89 days delinquent
5,597

 
4,161

 
9,758

Past due 90 days or more delinquent
17,038

 
5,761

 
22,799

Total past due
48,258

 
23,341

 
71,599

Total current loans
3,271,638

 
390,365

 
3,662,003

Total mortgage loans
$
3,319,896

 
$
413,706

 
$
3,733,602

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
8,278

 
$
1,560

 
$
9,838

Serious delinquency rate (2)
0.55
%
 
1.39
%
 
0.64
%
Past due 90 days or more still accruing interest
$

 
$
5,761

 
$
5,761

Loans on nonaccrual status (3)
$
17,526

 
$

 
$
17,526

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


21


 
December 31, 2015
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
22,270

 
$
13,784

 
$
36,054

Past due 60-89 days delinquent
8,428

 
5,230

 
13,658

Past due 90 days or more delinquent
22,408

 
5,665

 
28,073

Total past due
53,106

 
24,679

 
77,785

Total current loans
3,125,664

 
397,667

 
3,523,331

Total mortgage loans
$
3,178,770

 
$
422,346

 
$
3,601,116

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
10,812

 
$
2,341

 
$
13,153

Serious delinquency rate (2)
0.73
%
 
1.34
%
 
0.80
%
Past due 90 days or more still accruing interest
$

 
$
5,665

 
$
5,665

Loans on nonaccrual status (3)
$
22,408

 
$

 
$
22,408

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

Collectively Evaluated Mortgage Loans. We evaluate the credit risk of our investments in conventional mortgage loans for impairment on a collective basis that considers loan-pool-specific attribute data at the master commitment pool level, including historical delinquency migration, applies estimated loss severities, and incorporates available credit enhancements to establish our best estimate of probable incurred losses at the reporting date. Migration analysis is a methodology for estimating the rate of default experienced on pools of similar loans based on our historical experience. We apply migration analysis to conventional loans that are currently not past due, loans that are 30 to 59 days past due, 60 to 89 days past due, and 90 to 179 days past due. We then estimate the dollar amount of loans in these categories that we believe are likely to migrate to a realized loss position and apply a loss severity factor to estimate losses that would be incurred at the statement of condition date. The losses are then reduced by the probable cash flows resulting from available credit enhancement. Credit enhancement cash flows that are projected and assessed as not probable of receipt are not considered in reducing estimated losses.

Individually Evaluated Mortgage Loans. Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no credit enhancement from a participating financial institution to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss on these loans on an individual loan basis. Loans that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. The resulting incurred loss is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs. Additionally, for our investments in loans modified under our temporary loan modification plan, on the effective date of a loan modification we measure the present value of expected future cash flows discounted at the loan's effective interest rate and reduce the carrying value of the loan accordingly.

Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. We charge off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property, less cost to sell and adjusted for any available credit enhancements for loans that are 180 or more days past due, when the borrower has filed for bankruptcy protection and the loan is at least 30 days past due, or when there is evidence of fraud.

22



Individually Evaluated Impaired Loans. The following tables present the recorded investment, par value and any related allowance for impaired loans individually assessed for impairment at September 30, 2016, and December 31, 2015, and the average recorded investment and interest income recognized on these loans during the three and nine months ended September 30, 2016 and 2015 (dollars in thousands).
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
Recorded Investment
 
Par Value
 
Recorded Investment
 
Par Value
Individually evaluated impaired mortgage loans with no related allowance
 
$
22,950

 
$
22,909

 
$
26,668

 
$
26,622


 
 
2016
 
2015
 
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance:
 
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
$
23,492

 
$
116

 
$
30,295

 
$
105

 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
$
24,728

 
$
298

 
$
31,907

 
$
354


Roll-Forward of Allowance for Credit Losses on Mortgage Loans. The following table presents a roll-forward of the allowance for credit losses on conventional mortgage loans for the three and nine months ended September 30, 2016 and 2015, as well as the recorded investment in mortgage loans by impairment methodology at September 30, 2016 and 2015 (dollars in thousands). The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
900

 
$
1,100

 
$
1,025

 
$
2,012

Charge-offs, net of recoveries
(6
)
 
59

 
(31
)
 
(570
)
Reduction of provision for credit losses
(94
)
 
(159
)
 
(194
)
 
(442
)
Balance, end of period
$
800

 
$
1,000

 
$
800

 
$
1,000

Ending balance, individually evaluated for impairment
$

 
$

 
$

 
$

Ending balance, collectively evaluated for impairment
$
800

 
$
1,000

 
$
800

 
$
1,000

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
22,950

 
$
29,050

 
$
22,950

 
$
29,050

Collectively evaluated for impairment
$
3,296,946

 
$
3,138,248

 
$
3,296,946

 
$
3,138,248

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

REO. At September 30, 2016, and December 31, 2015, we had $2.4 million and $3.6 million, respectively, in assets classified as REO. During the nine months ended September 30, 2016 and 2015, we sold REO assets with a recorded carrying value of $3.2 million and $5.1 million, respectively. Upon the sale of these REO properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, we recognized net gains totaling $476,000 and $600,000 during the nine months ended September 30, 2016 and 2015, respectively. Gains and losses on the sale of REO assets are recorded in other income.

Note 10 — Derivatives and Hedging Activities


23


The following table presents the fair value of derivatives, including the effect of netting adjustments and cash collateral as of September 30, 2016, and December 31, 2015 (dollars in thousands):

 
September 30, 2016
 
December 31, 2015
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
18,830,355

 
$
16,435

 
$
(541,145
)
 
$
15,195,012

 
$
26,874

 
$
(468,982
)
Forward-start interest-rate swaps
527,800

 

 
(61,793
)
 
527,800

 

 
(35,547
)
Total derivatives designated as hedging instruments
19,358,155

 
16,435

 
(602,938
)
 
15,722,812

 
26,874

 
(504,529
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
1,152,000

 
250

 
(18,522
)
 
562,500

 
246

 
(16,623
)
Interest-rate caps or floors

 

 

 
300,000

 

 

CO bond firm commitments
100,000

 

 
(59
)
 

 

 

Mortgage-delivery commitments (1)
60,355

 
77

 
(40
)
 
24,714

 
18

 
(25
)
Total derivatives not designated as hedging instruments
1,312,355

 
327

 
(18,621
)
 
887,214

 
264

 
(16,648
)
Total notional amount of derivatives
$
20,670,510

 
 

 
 

 
$
16,610,026

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
16,762

 
(621,559
)
 
 
 
27,138

 
(521,177
)
Netting adjustments and cash collateral including related accrued interest (2)
 

 
46,185

 
157,801

 
 
 
12,979

 
79,170

Derivative assets and derivative liabilities
 

 
$
62,947

 
$
(463,758
)
 
 
 
$
40,117

 
$
(442,007
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $204.0 million and $92.9 million at September 30, 2016, and December 31, 2015, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $750,000 at December 31, 2015.

Net (losses) gains on derivatives and hedging activities recorded in Other Income (Loss) for the three and nine months ended September 30, 2016 and 2015 were as follows (dollars in thousands):


24


 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
   Interest-rate swaps
 
$
(3,278
)
 
$
(4,690
)
 
$
(8,529
)
 
$
(6,405
)
 Forward-start interest-rate swaps
 
(22
)
 
(205
)
 
(558
)
 
(101
)
Total net losses related to derivatives designated as hedging instruments
 
(3,300
)
 
(4,895
)
 
(9,087
)
 
(6,506
)
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
1,186

 
(3,313
)
 
(3,531
)
 
(5,988
)
CO bond firm commitments
 
(59
)
 

 
(59
)
 

Mortgage-delivery commitments
 
251

 
555

 
1,557

 
340

Total net gains (losses) related to derivatives not designated as hedging instruments
 
1,378

 
(2,758
)
 
(2,033
)
 
(5,648
)
Net losses on derivatives and hedging activities
 
$
(1,922
)
 
$
(7,653
)
 
$
(11,120
)
 
$
(12,154
)

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedge relationships and the impact of those derivatives on our net interest income for the three and nine months ended September 30, 2016 and 2015, (dollars in thousands):
 
For the Three Months Ended September 30, 2016
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
71,032

 
$
(70,859
)
 
$
173

 
$
(22,547
)
Investments
10,255

 
(9,810
)
 
445

 
(8,788
)
COs – bonds
(16,705
)
 
12,809

 
(3,896
)
 
6,500

Total
$
64,582

 
$
(67,860
)
 
$
(3,278
)
 
$
(24,835
)
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2015
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
(21,993
)
 
$
21,422

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

 
280

 
(9,405
)
COs – bonds
13,107

 
(17,506
)
 
(4,399
)
 
18,475

 Total
$
(48,833
)
 
$
44,143

 
$
(4,690
)
 
$
(23,862
)


25


 
For the Nine Months Ended September 30, 2016
 
Loss on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
(23,045
)
 
$
22,029

 
$
(1,016
)
 
$
(78,799
)
Investments
(66,030
)
 
67,215

 
1,185

 
(26,682
)
COs – bonds
(5,874
)
 
(2,824
)
 
(8,698
)
 
21,730

Total
$
(94,949
)
 
$
86,420

 
$
(8,529
)
 
$
(83,751
)
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
11,318

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

 
1,157

 
(28,326
)
COs – bonds
17,376

 
(24,800
)
 
(7,424
)
 
49,438

 Total
$
15,992

 
$
(22,397
)
 
$
(6,405
)
 
$
(76,330
)
____________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

The following table presents the gains (losses) recognized in accumulated other comprehensive loss, the gains (losses) reclassified from accumulated other comprehensive loss into income, and the effect of our hedging activities on our net losses on derivatives and hedging activities in the statement of income for our forward-start interest-rate swaps associated with hedged CO bonds in cash-flow hedge relationships (dollars in thousands).
Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Gains (Losses) Recognized in Other Comprehensive Loss on Derivatives
(Effective Portion)
 
Location of Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Recognized in Net Losses on Derivatives and Hedging Activities
(Ineffective Portion)
Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2016
 
$
1,082

 
Interest expense
 
$
(5,337
)
 
$
(22
)
For the Three Months Ended September 30, 2015
 
(15,959
)
 
Interest expense
 
(6,227
)
 
(205
)
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2016
 
(25,688
)
 
Interest expense
 
(19,434
)
 
(558
)
For the Nine Months Ended September 30, 2015
 
(15,329
)
 
Interest expense
 
(16,747
)
 
(101
)

For the nine months ended September 30, 2016 and 2015, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2016, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is eight years.

As of September 30, 2016, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $14.2 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a derivatives clearing organization (DCO), our counterparty for such derivatives. We also enter into derivatives that are not cleared (bilateral derivatives) under master-netting agreements. Certain of our bilateral derivatives master-netting agreements contain provisions that require us to post additional collateral with our bilateral derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's Investor Services (Moody's) or Standard and Poor's Rating Service (S&P) to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net

26


liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at September 30, 2016, was $486.8 million for which we had delivered cash or securities collateral with a post-haircut value of $438.2 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting agreements. The following table sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at September 30, 2016.

Post Haircut Value of Incremental Collateral to be Delivered
 as of September 30, 2016
(dollars in thousands)
Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral
AA+
 
AA or AA-
 
$
20,103

AA-
 
A+, A or A-
 
12,988

A-
 
below A-
 
23,528

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are U.S. Commodity Futures Trading Commission (the CFTC) - registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at September 30, 2016.

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

The following table presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of September 30, 2016, and December 31, 2015 and the fair value of derivatives that are not subject to such netting (dollars in thousands). Such netting includes any related cash collateral received from or pledged to counterparties.


27


 
 
September 30, 2016
 
December 31, 2015
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivatives meeting netting requirements
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Uncleared derivatives
 
$
4,459

 
$
(491,321
)
 
$
8,342

 
$
(463,154
)
Cleared derivatives
 
12,226

 
(130,198
)
 
18,778

 
(57,998
)
Total gross recognized amount
 
16,685

 
(621,519
)
 
27,120

 
(521,152
)
Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Uncleared derivatives
 
(4,205
)
 
27,603

 
(7,628
)
 
21,172

Cleared derivatives
 
50,390

 
130,198

 
20,607

 
57,998

Total gross amounts of netting adjustments and cash collateral
 
46,185

 
157,801

 
12,979

 
79,170

Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Uncleared derivatives
 
254

 
(463,718
)
 
714

 
(441,982
)
Cleared derivatives
 
62,616

 

 
39,385

 

Total net amounts after netting adjustments and cash collateral
 
62,870

 
(463,718
)
 
40,099

 
(441,982
)
Derivatives not meeting netting requirements
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
77

 
(40
)
 
18

 
(25
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
 
Uncleared derivatives
 
254

 
(463,718
)
 
714

 
(441,982
)
Cleared derivatives
 
62,616

 

 
39,385

 

Mortgage delivery commitments
 
77

 
(40
)
 
18

 
(25
)
Total derivative assets and total derivative liabilities presented in the statement of condition
 
62,947

 
(463,758
)
 
40,117

 
(442,007
)
 
 
 
 
 
 
 
 
 
Non-cash collateral received or pledged not offset (1)
 
 
 
 
 
 
 
 
Can be sold or repledged
 
 
 
 
 
 
 
 
Uncleared derivatives
 

 
37,623

 

 
64,391

Cannot be sold or repledged
 
 
 
 
 
 
 
 
Uncleared derivatives
 

 
385,382

 

 
331,716

Total non-cash collateral received or pledged, not offset
 

 
423,005

 

 
396,107

 Net amount
 
 
 
 
 
 
 
 
Uncleared derivatives
 
254

 
(40,713
)
 
714

 
(45,875
)
Cleared derivatives
 
62,616

 

 
39,385

 

Mortgage delivery commitments
 
77

 
(40
)
 
18

 
(25
)
Total net amount
 
$
62,947

 
$
(40,753
)
 
$
40,117

 
$
(45,900
)
_______________________
(1)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At September 30, 2016, and December 31, 2015, we had additional net credit exposure of $1.3 million and $3.1 million, respectively, due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

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


28


The following table details interest- and noninterest-bearing deposits (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Interest-bearing
 

 
 
Demand and overnight
$
567,776

 
$
454,087

Other
3,511

 
4,426

Noninterest-bearing
 

 
 

Other
39,496

 
24,089

Total deposits
$
610,783

 
$
482,602


Note 12 — Consolidated Obligations

COs - Bonds. The following table sets forth the outstanding CO bonds for which we were primarily liable at September 30, 2016, and December 31, 2015, by year of contractual maturity (dollars in thousands):
 
 
September 30, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
Due in one year or less
 
$
8,800,090

 
1.14
%
 
$
8,990,295

 
1.00
%
Due after one year through two years
 
7,970,550

 
1.33

 
6,101,990

 
1.70

Due after two years through three years
 
3,783,850

 
1.50

 
3,389,580

 
1.59

Due after three years through four years
 
1,985,855

 
1.98

 
2,056,215

 
1.97

Due after four years through five years
 
1,640,360

 
1.65

 
1,329,210

 
2.11

Thereafter
 
3,058,460

 
2.73

 
3,440,045

 
2.95

Total par value
 
27,239,165

 
1.52
%
 
25,307,335

 
1.65
%
Premiums
 
128,382

 
 

 
148,903

 
 

Discounts
 
(15,962
)
 
 

 
(20,451
)
 
 

Hedging adjustments
 
(5,687
)
 
 

 
(8,510
)
 
 

 
 
$
27,345,898

 
 

 
$
25,427,277

 
 

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

Our CO bonds outstanding at September 30, 2016, and December 31, 2015, included (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Par value of CO bonds
 

 
 

Noncallable and nonputable
$
23,088,165

 
$
21,714,335

Callable
4,151,000

 
3,593,000

Total par value
$
27,239,165

 
$
25,307,335


The following is a summary of the CO bonds for which we were primarily liable at September 30, 2016, and December 31, 2015, by year of contractual maturity or next call date for callable CO bonds (dollars in thousands):
Year of Contractual Maturity or Next Call Date
 
September 30, 2016
 
December 31, 2015
Due in one year or less
 
$
11,996,090

 
$
11,937,295

Due after one year through two years
 
7,229,550

 
5,802,990

Due after two years through three years
 
3,263,850

 
2,729,580

Due after three years through four years
 
1,757,855

 
1,831,215

Due after four years through five years
 
913,360

 
991,210

Thereafter
 
2,078,460

 
2,015,045

Total par value
 
$
27,239,165

 
$
25,307,335


29



The following table sets forth the CO bonds for which we were primarily liable by interest-rate-payment type at September 30, 2016, and December 31, 2015 (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Par value of CO bonds
 

 
 

Fixed-rate
$
21,332,165

 
$
21,847,335

Simple variable-rate
4,900,000

 
3,145,000

Step-up
1,007,000

 
315,000

Total par value
$
27,239,165

 
$
25,307,335


COs – Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
September 30, 2016
$
28,725,374

 
$
28,733,626

 
0.31
%
December 31, 2015
$
28,479,097

 
$
28,487,577

 
0.24
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 13 — Affordable Housing Program

The following table presents a roll-forward of the AHP liability for the nine months ended September 30, 2016, and year ended December 31, 2015 (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Balance at beginning of year
$
82,081

 
$
66,993

AHP expense for the period
12,731

 
32,328

AHP direct grant disbursements
(12,739
)
 
(16,716
)
AHP subsidy for AHP advance disbursements
(835
)
 
(1,255
)
Return of previously disbursed grants and subsidies
33

 
731

Balance at end of period
$
81,271

 
$
82,081


Note 14 — Capital

We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), and FHFA regulations:

1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.

2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.

3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.


30


The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

The following tables demonstrate our compliance with our regulatory capital requirements at September 30, 2016, and December 31, 2015 (dollars in thousands):
Risk-Based Capital Requirements
September 30,
2016
 
December 31,
2015
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,333,262

 
$
2,336,662

Mandatorily redeemable capital stock
33,812

 
41,989

Retained earnings
1,180,141

 
1,128,848

Total permanent capital
$
3,547,215

 
$
3,507,499

Risk-based capital requirement
 

 
 

Credit-risk capital
$
377,774

 
$
381,176

Market-risk capital
127,678

 
83,875

Operations-risk capital
151,635

 
139,515

Total risk-based capital requirement
$
657,087

 
$
604,566

Permanent capital in excess of risk-based capital requirement
$
2,890,128

 
$
2,902,933

 
 
September 30, 2016
 
December 31, 2015
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
657,087

 
$
3,547,215

 
$
604,566

 
$
3,507,499

Total regulatory capital
 
$
2,421,732

 
$
3,547,215

 
$
2,324,107

 
$
3,507,499

Total capital-to-asset ratio
 
4.0
%
 
5.9
%
 
4.0
%
 
6.0
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
3,027,165

 
$
5,320,823

 
$
2,905,133

 
$
5,261,249

Leverage capital-to-assets ratio
 
5.0
%
 
8.8
%
 
5.0
%
 
9.1
%

Note 15 — Accumulated Other Comprehensive Loss

The following table presents a summary of changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015, (dollars in thousands):








31


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, June 30, 2015
 
$
(67,827
)
 
$
(251,294
)
 
$
(70,271
)
 
$
(5,671
)
 
$
(395,063
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(1,962
)
 

 
(15,959
)
 

 
(17,921
)
Accretion of noncredit loss
 

 
10,072

 

 

 
10,072

Net actuarial loss
 

 

 

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

 
823

 

 

 
823

Amortization - hedging activities (2)
 

 

 
6,231

 

 
6,231

Amortization - pension and postretirement benefits (3)
 

 

 

 
166

 
166

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

 
(9,728
)
 
162

 
(633
)
Balance, September 30, 2015
 
$
(69,789
)
 
$
(240,399
)
 
$
(79,999
)
 
$
(5,509
)
 
$
(395,696
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2016
 
$
(57,947
)
 
$
(210,169
)
 
$
(83,903
)
 
$
(6,323
)
 
$
(358,342
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(17,325
)
 

 
1,082

 

 
(16,243
)
Noncredit other-than-temporary impairment losses
 

 
(486
)
 

 

 
(486
)
Accretion of noncredit loss
 

 
8,586

 

 

 
8,586

Net actuarial loss
 

 

 

 
(15
)
 
(15
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
290

 

 

 
290

Amortization - hedging activities (4)
 

 

 
5,341

 

 
5,341

Amortization - pension and postretirement benefits (3)
 

 

 

 
225

 
225

Other comprehensive (loss) income
 
(17,325
)
 
8,390

 
6,423

 
210

 
(2,302
)
Balance, September 30, 2016
 
$
(75,272
)
 
$
(201,779
)
 
$
(77,480
)
 
$
(6,113
)
 
$
(360,644
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified to (from) accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $6.2 million recorded in CO bond interest expense and $4,000 recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $5.3 million recorded in CO bond interest expense and $4,000 recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.


32


 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2014
 
$
(73,623
)
 
$
(275,942
)
 
$
(81,428
)
 
$
(5,993
)
 
$
(436,986
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains
 
3,834

 

 
(15,329
)
 

 
(11,495
)
Accretion of noncredit loss
 

 
33,525

 

 

 
33,525

Net actuarial loss
 

 

 

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

 
2,018

 

 

 
2,018

Amortization - hedging activities (2)
 

 

 
16,758

 

 
16,758

Amortization - pension and postretirement benefits (3)
 

 

 

 
496

 
496

Other comprehensive income
 
3,834

 
35,543

 
1,429

 
484

 
41,290

Balance, September 30, 2015
 
$
(69,789
)
 
$
(240,399
)
 
$
(79,999
)
 
$
(5,509
)
 
$
(395,696
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
$
(137,718
)
 
$
(229,785
)
 
$
(71,237
)
 
$
(3,857
)
 
$
(442,597
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
62,446

 

 
(25,688
)
 

 
36,758

Noncredit other-than-temporary impairment losses
 

 
(1,142
)
 

 

 
(1,142
)
Accretion of noncredit loss
 

 
26,938

 

 

 
26,938

Net actuarial loss
 

 

 

 
(2,931
)
 
(2,931
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 

 
2,210

 

 

 
2,210

Amortization - hedging activities (4)
 

 

 
19,445

 

 
19,445

Amortization - pension and postretirement benefits (3)
 

 

 

 
675

 
675

Other comprehensive income (loss)
 
62,446

 
28,006

 
(6,243
)
 
(2,256
)
 
81,953

Balance, September 30, 2016
 
$
(75,272
)
 
$
(201,779
)
 
$
(77,480
)
 
$
(6,113
)
 
$
(360,644
)
_______________________
(1)
Recorded in net amount of impairment losses reclassified to (from) accumulated other comprehensive loss in the statement of operations.
(2)
Amortization of hedging activities includes $16.7 million recorded in CO bond interest expense and $11,000 recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $19.4 million recorded in CO bond interest expense and $11,000 recorded in net (losses) gains on derivatives and hedging activities in the statement of operations.

Note 16 — Employee Retirement Plans

Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan

33


under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. Accordingly, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan.

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

Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. We maintain a rabbi trust, which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.

The following table sets forth our net pension costs under our defined benefit plan and expenses relating to our defined contribution plans (dollars in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Qualified Defined Benefit Multiemployer Plan - Pentegra Defined Benefit Plan
$
468

 
$
122

 
$
682

 
$
5,327

Qualified Defined Contribution Plan - Pentegra Defined Contribution Plan
259

 
237

 
829

 
765

Nonqualified Defined Contribution Plan - Thrift Benefit Equalization Plan
16

 
12

 
190

 
131


Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust, which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.

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

The following table presents the components of net periodic benefit cost for our nonqualified supplemental defined benefit retirement plan and postretirement benefits for the three and nine months ended September 30, 2016 and 2015, (dollars in thousands):

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Three Months Ended September 30,
 
Postretirement Benefits For the Three Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
255

 
$
171

 
$
9

 
$
9

Interest cost
 
159

 
121

 
9

 
7

Amortization of net actuarial loss
 
225

 
163

 

 
3

Net periodic benefit cost
 
$
639

 
$
455

 
$
18

 
$
19



34


 
 
Nonqualified Supplemental Defined Benefit Retirement Plan For the Nine Months Ended September 30,
 
Postretirement Benefits For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
769

 
$
514

 
$
25

 
$
28

Interest cost
 
478

 
363

 
26

 
23

Amortization of net actuarial loss
 
672

 
489

 
3

 
7

Net periodic benefit cost
 
$
1,919

 
$
1,366

 
$
54

 
$
58


Note 17 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2015 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the nine months ended September 30, 2016.

The carrying values, fair values, and fair-value hierarchy of our financial instruments at September 30, 2016, and December 31, 2015, were as follows (dollars in thousands). These fair values do not represent an estimate of our overall market value as a going concern, which would take into account, among other things, our future business opportunities and the net profitability of our assets and liabilities.

35


 
September 30, 2016
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
172,481

 
$
172,481

 
$
172,481

 
$

 
$

 
$

Interest-bearing deposits
249

 
249

 
249

 

 

 

Securities purchased under agreements to resell
3,749,000

 
3,748,880

 

 
3,748,880

 

 

Federal funds sold
5,500,000

 
5,499,887

 

 
5,499,887

 

 

Trading securities(1)
618,932

 
618,932

 

 
618,932

 

 

Available-for-sale securities(1)
7,125,064

 
7,125,064

 

 
7,125,064

 

 

Held-to-maturity securities
2,271,239

 
2,512,030

 

 
1,292,102

 
1,219,928

 

Advances
37,195,148

 
37,454,932

 

 
37,454,932

 

 

Mortgage loans, net
3,714,283

 
3,869,578

 

 
3,841,460

 
28,118

 

Accrued interest receivable
77,045

 
77,045

 

 
77,045

 

 

Derivative assets(1)
62,947

 
62,947

 

 
16,762

 

 
46,185

Other assets (1)
17,788

 
17,788

 
8,002

 
9,786

 

 

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(610,783
)
 
(610,779
)
 

 
(610,779
)
 

 

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(27,345,898
)
 
(27,756,392
)
 

 
(27,756,392
)
 

 

Discount notes
(28,725,374
)
 
(28,727,163
)
 

 
(28,727,163
)
 

 

Mandatorily redeemable capital stock
(33,812
)
 
(33,812
)
 
(33,812
)
 

 

 

Accrued interest payable
(93,117
)
 
(93,117
)
 

 
(93,117
)
 

 

Derivative liabilities(1)
(463,758
)
 
(463,758
)
 

 
(621,559
)
 

 
157,801

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
(2,062
)
 

 
(2,062
)
 

 

Standby letters of credit
(734
)
 
(734
)
 

 
(734
)
 

 

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


36


 
December 31, 2015
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
254,218

 
$
254,218

 
$
254,218

 
$

 
$

 
$

Interest-bearing deposits
197

 
197

 
197

 

 

 

Securities purchased under agreements to resell
6,700,000

 
6,699,852

 

 
6,699,852

 

 

Federal funds sold
2,120,000

 
2,119,962

 

 
2,119,962

 

 

Trading securities(1)
230,134

 
230,134

 

 
230,134

 

 

Available-for-sale securities(1)
6,314,285

 
6,314,285

 

 
6,314,285

 

 

Held-to-maturity securities
2,654,565

 
2,923,124

 

 
1,562,243

 
1,360,881

 

Advances
36,076,167

 
36,209,343

 

 
36,209,343

 

 

Mortgage loans, net
3,581,788

 
3,666,146

 

 
3,635,073

 
31,073

 

Accrued interest receivable
84,442

 
84,442

 

 
84,442

 

 

Derivative assets(1)
40,117

 
40,117

 

 
27,138

 

 
12,979

Other assets(1)
15,292

 
15,292

 
6,373

 
8,919

 

 

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(482,602
)
 
(482,595
)
 

 
(482,595
)
 

 

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(25,427,277
)
 
(25,578,547
)
 

 
(25,578,547
)
 

 

Discount notes
(28,479,097
)
 
(28,479,076
)
 

 
(28,479,076
)
 

 

Mandatorily redeemable capital stock
(41,989
)
 
(41,989
)
 
(41,989
)
 

 

 

Accrued interest payable
(81,268
)
 
(81,268
)
 

 
(81,268
)
 

 

Derivative liabilities(1)
(442,007
)
 
(442,007
)
 

 
(521,177
)
 

 
79,170

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances

 
(689
)
 

 
(689
)
 

 

Standby letters of credit
(831
)
 
(831
)
 

 
(831
)
 

 

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

Fair Value Measured on a Recurring Basis.

The following tables present our assets and liabilities that are measured at fair value on the statement of condition, which are recorded on a recurring basis at September 30, 2016, and December 31, 2015, by fair-value hierarchy level (dollars in thousands):


37


 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$

 
$
399,129

 
$

 
$

 
$
399,129

U.S. government-guaranteed – single-family MBS

 
8,995

 

 

 
8,995

GSEs – single-family MBS

 
911

 

 

 
911

GSEs – multi-family MBS

 
209,897

 

 

 
209,897

Total trading securities

 
618,932

 

 

 
618,932

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
455,191

 

 

 
455,191

U.S. government-owned corporations

 
301,338

 

 

 
301,338

GSEs

 
128,960

 

 

 
128,960

U.S. government guaranteed – single-family MBS

 
131,763

 

 

 
131,763

U.S. government guaranteed – multifamily MBS

 
650,902

 

 

 
650,902

GSEs – single-family MBS

 
4,774,160

 

 

 
4,774,160

GSEs – multi-family MBS

 
682,750

 

 

 
682,750

Total available-for-sale securities

 
7,125,064

 

 

 
7,125,064

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
16,685

 

 
46,185

 
62,870

Mortgage delivery commitments

 
77

 

 

 
77

Total derivative assets

 
16,762

 

 
46,185

 
62,947

Other assets
8,002

 
9,786

 

 

 
17,788

Total assets at fair value
$
8,002

 
$
7,770,544

 
$

 
$
46,185

 
$
7,824,731

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(621,519
)
 
$

 
$
157,801

 
$
(463,718
)
Mortgage delivery commitments

 
(40
)
 

 

 
(40
)
Total liabilities at fair value
$

 
$
(621,559
)
 
$

 
$
157,801

 
$
(463,758
)
_______________________
(1)
These amounts represent the application of the netting requirements which allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


38


 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustment (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

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

 
$
10,296

 
$

 
$

 
$
10,296

GSEs – single-family MBS

 
1,449

 

 

 
1,449

GSEs – multifamily MBS

 
218,389

 

 

 
218,389

Total trading securities

 
230,134

 

 

 
230,134

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

Supranational institutions

 
438,913

 

 

 
438,913

U.S. government-owned corporations

 
265,968

 

 

 
265,968

GSEs

 
117,792

 

 

 
117,792

U.S. government guaranteed – single-family MBS

 
156,642

 

 

 
156,642

U.S. government guaranteed – multifamily MBS

 
744,762

 

 

 
744,762

GSEs – single-family MBS

 
4,590,208

 

 

 
4,590,208

Total available-for-sale securities

 
6,314,285

 

 

 
6,314,285

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements

 
27,120

 

 
12,979

 
40,099

Mortgage delivery commitments

 
18

 

 

 
18

Total derivative assets

 
27,138

 

 
12,979

 
40,117

Other assets
6,373

 
8,919

 

 

 
15,292

Total assets at fair value
$
6,373

 
$
6,580,476

 
$

 
$
12,979

 
$
6,599,828

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$

 
$
(521,152
)
 
$

 
$
79,170

 
$
(441,982
)
Mortgage delivery commitments

 
(25
)
 

 

 
(25
)
Total liabilities at fair value
$

 
$
(521,177
)
 
$

 
$
79,170

 
$
(442,007
)
_______________________
(1)
These amounts represent the application of the netting requirements which allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).

The following tables present financial assets by level within the fair-value hierarchy which were recorded at fair value on a nonrecurring basis during the nine months ended September 30, 2016, and year ended December 31, 2015 (dollars in thousands):


39


 
For the Nine Months Ended September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$

 
$

 
$
8,586

 
$
8,586

Mortgage loans held for portfolio

 

 
5,534

 
5,534

REO

 

 
1,011

 
1,011

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
15,131

 
$
15,131


 
For the Year Ended December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Held-to-maturity securities:
 
 
 
 
 
 
 
Private-label residential MBS
$

 
$

 
$
16,653

 
$
16,653

Mortgage loans held for portfolio

 

 
5,376

 
5,376

REO

 

 
2,284

 
2,284

 
 
 
 
 
 
 
 
Total assets recorded at fair value on a nonrecurring basis
$

 
$

 
$
24,313

 
$
24,313


Note 18 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of September 30, 2016, and through the filing of this report, we believe there is a remote likelihood that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by FHFA regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, each FHLBank's joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at September 30, 2016, and December 31, 2015. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $911.8 billion and $851.4 billion at September 30, 2016, and December 31, 2015, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

The following table sets forth our off-balance-sheet commitments as of September 30, 2016, and December 31, 2015 (dollars in thousands):


40


 
 
September 30, 2016
 
December 31, 2015
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
4,228,471

 
$
59,125

 
$
4,287,596

 
$
3,998,609

 
$
77,477

 
$
4,076,086

Commitments for unused lines of credit - advances (2)
 
1,258,079

 

 
1,258,079

 
1,263,182

 

 
1,263,182

Commitments to make additional advances
 
334,240

 
43,910

 
378,150

 
650,890

 
54,308

 
705,198

Commitments to invest in mortgage loans
 
60,355

 

 
60,355

 
24,714

 

 
24,714

Unsettled CO bonds, at par (3)
 
390,000

 

 
390,000

 
25,000

 

 
25,000

Unsettled CO discount notes, at par
 
121,691

 

 
121,691

 
700,000

 

 
700,000

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At September 30, 2016, and December 31, 2015, these amounts totaled $22.5 million and $27.3 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $4.0 million at December 31, 2015.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.
(3)
We had $390.0 million and $25.0 million in unsettled CO bonds that were hedged with associated interest-rate swaps at September 30, 2016 and December 31, 2015.

Standby Letters of Credit. A standby letter of credit is a financing arrangement pursuant to which we agree for a fee to fund the associated obligation to a third-party beneficiary should the primary obligor fail to fund such obligation. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor’s demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. The original terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2024. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $734,000 and $831,000 at September 30, 2016, and December 31, 2015, respectively.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 10 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

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

Note 19 — Transactions with Shareholders

Related Parties. We define related parties as members with 10 percent or more of the voting interests of our capital stock outstanding. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of our stock that is required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At September 30, 2016,

41


and December 31, 2015, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding. The following tables present transactions with shareholders whose holdings of capital stock exceed 10 percent or more of total capital stock outstanding at September 30, 2016, and December 31, 2015 (dollars in thousands):

 
Capital Stock
Outstanding
 
Percent
of Total
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
326,244

 
13.8
%
 
$
6,560,582

 
17.7
%
 
$
1,224

 
3.5
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
308,280

 
13.0
%
 
$
6,015,163

 
16.7
%
 
$
1,583

 
4.5
%

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

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three and nine months ended September 30, 2016 and 2015 as follows (dollars in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Citizens Bank, N.A.
 
2016
 
2015
 
2016
 
2015
Interest income on advances
 
$
7,837

 
$
2,802

 
$
24,123

 
$
9,965

Fees on letters of credit
 
756

 
862

 
2,375

 
2,901


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

The following table presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition (dollars in thousands):
 
Capital Stock
Outstanding
 
Percent
of Total Capital Stock Outstanding
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2016
$
87,497

 
3.7
%
 
$
1,425,878

 
3.8
%
 
$
1,466

 
4.2
%
As of December 31, 2015
72,251

 
3.0

 
1,064,489

 
3.0

 
1,297

 
3.7


Note 20 — Subsequent Events

On October 28, 2016, the board of directors declared a cash dividend at an annualized rate of 3.80 percent based on capital stock balances outstanding during the third quarter of 2016. The dividend, including dividends on mandatorily redeemable capital stock, amounted to $23.2 million and was paid on November 2, 2016.


42


On November 4, 2016, we agreed with certain defendants to settle certain of our claims against them arising out of certain investments in private-label mortgage-backed securities, for an aggregate amount of $19.6 million (which amount is net of legal fees and expenses).


43


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

Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are “forward-looking statements.” These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2015 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. We do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
 
Forward-looking statements in this report may include, among others, our expectations for:

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

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

44


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

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2015 Annual Report.

EXECUTIVE SUMMARY

For the quarter ended September 30, 2016, our net income increased to $36.6 million from $30.5 million for the quarter ended September 30, 2015. This increase was largely due to an $8.6 million increase of net interest income partially offset by $2.3 million of interest-rate subsidies under the Jobs for New England and Helping to House New England programs, subsidized advance programs that support members’ small business lending and affordable rental and homeownership initiatives, respectively. Net interest income for the three months ended September 30, 2016, was $64.8 million compared with $56.2 million for the same period in 2015. This increase was primarily attributable to a $3.2 billion increase in average earning assets consisting of a $4.3 billion increase in average advances balances that was partially offset by a $1.1 billion decrease in average investments balances. Also offsetting the benefit from the increase in average earning assets was a $1.5 million decrease in net prepayment fees from advances and investments from $1.5 million in the three months ended September 30, 2015, to $50,000 in the three months ended September 30, 2016. Our retained earnings were $1.2 billion at September 30, 2016, compared to $1.1 billion at December 31, 2015, a surplus of $480.1 million over our minimum retained earnings target. We continued to satisfy all regulatory capital requirements as of September 30, 2016.

On October 28, 2016, our board of directors declared a cash dividend that was equivalent to an annual yield of 3.80 percent, the approximate daily average three-month London Interbank Offered Rate (LIBOR) yield for the third quarter of 2016 plus 300 basis points.

Net Interest Margin

For the three months ended September 30, 2016, net interest margin was 0.45 percent, compared with 0.41 percent for the three months ended September 30, 2015. This increase was primarily attributable to the increase of higher-yielding long term assets such as long-term advances and mortgage-backed securities.

Advances Balances

Advances balances increased to $37.2 billion at September 30, 2016, from $36.1 billion at December 31, 2015. The $1.1 billion increase was concentrated in fixed-rate putable advances and variable-rate advances. For the three months ended September 30, 2016, the average balance of total advances was $36.0 billion, compared to $31.7 billion during the same period in 2015. The $4.3 billion increase was broad-based, with the largest increases in variable-rate advances and short-term advances. We cannot predict whether this trend will continue.

Accretable yields from investments in private-label MBS

For both the three months ended September 30, 2016 and 2015, we recognized $9.6 million in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition.

The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $1.1 billion at September 30, 2016. Other-than-temporary impairment credit losses were $371,000 for the quarter ending September 30, 2016.

Excess Stock Management Program


45


Under the excess stock management program adopted by our board of directors on July 24, 2015, we repurchased $105.0 million in excess stock in the third quarter of 2016. For additional information see — Liquidity and Capital Resources — Internal Capital Practices and Policies — Excess Stock Management Program.

ECONOMIC CONDITIONS

Economic Environment

Economic data from third quarter 2016 suggests that the labor market has continued to strengthen and the pace of economic activity has increased compared to the first half of the year. While the unemployment rate is little changed in recent months, job gains have been consistent, on average. Household spending has grown, but business fixed investment has remained soft. The New England economy generally continues to improve, but at a moderately slower pace than the rest of the U.S. economy. Unemployment rates across the six New England states were relatively stable, on average, in the third quarter.

Interest-Rate Environment

On November 2, 2016, the Federal Open Market Committee (FOMC) announced that it decided to maintain the target range for the federal funds rate at 0.25 to 0.5 percent. The federal funds target rate had remained constant at zero to 0.25 percent from the fourth quarter of 2008 through the third quarter 2015 until it was raised in the fourth quarter of 2015. Long-term interest rates increased slightly from July through September.

The following table illustrates the interest-rate environment.
 
Three Month Average
 
Nine Month Average
 
Ending rate
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
December 31, 2015
3-month LIBOR
0.79
%
 
0.31
%
 
0.69
%
 
0.28
%
 
0.85
%
 
0.61
%
2-year U.S. Treasury yield
0.72
%
 
0.68
%
 
0.77
%
 
0.62
%
 
0.76
%
 
1.05
%
5-year U.S. Treasury yield
1.12
%
 
1.55
%
 
1.24
%
 
1.51
%
 
1.15
%
 
1.76
%
10-year U.S. Treasury yield
1.56
%
 
2.22
%
 
1.73
%
 
2.11
%
 
1.59
%
 
2.27
%

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition for December 31, 2015, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.



46


SELECTED FINANCIAL DATA
STATEMENT OF CONDITION
 (dollars in thousands)
 
 
 
 
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
60,543,301

 
$
62,160,154

 
$
58,669,046

 
$
58,102,669

 
$
57,397,372

Investments(1)
 
19,264,484

 
19,676,487

 
20,319,265

 
18,019,181

 
19,376,223

Advances
 
37,195,148

 
38,241,920

 
34,524,912

 
36,076,167

 
33,954,689

Mortgage loans held for portfolio, net(2)
 
3,714,283

 
3,628,464

 
3,575,262

 
3,581,788

 
3,580,269

Deposits and other borrowings
 
610,783

 
634,995

 
562,622

 
482,602

 
495,871

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
    Bonds
 
27,345,898

 
27,139,771

 
27,961,818

 
25,427,277

 
26,412,714

    Discount notes
 
28,725,374

 
30,483,963

 
26,358,590

 
28,479,097

 
26,538,537

    Total consolidated obligations
 
56,071,272

 
57,623,734

 
54,320,408

 
53,906,374

 
52,951,251

Mandatorily redeemable capital stock
 
33,812

 
35,076

 
35,244

 
41,989

 
42,643

Class B capital stock outstanding-putable(3)
 
2,333,262

 
2,353,698

 
2,301,039

 
2,336,662

 
2,542,598

Unrestricted retained earnings
 
962,798

 
955,126

 
938,287

 
934,214

 
894,676

Restricted retained earnings
 
217,343

 
210,031

 
200,534

 
194,634

 
179,502

Total retained earnings
 
1,180,141

 
1,165,157

 
1,138,821

 
1,128,848

 
1,074,178

Accumulated other comprehensive loss
 
(360,644
)
 
(358,342
)
 
(390,430
)
 
(442,597
)
 
(395,696
)
Total capital
 
3,152,759

 
3,160,513

 
3,049,430

 
3,022,913

 
3,221,080

Other Information
 
 
 
 
 
 
 
 
 
 
Total regulatory capital ratio(4)
 
5.86
%
 
5.72
%
 
5.92
%
 
6.04
%
 
6.38
%
_______________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $800,000, $900,000, $1.0 million, $1.0 million, and $1.0 million for the quarters ended September 30, 2016, June 30, 2016, March 31, 2016, December 31, 2015, and September 30, 2015, respectively.
(3)
Capital stock is putable at the option of a member, subject to applicable restrictions.
(4)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to Financial Statements — Note 14 — Capital.


47


SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS AND OTHER INFORMATION
 (dollars in thousands)
 
 
 
 
 
Results of Operations for the Three Months Ended
 
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
Net interest income
 
$
64,779

 
$
54,579

 
$
56,104

 
$
58,891

 
$
56,156

(Reduction of) provision for credit losses
 
(94
)
 
(111
)
 
11

 
112

 
(159
)
Net impairment losses on held-to-maturity securities recognized in earnings
 
(371
)
 
(1,003
)
 
(1,347
)
 
(1,231
)
 
(1,053
)
Litigation settlements
 

 
19,584

 

 
50,166

 

Other loss
 
(3,072
)
 
(1,787
)
 
(2,990
)
 
(1,895
)
 
(4,738
)
Other expense
 
20,773

 
18,688

 
18,934

 
21,717

 
16,631

AHP assessments
 
4,099

 
5,312

 
3,320

 
8,446

 
3,437

Net income
 
$
36,558

 
$
47,484

 
$
29,502

 
$
75,656

 
$
30,456

Other Information
 
 
 
 
 
 
 
 
 
 
Dividends declared
 
$
21,574

 
$
21,148

 
$
19,529

 
$
20,987

 
$
20,132

Dividend payout ratio
 
59.01
%
 
44.54
%
 
66.20
%
 
27.74
%
 
66.10
%
Weighted-average dividend rate(1)
 
3.65

 
3.63

 
3.42

 
3.32

 
3.28

Return on average equity(2)
 
4.55

 
6.09

 
3.88

 
10.13

 
3.80

Return on average assets
 
0.25

 
0.32

 
0.20

 
0.52

 
0.22

Net interest margin(3)
 
0.45

 
0.37

 
0.39

 
0.41

 
0.41

Average equity to average assets
 
5.48

 
5.31

 
5.20

 
5.17

 
5.79

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

RESULTS OF OPERATIONS

Net Income

Third Quarter of 2016 Compared with Third Quarter of 2015

Net income increased to $36.6 million for the three months ended September 30, 2016, from $30.5 million for the three months ended September 30, 2015, largely due to an increase of $8.6 million of net interest income partially offset by $2.3 million subsidies for Jobs for New England and Helping to House New England programs.

Nine Months Ended September 30, 2016, Compared with Nine Months Ended September 30, 2015

Net income decreased to $113.5 million for the nine months ended September 30, 2016, from $213.7 million for the nine months ended September 30, 2015, largely due to a decrease of $115.1 million in litigation settlement income, offset in part by an $8.4 million increase in net interest income after reduction of provision for credit losses.
 
Net Interest Income

Third Quarter of 2016 Compared with Third Quarter of 2015

Net interest income after reduction of provision for credit losses for the quarter ended September 30, 2016, was $64.9 million, compared to $56.3 million for the same period in 2015. For additional information see — Executive Summary as well as Rate and Volume Analysis.

48



Net interest spread was 0.39 percent for the quarter ended September 30, 2016, a three basis point increase from the same period in 2015. Net interest margin was 0.45 percent for the quarter ended September 30, 2016, a four basis point increase from the same period in 2015. The increase in net interest spread reflects a 16 basis point increase in the average yield on earning assets and a 13 basis point increase in the average yield on interest-bearing liabilities. The expansion of net interest spread and net interest margin was primarily attributable to the increase of higher-yielding long term assets such as long-term advances and mortgage-backed securities.

Nine Months Ended September 30, 2016, Compared with Nine Months Ended September 30, 2015

Net interest income after reduction of provision for credit losses for the nine months ended September 30, 2016, was $175.7 million, compared with $167.2 million for the same period in 2015. The $8.4 million increase was primarily attributable to a $3.6 billion increase in average earning assets from $54.7 billion for the nine months ended September 30, 2015, to $58.3 billion for the nine months ended September 30, 2016. The growth in average earning assets was driven by a $4.0 billion increase in average advances balances that was partially offset by a $397.6 million decrease in average investments balances. Also partially offsetting the benefit from the increase in average earning assets was a $2.5 million decrease in net prepayment fees from advances and investments from $5.8 million in the nine months ended September 30, 2015, to $3.3 million in the nine months ended September 30, 2016.

Net interest spread was 0.35 percent for the nine months ended September 30, 2016, a two basis point decrease from the same period in 2015, and net interest margin was 0.40 percent, a one basis point decrease from 2015. The decrease in net interest spread reflects a 12 basis point increase in the average yield on earning assets and a 14 basis point increase in the average yield on interest-bearing liabilities. The decrease in net interest spread and net interest margin was mainly a result of the aforementioned decrease in net prepayment fees from advances and investments.

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


49


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Three Months Ended September 30,
 
 
2016
 
2015
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
35,996,668

 
$
84,795

 
0.94
%
 
$
31,731,983

 
$
60,669

 
0.76
%
Securities purchased under agreements to resell
 
3,109,326

 
2,697

 
0.35

 
4,679,891

 
1,366

 
0.12

Federal funds sold
 
5,155,967

 
5,200

 
0.40

 
5,331,685

 
1,669

 
0.12

Investment securities(2)
 
9,781,842

 
52,142

 
2.12

 
9,232,488

 
49,613

 
2.13

Mortgage loans
 
3,667,314

 
29,874

 
3.24

 
3,579,328

 
30,392

 
3.37

Other earning assets
 
111,603

 
171

 
0.61

 
38,744

 
18

 
0.18

Total interest-earning assets
 
57,822,720

 
174,879

 
1.20

 
54,594,119

 
143,727

 
1.04

Other non-interest-earning assets
 
445,338

 
 
 
 
 
430,867

 
 
 
 
Fair-value adjustments on investment securities
 
87,557

 
 
 
 
 
(45,997
)
 
 
 
 
Total assets
 
$
58,355,615

 
$
174,879

 
1.19
%
 
$
54,978,989

 
$
143,727

 
1.04
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
25,981,154

 
$
23,011

 
0.35
%
 
$
23,910,270

 
$
6,391

 
0.11
%
Bonds
 
27,769,228

 
86,574

 
1.24

 
26,666,807

 
80,695

 
1.20

Deposits
 
502,769

 
180

 
0.14

 
404,010

 
13

 
0.01

Mandatorily redeemable capital stock
 
34,952

 
334

 
3.80

 
56,314

 
472

 
3.33

Other borrowings
 
701

 
1

 
0.57

 
653

 

 
0.24

Total interest-bearing liabilities
 
54,288,804

 
110,100

 
0.81

 
51,038,054

 
87,571

 
0.68

Other non-interest-bearing liabilities
 
868,420

 
 
 
 
 
759,257

 
 
 
 
Total capital
 
3,198,391

 
 
 
 
 
3,181,678

 
 
 
 
Total liabilities and capital
 
$
58,355,615

 
$
110,100

 
0.75
%
 
$
54,978,989

 
$
87,571

 
0.63
%
Net interest income
 
 

 
$
64,779

 
 
 
 

 
$
56,156

 
 
Net interest spread
 
 

 
 

 
0.39
%
 
 

 
 

 
0.36
%
Net interest margin
 
 

 
 

 
0.45
%
 
 

 
 

 
0.41
%
_________________________
(1)
Yields are annualized.

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


50


Net Interest Spread and Margin
(dollars in thousands)
                        
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
35,785,458

 
$
246,957

 
0.92
%
 
$
31,820,526

 
$
180,539

 
0.76
%
Securities purchased under agreements to resell
 
3,499,307

 
8,603

 
0.33

 
4,781,806

 
3,273

 
0.09

Federal funds sold
 
5,666,230

 
15,992

 
0.38

 
5,427,249

 
4,519

 
0.11

Investment securities(2)
 
9,641,011

 
149,617

 
2.07

 
9,053,267

 
147,794

 
2.18

Mortgage loans
 
3,611,442

 
90,856

 
3.36

 
3,547,026

 
91,633

 
3.45

Other earning assets
 
93,080

 
414

 
0.59

 
34,954

 
43

 
0.16

Total interest-earning assets
 
58,296,528

 
512,439

 
1.17

 
54,664,828

 
427,801

 
1.05

Other non-interest-earning assets
 
415,199

 
 
 
 
 
418,912

 
 
 
 
Fair-value adjustments on investment securities
 
29,087

 
 
 
 
 
(29,749
)
 
 
 
 
Total assets
 
$
58,740,814

 
$
512,439

 
1.17
%
 
$
55,053,991

 
$
427,801

 
1.04
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
26,747,661

 
$
68,287

 
0.34
%
 
$
24,730,894

 
$
16,813

 
0.09
%
Bonds
 
27,503,032

 
267,214

 
1.30

 
25,979,023

 
242,859

 
1.25

Deposits
 
490,595

 
441

 
0.12

 
401,199

 
46

 
0.02

Mandatorily redeemable capital stock
 
37,359

 
1,032

 
3.69

 
63,519

 
1,275

 
2.68

Other borrowings
 
874

 
3

 
0.46

 
2,556

 
2

 
0.10

Total interest-bearing liabilities
 
54,779,521

 
336,977

 
0.82

 
51,177,191

 
260,995

 
0.68

Other non-interest-bearing liabilities
 
830,264

 
 
 
 
 
821,959

 
 
 
 
Total capital
 
3,131,029

 
 
 
 
 
3,054,841

 
 
 
 
Total liabilities and capital
 
$
58,740,814

 
$
336,977

 
0.77
%
 
$
55,053,991

 
$
260,995

 
0.63
%
Net interest income
 
 

 
$
175,462

 
 
 
 

 
$
166,806

 
 
Net interest spread
 
 

 
 

 
0.35
%
 
 

 
 

 
0.37
%
Net interest margin
 
 

 
 

 
0.40
%
 
 

 
 

 
0.41
%
_________________________
(1)
Yields are annualized.

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

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2016 and 2015. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.


51


Rate and Volume Analysis
(dollars in thousands)
 
 
For the Three Months Ended
September 30, 2016 vs. September 30, 2015
 
For the Nine Months Ended
September 30, 2016 vs. September 30, 2015
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
8,848

 
$
15,278

 
$
24,126

 
$
24,274

 
$
42,144

 
$
66,418

Securities purchased under agreements to resell
 
(590
)
 
1,921

 
1,331

 
(1,091
)
 
6,421

 
5,330

Federal funds sold
 
(57
)
 
3,588

 
3,531

 
208

 
11,265

 
11,473

Investment securities
 
2,931

 
(402
)
 
2,529

 
9,326

 
(7,503
)
 
1,823

Mortgage loans
 
736

 
(1,254
)
 
(518
)
 
1,646

 
(2,423
)
 
(777
)
Other earning assets
 
69

 
84

 
153

 
144

 
227

 
371

Total interest income
 
11,937

 
19,215

 
31,152

 
34,507

 
50,131

 
84,638

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
600

 
16,020

 
16,620

 
1,480

 
49,994

 
51,474

Bonds
 
3,394

 
2,485

 
5,879

 
14,582

 
9,773

 
24,355

Deposits
 
4

 
163

 
167

 
12

 
383

 
395

Mandatorily redeemable capital stock
 
(197
)
 
59

 
(138
)
 
(628
)
 
385

 
(243
)
Other borrowings
 

 
1

 
1

 
(2
)
 
3

 
1

Total interest expense
 
3,801

 
18,728

 
22,529

 
15,444

 
60,538

 
75,982

Change in net interest income
 
$
8,136

 
$
487

 
$
8,623

 
$
19,063

 
$
(10,407
)
 
$
8,656


Average Balance of Advances Outstanding

The average balance of total advances increased $4.0 billion, or 12.5 percent, for the nine months ended September 30, 2016, compared with the same period in 2015. This increase of average advances balances was broad based, consisting of increases in fixed- rate short-term and long-term advances and variable-rate advances. The following table summarizes average balances of advances outstanding during the nine months ended September 30, 2016 and 2015, by product type.


52


Average Balance of Advances Outstanding by Product Type
(dollars in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Fixed-rate advances—par value
 
 
 
 
Long-term
 
$
13,519,952

 
$
12,831,168

Short-term
 
11,304,599

 
9,619,496

Putable
 
2,161,985

 
2,090,742

Overnight
 
816,945

 
935,806

Amortizing
 
864,734

 
869,974

All other fixed-rate advances
 
78,482

 
72,483

 
 
28,746,697

 
26,419,669

 
 
 
 
 
Variable-rate indexed advances—par value
 
 
 
 
Simple variable (1)
 
6,361,059

 
5,107,421

Putable
 
477,595

 
49,392

All other variable-rate indexed advances
 
39,726

 
48,267

 
 
6,878,380

 
5,205,080

Total average par value
 
35,625,077

 
31,624,749

Net premiums
 
4,468

 
13,016

Market value of bifurcated derivatives
 
4,467

 
2,117

Hedging adjustments
 
151,446

 
180,644

Total average balance of advances
 
$
35,785,458

 
$
31,820,526

_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $9.0 billion for the nine months ended September 30, 2016. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. For the nine months ended September 30, 2016, the average balance of all such advances totaled $28.0 billion, representing 78.1 percent of the total average balance of advances outstanding during that period. The average balance of all such advances totaled $21.4 billion for the nine months ended September 30, 2015, representing 67.3 percent of the total average balance of advances outstanding during that period.

For the nine months ended September 30, 2016 and 2015, net prepayment fees on advances and investments were $3.3 million and $5.8 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances.

Average Balance of Investments

Average short-term money market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $981.3 million, or 9.6 percent, for the nine months ended September 30, 2016, compared with the same period in 2015. The yield earned on short-term money market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.11 percent during the nine months ended September 30, 2015 to 0.38 percent during the nine months ended September 30, 2016, while average yields on securities purchased under agreements to resell increased from 0.09 percent for the nine months ended September 30, 2015 to 0.33 percent for the nine months ended September 30, 2016. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the nine months ended September 30, 2016, average balances of securities purchased under agreements to resell

53


decreased $1.3 billion and average balances of federal funds sold increased $239.0 million in comparison to the nine months ended September 30, 2015.

Average investment-securities balances increased $587.7 million, or 6.5 percent for the nine months ended September 30, 2016, compared with the same period in 2015, an increase consisting primarily of a $597.2 million increase in MBS.

Average Balance of COs

Average CO balances increased $3.5 billion, or 7.0 percent, for the nine months ended September 30, 2016, compared with the same period in 2015, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of increases of $2.0 billion and $1.5 billion in CO discount notes and CO bonds, respectively.

The average balance of CO discount notes represented approximately 49.3 percent of total average COs during the nine months ended September 30, 2016, compared with 48.8 percent of total average COs during the nine months ended September 30, 2015. The average balance of CO bonds represented 50.7 percent and 51.2 percent of total average COs outstanding during the nine months ended September 30, 2016 and 2015, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy. The following tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities, and net unrealized gains (losses) on trading securities for the three and nine months ended September 30, 2016 and 2015 (dollars in thousands).

 
 
For the Three Months Ended September 30, 2016
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(679
)
 
$

 
$
(155
)
 
$
(947
)
 
$
(1,781
)
 
Net interest settlements included in net interest income (2)
 
(22,547
)
 
(8,788
)
 

 
6,500

 
(24,835
)
 
Total net interest income
 
(23,226
)
 
(8,788
)
 
(155
)
 
5,553

 
(26,616
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
173

 
445

 

 
(3,896
)
 
(3,278
)
 
Losses on cash-flow hedges
 

 

 

 
(22
)
 
(22
)
 
Gains on derivatives not receiving hedge accounting
 
20

 
1,105

 

 
61

 
1,186

 
Mortgage delivery commitments
 

 

 
251

 
(59
)
 
192

 
Net gains (losses) on derivatives and hedging activities
 
193

 
1,550

 
251

 
(3,916
)
 
(1,922
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(23,033
)
 
(7,238
)
 
96

 
1,637

 
(28,538
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(2,849
)
 

 

 
(2,849
)
 
Total net effect of derivatives and hedging activities
 
$
(23,033
)
 
$
(10,087
)
 
$
96

 
$
1,637

 
$
(31,387
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.


54



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

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

 
18,475

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

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

 

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

 

 

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

 
34

 
(3,313
)
 
Mortgage delivery commitments
 

 

 
555

 

 
555

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

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

 
12,427

 
(34,269
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on trading securities
 

 
780

 

 

 
780

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

 
$
12,427

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

 
 
For the Nine Months Ended September 30, 2016
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(2,028
)
 
$

 
$
(437
)
 
$
(5,580
)
 
$
(8,045
)
 
Net interest settlements included in net interest income (2)
 
(78,799
)
 
(26,682
)
 

 
21,730

 
(83,751
)
 
Total net interest income
 
(80,827
)
 
(26,682
)
 
(437
)
 
16,150

 
(91,796
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(1,016
)
 
1,185

 

 
(8,698
)
 
(8,529
)
 
Losses on cash-flow hedges
 

 

 

 
(558
)
 
(558
)
 
(Losses) gains on derivatives not receiving hedge accounting
 
(86
)
 
(3,547
)
 

 
102

 
(3,531
)
 
Mortgage delivery commitments
 

 

 
1,557

 
(59
)
 
1,498

 
Net (losses) gains on derivatives and hedging activities
 
(1,102
)
 
(2,362
)
 
1,557

 
(9,213
)
 
(11,120
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(81,929
)
 
(29,044
)
 
1,120

 
6,937

 
(102,916
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(892
)
 

 

 
(892
)
 
Total net effect of derivatives and hedging activities
 
$
(81,929
)
 
$
(29,936
)
 
$
1,120

 
$
6,937

 
$
(103,808
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.

55


(2)
Represents interest income/expense on derivatives included in net interest income.

 
 
For the Nine Months Ended September 30, 2015
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(3,585
)
 
$

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

 
49,438

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

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

 

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

 

 

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

 
131

 
(5,988
)
 
Mortgage delivery commitments
 

 

 
340

 

 
340

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

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

 
(95,663
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 

 
(332
)
 

 

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

 
$
(95,995
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments.
(2)
Represents interest income/expense on derivatives included in net interest income.
 
Net interest margin for the three months ended September 30, 2016 and 2015 was 0.45 percent and 0.41 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.62 percent and 0.58 percent, respectively.

Net interest margin for the nine months ended September 30, 2016 and 2015 was 0.40 percent and 0.41 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.59 percent for each period.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $1.4 million and $1.7 million, respectively for the three months ended September 30, 2016 and 2015. For the nine months ended September 30, 2016 and 2015 interest accruals on derivatives classified as economic hedges totaled a net expense of $4.5 million and $5.2 million, respectively.

Other Income (Loss)

The following table presents a summary of other income (loss) for the three and nine months ended September 30, 2016 and 2015. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.


56


Other Income (Loss)
(dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
(Losses) gains on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Net losses related to fair-value hedge ineffectiveness
 
$
(3,276
)
 
$
(4,690
)
 
$
(8,527
)
 
$
(6,405
)
Net losses related to cash-flow hedge ineffectiveness
 
(22
)
 
(205
)
 
(558
)
 
(101
)
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
 
 
Advances
 
21

 
(5
)
 
(86
)
 
(4
)
Trading securities
 
2,542

 
(1,593
)
 
950

 
(822
)
CO Bonds
 
1

 
13

 
11

 
60

Mortgage delivery commitments
 
251

 
555

 
1,557

 
340

Net interest-accruals related to derivatives not receiving hedge accounting
 
(1,439
)
 
(1,728
)
 
(4,467
)
 
(5,222
)
Net losses on derivatives and hedging activities
 
(1,922
)
 
(7,653
)
 
(11,120
)
 
(12,154
)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(371
)
 
(1,053
)
 
(2,721
)
 
(2,828
)
Litigation settlements
 

 

 
19,584

 
134,713

Loss on early extinguishment of debt
 
(184
)
 
(82
)
 
(1,484
)
 
(211
)
Service-fee income
 
1,948

 
2,094

 
5,850

 
6,102

Net unrealized (losses) gains on trading securities
 
(2,849
)
 
780

 
(892
)
 
(332
)
Other
 
(65
)
 
123

 
(203
)
 
(329
)
Total other (loss) income
 
$
(3,443
)
 
$
(5,791
)
 
$
9,014

 
$
124,961


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

FINANCIAL CONDITION

Advances

At September 30, 2016, the advances portfolio totaled $37.2 billion, an increase of $1.1 billion compared with $36.1 billion at December 31, 2015. The increase was concentrated primarily in variable-rate advances and fixed-rate putable advances.

The following table summarizes advances outstanding by product type at September 30, 2016, and December 31, 2015.

57


 
Advances Outstanding by Product Type
(dollars in thousands)

 
September 30, 2016
 
December 31, 2015
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Long-term
$
13,227,695

 
35.7
%
 
$
13,392,525

 
37.2
%
Short-term
11,361,787

 
30.7

 
11,777,324

 
32.8

Putable
2,817,800

 
7.6

 
2,022,200

 
5.6

Amortizing
854,792

 
2.3

 
887,558

 
2.5

Overnight
697,290

 
1.9

 
1,080,755

 
3.0

All other fixed-rate advances
48,000

 
0.1

 
97,000

 
0.3

 
29,007,364

 
78.3

 
29,257,362

 
81.4

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable (1)
7,300,495

 
19.7

 
6,504,375

 
18.1

Putable
682,000

 
1.8

 
157,500

 
0.4

All other variable-rate indexed advances
73,416

 
0.2

 
48,546

 
0.1

 
8,055,911

 
21.7

 
6,710,421

 
18.6

Total par value
$
37,063,275

 
100.0
%
 
$
35,967,783

 
100.0
%
_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.
 
See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.

At September 30, 2016, we had advances outstanding to 314, or 70.2 percent of our 447 members. At December 31, 2015, we had advances outstanding to 321, or 72.0 percent of our 446 members.

Advances Credit Risk

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

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

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

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.

The following table provides information regarding advances outstanding with our borrowers in Category-1, Category-2, Category-3, and insurance company members, at September 30, 2016, along with their corresponding collateral balances.


58


Advances Outstanding by Borrower Credit Status Category
As of September 30, 2016
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
267

 
$
33,720,338

 
$
77,490,775

 
229.8
%
Category-2
17

 
438,302

 
864,658

 
197.3

Category-3
16

 
406,466

 
649,059

 
159.7

Insurance companies
20

 
2,498,169

 
2,932,688

 
117.4

Total
320

 
$
37,063,275

 
$
81,937,180

 
221.1
%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified. Based upon the method by which borrowers pledge collateral to us, the following table shows the total potential lending value of the collateral that borrowers have pledged to us, net of our collateral valuation discounts as of September 30, 2016.

Collateral by Pledge Type
(dollars in thousands)
 
Discounted Collateral
Collateral not specifically listed and identified
$
32,634,434

Collateral specifically listed and identified
44,927,888

Collateral delivered to us
11,386,363


We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Advances Credit Risk in the 2015 Annual Report. At both September 30, 2016 and December 31, 2015, the amount of pledged nontraditional and subprime loan collateral was nine percent of total member discounted collateral.

We have not recorded any allowance for credit losses on credit products at September 30, 2016, and December 31, 2015, for the reasons discussed in Item 1 Notes to the Financial Statements Note 9 Allowance for Credit Losses.

The following table presents the top five advance-borrowing institutions at September 30, 2016, and the interest earned on outstanding advances to such institutions for the three and nine months ended September 30, 2016.

Top Five Advance-Borrowing Institutions
(dollars in thousands)
 
 
September 30, 2016
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended September 30, 2016
Advances Interest Income for the
Nine Months Ended September 30, 2016
Citizens Bank, N.A.
 
$
6,560,582

 
17.7
%
 
0.54
%
 
$
7,837

$
24,123

People's United Bank, N.A.
 
3,005,075

 
8.1

 
0.51

 
4,020

10,874

Webster Bank, N.A.
 
2,587,969

 
7.0

 
0.81

 
4,883

15,058

Massachusetts Mutual Life Insurance Co.
 
1,100,000

 
3.0

 
2.22

 
6,228

18,549

Berkshire Bank
 
1,033,520

 
2.8

 
0.66

 
1,924

5,634

Total of top five advance-borrowing institutions
 
$
14,287,146

 
38.6
%
 
 
 
$
24,892

$
74,238


59


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

Investments

At September 30, 2016, investment securities and short-term money market instruments totaled $19.3 billion, compared with $18.0 billion at December 31, 2015.

Short-term money-market investments increased by $429.1 million to $9.2 billion at September 30, 2016, compared with $8.8 billion at December 31, 2015. The increase was attributable to an increase in federal funds sold of $3.4 billion offset, in part, by a decrease in securities purchased under agreements to resell of $3.0 billion.

Investment securities increased by $816.3 million to $10.0 billion at September 30, 2016, compared with $9.2 billion at December 31, 2015. The increase was attributable to the purchase of $399.2 million of U.S. Treasury obligations in the third quarter of 2016 and a $360.1 million increase in MBS.

Our MBS investment portfolio consists of the following categories of securities as of September 30, 2016, and December 31, 2015. The percentages in the table below are based on carrying value.

Mortgage-Backed Securities
 
September 30, 2016
 
December 31, 2015
Single-family MBS - U.S. government-guaranteed and GSE
67.9
%
 
71.5
%
Multifamily MBS - U.S. government-guaranteed and GSE
22.1

 
16.7

Private-label residential MBS
9.8

 
11.6

ABS backed by home-equity loans
0.2

 
0.2

Total MBS
100.0
%
 
100.0
%

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

Investments Credit Risk

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

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

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

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


60


Credit Ratings of Investments at Carrying Value
As of September 30, 2016
(dollars in thousands)
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money market instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$

 
$
249

 
$

 
$

 
$

 
$

Securities purchased under agreements to resell
 

 
750,000

 
1,000,000

 
1,999,000

 

 

Federal funds sold
 

 
1,450,000

 
4,050,000

 

 

 

Total money market instruments
 

 
2,200,249

 
5,050,000

 
1,999,000

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 

 
2,545

 

 

 

 

U.S Treasury obligations
 

 
399,129

 

 

 

 

U.S. government-owned corporations
 

 
301,338

 

 

 

 

GSEs
 

 
128,960

 

 

 

 

Supranational institutions
 
455,191

 

 

 

 

 

HFA securities
 
20,165

 
39,105

 
106,899

 

 

 

Total non-MBS
 
475,356

 
871,077

 
106,899

 

 

 

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

 
154,352

 

 

 

 

U.S. government guaranteed - multifamily(2)
 

 
654,511

 

 

 

 

GSE – single-family (2)
 

 
5,659,358

 

 

 

 

GSE – multifamily (2)
 

 
1,240,386

 

 

 

 

Private-label – residential
 

 
2,443

 
12,630

 
79,243

 
738,679

 
6,896

ABS backed by home-equity loans
 
594

 
1,136

 
6,013

 
1,707

 
3,955

 

Total MBS
 
594

 
7,712,186

 
18,643

 
80,950

 
742,634

 
6,896


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
475,950

 
8,583,263

 
125,542

 
80,950

 
742,634

 
6,896

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
475,950

 
$
10,783,512

 
$
5,175,542

 
$
2,079,950

 
$
742,634

 
$
6,896

_______________________
(1)
Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of September 30, 2016. If there is a split rating, the lowest rating is used.
(2)
The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

At September 30, 2016, our unsecured credit exposure related to money market instruments and debentures, including accrued interest, was $6.8 billion to 18 counterparties and issuers, of which $5.5 billion was for federal funds sold, and $1.3 billion was for Treasury bills, debentures issued by GSEs, and supranational institutions. As of September 30, 2016 no issuers/counterparties individually accounted for greater than 10 percent of total unsecured credit exposure.

Private-Label MBS


61


Of our $8.9 billion in par value of MBS and ABS investments at September 30, 2016, $1.4 billion in par value are private-label MBS and ABS backed by home equity loans, as set forth in the table below:

Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans
by Fixed Rate or Variable Rate
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Private-label MBS
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
 
Fixed
Rate (1)
 
Variable
Rate (1)
 
Total
Private-label residential MBS
 

 
 

 
 

 
 

 
 

 
 

Prime
$
9,621

 
$
108,807

 
$
118,428

 
$
10,680

 
$
126,518

 
$
137,198

Alt-A
19,831

 
1,205,852

 
1,225,683

 
23,178

 
1,361,942

 
1,385,120

Total private-label residential MBS
29,452

 
1,314,659

 
1,344,111

 
33,858

 
1,488,460

 
1,522,318

ABS backed by home equity loans
 

 
 

 
 

 
 

 
 

 
 

Subprime

 
14,346

 
14,346

 

 
15,999

 
15,999

Total par value of private-label MBS
$
29,452

 
$
1,329,005

 
$
1,358,457

 
$
33,858

 
$
1,504,459

 
$
1,538,317

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

The following table provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS, stratified by year of securitization. Average current credit enhancements as of September 30, 2016, reflect the percentage of subordinated class outstanding balances as of September 30, 2016, to our senior class outstanding balances as of September 30, 2016, weighted by the par value of our respective senior class securities. Average current credit enhancements as of September 30, 2016, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


62


Private-Label MBS and ABS Backed by Home Equity
As of September 30, 2016
(dollars in thousands)
 
 
 
Total
Par value by credit rating
 

   Triple-A
$
598

   Double-A
3,579

   Single-A
18,643

   Triple-B
81,075

Below Investment Grade
 
   Double-B
43,272

   Single-B
54,861

   Triple-C
562,246

   Double-C
252,614

   Single-C
23,518

   Single-D
311,138

   Unrated
6,913

Total
$
1,358,457

 
 
Amortized cost
$
1,055,075

Gross unrealized gains
63,077

Gross unrealized losses
(42,340
)
Fair value
$
1,075,812

 
 
Weighted average percentage of fair value to par value
79.19
%
Original weighted average credit support
26.91

Weighted average credit support
8.84

Weighted average collateral delinquency (1)
21.69

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

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is described under — Mortgage Loans Credit Risk and
in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2015 Annual Report. As of September 30, 2016, our mortgage loan investment portfolio totaled $3.7 billion, an increase of $132.5 million from December 31, 2015.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2015 Annual Report.

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


63


State Concentrations by Outstanding Principal Balance
 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
September 30, 2016
 
December 31, 2015
 
 

 
 

    Massachusetts
49
%
 
46
%
    Maine
13

 
12

    Wisconsin
9

 
11

    Connecticut
7

 
7

    New Hampshire
5

 
5

    All others
17

 
19

    Total
100
%
 
100
%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $800,000 and $1.0 million at September 30, 2016, and December 31, 2015, respectively.

For information on the determination of the allowance at September 30, 2016, see Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses, and for information on our methodology for estimating the allowance, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Allowance for Loan Losses in the 2015 Annual Report.

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

Delinquent Mortgage Loans
(dollars in thousands)
 
September 30, 2016
 
December 31, 2015
Total par value of government loans past due 90 days or more and still accruing interest
$
5,489

 
$
5,403

Nonaccrual loans, par value
17,494

 
22,361

Troubled debt restructurings (not included above)
7,029

 
7,130


Mortgage Insurance Companies. We are exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of September 30, 2016, we were the beneficiary of primary mortgage insurance coverage of $76.5 million on $305.6 million of conventional mortgage loans, and supplemental mortgage insurance coverage of $18.1 million on mortgage pools with a total unpaid principal balance of $192.8 million.

Consolidated Obligations

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

Derivative Instruments
 
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $62.9 million and $40.1 million as of September 30, 2016, and December 31, 2015, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $463.8 million and $442.0 million as of September 30, 2016, and December 31, 2015, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of September 30, 2016, and

64


December 31, 2015. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk. The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for fair-value or cash-flow hedge accounting, but are acceptable hedging strategies under our risk-management policy.

Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Hedged Item
 
Derivative
 
Designation
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
10,038,795

 
$
(125,669
)
 
$
8,195,652

 
$
(102,381
)
 
 
Swaps
 
Economic
 
857,000

 
(5,720
)
 
342,000

 
(1,246
)
Total associated with advances
 
 
 
 
 
10,895,795

 
(131,389
)
 
8,537,652

 
(103,627
)
Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(381,729
)
 
611,915

 
(314,571
)
 
 
Caps
 
Economic
 

 

 
300,000

 

Total associated with available-for-sale securities
 
 
 
 
 
611,915

 
(381,729
)
 
911,915

 
(314,571
)
Trading securities
 
Swaps
 
Economic
 
195,000

 
(12,969
)
 
202,000

 
(14,438
)
COs
 
Swaps
 
Fair value
 
8,179,645

 
(1,501
)
 
6,387,445

 
2,201

 
 
Firm commitments
 
Fair value
 
100,000

 
(59
)
 

 

 
 
Swaps
 
Economic
 
100,000

 
60

 
18,500

 
(11
)
 
 
Forward starting swaps
 
Cash Flow
 
527,800

 
(61,793
)
 
527,800

 
(35,547
)
Total associated with COs
 
 
 
 
 
8,907,445

 
(63,293
)
 
6,933,745

 
(33,357
)
Total
 
 
 
 
 
20,610,155

 
(589,380
)
 
16,585,312

 
(465,993
)
Mortgage delivery commitments
 
 
 
 
 
60,355

 
37

 
24,714

 
(7
)
Total derivatives
 
 
 
 
 
$
20,670,510

 
(589,343
)
 
$
16,610,026

 
(466,000
)
Accrued interest
 
 
 
 
 
 

 
(15,454
)
 
 

 
(28,039
)
Cash collateral and accrued interest
 
 
 
 
 
 
 
203,986

 
 
 
92,149

Net derivatives
 
 
 
 
 
 

 
$
(400,811
)
 
 

 
$
(401,890
)
Derivative asset
 
 
 
 
 
 

 
$
62,947

 
 

 
$
40,117

Derivative liability
 
 
 
 
 
 

 
(463,758
)
 
 

 
(442,007
)
Net derivatives
 
 
 
 
 
 

 
$
(400,811
)
 
 

 
$
(401,890
)
 _______________________
(1)
As of September 30, 2016, and December 31, 2015, embedded derivatives separated from the advance contract with notional amounts of $857.0 million and $342.0 million, respectively, and fair values of $5.6 million and $1.2 million, respectively, are not included in the table.

The following tables provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $18.2 billion, representing 88.1 percent of all derivatives outstanding as of September 30, 2016. Economic hedges and cash-flow hedges are not included within the two tables below.


65


Fair-Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of September 30, 2016
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
Advances(1)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value
 
Hedged
Amount
 
Fair-Value
Adjustment(2)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
2,823,055

 
$
(21,558
)
 
$
2,823,055

 
$
21,286

 
2.28
%
 
0.80
%
 
2.11
%
 
0.97
%
Due after one year through two years
1,960,085

 
(26,761
)
 
1,960,085

 
26,634

 
2.12

 
0.77

 
1.93

 
0.96

Due after two years through three years
1,228,562

 
(6,621
)
 
1,228,562

 
6,302

 
1.60

 
0.79

 
1.26

 
1.13

Due after three years through four years
1,188,940

 
(19,878
)
 
1,188,940

 
19,415

 
1.82

 
0.77

 
1.56

 
1.03

Due after four years through five years
906,613

 
(14,819
)
 
906,613

 
14,321

 
1.85

 
0.77

 
1.42

 
1.20

Thereafter
1,931,540

 
(36,032
)
 
1,931,540

 
34,469

 
1.27

 
0.82

 
0.88

 
1.21

Total
$
10,038,795

 
$
(125,669
)
 
$
10,038,795

 
$
122,427

 
1.88
%
 
0.79
%
 
1.61
%
 
1.06
%
_______________________
(1)
Included in the advances hedged amount are $2.8 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(2)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2016.

Fair-Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of September 30, 2016
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (3)
 
Derivatives
 
CO Bonds (1)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value
 
Hedged Amount
 
Fair-Value
Adjustment(2)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
2,882,210

 
$
190

 
$
2,882,210

 
$
111

 
0.73
%
 
0.76
%
 
0.77
%
 
0.74
%
Due after one year through two years
2,394,335

 
2,553

 
2,394,335

 
(2,974
)
 
1.11

 
1.08

 
0.77

 
0.80

Due after two years through three years
1,221,310

 
(722
)
 
1,221,310

 
445

 
1.04

 
1.04

 
0.79

 
0.79

Due after three years through four years
224,790

 
26

 
224,790

 
(129
)
 
1.38

 
1.38

 
0.81

 
0.81

Due after four years through five years
727,000

 
(794
)
 
727,000

 
691

 
1.17

 
1.17

 
0.82

 
0.82

Thereafter
730,000

 
(2,754
)
 
730,000

 
2,653

 
1.58

 
1.58

 
0.83

 
0.83

Total
$
8,179,645

 
$
(1,501
)
 
$
8,179,645

 
$
797

 
1.02
%
 
1.02
%
 
0.78
%
 
0.78
%
_______________________
(1)
Included in the CO bonds hedged amount are $3.6 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(2) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(3)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2016.

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

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to

66


counterparties (if we are the net obligor on the derivative contract). We accept cash or securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position (i.e., we are in the money) by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in the derivatives table below. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position (i.e., we are out-of-the-money) by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we receive from counterparties cash or securities collateral whose fair value is less than the current positive fair-value positions with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member. The table below details our counterparty credit exposure as of September 30, 2016.

Derivatives Counterparty Current Credit Exposure
As of September 30, 2016
(dollars in thousands)

Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To Counterparty
 
Non-cash Collateral Pledged To Counterparty
 
Net Credit Exposure to Counterparties
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
$
1,741,355

 
$
(13,179
)
 
$
1,881

 
$
12,134

 
$
836

Triple-B
 
837,750

 
(14,879
)
 

 
15,595

 
716

Cleared derivatives
 
10,563,695

 
(117,973
)
 
180,588

 

 
62,615

Total derivative positions with nonmember counterparties to which we had credit exposure
 
13,142,800

 
(146,031
)
 
182,469

 
27,729

 
64,167

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
60,355

 
77

 

 

 
77

Total
 
$
13,203,155

 
$
(145,954
)
 
$
182,469

 
$
27,729

 
$
64,244

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
CO bond firm commitments
 
$
100,000

 
 
 
 
 
 
 
 
Double-A
 
1,244,500

 
 
 
 
 
 
 
 
Single-A
 
3,493,300

 
 
 
 
 
 
 
 
Triple-B
 
2,629,555

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
7,467,355

 

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


67


For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion
and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit
Risk in the 2015 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations in the 2015 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

Internal Liquidity Sources / Liquidity Management

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

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

Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:

all maturing advances are renewed;
member overnight deposits are withdrawn at a rate of 50 percent per day;
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
MPF master commitments are funded at a rate of 10 percent of the previous days' total amount on the first day and at a rate of one percent on each day thereafter.

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

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

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:

if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and
if projected net cash flow falls below zero on or before the 21st day following the measurement date.

We did not breach either of these thresholds at any time during the quarter ended September 30, 2016. If either of these thresholds are breached, then Senior Management is notified and determines whether any corrective action is necessary.

The following table presents our projected net cash flow and structural liquidity as of September 30, 2016.


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Projected Net Cash Flow and Structural Liquidity
As of September 30, 2016
(dollars in thousands)

 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
7,353

 
$
27,656

Maturing liabilities
 
3,929,698

 
12,898,417

Committed asset settlements
 
322,025

 
322,025

Capital outflow
 
78,000

 
78,000

MPF delivery commitments
 
60,355

 
60,355

Gross uses of funds
 
4,397,431

 
13,386,453

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
31,396

 
58,206

Maturing or projected amortization of assets
 
10,963,036

 
16,206,783

Committed liability settlements
 
121,675

 
251,675

Cash and due from banks
 
172,481

 
172,481

Other
 
5,211

 
5,211

Gross sources of funds
 
11,293,799

 
16,694,356

 
 
 
 
 
Projected net cash flow
 
6,896,368

 
$
3,307,903

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
530,820

 
 
Drawdown of standby letters of credit and lines of credit
 
639,836

 
 
Rollover of all maturing advances
 
2,696,733

 
 
Projected funding of MPF master commitments
 
182,694

 
 
Total secondary uses of funds
 
4,050,083

 

 
 
 
 
 
Structural liquidity
 
$
2,846,285

 


Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

marketable securities with a maturity greater than one week and less than one year that can be sold;
self-liquidating assets with a maturity of seven days or less;
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the quarter ended September 30, 2016. As of September 30, 2016, and December 31, 2015, we held a surplus of $12.6 billion and $12.0 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO debt issuance.

The following table presents our contingency liquidity as of September 30, 2016.

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Contingency Liquidity
As of September 30, 2016
(dollars in thousands)

 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
7,353

Maturing liabilities
 
3,929,698

Committed asset settlements
 
322,025

Drawdown of standby letters of credit
 
124,640

Gross uses of funds
 
4,383,716

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
31,396

Maturing or amortizing advances
 
2,696,733

Committed liability settlements
 
121,675

Other
 
5,211

Gross sources of funds
 
2,855,015

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
1,400,000

Self-liquidating assets
 
8,249,000

Cash and due from banks
 
172,481

Marketable securities available for repo
 
4,281,370

Total sources of contingency liquidity
 
14,102,851

 
 
 
Net contingency liquidity
 
$
12,574,150


Additional Liquidity Requirements. In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot raise funds in the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the three months ended September 30, 2016.
 
Balance Sheet Funding Gap Policy. Further, we are sensitive to maintaining an appropriate funding balance between our assets and liabilities and maintain a policy that limits the potential gap between assets inclusive of projected prepayments, maturing in one year or longer (excluding floating rate advances indexed to discount note yields), funded by liabilities, inclusive of projected calls, maturing in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets and sets a management action trigger at a gap of 10 percent of total assets. We maintained compliance with this limit and its management action trigger at all times during the nine months ended September 30, 2016. During the three months ended September 30, 2016, this gap averaged 3.3 percent (the maximum level at any month-end during the quarter was 6.1 percent and the minimum level at any month-end during the quarter was 1.2 percent). As of September 30, 2016, this gap was 2.5 percent, compared with 5.0 percent at December 31, 2015.

We are focused on maintaining a liquidity and funding balance between our financial assets and financial liabilities. The FHLBanks work collectively to manage the System-wide liquidity and funding management and the FHLBanks jointly monitor the System’s collective risk arising out of an inability to fully access the capital markets to fund our obligations. In managing and monitoring the amounts of assets that require refunding, we may consider contractual maturities of our financial assets, as

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well as certain assumptions regarding expected cash flows (i.e. estimated prepayments and scheduled amortizations) and other factors in our discretion.

External Sources of Liquidity

FHLBank P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the FHLBank P&I Funding Contingency Plan Agreement as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — External Sources of Liquidity in the 2015 Annual Report. We have never drawn funding under this agreement.

Debt Financing Consolidated Obligations
 
At September 30, 2016, and December 31, 2015, outstanding COs, including both CO bonds and CO discount notes, totaled $56.1 billion and $53.9 billion, respectively.

CO bonds outstanding for which we are primarily liable at September 30, 2016, and December 31, 2015, include issued callable bonds totaling $4.2 billion and $3.6 billion, respectively.

CO discount notes comprised 51.2 percent and 52.8 percent of the outstanding COs for which we are primarily liable at September 30, 2016, and December 31, 2015, respectively, but accounted for 88.1 percent and 92.8 percent of the proceeds from the issuance of such COs during the nine months ended September 30, 2016 and 2015, respectively.

Financial Conditions for Consolidated Obligations

We have experienced relatively low CO issuance costs during the period covered by this report, reflecting the low interest-rate environment together with continuing investor preferences for low-risk investments. We have experienced good market demand for all tenors of COs with the strongest demand for short-term COs, and have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. During the period covered by this report, CO yield spreads appeared to be trending back to historical averages relative to market benchmarks, including U.S. dollar interest rate swaps and U.S. Treasury Notes. Investor demand for COs during the period remained strong and stable. We note that capacity among our CO underwriters has been occasionally somewhat constrained as a result of the imposition of higher capital requirements on many of our underwriters. So far, this development has not impeded our ability to meet our funding needs.

Capital

Total capital was $3.2 billion and $3.0 billion at September 30, 2016, and December 31, 2015, respectively.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at September 30, 2016, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital.

Subject to applicable law following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $33.8 million and $42.0 million at September 30, 2016, and December 31, 2015, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2015 Annual Report.

The following table sets forth the amount of mandatorily redeemable capital stock by year of expiry of the redemption-notice period at September 30, 2016, and December 31, 2015 (dollars in thousands).


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Expiry of Redemption-Notice Period
 
September 30, 2016
 
December 31, 2015
Past redemption date (1)
 
$
528

 
$
629

Due in one year or less
 

 

Due after one year through two years
 
4,687

 

Due after two years through three years
 
128

 
4,856

Due after three years through four years
 
28,429

 
36,450

Due after four years through five years
 

 
54

Thereafter (2)
 
40

 

Total
 
$
33,812

 
$
41,989

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
(2)
Consists of reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members on or after September 12, 2014, will have their memberships terminated no later than February 19, 2017.

We have the authority, but are not obliged, to repurchase excess stock, at our discretion, subject to continuing to meet all of our minimum capital requirements, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2015 Annual Report. At September 30, 2016, and December 31, 2015, excess capital stock totaled $78.1 million and $158.9 million, respectively, as set forth in the following table (dollars in thousands):

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
September 30, 2016
$
669,547

 
$
1,619,359

 
$
2,288,928

 
$
2,367,074

 
$
78,146

December 31, 2015
653,642

 
1,566,057

 
2,219,722

 
2,378,651

 
158,929

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

Repurchases of excess stock have led to reductions in our capital levels, including reductions to mandatorily redeemable capital stock from $42.0 million at December 31, 2015, to $33.8 million at September 30, 2016. Dividend payments on mandatorily redeemable capital stock are classified as interest expense, so the repurchase of this stock should lead to a reduction in interest expense, all other things being equal. For the three months ended September 30, 2016, interest expense on mandatorily redeemable capital stock amounted to $334,000 compared with $472,000 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, interest expense on mandatorily redeemable capital stock amounted to $1.0 million compared with $1.3 million for the nine months ended September 30, 2015.

Capital Rule

The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated September 20, 2016, the Director of the FHFA notified us that, based on June 30, 2016 financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2015 Annual Report.

Internal Capital Practices and Policies


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

Targeted Capital Ratio Operating Range

We target our operating capital ratio to be within the range of 4.0 percent to 7.5 percent. Our capital ratio was 5.9 percent at September 30, 2016.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must exceed four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of September 30, 2016, this internal minimum capital requirement equaled $3.0 billion, which was satisfied by our actual regulatory capital of $3.5 billion.

Excess Stock Management Program

On July 24, 2015, our board of directors authorized management to implement an excess stock management program, under which we are authorized to repurchase excess stock to target a range for excess stock between zero and $200 million. As of September 30, 2016, our shareholders held $78.1 million in excess stock. We used the Excess Stock Management program in the third quarter of 2016, to unilaterally repurchase $105.0 million of excess stock from shareholders on a pro rata basis.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations

Our significant off-balance-sheet arrangements consist of the following:

commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Commitments and Contingencies in the 2015 Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

We have identified five accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2015 Annual Report.

As of September 30, 2016, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.

RECENT ACCOUNTING DEVELOPMENTS
 
See Item 1 —Notes to the Financial Statements — Note 2 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

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LEGISLATIVE AND REGULATORY DEVELOPMENTS

Significant regulatory actions and developments for the period covered by this report are summarized below.
Minority and Women Inclusion. On October 27, 2016, the Finance Agency proposed amendments to its Minority and Women Inclusion regulations that, if adopted, would clarify the scope of the FHLBanks’ obligation to promote diversity and ensure inclusion, in part by greatly expanding recordkeeping and reporting requirements. These proposed amendments update existing Finance Agency regulations aimed at promoting diversity and the inclusion and utilization of minorities, women, and individuals with disabilities in all Bank business and activities, including management, employment and contracting.

The proposed amendments would:

require the FHLBanks to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusion into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;
encourage the FHLBanks to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;
require the FHLBanks to amend their policies on equal opportunity in employment and contracting by adding sexual orientation, gender identity, and status as a parent to the list of protected classifications; and
require the FHLBanks in their annual reports to the Finance Agency to provide extensive data on contracting and detailed descriptions of their efforts to advance diversity and inclusion through capital market transactions, affordable housing and community investment programs, initiatives to improve access to mortgage credit, and strategies for promoting the diversity of supervisors and managers.

Comments on the proposed amendments are due by December 27, 2016. We are currently assessing the effect of the proposed amendments, if adopted, on the Bank.

FHLBank Membership for Non-Federally-Insured Credit Unions. On September 28, 2016, the Finance Agency proposed amendments to regulations governing FHLBank membership that would implement statutory amendments to the Federal Home Loan Bank Act (the Bank Act) authorizing FHLBanks to accept applications for membership from state-chartered credit unions without Federal share insurance, provided that certain prerequisites have been met. The new rule, if adopted, would generally treat these credit unions the same as other depository institutions with an additional requirement that they obtain an affirmative statement from their state regulator that they meet the requirements for Federal insurance as of the date of their application for FHLBank membership; a written statement from the state regulator that it cannot or will not make any determination regarding eligibility for Federal insurance; or if the regulator fails or refuses to respond to the credit union’s request within six months, confirmation of the failure to receive a response.

Comments are due on the proposed rule by November 28, 2016. We are currently assessing the effect of the proposed rule but do not anticipate that, if adopted, it would materially impact the Bank.

Indemnification Payments. On September 20, 2016, the Finance Agency issued a re-proposed rule that, if adopted, would establish standards for identifying whether an indemnification payment by an FHLBank or the OF to an officer, director, employee, or other entity-affiliated party in connection with an administrative proceeding or civil action initiated by the Finance Agency is prohibited or permissible. Under the proposed rule, those payments with respect to an administrative proceeding or civil action initiated by the Finance Agency are only permitted if they relate to:

premiums for professional liability insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Finance Agency or a civil money penalty;
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and
amounts due under an indemnification agreement entered into on or prior to September 20, 2016.

The proposed rule also outlines the process a board of directors must undertake prior to making any permitted indemnification payment for expenses of defending an action initiated by the Finance Agency.

Comments are due on the proposed rule by December 21, 2016. We are currently assessing the effect of the proposed rule on the Bank.


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FHLBank New Business Activities. On August 23, 2016, the Finance Agency proposed a rule that, if adopted, would reduce the scope of new business activities (NBAs) for which a FHLBank must seek approval from the Finance Agency and would establish more certain timelines for Finance Agency review and approval of NBA notices. The proposed rule also would clarify the protocol for Finance Agency review of NBAs. Under the proposed rule, acceptance of new types of legally permissible collateral by the FHLBanks would not constitute a new business activity or require approval from the Finance Agency prior to acceptance. Instead, the Finance Agency would review new collateral types as part of the annual exam process.

On October 24, 2016, the FHLBanks provided comments to the proposed rule, which primarily related to certain procedures under the proposed rule. We do not anticipate that the proposed rule, if adopted, would materially impact the Bank.

Other Significant Developments

Mandatory Contractual Stay Requirements for Qualified Financial Contracts (QFCs). On August 19, 2016, the Office of the Comptroller of the Currency (OCC) issued a proposed rule, which, if adopted, would require certain systemically important financial institutions (SIFI) regulated by the OCC to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the SIFI or an affiliate of the SIFI. Covered QFCs include derivatives, repurchase agreements (know as “repos”) and reserve repos, and securities lending and borrowing agreements. On May 3, 2016, the Federal Reserve Board (FRB) issued a substantively identical proposed rule with respect to QFCs entered into with globally systemically important banking organizations (GSIBs) and their affiliates that are subject to regulation in the U.S. Further, on October 26, 2016, the Federal Deposit Insurance Corporation (FDIC) issued a parallel proposed rule applicable to certain FDIC-supervised institutions.

The FHLBanks provided comments on the FRB proposed rule on August 5, 2016 and to the OCC proposed rule on October 18, 2016, which primarily seek clarification of an exemption and the recognition of a safe harbor. We do not anticipate that the proposed rule, if adopted, would materially impact the Bank.

European Union (EU) Market Abuse Regulation. The EU issued updated Market Abuse Regulations (MAR) that became effective July 3, 2016, and which contain rules on insider dealing, unlawful disclosure of inside information and market manipulation for debt and equity securities on European securities exchanges, which differ in certain respects from U.S. regulations. MAR applies to issuers with securities admitted to trading on EU exchanges, including EU exchanges on which FHLBank COs are listed. MAR contains an exemption to its requirements for certain public bodies and central banks of third countries. The OF and the FHLBanks are examining whether this exemption applies. If the exemption does not apply, we anticipate that the most significant impact of the MAR on us will be more stringent and detailed recordkeeping, creation of detailed lists on parties who have access to inside information, and notification requirements.

Financial Industry Regulatory Authority (FINRA) Rule 4210 establishing margin requirements on certain “to-be-announced” (TBA) transactions. On June 15, 2016, the SEC approved a proposed rule by FINRA to require the margining of certain TBA transactions. Specifically, the approved FINRA Rule 4210 will require FINRA members to collect from, but not post to, their customer’s maintenance margin (i.e. initial margin) and variation margin on transactions that are “Covered Agency Transactions,” subject to certain exemptions. A “Covered Agency Transaction” includes (certain terms are defined under FINRA rules):

TBA transactions inclusive of adjustable-rate mortgage transactions, and Specified Pool Transactions, for which the difference between the trade date and contractual settlement date is greater than one business day; and
Collateralized mortgage obligations issued in conformity with a program of an agency or a GSE for which the difference between the trade date and contractual settlement date is greater than three business days.

Covered Agency Transactions in multifamily housing securities are exempt from the margin requirements provided that certain requirements are met.

Under the rule, we are exempt from posting initial margin but would be required to post variation margin to their FINRA-member counterparty in connection with covered transactions, provided the Bank has more than $10 million in gross open positions with the counterparty. FINRA members will be required to comply with the new margin requirements beginning in December 2017.

We are currently assessing the financial and operational impacts of this rule on the Bank.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Sources and Types of Market and Interest-Rate Risk

Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2015 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

General

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

the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at September 30, 2016, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $13.9 billion, compared with $14.3 billion at December 31, 2015);
the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at September 30, 2016, fixed-rate callable debt not hedged by interest-rate swaps amounted to $175.0 million compared with $1.4 billion at December 31, 2015);
the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements, was $8.3 billion, or 30.4 percent of our total outstanding CO bonds at September 30, 2016, compared with $6.4 billion, or 25.2 percent of total outstanding CO bonds, at December 31, 2015;
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2015 Annual Report.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

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

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

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

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

the ratio of MVE to BVE;

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

We maintain limits and management action triggers in connection with each of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2015 Annual Report.

The following table sets forth each of the foregoing metrics together with any targets, associated limits and management actions triggers at September 30, 2016, and December 31, 2015.

Interest/Market-Rate Risk Metric
 
September 30, 2016
 
December 31, 2015
 
Target, Limit or Management Action Trigger at December 31, 2015
MVE
 
$3.4 billion
 
$3.4 billion
 
None
MVE/BVE
 
97%
 
97%
 
None
MVE/Par Stock
 
146%
 
143%
 
102% (management action trigger) and 100% or higher (limit)
Economic Capital Ratio
 
5.6%
 
5.8%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$127.7 million
 
$83.9 million
 
Maintain below $225.0 million (management action trigger) and $275.0 million (limit)
Duration of Equity
 
-2.54 years
 
+0.07 years
 
Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(6.6)%
 
(5.4)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
-1.70 months
 
+0.05 months
 
None
MPF Portfolio VaR
 
$67.9 million
 
$66.6 million
 
Maintain below 25% of the VaR limit (management action trigger)
Income Simulation based on an instantaneous rise in interest rates of 300 basis points
 
Return on regulatory capital is 130 basis points above the average yield on three-month LIBOR
 
Return on regulatory capital is 135 basis points above the average yield on three-month LIBOR
 
Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

Value at Risk. The table below presents the historical simulation VaR estimate as of September 30, 2016, and December 31, 2015, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 120-business-day time horizon.

77


 
 
 
Value-at-Risk
(Gain) Loss Exposure (1)
 
 
September 30, 2016
 
December 31, 2015
Confidence Level
 
% of
MVE (2)
 
$ million
 
% of
MVE (2)
 
$ million
50%
 
0.22
%
 
$
7.5

 
0.13
%
 
$
4.6

75%
 
0.69

 
23.8

 
0.43

 
14.7

95%
 
1.65

 
56.7

 
1.43

 
48.6

99%
 
3.70

 
127.7

 
2.46

 
83.9

_______________________
(1)
To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.
(2)
Loss exposure is expressed as a percentage of base MVE.

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

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

 
 
September 30, 2016
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,196
 
$3,220
 
$3,323
 
$3,447
 
$3,457
 
$3,362
 
$3,225
Percent change in MVE from base
 
(7.3)%
 
(6.6)%
 
(3.6)%
 
—%
 
0.3%
 
(2.5)%
 
(6.4)%
MVE/BVE
 
90.1%
 
90.8%
 
93.7%
 
97.2%
 
97.4%
 
94.8%
 
90.9%
MVE/Par Stock
 
135%
 
136%
 
140%
 
146%
 
146%
 
142%
 
136%
Duration of Equity
 
-0.22 years
 
-1.97 years
 
-4.17 years
 
-2.54 years
 
+1.59 years
 
+3.44 years
 
+4.63 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.4%
 
2.4%
 
2.7%
 
2.6%
 
2.3%
 
1.9%
 
1.3%
Net income percent change from base
 
(32.2)%
 
(32.2)%
 
(24.5)%
 
—%
 
18.9%
 
34.3%
 
47.1%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for September 30, 2016, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; or d) changes in fair values from trading securities and hedging activities.


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December 31, 2015
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,101
 
$3,219
 
$3,364
 
$3,404
 
$3,359
 
$3,258
 
$3,130
Percent change in MVE from base
 
(8.9)%
 
(5.4)%
 
(1.2)%
 
—%
 
(1.3)%
 
(4.3)%
 
(8.0)%
MVE/BVE
 
88.4%
 
91.8%
 
95.9%
 
97.0%
 
95.8%
 
92.9%
 
89.2%
MVE/Par Stock
 
130%
 
135%
 
141%
 
143%
 
141%
 
137%
 
132%
Duration of Equity
 
-2.37 years
 
-4.10 years
 
-2.38 years
 
+0.07 years
 
+2.28 years
 
+3.53 years
 
+4.25 years
Return on Regulatory Capital less 3-month LIBOR (2)
 
2.6%
 
2.5%
 
2.6%
 
2.4%
 
2.2%
 
1.8%
 
1.4%
Net income percent change from base
 
(24.0)%
 
(26.0)%
 
(21.5)%
 
—%
 
22.3%
 
41.0%
 
57.6%
____________________________
(1)
Given the current environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.
(2)
The income simulation metric for December 31, 2015, is based on projections of adjusted net income over a range of potential interest-rate scenarios over the following 12-month horizon divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings, and projections of adjusted net income exclude a) interest expense on mandatorily redeemable capital stock; b) projected prepayment penalties; c) loss on early extinguishment of debt; or d) changes in fair values from trading securities and hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe our private-label MBS litigation in Item 3 — Legal Proceedings in the 2015 Annual Report.

Subsequent to the quarter covered by this report, we settled certain of our private-label MBS claims with certain defendants for an aggregate amount of $19.6 million, which amount is net of legal fees and expenses.

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We continue our private-label MBS litigation against the following entities and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Credit Suisse (USA), Inc.; Impac Mortgage Holdings, Inc.; Morgan Stanley; Nomura Holding America, Inc.; RBS Holdings USA Inc.; and UBS Americas Inc.

As reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (filed with the SEC on May 6, 2016), on May 2, 2016, the First Circuit for the United States Court of Appeals (the First Circuit) ruled favorably on our appeal of the dismissal of our claims against Moody’s Investors Service, Inc. and Moody’s Corporation (together Moody’s). The First Circuit vacated the United States District Court for the District of Massachusetts (the District Court), which had ruled that federal law does not permit the transfer of cases from one federal court to another where the first court is found to lack personal jurisdiction. The First Circuit remanded the case to the District Court to determine whether transfer of our claims to the Southern District of New York would be in the interest of justice, and such determination is pending. On August 1, 2016, Moody's filed a petition for writ of certiorari to the Supreme Court of the United States (the Supreme Court), asking the Supreme Court to review the First Circuit’s decision. On October 11, 2016, the Supreme Court denied Moody’s petition.

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

ITEM 1A. RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2015 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

80


Number
 
Exhibit Description
10.1
 
MPF Consolidated Interbank Agreement dated as of July 22, 2016
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
November 10, 2016
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
November 10, 2016
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer



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