UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51404
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
Federally chartered corporation (State or other jurisdiction of incorporation or organization) | 35-6001443 (I.R.S. employer identification number) | |
8250 Woodfield Crossing Boulevard Indianapolis, IN (Address of principal executive offices) | 46240 (Zip code) |
(317) 465-0200
(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 for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer | o Accelerated filer |
x Non-accelerated filer (Do not check if a smaller reporting company) | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares outstanding as of July 31, 2015 | ||
Class B Stock, par value $100 | 14,129,950 |
Table of Contents | Page | |
Number | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS (unaudited) | |
Statements of Condition as of June 30, 2015 and December 31, 2014 | ||
Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 | ||
Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 | ||
Statements of Capital for the Six Months Ended June 30, 2014 and 2015 | ||
Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 | ||
Notes to Financial Statements: | ||
Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle | ||
Note 2 - Recently Adopted and Issued Accounting Guidance | ||
Note 3 - Available-for-Sale Securities | ||
Note 4 - Held-to-Maturity Securities | ||
Note 5 - Other-Than-Temporary Impairment | ||
Note 6 - Advances | ||
Note 7 - Mortgage Loans Held for Portfolio | ||
Note 8 - Allowance for Credit Losses | ||
Note 9 - Derivatives and Hedging Activities | ||
Note 10 - Consolidated Obligations | ||
Note 11 - Affordable Housing Program | ||
Note 12 - Capital | ||
Note 13 - Accumulated Other Comprehensive Income | ||
Note 14 - Segment Information | ||
Note 15 - Estimated Fair Values | ||
Note 16 - Commitments and Contingencies | ||
Note 17 - Transactions with Related Parties and Other Entities | ||
GLOSSARY OF TERMS | ||
Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
Special Note Regarding Forward-Looking Statements | ||
Executive Summary | ||
Selected Financial Data | ||
Results of Operations and Changes in Financial Condition | ||
Operating Segments | ||
Analysis of Financial Condition | ||
Liquidity and Capital Resources | ||
Off-Balance Sheet Arrangements | ||
Critical Accounting Policies and Estimates | ||
Recent Accounting and Regulatory Developments | ||
Risk Management | ||
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
Item 4. | CONTROLS AND PROCEDURES | |
PART II. | OTHER INFORMATION | |
Item 1. | LEGAL PROCEEDINGS | |
Item 1A. | RISK FACTORS | |
Item 6. | EXHIBITS | |
Signatures | ||
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 31.3 | ||
Exhibit 32 |
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts in thousands, except par value per share and number of shares)
June 30, 2015 | December 31, 2014 | ||||||
Assets: | |||||||
Cash and due from banks | $ | 635,017 | $ | 3,550,939 | |||
Interest-bearing deposits | 251 | 483 | |||||
Securities purchased under agreements to resell | 200,000 | — | |||||
Federal funds sold | 1,895,000 | — | |||||
Available-for-sale securities (Notes 3 and 5) | 3,570,926 | 3,556,165 | |||||
Held-to-maturity securities (estimated fair values of $6,590,575 and $7,098,616, respectively) (Notes 4 and 5) | 6,481,002 | 6,982,115 | |||||
Advances (Note 6) | 24,318,357 | 20,789,667 | |||||
Mortgage loans held for portfolio, net of allowance for loan losses of $(1,350) and $(2,500), respectively (Notes 7 and 8) | 7,932,724 | 6,820,262 | |||||
Accrued interest receivable | 86,971 | 82,866 | |||||
Premises, software, and equipment, net | 37,970 | 38,418 | |||||
Derivative assets, net (Note 9) | 41,763 | 25,487 | |||||
Other assets | 36,536 | 6,630 | |||||
Total assets | $ | 45,236,517 | $ | 41,853,032 | |||
Liabilities: | |||||||
Deposits | $ | 1,163,762 | $ | 1,084,042 | |||
Consolidated obligations (Note 10): | |||||||
Discount notes | 11,802,629 | 12,567,696 | |||||
Bonds | 29,647,600 | 25,503,138 | |||||
Total consolidated obligations | 41,450,229 | 38,070,834 | |||||
Accrued interest payable | 83,461 | 77,034 | |||||
Affordable Housing Program payable (Note 11) | 35,120 | 36,899 | |||||
Derivative liabilities, net (Note 9) | 95,634 | 103,253 | |||||
Mandatorily redeemable capital stock (Note 12) | 14,341 | 15,673 | |||||
Other liabilities | 152,962 | 90,027 | |||||
Total liabilities | 42,995,509 | 39,477,762 | |||||
Commitments and contingencies (Note 16) | |||||||
Capital (Note 12): | |||||||
Capital stock putable (at par value of $100 per share): | |||||||
Class B-1 issued and outstanding shares: 13,882,023 and 15,509,811, respectively | 1,388,202 | 1,550,981 | |||||
Class B-2 issued and outstanding shares: 371 and 0, respectively | 37 | — | |||||
Total capital stock putable | 1,388,239 | 1,550,981 | |||||
Retained earnings: | |||||||
Unrestricted | 691,512 | 672,159 | |||||
Restricted | 118,409 | 105,470 | |||||
Total retained earnings | 809,921 | 777,629 | |||||
Total accumulated other comprehensive income (Note 13) | 42,848 | 46,660 | |||||
Total capital | 2,241,008 | 2,375,270 | |||||
Total liabilities and capital | $ | 45,236,517 | $ | 41,853,032 |
The accompanying notes are an integral part of these financial statements.
1
Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest Income: | |||||||||||||||
Advances | $ | 29,951 | $ | 24,443 | $ | 57,679 | $ | 52,559 | |||||||
Prepayment fees on advances, net | 101 | 12 | 292 | 1,061 | |||||||||||
Interest-bearing deposits | 53 | 60 | 107 | 114 | |||||||||||
Securities purchased under agreements to resell | 352 | 68 | 467 | 157 | |||||||||||
Federal funds sold | 545 | 416 | 1,164 | 696 | |||||||||||
Available-for-sale securities | 8,014 | 6,865 | 14,826 | 13,011 | |||||||||||
Held-to-maturity securities | 29,346 | 31,313 | 58,747 | 63,423 | |||||||||||
Mortgage loans held for portfolio | 64,174 | 57,511 | 126,400 | 115,616 | |||||||||||
Other interest income, net | (108 | ) | 421 | 45 | 535 | ||||||||||
Total interest income | 132,428 | 121,109 | 259,727 | 247,172 | |||||||||||
Interest Expense: | |||||||||||||||
Consolidated obligation discount notes | 3,457 | 1,347 | 6,473 | 2,749 | |||||||||||
Consolidated obligation bonds | 81,528 | 75,910 | 156,919 | 152,352 | |||||||||||
Deposits | 23 | 22 | 42 | 45 | |||||||||||
Mandatorily redeemable capital stock | 122 | 135 | 256 | 745 | |||||||||||
Total interest expense | 85,130 | 77,414 | 163,690 | 155,891 | |||||||||||
Net interest income | 47,298 | 43,695 | 96,037 | 91,281 | |||||||||||
Provision for (reversal of) credit losses | (951 | ) | (86 | ) | (388 | ) | (790 | ) | |||||||
Net interest income after provision for credit losses | 48,249 | 43,781 | 96,425 | 92,071 | |||||||||||
Other Income (Loss): | |||||||||||||||
Total other-than-temporary impairment losses | — | — | — | — | |||||||||||
Non-credit portion reclassified to (from) other comprehensive income, net | (32 | ) | (58 | ) | (32 | ) | (228 | ) | |||||||
Net other-than-temporary impairment losses, credit portion | (32 | ) | (58 | ) | (32 | ) | (228 | ) | |||||||
Net gains (losses) on derivatives and hedging activities | 7,263 | 3,138 | 5,383 | 6,106 | |||||||||||
Service fees | 200 | 227 | 388 | 442 | |||||||||||
Standby letters of credit fees | 188 | 134 | 339 | 293 | |||||||||||
Other, net (Note 16) | 322 | 6,521 | 5,439 | 9,234 | |||||||||||
Total other income | 7,941 | 9,962 | 11,517 | 15,847 | |||||||||||
Other Expenses: | |||||||||||||||
Compensation and benefits | 10,998 | 10,567 | 21,698 | 20,514 | |||||||||||
Other operating expenses | 5,541 | 4,452 | 10,633 | 8,496 | |||||||||||
Federal Housing Finance Agency | 590 | 619 | 1,310 | 1,418 | |||||||||||
Office of Finance | 787 | 625 | 1,650 | 1,443 | |||||||||||
Other | 388 | 345 | 740 | 636 | |||||||||||
Total other expenses | 18,304 | 16,608 | 36,031 | 32,507 | |||||||||||
Income before assessments | 37,886 | 37,135 | 71,911 | 75,411 | |||||||||||
Affordable Housing Program assessments | 3,801 | 3,727 | 7,217 | 7,616 | |||||||||||
Net income | $ | 34,085 | $ | 33,408 | $ | 64,694 | $ | 67,795 |
The accompanying notes are an integral part of these financial statements.
2
Federal Home Loan Bank of Indianapolis
Statements of Comprehensive Income
(Unaudited, $ amounts in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income | $ | 34,085 | $ | 33,408 | $ | 64,694 | $ | 67,795 | |||||||
Other Comprehensive Income (Loss): | |||||||||||||||
Net change in unrealized gains (losses) on available-for-sale securities | (2,908 | ) | 538 | (1,404 | ) | 12,577 | |||||||||
Non-credit portion of other-than-temporary impairment losses on available-for-sale securities: | |||||||||||||||
Reclassification of non-credit portion to other income (loss) | 32 | 58 | 32 | 228 | |||||||||||
Net change in fair value not in excess of cumulative non-credit losses | (107 | ) | 38 | (106 | ) | (181 | ) | ||||||||
Unrealized gains (losses) | 828 | 8,619 | (1,531 | ) | 12,873 | ||||||||||
Net non-credit portion of other-than-temporary impairment losses on available-for-sale securities | 753 | 8,715 | (1,605 | ) | 12,920 | ||||||||||
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities: | |||||||||||||||
Accretion of non-credit portion | 12 | 19 | 24 | 32 | |||||||||||
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities | 12 | 19 | 24 | 32 | |||||||||||
Pension benefits, net | (1,075 | ) | (208 | ) | (827 | ) | (72 | ) | |||||||
Total other comprehensive income (loss) | (3,218 | ) | 9,064 | (3,812 | ) | 25,457 | |||||||||
Total comprehensive income | $ | 30,867 | $ | 42,472 | $ | 60,882 | $ | 93,252 |
The accompanying notes are an integral part of these financial statements.
3
Federal Home Loan Bank of Indianapolis
Statements of Capital
Six Months Ended June 30, 2014 and 2015
(Unaudited, $ amounts and shares in thousands)
Capital Stock Class B Putable | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Capital | ||||||||||||||||||||||||
Shares | Par Value | Unrestricted | Restricted | Total | |||||||||||||||||||||||
Balance, December 31, 2013 | 16,099 | $ | 1,609,931 | $ | 647,624 | $ | 82,151 | $ | 729,775 | $ | 21,720 | $ | 2,361,426 | ||||||||||||||
Total comprehensive income | 54,236 | 13,559 | 67,795 | 25,457 | 93,252 | ||||||||||||||||||||||
Proceeds from sale of capital stock | 568 | 56,724 | 56,724 | ||||||||||||||||||||||||
Cash dividends on capital stock (4.63% annualized) | (37,084 | ) | — | (37,084 | ) | (37,084 | ) | ||||||||||||||||||||
Balance, June 30, 2014 | 16,667 | $ | 1,666,655 | $ | 664,776 | $ | 95,710 | $ | 760,486 | $ | 47,177 | $ | 2,474,318 | ||||||||||||||
Balance, December 31, 2014 | 15,510 | $ | 1,550,981 | $ | 672,159 | $ | 105,470 | $ | 777,629 | $ | 46,660 | $ | 2,375,270 | ||||||||||||||
Total comprehensive income | 51,755 | 12,939 | 64,694 | (3,812 | ) | 60,882 | |||||||||||||||||||||
Proceeds from sale of capital stock | 775 | 77,593 | 77,593 | ||||||||||||||||||||||||
Repurchase/redemption of capital stock | (2,403 | ) | (240,335 | ) | (240,335 | ) | |||||||||||||||||||||
Cash dividends on capital stock (4.00% annualized) | (32,402 | ) | — | (32,402 | ) | (32,402 | ) | ||||||||||||||||||||
Balance, June 30, 2015 | 13,882 | $ | 1,388,239 | $ | 691,512 | $ | 118,409 | $ | 809,921 | $ | 42,848 | $ | 2,241,008 |
The accompanying notes are an integral part of these financial statements.
4
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Operating Activities: | |||||||
Net income | $ | 64,694 | $ | 67,795 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Amortization and depreciation | 27,464 | 13,106 | |||||
Prepayment fees on advances, net of related swap termination fees | (1,862 | ) | — | ||||
Changes in net derivative and hedging activities | 24,463 | 26,822 | |||||
Net other-than-temporary impairment losses, credit portion | 32 | 228 | |||||
Provision for (reversal of) credit losses | (388 | ) | (790 | ) | |||
Changes in: | |||||||
Accrued interest receivable | (4,237 | ) | 1,624 | ||||
Other assets | (139 | ) | 9,121 | ||||
Accrued interest payable | 6,428 | (2,616 | ) | ||||
Other liabilities | 18,687 | 7,083 | |||||
Total adjustments, net | 70,448 | 54,578 | |||||
Net cash provided by operating activities | 135,142 | 122,373 | |||||
Investing Activities: | |||||||
Changes in: | |||||||
Interest-bearing deposits | 36,505 | 59,164 | |||||
Securities purchased under agreements to resell | (200,000 | ) | — | ||||
Federal funds sold | (1,895,000 | ) | (230,000 | ) | |||
Purchases of premises, software, and equipment | (2,190 | ) | (2,019 | ) | |||
Available-for-sale securities: | |||||||
Proceeds from maturities | 38,055 | 40,539 | |||||
Purchases | (79,866 | ) | — | ||||
Held-to-maturity securities: | |||||||
Proceeds from maturities | 810,146 | 379,421 | |||||
Purchases | (316,868 | ) | (174,142 | ) | |||
Advances: | |||||||
Principal collected | 38,155,389 | 33,858,469 | |||||
Disbursed to members | (41,710,652 | ) | (35,765,339 | ) | |||
Mortgage loans held for portfolio: | |||||||
Principal collected | 714,805 | 406,321 | |||||
Purchases from members | (1,827,183 | ) | (472,545 | ) | |||
Net cash used in investing activities | (6,276,859 | ) | (1,900,131 | ) |
The accompanying notes are an integral part of these financial statements.
5
Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Financing Activities: | |||||||
Changes in deposits | 79,680 | (108,354 | ) | ||||
Net payments on derivative contracts with financing elements | (29,874 | ) | (30,349 | ) | |||
Net proceeds from issuance of consolidated obligations: | |||||||
Discount notes | 33,034,814 | 24,336,904 | |||||
Bonds | 12,243,592 | 8,605,005 | |||||
Payments for matured and retired consolidated obligations: | |||||||
Discount notes | (33,801,641 | ) | (22,769,510 | ) | |||
Bonds | (8,104,300 | ) | (8,993,200 | ) | |||
Other Federal Home Loan Banks: | |||||||
Proceeds from borrowings | — | 22,000 | |||||
Principal payments | — | (22,000 | ) | ||||
Proceeds from sale of capital stock | 77,593 | 56,724 | |||||
Payments for redemption/repurchase of mandatorily redeemable capital stock | (1,332 | ) | (2 | ) | |||
Payments for redemption/repurchase of capital stock | (240,335 | ) | — | ||||
Cash dividends paid on capital stock | (32,402 | ) | (37,084 | ) | |||
Net cash provided by financing activities | 3,225,795 | 1,060,134 | |||||
Net increase (decrease) in cash and due from banks | (2,915,922 | ) | (717,624 | ) | |||
Cash and due from banks at beginning of period | 3,550,939 | 3,318,564 | |||||
Cash and due from banks at end of period | $ | 635,017 | $ | 2,600,940 | |||
Supplemental Disclosures: | |||||||
Interest paid | $ | 149,504 | $ | 153,880 | |||
Affordable Housing Program payments | 8,996 | 6,932 | |||||
Capitalized interest on certain held-to-maturity securities | 836 | 1,303 | |||||
Net transfers of mortgage loans to real estate owned | — | 117 |
The accompanying notes are an integral part of these financial statements.
6
Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle
Basis of Presentation. The accompanying interim financial statements of the Federal Home Loan Bank of Indianapolis have been prepared in accordance with GAAP and SEC requirements for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. The interim financial statements presented herein should be read in conjunction with our audited financial statements and notes thereto, which are included in our 2014 Form 10-K.
The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
Our significant accounting policies and certain other disclosures are set forth in Note 1 - Summary of Significant Accounting Policies in our 2014 Form 10-K. There have been no significant changes to these policies through June 30, 2015.
We use certain acronyms and terms throughout these financial statements, which are defined in the Glossary of Terms. Unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis or its management.
Reclassifications. We have reclassified certain amounts from the prior periods to conform to the current period presentation. These reclassifications had no effect on net income, total comprehensive income, total capital, or net cash flows.
Use of Estimates. When preparing financial statements in accordance with GAAP, we are required to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant estimates include the determination of other-than-temporary impairment of certain private-label RMBS, the fair values of derivatives and other financial instruments, and the allowance for credit losses. Although the reported amounts and disclosures reflect our best estimates, actual results could differ significantly from these estimates.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Change in Accounting Principle. Effective October 1, 2014, we changed our method of accounting for the amortization and accretion of premiums and discounts, deferred loan fees or costs, and hedging basis adjustments on our mortgage loans held for portfolio to the contractual interest method. The contractual method recognizes the income effects of premiums and discounts in a manner that reflects the actual prepayments and other activity of the mortgage loans during that period and the contractual terms of the loans without regard to estimated prepayments based upon assumptions about future borrower activity. Historically, we deferred and amortized premiums and accreted discounts into interest income using the retrospective interest method, which used both actual prepayment experience and estimates of future principal repayments in calculating the estimated lives of the loans. While both the retrospective interest and contractual interest methods are acceptable under GAAP, the contractual interest method has become preferable for recognizing net unamortized premiums on our mortgage loans held for portfolio because (i) it reduces our reliance on subjective assumptions and estimates that affect the reported amounts of assets, capital and income in the financial statements and (ii) it represents the base accounting model articulated in GAAP applicable to accounting for the amortization of premiums and the accretion of discounts, whereas the retrospective method is only permitted by the guidance in narrowly defined circumstances.
The change to the contractual method for amortizing premiums and accreting discounts, deferred loan fees or costs, and hedging basis adjustments on our mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented. For the three and six months ended June 30, 2014, the effect of this change was an increase to net income of $267 and $994, respectively.
The following table illustrates the impact of the change in amortization and accretion methodology on our previously reported financial statements as of and for the three and six months ended June 30, 2014.
For the Three Months Ended June 30, 2014 | ||||||||||||
Previous Method | New Method | Effect of Change | ||||||||||
Statements of Income: | ||||||||||||
Interest income - mortgage loans held for portfolio | $ | 57,214 | $ | 57,511 | $ | 297 | ||||||
Net interest income after provision for credit losses | 43,484 | 43,781 | 297 | |||||||||
Income before assessments | 36,838 | 37,135 | 297 | |||||||||
Affordable Housing Program assessments | 3,697 | 3,727 | 30 | |||||||||
Net income | $ | 33,141 | $ | 33,408 | $ | 267 | ||||||
Statements of Comprehensive Income: | ||||||||||||
Net income | $ | 33,141 | $ | 33,408 | $ | 267 | ||||||
Total comprehensive income | $ | 42,205 | $ | 42,472 | $ | 267 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
As of and for the Six Months Ended June 30, 2014 | ||||||||||||
Previous Method | New Method | Effect of Change | ||||||||||
Statements of Condition: | ||||||||||||
Mortgage loans held for portfolio, net | $ | 6,251,472 | $ | 6,230,400 | $ | (21,072 | ) | |||||
Total assets | 39,055,075 | 39,034,003 | (21,072 | ) | ||||||||
Affordable Housing Program payable | 43,351 | 43,462 | 111 | |||||||||
Total liabilities | 36,559,574 | 36,559,685 | 111 | |||||||||
Unrestricted retained earnings | 682,872 | 664,776 | (18,096 | ) | ||||||||
Restricted retained earnings | 98,797 | 95,710 | (3,087 | ) | ||||||||
Total retained earnings | 781,669 | 760,486 | (21,183 | ) | ||||||||
Total capital | 2,495,501 | 2,474,318 | (21,183 | ) | ||||||||
Total liabilities and capital | $ | 39,055,075 | $ | 39,034,003 | $ | (21,072 | ) | |||||
Statements of Income: | ||||||||||||
Interest income - mortgage loans held for portfolio | $ | 114,511 | $ | 115,616 | $ | 1,105 | ||||||
Net interest income after provision for credit losses | 90,966 | 92,071 | 1,105 | |||||||||
Income before assessments | 74,306 | 75,411 | 1,105 | |||||||||
Affordable Housing Program assessments | 7,505 | 7,616 | 111 | |||||||||
Net income | $ | 66,801 | $ | 67,795 | $ | 994 | ||||||
Statements of Comprehensive Income: | ||||||||||||
Net income | $ | 66,801 | $ | 67,795 | $ | 994 | ||||||
Total comprehensive income | $ | 92,258 | $ | 93,252 | $ | 994 | ||||||
Statements of Capital: | ||||||||||||
Total retained earnings, as of beginning of year | $ | 751,952 | $ | 729,775 | $ | (22,177 | ) | |||||
Total comprehensive income | 92,258 | 93,252 | 994 | |||||||||
Total retained earnings, as of end of period | 781,669 | 760,486 | (21,183 | ) | ||||||||
Total capital | $ | 2,495,501 | $ | 2,474,318 | $ | (21,183 | ) | |||||
Statements of Cash Flows: | ||||||||||||
Operating activities: | ||||||||||||
Net income | $ | 66,801 | $ | 67,795 | $ | 994 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Amortization and depreciation | 14,211 | 13,106 | (1,105 | ) | ||||||||
Changes in: | ||||||||||||
Other liabilities | 6,972 | 7,083 | 111 | |||||||||
Total adjustments, net | 55,572 | 54,578 | (994 | ) | ||||||||
Net cash provided by operating activities | $ | 122,373 | $ | 122,373 | $ | — |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 2 - Recently Adopted and Issued Accounting Guidance
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. 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. This guidance becomes effective for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We can elect to adopt the amendments either (i) prospectively to all arrangements entered into or materially modified after the effective date or (ii) retrospectively. We are in the process of evaluating this guidance, but its effect on our financial condition, results of operations, and cash flows is not expected to be material.
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 a reclassification on the statement of condition of debt issuance costs related to a recognized debt liability from other assets to a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance becomes effective for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of condition.
Amendments to the Consolidation Analysis. On February 18, 2015, the FASB issued amended guidance intended to enhance consolidation analysis for legal entities such as limited partnerships, limited liability companies, and securitization structures (collateralized debt obligations, collateralized loan obligations, and MBS transactions). The new guidance primarily focuses on: (i) placing more emphasis on risk of loss when determining a controlling financial interest, such that a reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement when certain criteria are met; (ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE; and (iii) changing consolidation conclusions for entities in several industries that typically make use of limited partnerships or VIEs. This guidance becomes effective for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted, including adoption in an interim period. We are in the process of evaluating this guidance, but its effect on our financial condition, results of operations, or cash flows is not expected to be material.
Note 3 - Available-for-Sale Securities
Major Security Types. The following table presents information on our AFS securities by type of security.
Gross | Gross | |||||||||||||||||||
Amortized | Non-Credit | Unrealized | Unrealized | Estimated | ||||||||||||||||
June 30, 2015 | Cost (1) | OTTI | Gains | Losses | Fair Value | |||||||||||||||
GSE and TVA debentures | $ | 3,113,797 | $ | — | $ | 14,695 | $ | (739 | ) | $ | 3,127,753 | |||||||||
GSE MBS | 77,736 | — | 718 | — | 78,454 | |||||||||||||||
Private-label RMBS | 328,152 | (201 | ) | 36,768 | — | 364,719 | ||||||||||||||
Total AFS securities | $ | 3,519,685 | $ | (201 | ) | $ | 52,181 | $ | (739 | ) | $ | 3,570,926 | ||||||||
December 31, 2014 | ||||||||||||||||||||
GSE and TVA debentures | $ | 3,139,037 | $ | — | $ | 17,430 | $ | (1,352 | ) | $ | 3,155,115 | |||||||||
Private-label RMBS | 362,878 | (127 | ) | 38,299 | — | 401,050 | ||||||||||||||
Total AFS securities | $ | 3,501,915 | $ | (127 | ) | $ | 55,729 | $ | (1,352 | ) | $ | 3,556,165 |
(1) | Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses) and fair-value hedge accounting adjustments. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Unrealized Loss Positions. The following table presents impaired AFS securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position. None of our GSE MBS were in an unrealized loss position at June 30, 2015.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
June 30, 2015 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
GSE and TVA debentures | $ | 266,017 | $ | (739 | ) | $ | — | $ | — | $ | 266,017 | $ | (739 | ) | ||||||||||
Private-label RMBS | — | — | 4,995 | (201 | ) | 4,995 | (201 | ) | ||||||||||||||||
Total impaired AFS securities | $ | 266,017 | $ | (739 | ) | $ | 4,995 | $ | (201 | ) | $ | 271,012 | $ | (940 | ) | |||||||||
December 31, 2014 | ||||||||||||||||||||||||
GSE and TVA debentures | $ | 264,959 | $ | (1,352 | ) | $ | — | $ | — | $ | 264,959 | $ | (1,352 | ) | ||||||||||
Private-label RMBS | — | — | 5,656 | (127 | ) | 5,656 | (127 | ) | ||||||||||||||||
Total impaired AFS securities | $ | 264,959 | $ | (1,352 | ) | $ | 5,656 | $ | (127 | ) | $ | 270,615 | $ | (1,479 | ) |
Contractual Maturity. The amortized cost and estimated fair value of non-MBS AFS securities by contractual maturity are presented below. MBS are not presented by contractual maturity because their actual maturities will likely differ from contractual maturities as borrowers have the right to prepay their obligations with or without prepayment fees.
June 30, 2015 | December 31, 2014 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Year of Contractual Maturity | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 207,315 | $ | 207,905 | $ | — | $ | — | ||||||||
Due after one year through five years | 2,252,418 | 2,262,091 | 2,484,379 | 2,497,034 | ||||||||||||
Due after five years through ten years | 654,064 | 657,757 | 654,658 | 658,081 | ||||||||||||
Total non-MBS | 3,113,797 | 3,127,753 | 3,139,037 | 3,155,115 | ||||||||||||
Total MBS | 405,888 | 443,173 | 362,878 | 401,050 | ||||||||||||
Total AFS securities | $ | 3,519,685 | $ | 3,570,926 | $ | 3,501,915 | $ | 3,556,165 |
Realized Gains and Losses. There were no sales of AFS securities during the three and six months ended June 30, 2015 or 2014. As of June 30, 2015, we had no intention of selling the AFS securities in an unrealized loss position nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 4 - Held-to-Maturity Securities
Major Security Types. The following table presents information on our HTM securities by type of security.
Gross | Gross | |||||||||||||||||||||||
Unrecognized | Unrecognized | |||||||||||||||||||||||
Amortized | Non-Credit | Carrying | Holding | Holding | Estimated | |||||||||||||||||||
June 30, 2015 | Cost (1) | OTTI | Value | Gains | Losses | Fair Value | ||||||||||||||||||
GSE debentures | $ | 100,000 | $ | — | $ | 100,000 | $ | 111 | $ | — | $ | 100,111 | ||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. obligations -guaranteed MBS | 2,986,326 | — | 2,986,326 | 30,870 | (2,097 | ) | 3,015,099 | |||||||||||||||||
GSE MBS | 3,296,309 | — | 3,296,309 | 82,921 | (713 | ) | 3,378,517 | |||||||||||||||||
Private-label RMBS | 86,549 | — | 86,549 | 418 | (957 | ) | 86,010 | |||||||||||||||||
Manufactured housing loan ABS | 10,394 | — | 10,394 | — | (1,010 | ) | 9,384 | |||||||||||||||||
Home equity loan ABS | 1,575 | (151 | ) | 1,424 | 76 | (46 | ) | 1,454 | ||||||||||||||||
Total MBS and ABS | 6,381,153 | (151 | ) | 6,381,002 | 114,285 | (4,823 | ) | 6,490,464 | ||||||||||||||||
Total HTM securities | $ | 6,481,153 | $ | (151 | ) | $ | 6,481,002 | $ | 114,396 | $ | (4,823 | ) | $ | 6,590,575 | ||||||||||
December 31, 2014 | ||||||||||||||||||||||||
GSE debentures | $ | 269,000 | $ | — | $ | 269,000 | $ | 199 | $ | — | $ | 269,199 | ||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. obligations -guaranteed MBS | 3,032,494 | — | 3,032,494 | 30,598 | (5,959 | ) | 3,057,133 | |||||||||||||||||
GSE MBS | 3,567,958 | — | 3,567,958 | 93,583 | (104 | ) | 3,661,437 | |||||||||||||||||
Private-label RMBS | 99,879 | — | 99,879 | 360 | (1,049 | ) | 99,190 | |||||||||||||||||
Manufactured housing loan ABS | 11,243 | — | 11,243 | — | (1,164 | ) | 10,079 | |||||||||||||||||
Home equity loan ABS | 1,716 | (175 | ) | 1,541 | 114 | (77 | ) | 1,578 | ||||||||||||||||
Total MBS and ABS | 6,713,290 | (175 | ) | 6,713,115 | 124,655 | (8,353 | ) | 6,829,417 | ||||||||||||||||
Total HTM securities | $ | 6,982,290 | $ | (175 | ) | $ | 6,982,115 | $ | 124,854 | $ | (8,353 | ) | $ | 7,098,616 |
(1) | Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses). |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Unrealized Loss Positions. The following table presents impaired HTM securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position. None of our non-MBS were in an unrealized loss position at June 30, 2015 or December 31, 2014.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
June 30, 2015 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses (1) | ||||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 71,333 | $ | (69 | ) | $ | 642,368 | $ | (2,028 | ) | $ | 713,701 | $ | (2,097 | ) | |||||||||
GSE MBS | 549,432 | (713 | ) | — | — | 549,432 | (713 | ) | ||||||||||||||||
Private-label RMBS | 8,632 | (30 | ) | 37,448 | (927 | ) | 46,080 | (957 | ) | |||||||||||||||
Manufactured housing loan ABS | — | — | 9,384 | (1,010 | ) | 9,384 | (1,010 | ) | ||||||||||||||||
Home equity loan ABS | — | — | 1,454 | (121 | ) | 1,454 | (121 | ) | ||||||||||||||||
Total MBS and ABS | 629,397 | (812 | ) | 690,654 | (4,086 | ) | 1,320,051 | (4,898 | ) | |||||||||||||||
Total impaired HTM securities | $ | 629,397 | $ | (812 | ) | $ | 690,654 | $ | (4,086 | ) | $ | 1,320,051 | $ | (4,898 | ) | |||||||||
December 31, 2014 | ||||||||||||||||||||||||
MBS and ABS: | ||||||||||||||||||||||||
Other U.S. obligations - guaranteed MBS | $ | 528,242 | $ | (1,254 | ) | $ | 702,768 | $ | (4,705 | ) | $ | 1,231,010 | $ | (5,959 | ) | |||||||||
GSE MBS | 31,554 | (8 | ) | 26,013 | (96 | ) | 57,567 | (104 | ) | |||||||||||||||
Private-label RMBS | 3,274 | (3 | ) | 41,050 | (1,046 | ) | 44,324 | (1,049 | ) | |||||||||||||||
Manufactured housing loan ABS | — | — | 10,080 | (1,164 | ) | 10,080 | (1,164 | ) | ||||||||||||||||
Home equity loan ABS | — | — | 1,579 | (138 | ) | 1,579 | (138 | ) | ||||||||||||||||
Total MBS and ABS | 563,070 | (1,265 | ) | 781,490 | (7,149 | ) | 1,344,560 | (8,414 | ) | |||||||||||||||
Total impaired HTM securities | $ | 563,070 | $ | (1,265 | ) | $ | 781,490 | $ | (7,149 | ) | $ | 1,344,560 | $ | (8,414 | ) |
(1) | For home equity loan ABS, total unrealized losses does not agree to total gross unrecognized holding losses at June 30, 2015 and December 31, 2014 of $(46) and $(77), respectively. Total unrealized losses include non-credit-related OTTI losses recorded in AOCI of $(151) and $(175), respectively, and gross unrecognized holding gains on previously OTTI securities of $76 and $114, respectively. |
Contractual Maturity. The amortized cost, carrying value and estimated fair value of non-MBS HTM securities by contractual maturity are presented below. MBS and ABS are not presented by contractual maturity because their actual maturities will likely differ from contractual maturities as certain borrowers have the right to prepay their obligations with or without prepayment fees.
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Amortized | Carrying | Estimated | Amortized | Carrying | Estimated | |||||||||||||||||||
Year of Contractual Maturity | Cost (1) | Value (2) | Fair Value | Cost (1) | Value (2) | Fair Value | ||||||||||||||||||
Non-MBS: | ||||||||||||||||||||||||
Due in one year or less | $ | 100,000 | $ | 100,000 | $ | 100,111 | $ | 169,000 | $ | 169,000 | $ | 169,099 | ||||||||||||
Due after one year through five years | — | — | — | 100,000 | 100,000 | 100,100 | ||||||||||||||||||
Total non-MBS | 100,000 | 100,000 | 100,111 | 269,000 | 269,000 | 269,199 | ||||||||||||||||||
Total MBS and ABS | 6,381,153 | 6,381,002 | 6,490,464 | 6,713,290 | 6,713,115 | 6,829,417 | ||||||||||||||||||
Total HTM securities | $ | 6,481,153 | $ | 6,481,002 | $ | 6,590,575 | $ | 6,982,290 | $ | 6,982,115 | $ | 7,098,616 |
(1) | Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal, and, if applicable, OTTI recognized in earnings (credit losses). |
(2) | Represents amortized cost after adjustment for non-credit OTTI recognized in AOCI. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 5 - Other-Than-Temporary Impairment
OTTI Evaluation Process and Results - Private-label RMBS and ABS. On a quarterly basis, we evaluate our individual AFS and HTM securities that have been previously OTTI or are in an unrealized loss position for OTTI. As part of our evaluation, we consider whether we intend to sell each security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we recognize an OTTI loss equal to the entire difference between the security's amortized cost basis and its estimated fair value at the statement of condition date. For those securities that meet neither of these conditions, we perform a cash flow analysis to determine whether we expect to recover the entire amortized cost basis of the security as described in Note 1 - Summary of Significant Accounting Policies and Note 6 - Other-Than-Temporary Impairment in our 2014 Form 10-K.
OTTI - Significant Inputs. The FHLBanks' OTTI Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 2% to an increase of 8% over a twelve-month period. For the vast majority of housing markets, the changes range from an increase of 2% to an increase of 5%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.
The following table presents the significant modeling assumptions used to determine the amount of credit loss recognized in earnings for the three months ended June 30, 2015 on the security for which an OTTI was determined to have occurred, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. A credit enhancement percentage of zero reflects a security that has no remaining credit support and is likely to have experienced an actual principal loss. The calculated averages represent the dollar-weighted averages of the private-label RMBS in each category shown. The classification (prime, Alt-A or subprime) is based on the model used to estimate the cash flows for the security, which may not be the same as the classification by the rating agency at the time of origination.
Significant Modeling Assumptions for OTTI private-label RMBS for the three months ended June 30, 2015 | ||||||||||||
Year of Securitization | Prepayment Rates (1) | Default Rates (1) | Loss Severities (1) | Current Credit Enhancement (1) | ||||||||
Prime - 2006 | 16.0 | % | 16.3 | % | 34.3 | % | 0.0 | % |
(1) | Weighted average based on UPB. |
Results of OTTI Evaluation Process. As a result of our analysis, OTTI credit losses were recognized for one security for the three and six months ended June 30, 2015 and one security for the three and six months ended June 30, 2014. We determined that the unrealized losses on the remaining private-label RMBS and ABS were temporary as we expect to recover the entire amortized cost. The following table presents a rollforward of the amounts related to credit losses recognized in earnings. The rollforward excludes accretion of credit losses for securities that have not experienced a significant increase in cash flows.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Credit Loss Rollforward | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period | $ | 68,374 | $ | 72,457 | $ | 69,626 | $ | 72,287 | ||||||||
Additions: | ||||||||||||||||
Additional credit losses for which OTTI was previously recognized (1) | 32 | 58 | 32 | 228 | ||||||||||||
Reductions: | ||||||||||||||||
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities) | (2,357 | ) | (931 | ) | (3,609 | ) | (931 | ) | ||||||||
Balance at end of period | $ | 66,049 | $ | 71,584 | $ | 66,049 | $ | 71,584 |
(1) | For the three and six months ended June 30, 2015 and 2014, the amount relates to one security originally impaired prior to January 1, 2014. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents the June 30, 2015 classification and balances of OTTI securities impaired prior to that date (i.e., life-to-date) but not necessarily as of that date. Securities are classified based on the originator's classification at the time of origination or based on the classification by the NRSROs upon issuance. Because there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, such classifications are subjective.
June 30, 2015 | ||||||||||||||||||||||||||||
HTM Securities | AFS Securities | |||||||||||||||||||||||||||
OTTI Life-to-Date | UPB | Amortized Cost | Carrying Value | Estimated Fair Value | UPB | Amortized Cost | Estimated Fair Value | |||||||||||||||||||||
Private-label RMBS - prime | $ | — | $ | — | $ | — | $ | — | $ | 386,909 | $ | 328,152 | $ | 364,719 | ||||||||||||||
Home equity loan ABS - subprime | 707 | 677 | 527 | 602 | — | — | — | |||||||||||||||||||||
Total | $ | 707 | $ | 677 | $ | 527 | $ | 602 | $ | 386,909 | $ | 328,152 | $ | 364,719 |
OTTI Evaluation Process and Results - All Other AFS and HTM Securities.
Other U.S. and GSE Obligations and TVA Debentures. For other U.S. obligations, GSE obligations, and TVA debentures, we determined that, based on current expectations, the strength of the issuers' guarantees through direct obligations of or support from the United States government is sufficient to protect us from any losses. As a result, all of the gross unrealized losses as of June 30, 2015 are considered temporary.
Note 6 - Advances
We had advances outstanding, as presented below by year of contractual maturity, with current interest rates ranging from 0% to 7.53%.
June 30, 2015 | December 31, 2014 | |||||||||||||
Year of Contractual Maturity | Amount | WAIR % | Amount | WAIR % | ||||||||||
Overdrawn demand and overnight deposit accounts | $ | 1,200 | 2.44 | $ | — | — | ||||||||
Due in 1 year or less | 10,014,629 | 0.70 | 7,406,652 | 0.83 | ||||||||||
Due after 1 year through 2 years | 2,521,285 | 1.24 | 2,529,649 | 1.28 | ||||||||||
Due after 2 years through 3 years | 2,765,255 | 1.90 | 2,331,427 | 1.57 | ||||||||||
Due after 3 years through 4 years | 1,496,916 | 2.04 | 2,047,262 | 2.05 | ||||||||||
Due after 4 years through 5 years | 2,539,194 | 1.55 | 1,571,567 | 2.51 | ||||||||||
Thereafter | 4,846,986 | 1.42 | 4,743,645 | 1.31 | ||||||||||
Total advances, par value | 24,185,465 | 1.21 | 20,630,202 | 1.33 | ||||||||||
Fair-value hedging adjustments | 95,336 | 117,118 | ||||||||||||
Unamortized swap termination fees associated with modified advances, net of deferred prepayment fees | 37,556 | 42,347 | ||||||||||||
Total advances | $ | 24,318,357 | $ | 20,789,667 |
Prepayments. At June 30, 2015 and December 31, 2014, we had $6.2 billion and $5.6 billion, respectively, of advances that can be prepaid without incurring prepayment or termination fees. All other advances may only be prepaid by paying a fee that is sufficient to make us financially indifferent to the prepayment of the advance.
At June 30, 2015 and December 31, 2014, we had putable advances outstanding totaling $335,500 and $179,000, respectively.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents advances by the earlier of the year of contractual maturity or the next call date and next put date.
Year of Contractual Maturity or Next Call Date | Year of Contractual Maturity or Next Put Date | |||||||||||||||
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | |||||||||||||
Overdrawn demand and overnight deposit accounts | $ | 1,200 | $ | — | $ | 1,200 | $ | — | ||||||||
Due in 1 year or less | 14,245,409 | 11,293,767 | 10,296,129 | 7,574,152 | ||||||||||||
Due after 1 year through 2 years | 2,722,535 | 2,533,649 | 2,468,785 | 2,499,649 | ||||||||||||
Due after 2 years through 3 years | 2,679,090 | 2,208,677 | 2,684,255 | 2,233,927 | ||||||||||||
Due after 3 years through 4 years | 1,271,916 | 1,847,262 | 1,486,916 | 2,012,262 | ||||||||||||
Due after 4 years through 5 years | 1,704,194 | 1,506,567 | 2,441,194 | 1,566,567 | ||||||||||||
Thereafter | 1,561,121 | 1,240,280 | 4,806,986 | 4,743,645 | ||||||||||||
Total advances, par value | $ | 24,185,465 | $ | 20,630,202 | $ | 24,185,465 | $ | 20,630,202 |
Credit Risk Exposure and Security Terms. At June 30, 2015 and December 31, 2014, we had a total of $12.5 billion and $8.3 billion, respectively, of advances outstanding, at par, to single borrowers with balances that were greater than or equal to $1.0 billion. These advances, representing 52% and 40%, respectively, of total advances at par outstanding on those dates, were made to seven and five borrowers, respectively. At June 30, 2015 and December 31, 2014, we held $22.4 billion and $15.1 billion, respectively, of UPB of collateral to cover the advances to these borrowers.
See Note 8 - Allowance for Credit Losses for information related to credit risk on advances and allowance methodology for credit losses.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 7 - Mortgage Loans Held for Portfolio
The following tables present information on mortgage loans held for portfolio by term and by type.
June 30, 2015 | ||||||||||||
Term | MPP | MPF | Total | |||||||||
Fixed-rate long-term mortgages | $ | 6,211,191 | $ | 401,909 | $ | 6,613,100 | ||||||
Fixed-rate medium-term (1) mortgages | 1,093,826 | 72,872 | 1,166,698 | |||||||||
Total mortgage loans held for portfolio, UPB | 7,305,017 | 474,781 | 7,779,798 | |||||||||
Unamortized premiums | 147,141 | 8,001 | 155,142 | |||||||||
Unamortized discounts | (3,790 | ) | (286 | ) | (4,076 | ) | ||||||
Fair-value hedging adjustments | 3,663 | (453 | ) | 3,210 | ||||||||
Allowance for loan losses | (1,200 | ) | (150 | ) | (1,350 | ) | ||||||
Total mortgage loans held for portfolio, net | $ | 7,450,831 | $ | 481,893 | $ | 7,932,724 |
December 31, 2014 | ||||||||||||
Term | MPP | MPF | Total | |||||||||
Fixed-rate long-term mortgages | $ | 5,233,682 | $ | 428,758 | $ | 5,662,440 | ||||||
Fixed-rate medium-term (1) mortgages | 963,083 | 78,919 | 1,042,002 | |||||||||
Total mortgage loans held for portfolio, UPB | 6,196,765 | 507,677 | 6,704,442 | |||||||||
Unamortized premiums | 107,876 | 8,726 | 116,602 | |||||||||
Unamortized discounts | (1,874 | ) | (302 | ) | (2,176 | ) | ||||||
Fair-value hedging adjustments | 4,369 | (475 | ) | 3,894 | ||||||||
Allowance for loan losses | (2,250 | ) | (250 | ) | (2,500 | ) | ||||||
Total mortgage loans held for portfolio, net | $ | 6,304,886 | $ | 515,376 | $ | 6,820,262 |
(1) | Defined as a term of 15 years or less at origination. |
June 30, 2015 | ||||||||||||
Type | MPP | MPF | Total | |||||||||
Conventional | $ | 6,731,081 | $ | 379,966 | $ | 7,111,047 | ||||||
Government | 573,936 | 94,815 | 668,751 | |||||||||
Total mortgage loans held for portfolio, UPB | $ | 7,305,017 | $ | 474,781 | $ | 7,779,798 |
December 31, 2014 | ||||||||||||
Type | MPP | MPF | Total | |||||||||
Conventional | $ | 5,562,460 | $ | 406,469 | $ | 5,968,929 | ||||||
Government | 634,305 | 101,208 | 735,513 | |||||||||
Total mortgage loans held for portfolio, UPB | $ | 6,196,765 | $ | 507,677 | $ | 6,704,442 |
For information related to our credit risk on mortgage loans and allowance for loan losses, see Note 8 - Allowance for Credit Losses.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 8 - Allowance for Credit Losses
We have established a methodology to determine the allowance for credit losses for each of our portfolio segments: credit products (advances, letters of credit, and other extensions of credit to members); term securities purchased under agreements to resell; term federal funds sold; government-guaranteed or insured mortgage loans held for portfolio; and conventional mortgage loans held for portfolio. A description of the allowance methodologies for our portfolio segments as well as our policy for impairing financing receivables and charging them off when necessary is disclosed in Note 1 - Summary of Significant Accounting Policies and Note 9 - Allowance for Credit Losses in our 2014 Form 10-K. Our policy for placing loans on non-accrual status was updated during the second quarter of 2015, and a description of this change is disclosed in Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle herein.
Credit Products. Using a risk-based approach, we consider the amount and quality of the collateral pledged and the borrower's financial condition to be the primary indicators of credit quality on the borrower's credit products. At June 30, 2015 and December 31, 2014, we had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of our outstanding extensions of credit.
At June 30, 2015 and December 31, 2014, we did not have any credit products that were past due, on non-accrual status, or considered impaired. In addition, there were no TDRs related to credit products during the six months ended June 30, 2015 and 2014.
Based upon the collateral held as security, our credit extension and collateral policies, our credit analysis and the repayment history on credit products, we have not recorded any allowance for credit losses on credit products and no liability was recorded to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information about off-balance sheet credit exposure, see Note 16 - Commitments and Contingencies.
Mortgage Loans.
Collectively Evaluated Mortgage Loans.
Collectively Evaluated MPP Loans. Our loan loss analysis includes collectively evaluating the MPP pools of conventional loans for impairment. The measurement of our allowance for loan losses includes evaluating (i) homogeneous pools of mortgage loans past due 180 days or more; and (ii) the current to 179 days past due portion of the loan portfolio. This loan loss analysis considers MPP pool-specific attribute data, estimated liquidation value of real estate collateral held, estimated costs associated with maintaining and disposing of the collateral, and credit enhancements. Delinquency reports are used to determine the population of loans incorporated into the allowance for loan loss analysis.
Beginning in the first quarter of 2015, we refined our technique for estimating losses on mortgage loans past due 180 days or more to incorporate loan-level property values obtained from a third-party model, instead of using a historical weighted-average collateral recovery rate. A haircut is applied to these loan-level values to capture the potential impact of severely distressed property sales. The reduced values are then aggregated to the pool level and are further reduced for estimated liquidation costs to determine the estimated liquidation value.
Credit Enhancements.
The following table presents the actual activity in the LRA.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
LRA Activity | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance of LRA, beginning of period | $ | 72,178 | $ | 46,958 | $ | 61,949 | $ | 45,330 | ||||||||
Additions | 10,959 | 3,684 | 21,508 | 6,110 | ||||||||||||
Claims paid | (361 | ) | (617 | ) | (547 | ) | (1,253 | ) | ||||||||
Distributions | (152 | ) | (107 | ) | (286 | ) | (269 | ) | ||||||||
Balance of LRA, end of period | $ | 82,624 | $ | 49,918 | $ | 82,624 | $ | 49,918 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
MPP Credit Enhancements. The following table presents the estimated impact of credit enhancements on the allowance.
MPP Credit Waterfall | June 30, 2015 | December 31, 2014 | ||||||
Estimated losses remaining after borrower's equity, before credit enhancements | $ | 12,007 | $ | 25,232 | ||||
Portion of estimated losses recoverable from PMI | (2,361 | ) | (3,301 | ) | ||||
Portion of estimated losses recoverable from LRA (1) | (1,513 | ) | (5,334 | ) | ||||
Portion of estimated losses recoverable from SMI | (7,072 | ) | (14,587 | ) | ||||
Allowance for unrecoverable PMI/SMI | 139 | 240 | ||||||
Allowance for MPP loan losses | $ | 1,200 | $ | 2,250 |
(1) | Amounts recoverable limited to (i) estimated losses remaining after borrower's equity and PMI and (ii) the remaining balance in each pool's portion of the LRA. The remainder of the LRA is available to cover any losses not yet incurred and to distribute any excess funds to members. |
MPF Credit Enhancements. CE fees paid to PFIs were $90 and $101 for the three months ended June 30, 2015 and 2014, respectively, compared with $184 and $203 for the six months ended June 30, 2015 and 2014, respectively. Performance-based CE fees may be withheld to cover losses allocated to us.
If losses occur in an MCC, these losses will either be: (i) recovered through the withholding of future performance-based CE fees from the PFI or (ii) absorbed by us in the FLA. As of June 30, 2015 and December 31, 2014, our exposure under the FLA was $3,462 and $3,431, respectively, with CE obligations available to cover losses in excess of the FLA totaling $26,862 and $26,851, respectively. Any estimated losses that would be absorbed by the CE obligation are not included in our allowance for loan losses. Accordingly, the allowance was reduced by $0 and $2 as of June 30, 2015 and December 31, 2014, respectively, for the amount in excess of the FLA to be covered by PFIs’ CE obligations. The resulting allowance for MPF loan losses was $150 at June 30, 2015 and $250 at December 31, 2014.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Allowance for Loan Losses on Mortgage Loans. The tables below present a rollforward of our allowance for loan losses, the allowance for loan losses by impairment methodology, and the recorded investment in mortgage loans by impairment methodology.
MPP | MPF | |||||||||||
Rollforward of Allowance | Conventional | Conventional | Total | |||||||||
Allowance for loan losses, March 31, 2015 | $ | 2,000 | $ | 250 | $ | 2,250 | ||||||
Charge-offs, net of recoveries | 53 | (2 | ) | 51 | ||||||||
Provision for (reversal of) loan losses | (853 | ) | (98 | ) | (951 | ) | ||||||
Allowance for loan losses, June 30, 2015 | $ | 1,200 | $ | 150 | $ | 1,350 | ||||||
Allowance for loan losses, March 31, 2014 | $ | 3,000 | $ | 500 | $ | 3,500 | ||||||
Charge-offs, net of recoveries | (164 | ) | — | (164 | ) | |||||||
Provision for (reversal of) loan losses | 164 | (250 | ) | (86 | ) | |||||||
Allowance for loan losses, June 30, 2014 | $ | 3,000 | $ | 250 | $ | 3,250 | ||||||
Allowance for loan losses, December 31, 2014 | $ | 2,250 | $ | 250 | $ | 2,500 | ||||||
Charge-offs, net of recoveries | (760 | ) | (2 | ) | (762 | ) | ||||||
Provision for (reversal of) loan losses | (290 | ) | (98 | ) | (388 | ) | ||||||
Allowance for loan losses, June 30, 2015 | $ | 1,200 | $ | 150 | $ | 1,350 | ||||||
Allowance for loan losses, December 31, 2013 | $ | 4,000 | $ | 500 | $ | 4,500 | ||||||
Charge-offs, net of recoveries | (451 | ) | (9 | ) | (460 | ) | ||||||
Provision for (reversal of) loan losses | (549 | ) | (241 | ) | (790 | ) | ||||||
Allowance for loan losses, June 30, 2014 | $ | 3,000 | $ | 250 | $ | 3,250 |
Allowance for Loan Losses, June 30, 2015 | ||||||||||||
Loans collectively evaluated for impairment | $ | 1,103 | $ | 150 | $ | 1,253 | ||||||
Loans individually evaluated for impairment (1) | 97 | — | 97 | |||||||||
Total allowance for loan losses | $ | 1,200 | $ | 150 | $ | 1,350 | ||||||
Allowance for Loan Losses, December 31, 2014 | ||||||||||||
Loans collectively evaluated for impairment | $ | 1,776 | $ | 250 | $ | 2,026 | ||||||
Loans individually evaluated for impairment (1) | 474 | — | 474 | |||||||||
Total allowance for loan losses | $ | 2,250 | $ | 250 | $ | 2,500 | ||||||
Recorded Investment, June 30, 2015 | ||||||||||||
Loans collectively evaluated for impairment | $ | 6,879,585 | $ | 388,243 | $ | 7,267,828 | ||||||
Loans individually evaluated for impairment (1) | 19,334 | — | 19,334 | |||||||||
Total recorded investment | $ | 6,898,919 | $ | 388,243 | $ | 7,287,162 | ||||||
Recorded Investment, December 31, 2014 | ||||||||||||
Loans collectively evaluated for impairment | $ | 5,667,524 | $ | 415,569 | $ | 6,083,093 | ||||||
Loans individually evaluated for impairment (1) | 19,889 | — | 19,889 | |||||||||
Total recorded investment | $ | 5,687,413 | $ | 415,569 | $ | 6,102,982 |
(1) | The recorded investment in our MPP conventional loans individually evaluated for impairment excludes principal that was previously paid in full by the servicers as of June 30, 2015 and December 31, 2014 of $4,001 and $5,519, respectively, that remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. However, the MPP allowance for loan losses includes $30 and $153 for these potential claims as of June 30, 2015 and December 31, 2014, respectively. |
As a result of our recent loss history, beginning in the first quarter of 2015, for conventional mortgage loans that are 180 days or more delinquent and/or where the borrower has filed for bankruptcy, we charge off the portion of the outstanding balance in excess of estimated fair value of the underlying property, less cost to sell and adjusted for any available credit enhancements.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Credit Quality Indicators. The tables below present our key credit quality indicators for mortgage loans held for portfolio.
Mortgage Loans Held for Portfolio June 30, 2015 | MPP | MPF | ||||||||||||||||||
Conventional | FHA | Conventional | Government | Total | ||||||||||||||||
Past due 30-59 days | $ | 46,989 | $ | 16,628 | $ | 627 | $ | 1,205 | $ | 65,449 | ||||||||||
Past due 60-89 days | 12,140 | 4,733 | 1 | 478 | 17,352 | |||||||||||||||
Past due 90 days or more | 38,810 | 2,613 | 175 | 188 | 41,786 | |||||||||||||||
Total past due | 97,939 | 23,974 | 803 | 1,871 | 124,587 | |||||||||||||||
Total current | 6,800,980 | 560,002 | 387,440 | 94,259 | 7,842,681 | |||||||||||||||
Total mortgage loans, recorded investment | 6,898,919 | 583,976 | 388,243 | 96,130 | 7,967,268 | |||||||||||||||
Net unamortized premiums | (135,331 | ) | (8,020 | ) | (6,746 | ) | (969 | ) | (151,066 | ) | ||||||||||
Fair-value hedging adjustments | (3,619 | ) | (44 | ) | 390 | 63 | (3,210 | ) | ||||||||||||
Accrued interest receivable | (28,888 | ) | (1,976 | ) | (1,921 | ) | (409 | ) | (33,194 | ) | ||||||||||
Total mortgage loans held for portfolio, UPB | $ | 6,731,081 | $ | 573,936 | $ | 379,966 | $ | 94,815 | $ | 7,779,798 | ||||||||||
Other Delinquency Statistics June 30, 2015 | ||||||||||||||||||||
In process of foreclosure (1) | $ | 26,752 | $ | — | $ | — | $ | — | $ | 26,752 | ||||||||||
Serious delinquency rate (2) | 0.56 | % | 0.45 | % | 0.05 | % | 0.20 | % | 0.52 | % | ||||||||||
Past due 90 days or more still accruing interest (3) | $ | 31,998 | $ | 2,613 | $ | — | $ | 188 | $ | 34,799 | ||||||||||
On non-accrual status | 8,125 | — | 335 | — | 8,460 |
Mortgage Loans Held for Portfolio December 31, 2014 | MPP | MPF | ||||||||||||||||||
Conventional | FHA | Conventional | Government | Total | ||||||||||||||||
Past due 30-59 days | $ | 59,365 | $ | 25,954 | $ | 1,011 | $ | 1,287 | $ | 87,617 | ||||||||||
Past due 60-89 days | 14,879 | 6,010 | 252 | 657 | 21,798 | |||||||||||||||
Past due 90 days or more | 49,128 | 3,636 | 1 | 483 | 53,248 | |||||||||||||||
Total past due | 123,372 | 35,600 | 1,264 | 2,427 | 162,663 | |||||||||||||||
Total current | 5,564,041 | 609,711 | 414,305 | 100,184 | 6,688,241 | |||||||||||||||
Total mortgage loans, recorded investment | 5,687,413 | 645,311 | 415,569 | 102,611 | 6,850,904 | |||||||||||||||
Net unamortized premiums | (97,411 | ) | (8,591 | ) | (7,400 | ) | (1,024 | ) | (114,426 | ) | ||||||||||
Fair-value hedging adjustments | (4,323 | ) | (45 | ) | 417 | 57 | (3,894 | ) | ||||||||||||
Accrued interest receivable | (23,219 | ) | (2,370 | ) | (2,117 | ) | (436 | ) | (28,142 | ) | ||||||||||
Total mortgage loans held for portfolio, UPB | $ | 5,562,460 | $ | 634,305 | $ | 406,469 | $ | 101,208 | $ | 6,704,442 | ||||||||||
Other Delinquency Statistics December 31, 2014 | ||||||||||||||||||||
In process of foreclosure (1) | $ | 32,369 | $ | — | $ | — | $ | — | $ | 32,369 | ||||||||||
Serious delinquency rate (2) | 0.86 | % | 0.56 | % | — | % | 0.47 | % | 0.78 | % | ||||||||||
Past due 90 days or more still accruing interest (3) | $ | 46,341 | $ | 3,636 | $ | — | $ | 483 | $ | 50,460 | ||||||||||
On non-accrual status | 7,207 | — | 1 | — | 7,208 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
(1) | Includes loans for which the decision of foreclosure or similar alternative, such as pursuit of deed-in-lieu of foreclosure, has been reported. Loans in process of foreclosure are included in past due categories depending on their delinquency status. |
(2) | Represents loans 90 days or more past due (including loans in process of foreclosure) expressed as a percentage of the total recorded investment in mortgage loans. The percentage excludes principal and interest amounts that were previously paid in full by the servicers on conventional loans that are pending resolution of potential loss claims. Many government, including FHA, loans are repurchased by the servicers when they reach 90 days or more delinquent status, similar to the rules for servicers of Ginnie Mae MBS, resulting in the lower serious delinquency rate for government loans. |
(3) | Although our past due scheduled/scheduled MPP loans are classified as loans past due 90 days or more based on the mortgagor's payment status, we do not consider these loans to be non-accrual. |
Troubled Debt Restructurings. The table below presents the recorded investment of the performing and non-performing TDRs. Non-performing represents loans on non-accrual status only.
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Recorded Investment | Performing | Non-Performing | Total | Performing | Non-Performing | Total | ||||||||||||||||||
MPP conventional loans | $ | 17,173 | $ | 2,161 | $ | 19,334 | $ | 13,744 | $ | 6,145 | $ | 19,889 |
Due to the minimal change in terms of modified loans (i.e., no principal forgiven), our pre-modification recorded investment was not materially different than the post-modification recorded investment in TDRs.
During the three and six months ended June 30, 2015 certain conventional MPP loans classified as TDRs within the previous 12 months experienced a payment default. A borrower is considered to have defaulted on a TDR if the borrower's contractually due principal or interest is 60 days or more past due at any time. The recorded investment of certain conventional MPP loans classified as TDRs within the previous 12 months that experienced an initial payment default at the end of such periods was $104 and $144 for the three and six months ended June 30, 2015, respectively. However, a loan can experience another payment default in a subsequent period. There were no such loans during the three or six months ended June 30, 2014.
A loan considered to be a TDR is individually evaluated for impairment when determining its related allowance for loan loss. Credit loss is measured by factoring in expected cash shortfalls as of the reporting date. The tables below present the impaired conventional loans individually evaluated for impairment. The first table presents the recorded investment, UPB and related allowance associated with these loans, while the next table presents the average recorded investment of individually impaired loans and related interest income recognized.
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Individually Evaluated Impaired Loans | Recorded Investment | UPB | Related Allowance for Loan Losses | Recorded Investment | UPB | Related Allowance for Loan Losses | ||||||||||||||||||
MPP conventional loans without allowance for loan losses (1) | $ | 18,215 | $ | 18,069 | $ | — | $ | 13,744 | $ | 13,647 | $ | — | ||||||||||||
MPP conventional loans with allowance for loan losses | 1,119 | 1,128 | 67 | 6,145 | 6,099 | 321 | ||||||||||||||||||
Total | $ | 19,334 | $ | 19,197 | $ | 67 | $ | 19,889 | $ | 19,746 | $ | 321 |
(1) | No allowance for loan losses was recorded on these impaired loans after consideration of the underlying loan-specific attribute data, estimated liquidation value of real estate collateral held, estimated costs associated with maintaining and disposing of the collateral, and credit enhancements. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
Individually Evaluated Impaired Loans | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
MPP conventional loans without allowance for loan losses | $ | 18,446 | $ | 232 | $ | 18,540 | $ | 275 | ||||||||
MPP conventional loans with allowance for loan losses | 1,133 | 15 | 948 | 14 | ||||||||||||
Total | $ | 19,579 | $ | 247 | $ | 19,488 | $ | 289 |
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
Individually Evaluated Impaired Loans | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
MPP conventional loans without allowance for loan losses | $ | 18,543 | $ | 455 | $ | 18,161 | $ | 530 | ||||||||
MPP conventional loans with allowance for loan losses | 1,139 | 79 | 950 | 30 | ||||||||||||
Total | $ | 19,682 | $ | 534 | $ | 19,111 | $ | 560 |
There was one MPF TDR during the three and six months ended June 30, 2015. The loan was non-performing at June 30, 2015 and had a recorded investment of $160. There were no MPF TDRs during the three and six months ended June 30, 2014.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 9 - Derivatives and Hedging Activities
Financial Statement Effect and Additional Financial Information.
Derivative Notional Amounts. The following table presents the notional amount and estimated fair value of derivative instruments, including the effect of netting adjustments, cash collateral, and the related accrued interest.
Notional | Estimated Fair Value | Estimated Fair Value | ||||||||||
Amount of | of Derivative | of Derivative | ||||||||||
June 30, 2015 | Derivatives | Assets | Liabilities | |||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 30,595,463 | $ | 57,482 | $ | 275,072 | ||||||
Total derivatives designated as hedging instruments | 30,595,463 | 57,482 | 275,072 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 341,717 | 301 | 111 | |||||||||
Interest-rate caps/floors | 340,500 | 161 | — | |||||||||
Interest-rate forwards | 175,500 | 179 | 33 | |||||||||
MDCs | 174,189 | 223 | 467 | |||||||||
Total derivatives not designated as hedging instruments | 1,031,906 | 864 | 611 | |||||||||
Total derivatives before adjustments | $ | 31,627,369 | 58,346 | 275,683 | ||||||||
Netting adjustments and cash collateral (1) | (16,583 | ) | (180,049 | ) | ||||||||
Total derivatives, net | $ | 41,763 | $ | 95,634 | ||||||||
December 31, 2014 | ||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest-rate swaps | $ | 27,527,697 | $ | 55,095 | $ | 331,546 | ||||||
Total derivatives designated as hedging instruments | 27,527,697 | 55,095 | 331,546 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest-rate swaps | 1,476,365 | 330 | 735 | |||||||||
Interest-rate caps/floors | 340,500 | 312 | — | |||||||||
Interest-rate forwards | 252,100 | — | 1,631 | |||||||||
MDCs | 252,418 | 711 | 6 | |||||||||
Total derivatives not designated as hedging instruments | 2,321,383 | 1,353 | 2,372 | |||||||||
Total derivatives before adjustments | $ | 29,849,080 | 56,448 | 333,918 | ||||||||
Netting adjustments and cash collateral (1) | (30,961 | ) | (230,665 | ) | ||||||||
Total derivatives, net | $ | 25,487 | $ | 103,253 |
(1) | Represents the application of the netting requirements that allow us to settle (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. Cash collateral placed at June 30, 2015 and December 31, 2014 was $165,007 and $201,284, respectively. Cash collateral held at June 30, 2015 and December 31, 2014 was $1,540 and $1,580, respectively. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
We record derivative instruments, related cash collateral received or pledged, including initial and variation margin, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when we have met the netting requirements. The following table presents separately the estimated fair value of derivative instruments meeting and not meeting netting requirements, including the related collateral received from or pledged to counterparties.
June 30, 2015 | December 31, 2014 | |||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||
Derivative instruments meeting netting requirements: | ||||||||||||||||
Gross recognized amount | ||||||||||||||||
Bilateral | $ | 34,252 | $ | 245,816 | $ | 48,532 | $ | 308,041 | ||||||||
Cleared | 23,692 | 29,367 | 7,205 | 24,240 | ||||||||||||
Total gross recognized amount | 57,944 | 275,183 | 55,737 | 332,281 | ||||||||||||
Gross amounts of netting adjustments and cash collateral | ||||||||||||||||
Bilateral | (33,871 | ) | (150,682 | ) | (48,389 | ) | (206,425 | ) | ||||||||
Cleared | 17,288 | (29,367 | ) | 17,428 | (24,240 | ) | ||||||||||
Total gross amounts of netting adjustments and cash collateral | (16,583 | ) | (180,049 | ) | (30,961 | ) | (230,665 | ) | ||||||||
Net amounts after netting adjustments and cash collateral | ||||||||||||||||
Bilateral | 381 | 95,134 | 143 | 101,616 | ||||||||||||
Cleared | 40,980 | — | 24,633 | — | ||||||||||||
Total net amounts after netting adjustments and cash collateral | 41,361 | 95,134 | 24,776 | 101,616 | ||||||||||||
Derivative instruments not meeting netting requirements (1) | 402 | 500 | 711 | 1,637 | ||||||||||||
Total derivatives, at estimated fair value | $ | 41,763 | $ | 95,634 | $ | 25,487 | $ | 103,253 |
(1) | Includes MDCs and certain interest-rate forwards. |
The following table presents the components of net gains (losses) on derivatives and hedging activities reported in other income (loss).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Type of Hedge | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net gain (loss) related to fair-value hedge ineffectiveness: | ||||||||||||||||
Interest-rate swaps | $ | 6,332 | $ | (2,908 | ) | $ | 6,441 | $ | (3,519 | ) | ||||||
Total net gain (loss) related to fair-value hedge ineffectiveness | 6,332 | (2,908 | ) | 6,441 | (3,519 | ) | ||||||||||
Net gain (loss) on derivatives not designated as hedging instruments: | ||||||||||||||||
Economic hedges: | ||||||||||||||||
Interest-rate swaps | 1,660 | 4,428 | 865 | 5,771 | ||||||||||||
Interest-rate caps/floors | (45 | ) | (413 | ) | (151 | ) | (875 | ) | ||||||||
Interest-rate forwards | 1,973 | (2,700 | ) | (1,348 | ) | (3,425 | ) | |||||||||
Net interest settlements | 201 | 2,715 | 492 | 5,440 | ||||||||||||
MDCs | (2,858 | ) | 2,016 | (916 | ) | 2,714 | ||||||||||
Total net gain (loss) on derivatives not designated as hedging instruments | 931 | 6,046 | (1,058 | ) | 9,625 | |||||||||||
Net gains (losses) on derivatives and hedging activities | $ | 7,263 | $ | 3,138 | $ | 5,383 | $ | 6,106 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair-value hedging relationships and the effect of those derivatives on net interest income.
Gain (Loss) | Gain (Loss) | Net Fair- | Effect on | ||||||||||||||
on | on Hedged | Value Hedge | Net Interest | ||||||||||||||
Three Months Ended June 30, 2015 | Derivative | Item | Ineffectiveness | Income (1) | |||||||||||||
Advances | $ | 47,732 | $ | (44,213 | ) | $ | 3,519 | $ | (39,242 | ) | |||||||
AFS securities | 31,739 | (32,147 | ) | (408 | ) | (24,303 | ) | ||||||||||
CO bonds | (4,823 | ) | 8,044 | 3,221 | 14,645 | ||||||||||||
Total | $ | 74,648 | $ | (68,316 | ) | $ | 6,332 | $ | (48,900 | ) | |||||||
Three Months Ended June 30, 2014 | |||||||||||||||||
Advances | $ | (19,830 | ) | $ | 19,172 | $ | (658 | ) | $ | (36,883 | ) | ||||||
AFS securities | (9,093 | ) | 9,041 | (52 | ) | (24,526 | ) | ||||||||||
CO bonds | 29,316 | (31,514 | ) | (2,198 | ) | 19,563 | |||||||||||
Total | $ | 393 | $ | (3,301 | ) | $ | (2,908 | ) | $ | (41,846 | ) | ||||||
Six Months Ended June 30, 2015 | |||||||||||||||||
Advances | $ | 10,780 | $ | (8,508 | ) | $ | 2,272 | $ | (78,669 | ) | |||||||
AFS securities | 20,841 | (21,828 | ) | (987 | ) | (48,732 | ) | ||||||||||
CO Bonds | 10,237 | (5,081 | ) | 5,156 | 31,241 | ||||||||||||
Total | $ | 41,858 | $ | (35,417 | ) | $ | 6,441 | $ | (96,160 | ) | |||||||
Six Months Ended June 30, 2014 | |||||||||||||||||
Advances | $ | (21,133 | ) | $ | 21,580 | $ | 447 | $ | (73,283 | ) | |||||||
AFS securities | (7,859 | ) | 7,981 | 122 | (49,021 | ) | |||||||||||
CO Bonds | 53,988 | (58,076 | ) | (4,088 | ) | 38,187 | |||||||||||
Total | $ | 24,996 | $ | (28,515 | ) | $ | (3,519 | ) | $ | (84,117 | ) |
(1) | Includes the effect of derivatives in fair-value hedging relationships on net interest income that is recorded in the interest income/expense line item of the respective hedged items. Excludes the interest income/expense of the respective hedged items, which fully offset the interest income/expense of the derivatives, except to the extent of any hedge ineffectiveness. Net interest settlements on derivatives that are not in fair-value hedging relationships are reported in other income (loss). |
Managing Credit Risk on Derivatives. We are subject to credit risk due to the risk of nonperformance by the counterparties to our derivative transactions.
For our bilateral derivatives, we have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by an NRSRO, we could be required to deliver additional collateral on bilateral derivative instruments in net liability positions. The aggregate estimated fair value of all bilateral derivative instruments with credit risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest on cash collateral) at June 30, 2015 was $212,307 for which we have posted collateral, including accrued interest, with an estimated fair value of $117,901 in the normal course of business. In addition, we held other derivative instruments in a net liability position of $500 that are not subject to credit support agreements containing credit risk-related contingent features. If our credit rating had been lowered by an NRSRO (from an S&P equivalent of AA+ to AA), we could have been required to deliver up to an additional $7,210 of collateral (at estimated fair value) to our bilateral derivative counterparties at June 30, 2015.
For cleared derivatives, the clearinghouse determines initial margin requirements, and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. We were not required to post additional initial margin by our clearing agents at June 30, 2015.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 10 - Consolidated Obligations
Although we are the primary obligor for our portion of consolidated obligations (i.e., those issued on our behalf), we are also jointly and severally liable with each of the other FHLBanks for the payment of the principal and interest on all FHLBank consolidated obligations. The par values of the FHLBanks' outstanding consolidated obligations at June 30, 2015 and December 31, 2014 totaled $852.8 billion and $847.2 billion, respectively.
Discount Notes. The following table presents our participation in discount notes outstanding, all of which are due within one year of issuance.
Discount Notes | June 30, 2015 | December 31, 2014 | ||||||
Book value | $ | 11,802,629 | $ | 12,567,696 | ||||
Par value | 11,807,026 | 12,570,811 | ||||||
Weighted average effective interest rate | 0.14 | % | 0.12 | % |
CO Bonds. The following table presents our participation in CO bonds outstanding by contractual maturity.
June 30, 2015 | December 31, 2014 | |||||||||||||
Year of Contractual Maturity | Amount | WAIR% | Amount | WAIR% | ||||||||||
Due in 1 year or less | $ | 14,715,220 | 0.36 | $ | 11,695,550 | 0.33 | ||||||||
Due after 1 year through 2 years | 3,828,220 | 0.94 | 2,018,510 | 1.49 | ||||||||||
Due after 2 years through 3 years | 2,326,710 | 1.81 | 2,158,950 | 1.76 | ||||||||||
Due after 3 years through 4 years | 1,104,850 | 2.42 | 1,934,100 | 1.49 | ||||||||||
Due after 4 years through 5 years | 1,796,625 | 2.67 | 999,700 | 2.51 | ||||||||||
Thereafter | 5,860,950 | 3.19 | 6,692,000 | 3.11 | ||||||||||
Total CO bonds, par value | 29,632,575 | 1.32 | 25,498,810 | 1.44 | ||||||||||
Unamortized premiums | 29,901 | 27,138 | ||||||||||||
Unamortized discounts | (14,083 | ) | (14,913 | ) | ||||||||||
Fair-value hedging adjustments | (793 | ) | (7,897 | ) | ||||||||||
Total CO bonds | $ | 29,647,600 | $ | 25,503,138 |
The following tables present our participation in CO bonds outstanding by redemption feature and contractual maturity or next call date.
Redemption Feature | June 30, 2015 | December 31, 2014 | ||||||
Non-callable / non-putable | $ | 22,281,575 | $ | 17,253,810 | ||||
Callable | 7,351,000 | 8,245,000 | ||||||
Total CO bonds, par value | $ | 29,632,575 | $ | 25,498,810 |
Year of Contractual Maturity or Next Call Date | ||||||||
Due in 1 year or less | $ | 21,933,220 | $ | 19,918,550 | ||||
Due after 1 year through 2 years | 3,230,220 | 1,651,510 | ||||||
Due after 2 years through 3 years | 1,274,710 | 883,950 | ||||||
Due after 3 years through 4 years | 677,850 | 461,100 | ||||||
Due after 4 years through 5 years | 1,149,625 | 543,700 | ||||||
Thereafter | 1,366,950 | 2,040,000 | ||||||
Total CO bonds, par value | $ | 29,632,575 | $ | 25,498,810 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 11 - Affordable Housing Program
The following table summarizes the activity in our AHP funding obligation.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
AHP Activity | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period | $ | 35,759 | $ | 43,211 | $ | 36,899 | $ | 42,778 | ||||||||
Assessment (expense) | 3,801 | 3,727 | 7,217 | 7,616 | ||||||||||||
Subsidy usage, net (1) | (4,440 | ) | (3,476 | ) | (8,996 | ) | (6,932 | ) | ||||||||
Balance at end of period | $ | 35,120 | $ | 43,462 | $ | 35,120 | $ | 43,462 |
(1) | Subsidies disbursed are reported net of returns/recaptures of previously disbursed subsidies. |
Note 12 - Capital
We are subject to capital requirements under our capital plan and the Finance Agency regulations as disclosed in Note 15 - Capital in our 2014 Form 10-K. As presented in the following table, we were in compliance with the Finance Agency's capital requirements at June 30, 2015 and December 31, 2014. For regulatory purposes, AOCI is not considered capital; MRCS, however, is considered capital.
June 30, 2015 | December 31, 2014 | |||||||||||||||
Regulatory Capital Requirements | Required | Actual | Required | Actual | ||||||||||||
Risk-based capital | $ | 555,561 | $ | 2,212,501 | $ | 566,683 | $ | 2,344,283 | ||||||||
Regulatory permanent capital-to-asset ratio | 4.00 | % | 4.89 | % | 4.00 | % | 5.60 | % | ||||||||
Regulatory permanent capital | $ | 1,809,461 | $ | 2,212,501 | $ | 1,674,121 | $ | 2,344,283 | ||||||||
Leverage ratio | 5.00 | % | 7.34 | % | 5.00 | % | 8.40 | % | ||||||||
Leverage capital | $ | 2,261,826 | $ | 3,318,752 | $ | 2,092,652 | $ | 3,516,425 |
Mandatorily Redeemable Capital Stock. At June 30, 2015 and December 31, 2014, we had $14,341 and $15,673, respectively, in capital stock subject to mandatory redemption, which is classified as a liability. There were eight former members holding MRCS at June 30, 2015 and December 31, 2014.
The following tables present the activity in MRCS and distributions on MRCS.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
MRCS Activity | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Liability at beginning of period | $ | 15,553 | $ | 16,786 | $ | 15,673 | $ | 16,787 | ||||||||
Redemptions/repurchases | (1,212 | ) | (1 | ) | (1,332 | ) | (2 | ) | ||||||||
Liability at end of period | $ | 14,341 | $ | 16,785 | $ | 14,341 | $ | 16,785 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
MRCS Distributions | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Recorded as interest expense | $ | 122 | $ | 135 | $ | 256 | $ | 745 | ||||||||
Recorded as distributions from retained earnings | — | — | — | — | ||||||||||||
Total | $ | 122 | $ | 135 | $ | 256 | $ | 745 |
Excess Capital Stock. Excess capital stock is defined as the amount of stock held by a member or former member in excess of our stock requirement for that institution. Finance Agency rules limit the ability of an FHLBank to create member excess stock under certain circumstances, including when its total excess stock exceeds 1% of total assets or if the issuance of excess stock would cause total excess stock to exceed 1% of total assets. Our excess stock totaled $148,739 at June 30, 2015, which was 0.3% of our total assets.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 13 - Accumulated Other Comprehensive Income
The following table presents a summary of the changes in the components of AOCI for the three and six months ended June 30, 2015 and 2014.
AOCI Rollforward | Unrealized Gains on AFS Securities | Non-Credit OTTI on AFS Securities | Non-Credit OTTI on HTM Securities | Pension Benefits | Total AOCI | |||||||||||||||
Balance, March 31, 2014 | $ | 12,356 | $ | 30,141 | $ | (228 | ) | $ | (4,156 | ) | $ | 38,113 | ||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | 538 | 8,619 | — | — | 9,157 | |||||||||||||||
Net change in fair value | — | 38 | — | — | 38 | |||||||||||||||
Accretion of non-credit losses | — | — | 19 | — | 19 | |||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Non-credit portion of OTTI losses | — | 58 | — | — | 58 | |||||||||||||||
Pension benefits, net | — | — | — | (208 | ) | (208 | ) | |||||||||||||
Total other comprehensive income (loss) | 538 | 8,715 | 19 | (208 | ) | 9,064 | ||||||||||||||
Balance, June 30, 2014 | $ | 12,894 | $ | 38,856 | $ | (209 | ) | $ | (4,364 | ) | $ | 47,177 | ||||||||
Balance, March 31, 2015 | $ | 17,582 | $ | 35,814 | $ | (163 | ) | $ | (7,167 | ) | $ | 46,066 | ||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | (2,908 | ) | 828 | — | — | (2,080 | ) | |||||||||||||
Net change in fair value | — | (107 | ) | — | — | (107 | ) | |||||||||||||
Accretion of non-credit loss | — | — | 12 | — | 12 | |||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Non-credit portion of OTTI losses | — | 32 | — | — | 32 | |||||||||||||||
Pension benefits, net | — | — | — | (1,075 | ) | (1,075 | ) | |||||||||||||
Total other comprehensive income (loss) | (2,908 | ) | 753 | 12 | (1,075 | ) | (3,218 | ) | ||||||||||||
Balance, June 30, 2015 | $ | 14,674 | $ | 36,567 | $ | (151 | ) | $ | (8,242 | ) | $ | 42,848 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
AOCI Rollforward | Unrealized Gains (Losses) on AFS Securities (Note 3) | Non-Credit OTTI on AFS Securities (Notes 3 and 5) | Non-Credit OTTI on HTM Securities (Notes 4 and 5) | Pension Benefits | Total AOCI | |||||||||||||||
Balance, December 31, 2013 | $ | 317 | $ | 25,936 | $ | (241 | ) | $ | (4,292 | ) | $ | 21,720 | ||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | 12,577 | 12,873 | — | — | 25,450 | |||||||||||||||
Net change in fair value | — | (181 | ) | — | — | (181 | ) | |||||||||||||
Accretion of non-credit loss | — | — | 32 | — | 32 | |||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Non-credit portion of OTTI losses | — | 228 | — | — | 228 | |||||||||||||||
Pension benefits, net | — | — | — | (72 | ) | (72 | ) | |||||||||||||
Total other comprehensive income (loss) | 12,577 | 12,920 | 32 | (72 | ) | 25,457 | ||||||||||||||
Balance, June 30, 2014 | $ | 12,894 | $ | 38,856 | $ | (209 | ) | $ | (4,364 | ) | $ | 47,177 | ||||||||
Balance, December 31, 2014 | $ | 16,078 | $ | 38,172 | $ | (175 | ) | $ | (7,415 | ) | $ | 46,660 | ||||||||
OCI before reclassifications: | ||||||||||||||||||||
Net change in unrealized gains (losses) | (1,404 | ) | (1,531 | ) | — | — | (2,935 | ) | ||||||||||||
Net change in fair value | — | (106 | ) | — | — | (106 | ) | |||||||||||||
Accretion of non-credit loss | — | — | 24 | — | 24 | |||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||
Non-credit portion of OTTI losses | — | 32 | — | — | 32 | |||||||||||||||
Pension benefits, net | — | — | — | (827 | ) | (827 | ) | |||||||||||||
Total other comprehensive income (loss) | (1,404 | ) | (1,605 | ) | 24 | (827 | ) | (3,812 | ) | |||||||||||
Balance, June 30, 2015 | $ | 14,674 | $ | 36,567 | $ | (151 | ) | $ | (8,242 | ) | $ | 42,848 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 14 - Segment Information
The following table presents our financial performance by operating segment.
Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | |||||||||||||||||||||||
Traditional | Mortgage Loans | Total | Traditional | Mortgage Loans | Total | |||||||||||||||||||
Net interest income | $ | 31,746 | $ | 15,552 | $ | 47,298 | $ | 27,954 | $ | 15,741 | $ | 43,695 | ||||||||||||
Provision for (reversal of) credit losses | — | (951 | ) | (951 | ) | — | (86 | ) | (86 | ) | ||||||||||||||
Other income (loss) | 8,800 | (859 | ) | 7,941 | 10,583 | (621 | ) | 9,962 | ||||||||||||||||
Other expenses | 15,575 | 2,729 | 18,304 | 14,461 | 2,147 | 16,608 | ||||||||||||||||||
Income before assessments | 24,971 | 12,915 | 37,886 | 24,076 | 13,059 | 37,135 | ||||||||||||||||||
Affordable Housing Program assessments | 2,510 | 1,291 | 3,801 | 2,421 | 1,306 | 3,727 | ||||||||||||||||||
Net income | $ | 22,461 | $ | 11,624 | $ | 34,085 | $ | 21,655 | $ | 11,753 | $ | 33,408 | ||||||||||||
Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||
Traditional | Mortgage Loans | Total | Traditional | Mortgage Loans | Total | |||||||||||||||||||
Net interest income | $ | 62,667 | $ | 33,370 | $ | 96,037 | $ | 58,952 | $ | 32,329 | $ | 91,281 | ||||||||||||
Provision for (reversal of) credit losses | — | (388 | ) | (388 | ) | — | (790 | ) | (790 | ) | ||||||||||||||
Other income (loss) | 13,664 | (2,147 | ) | 11,517 | 16,466 | (619 | ) | 15,847 | ||||||||||||||||
Other expenses | 30,672 | 5,359 | 36,031 | 28,243 | 4,264 | 32,507 | ||||||||||||||||||
Income before assessments | 45,659 | 26,252 | 71,911 | 47,175 | 28,236 | 75,411 | ||||||||||||||||||
Affordable Housing Program assessments | 4,592 | 2,625 | 7,217 | 4,792 | 2,824 | 7,616 | ||||||||||||||||||
Net income | $ | 41,067 | $ | 23,627 | $ | 64,694 | $ | 42,383 | $ | 25,412 | $ | 67,795 |
The following table presents asset balances by operating segment.
By Date | Traditional | Mortgage Loans | Total | |||||||||
June 30, 2015 | $ | 37,303,793 | $ | 7,932,724 | $ | 45,236,517 | ||||||
December 31, 2014 | 35,032,770 | 6,820,262 | 41,853,032 |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Note 15 - Estimated Fair Values
We review the fair value hierarchy classifications of our financial instruments on a quarterly basis. Changes in the observability of the inputs may result in a reclassification of certain assets or liabilities. Such reclassifications are reported as transfers in/out at estimated fair value as of the beginning of the quarter in which the changes occur. There were no such reclassifications during the three or six months ended June 30, 2015 or 2014.
The following tables present the carrying value and estimated fair value of each of our financial instruments. The total of the estimated fair values does not represent an estimate of our overall market value as a going concern, which would take into account, among other considerations, future business opportunities and the net profitability of assets and liabilities.
June 30, 2015 | ||||||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||||||
Carrying | Netting | |||||||||||||||||||||||
Financial Instruments | Value | Total | Level 1 | Level 2 | Level 3 | Adjustment (1) | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 635,017 | $ | 635,017 | $ | 635,017 | $ | — | $ | — | $ | — | ||||||||||||
Interest-bearing deposits | 251 | 251 | — | 251 | — | — | ||||||||||||||||||
Securities Purchased Under Agreements to Resell | 200,000 | 200,000 | — | 200,000 | — | — | ||||||||||||||||||
Federal funds sold | 1,895,000 | 1,895,000 | — | 1,895,000 | — | — | ||||||||||||||||||
AFS securities | 3,570,926 | 3,570,926 | — | 3,206,207 | 364,719 | — | ||||||||||||||||||
HTM securities | 6,481,002 | 6,590,575 | — | 6,493,727 | 96,848 | — | ||||||||||||||||||
Advances | 24,318,357 | 24,381,257 | — | 24,381,257 | — | — | ||||||||||||||||||
Mortgage loans held for portfolio, net | 7,932,724 | 8,166,880 | — | 8,132,629 | 34,251 | — | ||||||||||||||||||
Accrued interest receivable | 86,971 | 86,971 | — | 86,971 | — | — | ||||||||||||||||||
Derivative assets, net | 41,763 | 41,763 | — | 58,346 | — | (16,583 | ) | |||||||||||||||||
Grantor trust assets (included in other assets) | 13,025 | 13,025 | 13,025 | — | — | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | 1,163,762 | 1,163,762 | — | 1,163,762 | — | — | ||||||||||||||||||
Consolidated Obligations: | ||||||||||||||||||||||||
Discount notes | 11,802,629 | 11,807,026 | — | 11,807,026 | — | — | ||||||||||||||||||
Bonds | 29,647,600 | 29,971,732 | — | 29,971,732 | — | — | ||||||||||||||||||
Accrued interest payable | 83,461 | 83,461 | — | 83,461 | — | — | ||||||||||||||||||
Derivative liabilities, net | 95,634 | 95,634 | — | 275,683 | — | (180,049 | ) | |||||||||||||||||
MRCS | 14,341 | 14,341 | 14,341 | — | — | — |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
December 31, 2014 | ||||||||||||||||||||||||
Estimated Fair Value | ||||||||||||||||||||||||
Carrying | Netting | |||||||||||||||||||||||
Financial Instruments | Value | Total | Level 1 | Level 2 | Level 3 | Adjustment (1) | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 3,550,939 | $ | 3,550,939 | $ | 3,550,939 | $ | — | $ | — | $ | — | ||||||||||||
Interest-bearing deposits | 483 | 483 | — | 483 | — | — | ||||||||||||||||||
AFS securities | 3,556,165 | 3,556,165 | — | 3,155,115 | 401,050 | — | ||||||||||||||||||
HTM securities | 6,982,115 | 7,098,616 | — | 6,987,768 | 110,848 | — | ||||||||||||||||||
Advances | 20,789,667 | 20,844,701 | — | 20,844,701 | — | — | ||||||||||||||||||
Mortgage loans held for portfolio, net | 6,820,262 | 7,120,935 | — | 7,078,490 | 42,445 | — | ||||||||||||||||||
Accrued interest receivable | 82,866 | 82,866 | — | 82,866 | — | — | ||||||||||||||||||
Derivative assets, net | 25,487 | 25,487 | — | 56,448 | — | (30,961 | ) | |||||||||||||||||
Grantor trust assets (included in other assets) | 12,980 | 12,980 | 12,980 | — | — | — | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Deposits | 1,084,042 | 1,084,042 | — | 1,084,042 | — | — | ||||||||||||||||||
Consolidated Obligations: | ||||||||||||||||||||||||
Discount notes | 12,567,696 | 12,570,811 | — | 12,570,811 | — | — | ||||||||||||||||||
Bonds | 25,503,138 | 25,882,934 | — | 25,882,934 | — | — | ||||||||||||||||||
Accrued interest payable | 77,034 | 77,034 | — | 77,034 | — | — | ||||||||||||||||||
Derivative liabilities, net | 103,253 | 103,253 | — | 333,918 | — | (230,665 | ) | |||||||||||||||||
MRCS | 15,673 | 15,673 | 15,673 | — | — | — |
(1) | Represents the application of the netting requirements that allow the settlement of (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. |
Summary of Valuation Techniques and Significant Inputs. A description of the valuation techniques, significant inputs, and levels of fair value hierarchy is disclosed in Note 19 - Estimated Fair Values in our 2014 Form 10-K. No changes have been made in the current year, except as disclosed below.
Mortgage Loans Held for Portfolio. We record non-recurring fair value adjustments to reflect partial charge-offs on certain mortgage loans. We estimate the fair value of these assets using a current property value obtained from a third-party model with a haircut applied to the modeled values to capture potentially distressed property sales.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Estimated Fair Value Measurements. The following tables present by level within the fair value hierarchy the estimated fair value of our financial assets and liabilities that are recorded at estimated fair value on a recurring or non-recurring basis on our statement of condition. We did not have any financial assets or liabilities recorded at estimated fair value on a non-recurring basis on our statement of condition as of December 31, 2014.
Netting | ||||||||||||||||||||
June 30, 2015 | Total | Level 1 | Level 2 | Level 3 | Adjustment (1) | |||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | $ | 3,127,753 | $ | — | $ | 3,127,753 | $ | — | $ | — | ||||||||||
GSE MBS | 78,454 | — | 78,454 | — | — | |||||||||||||||
Private-label RMBS | 364,719 | — | — | 364,719 | — | |||||||||||||||
Total AFS securities | 3,570,926 | — | 3,206,207 | 364,719 | — | |||||||||||||||
Derivative assets: | ||||||||||||||||||||
Interest-rate related | 41,361 | — | 57,944 | — | (16,583 | ) | ||||||||||||||
Interest-rate forwards | 179 | — | 179 | — | — | |||||||||||||||
MDCs | 223 | — | 223 | — | — | |||||||||||||||
Total derivative assets, net | 41,763 | — | 58,346 | — | (16,583 | ) | ||||||||||||||
Grantor trust assets (included in other assets) | 13,025 | 13,025 | — | — | — | |||||||||||||||
Total assets at recurring estimated fair value | $ | 3,625,714 | $ | 13,025 | $ | 3,264,553 | $ | 364,719 | $ | (16,583 | ) | |||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest-rate related | $ | 95,134 | $ | — | $ | 275,183 | $ | — | $ | (180,049 | ) | |||||||||
Interest-rate forwards | 33 | — | 33 | — | — | |||||||||||||||
MDCs | 467 | — | 467 | — | — | |||||||||||||||
Total derivative liabilities, net | 95,634 | — | 275,683 | — | (180,049 | ) | ||||||||||||||
Total liabilities at recurring estimated fair value | $ | 95,634 | $ | — | $ | 275,683 | $ | — | $ | (180,049 | ) | |||||||||
Mortgage loans held for portfolio (2) | $ | 5,018 | $ | — | $ | — | $ | 5,018 | ||||||||||||
Total assets at non-recurring estimated fair value | $ | 5,018 | $ | — | $ | — | $ | 5,018 | $ | — | ||||||||||
December 31, 2014 | ||||||||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | $ | 3,155,115 | $ | — | $ | 3,155,115 | $ | — | $ | — | ||||||||||
Private-label RMBS | 401,050 | — | — | 401,050 | — | |||||||||||||||
Total AFS securities | 3,556,165 | — | 3,155,115 | 401,050 | — | |||||||||||||||
Derivative assets: | ||||||||||||||||||||
Interest-rate related | 24,776 | — | 55,737 | — | (30,961 | ) | ||||||||||||||
MDCs | 711 | — | 711 | — | — | |||||||||||||||
Total derivative assets, net | 25,487 | — | 56,448 | — | (30,961 | ) | ||||||||||||||
Grantor trust assets (included in other assets) | 12,980 | 12,980 | — | — | — | |||||||||||||||
Total assets at recurring estimated fair value | $ | 3,594,632 | $ | 12,980 | $ | 3,211,563 | $ | 401,050 | $ | (30,961 | ) | |||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest-rate related | $ | 101,616 | $ | — | $ | 332,281 | $ | — | $ | (230,665 | ) | |||||||||
Interest-rate forwards | 1,631 | — | 1,631 | — | — | |||||||||||||||
MDCs | 6 | — | 6 | — | — | |||||||||||||||
Total derivative liabilities, net | 103,253 | — | 333,918 | — | (230,665 | ) | ||||||||||||||
Total liabilities at recurring estimated fair value | $ | 103,253 | $ | — | $ | 333,918 | $ | — | $ | (230,665 | ) |
(1) | Represents the application of the netting requirements that allow the settlement of (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. |
(2) | Amounts are as of the date the fair value adjustment was recorded during the six months ended June 30, 2015. |
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
Level 3 Disclosures for All Assets and Liabilities that are Measured at Fair Value on a Recurring Basis. The table below presents a rollforward of our AFS private-label RMBS measured at estimated fair value on a recurring basis using Level 3 significant inputs. The estimated fair values for the private-label RMBS were determined using a pricing source, such as a dealer quote or comparable security price, for which the significant unobservable inputs used to determine the price were not readily available.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Level 3 Rollforward | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance, beginning of period | $ | 380,835 | $ | 455,812 | $ | 401,050 | $ | 469,685 | ||||||||
Total realized and unrealized gains (losses): | ||||||||||||||||
Accretion of credit losses in interest income | 2,242 | 853 | 3,361 | 874 | ||||||||||||
Net gains (losses) on changes in fair value in other income (loss) | (32 | ) | (58 | ) | (32 | ) | (228 | ) | ||||||||
Net change in fair value not in excess of cumulative non-credit losses in OCI | (107 | ) | 38 | (106 | ) | (181 | ) | |||||||||
Unrealized gains (losses) in OCI | 828 | 8,619 | (1,531 | ) | 12,873 | |||||||||||
Reclassification of non-credit portion in OCI to other income (loss) | 32 | 58 | 32 | 228 | ||||||||||||
Purchases, issuances, sales and settlements: | ||||||||||||||||
Settlements | (19,079 | ) | (22,610 | ) | (38,055 | ) | (40,539 | ) | ||||||||
Balance, end of period | $ | 364,719 | $ | 442,712 | $ | 364,719 | $ | 442,712 | ||||||||
Net gains (losses) included in earnings attributable to changes in fair value relating to assets still held at end of period | $ | 2,210 | $ | 795 | $ | 3,329 | $ | 646 |
Note 16 - Commitments and Contingencies
The following table presents our off-balance-sheet commitments at their notional amounts.
June 30, 2015 | ||||||||||||
Type of Commitment | Expire within one year | Expire after one year | Total | |||||||||
Letters of credit outstanding | $ | 43,944 | $ | 158,627 | $ | 202,571 | ||||||
Unused lines of credit (1) | 994,593 | — | 994,593 | |||||||||
Commitments to fund additional advances (2) | 99,988 | — | 99,988 | |||||||||
Commitments to fund or purchase mortgage loans (3) | 174,189 | — | 174,189 | |||||||||
Unsettled CO bonds, at par (4) | 20,500 | — | 20,500 |
(1) | Maximum line of credit amount per member is $50,000. |
(2) | Generally for periods up to six months. |
(3) | Generally for periods up to 91 days. |
(4) | Includes $15,000 hedged with associated interest-rate swaps. |
Pledged Collateral. At June 30, 2015 and December 31, 2014, we had pledged cash collateral, at par, of $164,994 and $201,267, respectively, to counterparties and clearing agents. At June 30, 2015 and December 31, 2014, we had not pledged any securities as collateral.
Legal Proceedings. We are subject to legal proceedings arising in the normal course of business. We would record an accrual for a loss contingency when it is probable that a loss for which we could be liable has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these proceedings will have a material effect on our financial condition, results of operations or cash flows.
Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)
In 2010, we filed a complaint asserting claims against several entities for negligent misrepresentation and violations of state and federal securities law occurring in connection with the sale of private-label RMBS to us. In 2013, 2014 and 2015, we executed confidential settlement agreements with certain defendants in this litigation, pursuant to which we have dismissed all pending claims against, and provided legal releases to, certain entities with respect to all applicable securities at issue in the litigation, in consideration of our receipt of cash payments on behalf of those defendants. These payments totaled $0 and $4,732, net of legal fees and litigation expenses, for the three and six months ended June 30, 2015 compared with $6,134 and $8,548 for the three and six months ended June 30, 2014, respectively, and were recorded in other income.
Additional discussion of other commitments and contingencies is provided in Note 6 - Advances; Note 7 - Mortgage Loans Held for Portfolio; Note 9 - Derivatives and Hedging Activities; Note 10 - Consolidated Obligations; Note 12 - Capital; and Note 15 - Estimated Fair Values.
Note 17 - Transactions with Related Parties and Other Entities
For financial reporting purposes, we define related parties as those members, and former members and their affiliates, with capital stock outstanding in excess of 10% of our total outstanding capital stock and MRCS. We had no related parties at June 30, 2015 or December 31, 2014 as no institution had capital stock outstanding in excess of 10% of our total outstanding capital stock and MRCS.
Flagstar Bank, FSB was a related party at June 30, 2014. We had net advances to and (repayments from) Flagstar for the three and six months ended June 30, 2014 of $(93,295) and $43,705, respectively.
Transactions with Directors' Financial Institutions. The following table presents the outstanding balances with respect to transactions with directors' financial institutions and their balance as a percent of the total balance on our statement of condition.
Capital stock and MRCS | Advances | Mortgage loans held for portfolio (1) | |||||||||||||||||||
Date | Par value | % of Total | Par value | % of Total | UPB | % of Total | |||||||||||||||
June 30, 2015 | $ | 27,128 | 2 | % | $ | 258,526 | 1 | % | $ | 176,920 | 2 | % | |||||||||
December 31, 2014 | 40,213 | 3 | % | 261,146 | 1 | % | 167,072 | 2 | % |
(1) | Represents UPB of mortgage loans purchased from directors' financial institutions. |
The following table presents net advances to (repayments from) directors' financial institutions and mortgage loans purchased from directors' financial institutions, taking into account the dates of the directors' appointments and term endings.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Transactions with Directors' Financial Institutions | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net advances (repayments) | $ | (2,258 | ) | $ | (12,401 | ) | $ | (2,620 | ) | $ | (24,736 | ) | ||||
Mortgage loans purchased | 13,734 | 6,181 | 21,124 | 10,916 |
Transactions with Other FHLBanks. We purchased no participation interests from the FHLBank of Topeka in mortgage loans originated by certain of its members under the MPF program in 2015, compared with $0 and $11,011 for the three and six months ended June 30, 2014, respectively.
Beginning in July 2012, we pay an MPF provider fee to the FHLBank of Chicago for our participation in the MPF program that is recorded in other expenses. For the three and six months ended June 30, 2015, we paid such fees of $67 and $136, respectively, compared with $75 and $150 for the three and six months ended June 30, 2014, respectively.
GLOSSARY OF TERMS
ABS: Asset-Backed Securities
Advance: Secured loan to members, former members or Housing Associates
AFS: Available-for-Sale
AHP: Affordable Housing Program
AMA: Acquired Member Assets
AOCI: Accumulated Other Comprehensive Income (Loss)
Bank Act: Federal Home Loan Bank Act of 1932, as amended
bps: basis points
CBSA: Core Based Statistical Areas, refer collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget
CDFI: Community Development Financial Institution
CE: Credit Enhancement
CEO: Chief Executive Officer
CFI: Community Financial Institution
CFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
Clearinghouse: A United States Commodity Futures Trading Commission-registered derivatives clearing organization
CMO: Collateralized Mortgage Obligation
CO bond: Consolidated Obligation bond
DB plan: Pentegra Defined Benefit Pension Plan for Financial Institutions
DC plan: Pentegra Defined Contribution Retirement Savings Plan for Financial Institutions
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended
Exchange Act: Securities Exchange Act of 1934, as amended
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FRB: Federal Reserve Board
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHLBank: A Federal Home Loan Bank
FHLBanks: The 11 Federal Home Loan Banks or a subset thereof
FHLBank System: The 11 Federal Home Loan Banks and the Office of Finance
FICO®: Fair Isaac Corporation, the creators of the FICO credit score
Finance Agency: Federal Housing Finance Agency, successor to Finance Board
Finance Board: Federal Housing Finance Board, predecessor to Finance Agency
Fitch: Fitch Ratings, Inc.
FLA: First Loss Account
FOMC: Federal Open Market Committee
Form 8-K: Current Report on Form 8-K as filed with the SEC under the Securities Exchange Act of 1934
Form 10-K: Annual Report on Form 10-K as filed with the SEC under the Securities Exchange Act of 1934
Form 10-Q: Quarterly Report on Form 10-Q as filed with the SEC under the Securities Exchange Act of 1934
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally Accepted Accounting Principles in the United States of America
GDP: Gross Domestic Product
Genworth: Genworth Mortgage Insurance Corporation
Ginnie Mae: Government National Mortgage Association
GLB Act: Gramm-Leach-Bliley Act of 1999
GSE: Government-Sponsored Enterprise
HERA: Housing and Economic Recovery Act of 2008, as amended
Housing Associate: Approved lender under Title II of the National Housing Act of 1934 that is either a government agency or is chartered under federal or state law with rights and powers similar to those of a corporation
HTM: Held-to-Maturity
HUD: United States Department of Housing and Urban Development
JCE Agreement: Joint Capital Enhancement Agreement, as amended, among the 11 FHLBanks
LIBOR: London Interbank Offered Rate
LRA: Lender Risk Account
LTV: Loan-to-Value
MAP-21: Moving Ahead for Progress in the 21st Century Act, enacted on July 6, 2012
MBS: Mortgage-Backed Securities
MCC: Master Commitment Contract
MDC: Mandatory Delivery Commitment
Moody's: Moody's Investor Services
MGIC: Mortgage Guaranty Insurance Corporation
MPF: Mortgage Partnership Finance®
MPP: Mortgage Purchase Program, including Original and Advantage unless indicated otherwise
MRCS: Mandatorily Redeemable Capital Stock
NRSRO: Nationally Recognized Statistical Rating Organization
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income (Loss)
OIS: Overnight Index Swap
ORERC: Other Real Estate-Related Collateral
OTTI: Other-Than-Temporary Impairment or -Temporarily Impaired (as the context indicates)
PFI: Participating Financial Institution
PMI: Primary Mortgage Insurance
REMIC: Real Estate Mortgage Investment Conduit
REO: Real Estate Owned
RHA: Rural Housing Service of the Department of Agriculture
RMIC: Republic Mortgage Insurance Company
RMBS: Residential Mortgage-Backed Securities
RMP: Risk Management Policy of the Bank
S&P: Standard & Poor's Rating Service
SEC: Securities and Exchange Commission
SERP: Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Retirement Plan and a similar frozen plan
SMI: Supplemental Mortgage Insurance
TBA: To Be Announced
TDR: Troubled Debt Restructuring
TVA: Tennessee Valley Authority
UCC: Uniform Commercial Code
UPB: Unpaid Principal Balance
VA: Department of Veterans Affairs
VaR: Value at Risk
VIE: Variable Interest Entity
WAIR: Weighted-Average Interest Rate
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 2014 Form 10-K and the Financial Statements and related Notes to Financial Statements contained in this Form 10-Q in Item 1. Financial Statements.
As used in this Item 2, unless the context otherwise requires, the terms "we," "us," "our," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis or its management. We use certain acronyms and terms throughout this Form 10-Q that are defined in the Glossary of Terms located in Item 1. Financial Statements.
Unless otherwise stated, amounts are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected and, due to rounding, may not appear to agree to the amounts presented in thousands in the Financial Statements and related Notes to Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
Special Note Regarding Forward-Looking Statements
Statements in this Form 10-Q, including statements describing our objectives, projections, estimates or predictions, may be considered to be "forward-looking statements." These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "expects," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following:
• | economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants; |
• | volatility of market prices, interest rates, and indices or other factors, resulting from the effects of, and changes in, various monetary or fiscal policies and regulations, including those determined by the FRB and the FDIC, or a decline in liquidity in the financial markets, that could affect the value of investments (including OTTI of private-label RMBS), or collateral we hold as security for the obligations of our members and counterparties; |
• | demand for our advances and purchases of mortgage loans under our MPP resulting from: |
◦ | changes in our members' deposit flows and credit demands; |
◦ | regulatory developments impacting suitability or eligibility of membership classes; |
◦ | membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters; |
◦ | changes in the general level of housing activity in the United States, the level of refinancing activity and consumer product preferences; and |
◦ | competitive forces, including, without limitation, other sources of funding available to our members; |
• | changes in mortgage asset prepayment patterns, delinquency rates and housing values or improper or inadequate mortgage originations and mortgage servicing; |
• | ability to introduce and successfully manage new products and services, including new types of collateral securing advances; |
• | political events, including legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members (or certain classes of members), prospective members, counterparties, one or more of the FHLBanks and/or investors in the consolidated obligations of the FHLBanks; |
• | ability to raise capital market funding at acceptable terms; |
• | changes in our credit ratings or the credit ratings of the other FHLBanks and the FHLBank System; |
• | changes in the level of government guarantees provided to other United States and international financial institutions; |
• | competition from other entities borrowing funds in the capital markets; |
• | dealer commitment to supporting the issuance of our consolidated obligations; |
• | ability of one or more of the FHLBanks to repay its participation in the consolidated obligations, or otherwise meet its financial obligations; |
• | ability to attract and retain skilled personnel; |
• | ability to develop, implement and support technology and information systems sufficient to manage our business effectively; |
• | nonperformance of counterparties to bilateral and cleared derivative transactions; |
• | changes in terms of derivative agreements and similar agreements; |
• | loss arising from natural disasters, acts of war or acts of terrorism; |
• | changes in or differing interpretations of accounting guidance; and |
• | other risk factors identified in our filings with the SEC. |
Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, additional disclosures may be made through reports filed with the SEC in the future, including our Forms 10-K, 10-Q and 8-K.
Executive Summary
Overview. We are a regional wholesale bank that makes secured loans in the form of advances; purchases whole mortgage loans from our member financial institutions; purchases other investments; and provides other financial services to our member financial institutions. Our member financial institutions may consist of federally-insured depository institutions (including commercial banks, thrifts, and credit unions), insurance companies and CDFIs with their principal place of business located in our district states of Indiana or Michigan as established in conformity with the laws under which the institution is organized. All member financial institutions are required to purchase shares of our Class B capital stock as a condition of membership.
Our public policy mission is to facilitate and expand the availability of financing for housing and community development. We seek to achieve our mission by providing products and services to our members in a safe, sound, and profitable manner, and by generating a reasonable, risk-adjusted return on their capital investment. See Item 1. Business - Background Information in our 2014 Form 10-K for more information.
Our principal source of funding is the proceeds from the sale to the public of FHLBank debt instruments, called consolidated obligations, which are the joint and several obligation of all FHLBanks. We obtain additional funds from deposits, other borrowings, and the sale of capital stock to our members.
Our primary source of revenue is interest earned on advances, mortgage loans, and long- and short-term investments.
Our net interest income is primarily determined by the interest spread between the interest earned on our assets and the interest paid on our share of the consolidated obligations. We use funding and hedging strategies to manage the related interest-rate risk.
We group our products and services within two operating segments:
• | Traditional, which consists of (i) credit products (including advances, letters of credit, and lines of credit), (ii) investments (including federal funds sold, securities purchased under agreements to resell, AFS securities and HTM securities) and (iii) correspondent services and deposits; and |
• | Mortgage loans, which consist of (i) mortgage loans purchased from our members through our MPP and (ii) participation interests previously purchased through the FHLBank of Topeka in mortgage loans originated by its members under the MPF Program. |
Economic Conditions. Our financial condition and results of operations are influenced by the general state of the global and national economies; the conditions in the financial, credit and mortgage markets; the prevailing interest rates; and the economies in our district states and their impact on our member financial institutions.
Global Economy. On May 12, 2015, Moody’s issued its Global Macro Outlook 2015-16, which focuses on the differing growth and inflation prospects among many countries as evidenced by the anticipated tightening of United States monetary policy while other major central banks are expected to ease monetary policy or maintain an accommodative stance. Countries that have built resilience to shifts in financing conditions, including the United States, are viewed as being less vulnerable to negative external or domestic shocks. The report notes that the strong dollar could reduce export activity, but the impact on the overall economy would be modest.
The International Monetary Fund’s July 2015 World Economic Outlook Update projects global growth of 3.3% for 2015, down slightly from its April 2015 projection of 3.5%. The reduction reflects a slightly lower than expected activity level in North America during the first quarter. Global growth is projected to increase to 3.8% in 2016, driven in part by increasing oil prices.
United States Economy. On July 30, 2015, the Bureau of Economic Analysis released its "advance" estimate of the United States real GDP for the second quarter of 2015. The estimated real GDP increase of 2.3% for the second quarter reflects positive contributions from personal consumption expenditures, exports, and state and local government spending that were partially offset by negative contributions from federal government spending, private inventory investment, and nonresidential fixed investment.
Moody’s projects a GDP growth rate of 2.8% for both 2015 and 2016. The 2015 forecast was reduced from the previous forecast of 3.2% due to weaker-than-expected activity levels stemming from temporary factors including unfavorable weather during the first quarter of the year. Moody’s maintained its forecasts for GDP growth to fall to between 2.5% and 3.5% for both years, and for the United States unemployment rate to decline from a 5.0% to 6.0% range for 2015 to a 4.5% to 5.5% range for 2016.
Freddie Mac’s June 2015 United States Economic and Housing Market Outlook views the year-over-year increase of outstanding debt for single-family properties to be an indicator that housing markets are moving toward normalcy. The report notes growing investor appetite for mortgage bonds, due in part to innovative credit-risk transfer transactions. However, mortgage originations are projected to taper in 2016 as refinancing activity slows.
On July 29, 2015, the FOMC reported that economic activity has been expanding moderately during recent months, as the labor market improved with job gains and declining unemployment. Growth in household spending has been moderate and the housing sector has shown improvement. Inflation continued to run below the FOMC’s longer-run objective and longer-term inflation expectations remain stable.
The FOMC expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward maximum employment and with inflation gradually rising toward 2%. The FOMC reaffirmed its view that the current 0 to 0.25% target range for the federal funds rate remains appropriate. An increase of the target range for the federal funds rate is expected to be based on further improvement in the labor market and confidence that inflation is moving back to the 2% objective over the medium term.
Indiana and Michigan Economies. The Bureau of Labor Statistics reported that Michigan’s preliminary unemployment rate was 5.5% for June 2015, while Indiana’s preliminary rate was 4.9%, compared to the national rate of 5.3%. On May 29, 2015, the Research Seminar in Quantitative Economics at the University of Michigan projected Michigan’s annualized job growth rate to moderate to 1.4% for the second quarter after spiking to 3.8% during the first quarter of 2015. More stable quarterly growth rates are projected through the rest of 2015 and 2016. Anticipated job growth is projected to boost personal income by 4.2% in 2015 and 4.5% in 2016. The Center for Econometric Research at Indiana University projects Indiana’s annual income growth rate to peak at 5.5% during the third quarter of 2015 and then move toward lower national rates through 2018. Unemployment is projected to gradually decline from 5.6% for March of 2015 to 4.8% by the end of 2018.
Information provided by Black Knight Financial Services for May 2015 shows Indiana's non-current mortgage rate (loans past due 30 days or more) at 8.2%, and Michigan's non-current mortgage rate at 5.5%, compared to the 6.4% national rate.
The Capital Markets. The Office of Finance, our fiscal agent, issues debt in the global capital markets on behalf of the FHLBanks. Our funding operations are dependent on the issuance of such debt, which is affected by events in the capital markets.
Effective July 14, 2015, the Office of Finance modified its Discount Note Auction program to enhance its short-term debt issuance programs and to strengthen the FHLBanks' ability to meet the funding needs of their members. The bi-weekly discount note auction was modified to use a single-price (Dutch) award method to determine the winning bids, with the auctions announced thirty-five minutes earlier, at 11:00am Eastern Time. In addition, the 9-week maturity was replaced with an 8-week maturity. The Discount Note Auction program is one of many short- and long-term debt issuance programs and products offered by the FHLBanks.
During the second quarter of 2015, Treasury rates increased, more than offsetting the decline during the first quarter. The 10-year Treasury rate closed the second quarter at 2.35%, approximately 40 bps higher than the rate at the end of the first quarter of 2015.
FOMC’s July 29, 2015 report stated its intent to maintain its existing policy of reinvesting principal payments from its holdings of agency MBS and agency debt in agency MBS and of rolling over maturing Treasury securities at auction. This policy of maintaining sizable holdings of longer-term securities is expected to help maintain accommodative financial conditions.
Selected Financial Data
The following table presents a summary of certain financial information ($ amounts in millions). Our change in the fourth quarter of 2014 to the contractual method for amortizing premiums and accreting discounts on our mortgage loans has been reported through retroactive application of the change in accounting principle to all periods presented. See Notes to Financial Statements - Note 1 - Summary of Significant Accounting Policies and Change in Accounting Principle for more information.
As of and for the Three Months Ended | ||||||||||||||||||||
June 30, 2015 | March 31, 2015 | December 31, 2014 | September 30, 2014 | June 30, 2014 | ||||||||||||||||
Statement of Condition: | ||||||||||||||||||||
Advances | $ | 24,318 | $ | 21,846 | $ | 20,789 | $ | 19,325 | $ | 19,248 | ||||||||||
Investments (1) | 12,147 | 10,607 | 10,539 | 10,647 | 10,801 | |||||||||||||||
Mortgage loans held for portfolio, net | 7,933 | 7,412 | 6,820 | 6,449 | 6,230 | |||||||||||||||
Total assets | 45,236 | 43,651 | 41,853 | 41,015 | 39,034 | |||||||||||||||
Discount notes | 11,803 | 11,161 | 12,568 | 10,106 | 9,001 | |||||||||||||||
CO bonds | 29,647 | 28,243 | 25,503 | 26,914 | 26,250 | |||||||||||||||
Total consolidated obligations | 41,450 | 39,404 | 38,071 | 37,020 | 35,251 | |||||||||||||||
MRCS | 14 | 16 | 16 | 16 | 17 | |||||||||||||||
Capital stock, Class B putable | 1,388 | 1,572 | 1,551 | 1,726 | 1,667 | |||||||||||||||
Retained earnings (2) | 810 | 791 | 777 | 777 | 760 | |||||||||||||||
AOCI | 43 | 46 | 47 | 57 | 47 | |||||||||||||||
Total capital | 2,241 | 2,409 | 2,375 | 2,560 | 2,474 | |||||||||||||||
Statement of Income: | ||||||||||||||||||||
Net interest income | $ | 47 | $ | 49 | $ | 49 | $ | 45 | $ | 44 | ||||||||||
Provision for (reversal of) credit losses | (1 | ) | 1 | — | — | — | ||||||||||||||
Other income (loss) | 8 | 4 | (10 | ) | 7 | 10 | ||||||||||||||
Other expenses | 18 | 18 | 19 | 16 | 17 | |||||||||||||||
Affordable Housing Program assessments | 4 | 3 | 2 | 4 | 4 | |||||||||||||||
Net income | $ | 34 | $ | 31 | $ | 18 | $ | 32 | $ | 33 | ||||||||||
Selected Financial Ratios: | ||||||||||||||||||||
Net interest margin (3) | 0.43 | % | 0.47 | % | 0.46 | % | 0.45 | % | 0.46 | % | ||||||||||
Return on average equity (4) | 5.82 | % | 4.43 | % | 2.65 | % | 4.44 | % | 4.81 | % | ||||||||||
Return on average assets (4) | 0.31 | % | 0.26 | % | 0.16 | % | 0.28 | % | 0.31 | % | ||||||||||
Weighted average dividend rate (5) | 4.00 | % | 4.00 | % | 3.75 | % | 3.75 | % | 3.75 | % | ||||||||||
Dividend payout ratio (6) | 45.16 | % | 55.57 | % | 97.21 | % | 48.07 | % | 44.65 | % | ||||||||||
Total capital ratio (7) | 4.95 | % | 5.52 | % | 5.68 | % | 6.24 | % | 6.34 | % | ||||||||||
Total regulatory capital ratio (8) | 4.89 | % | 5.45 | % | 5.60 | % | 6.14 | % | 6.26 | % | ||||||||||
Average equity to average assets | 5.35 | % | 5.92 | % | 6.16 | % | 6.28 | % | 6.41 | % |
(1) | Consists of interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, AFS securities, and HTM securities. |
(2) | Includes restricted and unrestricted retained earnings. |
(3) | Annualized net interest income expressed as a percentage of average interest-earning assets. |
(4) | Annualized. For the three months ended June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, and June 30, 2014, the annualization was adjusted to remove the impact of litigation settlements related to our private-label RMBS in those periods. Without the adjustment, return on average equity during those periods was 5.82%, 4.95%, 2.63%, 5.02%, and 5.49%, respectively, and return on average assets was 0.31%, 0.29%, 0.16%, 0.32%, and 0.35%, respectively. |
(5) | Dividends paid in cash during the period divided by the average amount of Class B capital stock eligible for dividends (i.e., excludes MRCS). |
(6) | Dividends paid in cash during the period divided by net income for the period. By dividing dividends paid in cash during the period by the net income for the prior period, the dividend payout ratios for each of the three months ended June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014 and June 30, 2014, would be 50.29%, 101.94%, 50.50%, 46.22% and 43.38% respectively. See Liquidity and Capital Resources - Capital Resources - Capital Distributions for more information. |
(7) | Capital stock plus retained earnings and AOCI expressed as a percentage of total assets. |
(8) | Capital stock plus retained earnings and MRCS expressed as a percentage of total assets. |
Results of Operations and Changes in Financial Condition
Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014. The following table presents the comparative highlights of our results of operations ($ amounts in millions).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
Comparative Highlights | 2015 | 2014 | $ Change | % Change | 2015 | 2014 | $ Change | % Change | ||||||||||||||||||||||
Net interest income | $ | 47 | $ | 44 | $ | 3 | 8 | % | $ | 96 | $ | 91 | $ | 5 | 5 | % | ||||||||||||||
Provision for (reversal of) credit losses | (1 | ) | — | (1 | ) | NM(1) | — | (1 | ) | 1 | 51 | % | ||||||||||||||||||
Net interest income after provision for credit losses | 48 | 44 | 4 | 10 | % | 96 | 92 | 4 | 5 | % | ||||||||||||||||||||
Other income | 8 | 10 | (2 | ) | (20 | %) | 12 | 16 | (4 | ) | (27 | %) | ||||||||||||||||||
Other expenses | 18 | 17 | 1 | 10 | % | 36 | 33 | 3 | 11 | % | ||||||||||||||||||||
Income before assessments | 38 | 37 | 1 | 2 | % | 72 | 75 | (3 | ) | (5 | %) | |||||||||||||||||||
AHP assessments | 4 | 4 | — | 2 | % | 7 | 7 | — | (5 | %) | ||||||||||||||||||||
Net income | 34 | 33 | 1 | 2 | % | 65 | 68 | (3 | ) | (5 | %) | |||||||||||||||||||
Total other comprehensive income (loss) | (3 | ) | 9 | (12 | ) | (135 | %) | (4 | ) | 25 | (29 | ) | (115 | %) | ||||||||||||||||
Total comprehensive income | $ | 31 | $ | 42 | $ | (11 | ) | (27 | %) | $ | 61 | $ | 93 | $ | (32 | ) | (35 | %) |
(1) | Not meaningful. |
The increase in net income for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to higher net interest income as well as higher net gains related to derivative and hedging activities. These increases were partially offset by lower net proceeds from litigation settlements related to certain private-label RMBS.
The decrease in net income for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to lower net proceeds from litigation settlements and higher operating expenses, partially offset by higher net interest income.
The decrease in total other comprehensive income for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to a smaller increase in the fair value of AFS OTTI securities and unrealized losses in 2015 on other AFS securities.
The decrease in total other comprehensive income for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to a decrease in the fair value of OTTI and other AFS securities during the six months ended June 30, 2015 compared to an increase in the fair value of OTTI and other AFS securities for the same period in 2014.
Changes in Financial Condition for the Six Months Ended June 30, 2015. The following table presents the changes in our financial condition ($ amounts in millions).
Condensed Statements of Condition | June 30, 2015 | December 31, 2014 | $ Change | % Change | |||||||||||
Advances | $ | 24,318 | $ | 20,789 | $ | 3,529 | 17 | % | |||||||
Mortgage loans held for portfolio, net | 7,933 | 6,820 | 1,113 | 16 | % | ||||||||||
Investments (1) | 12,147 | 10,539 | 1,608 | 15 | % | ||||||||||
Other assets (2) | 838 | 3,705 | (2,867 | ) | (77 | %) | |||||||||
Total assets | $ | 45,236 | $ | 41,853 | $ | 3,383 | 8 | % | |||||||
Consolidated obligations | $ | 41,450 | $ | 38,071 | $ | 3,379 | 9 | % | |||||||
MRCS | 14 | 16 | (2 | ) | (9 | %) | |||||||||
Other liabilities | 1,531 | 1,391 | 140 | 10 | % | ||||||||||
Total liabilities | 42,995 | 39,478 | 3,517 | 9 | % | ||||||||||
Capital stock, Class B putable | 1,388 | 1,551 | (163 | ) | (10 | %) | |||||||||
Retained earnings (3) | 810 | 777 | 33 | 4 | % | ||||||||||
AOCI | 43 | 47 | (4 | ) | (8 | %) | |||||||||
Total capital | 2,241 | 2,375 | (134 | ) | (6 | %) | |||||||||
Total liabilities and capital | $ | 45,236 | $ | 41,853 | $ | 3,383 | 8 | % | |||||||
Total regulatory capital (4) | $ | 2,212 | $ | 2,344 | $ | (132 | ) | (6 | %) |
(1) | Includes interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, AFS securities, and HTM securities. |
(2) | Includes cash and due from banks of $635 million and $3,551 million at June 30, 2015 and December 31, 2014, respectively. |
(3) | Includes restricted retained earnings of $118 million and $105 million at June 30, 2015 and December 31, 2014, respectively. |
(4) | Total capital less AOCI plus MRCS. |
The increase in total assets at June 30, 2015 compared to December 31, 2014 was primarily attributable to an increase in advances.
The increase in total liabilities at June 30, 2015 compared to December 31, 2014 was primarily attributable to an increase in consolidated obligations to fund our asset growth.
The decrease in total capital at June 30, 2015 compared to December 31, 2014 was due to our repurchase of excess capital stock.
Analysis of Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014.
Net Interest Income. Net interest income, which is primarily the interest income on advances, mortgage loans held for portfolio, short-term investments, and investment securities less the interest expense on consolidated obligations and interest-bearing deposits, is our primary source of earnings.
The following tables present average balances (calculated daily), interest income and expense, and average yields of our major categories of interest-earning assets and the sources funding those interest-earning assets ($ amounts in millions).
Three Months Ended June 30, | |||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield (1) | Average Balance | Interest Income/ Expense | Average Yield (1) | ||||||||||||||||
Assets: | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | 3,346 | $ | 1 | 0.11 | % | $ | 2,911 | $ | — | 0.07 | % | |||||||||
Investment securities (2) | 10,009 | 38 | 1.50 | % | 10,506 | 38 | 1.46 | % | |||||||||||||
Advances (3) | 22,374 | 30 | 0.54 | % | 17,974 | 25 | 0.55 | % | |||||||||||||
Mortgage loans held for portfolio (3) | 7,713 | 64 | 3.34 | % | 6,186 | 58 | 3.73 | % | |||||||||||||
Other assets (interest-earning) (4) | 213 | — | (0.10 | %) | 282 | — | 0.68 | % | |||||||||||||
Total interest-earning assets | 43,655 | 133 | 1.22 | % | 37,859 | 121 | 1.28 | % | |||||||||||||
Other assets (5) | 181 | 252 | |||||||||||||||||||
Total assets | $ | 43,836 | $ | 38,111 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Interest-bearing deposits | $ | 760 | — | 0.01 | % | $ | 806 | — | 0.01 | % | |||||||||||
Discount notes | 10,962 | 4 | 0.13 | % | 7,519 | 2 | 0.07 | % | |||||||||||||
CO bonds (3) | 28,630 | 82 | 1.14 | % | 26,298 | 75 | 1.16 | % | |||||||||||||
MRCS | 15 | — | 3.24 | % | 17 | — | 3.23 | % | |||||||||||||
Other borrowings | — | — | — | % | — | — | — | % | |||||||||||||
Total interest-bearing liabilities | 40,367 | 86 | 0.85 | % | 34,640 | 77 | 0.90 | % | |||||||||||||
Other liabilities | 1,122 | 1,030 | |||||||||||||||||||
Total capital | 2,347 | 2,441 | |||||||||||||||||||
Total liabilities and capital | $ | 43,836 | $ | 38,111 | |||||||||||||||||
Net interest income | $ | 47 | $ | 44 | |||||||||||||||||
Net spread on interest-earning assets less interest-bearing liabilities | 0.37 | % | 0.38 | % | |||||||||||||||||
Net interest margin (7) | 0.43 | % | 0.46 | % | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 1.08 | 1.09 |
Six Months Ended June 30, | |||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield (1) | Average Balance | Interest Income/ Expense | Average Yield (1) | ||||||||||||||||
Assets: | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | 3,381 | $ | 2 | 0.10 | % | $ | 2,952 | $ | 1 | 0.06 | % | |||||||||
Investment securities (2) | 10,134 | 74 | 1.46 | % | 10,569 | 76 | 1.46 | % | |||||||||||||
Advances (3) | 21,697 | 58 | 0.54 | % | 17,518 | 54 | 0.62 | % | |||||||||||||
Mortgage loans held for portfolio (3) | 7,388 | 126 | 3.45 | % | 6,175 | 116 | 3.78 | % | |||||||||||||
Other assets (interest-earning) (4) | 228 | — | 0.13 | % | 299 | — | 0.44 | % | |||||||||||||
Total interest-earning assets | 42,828 | 260 | 1.22 | % | 37,513 | 247 | 1.33 | % | |||||||||||||
Other assets (5) | 288 | 335 | |||||||||||||||||||
Total assets | $ | 43,116 | $ | 37,848 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Interest-bearing deposits | $ | 734 | — | 0.01 | % | $ | 855 | — | 0.01 | % | |||||||||||
Discount notes | 10,877 | 7 | 0.12 | % | 7,056 | 3 | 0.08 | % | |||||||||||||
CO Bonds (3) | 28,006 | 157 | 1.13 | % | 26,527 | 152 | 1.16 | % | |||||||||||||
MRCS (6) | 15 | — | 3.36 | % | 17 | 1 | 8.95 | % | |||||||||||||
Other borrowings | — | — | — | % | — | — | — | % | |||||||||||||
Total interest-bearing liabilities | 39,632 | 164 | 0.83 | % | 34,455 | 156 | 0.91 | % | |||||||||||||
Other liabilities | 1,056 | 981 | |||||||||||||||||||
Total capital | 2,428 | 2,412 | |||||||||||||||||||
Total liabilities and capital | $ | 43,116 | $ | 37,848 | |||||||||||||||||
Net interest income | $ | 96 | $ | 91 | |||||||||||||||||
Net spread on interest-earning assets less interest-bearing liabilities | 0.39 | % | 0.42 | % | |||||||||||||||||
Net interest margin (7) | 0.45 | % | 0.49 | % | |||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 1.08 | 1.09 |
(1) | Annualized. |
(2) | Consists of AFS securities and HTM securities. The average balances of investment securities are reflected at amortized cost; therefore, the resulting yields do not reflect changes in the estimated fair value of AFS securities that are reflected as a component of OCI, nor do they include the effect of OTTI-related non-credit losses. Interest income/expense includes the effect of associated derivative transactions. |
(3) | Interest income/expense and average yield include all other components of interest, including the impact of net interest payments or receipts on derivatives in qualifying hedge relationships, amortization of hedge accounting adjustments, and prepayment fees on advances. |
(4) | Consists of interest-bearing deposits, loans to other FHLBanks (if applicable), and grantor trust assets that are carried at estimated fair value. The amounts include the rights or obligations to cash collateral, which are included in the estimated fair value of derivative assets or derivative liabilities. |
(5) | Includes changes in the estimated fair value of AFS securities and the effect of OTTI-related non-credit losses on AFS and HTM securities. |
(6) | Includes impact of fourth quarter 2013 supplemental dividend paid in February 2014. |
(7) | Annualized net interest income expressed as a percentage of the average balance of interest-earning assets. |
Yields. The yield on total interest-earning assets for the three months ended June 30, 2015 was 1.22%, a decrease of 6 bps compared to the three months ended June 30, 2014, resulting substantially from a lower yield on mortgage loans due to higher levels of mortgage prepayments that have caused an accelerated runoff of our older MPP loans, which have been generating historically wider spreads, and higher amortization of purchased premiums on our newer loans. This lower yield was partially offset by a lower cost of funds related to interest-bearing liabilities. The yield on total interest-bearing liabilities was 0.85%, a decrease of 5 bps from the prior year period. The net effect of the lower yields on interest-earning assets was a reduction in the net interest spread to 0.37% for the three months ended June 30, 2015 from 0.38% for the three months ended June 30, 2014.
The yield on total interest-earning assets for the six months ended June 30, 2015 was 1.22%, a decrease of 11 bps compared to the six months ended June 30, 2014, resulting primarily from lower yields on advances and mortgage loans. The yield on advances decreased 8 bps primarily due to lower prepayment fees and related amortization on advances. The yield on mortgage loans decreased 33 bps due to higher levels of mortgage prepayments that have caused an accelerated runoff of our older MPP loans, which have been generating historically wider spreads, and higher amortization of purchased premiums on our newer loans. These lower yields were partially offset by a lower cost of funds related to interest-bearing liabilities. The yield on total interest-bearing liabilities was 0.83%, a decrease of 8 bps from the prior year period. The net effect of the lower yields on interest-earning assets was a reduction in the net interest spread to 0.39% for the six months ended June 30, 2015 from 0.42% for the six months ended June 30, 2014.
Average Balances. Higher average balances of both interest-earning assets and interest-bearing liabilities partially offset the impact of lower yields for the three and six months ended June 30, 2015 compared to the same periods in 2014. The increase in interest-earning assets was largely related to advances and mortgage loans held for portfolio. The average amount of advances outstanding increased 24% for the three and six months ended June 30, 2015 compared to the same periods in 2014 due primarily to certain members' higher funding needs. The average amount of mortgage loans held for portfolio outstanding increased 25% and 20% for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014 due to higher purchases under MPP Advantage. The increase in average interest-bearing liabilities was primarily due to an increase in consolidated obligations to fund the increases in advances and mortgage loans and included an increase in the funding mix from CO bonds to discount notes.
Provision for (Reversal of) Credit Losses. The change in the provision for (reversal of) credit losses for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to a refinement to the haircut applied to the loan-level property values obtained from the third-party model that was implemented in the first quarter of 2015.
The change in the provision for (reversal of) credit losses for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to (i) a lower reversal of the portion of the allowance for loan losses pertaining to potentially unrecoverable amounts from PMI and SMI providers, and (ii) a lower reversal of the MPF allowance for loan losses, partially offset by (iii) the change during the first quarter of 2015 in our technique for estimating losses on delinquent MPP loans to incorporate loan-level property values, which provides more specific estimates of liquidation values than our previous technique. See Notes to Financial Statements - Note 8 - Allowance for Credit Losses and Critical Accounting Policies and Estimates for more information.
Prepayment Fees. The following table presents advance prepayment fees and the associated swap termination fees recognized in interest income at the time of the prepayments ($ amounts in millions).
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Recognized prepayment/termination fees | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Prepayment fees on advances | $ | 2 | $ | — | $ | 3 | $ | 1 | ||||||||
Associated swap termination fees | (2 | ) | — | (2 | ) | — | ||||||||||
Prepayment fees on advances, net | $ | — | $ | — | $ | 1 | $ | 1 |
The following table presents deferred advance prepayment fees and deferred swap termination fees associated with those advance prepayments ($ amounts in millions).
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Deferred prepayment/termination fees | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Deferred prepayment fees on advances | $ | — | $ | — | $ | 2 | $ | — | ||||||||
Deferred associated swap termination fees | — | — | (2 | ) | — | |||||||||||
Deferred prepayment fees on advances, net | $ | — | $ | — | $ | — | $ | — |
Other Income (Loss). The following table presents the components of other income ($ amounts in millions).
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Components | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Total OTTI losses | $ | — | $ | — | $ | — | $ | — | ||||||||
Non-credit portion reclassified to (from) other comprehensive income | — | — | — | — | ||||||||||||
Net OTTI credit losses | — | — | — | — | ||||||||||||
Net gains (losses) on derivatives and hedging activities | 7 | 3 | 5 | 6 | ||||||||||||
Other | ||||||||||||||||
Litigation settlements, net (1) | — | 6 | 5 | 9 | ||||||||||||
Other miscellaneous | 1 | 1 | 2 | 1 | ||||||||||||
Total other income | $ | 8 | $ | 10 | $ | 12 | $ | 16 |
(1) | See Notes to Financial Statements - Note 16 - Commitments and Contingencies and Part II. Other Information - Item 1. Legal Proceedings for additional information on litigation settlements. |
The decrease in total other income for the three months ended June 30, 2015 compared to the same period in 2014 was due to the net proceeds in 2014 from a litigation settlement related to certain private-label RMBS, partially offset by higher net gains in 2015 related to derivative and hedging activities.
The decrease in total other income for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to lower net proceeds from litigation settlements related to certain private-label RMBS.
Net Gains (Losses) on Derivatives and Hedging Activities. Our net gains (losses) on derivatives and hedging activities fluctuate due to volatility in the overall interest rate environment as we hedge our asset or liability risk exposures. In general, we hold derivatives and associated hedged items to the maturity, call, or put date. Therefore, due to timing, nearly all of the cumulative net gains and losses for these financial instruments will reverse over the remaining contractual terms of the hedged item. However, there may be instances when we terminate these instruments prior to maturity or prior to the call or put dates. Terminating the financial instrument or hedging relationship may result in a realized gain or loss. See Notes to Financial Statements - Note 9 - Derivatives and Hedging Activities for more information.
The change in estimated fair value of derivatives in a fair value hedging relationship was a gain of $6 million for the three and six months ended June 30, 2015, compared to a loss of $3 million and $4 million for the three and six months ended June 30, 2014, respectively. The fair values are based on a wide range of factors, including current and projected levels of interest rates, credit spreads, and volatility. Gains (losses) related to fair value hedge ineffectiveness occur when changes in the fair value of the derivative and the associated hedged item do not perfectly offset.
Our net interest income and net gains (losses) on derivatives and hedging activities are affected by the inclusion or exclusion of the net interest income/expense associated with derivatives. For example, if a derivative qualifies for fair-value hedge accounting, the net interest income/expense associated with the derivative is included in net interest income along with the net interest income/expense on the hedged item. If a derivative does not qualify for fair-value hedge accounting or if we have not designated it in such a qualifying hedge relationship, the net interest income/expense associated with the derivative is recorded in net gains (losses) on derivatives and hedging activities.
The tables below present the net effect of derivatives on net interest income and other income (loss), within the net gains (losses) on derivatives and hedging activities, by type of hedge and hedged item ($ amounts in millions).
Three Months Ended June 30, 2015 | Advances | Investments | Mortgage Loans | CO Bonds | Discount Notes | Total | ||||||||||||||||||
Net interest income: | ||||||||||||||||||||||||
Amortization/accretion of hedging activities (1) | $ | — | $ | 4 | $ | (1 | ) | $ | (2 | ) | $ | — | $ | 1 | ||||||||||
Net interest settlements (2) | (39 | ) | (25 | ) | — | 15 | — | (49 | ) | |||||||||||||||
Total net interest income | (39 | ) | (21 | ) | (1 | ) | 13 | — | (48 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities: | ||||||||||||||||||||||||
Gains (losses) on fair-value hedges | 3 | — | — | 3 | — | 6 | ||||||||||||||||||
Gains (losses) on derivatives not qualifying for hedge accounting (3) | — | — | (1 | ) | 2 | — | 1 | |||||||||||||||||
Net gains (losses) on derivatives and hedging activities | 3 | — | (1 | ) | 5 | — | 7 | |||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (36 | ) | $ | (21 | ) | $ | (2 | ) | $ | 18 | $ | — | $ | (41 | ) | ||||||||
Three Months Ended June 30, 2014 | ||||||||||||||||||||||||
Net interest income: | ||||||||||||||||||||||||
Amortization/accretion of hedging activities (1) | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | 2 | ||||||||||||
Net interest settlements (2) | (37 | ) | (24 | ) | — | 19 | — | (42 | ) | |||||||||||||||
Total net interest income | (37 | ) | (22 | ) | — | 19 | — | (40 | ) | |||||||||||||||
Net gains (losses) on derivatives and hedging activities: | ||||||||||||||||||||||||
Gains (losses) on fair-value hedges | (1 | ) | — | — | (2 | ) | — | (3 | ) | |||||||||||||||
Gains (losses) on derivatives not qualifying for hedge accounting (3) | — | (1 | ) | — | 7 | — | 6 | |||||||||||||||||
Net gains (losses) on derivatives and hedging activities | (1 | ) | (1 | ) | — | 5 | — | 3 | ||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (38 | ) | $ | (23 | ) | $ | — | $ | 24 | $ | — | $ | (37 | ) |
Six Months Ended June 30, 2015 | Advances | Investments | Mortgage Loans | CO Bonds | Discount Notes | Total | ||||||||||||||||||
Net interest income: | ||||||||||||||||||||||||
Amortization/accretion of hedging activities (1) | $ | — | $ | 6 | $ | (1 | ) | $ | (2 | ) | $ | — | $ | 3 | ||||||||||
Net interest settlements (2) | (78 | ) | (49 | ) | — | 31 | — | (96 | ) | |||||||||||||||
Total effect on net interest income | (78 | ) | (43 | ) | (1 | ) | 29 | — | (93 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities: | ||||||||||||||||||||||||
Gains (losses) on fair-value hedges | 2 | (1 | ) | — | 5 | — | 6 | |||||||||||||||||
Gains (losses) on derivatives not qualifying for hedge accounting (3) | — | — | (2 | ) | 1 | — | (1 | ) | ||||||||||||||||
Net gains (losses) on derivatives and hedging activities | 2 | (1 | ) | (2 | ) | 6 | — | 5 | ||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (76 | ) | $ | (44 | ) | $ | (3 | ) | $ | 35 | $ | — | $ | (88 | ) | ||||||||
Six Months Ended June 30, 2014 | ||||||||||||||||||||||||
Net interest income: | ||||||||||||||||||||||||
Amortization/accretion of hedging activities (1) | $ | — | $ | 5 | $ | (1 | ) | $ | — | $ | — | $ | 4 | |||||||||||
Net interest settlements (2) | (73 | ) | (49 | ) | — | 38 | — | (84 | ) | |||||||||||||||
Total effect on net interest income | (73 | ) | (44 | ) | (1 | ) | 38 | — | (80 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities: | ||||||||||||||||||||||||
Gains (losses) on fair-value hedges | — | — | — | (4 | ) | — | (4 | ) | ||||||||||||||||
Gains (losses) on derivatives not qualifying for hedge accounting (3) | — | (1 | ) | — | 11 | — | 10 | |||||||||||||||||
Net gains (losses) on derivatives and hedging activities | — | (1 | ) | — | 7 | — | 6 | |||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (73 | ) | $ | (45 | ) | $ | (1 | ) | $ | 45 | $ | — | $ | (74 | ) |
(1) | Represents the amortization/accretion of hedging estimated fair value adjustments for both current and discontinued hedge positions. |
(2) | Represents interest income/expense on derivatives in qualifying hedge relationships. Excludes the interest income/expense of the respective hedged items, which fully offset the interest income/expense of the derivatives, except to the extent of any hedge ineffectiveness. |
(3) | Includes net interest settlements on derivatives not qualifying for hedge accounting. See Notes to Financial Statements - Note 9 - Derivatives and Hedging Activities for additional information. |
Other Expenses. The following table presents the components of other expenses ($ amounts in millions).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Components | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Compensation and benefits | $ | 11 | $ | 11 | $ | 22 | $ | 21 | ||||||||
Other operating expenses | 5 | 4 | 10 | 8 | ||||||||||||
Finance Agency and Office of Finance expenses | 1 | 1 | 3 | 3 | ||||||||||||
Other | 1 | 1 | 1 | 1 | ||||||||||||
Total other expenses | $ | 18 | $ | 17 | $ | 36 | $ | 33 |
The increase in total other expenses for the three and six months ended June 30, 2015 compared to the same periods in 2014 was driven by an increase in other operating expenses. This increase was caused primarily by an increase in amortization resulting from the initial implementation of our core banking system in the fourth quarter of 2014. Additionally, professional fees increased as a result of our implementation of other information technology and strategic initiatives.
Total Other Comprehensive Income (Loss). Total other comprehensive loss for the three months ended June 30, 2015 consisted primarily of unrealized losses on AFS securities, partially offset by increases in the fair value of OTTI AFS securities. Total other comprehensive income for the three months ended June 30, 2014 consisted primarily of increases in the fair value of OTTI AFS securities.
Total other comprehensive loss for the six months ended June 30, 2015 consisted primarily of decreases in the fair value of OTTI and other AFS securities. Total other comprehensive income for the six months ended June 30, 2014 consisted primarily of increases in the fair value of OTTI and other AFS securities.
Operating Segments
Our products and services are grouped within two operating segments: traditional and mortgage loans.
Traditional. The traditional operating segment consists of credit products (including advances, letters of credit, and lines of credit), investments (including federal funds sold, securities purchased under agreements to resell, AFS securities, and HTM securities), and correspondent services and deposits. The following table presents our financial performance for the traditional operating segment ($ amounts in millions).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Traditional Segment | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income | $ | 32 | $ | 28 | $ | 63 | $ | 59 | ||||||||
Provision for (reversal of) credit losses | — | — | — | — | ||||||||||||
Other income | 9 | 11 | 14 | 17 | ||||||||||||
Other expenses | 16 | 15 | 31 | 29 | ||||||||||||
Income before assessments | 25 | 24 | 46 | 47 | ||||||||||||
Total assessments | 3 | 3 | 5 | 5 | ||||||||||||
Net income | $ | 22 | $ | 21 | $ | 41 | $ | 42 |
The increase in net income for the traditional operating segment for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to higher net interest income, as well as higher net gains related to derivative and hedging activities. This increase was partially offset by lower net proceeds from litigation settlements.
The decrease in net income for the traditional operating segment for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to lower net proceeds from litigation settlements. This decrease was partially offset by higher net interest income.
Mortgage Loans. The mortgage loans operating segment includes (i) mortgage loans purchased from our members through our MPP and (ii) participation interests purchased through the FHLBank of Topeka in mortgage loans originated by certain of its members under the MPF program. The following table presents our financial performance for the mortgage loans operating segment ($ amounts in millions).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Mortgage Loans Segment | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income | $ | 15 | $ | 16 | $ | 33 | $ | 32 | ||||||||
Provision for (reversal of) credit losses | (1 | ) | — | — | (1 | ) | ||||||||||
Other income (loss) | (1 | ) | (1 | ) | (2 | ) | (1 | ) | ||||||||
Other expenses | 2 | 2 | 5 | 4 | ||||||||||||
Income before assessments | 13 | 13 | 26 | 28 | ||||||||||||
Total assessments | 1 | 1 | 2 | 2 | ||||||||||||
Net income | $ | 12 | $ | 12 | $ | 24 | $ | 26 |
The decrease in net income (in thousands) for the mortgage loans operating segment for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to an increase in other expenses (in thousands), substantially offset by a higher reversal of credit losses.
The decrease in net income for the mortgage loans operating segment for the six months ended June 30, 2015 compared to the same period in 2014 was primarily due to higher net losses related to derivative and hedging activities and an increase in other expenses, partially offset by higher net interest income.
Analysis of Financial Condition
Total Assets. The table below presents the carrying value of our major asset categories as a percentage of total assets ($ amounts in millions).
June 30, 2015 | December 31, 2014 | |||||||||||||
Major Asset Categories | Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
Advances | $ | 24,318 | 54 | % | $ | 20,789 | 50 | % | ||||||
Mortgage loans held for portfolio, net | 7,933 | 18 | % | 6,820 | 16 | % | ||||||||
Cash and short-term investments | 2,730 | 6 | % | 3,551 | 9 | % | ||||||||
Investment securities | 10,052 | 22 | % | 10,538 | 25 | % | ||||||||
Other assets (1) | 203 | — | % | 155 | — | % | ||||||||
Total assets | $ | 45,236 | 100 | % | $ | 41,853 | 100 | % |
(1) | Includes interest-bearing deposits, accrued interest receivable, premises, software, and equipment, derivative assets and other assets. |
Total assets were $45.2 billion as of June 30, 2015, a net increase of $3.4 billion or 8% compared to December 31, 2014. This increase was primarily due to a significant increase in advances and mortgage loans held for portfolio, which altered the mix of our assets during the period.
Advances. In general, advances fluctuate in accordance with our members' funding needs related to their deposit levels, mortgage pipelines, investment opportunities, available collateral, balance sheet strategies, and the cost of alternative funding opportunities. Advances at carrying value totaled $24.3 billion at June 30, 2015, a net increase of 17% compared to December 31, 2014. This increase was primarily due to certain members' higher funding needs and included a 28% increase in advances to depository members and an 11% increase to insurance company members.
The table below presents advances by type of borrower ($ amounts in millions).
June 30, 2015 | December 31, 2014 | |||||||||||||
Borrower Type | Par Value | % of Total | Par Value | % of Total | ||||||||||
Commercial banks | $ | 5,292 | 22 | % | $ | 4,675 | 23 | % | ||||||
Thrifts | 2,760 | 11 | % | 1,102 | 5 | % | ||||||||
Credit unions | 1,937 | 8 | % | 1,998 | 10 | % | ||||||||
Total depository institutions | 9,989 | 41 | % | 7,775 | 38 | % | ||||||||
Insurance companies | 13,994 | 58 | % | 12,641 | 61 | % | ||||||||
Total member advances | 23,983 | 99 | % | 20,416 | 99 | % | ||||||||
Former member borrowers | 203 | 1 | % | 214 | 1 | % | ||||||||
Total advances, par value | $ | 24,186 | 100 | % | $ | 20,630 | 100 | % |
Mortgage Loans Held for Portfolio. In general, the volume of mortgage loans purchased is affected by several factors, including interest rates, competition, the general level of housing activity in the United States, the level of refinancing activity, consumer product preferences and regulatory considerations. We purchased $1.8 billion of conventional mortgage loans through MPP Advantage in the six months ended June 30, 2015. The Finance Agency has established low-income housing goals for FHLBanks that acquire, in any calendar year, more than $2.5 billion of conventional mortgages through an AMA program. Therefore, if our 2015 purchase volume in MPP Advantage reaches $2.5 billion, we could become subject to these low-income housing goals. We continue to monitor the level of our MPP Advantage purchases and to evaluate the potential impacts of becoming subject to low-income housing goals in our AMA program.
A breakdown of mortgage loans held for portfolio by primary product type is presented below ($ amounts in millions).
June 30, 2015 | December 31, 2014 | |||||||||||||
Product Type | UPB | % of Total | UPB | % of Total | ||||||||||
MPP: | ||||||||||||||
Original | $ | 1,634 | 21 | % | $ | 1,854 | 28 | % | ||||||
Advantage | 5,097 | 66 | % | 3,709 | 55 | % | ||||||||
FHA | 574 | 7 | % | 634 | 9 | % | ||||||||
Total MPP | 7,305 | 94 | % | 6,197 | 92 | % | ||||||||
MPF: | ||||||||||||||
Conventional | 380 | 5 | % | 406 | 6 | % | ||||||||
Government | 95 | 1 | % | 101 | 2 | % | ||||||||
Total MPF | 475 | 6 | % | 507 | 8 | % | ||||||||
Total mortgage loans held for portfolio, UPB | $ | 7,780 | 100 | % | $ | 6,704 | 100 | % |
The increase in the UPB of mortgage loans held for portfolio was due to the excess of purchases of mortgage loans under MPP Advantage over repayments of outstanding MPP loans. Upon implementation of MPP Advantage in 2010 for new conventional MPP loans, the original MPP was phased out and is no longer being used for acquisitions of new conventional loans. Over time, the outstanding balance of mortgage loans purchased under our original MPP will continue to decrease.
We have established and maintain an allowance for loan losses based on our best estimate of probable losses over the loss emergence period. Our estimate of MPP losses remaining after borrower's equity was $12 million at June 30, 2015 and $25 million at December 31, 2014. This decrease from December 31, 2014 to June 30, 2015 was primarily the result of (i) fewer delinquent mortgage loans, (ii) a change during the first quarter of 2015 in the technique for estimating losses on delinquent MPP loans to incorporate loan-level property values obtained from a third-party model, with a haircut applied, instead of using a historical weighted-average collateral recovery rate, (iii) the charge-off portions of mortgage loans that were 180 days past due, and (iv) a reduction in potential claims by servicers on principal and interest previously paid in full. After we considered the portion recoverable under the associated credit enhancements, the resulting allowance for MPP loan losses was $1 million at June 30, 2015 and $2 million at December 31, 2014. See Notes to Financial Statements - Note 8 - Allowance for Credit Losses and Critical Accounting Policies and Estimates for more information.
Cash and Investments. The following table presents the components of our cash and investments at carrying value ($ amounts in millions).
Components of Cash and Investments | June 30, 2015 | December 31, 2014 | Change | |||||||||
Cash and short-term investments: | ||||||||||||
Cash and due from banks | $ | 635 | $ | 3,551 | $ | (2,916 | ) | |||||
Interest-bearing deposits | — | 1 | (1 | ) | ||||||||
Securities purchased under agreements to resell | 200 | — | 200 | |||||||||
Federal funds sold | 1,895 | — | 1,895 | |||||||||
Total cash and short-term investments | 2,730 | 3,552 | (822 | ) | ||||||||
Investment securities: | ||||||||||||
AFS securities: | ||||||||||||
GSE and TVA debentures | 3,128 | 3,155 | (27 | ) | ||||||||
GSE MBS | 78 | — | 78 | |||||||||
Private-label RMBS | 365 | 401 | (36 | ) | ||||||||
Total AFS securities | 3,571 | 3,556 | 15 | |||||||||
HTM securities: | ||||||||||||
GSE debentures | 100 | 269 | (169 | ) | ||||||||
Other U.S. obligations - guaranteed MBS | 2,986 | 3,032 | (46 | ) | ||||||||
GSE MBS | 3,296 | 3,568 | (272 | ) | ||||||||
Private-label RMBS | 87 | 100 | (13 | ) | ||||||||
Manufactured housing loan ABS | 11 | 11 | — | |||||||||
Home equity loan ABS | 1 | 2 | (1 | ) | ||||||||
Total HTM securities | 6,481 | 6,982 | (501 | ) | ||||||||
Total investment securities | 10,052 | 10,538 | (486 | ) | ||||||||
Total cash and investments, carrying value | $ | 12,782 | $ | 14,090 | $ | (1,308 | ) |
Cash and Short-Term Investments. Cash and short-term investments totaled $2.7 billion at June 30, 2015, a decrease of 23% compared to December 31, 2014. The total outstanding balance and composition of our short-term investment portfolio is influenced by our liquidity needs, market conditions and the availability of short-term investments at attractive interest rates, relative to our cost of funds.
Investment Securities. AFS securities totaled $3.6 billion at June 30, 2015 and December 31, 2014. Net unrealized gains on AFS securities totaled $51 million at June 30, 2015, a decrease of $3 million compared to net unrealized gains at December 31, 2014. This decrease was primarily due to a decrease in the fair values of our AFS securities. At June 30, 2015, the percentage of non-MBS AFS securities due in one year or less was 7%, due after one year through five years was 72%, and due after five years was 21%. See Notes to Financial Statements - Note 3 - Available-for-Sale Securities for more information.
HTM securities totaled $6.5 billion at June 30, 2015, a decrease of 7% compared to December 31, 2014, primarily due to principal paydowns. At June 30, 2015, the estimated fair value of our HTM securities in an unrealized loss position totaled $1.3 billion, a decrease of 2% from December 31, 2014, primarily due to principal paydowns combined with favorable changes in interest rates, credit spreads and volatility. See Notes to Financial Statements - Note 4 - Held-to-Maturity Securities for more information.
See Risk Management - Credit Risk Management - Investments - Long-Term Investments herein for more information on our investment securities.
Total Liabilities. Total liabilities were $43.0 billion at June 30, 2015, a net increase of 9% compared to December 31, 2014. This increase of $3.5 billion was primarily attributable to an increase in consolidated obligations to fund our asset growth.
Deposits (Liabilities). Total deposits were $1.2 billion at June 30, 2015, an increase of 7% compared to December 31, 2014. The balances of these custodial accounts can fluctuate from period to period. These deposits represent a relatively small portion of our funding and vary depending upon market factors, such as the attractiveness of our deposit pricing relative to the rates available on alternative money market instruments, members' investment preferences with respect to the maturity of their investments, and member liquidity.
Consolidated Obligations. At June 30, 2015, the carrying values of our discount notes and CO bonds totaled $11.8 billion and $29.6 billion, respectively, compared to $12.6 billion and $25.5 billion, respectively, at December 31, 2014. The overall balance of our consolidated obligations fluctuates in relation to our total assets and the availability of alternative sources of funds. The carrying value of our discount notes was 28% of total consolidated obligations at June 30, 2015, compared to 33% at December 31, 2014. Discount notes are issued primarily to provide short-term funds, while CO bonds are issued primarily to provide longer-term funding. The composition of our consolidated obligations can fluctuate significantly based on comparative changes in their cost levels, supply and demand conditions, demand for advances, and our overall balance sheet management strategy.
The following table presents the par value of our consolidated obligations outstanding ($ amounts in millions).
June 30, 2015 | December 31, 2014 | |||||||||||||
By Term | Par Value | % of Total | Par Value | % of Total | ||||||||||
Consolidated obligations due in 1 year or less: | ||||||||||||||
Discount notes | $ | 11,807 | 28 | % | $ | 12,571 | 33 | % | ||||||
CO bonds | 14,715 | 36 | % | 11,696 | 31 | % | ||||||||
Total due in 1 year or less | 26,522 | 64 | % | 24,267 | 64 | % | ||||||||
Long-term CO bonds | 14,917 | 36 | % | 13,803 | 36 | % | ||||||||
Total consolidated obligations | $ | 41,439 | 100 | % | $ | 38,070 | 100 | % |
Derivatives. As of June 30, 2015 and December 31, 2014, we had derivative assets, net of collateral held or posted, including accrued interest, with estimated fair values of $42 million and $25 million, respectively, and derivative liabilities, net of collateral held or posted, including accrued interest, with estimated fair values of $96 million and $103 million, respectively. Increases and decreases in the fair value of derivatives are primarily caused by market changes in the derivatives' underlying interest rate.
The volume of derivative hedges is often expressed in terms of notional amounts, which is the amount upon which interest payments are calculated. The following table highlights the amounts by type of hedged item (notional $ amounts in millions).
Hedged Item | June 30, 2015 | December 31, 2014 | ||||||
Advances | $ | 9,854 | $ | 10,278 | ||||
Investments | 3,438 | 3,358 | ||||||
Mortgage loans | 176 | 252 | ||||||
CO bonds | 17,781 | 14,460 | ||||||
Discount notes | 205 | 1,249 | ||||||
MDCs | 174 | 252 | ||||||
Total notional | $ | 31,628 | $ | 29,849 |
Total Capital. Total capital was $2.2 billion at June 30, 2015, a net decrease of $134 million since December 31, 2014.
The following tables present a percentage breakdown of the components of GAAP capital along with a reconciliation of GAAP capital to regulatory capital ($ amounts in millions).
Components of GAAP capital | June 30, 2015 | December 31, 2014 | ||||
Capital stock | 62 | % | 65 | % | ||
Retained earnings | 36 | % | 33 | % | ||
AOCI | 2 | % | 2 | % | ||
Total GAAP capital | 100 | % | 100 | % |
The change in the composition of our total GAAP capital is primarily due to growth in retained earnings and repurchases of excess stock.
Reconciliation of GAAP to regulatory capital | June 30, 2015 | December 31, 2014 | ||||||
Total GAAP capital | $ | 2,241 | $ | 2,375 | ||||
Exclude: AOCI | (43 | ) | (47 | ) | ||||
Add: MRCS | 14 | 16 | ||||||
Total regulatory capital | $ | 2,212 | $ | 2,344 |
Liquidity and Capital Resources
Liquidity. Our primary sources of liquidity are holdings of cash and short-term investments and the issuance of consolidated obligations. Our cash and short-term investments portfolio totaled $2.7 billion at June 30, 2015. During the first six months of 2015, we maintained sufficient access to funding; our net proceeds from the issuance of consolidated obligations totaled $45.3 billion.
We have not identified any trends, demands, commitments, events or uncertainties that are likely to materially increase or decrease our liquidity.
Capital Resources.
Total Regulatory Capital. Our total regulatory capital consists of retained earnings and total regulatory capital stock, which includes Class B capital stock and MRCS. However, MRCS is classified as a liability instead of capital under GAAP.
Our outstanding Class B capital stock, categorized by type of institution, and MRCS balances are provided in the following table ($ amounts in millions):
June 30, 2015 | December 31, 2014 | |||||||||||||
Institution Type | Amount | % of Total | Amount | % of Total | ||||||||||
Commercial banks | $ | 386 | 27 | % | $ | 451 | 29 | % | ||||||
Thrifts | 163 | 12 | % | 226 | 14 | % | ||||||||
Credit unions | 184 | 13 | % | 209 | 13 | % | ||||||||
Total depository institutions | 733 | 52 | % | 886 | 56 | % | ||||||||
Insurance companies | 655 | 47 | % | 665 | 43 | % | ||||||||
CDFIs | — | — | % | — | — | % | ||||||||
Total capital stock putable | 1,388 | 99 | % | 1,551 | 99 | % | ||||||||
MRCS (1) | 14 | 1 | % | 16 | 1 | % | ||||||||
Total regulatory capital stock | $ | 1,402 | 100 | % | $ | 1,567 | 100 | % |
(1) | Balances at June 30, 2015 and December 31, 2014 include $3 million of MRCS that had reached the end of the five-year redemption period but for which credit products and other obligations remain outstanding. Accordingly, these shares of stock will not be redeemed until the credit products are no longer outstanding. |
Excess Stock. Excess stock is capital stock that is not required as a condition of membership or to support services to members or former members. In general, the level of excess stock fluctuates with our members' demand for advances.
The following table presents the composition of our excess stock ($ amounts in millions).
Components of Excess Stock | June 30, 2015 | December 31, 2014 | ||||||
Member capital stock not subject to outstanding redemption requests | $ | 148 | $ | 516 | ||||
Member capital stock subject to outstanding redemption requests | — | — | ||||||
MRCS | 1 | 1 | ||||||
Total excess capital stock | $ | 149 | $ | 517 | ||||
Excess stock as a percentage of regulatory capital stock | 11 | % | 33 | % |
In May 2015, we repurchased a total of $241 million of excess capital stock. These repurchases were undertaken for general capital management purposes in accordance with our capital plan.
Capital Distributions. On July 29, 2015, our board of directors declared a cash dividend of 4.25% (annualized) on our capital stock putable-Class B-1 and 3.40% (annualized) on our capital stock putable-Class B-2 based on our net income for the quarter ended June 30, 2015, as well as other factors as stated in Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividends in our 2014 Form 10-K.
Adequacy of Capital. At June 30, 2015, our regulatory capital ratio was 4.89%, and our leverage capital ratio was 7.34%, both in excess of the regulatory requirement. See Notes to Financial Statements - Note 12 - Capital for more information.
Off-Balance Sheet Arrangements
The following table summarizes our off-balance-sheet arrangements (notional $ amounts in millions).
Types | June 30, 2015 | |||
Letters of credit outstanding | $ | 203 | ||
Unused lines of credit (1) | 995 | |||
Commitments to fund additional advances (2) | 100 | |||
Commitments to fund or purchase mortgage loans (3) | 174 | |||
Unsettled CO bonds, at par (4) | 21 |
(1) | Maximum line of credit amount per member is $50 million. |
(2) | Generally for periods up to six months. |
(3) | Generally for periods up to 91 days. |
(4) | Includes $15 million hedged with associated interest-rate swaps. |
At June 30, 2015, principal previously paid in full by our MPP servicers of $4 million remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. An estimate of the losses is included in the MPP allowance for loan losses. See Notes to Financial Statements - Note 8 - Allowance for Credit Losses for more information. See Notes to Financial Statements - Note 16 - Commitments and Contingencies for information on additional commitments and contingencies.
Critical Accounting Policies and Estimates
We have identified four accounting policies that we believe are critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These accounting policies relate to:
• | Derivatives and hedging activities (see Notes to Financial Statements - Note 9 - Derivatives and Hedging Activities for more detail); |
• | Fair value estimates (see Notes to Financial Statements - Note 15 - Estimated Fair Values for more detail); |
• | Provision for credit losses (see Notes to Financial Statements - Note 8 - Allowance for Credit Losses for more detail); and |
• | OTTI (see Notes to Financial Statements - Note 5 - Other-Than-Temporary Impairment for more detail). |
A full discussion of our critical accounting policies and estimates can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our 2014 Form 10-K. See below for additional information regarding certain of these policies.
Provision for Credit Losses.
Mortgage Loans Acquired under the MPP. Our allowance for loan losses incorporates our analysis of delinquent conventional MPP loans, using the estimated fair value of the underlying collateral, further reduced by estimated liquidation costs.
Beginning in the first quarter of 2015, we refined our technique for estimating losses on mortgage loans past due 180 days or more to incorporate loan-level property values obtained from a third-party model. A haircut of 25% is applied to these loan-level values to capture the potential impact of severely distressed property sales. The reduced values are then aggregated to the pool level and are further reduced for estimated liquidation costs to determine the estimated liquidation value.
We also perform our loan loss analysis under an adverse scenario whereby we increase the haircut on our underlying collateral values to 45% for delinquent conventional loans, including individually evaluated loans. While holding all other assumptions constant, such scenario would have increased our allowance by approximately $2 million at June 30, 2015. We consider a haircut of 45% on the modeled values to be the lowest value that is reasonably possible to occur over the loss emergence period of 24 months. We continue to monitor the appropriateness of this adverse scenario.
We evaluated this adverse scenario and determined that the likelihood of incurring losses resulting from this scenario during the next 24 months was not probable. Therefore, the allowance for loan losses is based upon our best estimate of the probable losses over the next 24 months that would not be recovered from the credit enhancements.
Other-Than-Temporary Impairment Analysis. In addition to evaluating our private-label RMBS under a best estimate scenario, we perform a cash flow analysis for each of these securities under a more stressful housing price scenario. This more stressful scenario is primarily based on a short-term housing price forecast, which is 5% lower than the best estimate scenario, followed by a recovery path with annual rates of housing price growth that are 33% lower than the best estimate.
The actual OTTI-related credit losses recognized in earnings for the quarter ended June 30, 2015 were $32 thousand. Under the more stressful scenario, the OTTI-related credit losses estimate would have been $84 thousand for the quarter ended June 30, 2015.
Additional information regarding OTTI of our private-label RMBS and ABS is provided in Notes to Financial Statements - Note 5 - Other-Than-Temporary Impairment and Risk Management - Credit Risk Management - Investments herein.
Recent Accounting and Regulatory Developments
Accounting Developments. See Notes to Financial Statements - Note 2 - Recently Adopted and Issued Accounting Guidance for a description of how recent accounting developments may impact our results of operations or financial condition.
Legislative and Regulatory Developments.
Finance Agency Developments.
Advisory Bulletin on Core Mission Achievement. On July 14, 2015, the Finance Agency issued Advisory Bulletin 2015-05, establishing a core mission asset ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members, to consolidated obligations. The core mission asset ratio will be determined annually, starting at year-end 2015, and will be calculated using annual average par values.
The advisory bulletin provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on its ratio, which are:
• | when the ratio is 70% or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining at least this level; |
• | when the ratio is between 55% and 70%, the strategic plan should explain the FHLBank’s plan to increase its mission achievement; and |
• | when the ratio is below 55%, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55% over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives. |
Our core mission activities primarily include the issuance of advances. In addition, we acquire mortgage loans from members through the MPP.
Risk Management
We have exposure to a number of risks in pursuing our business objectives. These risks may be broadly classified as market, credit, liquidity, operational, and business. Market risk is discussed in detail in Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management in our 2014 Form 10-K for more detailed information.
Credit Risk Management. We face credit risk on advances and other credit products, investments, mortgage loans, derivative financial instruments, and AHP grants.
Advances. Advances, at par, to our insurance company members were 58% and 61% of total advances at June 30, 2015 and December 31, 2014, respectively. Our credit policy requires an additional approval by our Bank to lend to an insurance company member whose total credit products exceed 15% of general account assets less borrowed money. As of June 30, 2015 and December 31, 2014, we had advances outstanding, at par, of $5.4 billion to nine of our insurance company members and $4.6 billion to five of our insurance company members, respectively, whose total credit products exceeded 15% of their general account assets, net of borrowed money. Six of these nine insurance company members as of June 30, 2015 are captive insurance companies for which management establishes a borrowing limit on a case-by-case basis based on a review and recommendation by our credit services underwriting department.
Concentration. Our credit risk is magnified due to the concentration of advances in a few borrowers. As of June 30, 2015, our top two borrowers held 19% of total advances outstanding, at par, and our top five borrowers held 42% of total advances outstanding, at par. As a result of this concentration, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we analyze the implications to our financial management and profitability if we were to lose the business of one or more of these borrowers.
Investments. We are also exposed to credit risk through our investment portfolios. The RMP approved by our board of directors restricts the acquisition of investments to high-quality, short-term money market instruments and high-quality long-term securities.
Short-Term Investments. Our short-term investment portfolio at June 30, 2015 included securities purchased under agreements to resell, which are secured by United States treasuries and mature overnight. Our unsecured credit exposure to United States branches and agency offices of foreign commercial banks was limited to federal funds sold.
The following table presents the unsecured investment credit exposures to all private counterparties, categorized by the domicile of the counterparty's parent, based on the lowest of the NRSRO long-term credit ratings of the counterparty, each stated in terms of the S&P equivalent. The table does not reflect the foreign sovereign government's credit rating ($ amounts in millions).
June 30, 2015 | AA | A | Total | |||||||||
Domestic | $ | — | $ | 775 | $ | 775 | ||||||
Canada | 560 | — | 560 | |||||||||
Australia | 560 | — | 560 | |||||||||
Total unsecured credit exposure | $ | 1,120 | $ | 775 | $ | 1,895 |
Long-Term Investments. A Finance Agency regulation provides that the total value of our investments in MBS and ABS, calculated using amortized historical cost, must not exceed 300% of our total regulatory capital, consisting of retained earnings, Class B capital stock, and MRCS, as of the day we purchase the securities, based on the capital amount most recently reported to the Finance Agency. These investments were 307% of total regulatory capital at June 30, 2015. Although our outstanding investments in MBS and ABS exceeded the limitation at June 30, 2015, we were in compliance at the time we purchased the investments; therefore, we were not out of compliance with the regulation. However, we are not permitted to purchase additional investments in MBS and ABS until these outstanding investments are within the capital limitation. Generally, our goal is to maintain these investments near the 300% limit in order to enhance earnings and capital for our members and diversify our revenue stream.
The following table presents the carrying values of our investments, excluding accrued interest, by credit rating, grouped by investment category. Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's and Fitch, each stated in terms of the S&P equivalent. Rating modifiers are ignored when determining the applicable rating level for a given counterparty or investment. Amounts reported do not reflect any changes in ratings, outlook, or watch status ($ amounts in millions).
Below | ||||||||||||||||||||
Investment | ||||||||||||||||||||
June 30, 2015 | AA | A | BBB | Grade | Total | |||||||||||||||
Short-term investments: | ||||||||||||||||||||
Interest-bearing deposits | $ | — | �� | $ | — | $ | — | $ | — | $ | — | |||||||||
Securities purchased under agreements to resell | 200 | — | — | — | 200 | |||||||||||||||
Federal funds sold | 1,120 | 775 | — | — | 1,895 | |||||||||||||||
Total short-term investments | 1,320 | 775 | — | — | 2,095 | |||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | 3,128 | — | — | — | 3,128 | |||||||||||||||
GSE MBS | 78 | — | — | — | 78 | |||||||||||||||
Private-label RMBS | — | — | — | 365 | 365 | |||||||||||||||
Total AFS securities | 3,206 | — | — | 365 | 3,571 | |||||||||||||||
HTM securities: | ||||||||||||||||||||
GSE debentures | 100 | — | — | — | 100 | |||||||||||||||
Other U.S. obligations - guaranteed RMBS | 2,986 | — | — | — | 2,986 | |||||||||||||||
GSE MBS | 3,296 | — | — | — | 3,296 | |||||||||||||||
Private-label RMBS | 14 | 15 | 15 | 43 | 87 | |||||||||||||||
Private-label ABS | — | 10 | — | 2 | 12 | |||||||||||||||
Total HTM securities | 6,396 | 25 | 15 | 45 | 6,481 | |||||||||||||||
Total investments, carrying value | $ | 10,922 | $ | 800 | $ | 15 | $ | 410 | $ | 12,147 | ||||||||||
Percentage of total | 90 | % | 7 | % | — | % | 3 | % | 100 | % | ||||||||||
December 31, 2014 | ||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||
Interest-bearing deposits | $ | 1 | $ | — | $ | — | $ | — | $ | 1 | ||||||||||
Securities purchased under agreements to resell | — | — | — | — | — | |||||||||||||||
Total short-term investments | 1 | — | — | — | 1 | |||||||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA debentures | 3,155 | — | — | — | 3,155 | |||||||||||||||
Private-label RMBS | — | — | — | 401 | 401 | |||||||||||||||
Total AFS securities | 3,155 | — | — | 401 | 3,556 | |||||||||||||||
HTM securities: | ||||||||||||||||||||
GSE debentures | 269 | — | — | — | 269 | |||||||||||||||
Other U.S. obligations - guaranteed RMBS | 3,032 | — | — | — | 3,032 | |||||||||||||||
GSE MBS | 3,568 | — | — | — | 3,568 | |||||||||||||||
Private-label RMBS | 17 | 17 | 18 | 48 | 100 | |||||||||||||||
Private-label ABS | — | 11 | — | 2 | 13 | |||||||||||||||
Total HTM securities | 6,886 | 28 | 18 | 50 | 6,982 | |||||||||||||||
Total investments, carrying value | $ | 10,042 | $ | 28 | $ | 18 | $ | 451 | $ | 10,539 | ||||||||||
Percentage of total | 96 | % | — | % | — | % | 4 | % | 100 | % |
Private-label RMBS and ABS. Private-label RMBS and ABS are classified as prime, Alt-A or subprime based on the originator's classification at the time of origination or based on classification by an NRSRO upon issuance. Because there is no universally accepted definition of prime, Alt-A or subprime underwriting standards, such classifications are subjective. All private-label RMBS and ABS were rated with an S&P equivalent rating of AAA at the date of purchase.
Our private-label RMBS and ABS are backed by collateral located only in the United States and the District of Columbia. The top five states, by percentage of collateral located in those states as of June 30, 2015, were California (65%), New York (6%), Florida (4%), Connecticut (3%), and Virginia (2%).
OTTI Evaluation Process. The following table presents the significant modeling assumptions used to determine whether a security was OTTI during the second quarter of 2015, as well as the related current credit enhancement as of June 30, 2015. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all of the OTTI private-label RMBS and ABS in each category shown. RMBS and ABS are classified as prime, Alt-A or subprime based on the model used to estimate the cash flows for the security, which may not be the same as the classification by the rating agency at the time of origination ($ amounts in millions).
Significant Modeling Assumptions for all private-label RMBS and ABS | Current Credit Enhancement (2) | |||||||||||||||
Year of Securitization | UPB (1) | Prepayment Rates (2) | Default Rates (2) | Loss Severities (2) | ||||||||||||
Private-label RMBS: | ||||||||||||||||
Total Prime | $ | 467 | 12 | % | 9 | % | 24 | % | 5 | % | ||||||
Total Alt-A | 7 | 15 | % | 8 | % | 32 | % | 13 | % | |||||||
Total private-label RMBS | $ | 474 | 12 | % | 9 | % | 24 | % | 5 | % | ||||||
Home equity loan ABS: | ||||||||||||||||
Total subprime - home equity loans (3) | $ | 2 | 7 | % | 20 | % | 25 | % | 100 | % |
(1) | Excludes one manufactured housing loan ABS, with a UPB of $10 million, for which underlying collateral data is not readily available and alternative procedures are used to evaluate for OTTI. |
(2) | Weighted average based on UPB. |
(3) | Insured by monoline bond insurers. |
See Notes to Financial Statements - Note 5 - Other-Than-Temporary Impairment for additional information.
Mortgage Loans Held for Portfolio.
MPP.
PMI. As of June 30, 2015, we had PMI coverage on $1.0 billion or 15% of our conventional mortgage loans. For a conventional loan, PMI, if applicable, covers losses or exposure down to approximately an LTV ratio between 65% and 80% based upon the original appraisal, original LTV ratio, term, and amount of PMI coverage.
The following table presents the lowest credit rating of S&P, Moody's and Fitch stated in terms of the S&P equivalent as of July 31, 2015 and the related PMI coverage amount on seriously delinquent loans held in our portfolio as of June 30, 2015 ($ amounts in millions).
Seriously Delinquent Loans (1) | ||||||||||
PMI | ||||||||||
Coverage | ||||||||||
Mortgage Insurance Company | Credit Rating | UPB | Outstanding | |||||||
MGIC | BB+ | $ | 2 | $ | 1 | |||||
RMIC | NR | 2 | 1 | |||||||
Radian Guaranty, Inc. | BB | 2 | 1 | |||||||
Genworth | BB- | 1 | — | |||||||
United Guaranty Residential Insurance Corporation | BBB+ | 1 | — | |||||||
All others | NR, BBB+ | 1 | — | |||||||
Total | $ | 9 | $ | 3 |
(1) | Includes loans that are 90 days or more past due or in the process of foreclosure. |
LRA. The following table presents the changes in the LRA for original MPP and MPP Advantage ($ amounts in millions).
Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | |||||||||||||||||||||||
LRA Activity | Original | Advantage | Total | Original | Advantage | Total | ||||||||||||||||||
Balance of LRA, beginning of period | $ | 10 | $ | 62 | $ | 72 | $ | 11 | $ | 36 | $ | 47 | ||||||||||||
Additions | 1 | 11 | 12 | — | 3 | 3 | ||||||||||||||||||
Claims paid | (1 | ) | — | (1 | ) | — | — | — | ||||||||||||||||
Distributions | — | — | — | — | — | — | ||||||||||||||||||
Balance of LRA, end of period | $ | 10 | $ | 73 | $ | 83 | $ | 11 | $ | 39 | $ | 50 |
Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||
LRA Activity | Original | Advantage | Total | Original | Advantage | Total | ||||||||||||||||||
Balance of LRA, beginning of period | $ | 10 | $ | 52 | $ | 62 | $ | 11 | $ | 34 | $ | 45 | ||||||||||||
Additions | 1 | 21 | 22 | 1 | 5 | 6 | ||||||||||||||||||
Claims paid | (1 | ) | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||||
Distributions | — | — | — | — | — | — | ||||||||||||||||||
Balance of LRA, end of period | $ | 10 | $ | 73 | $ | 83 | $ | 11 | $ | 39 | $ | 50 |
SMI. As of June 30, 2015, we were the beneficiary of SMI coverage, under our original MPP, on conventional mortgage pools with a total UPB of $1.6 billion. Two mortgage insurance companies provide all of the SMI coverage.
The following table presents the lowest credit rating of S&P, Moody's and Fitch stated in terms of the S&P equivalent as of July 31, 2015, and the estimated SMI exposure as of June 30, 2015 ($ amounts in millions).
Mortgage Insurance Company | Credit Rating | June 30, 2015 | ||||
MGIC | BB+ | $ | 20 | |||
Genworth | BB- | 7 | ||||
Total | $ | 27 |
MPP and MPF Loan Characteristics. Two indicators of credit quality are LTV ratios and credit scores provided by FICO®. FICO® provides a commonly used measure to assess a borrower’s credit quality, with scores ranging from a low of 300 to a high of 850. The combination of a lower FICO® score and a higher LTV ratio is a key indicator of potential mortgage delinquencies and defaults.
As of June 30, 2015, 96% of the borrowers in our conventional loan portfolio had FICO® scores greater than 680 at origination and 85% had an LTV ratio of 80% or lower. We believe these measures indicate that these loans have a low risk of default. We do not knowingly purchase any loan that violates the terms of our Anti-Predatory Lending Policy.
MPP and MPF Credit Performance. The serious delinquency rate for MPP FHA mortgages was 0.45% and 0.56% at June 30, 2015 and December 31, 2014, respectively. We rely on insurance provided by the FHA, which generally provides coverage for 100% of the principal balance of the underlying mortgage loan and defaulted interest at the debenture rate. However, we would receive defaulted interest at the contractual rate from the servicer.
The serious delinquency rate for MPP conventional mortgages was 0.56% at June 30, 2015, compared to 0.86% at December 31, 2014. Both rates were below the national serious delinquency rate. There were three seriously delinquent conventional MPF loans at June 30, 2015 compared to two at December 31, 2014. See Notes to Financial Statements - Note 8 - Allowance for Credit Losses for more information.
Derivatives. Our over-the-counter derivative transactions are either (i) executed with a counterparty (bilateral derivatives) or (ii) cleared through a Futures Commission Merchant (i.e., clearing agent) with a clearinghouse (cleared derivatives). See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk Management - Derivatives in our 2014 Form 10-K for more information.
The following table presents key information on derivative counterparties on a settlement date basis using the lowest credit rating from S&P or Moody's, stated in terms of the S&P equivalent ($ amounts in millions).
June 30, 2015 | Notional Amount | Net Derivatives Estimated Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparties | Net Credit Exposure To (From) Counterparties | ||||||||||||
Non-member counterparties: | ||||||||||||||||
Asset positions with credit exposure | ||||||||||||||||
Bilateral derivatives | ||||||||||||||||
AA | $ | 835 | $ | — | $ | — | $ | — | ||||||||
A | 41 | — | — | — | ||||||||||||
BBB | 60 | — | — | — | ||||||||||||
Cleared derivatives (1) | 2,342 | 12 | 3 | 15 | ||||||||||||
Liability positions with credit exposure | ||||||||||||||||
Cleared derivatives (1) | 17,177 | (18 | ) | 44 | 26 | |||||||||||
Total derivative positions with credit exposure to non-member counterparties | 20,455 | (6 | ) | 47 | 41 | |||||||||||
Member institutions (2) | 78 | — | — | — | ||||||||||||
Subtotal - derivative positions with credit exposure | 20,533 | (6 | ) | 47 | 41 | |||||||||||
Derivative positions without credit exposure | 11,094 | (212 | ) | 117 | (95 | ) | ||||||||||
Net derivative positions (3) | $ | 31,627 | $ | (218 | ) | $ | 164 | $ | (54 | ) |
(1) | Represents derivative transactions cleared with a clearinghouse, which is not rated. |
(2) | Includes MDCs from member institutions (MPP). |
(3) | Subject to a legal right of offset and all other requirements for netting are met. |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Measuring Market Risks
We utilize multiple risk measurements, including duration of equity, duration gap, convexity, VaR, earnings at risk, and changes in market value of equity, to evaluate market risk. Periodically, we conduct stress tests to measure and analyze the effects that extreme movements in the level of interest rates and the shape of the yield curve would have on our risk position.
Duration of Equity. The following table presents the effective duration of equity levels for our total position, which are subject to our RMP guidelines.
Date | -200 bps (1) | 0 bps | +200 bps | |||
June 30, 2015 | (2.7) years | 1.6 years | 2.4 years | |||
December 31, 2014 | (3.7) years | (0.0) years | 2.6 years |
(1) | Our RMP guidelines provide for the calculation of the duration of equity in a low-rate environment to be based on the Finance Agency Advisory Bulletin 03-09, as modified September 3, 2008. Under these guidelines, our duration of equity for the -200 bps duration level is equal to the level under the base case (0 bps). |
We were in compliance with the duration of equity limits established by our RMP at both dates. The increase in the base case duration of equity level (0 bps) at June 30, 2015 compared to December 31, 2014 was partly due to changes in the market rate environment. This resulted in the shortening of the duration of both assets and liabilities; however, the duration of our liabilities shortened more than the duration of our assets, which lengthened the duration of equity.
Duration Gap. The base case duration gap was 0.3 months at June 30, 2015, compared to (0.9) months at December 31, 2014. The causes of this change are the same as the causes of the change in the duration of equity.
Market Risk-Based Capital Requirement. When calculating the risk-based capital requirement, the VaR comprising the first factor of the market risk component is defined as the potential dollar loss from adverse market movements, for a holding period of 120 business days, with a 99% confidence interval, based on those historical prices and market rates. The table below presents the VaR ($ amounts in millions).
Date | VaR | |||
June 30, 2015 | $ | 147 | ||
December 31, 2014 | 156 |
Ratio of Market Value to Book Value of Equity between Base Rates and Shift Scenarios. We measure potential changes in the market value to book value of equity based on the current month-end level of rates versus large parallel rate shifts. This measurement provides information related to the sensitivity of our interest-rate position. The table below presents the ratios of market value to book value of equity.
Date | -200 bps | Base | +200 bps | ||||||
June 30, 2015 | 105 | % | 103 | % | 100 | % | |||
December 31, 2014 | 102 | % | 103 | % | 100 | % |
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Use of Derivative Hedges in our 2014 Form 10-K for more information about our use of derivative hedges.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act of 1934, as amended ("Exchange Act") is: (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, to allow timely decisions regarding required disclosures. As of June 30, 2015, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the Principal Executive Officer), Chief Financial Officer (the Principal Financial Officer), and Chief Accounting Officer (the Principal Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.
Internal Control Over Financial Reporting
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in rules 13a-15(f) and 15(d)-15(f) of the Exchange Act that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures and other internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Additionally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are unaware of any potential claims against us that could be material.
Private-Label Mortgage-Backed Securities Litigation
On October 15, 2010, we filed a complaint in the Superior Court of Marion County, Indiana, relating to private-label residential mortgage-backed securities ("RMBS") we purchased in the aggregate original principal amount of approximately $2.9 billion. The complaint, which was amended, was an action for rescission and damages and asserted claims for negligent misrepresentation and violations of state and federal securities law occurring in connection with the sale of these private-label RMBS to us. During 2013, 2014 and 2015, we executed confidential settlement agreements with certain defendants in this litigation, pursuant to which we have dismissed all pending claims against, and provided legal releases to, certain entities with respect to all applicable securities at issue in the litigation, in consideration of our receipt of cash payments from or on behalf of those defendants. As a result, all proceedings in this private-label RMBS litigation have been concluded.
Item 1A. RISK FACTORS
There have been no material changes in the risk factors described in Item 1A. Risk Factors of our 2014 Form 10-K.
Item 6. EXHIBITS
EXHIBIT INDEX
Exhibit Number | Description | |
3.1* | Organization Certificate of the Federal Home Loan Bank of Indianapolis, incorporated by reference to our Registration Statement on Form 10 (Commission File No. 0-51404) filed on February 14, 2006 | |
3.2* | Bylaws of the Federal Home Loan Bank of Indianapolis, incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K (Commission File No. 0-51404) filed on May 21, 2010 | |
4* | Capital Plan of the Federal Home Loan Bank of Indianapolis, effective September 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 | |
10.1*+ | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K (Commission File No. 0-51404), filed on November 20, 2007 | |
10.2*+ | Directors' Compensation and Expense Reimbursement Policy, effective January 1, 2015, as adopted by the board of directors on October 17, 2014, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K/A filed on October 24, 2014 | |
10.3*+ | Federal Home Loan Bank of Indianapolis 2011 Long Term Incentive Plan, effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 | |
10.4* | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (Commission File No. 0-51404) filed on June 27, 2006 | |
10.5*+ | Form of Key Employee Severance Agreement for Executive Officers, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on February 4, 2011 | |
10.6*+ | Joint Capital Enhancement Agreement dated August 5, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 5, 2011 | |
Exhibit Number | Description | |
10.7+ | Federal Home Loan Bank of Indianapolis Incentive Plan, effective January 1, 2012, as amended on July 17, 2015, effective as of January 1, 2015. | |
10.8*+ | Federal Home Loan Bank of Indianapolis 2011 Executive Incentive Compensation Plan (STI), effective January 1, 2011, incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed on August 3, 2011 | |
31.1 | Certification of the President - Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Senior Vice President - Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.3 | Certification of the Senior Vice President - Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 | |
32 | Certification of the President - Chief Executive Officer, Senior Vice President - Chief Financial Officer, and Senior Vice President - Chief Accounting 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 |
* These documents are incorporated by reference.
+ Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS | ||
August 7, 2015 | By: | /s/ CINDY L. KONICH |
Name: | Cindy L. Konich | |
Title: | President - Chief Executive Officer | |
August 7, 2015 | By: | /s/ GREGORY L. TEARE |
Name: | Gregory L. Teare | |
Title: | Senior Vice President - Chief Financial Officer | |
August 7, 2015 | By: | /s/ K. LOWELL SHORT, JR. |
Name: | K. Lowell Short, Jr. | |
Title: | Senior Vice President - Chief Accounting Officer |