10-Q 1 fhlbpit10q2012630.htm FORM 10-Q FHLB Pit 10Q 2012.6.30
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, 2012
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
 
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
601 Grant Street
Pittsburgh, PA 15219
 (Address of principal executive offices)
 
15219
 (Zip Code)
 
(412) 288-3400 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [x]Yes []No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [x] Yes [] 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 the 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
 
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).  [] Yes [x] No

There were 31,337,434 shares of common stock with a par value of $100 per share outstanding at July 31, 2012.


FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS












i.

PART I – FINANCIAL INFORMATION

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Statements contained in this Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results 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, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; changes in the Bank's capital structure; changes in the Bank's capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances' prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the FHLBank System's debt rating or the Bank's rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank's ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; and timing and volume of market activity. This Management's Discussion and Analysis should be read in conjunction with the Bank's unaudited interim financial statements and notes and Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2011 Form 10-K, including Risk Factors included in Item 1A of that report.


Executive Summary

Overview. The second quarter of 2012 included further developments with the European sovereign debt crisis and heightened concerns over an economic slowdown domestically. Market sentiment wavered although long-term refinancing operations helped provide longer-term liquidity to Europe and increased investors' willingness to commit capital and assume risk. At the same time, U.S. economic data started to show signs of weakness. Investors reacted to this trend by purchasing U.S. Treasuries, pushing the 10-year to a low of 1.45% in early June. Demand, combined with limited supply for spread-yielding assets, led to higher prices (i.e., tighter spreads) in the U.S. agency mortgage backed securities (MBS) market.

The Bank's financial condition and results of operation are influenced by the interest rate environment, global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets. During the second quarter of 2012, the Bank's average advance portfolio increased approximately 23% from second quarter 2011, and net income rose to $23.2 million, compared with $12.7 million in second quarter 2011. In February and April 2012, the Bank declared a quarterly dividend of 10 basis points on an annualized basis and repurchased a total of approximately $278 million in excess capital stock. In July 2012, the Bank declared another quarterly dividend of 10 basis points on an annualized basis and repurchased approximately $200 million of excess capital stock. The Bank has repurchased approximately $1.4 billion in excess capital stock over the past eight quarters.

Interest Rate Environment. In late June 2012, the Federal Open Market Committee (FOMC) announced the extension of Operation Twist through year end, which was longer than market expectations. The FOMC also signaled the possibility of additional easing as it closely monitors economic activity and job growth. In terms of the interest rate environment, benchmark Treasury rates remained low throughout the second quarter, hitting lows in early June 2012. As the European crisis continued to evolve and the FOMC announced taking further action, swap spreads to U.S. Treasuries tightened during the quarter.

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To

1

manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. The Bank expects its near-term ability to generate significant earnings on short-term investments will be limited in light of the FOMC announcement noted above. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities.
 
With ample liquidity available in the domestic banking system, the effective rate on Federal funds remained in a narrow range and averaged approximately 0.15% during the second quarter of 2012. If the Federal funds effective rate remains in this expected lower range, the Bank's earnings on capital will be negatively impacted as it continues to invest in short-term assets. The Federal Reserve has announced that it has decided to keep the target range for the Federal funds rate at zero to 25 basis points and anticipates that economic conditions are likely to warrant exceptionally low levels for the Federal funds rate at least through late 2014.

The following table presents key market interest rates.
 
2nd Quarter 2012
1st Quarter 2012
4th Quarter 2011
2nd Quarter 2011
 
Average
Ending
Average
Ending
Average
Ending
Average
Ending
Federal funds effective rate
0.15
%
0.09
%
0.10
%
0.09
%
0.07
%
0.04
%
0.09
%
0.07
%
3-month LIBOR
0.47
%
0.46
%
0.51
%
0.47
%
0.48
%
0.58
%
0.26
%
0.25
%
2-year U.S. Treasury
0.28
%
0.31
%
0.28
%
0.33
%
0.26
%
0.24
%
0.55
%
0.46
%
5-year U.S. Treasury
0.78
%
0.72
%
0.89
%
1.04
%
0.95
%
0.83
%
1.84
%
1.76
%
10-year U.S. Treasury
1.81
%
1.65
%
2.02
%
2.21
%
2.03
%
1.88
%
3.19
%
3.16
%
15-year mortgage current coupon (1)
1.77
%
1.63
%
1.92
%
2.04
%
2.26
%
2.05
%
3.15
%
3.08
%
30-year mortgage current coupon (1)
2.79
%
2.60
%
2.90
%
3.10
%
3.13
%
2.92
%
4.06
%
4.04
%
Notes:
(1)Simple average of Fannie Mae and Freddie Mac MBS current coupon rates.

Interest Rates and Yield Curve Shifts.  The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. During the second quarter 2012, the U.S. Treasury yield curve flattened with short-term U.S. Treasury rates decreasing modestly and 10-year Treasury rates decreasing 56 basis points from March 31, 2012. The spread between 2-year and 10-year U.S. Treasuries decreased by 54 basis points but remained relatively wide at 134 basis points at June 30, 2012. Decreased credit concerns globally resulted in 3-month LIBOR declining one basis point in second quarter 2012, while 3-month U.S. Treasury bills increased two basis points.

The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter duration mortgage products. Under normal circumstances, when rates decline, prepayments increase, resulting in accelerated accretion/amortization of any associated discounts/premiums. In addition, when higher coupon mortgage loans prepay, the unscheduled return of principal cannot be invested in assets with a comparable yield resulting in a decline in the aggregate yield on the remaining loan portfolio and a possible decrease in the net interest margin. Given the prolonged trend of declining home values and tighter mortgage credit, refinancing activity has been slow compared to historical experience. However, the reduced refinancing level has not prevented higher spread MBS portfolios from prepaying and being replaced with lower spread MBS. The Federal Housing Finance Agency (Finance Agency), along with Fannie Mae and Freddie Mac, have announced a series of changes to the Home Affordable Refinance Program (HARP) in an effort to assist more eligible borrowers who can benefit from refinancing their home mortgage. Other federal agencies have implemented other programs during the past few years to prevent foreclosure (including the Home Affordable Modification Program and the Principal Reduction Alternative). The Bank does not expect the HARP changes or existing foreclosure prevention programs to have a significant impact on the Bank's mortgage portfolios. However, program execution and related changes may alter this perspective.
 
The volatility of yield curve shifts may also have an effect on the Bank's duration of equity and the cost of maintaining duration within limits. Volatility in interest rates may cause management to take action to maintain compliance with these

2

limits, even though a subsequent, sudden reversal in rates may make such hedges unnecessary. Volatility in interest rate levels and in the shape of the yield curve may increase the cost of compliance with the Bank's duration limits. In the past few years, the typical cash flow variability of mortgage assets has become less pronounced as the combination of declining residential housing values and reduced credit availability has diminished refinancing activity. If this trend continues, the duration of assets could be extended and the cost to fund these assets could increase.

Market and Housing Trends. The economy showed signs of weakness as the second quarter of 2012 closed. Weak job growth, waning consumer confidence and sluggish retail sales combined with continued uncertainty regarding the Eurozone caused many economists to revise their economic forecasts down for the remainder of 2012. Consensus growth rates are now forecasting growth between 1.5% to 2.0% Gross Domestic Product (GDP) for the remainder of 2012. Despite the recent negative trends, the outlook for 2012 remains mixed, as many parts of the economy, housing in particular, are showing some signs of improvement despite the ongoing long-term concerns.

Real estate is not contributing significantly to economic growth, but has shown some signs of stabilization. Home prices appear to be stabilizing nationally and construction activity has increased. Rates on 30-year mortgages have hovered near 3.0% due in part to the Operation Twist program. These low rates are expected to persist for the foreseeable future and should help support the housing market. Despite low rates and high levels of affordability, the rental market appears to be leading the recovery. Rents are up and vacancies are down in almost all regions of the U.S. while multi-family construction starts have made strong contributions to construction activity. Despite the low rates, high unemployment, foreclosures and large "shadow" inventory are expected to deter any dramatic housing recovery during the remainder of 2012.

Weaker economic trends domestically and the ongoing European sovereign debt crisis were the main themes of the second quarter of 2012. It is uncertain whether the sovereign debt resolutions will provide long-term stability in Europe but the markets have received the recent trends positively, pushing LIBOR rates lower. In addition to the decreased concern over European sovereign debt and the corresponding banking crisis, negative economic results in the first quarter of 2012 led to lower U.S. Treasury rates and a flatter yield curve as concerns over the long-term economic outlook increased. The ongoing European crisis also demonstrates the fragility of the global economic recovery. The Eurozone GDP is slightly larger than that of the U.S., and a drawn-out recession in the Eurozone could lead to a significant slowdown domestically. European countries facing higher borrowing costs combined with reduced government and consumer spending activity have led many economists to forecast a European recession in 2012. Domestically, economists are concerned about the "fiscal cliff" and the possible impact a prolonged government spending freeze and potential U.S. default scenario could have on the global economy.

Results of Operations. During the second quarter of 2012, the Bank recorded net income of $23.2 million, up $10.5 million from the second quarter of 2011. This improvement was driven primarily by higher net interest income and lower OTTI credit losses on the Bank's private label MBS. Net interest income for the second quarter 2012 was $49.9 million, up $13.9 million compared to $36.0 million for second quarter 2011 and was primarily due to favorable funding costs and increased interest income related to advance prepayment fees, partially offset by lower interest income from investments and mortgage loans held for portfolio. OTTI credit losses were $3.6 million in second quarter 2012 compared to $10.8 million for second quarter 2011. Partially offsetting these improvements, all other income declined $11.7 million quarter over quarter, primarily due to net losses on derivatives and hedging activities in 2012 and the impact of a gain on a private label MBS security sold in 2011.

OTTI. The vast majority of the Bank's OTTI has been in the Bank's Alt-A and Prime private label MBS portfolios. The Alt-A sector includes borrowers who have characteristics of both subprime and Prime borrowers. A significant portion of the Bank's private label MBS portfolio is Alt-A, although the majority of the portfolio continues to be comprised of MBS backed by Prime loans. The Bank experienced Alt-A OTTI credit charges of $0.3 million and Prime OTTI credit charges of $3.2 million in second quarter 2012. The Bank was not significantly impacted by the deterioration in the subprime market, as there is very little subprime private label MBS in the portfolio.

The overall portfolio's performance has stabilized in terms of delinquencies, and the credit enhancement (CE) levels continue to decline as foreclosures make their way through the system. Additionally, certain types and vintages of securities feel greater stress than others. Quarterly OTTI assumption changes during the second quarter of 2012 did not significantly impact the Bank; however, assumption changes in future periods could materially impact the amount of recorded OTTI credit-related losses. Additionally, if the performance of the underlying loan collateral deteriorates, the Bank could experience further credit losses on the portfolio. The Bank cannot estimate the future amount of additional credit losses. See Note 6 - OTTI to the unaudited financial statements in this Form 10-Q for additional information regarding the key modeling assumptions for OTTI measurement.

Net Interest Income. The increase in net interest income was driven by two main factors: favorable funding costs and an

3

increase in interest income from advance prepayment fees. This was partially offset by lower interest income from investments and mortgage loans held for portfolio. As a result, the net interest margin for second quarter 2012 increased nine basis points to 36 basis points compared to second quarter 2011. Going forward as private label MBS, which are generally higher-coupon assets, pay down and otherwise decline, the Bank expects to replace such investments with lower-yielding, less risky agency and government-sponsored enterprise (GSE) MBS. In addition, the runoff of higher-yielding mortgage assets was replaced by an increase in advance demand during the second quarter of 2012.
 
Financial Condition. Advances. Advances totaled $33.6 billion at June 30, 2012 compared to $30.6 billion at December 31, 2011. The average advance portfolio balance also increased, up 23% from second quarter 2011. Demand for advances has increased primarily due to increased member liquidity needs and attractive advance rates relative to other wholesale funding sources. Although the size of the advance portfolio increased during the first six months of 2012, the average life of an advance has decreased, as evidenced in the swing of short-term advance balances. At June 30, 2012, nearly 59% of the par value of advances in the portfolio had a remaining maturity of one year or less, compared to 48% at December 31, 2011. A large portion of short-term advances has historically been rolled over upon maturity.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) member reaction to the Bank's decision to execute partial excess stock repurchases and pay a dividend; (4) the Bank's liquidity position and how management chooses to fund the Bank; (5) current and future credit market conditions; (6) housing market trends; and (7) the shape of the yield curve. The low interest rate environment that has persisted for a substantial period of time has not appeared to affect members' advance demand. Rather, low advance demand that the Bank has experienced in the recent past has been driven primarily by the significant increase in members' liquidity due to higher retail deposits and an overall decrease in the size of members' balance sheets.

Investments. At June 30, 2012, the Bank held $18.3 billion of total investment securities, including trading, available-for-sale (AFS) and held-to-maturity (HTM) investment securities as well as securities purchased under agreement to resell, interest-bearing deposits, and Federal funds sold. This total included $2.9 billion of private label MBS, of which $0.9 billion was rated "investment grade" and $2.0 billion was rated "below investment grade." The Bank has experienced overall improvement in the fair value of its private label MBS portfolio since the low point at the end of 2008. Prices can change for many reasons; the Bank is unable to predict future prices on these investments. The overall balance of the private label MBS continues to decline, primarily due to paydowns.

Consolidated Obligations of the FHLBank System. FHLBank monthly bond trading volume averaged $41 billion during the second quarter of 2012, and similar to the first quarter, was somewhat uneven in nature. On a weighted average basis, when compared to 3-month LIBOR, FHLBank monthly bond funding costs were relatively stable during the quarter but did worsen slightly when compared to first quarter 2012. Reversing a first quarter decline, FHLBank consolidated obligations outstanding increased approximately $27 billion in the second quarter 2012 to $685 billion at June 30, 2012, driven by net supply increases in both consolidated bonds and discount notes.

The Bank's consolidated obligations totaled $50.6 billion at June 30, 2012, an increase of $4.1 billion since December 31, 2011. The increase in consolidated obligations was due to a $5.3 billion increase in discount notes, partially offset by a $1.2 billion decrease in bonds. At June 30, 2012, bonds represented 67.9% of the Bank's consolidated obligations, compared with 76.5% at December 31, 2011. Discount notes represented 32.1% of the Bank's consolidated obligations at the end of the second quarter 2012 compared with 23.5% at year-end 2011. As the maturities on advances have shortened, the Bank has shortened its maturities on consolidated obligations.

Capital Position and Regulatory Requirements. Total retained earnings at June 30, 2012 were $478.7 million, up from $435.3 million at year-end 2011 reflecting first half 2012 net income slightly offset by dividends paid. Accumulated other comprehensive income (AOCI) related to the noncredit portion of OTTI losses on AFS securities improved from $(168.1) million at December 31, 2011 to $(96.7) million at June 30, 2012, primarily due to paydowns in the private label MBS portfolio.

In the Finance Agency's most recent determination, as of March 31, 2012, the Bank was deemed "adequately capitalized." In its determination, the Finance Agency expressed concerns regarding the Bank's capital position. The Finance Agency believes that the Bank's retained earnings are not sufficient and the poor quality of its private label MBS portfolio creates uncertainty about the Bank's earnings prospects and ability to build retained earnings at a satisfactory pace. The Finance Agency continues to monitor the Bank's capital adequacy. As provided for under the Finance Agency's final rule on FHLBank capital classification and critical capital levels, the Director of the Finance Agency has discretion to reclassify the Bank's capital classification even if the Bank meets or exceeds the regulatory requirements established. As of the date of this filing, the Bank

4

has not received final notice from the Finance Agency regarding its capital classification for the quarter ended June 30, 2012. The Bank exceeded its risk-based, total and leverage capital requirements at June 30, 2012, as presented in the Capital Resources section of this Item 2.

The Bank measures capital adequacy with the key risk indicator Market Value of Equity to Par Value of Capital Stock (MV/CS). As of June 30, 2012, the floor established by the Board for this metric was 90.0%, representing the estimated level from which the MV/CS would recover to par through the retention of earnings over the 5-year redemption period of the Bank's capital stock. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are required to be restricted. See the "Risk Governance" section of Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K for additional details.

Because the MV/CS ratio was 105.7% at June 30, 2012, above the floor of 90.0%, the Bank performed additional analysis of the adequacy of capital, taking into consideration the impact of potential excess capital stock repurchases and/or dividend payouts. As a result of the analysis, on July 31, 2012, the Bank executed a partial repurchase of excess capital stock and paid a dividend to members. The Bank repurchased the lesser of nearly 9.6% of each member's total stock or its excess stock. The total amount of excess capital stock repurchased was approximately $200 million. This was the Bank's eighth consecutive quarter of excess capital stock repurchases. Additionally, on July 31, 2012, the Bank paid an annualized dividend of 10 basis points per share. This was the Bank's third consecutive quarterly dividend.

Management has a framework for evaluating retained earnings adequacy. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The retained earnings target generated from this framework is sensitive to favorable and unfavorable changes in the Bank's risk profile. The framework assists the Board and management in their overall analysis of the level of future excess stock repurchases and dividends. See the "Capital and Retained Earnings" discussion in Financial Condition in Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K for additional details regarding the retained earnings framework.

Decisions regarding any future repurchases of excess capital stock and payment of dividends will be made on a quarterly basis. The Bank will continue to monitor the condition of its private label MBS portfolio, its overall financial performance and retained earnings (including analysis based on the framework noted above), developments in the mortgage and credit markets, and other relevant information as the basis for determining the status of dividends and excess capital stock repurchases in future quarters.

5


Financial Highlights

The Condensed Statement of Income data for the three and six months ended June 30, 2012 and the Condensed Statement of Condition data as of June 30, 2012 are unaudited and were derived from the financial statements included in this Form 10-Q. Except for data as of December 31, 2011 and the three months then ended, the Condensed Statement of Income and Condensed Statement of Condition data for all other quarterly periods is unaudited and was derived from the applicable quarterly reports filed on Form 10-Q. The Condensed Statement of Condition data as of December 31, 2011 was derived from the audited financial statements in the Bank's 2011 Form 10-K. The Condensed Statement of Income data for the three months ended December 31, 2011 is unaudited and was derived from the Bank's 2011 Form 10-K.

Condensed Statement of Income
 
Three Months Ended
 
June 30,
March 31,
December 31,
September 30,
June 30,
(in millions, except per share data)
2012
2012
2011
2011
2011
Net interest income
$
49.9

$
42.2

$
41.7

$
37.5

$
36.0

Provision for credit losses
—

0.1

3.7

2.4

1.1

Other noninterest income (loss):
 
 
 
 
 
  Net OTTI losses, credit portion (1)
(3.6
)
(7.2
)
(7.6
)
(6.2
)
(10.8
)
  Net gains (losses) on derivatives and
    hedging activities
(4.9
)
4.0

(0.5
)
(5.3
)
(0.7
)
  Net realized gains from sale of AFS securities
—

—

—

—

7.3

  Other income, net
1.8

2.8

3.0

2.3

2.1

Total other noninterest loss
(6.7
)
(0.4
)
(5.1
)
(9.2
)
(2.1
)
Other expense
17.4

17.5

20.8

12.2

15.6

Income before assessments
25.8

24.2

12.1

13.7

17.2

Assessments (2)
2.6

2.4

1.2

1.8

4.5

Net income
$
23.2

$
21.8

$
10.9

$
11.9

$
12.7

Earnings per share (3)
$
0.76

$
0.69

$
0.32

$
0.34

$
0.34

Dividends (4)
$
0.8

$
0.9

$
—

$
—

$
—

Dividend payout ratio
3.40
%
3.91
%
—

—

—

Return on average equity
2.70
%
2.51
%
1.19
%
1.23
%
1.27
%
Return on average assets
0.16
%
0.16
%
0.09
%
0.09
%
0.09
%
Net interest margin (5)
0.36
%
0.32
%
0.34
%
0.30
%
0.27
%
Regulatory capital ratio (6)
6.77
%
7.03
%
7.44
%
8.45
%
7.91
%
Total capital ratio (at period-end) (7)
6.26
%
6.48
%
6.47
%
8.05
%
7.59
%
Total average equity to average assets
6.09
%
6.50
%
7.37
%
7.53
%
7.69
%




6


Condensed Statement of Income

 
Six Months Ended
 
June 30,
June 30,
(in millions, except per share data)
2012
2011
Net interest income
$
92.1

$
75.2

Provision for credit losses
0.1

3.9

Other noninterest income (loss):
 
 
  Net OTTI losses, credit portion (1)
(10.8
)
(31.3
)
  Net gains (losses) on derivatives and hedging activities
(0.9
)
0.1

  Net realized gains from sale of AFS securities
—

7.3

  Other income, net
4.6

5.2

Total other noninterest loss
(7.1
)
(18.7
)
Other expense
34.9

32.0

Income before assessments
50.0

20.6

Assessments (2)
5.0

5.4

Net income
$
45.0

$
15.2

Earnings per share (3)
$
1.44

$
0.40

Dividends (4)
$
1.7

$
—

Dividend payout ratio
3.64
%
—

Return on average equity
2.61
%
0.76
%
Return on average assets
0.16
%
0.06
%
Net interest margin (5)
0.34
%
0.29
%
Regulatory capital ratio (6)
6.77
%
7.91
%
Total capital ratio (at period-end) (7)
6.26
%
7.59
%
Total average equity to average assets
6.29
%
7.61
%
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) Includes Resolution Funding Corporation (REFCORP) assessments through second quarter 2011. On August 5, 2011, the FHLBanks fully satisfied the REFCORP obligation; as a result, REFCORP assessments ceased after the second quarter of 2011. Also includes Affordable Housing Program (AHP) assessments for all periods presented.
(3) Calculated based on net income.
(4) On February 23, 2012 and April 30, 2012, the Bank paid a dividend of 0.10% annualized.
(5) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(6) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(7) Total capital ratio is capital stock plus retained earnings and AOCI as a percentage of total assets at period-end.



7


Condensed Statement of Condition
 
June 30,
March 31,
December 31,
September 30,
June 30,
(in millions)
2012
2012
2011
2011
2011
Cash and due from banks
$
287.2

$
198.0

$
634.3

$
195.7

$
1,468.1

Investments(1)
18,313.7

17,694.0

16,639.5

16,526.3

19,185.5

Advances
33,617.2

31,446.4

30,604.8

25,838.6

26,912.4

Mortgage loans held for portfolio, net(2)
3,620.9

3,726.6

3,883.1

4,031.2

4,131.3

Total assets
56,052.2

53,291.2

51,994.3

46,828.7

51,946.8

Consolidated obligations, net:
 
 
 
 
 
 Discount notes
16,262.7

11,794.4

10,921.5

7,465.9

10,815.0

 Bonds
34,381.2

35,709.3

35,613.0

33,657.3

34,891.6

Total consolidated obligations, net(3)
50,643.9

47,503.7

46,534.5

41,123.2

45,706.6

Deposits
1,102.7

1,275.5

1,099.7

1,222.7

1,192.0

Mandatorily redeemable capital stock
207.7

194.1

45.7

48.1

31.5

AHP payable
16.9

15.5

13.6

13.1

12.8

REFCORP payable
—

—

—

—

3.1

Total liabilities
52,542.3

49,838.3

48,331.4

43,057.6

48,002.4

Capital stock - putable
3,109.8

3,097.3

3,389.9

3,483.7

3,664.0

Restricted retained earnings (4)
13.6

8.9

4.5

2.4

—

Unrestricted retained earnings
465.1

447.3

430.8

422.0

412.5

AOCI
(78.6
)
(100.6
)
(162.3
)
(137.0
)
(132.1
)
Total capital
3,509.9

3,452.9

3,662.9

3,771.1

3,944.4

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreement to resell and interest-bearing deposits.
(2) Includes allowance for credit losses of $14.1 million at June 30, 2012, $14.3 million at March 31, 2012 and December 31, 2011, $11.5 million at September 30, 2011, and $9.2 million at June 30, 2011.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $685.2 billion, $658.0 billion, $691.9 billion, $696.5 billion and $727.5 billion at June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011 and June 30, 2011, respectively.
(4) Prior to September 30, 2011, all retained earnings were unrestricted.

Adjusted Earnings. Adjusted earnings are considered to be a non-GAAP measurement. Results based on this definition of adjusted earnings are presented below.

Because of the nature of (1) OTTI credit charges and (2) the gains (losses) on sales of OTTI securities, the Bank believes that adjusting net income for these items, including applicable assessments, and evaluating these results as adjusted (which the Bank defines as "adjusted earnings") is important to understand how the Bank is performing with respect to its primary business operations and to provide meaningful comparisons to prior periods.

The Bank's primary business operations include the following: lending to members (advances); maintaining an investment portfolio for liquidity, derivative counterparty collateral, and earnings purposes; participating in the Mortgage Partnership Finance (MPF) Program by purchasing mortgage loans originated by or through members; offering other credit and noncredit products to members, including letters of credit, interest rate exchange agreements, affordable housing grants, securities safekeeping, and deposits products and services; issuing consolidated obligations to fund the Bank's operations in these programs; and providing funding for housing and economic development in its district's communities.

 

8


Statement of Income
Reconciliation of GAAP Earnings to Non-GAAP Adjusted Earnings
 
Three Months Ended June 30, 2012

(in millions)
GAAP
Earnings
Private Label MBS-OTTI Activity
Non-GAAP Adjusted
Earnings
Net interest income
$
49.9

$
—

$
49.9

Provision for credit losses
—

—

—

Other noninterest income (loss):
 
 

 Net OTTI losses, credit portion
(3.6
)
3.6

—

 Net losses on derivatives and hedging activities
(4.9
)
—

(4.9
)
 Other income, net
1.8

—

1.8

Total other noninterest income (loss)
(6.7
)
3.6

(3.1
)
Other expense
17.4

—

17.4

Income before assessments
25.8

3.6

29.4

Assessments 
2.6

0.4

3.0

Net income
$
23.2

$
3.2

$
26.4

Earnings per share
$
0.76

$
0.10

$
0.86

 
 
 
 
Return on average equity
2.70
%
0.39
%
3.09
%
Return on average assets
0.16
%
0.03
%
0.19
%


 
Three Months Ended June 30, 2011

(in millions)
GAAP
Earnings
Private Label MBS-OTTI Activity
Non-GAAP Adjusted
Earnings
Net interest income
$
36.0

$
—

$
36.0

Provision for credit losses
1.1

—

1.1

Other noninterest income (loss):
 
 
 
 Net OTTI losses, credit portion
(10.8
)
10.8

—

 Net losses on derivatives and hedging activities
(0.7
)
—

(0.7
)
 Net realized gains on AFS securities
7.3

(7.3
)
—

 Other income, net
2.1

—

2.1

Total other noninterest income (loss)
(2.1
)
3.5

1.4

Other expense
15.6

—

15.6

Income before assessments
17.2

3.5

20.7

Assessments 
4.5

0.9

5.4

Net income
$
12.7

$
2.6

$
15.3

Earnings per share
$
0.34

$
0.07

$
0.41

 
 
 
 
Return on average equity
1.27
%
0.27
%
1.54
%
Return on average assets
0.09
%
0.02
%
0.11
%

9


 
Six Months Ended June 30, 2012

(in millions)
GAAP
Earnings
Private Label MBS-OTTI Activity
Non-GAAP Adjusted
Earnings
Net interest income
$
92.1

$
—

$
92.1

Provision for credit losses
0.1

—

0.1

Other noninterest income (loss):
 
 
 
 Net OTTI losses, credit portion
(10.8
)
10.8

—

 Net losses on derivatives and hedging activities
(0.9
)
—

(0.9
)
 Other income, net
4.6

—

4.6

Total other noninterest income (loss)
(7.1
)
10.8

3.7

Other expense
34.9

—

34.9

Income before assessments
50.0

10.8

60.8

Assessments 
5.0

1.0

6.0

Net income
$
45.0

$
9.8

$
54.8

Earnings per share
$
1.44

$
0.31

$
1.75

 
 
 
 
Return on average equity
2.61
%
0.56
%
3.17
%
Return on average assets
0.16
%
0.04
%
0.20
%


 
Six Months Ended June 30, 2011

(in millions)
GAAP
Earnings
Private Label MBS-OTTI Activity
Non-GAAP Adjusted
Earnings
Net interest income
$
75.2

$
—

$
75.2

Provision for credit losses
3.9

—

3.9

Other noninterest income (loss):
 
 
 
 Net OTTI losses, credit portion
(31.3
)
31.3

—

 Net gains on derivatives and hedging activities
0.1

—

0.1

 Net realized gains on AFS securities
7.3

(7.3
)
—

 Other income, net
5.2

—

5.2

Total other noninterest income (loss)
(18.7
)
24.0

5.3

Other expense
32.0

—

32.0

Income before assessments
20.6

24.0

44.6

Assessments 
5.4

6.3

11.7

Net income
$
15.2

$
17.7

$
32.9

Earnings per share
$
0.40

$
0.86

$
1.26

 
 
 
 
Return on average equity
0.76
%
0.88
%
1.64
%
Return on average assets
0.06
%
0.06
%
0.12
%



10

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the second quarter and six months ended June 30, 2012 and 2011, which should be read in conjunction with the Bank's unaudited interim financial statements included in this Form 10-Q as well as the audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2011 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank recorded net income of $23.2 million for second quarter 2012, compared to $12.7 million for second quarter 2011. This improvement was driven primarily by higher net interest income and lower net OTTI credit losses on the Bank's private label MBS portfolio. Net interest income was $49.9 million for second quarter 2012 compared to $36.0 million in second quarter 2011, an increase of $13.9 million. This increase was due to favorable funding costs and increased interest income related to advance prepayment fees, partially offset by lower interest income from investments and mortgage loans held for portfolio. Net OTTI credit losses were $3.6 million and $10.8 million for the three months ended June 30, 2012 and 2011, respectively. Partially offsetting these improvements was $7.3 million of net gains from the sale of an AFS security in the second quarter of 2011 and a $4.1 million increase in net losses on derivatives and hedging activities in the second quarter of 2012. The Bank's return on average equity for second quarter 2012 was 2.70%, compared to 1.27% for second quarter 2011.

The Bank recorded net income of $45.0 million for the six months ended June 30, 2012, compared to $15.2 million for the six months ended June 30, 2011. This increase was driven primarily by higher net interest income and lower net OTTI credit losses, partially offset by $7.3 million of net gains from the sale of an AFS security noted above. For the first six months of 2012, net interest income was $92.1 million, an increase of $16.9 million from $75.2 million in the same prior-year period. Higher net interest income for the first half of 2012 reflected favorable funding costs and increased interest income related to advance prepayment fees, partially offset by lower interest income from investments and mortgage loans held for portfolio. The OTTI losses were $10.8 million and $31.3 million for the six months ended June 30, 2012 and 2011, respectively. The Bank's return on average equity for the first half of 2012 was 2.61%, compared to 0.76% for the comparable prior year period.

Adjusted Earnings. As presented in Financial Highlights, adjusted earnings for the three months ended June 30, 2012 and 2011 exclude the impact of OTTI charges, gains on sale of OTTI securities and related assessments, as applicable. For second quarter 2012, the Bank's adjusted earnings totaled $26.4 million, an increase of $11.1 million over second quarter 2011 adjusted earnings. Higher net interest income, partially offset by higher net losses on derivatives and hedging activities resulted in higher adjusted earnings. The Bank's adjusted return on average equity was 3.09% for second quarter 2012, compared to 1.54% percent for second quarter 2011.

Adjusted earnings for the six months ended June 30, 2012 and 2011 totaled $54.8 million and $32.9 million, respectively. This increase was driven primarily by higher net interest income and a lower provision for credit losses. The Bank's adjusted return on average equity was 3.17% for the six months ended June 30, 2012, compared to 1.64% percent for the same prior year period.



11

Net Interest Income

The following tables summarize the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for the three and six months ended June 30, 2012 and 2011.

Average Balances and Interest Yields/Rates Paid
 
Three Months Ended June 30,
 
2012
2011


(dollars in millions)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
Federal funds sold and Securities purchased under
  agreements to resell(1)
$
4,824.6

$
1.7

0.15
$
5,102.3

$
1.0

0.08
Interest-bearing deposits(2)
512.6

0.2

0.16
334.5

0.1

0.09
Investment securities(3)
14,156.7

67.9

1.93
16,506.7

81.3

1.98
Advances(4) 
32,936.5

72.8

0.89
26,885.7

61.8

0.92
Mortgage loans held for portfolio(5)
3,687.0

42.5

4.64
4,198.1

51.4

4.91
Total interest-earning assets
56,117.4

185.1

1.33
53,027.3

195.6

1.48
Allowance for credit losses
(17.0
)
 
 
(11.8
)
 
 
Other assets(6)
642.6

 
 
567.3

 
 
Total assets
$
56,743.0

 
 
$
53,582.8

 
 
Liabilities and capital:
 
 
 
 
 
 
Deposits (2)
$
1,160.3

$
0.2

0.05
$
1,137.0

$
0.1

0.03
Consolidated obligation discount notes
15,126.9

4.1

0.11
13,131.2

3.4

0.10
Consolidated obligation bonds(7)
35,433.6

130.8

1.49
33,886.0

156.1

1.85
Other borrowings
216.1

0.1

0.12
32.0

—

0.12
Total interest-bearing liabilities
51,936.9

135.2

1.05
48,186.2

159.6

1.33
Other liabilities
1,351.4

 
 
1,400.5

 
 
Total capital
3,454.7

 
 
3,996.1

 
 
Total liabilities and capital
$
56,743.0

 
 
$
53,582.8

 
 
Net interest spread
 
 
0.28
 
 
0.15
Impact of noninterest-bearing funds
 
 
0.08
 
 
0.12
Net interest income/net interest margin
 
$
49.9

0.36
 
$
36.0

0.27
Notes:
(1)The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2)Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statement of Condition as derivative assets/liabilities.
(3)Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4)Average balances reflect noninterest-earning hedge accounting adjustments of $1.2 billion and $1.1 billion in 2012 and 2011, respectively.
(5)Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6)The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7)Average balances reflect noninterest-bearing hedge accounting adjustments of $309.8 million and $255.1 million in 2012 and 2011, respectively.

Net interest income for second quarter 2012 increased $13.9 million over second quarter 2011. Yields on interest-earning assets declined 15 basis points, which was primarily due to lower yields on investment securities and mortgage loans as maturing assets continue to be replaced at a lower-yield. The rate paid on interest-bearing liabilities declined 28 basis points due to lower funding costs on bonds and an increase in the level of discount notes relative to the total debt portfolio. This increase resulted in a 13 basis point improvement in the net interest spread. Average interest-earning assets increased 6% with higher demand for advances being partially offset by lower investments.


12

Average Balances and Interest Yields/Rates Paid
 
Six Months Ended June 30,
 
2012
2011


(dollars in millions)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
Federal funds sold and Securities purchased under
  agreements to resell(1)
$
4,354.5

$
2.7

0.13
$
5,022.3

$
2.7

0.11
Interest-bearing deposits(2)
527.4

0.3

0.13
333.7

0.2

0.12
Investment securities(3)
14,238.4

137.1

1.94
16,036.1

169.2

2.13
Advances(4) 
31,761.2

143.0

0.91
27,246.3

126.0

0.93
Mortgage loans held for portfolio(5)
3,749.1

87.5

4.69
4,284.8

104.0

4.89
Total interest-earning assets
54,630.6

370.6

1.36
52,923.2

402.1

1.53
Allowance for credit losses
(17.1
)
 
 
(10.3
)
 
 
Other assets(6)
598.8

 
 
485.7

 
 
Total assets
$
55,212.3

 
 
$
53,398.6

 
 
Liabilities and capital:
 
 
 
 
 
 
Deposits (2)
$
1,164.1

$
0.3

0.05
$
1,142.8

$
0.3

0.04
Consolidated obligation discount notes
13,829.6

5.9

0.09
12,866.5

8.6

0.13
Consolidated obligation bonds(7)
35,146.0

272.1

1.56
33,918.2

318.0

1.89
Other borrowings
211.0

0.2

0.13
34.7

—

0.13
Total interest-bearing liabilities
50,350.7

278.5

1.11
47,962.2

326.9

1.37
Other liabilities
1,390.3

 
 
1,372.9

 
 
Total capital
3,471.3

 
 
4,063.5

 
 
Total liabilities and capital
$
55,212.3

 
 
$
53,398.6

 
 
Net interest spread
 
 
0.25
 
 
0.16
Impact of noninterest-bearing funds
 
 
0.09
 
 
0.13
Net interest income/net interest margin
 
$
92.1

0.34
 
$
75.2

0.29
Notes:
(1)The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2)Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statement of Condition as derivative assets/liabilities.
(3)Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM securities are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4)Average balances reflect noninterest-earning hedge accounting adjustments of $1.2 billion and $1.1 billion in 2012 and 2011, respectively.
(5)Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6)The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7)Average balances reflect noninterest-bearing hedge accounting adjustments of $326.9 million and $257.2 million in 2012 and 2011, respectively.

Net interest income for year-to-date June 30, 2012 increased $16.9 million from the same year-ago period. Yields on interest-earning assets declined 17 basis points primarily due to lower yields on investment securities and mortgage loans as maturing assets continue to be replaced at a lower yield. The rate paid on interest-bearing liabilities declined 26 basis points due to lower funding costs on bonds and discount notes, which resulted in a 9 basis point improvement in the net interest spread. Average interest-earning assets increased 3%, with higher demand for advances being partially offset by lower investments.


13

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three and six months ended June 30, 2012 and 2011.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in
Rate/Volume
 
Three Months Ended June 30
Six Months Ended June 30
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold
$
(0.1
)
$
0.8

$
0.7

$
(0.4
)
$
0.4

$
—

Interest-bearing deposits
—

0.1

0.1

0.1

—

0.1

Investment securities
(11.4
)
(2.0
)
(13.4
)
(17.5
)
(14.6
)
(32.1
)
Advances
13.3

(2.3
)
11.0

20.8

(3.8
)
17.0

Mortgage loans held for portfolio
(6.2
)
(2.7
)
(8.9
)
(12.4
)
(4.1
)
(16.5
)
 Total interest-earning assets
$
(4.4
)
$
(6.1
)
$
(10.5
)
$
(9.4
)
$
(22.1
)
$
(31.5
)
 
 
 
 
 
 
 
Interest-bearing deposits
$
—

$
0.1

$
0.1

$
—

$
—

$
—

Consolidated obligation discount notes
0.5

0.2

0.7

0.6

(3.3
)
(2.7
)
Consolidated obligation bonds
6.4

(31.7
)
(25.3
)
12.1

(58.0
)
(45.9
)
Other borrowings
0.1

—

0.1

0.2

—

0.2

 Total interest-bearing liabilities
$
7.0

$
(31.4
)
$
(24.4
)
$
12.9

$
(61.3
)
$
(48.4
)
Total increase (decrease) in net interest income
$
(11.4
)
$
25.3

$
13.9

$
(22.3
)
$
39.2

$
16.9


Interest income and interest expense decreased in both the quarter-over-quarter and year-over-year comparisons. For both comparisons, the decline in interest income was driven by rate and volume declines, while the interest expense decline was rate driven and partially offset by a volume increase. The decline in interest income was from the investment portfolio and mortgage loans held for portfolio, partially offset by an increase in the advances portfolio. Interest income from the investment and mortgage portfolios declined due to decreases in rates and volume. The increase in interest income from the advances portfolio was due to an increase in volume which was partially offset by a small decrease due to rates. A decrease in rates paid for consolidated obligation bonds drove the decline in interest expense, partially offset by an increase in volume.

The investment securities portfolio includes trading, AFS and HTM securities. Average investment balances decreased quarter-over-quarter and year-over-year, leading to the volume decline in interest income. In both comparisons, the decline was driven by certificates of deposit balances, partially offset by increases in agency notes and agency MBS balances. Agency MBS balances increased as purchases exceeded the run-off of the existing MBS portfolio. The Bank has not purchased any private label MBS since late 2007, purchasing only agency and GSE MBS since 2008, including approximately $1.5 billion in 2012. The rate decrease was primarily related to the MBS portfolio as lower-yielding agency MBS have replaced the run-off of higher-yielding private label MBS.
 

14

Average Advances Portfolio Detail

The following table presents the average par balances of the Bank's advance portfolio for the three and six months ended June 30, 2012 and 2011. These balances do not reflect any hedge accounting adjustments.
(in millions)
Three Months Ended June 30,
Six Months Ended June 30,
Product
2012
2011
2012
2011
Repo/Mid-Term Repo
$
11,157.5

$
7,552.7

$
10,230.7

$
7,723.7

Core (Term)
17,055.9

12,906.7

16,580.6

13,159.1

Convertible Select
3,527.6

5,202.3

3,706.9

5,122.6

Total par value
$
31,741.0

$
25,661.7

$
30,518.2

$
26,005.4


The average advances portfolio increased quarter-over-quarter and year-over-year. This increase in volume resulted in an increase in interest income partially offset by a slight decrease in the yield. Demand for advances increased in fourth quarter 2011 and continued through the first half of 2012. Attractive advance rates and member's liquidity needs contributed to the recent increase in advance balances. The yield on this portfolio dropped slightly in both comparisons.

The average mortgage loans held for portfolio balance declined quarter-over-quarter and year-over-year. The related interest income on the portfolio also declined. In both comparisons the portfolio balance decreased due to the continued run-off of the existing portfolio, which more than offset purchases of new loans. Interest income decreased due to the lower average portfolio balances and a lower yield on the portfolio. The yield decreased due to new lower yielding mortgage loans replacing the runoff of higher yielding loans and an increase in nonperforming loans in the comparison period.
The consolidated obligations portfolio balance increased quarter-over-quarter and year-over-year on increases in average bond and discount note balances. Interest expense on bonds declined in the comparison periods as the decrease in rates paid more than offset the increase in volume. The rate decrease was primarily due to falling longer term rates as longer term debt was called and replaced with lower-paying bonds. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore, as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.
Market conditions continued to impact the cost of the Bank's consolidated obligations. In the third quarter of 2011, the European sovereign debt crisis re-emerged, leading to an improvement in funding levels, primarily realized in shorter-term consolidated obligations. This trend continued for the remainder of 2011. Funding levels, relative to LIBOR, have approached more customary levels during the first half of 2012.

15

Interest Income Derivative Effects. The following tables separately quantify the effects of the Bank's derivative activities on its interest income and interest expense for the three and six months ended June 30, 2012 and 2011. Derivative and hedging activities are discussed below.

Three Months Ended
June 30, 2012

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
32,936.5

$
72.8

0.89
$
178.0

2.17
$
(105.2
)
(1.28
)
Mortgage loans held for
 portfolio
3,687.0

42.5

4.64
43.5

4.75
(1.0
)
(0.11
)
All other interest-earning
 assets
19,493.9

69.8

1.44
69.8

1.44
—

—

Total interest-earning
 assets
$
56,117.4

$
185.1

1.33
$
291.3

2.09
$
(106.2
)
(0.76
)
Liabilities and capital:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
35,433.6

$
130.8

1.49
$
186.9

2.12
$
(56.1
)
(0.63
)
All other interest-bearing
 liabilities
16,503.3

4.4

0.11
4.4

0.11
—

—

Total interest-bearing
 liabilities
$
51,936.9

$
135.2

1.05
$
191.3

1.48
$
(56.1
)
(0.43
)
Net interest income/net
 interest spread
 
$
49.9

0.28
$
100.0

0.61
$
(50.1
)
(0.33
)

Three Months Ended
June 30, 2011

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
26,885.7

$
61.8

0.92
$
200.6

2.99
$
(138.8
)
(2.07
)
Mortgage loans held for
 portfolio
4,198.1

51.4

4.91
52.0

4.97
(0.6
)
(0.06
)
All other interest-earning
 assets
21,943.5

82.4

1.51
82.4

1.51
—

—

Total interest-earning
 assets
$
53,027.3

$
195.6

1.48
$
335.0

2.53
$
(139.4
)
(1.05
)
Liabilities and capital:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
33,886.0

$
156.1

1.85
$
221.8

2.63
$
(65.7
)
(0.78
)
All other interest-bearing
 liabilities
14,300.2

3.5

0.10
3.5

0.10
—

—

Total interest-bearing
 liabilities
$
48,186.2

$
159.6

1.33
$
225.3

1.88
$
(65.7
)
(0.55
)
Net interest income/net
 interest spread

$
36.0

0.15
$
109.7

0.65
$
(73.7
)
(0.50
)
  


16

Six Months Ended
June 30, 2012

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
31,761.2

$
143.0

0.91
$
358.9

2.27
$
(215.9
)
(1.36
)
Mortgage loans held for
 portfolio
3,749.1

87.5

4.69
89.3

4.79
(1.8
)
(0.10
)
All other interest-earning
 assets
19,120.3

140.1

1.47
140.1

1.47
—

—

Total interest-earning
 assets
$
54,630.6

$
370.6

1.36
$
588.3

2.16
$
(217.7
)
(0.80
)
Liabilities and capital:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
35,146.0

$
272.1

1.56
$
374.3

2.14
$
(102.2
)
(0.58
)
All other interest-bearing
 liabilities
15,204.7

6.4

0.08
6.4

0.08
—

—

Total interest-bearing
 liabilities
$
50,350.7

$
278.5

1.11
$
380.7

1.52
$
(102.2
)
(0.41
)
Net interest income/net
 interest spread
 
$
92.1

0.25
$
207.6

0.64
$
(115.5
)
(0.39
)
 
Six Months Ended
June 30, 2011

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
27,246.3

$
126.0

0.93
$
407.6

3.02
$
(281.6
)
(2.09
)
Mortgage loans held for
 portfolio
4,284.8

104.0

4.89
105.5

4.97
(1.5
)
(0.08
)
All other interest-earning
 assets
21,392.1

172.1

1.62
172.1

1.62
—

—

Total interest-earning
 assets
$
52,923.2

$
402.1

1.53
$
685.2

2.61
$
(283.1
)
(1.08
)
Liabilities and capital:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
33,918.2

$
318.0

1.89
$
451.8

2.69
$
(133.8
)
(0.80
)
All other interest-bearing
 liabilities
14,044.0

8.9

0.13
8.9

0.13
—

—

Total interest-bearing
 liabilities
$
47,962.2

$
326.9

1.37
$
460.7

1.93
$
(133.8
)
(0.56
)
Net interest income/net
 interest spread
 
$
75.2

0.16
$
224.5

0.68
$
(149.3
)
(0.52
)
Note:
(1)Impact of Derivatives includes net interest settlements, amortization of basis adjustments resulting from previously terminated hedging relationships and the amortization of the market value of mortgage purchase commitments classified as derivatives at the time the commitment settled.

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.


17

The impact of derivatives reduced net interest income and net interest spread for the quarters and six months ended June 30, 2012 and 2011.

The Bank uses many different funding and hedging strategies. One strategy involves closely match-funding bullet advances with bullet debt. This is designed in part to (1) avoid the use of derivatives where prudent, (2) restrain growth in the size of the Bank's derivatives portfolio, and (3) reduce the Bank's reliance on short-term funding.

In addition, the Bank has a program to lower derivative counterparty credit exposure by reducing the number of derivatives outstanding without materially impacting the Bank's risk or earnings profiles. Basis adjustments (BAs) that are created as a result of the discontinuation of fair value hedge accounting upon termination of the swaps are accreted or amortized over the remaining lives of the advances or debt. This strategy will result in additional accretion and amortization of BAs which will be reflected in the Statement of Income within net interest income. If there are significant prepayments of advances that have associated BAs, there will be an acceleration of the amortization of the related BA, which may or may not be offset by prepayment fees. If a significant number of instruments prepay, this will result in volatility within interest income in the Statement of Income.

Provision for Credit Losses. The provision for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for the three months ended June 30, 2012 was less than $0.1 million compared to $1.1 million for the same period in 2011. The decrease quarter over quarter was primarily due to the MPF portfolio experiencing decreased delinquencies and increased credit enhancements.

The provision for credit losses on mortgage loans held for portfolio and BOB loans for the six months ended June 30, 2012 was $0.1 million compared to $3.9 million in the same prior year period. The decrease was primarily due to decreases in delinquencies and estimated loss severities in the MPF Plus portfolio. In addition, the MPF Plus portfolio continues to run-off so the overall dollar exposure is lower and delinquent loans are being resolved.


18

Other Noninterest Income (Loss)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions)
2012
2011
2012
2011
  Total OTTI losses
$
(1.1
)
$
—

$
(2.2
)
$
(3.1
)
  OTTI losses reclassified (from) AOCI
(2.5
)
(10.8
)
(8.6
)
(28.2
)
Net OTTI losses, credit portion
(3.6
)
(10.8
)
(10.8
)
(31.3
)
Net gains (losses) on trading securities
(0.3
)
—

0.1

0.1

Net realized gains from sale of AFS securities
—

7.3

—

7.3

Net gains (losses) on derivatives and hedging activities
(4.9
)
(0.7
)
(0.9
)
0.1

Services fees
0.6

0.6

1.2

1.2

Other, net
1.5

1.5

3.3

3.9

Total other noninterest income (loss)
$
(6.7
)
$
(2.1
)
$
(7.1
)
$
(18.7
)

The Bank's higher total other noninterest losses for second quarter 2012 compared to second quarter 2011 reflected higher losses on derivatives and hedging activities. Lower net OTTI credit losses in 2012 were offset by a gain on the sale of an AFS security in 2011.

The Bank's lower total other noninterest losses for the first half of 2012 compared to the first half of 2011 reflected lower net OTTI credit losses in 2012 partially offset by a gain on sale of AFS securities in 2011.

See additional discussion on OTTI charges in Critical Accounting Policies and the “Credit and Counterparty Risk - Investments” discussion in Risk Management, both in this Item 2. The activity related to derivatives and hedging activities is discussed in more detail below.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, caps, floors and swaption agreements, referred to collectively as interest rate exchange agreements and more broadly as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives fair values are either recorded in the Statement of Income or AOCI within the Capital section of the Statement of Condition depending on the hedge strategy.

The Bank's hedging strategies consist of fair value and cash flow accounting hedges as well as economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but they do not qualify for hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes to generate profits nor does it have any cash flow hedges.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.


19

The following tables detail the net effect of derivatives and hedging activities for the three and six months ended June 30, 2012 and 2011.
 
Three Months Ended June 30, 2012
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest
    income (1)
$
(8.6
)
$
—

$
(1.0
)
$
9.4

$
(0.2
)
  Net interest settlements included in net interest income (2)
(96.6
)
—

—

46.7

(49.9
)
Total net interest income
$
(105.2
)
$
—

$
(1.0
)
$
56.1

$
(50.1
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
Gains (losses) on fair value hedges
$
(1.2
)
$
—

$
—

$
0.4

$
(0.8
)
Gains (losses) on derivatives not receiving hedge accounting
0.1

(3.6
)
(0.7
)
0.1

(4.1
)
Total net gains (losses) on derivatives and hedging activities
$
(1.1
)
$
(3.6
)
$
(0.7
)
$
0.5

$
(4.9
)
Total net effect of derivatives and hedging activities
$
(106.3
)
$
(3.6
)
$
(1.7
)
$
56.6

$
(55.0
)


 
Three Months Ended June 30, 2011
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest
    income (1)
$
(14.4
)
$
—

$
(0.6
)
$
9.6

$
(5.4
)
  Net interest settlements included in net interest income (2)
(124.4
)
—

—

56.1

(68.3
)
Total net interest income
$
(138.8
)
$
—

$
(0.6
)
$
65.7

$
(73.7
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
Gains (losses) on fair value hedges
$
(1.1
)
$
—

$
—

$
1.0

$
(0.1
)
Gains (losses) on derivatives not receiving hedge accounting
(0.2
)
(1.7
)
0.7

0.6

(0.6
)
Total net gains (losses) on derivatives and hedging activities
$
(1.3
)
$
(1.7
)
$
0.7

$
1.6

$
(0.7
)
Total net effect of derivatives and hedging activities
$
(140.1
)
$
(1.7
)
$
0.1

$
67.3

$
(74.4
)

20


 
Six Months Ended June 30, 2012
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
Amortization/accretion of hedging activities in net interest
   income (1)
$
(19.7
)
$
—

$
(1.8
)
$
15.9

$
(5.6
)
Net interest settlements included in net interest income (2)
(196.2
)
—

—

86.3

(109.9
)
Total net interest income
$
(215.9
)
$
—

$
(1.8
)
$
102.2

$
(115.5
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
  Gains on fair value hedges
$
0.7

$
—

$
—

$
1.2

$
1.9

  Gains (losses) on derivatives not receiving hedge accounting
(0.6
)
(3.7
)
0.4

1.1

(2.8
)
Total net gains (losses) on derivatives and hedging activities
$
0.1

$
(3.7
)
$
0.4

$
2.3

$
(0.9
)
Total net effect of derivatives and hedging activities
$
(215.8
)
$
(3.7
)
$
(1.4
)
$
104.5

$
(116.4
)

 
Six Months Ended June 30, 2011
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
Amortization/accretion of hedging activities in net interest
   income (1)
$
(28.8
)
$
—

$
(1.5
)
$
16.9

$
(13.4
)
Net interest settlements included in net interest income (2)
(252.8
)
—

—

116.9

(135.9
)
Total net interest income
$
(281.6
)
$
—

$
(1.5
)
$
133.8

$
(149.3
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
  Gains on fair value hedges
$
0.4

$
—

$
—

$
0.3

$
0.7

  Gains (losses) on derivatives not receiving hedge accounting
—

(2.1
)
0.8

0.5

(0.8
)
  Other
—

0.2

—

—

0.2

Total net gains (losses) on derivatives and hedging activities
$
0.4

$
(1.9
)
$
0.8

$
0.8

$
0.1

Total net effect of derivatives and hedging activities
$
(281.2
)
$
(1.9
)
$
(0.7
)
$
134.6

$
(149.2
)
Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) Represents interest income/expense on derivatives included in net interest income.

Fair Value Hedges. The Bank uses fair value hedge accounting treatment for most of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e. LIBOR). During the second quarter 2012 and 2011, total ineffectiveness related to these fair value hedges resulted in net losses. For the six months ended June 30, 2012 and 2011, total ineffectiveness related to these fair value hedges resulted in net gains. The total notional amount increased to $28.3 billion at June 30, 2012 from $27.4 billion at December 31, 2011. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as “economic hedges,” the Bank includes the net interest income and the changes in the fair value of the hedges in the "Net gains (losses) on derivatives and hedging activities" line item. For economic hedges, the Bank recorded net losses in both the second quarter of 2012 and 2011 and the first half of 2012 and 2011. The total notional amount of economic hedges was $3.9 billion at June 30, 2012 and $3.7 billion at December 31, 2011.



21

Other Expense

The Bank's total other expenses increased $1.9 million, to $17.4 million, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The Bank's total other expenses increased $2.9 million, to $34.9 million, for the first half of 2012 compared to the same prior year period. The increases in both comparisons were primarily due to legal expenses related to the Bank's ongoing private label MBS litigation and professional fees paid for consulting services.


AHP and REFCORP Assessments

Assessment Calculations. Although the FHLBanks are not subject to federal or state income taxes, the combined financial obligations of making payments to REFCORP (20%) and AHP contributions (10%) have equated to a proportion of the Bank's net income comparable to that paid in income tax by fully taxable entities. In second quarter of 2011, the FHLBanks fully satisfied their REFCORP obligation. As a result, the FHLBanks are no longer required to pay REFCORP assessments. Beginning in the third quarter of 2011, under the terms of the Amended Joint Capital Enhancement Agreement (Amended JCEA), the Bank began allocating 20% of its net income to restricted retained earnings (RRE). The Amended JCEA and RRE account are discussed in further detail in Note 17 - Capital in the Notes to the Financial Statements in the Bank's 2011 Form 10-K.


Financial Condition

The following should be read in conjunction with the Bank's unaudited interim financial statements in this Form 10-Q and the audited Financial Statements in the Bank's 2011 Form 10-K.

Assets

Total assets were $56.1 billion at June 30, 2012, compared to $52.0 billion at December 31, 2011. The increase was primarily due to increases of $3.0 billion in advances, $1.9 billion of securities purchased under agreements to resell, and $1.0 billion in investment securities. These increases were partially offset by a $1.2 billion decrease in Federal funds sold and a $0.3 billion decrease in mortgage loans held for portfolio. The following provides additional details regarding the primary components of the Statement of Condition.

Advances. Advances (par) totaled $32.4 billion at June 30, 2012 compared to $29.3 billion at December 31, 2011. This increase reflected a higher demand for Core (Term) products and moderate demand for the Repo product, partially offset by a decline in the Convertible product. The increase in the Core (Term) product from December 31, 2011 was due to callable advances which have a maturity of less than one year. At June 30, 2012, the Bank had advances to 179 borrowing members, compared to 191 borrowing members at December 31, 2011. A significant amount of the advances continued to be generated from the Bank's five largest borrowers, reflecting the asset concentration mix of the Bank's membership base. Total advances outstanding to the Bank's five largest members represented 76.1% of total advances as of June 30, 2012 compared to 70.4% at December 31, 2011.


22

The following table provides information (at par) on advances by different product type at June 30, 2012 and December 31, 2011.
 
June 30,
December 31,
in millions
2012
2011
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
5.0

$
5.0

    Core (Term)
1,246.0

1,748.0

      Total adjustable/variable-rate indexed
$
1,251.0

$
1,753.0

Fixed rate:
 
 
    Repo/Mid-Term Repo
$
11,853.1

$
11,782.5

    Core (Term)
15,560.6

11,332.9

      Total fixed rate
$
27,413.7

$
23,115.4

Convertible
$
3,393.5

$
3,990.8

Amortizing/mortgage-matched:
 
 
   Core (Term)
$
373.2

$
453.2

Total par balance
$
32,431.4

$
29,312.4

 
 
 
Total callable advances
$
6,000.0

$
1,002.0


The Bank had no putable advances at June 30, 2012 or December 31, 2011.

The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding average advance balance during the six months ended June 30, 2012 and the year ended December 31, 2011.
 
June 30,
December 31,
Member Asset Size
2012
2011
Less than $100 million
24

30

Between $100 million and $500 million
103

116

Between $500 million and $1 billion
41

45

Between $1 billion and $5 billion
27

30

Greater than $5 billion
12

15

Total borrowing members during the year
207

236

Total membership
295

300

Percentage of members borrowing during the period
70.2
%
78.7
%
Total borrowing members with outstanding loan balances at period-end
179

191

Percentage of members borrowing at period-end
60.7
%
63.7
%
 
During 2012, changes in the Bank's membership resulted in a net decrease of five members. This activity included one out-of-district merger, one member placed into receivership and five members merged within the Bank's district, partially offset by the addition of two new members.

See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of Item 2 for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of June 30, 2012.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, totaled $3.6 billion at June 30, 2012 compared to $3.9 billion at December 31, 2011. This decline was primarily driven by the continued runoff of the existing portfolio, which more than offset new portfolio purchase activity. New portfolio activity has been negatively impacted by: (1) the current economic environment, which has resulted in fewer mortgage loan originations; (2) the Bank's 4.0% capital stock requirement on new MPF loans, which was previously zero; and (3) the Bank's decision to focus on purchasing MPF loans directly originated by member banks in its district rather than nationwide indirect originations sourced

23

by members.

All of the Bank's loan products are summarized below. The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status and records cash payments received as a reduction of principal. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to guarantees or insurance. The Bank has a loan modification program for participating financial institutions (PFIs) under the MPF Program, which has not resulted in a significant amount of modifications to date. The Bank considers modifications under the MPF Program to be troubled debt restructurings (TDRs), as the terms of such loans have been modified due to deterioration in the borrower's financial position.
 
June 30,
December 31,
(in millions)
2012
2011
Advances(1)
$
33,617.2

$
30,604.8

Mortgage loans held for portfolio, net(2)
3,620.9

3,883.1

Nonaccrual mortgage loans(3)
80.5

86.1

TDRs
4.5

4.1

Mortgage loans 90 days or more delinquent and still accruing interest(4)
7.4

8.5

BOB loans, net
13.2

14.0

Nonaccrual BOB loans
0.5

1.1

Notes:
(1)There are no advances which are past due or on nonaccrual status.
(2)All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3)Nonaccrual mortgage loans are reported net of interest applied to principal.
(4)Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has continued to deteriorate as a result of the overall economic conditions and the mortgage market. As of June 30, 2012, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.9% of the MPF Original portfolio and 3.8% of the MPF Plus portfolio compared with 0.8% and 3.6%, respectively, at December 31, 2011.

The allowance for credit losses (ACL) on mortgage loans is based on the losses inherent in the Bank's mortgage loan portfolio after taking into consideration the credit enhancement (CE) structure of the MPF Program. Probability of default and loss given default are based on the actual 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is based on realized losses incurred on the sale of mortgage loan collateral. The resulting estimated loss is reduced by the CE structure of the MPF Program, discussed below.

The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the first loss account (FLA). Additional credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at June 30, 2012.
 
MPF CE structure

ACL
June 30, 2012
(in millions)
FLA
Available CE
Estimate of Credit loss
Reduction to the ACL due
to CE
ACL
MPF Original
$
2.4

$
96.6

$
3.1

$
(2.0
)
$
1.1

MPF Plus
30.0

49.3

28.9

(15.9
)
13.0



24

Investments. At June 30, 2012, the sum of the Bank's interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold increased approximately $654.3 million from December 31, 2011. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements.

Investment securities totaled $15.2 billion at June 30, 2012 and $14.2 billion at December 31, 2011. Details of investment securities follow.
 
Carrying Value
(in millions)
June 30,
2012
December 31,
2011
Trading securities:
 
 
  U.S. Treasury bills
$
730.0

$
730.0

  TLGP investments
—

250.1

  Mutual funds offsetting deferred compensation
3.8

4.2

Total trading securities
$
733.8

$
984.3

AFS securities:
 
 
  State or local agency obligations
$
12.7

$
—

  Other U.S. obligations
20.9

—

  Mutual funds partially securing supplemental retirement plan
2.0

2.0

  GSE securities
973.7

900.6

  MBS:
 
 
   GSE residential MBS
3,084.4

1,807.1

   Private label residential MBS
1,474.0

1,631.3

   Private label home equity line of credit (HELOCs)
14.4

15.1

Total AFS securities
$
5,582.1

$
4,356.1

HTM securities:
 
 
 Certificates of deposit
$
2,850.0

$
2,000.0

 State or local agency obligations
267.1

278.7

 GSE securities
31.1

38.5

 MBS:
 
 
  U.S. agency
2,179.9

2,411.1

   GSE residential MBS
2,134.9

2,462.7

  Private label residential MBS
1,399.3

1,624.2

  Private label HELOCs
15.0

17.6

Total HTM securities
$
8,877.3

$
8,832.8

Total investment securities
$
15,193.2

$
14,173.2



25

The following table presents the maturity and yield characteristics for the investment securities portfolio, assuming no principal prepayments, as of June 30, 2012. Contractual maturity of MBS is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligation at any time.
(dollars in millions)
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
Carrying Value
Trading securities:
 
 
 
 
 
  U.S. Treasury bills
$
730.0

$
—

$
—

$
—

$
730.0

  Mutual funds offsetting deferred compensation
3.8

—

—

—

3.8

Total trading securities
$
733.8

$
—

$
—

$
—

$
733.8

Yield on trading securities
0.06
%
n/a
n/a
n/a
0.06
%
 
 
 
 
 
 
AFS securities:
 
 
 
 
 
State or local agency obligations
$
—

$
—

$
—

$
12.7

$
12.7

Other U.S. obligations
—

—

—

20.9

20.9

GSE securities
50.0

923.7

—

—

973.7

 MBS:
 
 
 
 
 
  GSE residential MBS
—

100.9

503.7

2,479.8

3,084.4

  Private label residential MBS
—

—

—

1,474.0

1,474.0

  HELOCs
—

—

—

14.4

14.4

  Mutual funds partially securing supplemental
      retirement plan
2.0

—

—

—

2.0

Total AFS securities
$
52.0

$
1,024.6

$
503.7

$
4,001.8

$
5,582.1

Yield on AFS Securities
0.18
%
0.48
%
2.48
%
3.05
%
2.54
%
 
 
 
 
 
 
HTM securities:
 
 
 
 
 
 Certificates of deposit
$
2,850.0

$
—

$
—

$
—

$
2,850.0

 State or local agency obligations
1.7

0.3

8.1

257.0

267.1

GSE securities
—

31.1

—

—

31.1

 MBS:
 
 
 
 
 
  U.S. agency
—

—

438.1

1,741.8

2,179.9

  GSE residential MBS
—

—

949.0

1,185.9

2,134.9

  Private label residential MBS
—

—

74.4

1,324.9

1,399.3

  Private label HELOCs
—

—

—

15.0

15.0

Total HTM securities
$
2,851.7

$
31.4

$
1,469.6

$
4,524.6

$
8,877.3

Yield on HTM securities
0.21
%
4.07
%
2.62
%
1.98
%
1.52
%
 
 
 
 
 
 
Total investment securities
$
3,637.5

$
1,056.0

$
1,973.3

$
8,526.4

$
15,193.2

Yield on investment securities
0.18
%
0.59
%
2.58
%
2.51
%
1.84
%
Securities purchased under agreements to resell
1,915.0

—

—

—

1,915.0

Interest-bearing deposits
5.5

—

—

—

5.5

Federal funds sold
1,200.0

—

—

—

1,200.0

Total investments
$
6,758.0

$
1,056.0

$
1,973.3

$
8,526.4

$
18,313.7



26

As of June 30, 2012, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
 
Total
Book Value
Total
Fair Value
(in millions)
Freddie Mac
$
3,087.9

$
3,151.9

Fannie Mae
2,686.5

2,717.1

Ginnie Mae
1,741.8

1,753.9

U.S. Treasury
730.0

730.0

J.P. Morgan Mortgage Trust
510.6

505.8

Federal Farm Credit Banks
449.7

449.7

National Credit Union Administration
438.1

438.7

Australia & New Zealand Banking Group, LTD
400.0

400.0

Toronto Dominion Bank
400.0

400.0

Westpac Banking Corporation
400.0

400.0

Total
$
10,844.6

$
10,947.1


For additional information on the credit risk of the investment portfolio, see “Credit and Counterparty Risk-Investments” discussion in the Risk Management section of this Item 2.


Liabilities and Capital

Commitments and Off-Balance Sheet Items. As of June 30, 2012, the Bank was obligated to fund approximately $1.0 billion in additional advances, $22.9 million of mortgage loans and $6.7 billion in outstanding standby letters of credit, and to issue $2.1 billion in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

Capital and Retained Earnings. The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of its retained earnings.

Management monitors capital adequacy, including the level of retained earnings, through the evaluation of MV/CS as well as other risk metrics. Details regarding these metrics are discussed in the Risk Management portion of this Item 2.

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The framework includes five risk elements that comprise the Bank's total retained earnings target: (1) AFS private label MBS risk (HTM is included in market risk); (2) market risk; (3) credit risk; (4) operating risk; and (5) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. For example, a further sharp deterioration in expected performance of loans underlying private label MBS would likely cause the Bank to adopt a higher target, whereas stabilization or improvement of the performance of these loans may lead to a reduction in the retained earnings target. This framework generates a retained earnings target of $639 million as of June 30, 2012, which is projected to decline to $428 million by 2016, based on runoff of the private label MBS portfolio as well as the Bank's risk management actions. The framework also assists management in its overall analysis of the level of future excess stock repurchases and dividends.

Changes in total retained earnings for the six months of 2012 and 2011 reflected the impact of net income in those periods. The change in 2012 retained earnings also reflected the impact of dividend payments during the first half of 2012. Total retained earnings of $478.7 million at June 30, 2012 included unrestricted retained earnings of $465.1 million and RRE of $13.6 million.



27

Capital Resources
 
The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q and the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2011 Form 10-K.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.

 
June 30,
December 31,
(in millions)
2012
2011
Permanent capital:
 
 
 Capital stock (1)
$
3,317.5

$
3,435.6

 Retained earnings
478.7

435.3

Total permanent capital
$
3,796.2

$
3,870.9

 
 
 
RBC requirement:
 
 
 Credit risk capital
$
647.8

$
678.2

 Market risk capital
104.7

138.8

 Operations risk capital
225.7

245.1

Total RBC requirement
$
978.2

$
1,062.1

Excess permanent capital over RBC
    requirement
$
2,818.0

$
2,808.8

Note:
 
 
(1)Capital stock includes mandatorily redeemable capital stock.

The Bank continues to maintain excess permanent capital over the RBC requirement. Total excess permanent capital increased $9.2 million from year-end. The impact of the partial repurchases of excess capital stock during 2012 reduced total permanent capital.

On June 19, 2012, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended March 31, 2012. In its determination, the Finance Agency expressed concerns regarding the Bank's capital position. The Finance Agency believes that the Bank's retained earnings levels are insufficient and the poor quality of its private label MBS portfolio has created uncertainties about the Bank's earnings prospects and ability to build retained earnings at a satisfactory pace. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended June 30, 2012.


28

Regulatory Capital and Leverage Ratios

In addition to the RBC requirements, the Finance Agency has mandated maintenance of total regulatory capital and leverage ratios of at least 4.0% and 5.0% of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements. The Bank exceeded all regulatory capital requirements at June 30, 2012.
 
June 30,
December 31,
(dollars in millions)
2012
2011
Regulatory Capital Ratio
 
 
Minimum capital (4.0% of total assets)
$
2,242.1

$
2,079.8

Regulatory capital
3,796.2

3,870.9

Total assets
56,052.2

51,994.3

Regulatory capital ratio (regulatory capital as a percentage of total assets)
6.8
%
7.4
%
 
 
 
Leverage Ratio
 
 
Minimum leverage capital (5.0% of total assets)
$
2,802.6

$
2,599.7

Leverage capital (permanent capital multiplied by a 1.5 weighting factor)
5,694.4

5,806.3

Leverage ratio (leverage capital as a percentage of total assets)
10.2
%
11.2
%

The decline in the ratios from December 31, 2011 to June 30, 2012 was due to the repurchases of excess capital stock in both February and April 2012.

The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock is presented below.
 
 
June 30,
December 31,
(dollars in millions)
 
2012
2011
Commercial banks
 
$
1,750.4

$
1,839.4

Thrifts
 
1,247.7

1,445.4

Credit unions
 
47.4

48.8

Insurance companies
 
64.3

56.3

Total GAAP capital stock
 
3,109.8

3,389.9

Mandatorily redeemable capital stock
 
207.7

45.7

Total capital stock
 
$
3,317.5

$
3,435.6


The composition of the Bank's membership by institution type is presented below.
 
 
June 30,
December 31,
 
 
2012
2011
Commercial banks
 
183

186

Thrifts
 
83

88

Credit unions
 
25

23

Insurance companies
 
4

3

Total
 
295

300




29

Critical Accounting Policies

The Bank's financial statements are prepared by applying certain accounting policies. Note 1 - Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2011 Form 10-K describes the most significant accounting policies used by the Bank. In addition, the Bank's critical accounting policies are presented in Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K. Certain of these policies require management to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the Bank's reported results and financial position for the period or in future periods. Management views these policies as critical accounting policies.

The Bank made no changes to its critical accounting policies during the six months ended June 30, 2012.
 
Proposed and Recently Issued Accounting Guidance. See Note 1 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued and Adopted Accounting Guidance to the unaudited financial statements in this Form 10-Q for information on new accounting pronouncements impacting the financial statements or that will become effective for the Bank in future periods.


Legislative and Regulatory Developments

The legislative and regulatory environment in which the Bank operates continues to undergo rapid change driven principally by reforms under the Housing and Economic Reform Act of 2008, as amended (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The Bank expects HERA and the Dodd-Frank Act as well as plans for housing finance and GSE reform to result in still further changes to this environment. Business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.

Developments under the Dodd-Frank Act Impacting Derivatives Transactions

Definitions of Certain Terms under New Derivatives Requirements. The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the U.S. Commodity Futures Trading Commission (the CFTC) and/or the Securities and Exchange Commission (SEC). Based on the definitions in the final rules jointly issued by the CFTC and SEC in April 2012, the Bank will not be required to register as either a major swap participant or as a swap dealer because of the derivative transactions that the Bank enters into for the purposes of hedging and managing its interest rate risk or the derivatives transactions that the Bank intermediates for its member institutions.
Based on the final rules and accompanying interpretive guidance jointly issued by the CFTC and SEC in July 2012, call and put optionality in certain advances to the Bank's member institutions will not be treated as “swaps” as long as the optionality relates solely to the interest rate on the advance and doesn't result in enhanced or increased performance or other risks unrelated to the interest rate Accordingly, the Bank's ability to offer these advance products to member customers should not be affected by the new derivatives regulation.
Mandatory Clearing of Derivatives Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. As further discussed in the Bank's 2011 Form 10-K, cleared swaps will be subject to new requirements including mandatory reporting, record keeping, and documentation requirements established by applicable regulators and initial and variation margin requirements established by the clearinghouse and its clearing members.

The CFTC recently finalized an end-user exception to mandatory clearing that would not apply to the derivatives transactions that the Bank has entered into to hedge and manage its interest rate risk but that would apply to derivatives transactions that the Bank intermediates for its member institutions with $10 billion or less in assets as long as the member uses

30

the swaps to hedge or mitigate its commercial risk. As a result, the Bank could continue to intermediate swaps for such member institutions on an uncleared basis, subject to the new requirements for uncleared swaps discussed below.

Uncleared Derivatives Transactions. The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new requirements, including mandatory reporting, record keeping, documentation, and minimum margin and capital requirements established by applicable regulators. These requirements are discussed in the Bank's 2011 Form 10-K. At this time, the Bank does not expect to have to comply with such requirements until the beginning of 2013, at the earliest.
The CFTC, SEC, the Finance Agency and other bank regulators are expected to continue to issue final rulemakings implementing the foregoing requirements through the end of 2012.
Effectiveness of Key Rules for Derivatives Transactions. Many of the provisions of the Dodd-Frank Act relating to derivatives that are expected to have the most effect on the Bank's derivatives transactions will take effect on a date determined by the CFTC, which must be no less than 60 days after the CFTC publishes final regulations implementing such provisions. Compliance dates for certain of these rulemakings that have been finalized and published by the CFTC, including new record keeping and reporting requirements, are based on the effectiveness of the final rules further defining the term “swap” jointly issued by the CFTC and SEC. Such final rules were issued in July 2012 and will not become effective until at least 60 days after they are published in the Federal Register. The implementation timeframe for mandatory clearing of eligible interest rate swaps is based on the effectiveness of the CFTC’s mandatory clearing determinations, which were released in proposed form on July 24, 2012 for interest rate swaps that are currently clearable. The CFTC will finalize these determinations within 90 days after the proposal is published in the Federal Register, and the Bank will have to clear eligible interest rate swaps within 180 days after publication of the final determinations, which the Bank estimates will be sometime late first quarter or early second quarter 2013.
The Bank, together with the other FHLBanks, will continue to monitor these rulemakings and the overall regulatory process to implement the derivatives reform under the Dodd-Frank Act. The Bank will also continue to work with the other FHLBanks to implement the processes and documentation necessary to comply with the Dodd-Frank Act's new requirements for derivatives.
Developments Impacting Systemically Important Nonbank Financial Companies

Final Rule and Guidance on the Supervision and Regulation of Certain Nonbank Financial Companies. On April 11, 2012, the Financial Stability Oversight Council (the Oversight Council) issued a final rule and guidance on the standards and procedures the Oversight Council will follow in determining whether to designate a nonbank financial company for supervision by the Federal Reserve and to be subject to certain heightened prudential standards. The rule became effective May 11, 2012. If the Oversight Council determines the Bank to be a nonbank financial company subject to the supervision of the Federal Reserve, the Bank would be subject to a separate prudential standards rule that has been proposed by the Federal Reserve, but is not yet final. The guidance issued with this final rule provides that the Oversight Council expects generally to follow a process in making its determinations consisting of:

•
a first stage that will identify those nonbank financial companies that have $50 billion or more of total consolidated assets (as of June 30, 2012, the Bank had $56.1 billion in total assets) and exceed any one of five threshold indicators of interconnectedness or susceptibility to material financial distress, including whether a company has $20 billion or more in total debt outstanding. As of June 30, 2012, the Bank had $50.6 billion in total outstanding consolidated obligations, the Bank's principal form of outstanding debt;

•
a second stage involving a robust analysis of the potential threat that the subject nonbank financial company could pose to U.S. financial stability based on additional quantitative and qualitative factors that are both industry and company specific; and

•
a third stage analyzing the subject nonbank financial company using information collected directly from it.

The final rule provides that, in making its determinations, the Oversight Council will consider as one factor whether the nonbank financial company is subject to oversight by a primary financial regulatory agency (for the Bank, the Finance Agency). A nonbank financial company that the Oversight Council proposes to designate for additional supervision and prudential standards under this rule has the opportunity to contest the designation. If the Bank is designated by the Oversight

31

Council for supervision by the Federal Reserve and to be subject to the additional prudential standards, then the Bank's operations and business could be adversely impacted by resulting additional costs and restrictions on business activities.

Developments under the Finance Agency

Finance Agency Final Rule on Prudential Management and Operations Standards. On June 8, 2012, the Finance Agency issued a final rule, as required by HERA, regarding prudential standards for the operation and management of the FHLBanks, including among other things, internal controls and information systems, internal audit systems, market and interest rate risks, liquidity, asset growth, investments, credit and counterparty risk management, and records maintenance. The rule requires an FHLBank that fails to meet a standard to file a corrective action plan with the Finance Agency within 30 calendar days. If an acceptable corrective action plan is not submitted by the deadline or the terms of such a plan are not complied with, the Director of the Finance Agency can impose sanctions, such as limits on asset growth, increases in the level of retained earnings, and prohibitions on dividends or the redemption or repurchase of capital stock. The final rule became effective August 7, 2012.

Other Significant Developments

Basel Committee on Banking Supervision Capital Framework. In September 2010, the Basel Committee on Banking Supervision (the Basel Committee) approved a new capital framework for internationally active banks. Banks subject to the new framework will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses.
On June 7, 2012, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Agencies) concurrently published three joint notices of proposed rulemaking (the NPRs) seeking comments on comprehensive revisions to the Agencies’ capital framework to incorporate the Basel Committee’s new capital framework.
These revisions would, among other things:

•
implement the Basel Committee’s capital standards related to minimum requirements, regulatory capital, and additional capital buffers;

•
revise the methodologies for calculating risk-weighted assets in the general risk-based capital rules; and

•
revise the approach by which large banks determine their capital adequacy.

The NPRs do not incorporate the reforms related to liquidity risk management published in Basel III, which the Agencies are expected to propose in a separate rulemaking.

If the new NPRs are adopted as proposed (including the capital requirements for residential mortgage assets) and depending on the liquidity framework expected to be proposed by the Agencies, some of the Bank's members could determine to reduce the level of their residential mortgage lending and need to divest assets in order to comply with the more stringent capital and liquidity requirements, thereby tending to decrease their need for advances. The requirements may also adversely impact investor demand for consolidated obligations to the extent that affected institutions divest or limit their investments in consolidated obligations. On the other hand, any new liquidity requirements could motivate Bank members to borrow term advances to create and maintain balance sheet liquidity.


Risk Management

The Bank employs a corporate governance and internal control framework designed to support the effective management of the Bank's business activities and the related inherent risks. As part of this framework, the Board adopted a Risk Governance Policy and a Member Products Policy, which are reviewed regularly and re-approved at least annually. The Risk Governance Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operating risk, and business risk in accordance with Finance Agency regulations consistent with the Bank's risk profile. The risk profile was established by the Board, as were other applicable guidelines in connection with the Bank's Capital Plan and overall risk management.

Risk Governance


32


The Bank's lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operating and business risk, among others, including those described in Item 1A. Risk Factors in the Bank's 2011 Form 10-K. The Bank's risks are affected by current and projected financial and residential market trends, which are discussed in the Executive Summary portion of this Item 2.

Details regarding the Bank's Risk Governance framework and processes are included in the "Risk Governance" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K.

Capital Adequacy Measures. MV/CS provides a current assessment of the liquidation value of the balance sheet and measures the Bank's current ability to honor the par put redemption feature of its capital stock. The risk metric is used to evaluate the adequacy of retained earnings and develop dividend payment and excess capital stock repurchase recommendations.

An initial floor of 85% was established for MV/CS. In February 2012, the Board approved a change to the MV/CS floor from 87.5% to 90.0%, demonstrating the Board's commitment to move the Bank toward par value capital stock. MV/CS is measured against the floor monthly. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are restricted. When MV/CS is above the established floor, additional analysis is performed, taking into consideration the impact of excess capital stock repurchases and/or dividend payouts.

The MV/CS ratio was 105.7% and 96.9% at June 30, 2012 and December 31, 2011, respectively. The improvement in the MV/CS in first six months of 2012 was primarily due to higher prices (i.e., narrower spreads) and principal paydowns on the private label MBS portfolio, increased retained earnings, and narrower advance spreads resulting from pricing changes adopted during the first quarter. Because the MV/CS ratio was above the 90.0% floor at June 30, 2012, the Bank performed additional analysis of capital adequacy taking into consideration the impact of excess capital stock repurchases and dividend payouts to determine if any excess stock should be repurchased. As a result of this analysis, the Bank repurchased approximately $200 million in excess capital stock on July 31, 2012. The Bank also executed partial repurchases in February and April 2012 which totaled $278 million. The effect of the repurchases was a modest improvement in the MV/CS ratio.

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. During 2011, the Bank did not pay a dividend. On February 23, 2012, April 30, 2012, and July 31, 2012, the Bank paid a dividend equal to an annual yield of 10 basis points. The dividend was calculated on stockholders' average balances for the previous quarter.

Decisions regarding any future repurchase of excess capital stock or dividend payouts will be made on a quarterly basis. The Bank will continue to monitor the MV/CS ratio as well as the condition of its private label MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets and other relevant information as the basis for determining the status of dividends and excess capital stock repurchases in future quarters. See the "Capital and Retained Earnings" discussion in Financial Condition in this Item 2. for details regarding the Bank's Retained Earnings policy.

Subprime and Nontraditional Loan Exposure. The Bank policy definitions of subprime and nontraditional residential mortgage loans and securities are consistent with Federal Financial Institutions Examination Council (FFIEC) and Finance Agency guidance. According to policy, loans identified as subprime are not eligible to be included in the member's collateral position. However, the policy allows for low FICO loans with reasonable mitigating credit factors (i.e. low LTV or debt-to-income ratios.) Therefore, the Bank's definition of subprime loans are loans with low FICO scores that do not possess reasonable mitigating credit factors.

Limits have been established for exposure to low FICO and nontraditional residential mortgages. A limit of 25% has been established for the percentage of member collateral that is categorized as low FICO (with acceptable mitigating factors or unknown and missing FICO score loans) or nontraditional loans and securities. A limit of 25% has also been established for total exposure including low FICO and nontraditional member collateral, subprime and nontraditional private label MBS, and low FICO whole mortgage loans acquired through the Bank's MPF program.

In addition, an enhanced reporting process has been established to aggregate the volume of the aforementioned loans and securities. Lastly, with respect to collateral, all members are required to identify subprime, low FICO score and nontraditional loans and provide periodic certification that they comply with the FFIEC guidance.



33

Qualitative and Quantitative Disclosures Regarding Market Risk

Managing Market and Interest Rate Risk. The Bank's market and interest rate risk management objective is to protect member/shareholder and bondholder value consistent with the Bank's housing mission and safe and sound operations in all interest rate environments. Management believes that a disciplined approach to market and interest rate risk management is essential to maintaining a strong capital base and uninterrupted access to the capital markets.

The Bank's Market Risk Model. Significant resources are devoted to ensuring that the level of interest rate risk in the balance sheet is accurately measured, thus allowing management to monitor the risk against policy and regulatory limits. The Bank uses an externally developed market risk model to evaluate its financial position and interest rate risk. Management regularly reviews the major assumptions and methodologies used in the model, as well as available upgrades to the model. One of the most critical market-based model assumptions relates to the prepayment of principal on mortgage-related instruments. The Bank continues to upgrade the mortgage prepayment models used within the market risk model to more accurately reflect expected prepayment behavior. Another critical assumption relates to the term structure model which specifies the behavior or dynamics of the yield curve and is used in the valuation of options and instruments with embedded options. During the second quarter of 2012, the Asset and Liability Committee (ALCO) approved changes to the term structure model used for market risk measurement which more adequately reflect the potential evolution of interest rates as implied by market prices.

The Bank regularly validates the models used to measure market risk. Such model validations are generally performed by third-party specialists and are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group independent of the business unit measuring risk and conducting the transactions. Results of the validation process, as well as any changes in valuation methodologies, are reported to ALCO, which is responsible for reviewing and approving the approaches used in the valuation to ensure that they are well controlled and effective, and result in reasonable fair values.

Duration of Equity. One key risk metric used by the Bank, which is commonly used throughout the financial services industry, is duration. Duration is a measure of the sensitivity of a financial instrument's value, or the value of a portfolio of instruments, to a 100 basis point parallel shift in interest rates. Duration (typically measured in months or years) is commonly used by investors throughout the fixed income securities market as a measure of financial instrument price sensitivity.

The Bank's asset/liability management policy approved by the Board calls for actual duration of equity to be maintained within a + 4.5 year range in the base case. In addition, the duration of equity exposure limit in an instantaneous parallel interest rate shock of + 200 basis points is + 7 years. Management analyzes the duration of equity exposure against this policy limit on a daily basis and continually evaluates its market risk management strategies.

In response to unprecedented mortgage spread levels, management developed an Alternative Risk Profile to exclude the effects of increases in certain mortgage-related asset credit spreads to better reflect the underlying interest rate risk and accommodate prudent management of the Bank's balance sheet. Use of this alternate calculation of duration of equity for monitoring against established limits was approved through December 31, 2011. A revised alternate methodology which removes the interest rate sensitivity of impaired private label MBS and more fully reflects the credit-intensive nature of the securities was approved by the Board in December 2011. The revised methodology became effective January 1, 2012, along with use of both the actual and alternate duration of equity for monitoring against established limits. The revised methodology more fully reflects the credit-intensive nature of the securities and resulting low correlation of price changes to interest rates in the current environment.


34

The following table presents the Bank's duration of equity exposure calculated in accordance with the revised alternate methodology and the actual duration of equity at June 30, 2012 and December 31, 2011.
(in years)
Base
Case
Up 100
 basis points
Up 200
 basis points
Alternate duration of equity:
 
 
 
June 30, 2012
0.4
0.4
1.8
December 31, 2011(1)
0.6
0.6
2.1
 
 
 
 
Actual duration of equity:
 
 
 
June 30, 2012
2.1
2.0
3.5
December 31, 2011
2.7
2.8
4.4
(1) For comparison purposes, the alternate duration of equity calculation methodology in effect at December 31, 2011 resulted in duration of 1.9 in the Base Case; 2.3 at Up 100 basis points; and 3.8 at Up 200 basis points, as reported in the Bank's 2011 Form 10-K.
Note: Given the low level of interest rates, an instantaneous parallel interest rate shock of “down 200 basis points” and “down 100 basis points” cannot be meaningfully measured for these periods and therefore is not presented.

Duration of equity declined from the prior year-end primarily due to lower long-term interest rates and the term structure model change noted above. Partial replacement of fixed-rate debt calls during the first six months lessened the decline. The Bank continues to monitor the mortgage and related fixed income markets and the impact that changes in the market may have on duration of equity and other market risk measures and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.

Earned Dividend Spread (EDS). The Bank's asset/liability management policy also measures interest rate risk based on an EDS. EDS is defined as the Bank's return on average capital stock in excess of the average return of an established benchmark market index, 3-month LIBOR in the Bank's case, for the period measured. The EDS Floor represents the minimum acceptable return under the selected interest rate scenarios, for both Year 1 and Year 2. For both Years 1 and 2, the EDS Floor is 3-month LIBOR plus 15 basis points. EDS Volatility is a measure of the variability of the Bank's EDS in response to shifts in interest rates, specifically the change in EDS for a given time period and interest rate scenario compared to the current base forecasted EDS. Consistent with the Return Volatility metric, EDS is measured over both a rolling forward one to 12 month time period (Year 1) and a 13 to 24 month time period (Year 2), for selected interest rate scenarios.

The following table presents the Bank's EDS level and volatility as of June 30, 2012 and December 31, 2011. These metrics are presented as spreads over 3-month LIBOR. The steeper and flatter yield curve shift scenarios shown below are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the current low rate environment, management replaced the “down 200 basis points parallel” rate scenario during the fourth quarter of 2009 with an additional non-parallel rate scenario that reflects a decline in longer term rates. The Bank was in compliance with the EDS Floor and EDS Volatility limits across all selected interest rate shock scenarios at June 30, 2012 and December 31, 2011.
 
EDS
Yield Curve Shifts(1)
(expressed in basis points)
 
Down 100 bps Longer Term Rate Shock
100 bps Steeper
Forward Rates
100 bps Flatter
Up 200 bps Parallel Shock
 
EDS
Volatility
EDS
Volatility
EDS
EDS
Volatility
EDS
Volatility
Year 1 Return Volatility
 
 
 
 
 
 
 
 
 
June 30, 2012
226

(27
)
248

(5
)
253

298

45

409

156

December 31, 2011
182

10

166

(6
)
172

251

79

364

192

 
 
 
 
 
 
 
 
 
 
Year 2 Return Volatility
 
 
 
 
 
 
 
 
 
June 30, 2012
309

(29
)
347

9

338

369

31

475

137

December 31, 2011
203

(18
)
177

(44
)
221

249

28

382

161

Notes:
(1)Based on adjusted earnings excluding future potential OTTI charges which could be material, so that earnings movement related to interest rate changes can be isolated.

EDS increased primarily as a result of higher earnings resulting from higher projected advance balances and debt issued at

35

more favorable levels. EDS in Year 1 also improved as a result of continued capital stock repurchases. The benefit of the favorable debt levels was lower in the Down 100 bps Longer Term Rate Shock scenario due to projected calls which resulted in higher EDS volatility for that scenario. EDS volatility in the 100bps Flatter and Up 200 bps Parallel Shock scenarios mostly decreased as a result of partial replacement of fixed-rate debt calls while EDS volatility in the 100 bps Steeper scenario decreased as a result of reduced spread compression.

Earnings-at-Risk (EaR). The Bank employs an EaR framework for certain mark-to-market positions, including economic hedges. This framework establishes a forward-looking, scenario-based exposure limit based on interest rate and volatility shocks that would apply to any existing or proposed transaction that is marked to market through the income statement without an offsetting mark arising from a qualifying hedge relationship. The Bank's Capital Markets and Corporate Risk Management departments also monitor actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis.

During the second quarter, the daily exposure limit of EaR was increased to $1.8 million and the Bank's ALCO increased the operating guideline to $1.4 million based on improved forecasted levels of income. The daily forward-looking exposure was below the applicable Board limit and operating guidelines during the first six months of 2012. At June 30, 2012, EaR measured $1.1 million.

Credit and Counterparty Risk - Total Credit Exposure (TCE) and Collateral

TCE. The Bank manages the credit risk on a member's total credit exposure or TCE, which includes advances with accrued interest, fees, basis adjustments and estimated prepayment penalties; letters of credit (LOC); forward dated advance commitments; member derivatives; and MPF credit enhancement and related obligations. This credit risk management is done by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all member obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. At June 30, 2012, TCE was $40.4 billion, comprised of approximately $32.4 billion in advance principal outstanding, $6.7 billion in LOCs, $1.0 billion in advance commitments, and $0.3 billion in accrued interest, prepayment, MPF credit enhancement and other fees. The Bank establishes a maximum borrowing capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank's Member Products Policy. Details regarding this Policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2011 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank's fully secured position.

The financial condition of all members and housing associates is closely monitored for compliance with financial criteria as set forth in the Bank's credit policies. The Bank has developed an internal credit scoring system (ICR) that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member's asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results for the previous four quarters are used, with the most recent quarter's results given a higher weighting. Additionally, a member's credit score can be adjusted for various qualitative factors, such as the financial condition of the member's holding company. While financial scores and resulting ratings are calculations based only upon point-in-time financial data and the resulting ratios, a rating in one of the higher (i.e., worse) categories indicates that a member exhibits defined financial weaknesses. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. A separate ICR model, along with additional financial analysis, is used for any insurance company exposure.

During the first six months of 2012, there were 32 failures of Federal Deposit Insurance Corporation (FDIC)-insured institutions nationwide. One of these failures was a member of the Bank. Upon closure by the Office of the Comptroller of the Currency, all of the member's credit obligations were fully assumed and secured through an FDIC Purchase and Assumption agreement with an out-of-district nonmember financial institution. All credit obligations were promptly paid off in full. Between July 1, 2012 and August 7, 2012, the Bank experienced no additional member failures.

Management believes that it has adequate policies and procedures in place to effectively manage credit risk exposure related to member TCE. These credit and collateral policies balance the Bank's dual goals of meeting members' needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms in response to deterioration in creditworthiness. The Bank has never experienced a loss on its member credit exposure.


36


The following table presents the Bank's top ten borrowers with respect to their TCE at June 30, 2012 and the corresponding December 31, 2011 amounts.
 
June 30, 2012
December 31, 2011
(dollars in millions)
Total Credit Exposure
% of Total
Total Credit Exposure
% of Total
Sovereign Bank, N.A, DE (1)
$
12,894.8

31.9
%
$
11,145.2

30.2
%
PNC Bank, National Association, DE (2)
6,083.6

15.1

2,580.9

7.0

TD Bank, National Association, DE
5,715.1

14.1

5,493.8

14.9

Ally Bank, UT(3)
4,358.5

10.8

5,420.1

14.7

Susquehanna Bank, PA
1,430.2

3.5

1,389.8

3.8

Citizens Bank of Pennsylvania, PA (4)
1,186.3

2.9

719.7

2.0

Northwest Savings Bank, PA
727.0

1.8

726.4

2.0

National Penn Bank, PA
537.8

1.3

618.8

1.7

Genworth Life Insurance Company, DE
493.4

1.2

493.5

1.2

Fulton Bank, N.A., PA
401.3

1.0

598.8

1.6

 
$
33,828.0

83.6
%
$
29,187.0

79.1
%
Other borrowers
6,621.9

16.4

7,714.9

20.9

Total TCE outstanding
$
40,449.9

100.0
%
$
36,901.9

100.0
%
Notes:
(1) Sovereign Bank, N.A is a subsidiary of Banco Santander, which is located in Spain.
(2) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(3) For Bank membership purposes, principal place of business is Horsham, PA.
(4) Citizens Bank of Pennsylvania is a subsidiary of the Royal Bank of Scotland, which is located in the United Kingdom.

The total exposure of the majority of the top ten borrowers was primarily outstanding advance balances at June 30, 2012. As noted in the table above, the TCE increased approximately $3.5 billion from December 31, 2011 to June 30, 2012. The majority of this increase was due to higher advance balances.

Member Advance Concentration Risk. The following table lists the Bank's top ten borrowers based on advance balances at par as of June 30, 2012 and December 31, 2011.
 
June 30, 2012
December 31, 2011
(dollars in millions)
Advance Balance
% of Total
Advance Balance
% of Total
Sovereign Bank, N.A., DE (1)
$
12,345.0

38.1
%
$
11,095.0

37.9
%
PNC Bank, National Association, DE (2)
6,000.2

18.5

2,500.2

8.5

Ally Bank, UT(3)
4,319.0

13.3

5,366.0

18.3

Susquehanna Bank, PA
1,007.6

3.1

967.4

3.3

Citizens Bank of Pennsylvania, PA(4)
1,000.0

3.1

500.0

1.7

Northwest Savings Bank, PA
695.6

2.2

695.5

2.4

National Penn Bank, PA
534.4

1.6

614.5

2.0

Genworth Life Insurance Company, DE
492.9

1.5

492.9

1.7

Wilmington Savings Fund Society FSB, DE
392.9

1.2

538.7

1.8

Fulton Bank, N.A., PA
352.8

1.1

398.9

1.4

 
27,140.4

83.7

23,169.1

79.0

Other borrowers
5,291.0

16.3

6,143.3

21.0

Total advances
$
32,431.4

100.0
%
$
29,312.4

100.0
%
Notes:
(1) Sovereign Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(2) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(3) For Bank membership purposes, principal place of business is Horsham, PA.
(4) Citizens Bank of Pennsylvania is a subsidiary of the Royal Bank of Scotland, which is located in the United Kingdom.



37


In contrast to the June 30, 2012 spot balances, the average year-to-date balances for the ten largest borrowers was $25.0 billion, or 81.8% of total average advances outstanding. During the six months ended June 30, 2012, the maximum outstanding balance to any one borrower was $12.3 billion. The advances made by the Bank to these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank does not expect to incur any losses on these advances. Because of the Bank's advance concentrations, the Bank has implemented specific credit and collateral review procedures for these members.

Letters of Credit. The following table presents the Bank's total outstanding letters of credit as of June 30, 2012 and December 31, 2011. The majority of the balance was due to public unit deposit letters of credit, which collateralize public unit deposits. The letter of credit product is collateralized under the same procedures and guidelines that apply to advances. There has never been a draw on any letter of credit issued by the Bank.
(dollars in millions)
June 30, 2012
December 31, 2011
Letters of credit:
 
 
   Public unit deposit
$
6,463.4

$
6,427.0

   Tax exempt bonds
194.8

203.4

   Other
68.2

71.7

Total
$
6,726.4

$
6,702.1

Expiration terms:
 
 
   One year or less
$
6,485.8

$
6,509.6

   After one year through five years
240.6

192.5

Total
$
6,726.4

$
6,702.1


At June 30, 2012 and December 31, 2011, the Bank had a concentration of letters of credit to one member totaling $5.7 billion and $5.5 billion, respectively. These amounts accounted for 85.0% and 82.1% of the total outstanding amount for each period, respectively.

Collateral Policies and Practices. All members are required to maintain collateral to secure their TCE. Collateral eligible to secure TCE includes: (1) one-to-four family and multifamily mortgage loans and securities representing an interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. government or any Federal agency; (3) cash or deposits held by the Bank; and (4) certain other collateral that is real estate-related, or certain small business, small farm and small agribusiness and community development loans from members that qualify as Community Financial Institutions (CFIs), provided that the collateral has a readily ascertainable value and that the Bank can perfect a security interest in it. The Bank also requires each borrower and affiliate pledgor, where applicable, to execute an agreement that establishes the Bank's security interest in all collateral pledged by the borrower or affiliate pledgor. The Act affords any security interest granted to the Bank by any member, or any affiliate of any such member, priority over the claims and rights of any party, other than claims and rights that: (1) would be entitled to priority under otherwise applicable law; and (2) are held by actual bona fide purchasers for value or by secured parties that are secured by perfected security interests in priority ahead of the Bank. Pursuant to its regulations, the FDIC has recognized the priority of an FHLBank's security interest under the Act and the right of an FHLBank to require delivery of collateral held by the FDIC as receiver for a failed depository institution. Finally, as additional security for a member's indebtedness, the Bank has a statutory and contractual lien on the member's capital stock in the Bank.

The Bank periodically reviews the collateral pledged by members or affiliates, where applicable. Additionally, the Bank conducts periodic collateral verification reviews to ensure the eligibility, adequacy and sufficiency of the collateral pledged. The Bank may, in its discretion, require the delivery of loan collateral at any time.

The Bank reviews and assigns borrowing capacities based on this collateral, taking into account the known credit attributes in assigning the appropriate secondary market discounts to determine that a member's TCE is fully collateralized. Other factors that the Bank may consider in calculating a member's MBC include the collateral status for loans, frequency of loan data reporting, collateral field review results, the member's financial strength and condition, and the concentration of collateral type by member.

The Bank uses a Qualifying Collateral Report (QCR) that is designed to provide more timely and detailed collateral information. Depending on a member's credit product usage and financial condition, a member may be required to file the QCR on a quarterly or monthly basis. The QCR is designed to strengthen the Bank's collateral analytical review procedures. The output of the QCR is a member's MBC. For the small number of members who opt out of QCR filing, MBC is calculated

38


by the Bank, based on the member's regulatory filing data. The Bank's calculation is further reduced to 20% of the aggregate sum of eligible collateral values to establish an MBC. Such members are required to file an Annual Collateral Certification.
 
The Bank does not accept subprime residential mortgage loans as qualifying collateral. Therefore, loans identified as subprime residential mortgage loans are not included in a member's MBC. As of June 30, 2012, however, the Bank held security interests in subprime residential mortgage loans pledged as collateral under blanket-lien agreements; such assets were not assigned a lending value. The Bank will allow loans with a FICO score of 660 or below if there are other mitigating factors, including a loan-to-value (LTV) ratio of 65% or less plus one of the following: (1) a debt-to-income ratio of 35% or less or (2) a satisfactory payment history over the past 12 months (i.e., no 30-day delinquencies). For loans in which no FICO is available, a collateral weighting of 60% will apply. During 2011, the Bank implemented modifications to the QCR process whereby filing members stratify their holdings of first lien residential mortgage loans into traditional, qualifying low FICO, and qualifying unknown FICO categories. Under limited circumstances, the Bank allows nontraditional residential mortgage loans that are consistent with FFIEC guidance to be pledged as collateral and used to determine a member's MBC. The Bank may require specific loan level characteristic reporting on nontraditional residential mortgage loans and may assign more conservative collateral weightings on a case-by-case basis. At June 30, 2012, less than 13% of the Bank's total pledged collateral was considered nontraditional mortgage loans consistent with FFIEC guidance.

During June 2012, the Bank implemented the following changes to its Collateral Policy: (1) an increase in the collateral weighting on commercial real estate by 10% (from 50% to 60% for blanket-undelivered; from 40% to 50% for blanket-delivered); and (2) an increase in the collateral weighting on agricultural and commercial business loans (CFI eligible collateral) by 10% (from 50% to 60% for blanket-undelivered; from 40% to 50% for blanket-delivered).

The Bank is allowed to expand eligible collateral for many of its members. Members that qualify as CFIs can pledge small-business, small-farm, small-agribusiness and community development loans as collateral for credit products from the Bank. At June 30, 2012, loans to CFIs secured with both eligible standard and expanded collateral represented approximately $2.9 billion, or 9.1% of total par value of loans outstanding. Eligible expanded collateral represented 9.0% of total eligible collateral for these loans. However, these loans were collateralized by sufficient levels of non-CFI collateral.

Collateral Agreements and Valuation. The Bank provides members with two options regarding collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. Under a blanket lien agreement, the Bank obtains a lien against all of the member's unencumbered eligible collateral assets and most ineligible assets to secure the member's obligations with the Bank. If applicable, under a specific collateral agreement, the Bank obtains a lien against specified eligible collateral assets of the member or its affiliate to secure the member's obligations with the Bank. The member provides a detailed listing, as an addendum to the agreement, identifying those assets pledged as collateral. Details regarding average lending values assigned to various types of collateral provided under both blanket liens and specific liens and delivery arrangements are available in the "Credit and Counterparty Risk - TCP and Collateral" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K.

The following table summarizes total eligible collateral values for the Bank's ten largest member borrowers, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of June 30, 2012 and the amounts at December 31, 2011. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
Ten largest member borrowers
June 30, 2012
December 31, 2011
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
30,235.7

38.6
%
$
29,787.6

43.1
%
High quality investment securities(1)
723.8

0.9

—

—

ORERC(2)/CFI eligible collateral
40,657.0

52.0

32,750.5

47.5

Multi-family residential mortgage loans
6,626.8

8.5

6,473.1

9.4

Total eligible collateral value
$
78,243.3

100.0
%
$
69,011.2

100.0
%
Total TCE
$
33,828.0

 
$
29,125.6

 
Collateralization ratio (eligible collateral value to TCE
outstanding)
231.3
%
 
236.9
%
 
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. agency securities, TLGP investments, GSE MBS and private label MBS with a credit rating of AAA and acquired by the member prior to July 10, 2007. Upon delivery, these securities are valued daily and private label MBS are subject to weekly ratings reviews.
(2) Other real estate related collateral.


39



The following tables present information on a combined basis regarding the type of collateral securing the outstanding credit exposure and the collateral status of all members as of June 30, 2012 and December 31, 2011.

 
June 30, 2012
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
43,648.2

39.6
%
$
4.0

0.6
%
$
2,134.0

35.0
%
$
45,786.2

39.1
%
High quality investment securities(1)
1,818.8

1.6

667.1

99.4

480.4

7.9

2,966.3

2.5

ORERC/ CFI eligible collateral
57,051.5

51.7

—

—

3,275.2

53.7

60,326.7

51.5

Multi-family residential mortgage
  loans
7,846.4

7.1

0.1

—

206.5

3.4

8,053.0

6.9

Total eligible collateral value
$
110,364.9

100.0
%
$
671.2

100.0
%
$
6,096.1

100.0
%
$
117,132.2

100.0
%
Total TCE
$
38,846.0

96.0
%
$
622.2

1.6
%
$
981.7

2.4
%
$
40,449.9

100.0
%
Number of members
174

81
%
5

2
%
36

17
%
215

100.0
%


 
December 31, 2011
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
43,008.5

43.0
%
$
4.3

0.4
%
$
2,200.8

40.3
%
$
45,213.6

42.4
%
High quality investment securities(1)
1,788.4

1.8

1,143.4

99.6

643.4

11.8

3,575.2

3.4

ORERC/ CFI eligible collateral
47,591.1

47.5

—

—

2,465.7

45.1

50,056.8

46.9

Multi-family residential mortgage
  loans
7,719.6

7.7

0.1

—

154.2

2.8

7,873.9

7.3

Total eligible collateral value
$
100,107.6

100.0
%
$
1,147.8

100.0
%
$
5,464.1

100.0
%
$
106,719.5

100.0
%
Total TCE
$
34,950.7

94.7
%
$
944.6

2.6
%
$
1,006.6

2.7
%
$
36,901.9

100.0
%
Number of members
177

81
%
4

2
%
38
17
%
219
100.0
%
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. agency securities, TLGP investments, GSE MBS and private label MBS with a credit rating of AAA and acquired by the member prior to July 10, 2007. Upon delivery, these securities are valued daily and private label MBS are subject to weekly ratings reviews.

Credit and Counterparty Risk - Investments

The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. As of June 30, 2012 and December 31, 2011, the Bank's carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $6.0 billion and $5.8 billion, respectively.


40

Investment External Credit Ratings. The following tables present the Bank's investment carrying values as of June 30, 2012 and December 31, 2011 based on the lowest rating from the NRSROs (Moody's, S&P and Fitch). Carrying values for AFS and trading securities represent fair value.
 
June 30, 2012 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
BB
B
Other(4)
Total
Money market investments:
 
 
 
 
 
 
 
 
   Securities purchased under agreements
   to resell
$
—

$
750.0

$
1,165.0

$
—

$
—

$
—

$
—

$
1,915.0

   Federal funds sold
—

1,000.0

200.0

—

—

—

—

1,200.0

Total money market investments
—

1,750.0

1,365.0

—

—

—

—

3,115.0

Investment securities:
 
 
 
 
 
 
 
 
   Certificates of deposit
—

1,800.0

1,050.0

—

—

—

—

2,850.0

   Treasury bills
—

730.0

—

—

—

—

—

730.0

   Other U.S. obligations
—

20.9

—

—

—

—

—

20.9

   TLGP investments
—

—

—

—

—

—

—

—

   GSE securities
—

1,004.8

—

—

—

—

—

1,004.8

   State and local agency obligations
14.7

265.1

—

—

—

—

—

279.8

Total non-MBS
14.7

3,820.8

1,050.0

—

—

—

—

4,885.5

  MBS issued by Federal agencies
—

2,179.9

—

—

—

—

—

2,179.9

  MBS issued by GSEs
—

5,219.3

—

—

—

—

—

5,219.3

  Private label residential MBS
66.2

178.1

67.8

537.2

264.9

320.9

1,438.2

2,873.3

  Private label HELOCs
—

13.7

1.3

—

—

7.9

6.5

29.4

Total MBS
66.2

7,591.0

69.1

537.2

264.9

328.8

1,444.7

10,301.9

Total investments
$
80.9

$
13,161.8

$
2,484.1

$
537.2

$
264.9

$
328.8

$
1,444.7

$
18,302.4



41

 
December 31, 2011 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
BB
B
Other(4)
Total
Money market investments:
 
 
 
 
 
 
 
 
   Federal funds sold
$
—

$
1,750.0

$
700.0

$
—

$
—

$
—

$
—

$
2,450.0

Investment securities:
 
 
 
 
 
 
 
 
   Certificates of deposit
—

1,100.0

900.0

—

—

—

—

2,000.0

   Treasury bills
—

730.0

—

—

—

—

—

730.0

   TLGP investments
—

250.1

—

—

—

—

—

250.1

   GSE securities
—

939.1

—

—

—

—

—

939.1

   State and local agency obligations
3.0

275.7

—

—

—

—

—

278.7

Total non-MBS
3.0

3,294.9

900.0

—

—

—

—

4,197.9

  MBS issued by Federal agencies
—

2,411.1

—

—

—

—

—

2,411.1

  MBS issued by GSEs
—

4,269.8

—

—

—

—

—

4,269.8

  Private label residential MBS
178.5

140.8

181.6

541.4

318.6

330.2

1,564.4

3,255.5

  Private label HELOCs
—

15.4

2.2

—

—

8.1

7.0

32.7

Total MBS
178.5

6,837.1

183.8

541.4

318.6

338.3

1,571.4

9,969.1

Total investments
$
181.5

$
11,882.0

$
1,783.8

$
541.4

$
318.6

$
338.3

$
1,571.4

$
16,617.0

Notes:
(1) Securities purchased under agreements to resell, Federal funds sold, and certificates of deposit had short-term ratings of A-1/P-1.
(2) Various deposits not held as investments as well as mutual fund equity investments held by the Bank through Rabbi trusts which are not generally assigned a credit rating are excluded from the tables above. The mutual fund equity investment balances totaled $5.8 million and $6.2 million at June 30, 2012 and December 31, 2011, respectively.
(3) Balances exclude total accrued interest of $14.7 million and $15.7 million at June 30, 2012 and December 31, 2011, respectively.
(4) At June 30, 2012, “Other” included securities rated CCC, CC, C and D with balances of $109.8 million, $351.1 million, $494.1 million and $489.7 million, respectively. At December 31, 2011, “Other” included securities rated CCC, CC, C and D with balances of $157.7 million, $518.7 million, $760.4 million and $134.6 million, respectively.

As of June 30, 2012, there were credit rating agency actions affecting a total of 26 private label MBS in the investment portfolio resulting in downgrades of at least one credit rating level since December 31, 2011. These securities had a total par value of $800.9 million and $899.9 million as of June 30, 2012 and at December 31, 2011, respectively, reflected in the tables above. Securities downgraded from "investment grade" to “below investment grade” represented a total par balance of $23.2 million and $27.7 million at June 30, 2012 and December 31, 2011, respectively.

The Bank also manages credit risk based on an internal credit rating system. For purposes of determining the internal credit rating, the Bank measures credit exposure through a process which includes internal credit review and various external factors, including the placement on negative watch by one or more NRSROs. In all cases, the Bank's assigned internal credit rating will never be higher than the lowest external credit rating. For internal reporting purposes, the incorporation of negative credit watch into the credit rating analysis of an investment may translate into a downgrade of one credit rating level from the external rating.


42

From July 1, 2012 through July 31, 2012, the following credit rating agency actions were taken with respect to securities in the Bank's investment portfolio. The carrying values and fair values of these securities as of June 30, 2012 are presented in the following table.
(in millions)
Private label residential MBS
From
To
Carrying Value
Fair Value
AA
A
$
8.0

$
7.6

AA
BBB
29.4

30.0

A
BBB
14.6

13.8

BBB
BB
15.5

14.5

CCC
CC
47.1

47.1

 
 
$
114.6

$
113.0


At July 31, 2012, the following securities were on negative watch. The carrying values and fair values of these securities as of June 30, 2012 are presented in the following table.
 
Private label residential MBS
HELOCs
(in millions)
Carrying Value
Fair Value
Carrying Value
Fair Value
AAA
$
12.7

$
13.1

$
—

$
—

AA
—

—

13.7

10.1

A
4.2

4.2

—

—

BB
27.7

24.7

—

—

B
—

—

7.9

7.9

 
$
44.6

$
42.0

$
21.6

$
18.0


Short-term Investments. The Bank maintains a short-term investment portfolio to provide funds to meet the credit needs of its members and to maintain liquidity. The FHLBank Act and Finance Agency regulations set liquidity requirements for the FHLBanks. In addition, the Bank maintains a contingency liquidity plan in the event of operational disruptions at the Bank and the Office of Finance. See the Liquidity and Funding Risk section of this Item 2 for a discussion of the Bank's liquidity management.

Within the portfolio of short-term investments, the Bank faces credit risk from unsecured exposures. The Bank's unsecured credit investments have maturities generally ranging between overnight and six months and include the following types:
•
Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest;
•
Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on an overnight and term basis;
•
Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities;
•
Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer on demand.

Under the Bank's Risk Governance Policy, the Bank can place money market investments, certificates of deposit, and commercial paper on an unsecured basis with large financial institutions with long-term credit ratings no lower than A. This policy was revised in April 2012 to permit the long-term credit rating to be no lower than BBB on these types of future transactions. Management actively monitors the credit quality of these counterparties.

As of June 30, 2012, the Bank had unsecured exposure to 13 counterparties totaling $4.1 billion, or an average of $311.6 million per counterparty, with unsecured exposure to two counterparties exceeding 10% of the total exposure.


43

The following table presents the Banks' unsecured credit exposure with private counterparties by investment type at June 30, 2012. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
 
 
Carrying Value (1)
June 30, 2012
December 31, 2011
Certificates of deposit
$
2,850

$
2,000

Federal funds sold
1,200

2,450

Total
$
4,050

$
4,450

Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and
supranational entities.

As of June 30, 2012, the Banks' unsecured investment credit exposure to U.S. branches and agency offices of foreign commercial banks was limited to Federal funds sold and certificates of deposit. As of June 30, 2012, 100.0% and 70.2% of the Bank's unsecured investment credit exposure in Federal funds sold and certificates of deposit, respectively, was to U.S. branches and agency offices of foreign commercial banks.

The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty's financial performance, capital adequacy, sovereign support, and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, the Bank may limit or suspend existing exposures.

Finance Agency regulations include limits on the amount of unsecured credit the Bank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty's overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of the Bank's total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that the Bank may offer for term extensions of unsecured credit ranges from 1% to 15% based on the counterparty's credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments, and derivative transactions.

Finance Agency regulation also permits the Bank to extend additional unsecured credit for overnight transactions and for sales of Federal funds subject to continuing contracts that renew automatically. The Bank's total unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of 2% to 30% of the eligible amount of regulatory capital, based on the counterparty's credit rating. As of June 30, 2012, the Bank was in compliance with the regulatory limits established for unsecured credit.

The Bank is prohibited by Finance Agency regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. The Bank's unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. The Bank's unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. The Bank is in compliance with the regulation and did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union, as of June 30, 2012. Bank management has limited its unsecured investment activity with all European counterparties to overnight maturities only.

The following table presents the long-term credit ratings of the unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks based on the nationally recognized statistical rating organization(s) used. This table does not reflect the foreign sovereign government's credit rating. The Bank mitigates this credit risk by generally investing in unsecured investments of highly-rated counterparties and limits foreign exposure to those countries rated AA or higher.

44

(in millions)
 
 
 
 
 
 
June 30, 2012 (1)
Carrying Value (2)
 
Investment Grade
 
 
 
AAA
AA
A
BBB
 
Total
Domicile of Counterparty
 
 
 
 
 
 
Domestic
$
—

$
650

$
200

$
—

 
$
850

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
 
 
  Australia
—

1,500

—

—

 
1,500

  Canada
—

900

600

—

 
1,500

  Netherlands
—

200

—

—

 
200

Total
$
—

$
3,250

$
800

$
—

 
$
4,050

Notes:
(1) Does not reflect any changes in ratings, outlook or watch status occurring after June 30, 2012. These ratings represent the lowest rating
available for each security owned by the Bank based on the nationally recognized statistical rating organization(s) used by the Bank.
The Bank's internal ratings may differ from those obtained from the nationally recognized statistical rating organization(s).
(2) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and
supranational entities.

The following table presents the remaining contractual maturity of the Bank's unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks. The Bank also mitigates the credit risk on investments by generally investing in investments that have short-term maturities. At June 30, 2012, 29.6% of the carrying value of the total unsecured investments held by the Bank had overnight maturities.
(in millions)
 
 
 
 
 
 
 
 
June 30, 2012
Carrying Value (1)
 
Overnight
Due 2 days through 30 days
Due 31 days through 90 days
Due 91 days through 180 days
Due 181 days through 270 days
Due after 270 days
 
Total
Domicile of Counterparty
 
 
 
 
 
 
 
 
Domestic
$
100

$
350

$
400

$
—

$
—

$
—

 
$
850

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
 
 
 
 
  Australia
500

—

700

300

—

—

 
1,500

  Canada
500

400

600

—

—

—

 
1,500

  Netherlands
200

—

—

—

—

—

 
200

Total
$
1,200

$
850

$
1,700

$
300

$
—

$
—

 
$
4,050

Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and
supranational entities.

In addition, at June 30, 2012, the Bank had $1.9 billion in overnight securities purchased under agreements to resell which were secured by U.S. Treasuries. These investments were with one counterparty in Canada ($0.7 billion) and with two European counterparties, one of which is located in the United Kingdom ($0.9 billion) and the other located in Germany ($0.3 billion).

Treasury Bills, Agency, GSE Securities and State and Local Agency Obligations. In addition to U.S. Treasury bills and securities issued or guaranteed by U.S. agencies, the Bank invests in and is subject to credit risk related to GSE securities and state and local agency obligations. The Bank maintains a portfolio of U.S. Treasury, U.S. agency and GSE securities as a secondary liquidity portfolio. Further, the Bank maintains a portfolio of state and local agency obligations to invest in mission-related assets and enhance net interest income. These portfolios totaled $2.0 billion and $2.2 billion as of June 30, 2012 and December 31, 2011, respectively. The year-end balance includes investment in TLGP, which matured in June 2012.

Agency and GSE MBS. The Bank invests in and is subject to credit risk related to MBS issued by Federal agencies and

45

GSEs that are directly supported by underlying mortgage loans. The Bank's total agency and GSE MBS portfolio increased $718.3 million from December 31, 2011 to June 30, 2012 due to purchases.

Private Label MBS. The Bank also holds investments in private label MBS, which are also supported by underlying mortgage loans. The Bank made investments in private label MBS that were rated AAA at the time of purchase with the exception of one, which was rated AA at the time of purchase. The carrying value of the Bank's private label MBS portfolio decreased $385.5 million from December 31, 2011 to June 30, 2012. This decline was primarily due to repayments.

Approximately 28.2% of the Bank's MBS portfolio at June 30, 2012 was issued by private label issuers. The Bank generally focused its private label MBS purchases on credit-enhanced, senior tranches of securities in which the subordinate classes of the securities provide credit support for the senior class of securities. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the senior class of securities would experience any credit losses. In late 2007, the Bank discontinued the purchase of private label MBS.

The prospectuses and offering memoranda for the private label MBS in the Bank's portfolio contain representations and warranties that the mortgage loans in the collateral pools were underwritten to certain standards. Based on the performance of the mortgages in some of the collateral pools, among other information, it appears that the failure to adhere to the stated underwriting standards was so routine that the underwriting standards were all but completely abandoned. The issuers, underwriters and rating agencies all failed to disclose that the underwriting standards that were represented in the offering documents were routinely not followed or had been abandoned altogether. This failure resulted in the Bank owning certain private label MBS on which it has recognized losses as more fully explained in the discussion on OTTI later on in this Risk Management section. The Bank has filed lawsuits against certain issuers, underwriters and rating agencies as more fully discussed in Part II, Item 1. Legal Proceedings in this Form 10-Q.

Participants in the mortgage market often characterize single family loans based upon their overall credit quality at the time of origination, generally considering them to be Prime, Alt-A or subprime. There is no universally accepted definition of these segments or classifications. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories, and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than Prime loans. Further, many mortgage participants classify single family loans with credit characteristics that range between Prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category or may be underwritten with low or no documentation compared to a full documentation mortgage loan. Industry participants often use this classification principally to describe loans for which the underwriting process is less rigorous to reduce the documentation requirements of the borrower.

The following table presents the par value of the private label MBS portfolio by various categories of underlying collateral and by interest rate payment terms. Unless otherwise noted, the private label MBS exposures below, and throughout this report, reflect the most conservative classification provided by the credit rating agencies at the time of issuance.

Characteristics of Private Label MBS by Type of Collateral
 
June 30, 2012
December 31, 2011
(dollars in millions)
Fixed Rate
Variable Rate
Total
Fixed Rate
Variable Rate
Total
Private label residential MBS:
 
 
 
 
 
 
  Prime
$
405.5

$
1,522.9

$
1,928.4

$
535.6

$
1,713.2

$
2,248.8

  Alt-A
618.4

744.8

1,363.2

674.9

821.1

1,496.0

  Subprime
—

6.5

6.5

—

7.3

7.3

    Total
1,023.9

2,274.2

3,298.1

1,210.5

2,541.6

3,752.1

HELOC:
 
 
 
 
 
 
  Alt-A
—

37.4

37.4

—

41.6

41.6

    Total
—

37.4

37.4

—

41.6

41.6

Total private label MBS
$
1,023.9

$
2,311.6

$
3,335.5

$
1,210.5

$
2,583.2

$
3,793.7



46

Certain MBS securities have a fixed-rate component for a specified period of time, then have a rate reset on a given date. When the rate is reset, the security is then considered to be a variable-rate security. Examples include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid adjustable-rate mortgages. In addition, certain of these securities may have a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are all reported as variable-rate, regardless of whether the rate reset date has occurred.

Private Label MBS Collateral Statistics. The following tables provide collateral performance and credit enhancement information for the Bank's private label MBS portfolio by par and by collateral type as of June 30, 2012. The Bank has purchased no private label MBS since 2007.
 
Private Label MBS by Vintage - Prime
(dollars in millions)
2007
2006
2005
2004 and earlier
Total
Par by lowest external long-
 term rating:
 
 
 
 
 
  AAA
$
—

$
—

$
7.6

$
45.7

$
53.3

  AA
—

—

—

106.2

106.2

  A
—

—

—

50.4

50.4

  BBB
—

40.0

8.3

318.4

366.7

Below investment grade:
 
 
 
 

  BB
—

11.7

114.2

142.9

268.8

  B
5.5

—

57.7

108.4

171.6

  CCC
—

—

36.5

10.3

46.8

  CC
172.8

139.9

40.9

—

353.6

  C
48.0

194.1

63.2

—

305.3

  D
202.4

—

3.3

—

205.7

    Total
$
428.7

$
385.7

$
331.7

$
782.3

$
1,928.4

Amortized cost
$
351.4

$
350.6

$
319.3

$
776.5

$
1,797.8

Gross unrealized losses
(8.8
)
(13.0
)
(18.1
)
(37.5
)
(77.4
)
Fair value
345.1

340.2

303.3

741.3

1,729.9

OTTI :
 
 
 
 
 
  Credit-related OTTI taken
$
(2.9
)
$
(5.4
)
$
(0.1
)
$
(0.1
)
$
(8.5
)
  Noncredit-related OTTI taken
2.9

4.0

0.1

(0.7
)
6.3

Total YTD 2012 OTTI taken
$
—

$
(1.4
)
$
—

$
(0.8
)
$
(2.2
)
Weighted average fair value/par
80.5
%
88.2
%
91.4
%
94.8
%
89.7
%
Original weighted average credit support
6.8

7.7

4.2

5.1

5.8

Weighted-average credit
support - current
1.5

4.2

5.4

10.6

6.4

Weighted average collateral delinquency(1)
17.0

13.5

12.4

8.5

12.1


 











47

 
Private Label MBS by Vintage - Alt-A
(dollars in millions)
2007
2006
2005
2004 and Earlier
Total
Par by lowest external long-
 term rating:
 
 
 
 
 
  AAA
$
—

$
—

$
—

$
13.0

$
13.0

  AA
—

13.7

—

59.7

73.4

  A
—

 
10.6

4.2

14.8

  BBB
—

—

—

173.1

173.1

Below investment grade:
 
 
 
 
 
  B
—

—

118.1

39.3

157.4

  CCC
—

56.1

—

11.9

68.0

  CC
—

—

43.5

—

43.5

  C
160.5

148.9

18.8

—

328.2

  D
107.8

353.3

30.7

—

491.8

    Total
$
268.3

$
572.0

$
221.7

$
301.2

$
1,363.2

Amortized cost
$
197.7

$
457.8

$
210.5

$
299.9

$
1,165.9

Gross unrealized losses
(25.8
)
(45.3
)
(21.4
)
(9.7
)
(102.2
)
Fair value
171.9

414.9

189.1

291.6

1,067.5

OTTI:
 
 
 
 
 
  Credit-related OTTI taken
$
—

$
(0.4
)
$
—

$
(0.6
)
$
(1.0
)
  Noncredit-related OTTI taken
—

0.4

—

0.6

1.0

Total YTD 2012 OTTI taken
$
—

$
—

$
—

$
—

$
—

Weighted average fair value/par
64.1
%
72.5
%
85.3
%
96.8
%
78.3
%
Original weighted average credit support
13.6

9.9

5.8

5.3

9.0

Weighted-average credit
 Support - current
2.3

1.9

6.9

14.1

5.9

Weighted average collateral delinquency(1)
33.5

23.5

15.0

9.2

20.9

Notes:
(1) Delinquency information is presented at the cross-collateralization level.

The Bank's subprime and HELOC private label MBS balances are immaterial to the overall portfolio. Accordingly, the related collateral statistics for these private label MBS are not presented.



48

Private Label MBS Issuers and Servicers. The following tables provide information regarding the issuers and master servicers of the Bank's private label MBS portfolio that exceeded 5% of the total as of June 30, 2012. Management actively monitors the credit quality of the portfolio's master servicers. For further information on the Bank's MBS master servicer risks, see additional discussion in the Item 1A. Risk Factors in the Bank's 2011 Form 10-K.
 
June 30, 2012
Original Issuers
(in millions)
Total Carrying Value
Total Fair Value
Lehman Brothers Holdings Inc.(1)
$
683.1

$
668.9

J.P. Morgan Chase & Co.
597.9

593.3

Wells Fargo & Co.
326.3

319.0

Countrywide Financial Corp.(2)
316.1

308.2

Citigroup Inc.
232.2

217.8

GMAC LLC
154.0

153.9

Other
593.1

566.5

Total
$
2,902.7

$
2,827.6


 
June 30, 2012
Current Master Servicers
(in millions)
Total Carrying Value
Total Fair Value
Wells Fargo Bank, NA
$
1,027.1

$
1,000.7

Aurora Loan Services Inc.
683.1

668.9

Bank of America Corp.
371.7

359.2

Citimortgage Inc.
232.2

217.8

US Bank
207.5

207.5

Other
381.1

373.5

Total
$
2,902.7

$
2,827.6

Notes:
(1)Lehman Brothers Holdings Inc. filed for bankruptcy in 2008. Aurora Loan Services Inc. is now servicing all but one of the bonds, and six different trustees have assumed responsibility for these 20 bonds. However, the Bank believes the original issuer is more relevant with respect to understanding the bond underwriting criteria.
(2)Bank of America acquired Countrywide Financial Corp and Countrywide Home Loan Servicing LP following issuance of certain private label MBS. The Bank believes the original issuer is more relevant with respect to understanding the bond underwriting criteria. However, Bank of America is currently servicing these private label MBS.
 

49

Private Label MBS in Unrealized Loss Positions. The following table provides information on the portion of the private label MBS portfolio in an unrealized loss position at June 30, 2012 and July 31, 2012.

Private Label MBS in Unrealized Loss Positions
 
June 30, 2012
July 31, 2012(1)
(dollars in millions)
Par
Amort Cost
Gross Unrealized Losses
Wtd-Avg
Collateral
Del Rate %(2)
% AAA
% AAA
% All Other Inv Grade(3)
% Total Inv Grade
% Below Inv Grade
Current % Watchlist
Residential MBS
 backed by:
 
 
 
 
 
 
  Prime loans:
 
 
 
 
 
 
 
 
 
 
    First lien
$
1,462.5

$
1,352.6

$
(77.4
)
13.3
0.3
0.3
21.4
21.7
78.3
1.9
  Alt-A and other:
 
 
 
 
 
 
 
 
 
 
    Alt-A other
1,155.6

980.2

(102.2
)
22.4
—
—
15.2
15.2
84.8
—
  Subprime loans:
 
 
 
 
 
 
 
 
 
 
    First lien
6.5

5.5

(0.9
)
31.9
—
—
61.7
61.7
38.3
—
HELOC backed by
 Alt-A and other:
 
 
 
 
 
 
 
 
 
 
    Alt-A other
33.9

28.9

(5.2
)
7.4
—
—
44.1
44.1
55.9
75.9
Notes:
(1) Reflects impact of paydowns to zero or sales of securities.
(2) Delinquency information is presented at the cross-collateralization level.
(3) Excludes AAA-rated investments.

Monoline Bond Insurers. The Bank's investment securities portfolio includes a limited number of investments which are insured by one of four monoline bond insurers/guarantors as shown in the following table. The table reflects the par balance of the investments guaranteed by each insurer. The bond insurance on these investments generally guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying collateral. The Bank closely monitors the financial condition of these bond insurers.

There are seven insured investment securities backed by HELOC mortgage loans as of June 30, 2012. The credit rating of each of the MBS is closely related to the credit rating of the applicable bond insurer. Most of these securities did not have stand-alone credit ratings and carry limited or no additional CE. The Bank analyzes the creditworthiness of the bond insurer and typically assigns to the individual security the higher of the bond insurer's rating or the stand-alone investment rating, if available. Refer to additional information provided in Note 6 - OTTI to the unaudited financial statements in this Form 10-Q which describes the analysis of monoline bond insurers to assess their financial strength and burnout period (i.e., the time horizon of their ability to fulfill their financial obligations).
 
June 30, 2012
December 31, 2011
(in millions)
Private
Label
MBS
Private
Label
MBS
AMBAC Assurance Corporation (AMBAC)
$
9.3

$
10.8

Financial Guaranty Insurance Co. (FGIC)
2.3

2.5

Assured Guaranty Municipal Corp (AGMC)
13.7

15.4

MBIA Insurance Corporation (MBIA)
12.1

12.9

Total
$
37.4

$
41.6



The following table presents the credit rating of the Bank's monoline insurers as of June 30, 2012. Fitch no longer rates these monoline insurers. In addition, neither AMBAC nor FGIC are rated by Fitch, Moody's, or S&P.
 
Moody's
S&P
AGMC
Aa3
AA-
MBIA
B3
B

At June 30, 2012, the Bank also had three Prime reperforming private label MBS, the underlying mortgage loans of which

50

are government-guaranteed, which generally provides for the substantial repayment of principal. These three securities had a total par balance of $26.5 million and a total fair value of $19.6 million at June 30, 2012 and all three securities were rated “below investment grade” at June 30, 2012.

OTTI. During the six months ended June 30, 2012 and 2011, the Bank recognized $10.8 million and $31.3 million of credit-related OTTI charges in earnings (the credit loss) related to private label MBS after the Bank determined that it was likely that it would not recover the entire amortized cost of each of these securities. Because the Bank does not intend to sell and it is not more likely than not that the Bank will be required to sell any OTTI securities before anticipated recovery of their amortized cost basis, the Bank does not have an additional OTTI charge for the difference between amortized cost and fair value. The Bank has not recorded OTTI on any other type of security (i.e., U.S. agency MBS or non-MBS securities).
 
The Bank's estimate of cash flows has a significant impact on the determination of credit losses. Cash flows expected to be collected are based on the performance and type of private label MBS and the Bank's expectations of the economic environment. To ensure consistency in determination of the OTTI for private label MBS among all FHLBanks, each quarter the Bank works with the OTTI Governance Committee to update its OTTI analysis based on actual loan performance and current housing market assumptions in the collateral loss projection models, which generate the estimated cash flows from the Bank's private label MBS.
 
In performing the cash flow analysis on the majority of the Bank's private label MBS, the Bank used two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the majority of the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs), based upon an assessment of the individual housing markets. The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget . As currently defined, a CBSA must contain at least one urban area of ten thousand or more people.

The OTTI Governance Committee's housing price forecast assumed current-to-trough home price declines ranging from zero (for those housing markets that are believed to have reached their trough) to 6%. For those markets where further home price declines are anticipated, the declines were projected to occur over the nine month period beginning April 1, 2012. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market as noted in the table below.
Recovery Ranges of Housing Price Change
Months
Annualized Rates %
1 - 6
0.0 - 2.8
7 - 18
0.0 - 3.0
19 - 24
1.0 - 4.0
25 - 30
2.0 - 4.0
31 - 42
2.0 - 5.0
43 - 66
2.0 - 6.0
Thereafter
2.3 - 5.6

The month-by-month projection of future loan performance derived from the first model is the median of 100 projections (based on cumulative defaults), and reflects the projected prepayments, defaults and loss severities. These projections were input into a second model that allocated the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach reflects a best estimate scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described above.


51

Significant assumptions used on securities that incurred a credit loss during the three months ended June 30, 2012 are included in Note 6 - OTTI to the unaudited financial statements included in this Form 10-Q. The classification of the bond is determined by the cash flow model. Significant assumptions used on all of the Bank's private label MBS as part of its second quarter 2012 analysis, whether OTTI was recorded or not, are presented below.
 
Significant Inputs for Private Label Residential MBS
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Year of securitization
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
Prime:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
8.7
 
6.0
-
11.6
11.6
29.0
 
13.0
-
36.9
 
45.2
 
35.2
-
51.6
 
1.5
 
0.0
-
4.3
2006
9.5
 
6.9
-
17.9
 
27.7
 
5.1
-
38.4
 
38.6
 
25.0
-
43.3
 
4.6
 
0.5
-
10.0
2005
11.5
 
7.1
-
18.3
 
14.0
 
2.7
-
28.4
 
33.1
 
19.9
-
44.5
 
6.6
 
0.0
-
11.9
     2004 and prior
18.4
 
7.3
-
43.2
 
6.8
 
0.0
-
19.3
 
25.9
 
0.0
-
44.5
 
9.0
 
4.4
-
27.7
    Total Prime
12.5
 
6.0
-
43.2
 
18.3
 
0.0
-
38.4
 
35.0
 
0.0
-
51.6
 
5.7
 
0.0
-
27.7
Alt-A:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
6.8
 
5.9
-
7.0
 
51.6
 
45.2
-
55.7
 
47.1
 
44.1
-
49.8
 
1.4
 
0.0
-
3.9
2006
8.8
 
6.8
-
16.4
 
40.0
 
1.8
-
54.0
 
47.9
 
18.4
-
57.8
 
1.4
 
0.0
-
12.1
2005
11.1
 
9.3
-
14.7
 
23.7
 
7.0
-
29.6
 
42.0
 
25.8
-
66.3
 
3.4
 
0.0
-
13.7
     2004 and prior
12.5
 
6.2
-
19.0
 
12.7
 
1.5
-
50.1
 
28.1
 
18.4
-
44.8
 
14.6
 
5.8
-
25.1
    Total Alt-A
9.9
 
5.9
-
19.0
 
31.5
 
1.5
-
55.7
 
40.4
 
18.4
-
66.3
 
6.2
 
0.0
-
25.1
Subprime:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     2004 and prior
5.5
 
5.3
-
5.8
 
36.0
 
35.4
-
37.1
 
75.8
 
65.9
-
81.9
 
42.4
 
11.1
-
61.8
 Total Residential MBS
11.3
 
5.3
-
43.2
 
24.1
 
0.0
-
55.7
 
37.4
 
0.0
-
81.9
 
6.0
 
0.0
-
61.8

 
Significant Inputs for HELOCs
 
Prepayment Rates
Default Rates
Loss Severities
 
Current Credit Enhancement
Year of Securitization
Weighted Avg %
 
Range %
Weighted Avg %
 
Range %
Weighted Avg %
Range %
Weighted Avg %
Range %
HELOCs (Alt-A):
 
 
 
 
 
 
 
 
 
 
 
 
2006
14.8
 
14.8
2.5
 
2.5
100.0
 
100.0
 
0.0

0.0
 
2005
32.2
 
32.2
0.3
 
0.3
100.0
 
100.0
 
72.5

72.5
 
     2004 and prior
10.3
 
7.2
-
17.4
4.7
 
0.6
-
6.8
100.0
 
100.0
 
2.6

0.0

-
8.4

  Total HELOCs (Alt-A)
12.7
 
7.2
-
32.2
3.8
 
0.3
-
6.8
100.0
 
100.0
 
4.1

0.0

-
72.5


Of the $10.8 million of OTTI credit losses recognized during 2012, $7.2 million was recognized during the first quarter and $3.6 million was recognized during the second quarter. The Bank's quarterly OTTI analysis is based on current and forecasted economic trends. The Bank's life-to-date credit losses are concentrated in its 2006 and 2007 vintage bonds. These vintages represent 92% of life-to-date credit losses, of which 48% relates to Prime and 44% relates to Alt-A.

The second quarter 2012 OTTI credit loss was primarily due to 2006 private label MBS that are classified as Prime Hybrid securities. The OTTI credit loss on these securities was the result of more pessimistic assumptions based on comparisons to relevant benchmark statistics for the private label MBS.

Based on the Bank's OTTI evaluation, the Bank determined that 52 of its private label MBS were OTTI at June 30, 2012 (i.e., they are projected to incur a credit loss during their life), including one private label MBS deemed to be OTTI for the first time during 2012. The Bank has recognized $314.1 million of credit losses on these securities life-to-date. The life-to-date credit loss excludes actual cash losses realized, which are recorded as a reduction to credit loss and par. During 2012, the Bank recognized $13.2 million of actual cash losses and $32.9 million life-to-date. The life-to-date credit loss excludes $106.0

52

million of credit losses related to securities sold in previous quarters for which the Bank recognized gains of $15.6 million.

By comparison, at June 30, 2011, the Bank had determined that 51 of its private label MBS were other-than-temporarily-impaired, including four private label MBS deemed to be other-than-temporarily-impaired for the first time. The Bank recognized $309.4 million of credit losses on these securities life-to-date. During the first half of 2011, the Bank realized $7.9 million of actual principal writedowns on two private label MBS and $13.0 million life-to-date. The life-to-date credit loss excludes credit losses related to securities sold in previous quarters for which the Bank recognized gains of $7.3 million in 2011.

The following table presents the amount of credit-related and noncredit-related OTTI charges the Bank recorded on its private label MBS portfolio, on both newly impaired and previously impaired securities, for the three and six months of 2012 and 2011.
 
Three Months Ended June 30, 2012
Three Months Ended June 30, 2011
(in millions)
Credit Losses
Net Noncredit Losses
Total Losses
Credit Losses
Net Noncredit Losses
Total Losses
Securities newly impaired
  during the period
$
—

$
—

$
—

$
—

$
—

$
—

Securities previously
  impaired prior to current
  period
$
(3.6
)
$
2.5

$
(1.1
)
$
(10.8
)
$
10.8

$
—

Total
$
(3.6
)
$
2.5

$
(1.1
)
$
(10.8
)
$
10.8

$
—


 
Six Months Ended June 30, 2012
Six Months Ended June 30, 2011
(in millions)
Credit Losses
Net Noncredit Losses
Total Losses
Credit Losses
Net Noncredit Losses
Total Losses
Securities newly impaired
  during the period
$
(0.1
)
$
(0.7
)
$
(0.8
)
$
(0.6
)
$
(2.5
)
$
(3.1
)
Securities previously
  impaired prior to current
  period
$
(10.7
)
$
9.3

$
(1.4
)
$
(30.7
)
$
30.7

$
—

Total
$
(10.8
)
$
8.6

$
(2.2
)
$
(31.3
)
$
28.2

$
(3.1
)

Each quarter the Bank updates its estimated cash flow projections and determines if there is an increase in the estimated cash flows the Bank will receive. If there is an increase in estimated cash flows and it is deemed significant, it is recorded as an increase in the yield on the Bank's investment and is recognized over the life of the investment. The Bank recognized an increase in yield on certain private label MBS which resulted in $4.5 million and $5.1 million of interest income during the first half of 2012 and the first half of 2011, respectively.

The Bank transfers private label MBS from HTM to AFS when an OTTI credit loss is recorded on a security. Transferring securities at the time of an OTTI credit loss event is considered a deterioration in the credit quality of the security. The Bank believes that the transfer increases its flexibility to potentially sell other-than-temporarily-impaired securities if market conditions are right. During the first half of 2012 and 2011, the Bank transferred private label MBS with a fair value of $11.3 million and $90.9 million, respectively, as of the date of the transfer.

Management will continue to evaluate all impaired securities, including those on which OTTI has been recorded. Material credit losses have occurred during the first half of 2012 and may occur in the future. The specific amount of credit losses will depend on the actual performance of the underlying loan collateral as well as the Bank's future modeling assumptions. Assumption changes in future periods could materially impact the amount of OTTI credit-related losses which could be recorded. Additionally, if the performance of the underlying loan collateral deteriorates, the Bank could experience further credit losses on the portfolio. The Bank cannot estimate the future amount of any additional credit losses.
 
As discussed above, the projection of cash flows expected to be collected on private label MBS involves significant judgment with respect to key modeling assumptions. Therefore, on all private label MBS, including HELOC investments, the Bank performed a cash flow analysis under one additional scenario that represented meaningful, plausible and more adverse

53

external assumptions. This more adverse scenario showed a larger home price decline and a slower rate of housing price recovery. Specifically, the current-to-trough forecast showed a decline of 5 percentage points more than the base case, and housing price recovery rates that are 33% lower than in the base case.

As shown in the table below, based on the estimated cash flows of the Bank's private label MBS under the adverse case scenario, the Bank's second quarter 2012 credit losses would have increased $32.1 million. Under the stress scenario, the Bank may recognize a credit loss in excess of the current maximum credit loss, the difference between the security's amortized cost basis and fair value, because the Bank believes fair value would decrease in the adverse scenario. The adverse scenario estimated cash flows were generated using the same model (Prime, Alt-A or subprime) as the base scenario. Using a model with more severe assumptions could increase the estimated credit loss recorded by the Bank. The adverse case housing price forecast is not management's current best estimate of cash flows and is therefore not used as a basis for determining OTTI. The table below classifies results based on the classification at the time of issuance and not the model used to estimate the cash flows.
Housing Price Scenarios
OTTI Credit Losses - Base vs. Stress Scenario
For the Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
Base Case
Adverse Case
($ in millions)
# of Securities
Unpaid Principal Balance
OTTI Related to Credit Loss
# of Securities (1)
Unpaid Principal Balance
OTTI
Related to Credit Loss
Prime
5

$
265.8

$
(3.2
)
14

$
509.5

$
(14.4
)
 
Alt-A
1

32.3

(0.3
)
19

818.3

(19.5
)
 
Subprime
1

2.5

(0.1
)
1

2.5

(0.2
)
 
HELOCs
—

—

—

4

17.8

(1.6
)
 
Total
7

$
300.6

$
(3.6
)
38

$
1,348.1

$
(35.7
)
 
(1) Of these 38 securities, 35 had an OTTI credit loss recorded in a prior period.


Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives

Mortgage Loans. The Finance Agency has authorized the Bank to hold mortgage loans under the MPF Program whereby the Bank acquires mortgage loans from participating members in a shared credit risk structure. These assets carry CEs, which give them the approximate equivalent of a AA credit rating at the time of purchase by the Bank, although the CE is not actually rated. The Bank had net mortgage loans held for portfolio of $3.6 billion at June 30, 2012 and $3.9 billion at December 31, 2011 after an allowance for credit losses of $14.1 million and $14.3 million, respectively.
 
Mortgage Insurers. The Bank's MPF Program currently has credit exposure to nine mortgage insurance companies to provide both primary mortgage insurance (PMI) and supplemental mortgage insurance (SMI) under the Bank's various products. The Bank closely monitors the financial condition of these mortgage insurers. PMI for MPF Program loans must be issued by an mortgage insurance company on the approved mortgage insurance company list whenever PMI coverage is required. However, no mortgage insurance company on the approved mortgage insurance company list currently has a AA- or better claims-paying ability rating from any NRSRO.

None of the Bank's mortgage insurers currently maintain a rating of A+ or better by at least one NRSRO. Given the credit deterioration of PMI providers, the estimate of the allowance for credit losses includes projected reduced claim payments. As required by the MPF Program, for ongoing PMI, the ratings model currently requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below A+. All PFIs have met this requirement.

The MPF Plus product required SMI under the MPF Program when each pool was established. At June 30, 2012, eight of the 14 MPF Plus pools still have SMI policies in place. The Bank does not currently offer the MPF Plus product and has not purchased loans under MPF Plus Commitments since July 2006. Per MPF Program guidelines, the existing MPF Plus product exposure is required to be secured by the PFI once the SMI company is rated below AA-. Because no mortgage insurer that underwrites SMI is rated AA or better, this requirement has been waived by the Finance Agency until the regulation is amended, provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of June 30, 2012, $71.6 million of SMI exposure had been secured by two PFIs.


54


The following tables present unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of June 30, 2012 and December 31, 2011.
 
Ratings by S&P/Moody's
June 30, 2012
(in millions)
June 30, 2012
Unpaid Principal Balance (1)
Maximum Coverage Outstanding (2)
Republic Mortgage Insurance Co.
R/-
$
6.7

$
2.6

Mortgage Guaranty Insurance Corp.
B/B1
5.2

2.1

PMI Mortgage Insurance Co.
R/Caa3
5.2

2.0

United Guaranty Residential Insurance Co.
BBB/Baa1
2.5

0.9

Radian Guaranty, Inc.
B/Ba3
1.5

0.6

Genworth Mortgage Insurance Corp.
B/Ba1
1.8

0.7

Other insurance providers
 
1.1

0.4

Total
 
$
24.0

$
9.3


 
Ratings by S&P/Moody's
December 31, 2011
(in millions)
December 31, 2011
Unpaid Principal Balance (1)
Maximum Coverage Outstanding (2)
Republic Mortgage Insurance Co.
CC/Caa2
$
6.9

$
2.7

Mortgage Guaranty Insurance Corp.
B+/B1
5.4

2.2

PMI Mortgage Insurance Co.
R/Caa3
5.0

1.9

United Guaranty Residential Insurance Co.
BBB/Baa1
2.4

1.0

Radian Guaranty, Inc.
B+/Ba3
2.0

0.8

Genworth Mortgage Insurance Corp.
BB-/Ba1
1.6

0.6

Other insurance providers
 
0.7

0.3

Total
 
$
24.0

$
9.5

Notes:
(1) Represents the unpaid principal balance of conventional loans 90 days or more delinquent or in the process of foreclosure. Assumes PMI in effect at time of origination. Insurance coverage may be discontinued once a certain LTV is met.
(2) Represents the estimated contractual limit for reimbursement of principal losses (i.e., risk in force) assuming the PMI at origination is still in effect. The amount of expected claims under these insurance contracts is substantially less than the contractual limit for reimbursement.

BOB Loans. See Item 1. Business in the Bank's 2011 Form 10-K for a description of this program. At June 30, 2012, the allowance for credit losses on BOB loans was $2.8 million, a decrease of $0.4 million from December 31, 2011, due to improved performance of the BOB loan portfolio.

Derivative Counterparties. The Bank is subject to credit risk arising from the potential non-performance by derivative counterparties with respect to the agreements entered into with the Bank, as well as certain operational risks relating to the management of the derivative portfolio. To manage credit risk, the Bank follows the policies established by the Board regarding unsecured extensions of credit. For all derivative counterparties, the Bank selects only highly-rated derivatives dealers and major banks that meet the Bank's eligibility criteria.


55


In the table below, Total Notional reflects outstanding positions with all counterparties while the credit exposure reflects only those counterparties to which the Bank has net credit exposure. In addition, Net Credit Exposure represents the estimated fair value of the derivative contracts that have a net positive market value to the Bank after adjusting for all cash and/or securities collateral.
 
June 30, 2012
December 31, 2011
(dollars in millions)
Credit Rating(1)
Total Notional
Net Credit Exposure
Total Notional
Net Credit Exposure
AA
$
845.0

$
16.1

$
4,777.0

$
29.9

A
23,718.7

10.5

26,320.6

6.2

BBB
7,635.6

—

—

—

Subtotal
32,199.3

26.6

31,097.6

36.1

Member institutions (2)
22.8

0.2

14.0

0.2

Total
$
32,222.1

$
26.8

$
31,111.6

$
36.3

Note:
(1) Credit ratings reflect the lowest rating from the credit rating agencies. These tables do not reflect changes in any rating, outlook or watch status after June 30. The Bank measures credit exposure through a process which includes internal credit review and various external factors.
(2) Member institutions include mortgage delivery commitments and derivatives with members where the Bank is acting as an intermediary. Collateral held with respect to derivatives with member institutions represents the minimum amount of eligible collateral physically held by or on behalf of the Bank or eligible collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

The following tables summarize the Bank's derivative counterparties which represent more than 10% of the Bank's total notional amount outstanding and net credit exposure as of June 30, 2012 and December 31, 2011.

Notional Greater Than 10%
June 30, 2012
December 31, 2011
(dollars in millions)
Derivative Counterparty
Credit Rating
Notional
% of Notional
Credit Rating
Notional
% of Notional
JP Morgan Chase Bank, NA
A
$
4,559.2

14.1

A
$
4,326.0

13.9

Deutsche Bank AG
A
4,252.6

13.2

A
5,274.2

16.9

Citi Group Financial
A
4,210.2

13.1

-
(1) 

(1) 

Credit Suisse International
A
3,603.0

11.2

A
3,419.0

11.0

Morgan Stanley Capital
A
3,425.3

10.6

-
(1) 

(1) 

BNP Paribas
-
(1 
) 
(1) 

AA
3,627.0

11.7

All others
n/a
12,171.8

37.8

n/a
14,465.4

46.5

 Total
 
$
32,221.1

100.0
%
 
$
31,111.6

100.0
%
 
 
 
 
 
 
 
Net Credit Exposure
  Greater Than 10%
June 30, 2012
December 31, 2011
(dollars in millions)
Derivative Counterparty
Credit Rating
Net Credit Exposure
% of Total Net Credit Exposure
Credit Rating
Net Credit Exposure
% of Total Net Credit Exposure
Royal Bank of Canada
AA
$
15.6

58.2

AA
$
14.9

41.1
%
HSBC Bank USA, NA
AA
6.3

23.5

AA
6.5

17.9

UBS AG
A
2.7

10.1

A
4.9

13.5

BNP Paribas
-
(1) 

(1) 

AA
8.5

23.5

All others
n/a
2.2

8.2

n/a
1.5

4.0

 Total
 
$
26.8

100.0
%
 
$
36.3

100.0
%
Note:
(1) The percentage of notional is not greater than 10%, so amount is not shown in table.

56


To manage market risk, the Bank enters into derivative contracts. Some of these derivatives are with U.S. branches of financial institutions located in Europe, specifically in Germany, Switzerland, France, and the United Kingdom. In terms of counterparty credit risk exposure, European financial institutions are exposed to the Bank as shown below.
(in millions)
As of June 30, 2012
Country of
Market Value
Collateral Obligation
Collateral Pledged
Counterparty
of Total Exposure
(Net Exposure)
by the Bank
Switzerland
$
248.1

$
248.1

$
246.8

United Kingdom
81.2

71.2

69.7

Germany
31.7

16.7

16.2

Total
$
361.0

$
336.0

$
332.7


(in millions)
As of December 31, 2011
Country of
Market Value
Collateral Obligation
Collateral Pledged
Counterparty
of Total Exposure
(Net Exposure)
by the Bank
Switzerland
$
256.4

$
256.4

$
254.3

United Kingdom
87.2

77.1

71.7

Germany
31.1

16.1

15.1

Total
$
374.7

$
349.6

$
341.1

Note: The average maturity of these derivative contracts is July 2016. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

In addition, the Bank is exposed to counterparty credit risk with U.S. branches of European financial institutions. This information is shown below.
(in millions)
As of June 30, 2012
Country of
Market Value
Collateral Obligation
Collateral Pledged
Counterparty
of Total Exposure
(Net Exposure)
to the Bank
France
$
10.9

$
10.9

$
10.9

United Kingdom
15.2

7.9

7.9

Switzerland
2.8

—

—

Total
$
28.9

$
18.8

$
18.8


(in millions)
As of December 31, 2011
Country of
Market Value
Collateral Obligation
Collateral Pledged
Counterparty
of Total Exposure
(Net Exposure)
to the Bank
France
$
7.8

$
—

$
—

United Kingdom
11.8

4.5

4.7

Switzerland
5.3

—

—

Total
$
24.9

$
4.5

$
4.7

Note: The average maturity of these derivative contracts is April 2016. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

To appropriately assess potential credit risk to its European holdings, the Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications for changes to credit quality. The Bank also actively monitors its counterparties' approximate indirect exposure to European sovereign debt and considers this exposure as a component of its credit risk review process.


Liquidity and Funding Risk

As a wholesale bank, the Bank employs financial strategies that are designed to enable it to expand and contract its assets, liabilities and capital in response to changes in member credit demand, membership composition and other market factors. The Bank's liquidity resources are designed to support these strategies. The Bank actively manages its liquidity position to maintain

57


stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member credit demand for short-and long-term loans, investment opportunities and the maturity profile of the Bank's assets and liabilities. The Bank recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. The Bank's various liquidity requirements are designed to enhance the Bank's protection against temporary disruptions in access to the debt markets. Longer term contingency liquidity is discussed in the contingency liquidity section below.
 
Consolidated obligation bonds and discount notes, along with member deposits and capital, represent the primary funding sources used by the Bank to support its asset base. Consolidated obligations benefit from the Bank's GSE status; however, they are not obligations of the U.S., and the U.S. government does not guarantee them. Consolidated obligation bonds and discount notes are rated Aaa with negative outlook/P-1 by Moody's Investor Service, Inc. and AA+ with negative outlook/A-1+ by Standard & Poor's. These ratings measure the likelihood of timely payment of principal and interest. At June 30, 2012, the Bank's consolidated obligation bonds outstanding decreased slightly to $34.4 billion compared to $35.6 billion at December 31, 2011. The Bank also issues discount notes, which are shorter-term consolidated obligations, to support its short-term member loan portfolio and other short-term asset funding needs. Total discount notes outstanding at June 30, 2012 increased to $16.2
billion compared to $10.9 billion at December 31, 2011, primarily due to an increase in short-term advance activity.

The Bank's ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of various debt structures at attractive rates. Access and funding levels have fluctuated with conditions in the global financial markets over the past several years. In the second half of 2011, as the financial crisis in Europe worsened, the Bank's funding levels improved markedly, benefiting from a flight to quality and wider swap spreads. In 2012, the crisis in Europe appears to have abated somewhat, and as a result, funding levels have deteriorated relative to LIBOR.

Consolidated obligations bonds often have investor-determined features. The decision to issue a bond using a particular structure is based upon the desired amount of funding, and the ability of the Bank to hedge the risks. The issuance of a bond with a simultaneously-transacted interest-rate exchange agreement usually results in a funding vehicle with a lower cost than the Bank could otherwise achieve. The continued attractiveness of such debt/swap transactions depends on price relationships in both the consolidated bond and interest-rate exchange markets. If conditions in these markets change, the Bank may alter the types or terms of the bonds issued. The increase in funding alternatives available to the Bank through negotiated debt/swap transactions is beneficial to the Bank because it may reduce funding costs and provide additional asset/liability management tools. The types of consolidated obligations bonds issued can fluctuate based on comparative changes in their cost levels, supply and demand conditions, advance demand, and the Bank's balance sheet management strategy. The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank's mortgage portfolio while swapped callable bonds fund other floating rate assets. At June 30, 2012, callable bonds issued by the Bank were up approximately $2.6 billion from December 31, 2011. Note 11 to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank's consolidated obligations.

The Bank's investments also represent a key source of liquidity. Total investments available for liquidity purposes may include trading securities, AFS securities, Federal funds sold, securities purchased under agreements to resell, and certificates of deposit. These totaled $12.3 billion at June 30, 2012, compared to $9.8 billion at December 31, 2011. The Bank also maintains a secondary liquidity portfolio which may include U.S. Treasuries, U.S. agency securities and other GSE securities that can be financed under normal market conditions in securities repurchase agreement transactions to raise additional funds. The Bank utilizes repurchase transactions as a contingent source of liquidity. In addition, U.S. Treasuries may be used as collateral for derivative counterparty obligations in lieu of cash.

The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. Under these policies and guidelines, the Bank is required to maintain sufficient liquidity in an amount at least equal to its anticipated net cash outflows under two different scenarios. One scenario assumes that the Bank cannot access the capital markets for a period of 15 days and that, during that time, members do not renew any maturing, prepaid and called advances. The second scenario assumes that the Bank cannot access the capital markets for five days and that, during that period, it will automatically renew maturing and called advances for all members except very large, highly rated members. These additional requirements are more stringent than the five business day contingency liquidity requirement discussed below. The requirements are designed to enhance the Bank's protection against temporary disruptions in access to the debt markets. Longer term contingency liquidity is discussed below. The Bank was in compliance with these requirements at June 30, 2012.

Contingency Liquidity. In their asset/liability management planning, members may look to the Bank to provide standby

58


liquidity. The Bank seeks to be in a position to meet its customers' credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. To satisfy these requirements and objectives, the Bank's primary sources of liquidity are the issuance of new consolidated obligation bonds and discount notes and short-term investments, such as Federal funds sold and overnight repos.

The Bank maintains contingency liquidity plans designed to enable it to meet its obligations and the liquidity needs of members in the event of short-term capital market disruptions, operational disruptions at other FHLBanks or the OF, or short-term disruptions of the consolidated obligations markets. Specifically, the Board has adopted a Liquidity and Funds Management Policy which requires the Bank to maintain at least 90 days of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations market disruption. If a market or operational disruption occurred that prevented the issuance of new consolidated obligation bonds or discount notes through the capital markets, the Bank could meet its obligations by: (1) allowing short-term liquid investments to mature; (2) purchasing Federal funds; (3) using eligible securities as collateral for repurchase agreement borrowings; and (4) if necessary, allowing loans to mature without renewal. The Bank's GSE status and the FHLBank System consolidated obligation credit rating, which reflects the fact that all twelve FHLBanks share a joint and several liability on the consolidated obligations, have historically provided excellent capital market access.

Additionally, consistent with regulatory requirements, the Bank's Liquidity and Funds Management Policy has historically required the Bank to hold contingency liquidity sufficient to meet the Bank's estimated needs for a minimum of five business days without access to the consolidated obligation debt markets. The Bank's liquidity measures are estimates which are dependent upon certain assumptions which may or may not prove valid in the event of an actual complete capital market disruption. Management believes that under normal operating conditions, routine member borrowing needs and consolidated obligation maturities could be met under these requirements; however, under extremely adverse market conditions, the Bank's ability to meet a significant increase in member loan demand could be impaired without immediate access to the consolidated obligation debt markets. The Bank's access to the capital markets has never been interrupted to the extent the Bank's ability to meet its obligations was compromised, and the Bank currently has no reason to believe that its ability to issue consolidated obligations will be impeded to that extent. Specifically, the Bank's sources of contingency liquidity include maturing overnight and short-term investments, maturing advances, unencumbered repurchase-eligible assets, trading securities, AFS securities and MBS repayments. Uses of contingency liquidity include net settlements of consolidated obligations, member loan commitments, mortgage loan purchase commitments, deposit outflows and maturing other borrowed funds. Excess contingency liquidity is calculated as the difference between sources and uses of contingency liquidity. At June 30, 2012 and December 31, 2011, excess contingency liquidity was approximately $15.8 billion and $14.3 billion, respectively.

Joint and Several Liability. Although the Bank is primarily liable for its portion of consolidated obligations, (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. The Finance Agency, in its discretion and notwithstanding any other provisions, may at any time order any FHLBank to make principal or interest payments due on any consolidated obligation, even in the absence of default by the primary obligor. To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-paying FHLBank, which has a corresponding obligation to reimburse the FHLBank to the extent of such assistance and other associated costs. However, if the Finance Agency determines that the non-paying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and authorize the FHLBanks to issue consolidated obligations, through the OF as its agent. The Bank is not permitted to issue individual debt without Finance Agency approval. See Note 14 - Consolidated Obligations to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2011 Form 10-K for additional information.


Operating and Business Risks

The Bank is exposed to various operating and business risks. Operating risk is the risk of unexpected loss resulting from human error, systems malfunctions, man-made or natural disasters, fraud, or circumvention or failure of internal controls, categorized as compliance, fraud, legal, information and personnel risk. Business risk is the risk of an adverse impact on the Bank's profitability or financial or business strategies resulting from external factors that may occur in the short-term and/or long-term. The Bank has established operating policies and procedures to manage each of the specific operating and business risks. For additional information on operating and business risks, see the “Operating and Business Risks” discussion in the Risk Management section of Item 7. Management's Discussion and Analysis in the Bank's 2011 Form 10-K.


59


Item 1: Financial Statements (unaudited)


Federal Home Loan Bank of Pittsburgh
Statement of Income (unaudited)

 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
(in thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Interest income:
 

 
 

 
 

 
 
Advances
$
65,417

 
$
61,810

 
$
130,905

 
$
125,749

      Prepayment fees on advances, net
7,364

 
9

 
12,036

 
229

Interest-bearing deposits
199

 
79

 
340

 
207

Securities purchased under agreements to resell
1,218

 
—

 
1,699

 
—

Federal funds sold
575

 
984

 
1,036

 
2,696

      Trading securities
313

 
355

 
688

 
859

Available-for-sale (AFS) securities
32,766

 
33,088

 
64,081

 
68,589

Held-to-maturity (HTM) securities
34,745

 
47,913

 
72,255

 
99,798

Mortgage loans held for portfolio
42,521

 
51,370

 
87,504

 
103,983

Total interest income
185,118

 
195,608

 
370,544

 
402,110

Interest expense:
 
 
 
 
 
 
 
      Consolidated obligations - discount notes
4,115

 
3,382

 
5,884

 
8,564

      Consolidated obligations - bonds
130,860

 
156,142

 
272,118

 
318,017

Mandatorily redeemable capital stock
53

 
—

 
114

 
—

Deposits
151

 
87

 
277

 
250

Other borrowings
10

 
10

 
21

 
22

Total interest expense
135,189

 
159,621

 
278,414


326,853

Net interest income
49,929

 
35,987

 
92,130


75,257

Provision for credit losses
39

 
1,105

 
117

 
3,952

Net interest income after provision for credit losses
49,890

 
34,882

 
92,013

 
71,305

Other noninterest income (loss):
 
 
 
 
 
 
 
      Total OTTI losses (Note 6)
(1,140
)
 
—

 
(2,191
)
 
(3,119
)
      OTTI losses reclassified (from) AOCI (Note 6)
(2,519
)
 
(10,844
)
 
(8,647
)
 
(28,237
)
        Net OTTI losses, credit portion (Note 6)
(3,659
)
 
(10,844
)
 
(10,838
)
 
(31,356
)
      Net gains (losses) on trading securities (Note 3)
(289
)
 
(29
)
 
146

 
138

      Net realized gains from sales of AFS securities (Note 4)
—

 
7,278

 
—

 
7,278

      Net gains (losses) on derivatives and hedging activities (Note 10)
(4,848
)
 
(737
)
 
(841
)
 
107

      Service fees
591

 
622

 
1,167

 
1,197

Other, net
1,522

 
1,559

 
3,276

 
3,952

Total other noninterest loss
(6,683
)
 
(2,151
)
 
(7,090
)
 
(18,684
)
Other expense:
 
 
 
 
 
 
 
      Compensation and benefits expense
8,707

 
8,437

 
18,260

 
17,368

Other operating expense
6,721

 
5,305

 
12,571

 
10,535

Finance Agency expense
1,092

 
1,207

 
2,418

 
2,592

Office of Finance expense
881

 
586

 
1,661

 
1,470

Total other expense
17,401

 
15,535

 
34,910

 
31,965

Income before assessments
25,806

 
17,196

 
50,013

 
20,656

Affordable Housing Program
2,586

 
1,409

 
5,013

 
1,691

REFCORP
—

 
3,108

 
—

 
3,744

Total assessments
2,586

 
4,517

 
5,013

 
5,435

Net income
$
23,220

 
$
12,679

 
$
45,000

 
$
15,221

Earnings per share:
 
 


 
 
 
 
Weighted avg shares outstanding (excludes mandatorily redeemable capital stock)
30,751

 
37,125

 
31,241

 
38,115

Basic and diluted earnings per share
$
0.76

 
$
0.34

 
$
1.44

 
$
0.40

Dividends per share
$
0.03

 
$
—

 
$
0.05

 
$
—

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

60

Federal Home Loan Bank of Pittsburgh
Statement of Comprehensive Income (unaudited)

 
 
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
 
2012
 
2011
2012
 
2011
Net income
 
$
23,220

 
$
12,679

$
45,000

 
$
15,221

Other comprehensive income (loss) :
 
 
 
 
 
 
 
Net unrealized gains (losses) on AFS securities:
 
 
 
 
 
 
 
  Unrealized gains (losses)
 
12,964

 
(522
)
12,343

 
(194
)
Net non-credit portion of OTTI losses on AFS securities:
 
 
 
 
 
 
 
  Non-credit OTTI losses transferred from HTM securities
 
—

 
—

(662
)
 
(2,697
)
  Net change in fair value of OTTI securities
 
6,108

 
2,158

55,254

 
59,802

  Unrealized gains
 
416

 
6,314

7,510

 
10,714

  Reclassification of gains included in net income
 
—

 
(7,278
)
—

 
(7,278
)
  Reclassification of non-credit portion included in net income
 
2,519

 
10,844

9,309

 
30,934

Total net non-credit portion of OTTI losses on AFS securities
 
9,043

 
12,038

71,411

 
91,475

Net non-credit portion of OTTI losses on HTM securities:
 
 
 
 
 
 
 
  Non-credit portion
 
—

 
—

(662
)
 
(2,697
)
  Reclassification of non-credit portion from HTM to AFS securities
 
—

 
—

662

 
2,697

Total net non-credit portion of OTTI losses on HTM securities
 
—

 
—

—

 
—

Reclassification of net losses included in net income relating
  to hedging activities
 
—

 
6

—

 
15

Pension and post-retirement benefits
 
12

 
(4
)
25

 
(8
)
Total other comprehensive income
 
22,019

 
11,518

83,779

 
91,288

Total comprehensive income
 
$
45,239

 
$
24,197

$
128,779

 
$
106,509


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


61

Federal Home Loan Bank of Pittsburgh
Statement of Condition (unaudited)
 
June 30,
2012
 
December 31,
2011
(in thousands)
 
ASSETS
 

 
 

Cash and due from banks
$
287,177

 
$
634,278

Interest-bearing deposits
5,495

 
16,180

Federal funds sold
1,200,000

 
2,450,000

Securities purchased under agreements to resell (Note 2)

1,915,000

 
—

Investment securities:
 
 
 
Trading securities (Note 3)
733,845

 
984,285

AFS securities, at fair value (Note 4)
5,582,084

 
4,356,147

     HTM securities; fair value of $8,892,293 and $8,782,348, respectively (Note 5)
8,877,260

 
8,832,845

          Total investment securities
15,193,189

 
14,173,277

Advances (Note 7)
33,617,182

 
30,604,801

Mortgage loans held for portfolio (Note 8), net of allowance for credit losses of
    $14,066 and $14,344, respectively (Note 9)
3,620,949

 
3,883,127

Banking on Business (BOB) loans, net of allowance for credit losses of $2,773 and
    $3,223, respectively (Note 9)
13,217

 
14,016

Accrued interest receivable
123,078

 
132,152

Premises, software and equipment, net
15,394

 
16,281

Derivative assets (Note 10)
26,854

 
36,256

Other assets
34,702

 
33,918

Total assets
$
56,052,237

 
$
51,994,286































62

Federal Home Loan Bank of Pittsburgh
Statement of Condition (continued)

 
June 30,
 
December 31,
(in thousands, except par value)
2012
 
2011
LIABILITIES AND CAPITAL
 

 
 

Liabilities
 

 
 

Deposits:
 

 
 

Interest-bearing
$
1,068,008

 
$
1,062,027

Noninterest-bearing
34,669

 
37,667

Total deposits
1,102,677

 
1,099,694

Consolidated obligations, net: (Note 11)
 
 
 
Discount notes
16,262,691

 
10,921,498

Bonds
34,381,160

 
35,613,036

Total consolidated obligations, net
50,643,851

 
46,534,534

Mandatorily redeemable capital stock (Note 12)
207,726

 
45,673

Accrued interest payable
120,820

 
125,564

Affordable Housing Program
16,895

 
13,588

Derivative liabilities (Note 10)
411,008

 
441,975

Other liabilities
39,327

 
70,420

Total liabilities
52,542,304

 
48,331,448

Commitments and contingencies (Note 15)
—

 
—

Capital (Note 12)
 
 
 
Capital stock - putable ($100 par value) issued and outstanding 31,098 and 33,899
  shares
3,109,819

 
3,389,863

Retained earnings:
 
 
 
    Unrestricted
465,134

 
430,774

    Restricted
13,566

 
4,566

Total retained earnings
478,700

 
435,340

AOCI (Note 12)
(78,586
)
 
(162,365
)
Total capital
3,509,933

 
3,662,838

Total liabilities and capital
$
56,052,237

 
$
51,994,286


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


63

Federal Home Loan Bank of Pittsburgh
Statement of Cash Flows (unaudited)
 
 
Six Months Ended June 30,
(in thousands)
2012
2011
OPERATING ACTIVITIES
 
 

Net income
$
45,000

$
15,221

Adjustments to reconcile net income to net cash provided by
 operating activities:
 
 
Depreciation and amortization
9,338

911

Change in net fair value adjustment on derivative and hedging
  activities
24,640

65,367

Net OTTI credit losses
10,838

31,356

Other adjustments
114

(3,326
)
Net change in:
 
 
Trading securities
250,440

1,374

Accrued interest receivable
9,040

12,872

Other assets
1,206

(1,602
)
Accrued interest payable
(4,743
)
(16,885
)
Other liabilities(1) 
1,208

36,754

Total adjustments
302,081

126,821

Net cash provided by operating activities
$
347,081

$
142,042

INVESTING ACTIVITIES
 
 
Net change in:
 
 
Interest-bearing deposits (including $10,685 and
  $1,329 to other FHLBanks for mortgage loan program)
$
46,834

$
8,515

Securities purchased under agreements to resell

(1,915,000
)
—

Federal funds sold
1,250,000

(50,000
)
Premises, software and equipment, net
(1,809
)
(1,836
)
AFS securities:
 
 
Proceeds (includes $138,461 from sales of
  AFS securities in 2011)
1,199,827

445,677

Purchases
(2,374,812
)
(655,630
)
HTM securities:
 
 
Net change in short-term
(850,000
)
(400,000
)
Proceeds from long-term
790,858

1,421,037

Purchases of long-term
—

(814,687
)
Advances:
 
 
Proceeds
80,848,993

44,155,428

Made
(83,967,159
)
(41,430,267
)
Mortgage loans held for portfolio:
 
 
Proceeds
478,046

458,051

Purchases
(217,948
)
(119,266
)
Net cash (used in) provided by investing activities
$
(4,712,170
)
$
3,017,022






64

Federal Home Loan Bank of Pittsburgh
Statement of Cash Flows (unaudited)
(continued)

 
Six Months Ended June 30,
(in thousands)
2012
2011
FINANCING ACTIVITIES
 
 

Net change in:
 
 

Deposits and pass-through reserves
$
15,712

$
18,563

Net payments for derivative contracts with financing element
(31,364
)
(39,020
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
180,216,655

61,804,322

Bonds (none from other FHLBanks)
13,783,809

9,362,112

Payments for maturing and retiring consolidated obligations:
 
 
Discount notes
(174,878,608
)
(64,069,191
)
Bonds
(14,968,585
)
(8,585,459
)
Proceeds from issuance of capital stock
159,119

44,682

Payments for repurchase/redemption of mandatorily redeemable
  capital stock
(21,152
)
(3,408
)
Payments for repurchase/redemption of capital stock
(255,958
)
(366,960
)
Cash dividends paid
(1,640
)
—

Net cash provided by (used in) financing activities
$
4,017,988

$
(1,834,359
)
Net (decrease) increase in cash and cash equivalents
$
(347,101
)
$
1,324,705

Cash and cash equivalents at beginning of the period
634,278

143,393

Cash and cash equivalents at end of the period
$
287,177

$
1,468,098

Supplemental disclosures:
 
 
Interest paid
$
307,120

$
364,733

AHP payments, net
1,706

2,550

REFCORP assessments, net
—

(36,929
)
Transfers of mortgage loans to real estate owned
11,379

8,599

Non-cash transfer of OTTI HTM securities to AFS
11,268

90,925

Note:
(1)Other liabilities includes the net change in the REFCORP asset/liability where applicable.

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


65

Federal Home Loan Bank of Pittsburgh
Statement of Changes in Capital (unaudited)

 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total Capital
December 31, 2010
39,869

 
$
3,986,932

 
$
397,291

 
$
—

 
$
397,291

 
$
(223,341
)
 
$
4,160,882

Proceeds from sale of capital stock
447

 
44,682

 
—

 
—

 
—

 
—

 
44,682

Repurchase/redemption of capital stock
(3,669
)
 
(366,960
)
 
—

 
—

 
—

 
—

 
(366,960
)
Net shares reclassified to mandatorily redeemable capital stock
(7
)
 
(665
)
 
—

 
—

 
—

 
—

 
(665
)
Comprehensive income
—

 
—

 
15,221

 
—

 
15,221

 
91,288

 
106,509

June 30, 2011
36,640

 
$
3,663,989

 
$
412,512

 
$
—

 
$
412,512

 
$
(132,053
)
 
$
3,944,448

 


 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total Capital
December 31, 2011
33,899

 
$
3,389,863

 
$
430,774

 
$
4,566

 
$
435,340

 
$
(162,365
)
 
$
3,662,838

Proceeds from sale of capital stock
1,591

 
159,119

 
—

 
—

 
—

 
—

 
159,119

Repurchase/redemption of capital stock
(2,560
)
 
(255,958
)
 
—

 
—

 
—

 
—

 
(255,958
)
Net shares reclassified to mandatorily redeemable capital stock
(1,832
)
 
(183,205
)
 
—

 
—

 
—

 
—

 
(183,205
)
Comprehensive income
—

 
—

 
36,000

 
9,000

 
45,000

 
83,779

 
128,779

Cash dividends
—

 
—

 
(1,640
)
 
—

 
(1,640
)
 
—

 
(1,640
)
June 30, 2012
31,098

 
$
3,109,819

 
$
465,134

 
$
13,566

 
$
478,700

 
$
(78,586
)
 
$
3,509,933


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

66

Federal Home Loan Bank of Pittsburgh
Notes to Financial Statements (unaudited)

Background Information

The Bank, a federally chartered corporation, is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by increasing the availability of credit for residential mortgages and community development. The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank. All holders of the Bank’s capital stock may, to the extent declared by the Board, receive dividends on their capital stock. Regulated financial depositories and insurance companies engaged in residential housing finance that maintain their principal place of business in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet certain standards are also eligible to become Bank members. State and local housing associates that meet certain statutory and regulatory criteria may also borrow from the Bank. While eligible to borrow, state and local housing associates are not members of the Bank and, as such, are not required to hold capital stock.

All members must purchase stock in the Bank. The amount of capital stock members own is based on outstanding advances, letters of credit, membership asset value, and principal balance of residential mortgage loans previously sold to the Bank. The Bank considers those members with capital stock outstanding in excess of 10% of total capital stock outstanding to be related parties. See Note 13 for additional information.

The Finance Agency is the independent regulator of the FHLBanks. The mission of the Finance Agency is to provide effective supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. Each FHLBank operates as a separate entity with its own management, employees and board of directors. The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.

As provided by the Housing and Economic Recovery Act of 2008 as amended (HERA), or Finance Agency regulation, the Bank’s debt instruments, referred to as consolidated obligations, are the joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBanks. These funds are primarily used to provide advances, purchase mortgages from members through the MPF Program and purchase certain investments. See Note 11 for additional information. The Office of Finance (OF) is a joint office of the FHLBanks established to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare the combined quarterly and annual financial reports of all 12 FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The Bank primarily invests these funds in short-term investments to provide liquidity. The Bank also provides member institutions with correspondent services, such as wire transfer, safekeeping and settlement.

The accounting and financial reporting policies of the Bank conform to U.S. Generally Accepted Accounting Principles (GAAP). Preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In addition, from time to time certain amounts in the prior period may be reclassified to conform to the current presentation. These reclassifications did not have a material impact on the Bank's Statement of Condition or Statement of Income. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011 included in the Bank's 2011 Annual Report on Form 10-K (2011 Form 10-K).


67
Notes to Financial Statements (continued)

Note 1 – Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations

Reconsideration of Effective Control for Repurchase Agreements. During April 2011, the Financial Accounting Standards Board (FASB) issued guidance to improve the identification of repurchase transactions as sales or secured borrowings by modifying the requirements to assess effective control. The FASB removed the criterion requiring the transferor to have the ability to repurchase or redeem financial assets on substantially the same terms and removed the requirement of the transferor to possess adequate collateral to fund the cost of purchasing replacement financial assets. The guidance was effective for the Bank beginning January 1, 2012 and was applied prospectively. The Bank's adoption of this guidance had no impact on its Statement of Income, Statement of Comprehensive Income, or Statement of Condition.

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the FHFA issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02), effective on the date of issuance. AB 2012-02 establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The Bank is currently assessing the effect of this advisory bulletin and has not yet determined the effect that this guidance will have on its Statement of Income, Statement of Comprehensive Income, Statement of Condition, or Statement of Cash Flows.

Presentation of Comprehensive Income. During June and December 2011, the FASB issued guidance to increase the prominence of items reported in comprehensive income as part of the convergence project. The guidance requires non-owner changes in equity to be reported in either a single continuous statement of comprehensive income, or in two consecutive statements that separately present total net income and total comprehensive income. It does not change the accounting for other comprehensive income or the calculation of earnings per share. The Bank adopted this guidance beginning with its first quarter 2012 financial statements and has applied it retrospectively. See the Statement of Comprehensive Income in the Bank's Financial Statements.

The following pronouncements have impacted, or will impact, the Bank's financial disclosures but will have no impact on its Statement of Income or Statement of Condition.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). During May 2011, the FASB issued guidance to substantially converge the definition of fair value and related disclosure requirements, but not when fair value accounting is applied. The guidance includes additional disclosure requirements around Level 3 inputs and an increased requirement to report all instruments measured or disclosed at fair value within the fair value hierarchy. The guidance was effective for the Bank beginning January 1, 2012 and was applied prospectively. The Bank's adoption of this guidance had no impact on the Bank's Statement of Income and Statement of Condition, but resulted in additional disclosure in Note 14 to the Financial Statements.

Offsetting Assets and Liabilities. During December 2011, the FASB issued new disclosure requirements for assets and liabilities which are offset in the financial statements. The guidance requires presentation of both gross and net information about instruments which are offset. The guidance will be effective for the Bank for the first quarter 2013 and will be applied retrospectively.


Note 2 - Securities Purchased Under Agreements to Resell

The Bank periodically holds securities purchased under agreements to resell those securities. These amounts represent short-term loans and are classified as assets in the Statement of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the Bank or (2) remit an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly.



68
Notes to Financial Statements (continued)

Note 3 – Trading Securities

The following table presents trading securities as of June 30, 2012 and December 31, 2011.
(in thousands)
June 30,
2012
December 31,
2011
TLGP investments
$
—

$
250,080

U.S. Treasury bills
729,951

729,994

Mutual funds offsetting deferred compensation
3,894

4,211

Total
$
733,845

$
984,285


The mutual funds are held in a Rabbi trust to generate returns that seek to offset changes in liabilities related to market risk of certain deferred compensation agreements. These deferred compensation liabilities were $4.0 million and $4.3 million at June 30, 2012 and December 31, 2011, respectively.

The following table presents net gains (losses) on trading securities for the second quarter and the first six months of 2012 and 2011.
 
Three Months Ended June 30
Six Months Ended June 30
(in thousands)
2012
2011
2012
2011
Net unrealized gains on trading securities held at period-end
$
129

$
10

$
241

$
202

Net realized (losses) on securities sold/matured during the
   period
(418
)
(39
)
(95
)
(64
)
Net gains (losses) on trading securities
$
(289
)
$
(29
)
$
146

$
138



Note 4 – Available-for-Sale (AFS) Securities

The following tables present AFS securities as of June 30, 2012 and December 31, 2011.
 
June 30, 2012
(in thousands)
Amortized Cost(1)
 
OTTI Recognized in AOCI(2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds partially securing
     supplemental retirement plan
$
1,993

 
$
—

 
$
5

 
$
—

 
$
1,998

Other U.S. obligations
21,000

 
—

 
—

 
(75
)
 
20,925

GSE securities
974,990

 
—

 
12

 
(1,255
)
 
973,747

State and local agency obligations
12,995

 
—

 
—

 
(316
)
 
12,679

Total non-MBS
$
1,010,978

 
$
—

 
$
17

 
$
(1,646
)
 
$
1,009,349

MBS:
 
 
 
 
 
 
 
 
 
GSE residential MBS
$
3,063,727

 
$
—

 
$
21,059

 
$
(391
)
 
$
3,084,395

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS
1,569,922

 
(101,935
)
 
6,948

 
(969
)
 
1,473,966

HELOCs
15,926

 
(1,615
)
 
63

 
—

 
14,374

Total private label MBS
1,585,848

 
(103,550
)
 
7,011

 
(969
)
 
1,488,340

Total MBS
$
4,649,575

 
$
(103,550
)
 
$
28,070

 
$
(1,360
)
 
$
4,572,735

Total AFS securities
$
5,660,553

 
$
(103,550
)
 
$
28,087

 
$
(3,006
)
 
$
5,582,084


69
Notes to Financial Statements (continued)

 
December 31, 2011
(in thousands)
Amortized Cost(1)
 
OTTI Recognized in AOCI(2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds partially securing
     supplemental retirement plan
$
1,993

 
$
—

 
$
5

 
$
—

 
$
1,998

GSE securities
900,000

 
—

 
574

 
—

 
900,574

Total non-MBS
$
901,993

 
$
—

 
$
579

 
$
—

 
$
902,572

MBS:
 
 
 
 
 
 
 
 
 
GSE residential MBS
$
1,801,193

 
$
—

 
$
6,849

 
$
(901
)
 
$
1,807,141

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS
1,796,969

 
(165,029
)
 
3,601

 
(4,180
)
 
1,631,361

HELOCs
18,215

 
(3,142
)
 
—

 
—

 
15,073

Total private label MBS
1,815,184

 
(168,171
)
 
3,601

 
(4,180
)
 
1,646,434

Total MBS
$
3,616,377

 
$
(168,171
)
 
$
10,450

 
$
(5,081
)
 
$
3,453,575

Total AFS securities
$
4,518,370

 
$
(168,171
)
 
$
11,029

 
$
(5,081
)
 
$
4,356,147

Notes:
(1)Amortized cost includes adjustments made to the cost basis of an investment for accretion and/or amortization, collection of cash, and/or previous OTTI recognized in earnings.
(2)Represents the noncredit portion of an OTTI recognized during the life of the security.

The mutual funds are held in a Rabbi trust to secure a portion of the Bank’s supplemental retirement obligation. This obligation was $3.8 million at both June 30, 2012 and December 31, 2011.

As of June 30, 2012, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $9.0 million and credit losses of $314.1 million, partially offset by OTTI-related accretion adjustments of $6.4 million. As of December 31, 2011, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $11.1 million and credit losses of $316.5 million, partially offset by OTTI-related accretion adjustments of $9.1 million.

The following table presents a reconciliation of the AFS OTTI loss recognized through accumulated comprehensive income (AOCI) to the total net noncredit portion of OTTI losses on AFS securities in AOCI as of June 30, 2012 and December 31, 2011.
(in thousands)
June 30, 2012
December 31, 2011
Non-credit portion of OTTI losses
$
(103,550
)
$
(168,171
)
OTTI securities in an unrealized gain/loss position since their last OTTI
  credit charge
6,847

57

Net non-credit portion of OTTI losses on AFS securities in AOCI
$
(96,703
)
$
(168,114
)
 


70
Notes to Financial Statements (continued)

The following tables summarize the AFS securities with unrealized losses as of June 30, 2012 and December 31, 2011. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
June 30, 2012
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses(1)
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
$
20,925

 
$
(75
)
 
$
—

 
$
—

 
$
20,925

 
$
(75
)
GSE securities
873,745

 
(1,255
)
 
—

 
—

 
873,745

 
(1,255
)
State or local agency obligations
12,679

 
(316
)
 
—

 
—

 
12,679

 
(316
)
Total non-MBS
$
907,349

 
$
(1,646
)
 
$
—

 
$
—

 
$
907,349

 
$
(1,646
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
$
468,148

 
$
(391
)
 
$
—

 
$
—

 
$
468,148

 
$
(391
)
Private label:
 
 
 
 
 
 
 
 
 
 
 
Private label residential MBS
191,471

 
(2,734
)
 
1,018,347

 
(100,170
)
 
1,209,818

 
(102,904
)
HELOCs
—

 
—

 
12,334

 
(1,615
)
 
12,334

 
(1,615
)
Total private label MBS
191,471

 
(2,734
)
 
1,030,681

 
(101,785
)
 
1,222,152

 
(104,519
)
Total MBS
$
659,619

 
$
(3,125
)
 
$
1,030,681

 
$
(101,785
)
 
$
1,690,300

 
$
(104,910
)
Total AFS securities
$
1,566,968

 
$
(4,771
)
 
$
1,030,681

 
$
(101,785
)
 
$
2,597,649

 
$
(106,556
)
 
December 31, 2011
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses(1)
MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
$
844,628

 
$
(901
)
 
$
—

 
$
—

 
$
844,628

 
$
(901
)
Private label:
 
 
 
 
 
 
 
 
 
 
 
Private label residential MBS
232,848

 
(11,150
)
 
1,290,706

 
(158,059
)
 
1,523,554

 
(169,209
)
HELOCs
2,118

 
(45
)
 
12,955

 
(3,097
)
 
15,073

 
(3,142
)
Total private label MBS
234,966

 
(11,195
)
 
1,303,661

 
(161,156
)
 
1,538,627

 
(172,351
)
Total MBS
1,079,594

 
(12,096
)
 
1,303,661

 
(161,156
)
 
2,383,255

 
(173,252
)
Total AFS securities
$
1,079,594

 
$
(12,096
)
 
$
1,303,661

 
$
(161,156
)
 
$
2,383,255

 
$
(173,252
)
Note:
(1)Total unrealized losses equal the sum of "OTTI Recognized in AOCI" and "Gross Unrealized Losses" in the first two tables of this Note 4.

Securities Transferred.  The Bank may transfer investment securities from HTM to AFS when an OTTI credit loss has been recorded on the security. The Bank believes that a credit loss constitutes evidence of a significant decline in the issuer’s creditworthiness. The Bank transfers these securities to increase its flexibility to sell the securities if management determines it is prudent to do so. The Bank transferred one private label MBS from HTM to AFS during the six months ended June 30, 2012 and four during the first six months of 2011. These securities had an OTTI credit loss recorded on them during the period in which they were transferred.


71
Notes to Financial Statements (continued)

The following table presents the information on the private label MBS transferred during the six months ended June 30, 2012 and 2011.
(in thousands)
Amortized
Cost
OTTI Recognized in OCI
Gross Unrecognized Holding Gains
Gross
Unrecognized Holding Losses
Fair Value
March 31, 2012 transfers
$
11,930

$
(662
)
$
—

$
—

$
11,268

June 30, 2012 transfers
—

—

—

—

—

Total June 30, 2012 year-to-date transfers
$
11,930

$
(662
)
$
—

$
—

$
11,268

March 31, 2011 transfers
$
93,622

$
(2,697
)
$
—

$
—

$
90,925

June 30, 2011 transfers
—

—

—

—

—

Total June 30, 2011 year-to-date transfers
$
93,622

$
(2,697
)
$
—

$
—

$
90,925


Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of June 30, 2012 and December 31, 2011 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

(in thousands)
June 30, 2012
 
December 31, 2011
Year of Maturity
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
51,992

 
$
52,000

 
$
1,993

 
$
1,998

Due after one year through five years
924,991

 
923,745

 
900,000

 
900,574

Due in more than ten years
33,995

 
33,604

 
—

 
—

AFS securities excluding MBS
1,010,978

 
1,009,349

 
901,993

 
902,572

MBS
4,649,575

 
4,572,735

 
3,616,377

 
3,453,575

Total AFS securities
$
5,660,553

 
$
5,582,084

 
$
4,518,370

 
$
4,356,147


Interest Rate Payment Terms.  The following table details interest payment terms at June 30, 2012 and December 31, 2011.
(in thousands)
June 30,
2012
 
December 31,
2011
Amortized cost of AFS securities other than MBS:
 
 
 
 Fixed-rate
$
560,988

 
$
751,993

 Variable-rate
449,990

 
150,000

Total non-MBS
$
1,010,978

 
$
901,993

Amortized cost of AFS MBS:
 
 
 
  Fixed-rate
$
2,243,148

 
$
2,145,595

  Variable-rate
2,406,427

 
1,470,782

Total MBS
$
4,649,575

 
$
3,616,377

Total AFS securities
$
5,660,553

 
$
4,518,370

Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument would include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may have a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is then considered to be variable-rate.


72
Notes to Financial Statements (continued)

Realized Gains and Losses on AFS Securities.  The following table provides a summary of proceeds, gross gains and gross losses on sales of AFS securities for the three and six months ended June 30, 2012 and 2011.
 
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2012
2011
2012
2011
Proceeds from sale of AFS securities
$
—

$
138,461

$
—

$
138,461

Gross gains on AFS securities
—

7,278

—

7,278



Note 5 – Held-to-Maturity (HTM) Securities

The following tables present HTM securities as of June 30, 2012 and December 31, 2011.
 
June 30, 2012
(in thousands)
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
Certificates of deposit
$
2,850,000

 
$
261

 
$
—

 
$
2,850,261

GSE securities
31,064

 
1,446

 
—

 
32,510

State or local agency obligations
267,109

 
5,371

 
(22,924
)
 
249,556

Total non-MBS
$
3,148,173

 
$
7,078

 
$
(22,924
)
 
$
3,132,327

MBS:
 
 
 
 
 
 
 
U.S. agency
$
2,179,942

 
$
12,758

 
$
(84
)
 
$
2,192,616

GSE residential MBS
2,134,871

 
93,791

 
(572
)
 
2,228,090

Private label MBS:
 
 
 
 
 
 
 
Private label residential MBS
1,399,304

 
6,198

 
(77,627
)
 
1,327,875

HELOCs
14,970

 
—

 
(3,585
)
 
11,385

Total private label MBS
1,414,274

 
6,198

 
(81,212
)
 
1,339,260

Total MBS
$
5,729,087

 
$
112,747

 
$
(81,868
)
 
$
5,759,966

Total HTM securities
$
8,877,260

 
$
119,825

 
$
(104,792
)
 
$
8,892,293

 
December 31, 2011
(in thousands)
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
Certificates of deposit
$
2,000,000

 
$
180

 
$
—

 
$
2,000,180

GSE securities
38,589

 
1,860

 
—

 
40,449

State or local agency obligations
278,704

 
2,668

 
(34,291
)
 
247,081

Total non-MBS
$
2,317,293

 
$
4,708

 
$
(34,291
)
 
$
2,287,710

MBS:
 
 
 
 
 
 
 
U.S. agency
$
2,411,090

 
$
11,273

 
$
(91
)
 
$
2,422,272

GSE residential MBS
2,462,698

 
83,222

 
(1,939
)
 
2,543,981

Private label MBS:
 
 
 
 
 
 
 
Private label residential MBS
1,624,190

 
4,173

 
(113,072
)
 
1,515,291

HELOCs
17,574

 
—

 
(4,480
)
 
13,094

Total private label MBS
1,641,764

 
4,173

 
(117,552
)
 
1,528,385

Total MBS
$
6,515,552

 
$
98,668

 
$
(119,582
)
 
$
6,494,638

Total HTM securities
$
8,832,845

 
$
103,376

 
$
(153,873
)
 
$
8,782,348


73
Notes to Financial Statements (continued)

The following tables summarize the HTM securities with unrealized losses as of June 30, 2012 and December 31, 2011. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
June 30, 2012
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
State or local agency obligations
$
—

 
$
—

 
$
153,651

 
$
(22,924
)
 
$
153,651

 
$
(22,924
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency
$
84,195

 
$
(84
)
 
$
—

 
$
—

 
$
84,195

 
$
(84
)
GSE residential MBS
—

 
—

 
106,376

 
(572
)
 
106,376

 
(572
)
Private label:
 
 
 
 
 
 
 
 
 
 
 
Private label residential MBS
46,752

 
(229
)
 
901,115

 
(77,398
)
 
947,867

 
(77,627
)
HELOCs
—

 
—

 
11,385

 
(3,585
)
 
11,385

 
(3,585
)
Total private label MBS
46,752

 
(229
)
 
912,500

 
(80,983
)
 
959,252

 
(81,212
)
Total MBS
$
130,947

 
$
(313
)
 
$
1,018,876

 
$
(81,555
)
 
$
1,149,823

 
$
(81,868
)
Total
$
130,947

 
$
(313
)
 
$
1,172,527

 
$
(104,479
)
 
$
1,303,474

 
$
(104,792
)


 
December 31, 2011
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
State or local agency obligations
$
—

 
$
—

 
$
195,899

 
$
(34,291
)
 
$
195,899

 
$
(34,291
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency
$
90,308

 
$
(16
)
 
$
154,860

 
$
(75
)
 
$
245,168

 
$
(91
)
GSE residential MBS
194,118

 
(208
)
 
358,160

 
(1,731
)
 
552,278

 
(1,939
)
Private label:
 
 
 
 
 
 
 
 
 
 
 
Private label residential MBS
303,899

 
(3,718
)
 
861,942

 
(109,354
)
 
1,165,841

 
(113,072
)
HELOCs
—

 
—

 
13,094

 
(4,480
)
 
13,094

 
(4,480
)
Total private label MBS
303,899

 
(3,718
)
 
875,036

 
(113,834
)
 
1,178,935

 
(117,552
)
Total MBS
$
588,325

 
$
(3,942
)
 
$
1,388,056

 
$
(115,640
)
 
$
1,976,381

 
$
(119,582
)
Total
$
588,325

 
$
(3,942
)
 
$
1,583,955

 
$
(149,931
)
 
$
2,172,280

 
$
(153,873
)

Securities Transferred. During the first six months of 2012 and 2011, the Bank transferred certain private label MBS from HTM to AFS. See Note 4 for additional information.


74
Notes to Financial Statements (continued)

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of June 30, 2012 and December 31, 2011 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

(in thousands)
June 30, 2012
 
December 31, 2011
Year of Maturity
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
Due in one year or less
$
2,851,740

 
$
2,852,030

 
$
2,000,000

 
$
2,000,180

Due after one year through five years
31,384

 
32,843

 
41,594

 
43,528

Due after five years through ten years
8,069

 
8,102

 
7,420

 
7,159

Due after ten years
256,980

 
239,352

 
268,279

 
236,843

HTM securities excluding MBS
3,148,173

 
3,132,327

 
2,317,293

 
2,287,710

MBS
5,729,087

 
5,759,966

 
6,515,552

 
6,494,638

Total HTM securities
$
8,877,260

 
$
8,892,293

 
$
8,832,845

 
$
8,782,348


At June 30, 2012 and December 31, 2011, the amortized cost of the Bank’s MBS classified as HTM included net purchased discounts of $0.8 million and $2.3 million, respectively.

Interest Rate Payment Terms. The following table details interest rate payment terms at June 30, 2012 and December 31, 2011.
 
June 30, 2012
 
December 31, 2011
(in thousands)
 
Amortized cost of HTM securities other than MBS:
 

 
 

Fixed-rate
$
2,971,598

 
$
2,136,243

Variable-rate
176,575

 
181,050

Total non-MBS
$
3,148,173

 
$
2,317,293

Amortized cost of HTM MBS:
 
 
 
Fixed-rate
$
2,051,471

 
$
2,437,697

Variable-rate
3,677,616

 
4,077,855

Total HTM MBS
$
5,729,087

 
$
6,515,552

Total HTM securities
$
8,877,260

 
$
8,832,845

Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument would include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may have a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is then considered to be variable-rate.

Realized Gains and Losses on HTM Securities. There were no sales of HTM securities and, therefore, no realized gains or losses on sales for during the six months ended June 30, 2012 or 2011.

Changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future, as noted above in the Securities Transferred and Realized Gains and Losses discussions. Thus, the sale or transfer of an HTM security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity.


75
Notes to Financial Statements (continued)

Note 6 – Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not the Bank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank recognizes the maximum OTTI loss in earnings, which is equal to the entire difference between the security’s amortized cost basis and its fair value at the Statement of Condition date. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is OTTI by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security's amortized cost basis and its fair value.

Private Label Residential MBS and HELOCs. The Bank invests in MBS, which were rated AAA at the time of purchase with the exception of one pre-2004 vintage security that was rated AA at the time of purchase. Each MBS may contain one or more forms of credit protection/enhancements, including but not limited to guarantee of principal and interest, subordination, over-collateralization, and excess interest and insurance wrap.

To ensure consistency among the FHLBanks, the Bank completes its OTTI analysis of private label MBS based on the methodologies and key modeling assumptions provided by the OTTI Governance Committee. The OTTI analysis is a cash flow analysis that is run on a common platform. The Bank performs the cash flow analysis on all of its private label MBS portfolio that have available data. Private label MBS backed by HELOCs and certain other securities are not able to be cash flow tested using the FHLBanks’ common platform. For these types of private label MBS and certain securities where underlying collateral data is not available, alternate procedures, as prescribed by the OTTI Governance Committee, are used by the Bank to assess these securities for OTTI. These alternative procedures include using a proxy bond’s loan level results to allocate loan level cash flows, a qualitative analysis of government agency loan-level guarantee, or different models for HELOCs. Securities evaluated using alternative procedures during the second quarter were not significant to the Bank, as they represented approximately 5% of the par balance of private label MBS at June 30, 2012.

The Bank's evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of all available information, including the structure of the applicable security and certain assumptions, to determine whether the Bank will recover the entire amortized cost basis of the security, such as:
•
the remaining payment terms for the security;
•
prepayment speeds and default rates;
•
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
•
expected housing price changes; and
•
interest-rate assumptions.

To determine the amount of the credit loss, the Bank compares the present value of the cash flows expected to be collected from its private label residential MBS to its amortized cost basis. For the Bank’s private label residential MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. To calculate the present value of the estimated cash flows for fixed rate bonds the Bank uses the effective interest rate for the security prior to impairment. To calculate the present value of the estimated cash flows for variable rate and hybrid private label MBS, the Bank uses the contractual interest rate plus a fixed spread that sets the present value of cash flows equal to amortized cost before impairment. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis and uses the previous effective rate or spread until there is a significant increase in cash flows. When the Bank determines there is a significant increase in cash flows, the effective rate is recalculated.

The Bank performed a cash flow analysis using two third-party models to assess whether the amortized cost basis of its private label residential MBS will be recovered.

The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget (OMB); as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The OTTI Governance Committee's housing price forecast assumed current-to-trough home price declines ranging from 0% (for those housing markets that are believed to have reached their trough) to 6.0% over the nine month period beginning April 1, 2012. For the vast majority of markets where further home price declines are anticipated, the

76
Notes to Financial Statements (continued)

declines are projected to range from 1% to 4%. Thereafter, home prices were projected to recover using one of five different recovery paths that vary by housing market.
Recovery Ranges of Housing Price Change
Months
Annualized Rates %
1 - 6
0.0%
-
2.8%
7 - 18
0.0%
-
3.0%
19 - 24
1.0%
-
4.0%
25 - 30
2.0%
-
4.0%
31 - 42
2.0%
-
5.0%
43 - 66
2.0%
-
6.0%
Thereafter
2.3%
-
5.6%

The month-by-month projection of future loan performance derived from the first model is the median of 100 projections (based on cumulative defaults) and reflects projected prepayments, defaults and loss severities. These projections are input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate scenario and includes a base case current to trough housing price forecast and a base case housing price recovery path described above.

For HELOCs, the Bank performs a security-level cash flow test on different third-party models because loan-level data is not available. The security-level cash flow test is based on prepayment assumptions, actual six-month average constant default rate, and loss severities of 100%. HELOCs owned by the Bank are insured by third-party bond insurers (monoline insurers), which guarantee the timely payments of principal and interest. The cash flow analysis of the HELOCs looks first to the performance of the underlying security. If these cash flows are insufficient, the Bank considers the capacity of the third-party bond insurer to cover shortfalls. Certain of the monoline insurers have been subject to adverse ratings, rating downgrades, and weakening financial performance measures. Accordingly, the OTTI Governance Committee has performed analyses to assess the financial strength of these monoline insurers to establish the time horizon (burnout period) of their ability to fulfill their financial obligations. Any cash flow shortfalls that occurred beyond this burnout period are considered not recoverable.

There are four insurers wrapping the Bank’s HELOC investments. The financial guarantee from AGMC (formerly Financial Services Assurance Corp.) is considered sufficient to cover all future claims. The Bank has placed no reliance on the financial guarantee from FGIC and AMBAC. The Bank established a burnout period ending September 30, 2012 for MBIA Insurance Corporation. The Bank monitors this insurer and as facts and circumstances change, the burnout period could significantly change.

For those securities for which an OTTI credit loss was determined to have occurred during the three months ended June 30, 2012 (that is, a determination was made that the entire amortized cost basis will not likely be recovered), the following tables present a summary of the significant inputs used to measure the amount of the last credit loss recognized in earnings during the three months ended June 30, 2012 as well as the related credit enhancement (CE). CE is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar weighted averages of the significant inputs used to measure the credit loss. The CUSIP classification (Prime, Alt-A and subprime) is based on the classification as determined by the first model used to run the estimated cash flows for the CUSIP and not the classification at the time of issuance.

77
Notes to Financial Statements (continued)

 
Significant Inputs for OTTI Residential MBS
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Year of Securitization
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
 
Weighted Avg %
 
Range %
Prime:
 

 
 
 
 

 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

2006
7.5

 
6.9

-
9.6

 
33.8

 
20.0

-
38.4

 
40.1

 
36.3

-
43.3

 
4.8

 
2.4

-
7.0

Alt-A:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
12.3

 
 
 
12.3

 
28.5

 
 
 
28.5

 
44.8

 
 
 
44.8

 
9.7

 
 
 
9.7

Subprime
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
5.8

 
 
 
5.8

 
37.1

 
 
 
37.1

 
65.9

 
 
 
65.9

 
11.1

 
 
 
11.1

Total Residential
   MBS - OTTI
8.0

 
5.8

-
12.3

 
33.2

 
20.0

-
38.4

 
40.8

 
36.3

-
65.9

 
5.4

 
2.4

-
11.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All of the Bank's other-than-temporarily impaired securities were classified as AFS as of June 30, 2012. The top portion of the table below summarizes the Bank’s securities as of June 30, 2012 for which an OTTI has been recognized during the second quarter 2012 and during the life of the security. The bottom portion of the table includes AFS securities on which an OTTI was not taken so that the table reflects the entire AFS private label MBS portfolio balance.
 
OTTI Recognized During the Three Months Ended June 30, 2012
OTTI Recognized During the Life of the Security
(in thousands)
Unpaid Principal Balance
 
Amortized Cost(1)
 
Fair Value
Unpaid Principal Balance
 
Amortized Cost(1)
 
Fair Value
Private label residential MBS:
 
 
 
 
 
 

 
 

 
 

Prime
$
265,816

 
$
238,601

 
$
227,274

$
943,888

 
$
819,846

 
$
799,902

Alt-A
32,295

 
30,984

 
26,961

940,606

 
744,597

 
669,501

Subprime
2,518

 
1,422

 
1,311

2,518

 
1,422

 
1,311

HELOCs
—

 
—

 
—

22,393

 
15,926

 
14,374

Total OTTI securities
300,629

 
271,007

 
255,546

1,909,405

 
1,581,791

 
1,485,088

Private label MBS with no OTTI
1,612,833

 
1,314,841

 
1,232,794

4,057

 
4,057

 
3,252

Total AFS private label MBS
$
1,913,462

 
$
1,585,848

 
$
1,488,340

$
1,913,462

 
$
1,585,848

 
$
1,488,340

Notes:
(1)Amortized cost includes adjustments made to the cost basis of an investment for accretion and/or amortization, collection of cash, and/or previous OTTI recognized in earnings.

The tables below summarize the impact of OTTI credit and noncredit losses recorded on AFS investment securities for the three and six months ended June 30, 2012 and 2011.
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
(in thousands)
OTTI Related to Credit Loss
 
OTTI Related to Noncredit Loss
 
Total OTTI Losses
 
OTTI Related to Credit Loss
 
OTTI Related to Noncredit Loss
 
Total OTTI Losses
Private label residential MBS:
 

 
 

 
 

 
 
 
 
 
 
Prime
$
(3,258
)
 
$
2,118

 
$
(1,140
)
 
$
(8,484
)
 
$
6,293

 
$
(2,191
)
Alt-A
(317
)
 
317

 
—

 
(947
)
 
947

 
—

Subprime
(84
)
 
84

 
—

 
(323
)
 
323

 
—

HELOCs
—

 
—

 
—

 
(1,084
)
 
1,084

 
—

Total OTTI on private label MBS
$
(3,659
)
 
$
2,519

 
$
(1,140
)
 
$
(10,838
)
 
$
8,647

 
$
(2,191
)
 

78
Notes to Financial Statements (continued)

 
Three Months Ended June 30, 2011
 
Six Months Ended June 30, 2011
(in thousands)
OTTI Related to Credit Loss
 
OTTI Related to Noncredit Loss
 
Total OTTI Losses
 
OTTI Related to Credit Loss
 
OTTI Related to Noncredit Loss
 
Total OTTI Losses
Private label residential MBS:
 

 
 

 
 

 
 
 
 
 
 
Prime
$
(2,819
)
 
$
2,819

 
$
—

 
$
(10,195
)
 
$
7,076

 
$
(3,119
)
Alt-A
(7,496
)
 
7,496

 
—

 
(20,390
)
 
20,390

 
—

Subprime
(87
)
 
87

 
—

 
(134
)
 
134

 
—

HELOCs
(442
)
 
442

 
—

 
(637
)
 
637

 
—

Total OTTI on private label MBS
$
(10,844
)
 
$
10,844

 
$
—

 
$
(31,356
)
 
$
28,237

 
$
(3,119
)

The following tables present the rollforward of the amounts related to OTTI credit losses recognized during the life of the security for which a portion of the OTTI charges was recognized in AOCI for the three and six months ended June 30, 2012 and 2011.
 
2012
(in thousands)
Three Months Ended June 30
 
Six Months Ended June 30
Beginning balance
$
327,952

 
$
322,589

Additions:
 
 
 
Credit losses for which OTTI was not previously recognized
—

 
74

Additional OTTI credit losses for which an OTTI charge was previously
    recognized(1)
3,659

 
10,764

Reductions:
 
 
 
Securities sold and matured during the period
—

 
—

Increases in cash flows expected to be collected, recognized over the remaining
   life of the securities(2)
(2,674
)
 
(4,490
)
Ending balance
$
328,937

 
$
328,937


 
2011
(in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
Beginning balance
$
334,984

 
$
317,344

Additions:
 
 
 
Credit losses for which OTTI was not previously recognized
—

 
641

Additional OTTI credit losses for which an OTTI charge was previously
    recognized(1)
10,844

 
30,715

Reductions:
 
 
 
Securities sold and matured during the period
(30,687
)
 
(30,687
)
Increases in cash flows expected to be collected, recognized over the remaining
   life of the securities(2)
(2,249
)
 
(5,121
)
Ending balance
$
312,892

 
$
312,892

Notes:
(1) For the three months ended June 30, 2012 and 2011, OTTI "previously recognized" represents securities that were impaired prior to April 1, 2012 and 2011. For the six months ended June 30, 2012 and 2011, OTTI "previously recognized" represents securities that were impaired prior to January 1, 2012 and 2011.
(2) This activity represents the increase in cash flows recognized in interest income during the period.

All Other AFS and HTM Investments. At June 30, 2012, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not

79
Notes to Financial Statements (continued)

that the Bank would be required to sell the security before its anticipated recovery. As a result, the Bank did not consider any of the following investments to be other-than-temporarily impaired at June 30, 2012.

State and Local Housing Finance Agency Obligations. The Bank has determined that all unrealized losses on these investments were temporary given the creditworthiness of the issuers and the underlying collateral.

Certificates of Deposit. The Bank evaluates the creditworthiness of the issuer to determine if an unrealized loss is temporary on certificates of deposit. At June 30, 2012 there were no unrealized losses on certificates of deposit.

Other U.S. Obligations and GSE Investments. For other U.S. obligations, GSE non-MBS investments and GSE MBS investments, the Bank has determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government was sufficient to protect the Bank from losses based on current expectations. As a result, the Bank has determined that as of June 30, 2012, all of these unrealized losses were temporary.


Note 7 – Advances

General Terms. The Bank offers a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to LIBOR or other specified indices.

At June 30, 2012 and December 31, 2011, the Bank had advances outstanding, including AHP advances, with interest rates ranging from zero to 7.40%. AHP subsidized loans have interest rates ranging between zero and 5.50%.
 
The following table details the Bank’s advances portfolio by year of contractual maturity as of June 30, 2012 and December 31, 2011.
(dollars in thousands)
June 30, 2012
 
December 31, 2011
Year of Contractual Maturity
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
$
18,972,737

 
0.82
%
 
$
14,129,734

 
1.12
%
Due after 1 year through 2 years
1,698,684

 
2.89

 
2,614,149

 
2.89

Due after 2 years through 3 years
3,156,679

 
3.19

 
3,071,155

 
2.63

Due after 3 years through 4 years
3,736,847

 
4.19

 
3,560,115

 
4.05

Due after 4 years through 5 years
1,870,886

 
3.79

 
2,193,086

 
4.51

Thereafter
2,995,547

 
4.13

 
3,744,103

 
4.20

Total par value
32,431,380

 
2.03
%
 
29,312,342

 
2.44
%
Discount on AHP advances
(282
)
 
 
 
(377
)
 
 
Deferred prepayment fees
(15,334
)
 
 
 
(16,653
)
 
 
Hedging adjustments
1,201,418

 
 
 
1,309,489

 
 
Total book value
$
33,617,182

 
 
 
$
30,604,801

 
 

The Bank also offers convertible advances. Convertible advances allow the Bank to convert an advance from one interest rate structure to another. When issuing convertible advances, the Bank may purchase put options from a member that allow that Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed-rate advance without the conversion feature. Variable- to fixed-rate convertible advances have a defined lockout period during which the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances may convert to fixed-rate advances. The fixed rates on the converted advances are determined at origination. At June 30, 2012 and December 31, 2011, the Bank had convertible advances outstanding of $3.4 billion and $4.0 billion, respectively.

The Bank offers certain advances to members that provide a member the right, based upon predetermined option exercise dates, to call the advance prior to maturity without incurring prepayment or termination fees (returnable advances). In exchange

80
Notes to Financial Statements (continued)

for receiving the right to call the advance on a predetermined call schedule, the member pays a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed-rate advance. If the call option is exercised, replacement funding may be available. At June 30, 2012 and December 31, 2011, the Bank had returnable advances of $6.0 billion and $1.0 billion, respectively.

The following table summarizes advances by year of contractual maturity or next call date or next convertible date as of June 30, 2012 and December 31, 2011.
 
Year of Contractual Maturity or
Next Call Date
Year of Contractual Maturity or Next Convertible Date
(in thousands)
June 30, 2012
December 31, 2011
June 30, 2012
December 31, 2011
Due in 1 year or less
$
18,972,737

$
14,129,734

$
21,754,737

$
17,478,985

Due after 1 year through 2 years
1,698,684

2,614,149

1,645,184

2,283,148

Due after 2 years through 3 years
3,156,679

3,071,155

3,107,179

2,922,405

Due after 3 years through 4 years
3,736,847

3,560,115

3,117,347

3,287,615

Due after 4 years through 5 years
1,870,886

2,193,086

624,886

1,044,586

Thereafter
2,995,547

3,744,103

2,182,047

2,295,603

Total par value
$
32,431,380

$
29,312,342

$
32,431,380

$
29,312,342


Interest Rate Payment Terms.  The following table details interest rate payment terms for advances as of June 30, 2012 and December 31, 2011.
(in thousands)
June 30,
2012
 
December 31,
2011
 Fixed rate – overnight
$
312,700

 
$
588,583

Fixed rate – term:
 
 
 
Due in 1 year or less
18,660,037

 
13,487,574

Thereafter
11,194,857

 
12,483,536

       Total fixed rate
30,167,594

 
26,559,693

Variable rate:
 
 
 
Due in 1 year or less
—

 
53,577

Thereafter
2,263,786

 
2,699,072

       Total variable rate
2,263,786

 
2,752,649

Total par value
$
32,431,380

 
$
29,312,342


At June 30, 2012 and December 31, 2011, 32.7% and 39.1%, respectively, of the Bank's fixed-rate advances were swapped to a floating rate. At June 30, 2012 and December 31, 2011, 39.8% and 32.7%, respectively, of the Bank's variable-rate advances were swapped to a different variable-rate index.

Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of June 30, 2012, the Bank had advances of $24.7 billion outstanding to its five largest borrowers, which represented 76.1% of total advances outstanding. Of these five, three had outstanding loan balances in excess of 10% of the total portfolio at June 30, 2012. As of December 31, 2011, the Bank had advances of $20.6 billion outstanding to the five largest borrowers, which represented 70.4% of total advances outstanding. Of these five, two had outstanding loan balances in excess of 10% of the total portfolio at December 31, 2011.

The Bank lends to financial institutions involved in housing finance within Delaware, Pennsylvania and West Virginia according to Federal statutes, including the Act. The Act requires each FHLBank to hold, or have access to, collateral to secure their advances. The Bank does not expect to incur any credit losses on advances. The Bank has policies and procedures in place to manage credit risk appropriately, including requirements for physical possession or control of pledged collateral, restrictions on borrowing, verifications of collateral and continuous monitoring of borrowings and the member's financial condition. Based on the collateral pledged as security for advances and management's credit analyses of members' financial condition, and credit extension and collateral policies, the Bank expects to collect all amounts due according to the contractual terms of the

81
Notes to Financial Statements (continued)

advances. See Note 9 for information related to the Bank's credit risk on advances and allowance for credit losses.


Note 8 – Mortgage Loans Held for Portfolio

Under the MPF Program, the Bank invests in mortgage loans, which it purchases from its participating members and housing associates. Under the MPF Program, the Bank’s participating members originate, service, and credit enhance residential mortgage loans that are then sold to the Bank. In the past, the Bank has sold participation interests in some of its MPF Program loans to other FHLBanks and purchased participation interests from other FHLBanks. See Note 13 for further information regarding transactions with related parties.

The following table presents balances as of June 30, 2012 and December 31, 2011 for mortgage loans held for portfolio.
(in thousands)
June 30,
2012
 
December 31,
2011
Fixed medium-term single-family mortgages(1)
$
556,504

 
$
601,104

Fixed long-term single-family mortgages(1)
3,030,710

 
3,252,150

Total par value
3,587,214

 
3,853,254

Premiums
43,707

 
41,904

Discounts
(9,833
)
 
(11,555
)
Hedging adjustments
13,927

 
13,868

Total mortgage loans held for portfolio
$
3,635,015

 
$
3,897,471

Note:
(1)Medium-term is defined as a term of 15 years or less. Long-term is defined as greater than 15 years.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type and by maturity as of June 30, 2012 and December 31, 2011.
(in thousands)
June 30,
2012
 
December 31,
2011
Government-guaranteed/insured loans
$
349,179

 
$
345,346

Conventional loans
3,238,035

 
3,507,908

Total par value
$
3,587,214

 
$
3,853,254

Year of maturity
 
 
 
Due within one year
$
202

 
$
99

Due after one year through five years
12,351

 
5,006

Due after five years
3,574,661

 
3,848,149

Total par value
$
3,587,214

 
$
3,853,254


See Note 9 for information related to the Banks' credit risk on mortgage loans and allowance for credit losses.


Note 9 – Allowance for Credit Losses

The Bank has established an allowance methodology for each of the Bank's portfolio segments: credit products, government-guaranteed or insured mortgage loans held for portfolio, conventional MPF loans held for portfolio, and BOB loans.

Credit Products. The Bank manages its total credit exposure (TCE) (which includes advances, letters of credit, advance commitments, and other credit product exposure) through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with collateral/lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends to its members in accordance with the Act and Finance Agency regulations. Specifically, the Act requires the Bank to obtain collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit

82
Notes to Financial Statements (continued)

products is calculated by applying collateral weightings, or haircuts, to the value of the collateral. The Bank accepts cash, certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture, and community development loans. The Bank's capital stock owned by the borrowing member is pledged as secondary collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can call for additional or substitute collateral to protect its security interest. Management of the Bank believes that these policies effectively manage the Bank's respective credit risk from credit products.

Based upon the financial condition of the member, the Bank either allows a member to retain physical possession of the collateral assigned to the Bank or requires the member to specifically place physical possession or control of the collateral with the Bank or its custodians. However, notwithstanding financial condition, the Bank always takes possession or control of securities collateral if it is used for maximum borrowing capacity (MBC) or to secure advances. The Bank perfects its security interest in all pledged collateral. The Act affords any security interest granted to the Bank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the Bank considers the payment status, collateral types and concentration levels, and borrower's financial condition to be indicators of credit quality on its credit products. At June 30, 2012 and December 31, 2011, the Bank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The Bank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. At June 30, 2012 and December 31, 2011, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings.

Based upon the collateral held as security, its credit extension, collateral policies, management's credit analysis and the repayment history on credit products, the Bank did not incur any credit losses on credit products during 2012 or 2011, or since inception. Accordingly, the Bank has not recorded any allowance for credit losses. Additionally, at June 30, 2012 and December 31, 2011, the Bank has not recorded any allowance for credit losses for off-balance sheet credit products.

Mortgage Loans - Government-Guaranteed or Insured. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture and/or by Housing and Urban Development (HUD). Any losses from such loans are expected to be recovered from those entities. If not, losses from such loans must be contractually absorbed by the servicers. Therefore, there is no allowance for credit losses on government-guaranteed or insured mortgage loans.

Mortgage Loans - Conventional MPF. The allowances for conventional loans are determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses includes: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; and/or (3) reviewing homogeneous pools of residential mortgage loans.

The Bank's allowance for credit losses takes into consideration the CE fees associated with conventional mortgage loans under the MPF Program. Specifically, the determination of the allowance generally considers expected primary mortgage insurance (PMI), supplemental mortgage insurance (SMI), and other CE amounts. Any incurred losses that are expected to be recovered from the CE fees reduce the Bank's allowance for credit losses.

For conventional MPF loans, credit losses that are not fully covered by PMI are allocated to the Bank up to an agreed upon amount, referred to as the first loss account (FLA). The FLA functions as a tracking mechanism for determining the point after which the participating financial institution (PFI) is required to cover losses. The Bank pays the PFI a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the second layer of losses up to an agreed-upon CE amount. The CE amount may be a direct obligation of the PFI and/or an SMI policy paid for by the PFI, and may include performance-based fees which can be withheld to cover losses allocated to the Bank (referred to as recaptured CE fees). Estimated losses exceeding the CE and SMI, if any, are incurred by the Bank. The PFI is required to pledge collateral to secure any portion of its CE amount that is a direct obligation. A receivable which is assessed for collectability is generally established for losses expected to be recovered by withholding CE fees. At June 30, 2012 and December 31, 2011, the MPF

83
Notes to Financial Statements (continued)

exposure under the FLA was $31.9 million and $34.3 million respectively. This exposure includes both accrual and nonaccrual loans. The Bank records CE fees paid to PFIs as a reduction to mortgage loan interest income. The Bank incurred CE fees of $1.0 million and $1.2 million for the second quarter of 2012 and 2011, respectively, and $2.0 million and $2.4 million during the six months ended June 30, 2012 and 2011, respectively.

Collectively Evaluated Mortgage Loans. The Bank collectively evaluates the homogeneous mortgage loan portfolio for impairment. The allowance for credit loss methodology for mortgage loans considers loan pool specific attribute data, applies loss severities and incorporates the CEs of the MPF Program and PMI. The probability of default and loss given default are based on the actual 12-month historical performance of the Bank's mortgage loans. Actual probability of default was determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default was determined based on realized losses incurred on the sale of mortgage loan collateral over the previous 12 months. Given the credit deterioration experience by PMI companies, estimated future claim payments from these companies have been reduced and factored into estimated loan losses in determining the allowance for credit losses. The resulting estimated losses are reduced by the CEs available under the MPF Program by Master Commitment, which are contractually set. Losses in excess of the FLA which are covered by the CEs of the MPF Program are netted against loan losses and reduce the allowance for credit losses. Losses in excess of the CEs are incurred by the Bank.

Individually Evaluated Mortgage Loans. The Bank evaluates certain mortgage loans for impairment individually. These loans are considered troubled debt restructurings (TDR) as discussed in the TDR section of this Note 9.

BOB Loans. Both the probability of default and loss given default are determined and used to estimate the allowance for credit losses on BOB loans. Loss given default is considered to be 100% due to the fact that the BOB program has no collateral or credit enhancement requirements. The probability of default is based on the actual performance of the BOB program. The Bank considers BOB loans that are delinquent to be nonperforming assets.


84
Notes to Financial Statements (continued)

Rollforward of Allowance for Credit Losses. Mortgage Loans. The following table presents a rollforward of the allowance for credit losses on conventional mortgage loans for the second quarter and the first six months of 2012 and 2011 as well as the recorded investment in conventional mortgage loans by impairment methodology at June 30, 2012 and 2011.
 
2012
(in thousands)
Three Months Ended June 30
Six Months Ended June 30
Balance, beginning of period
$
14,324

$
14,344

Charge-offs
(129
)
(355
)
Provision (benefit) for credit losses
(129
)
77

Balance, June 30
$
14,066

$
14,066

  Ending balance, individually evaluated for impairment
$
157



  Ending balance, collectively evaluated for impairment
13,909



 Total allowance for credit losses
$
14,066


Recorded investment balance, end of period:
 
 
Individually evaluated for impairment, with or without a
  related allowance
$
4,460

 
Collectively evaluated for impairment
3,290,817

 
Total recorded investment
$
3,295,277




 
2011
(in thousands)
Three Months Ended June 30
Six Months Ended June 30
Balance, beginning of period
$
8,276

$
3,150

Charge-offs
(161
)
(161
)
Provision for credit losses
1,035

6,161

Balance, June 30
$
9,150

$
9,150

  Ending balance, individually evaluated for impairment
$
—

 
  Ending balance, collectively evaluated for impairment
9,150

 
 Total allowance for credit losses
$
9,150


Recorded investment balance, end of period:

 
Individually evaluated for impairment, with or without a
  related allowance
$
—

 
Collectively evaluated for impairment
3,805,371

 
Total recorded investment
$
3,805,371

 



85
Notes to Financial Statements (continued)

BOB Loans.  The following table presents a rollforward of the allowance for credit losses on BOB loans for the second quarter and first six months of 2012 and 2011, as well as the recorded investment in BOB loans by impairment methodology at June 30, 2012 and 2011.
 
2012
(in thousands)
Three Months Ended June 30
Six Months Ended June 30
Balance, beginning of period
$
2,573

$
3,223

Charge-offs
(84
)
(579
)
Provision for credit losses
284

129

Balance, June 30
$
2,773

$
2,773

  Ending balance, individually evaluated for impairment
$
—



  Ending balance, collectively evaluated for impairment
2,773



 Total allowance for credit losses
$
2,773



Recorded investment balance, end of period:
 
 
Individually evaluated for impairment, with or without a
  related allowance
$
—

 
Collectively evaluated for impairment
16,124

 
Total recorded investment
$
16,124

 

 
2011
(in thousands)
Three Months Ended June 30
Six Months Ended June 30
Balance, beginning of period
$
3,466

$
5,753

Charge-offs
(439
)
(563
)
Provision (benefit) for credit losses
(29
)
(2,192
)
Balance, June 30
$
2,998

$
2,998

  Ending balance, individually evaluated for impairment
$
—

 
  Ending balance, collectively evaluated for impairment
2,998

 
 Total allowance for credit losses
$
2,998


Recorded investment balance, end of period:
 
 
Individually evaluated for impairment, with or without a
  related allowance
$
—

 
Collectively evaluated for impairment
18,072

 
Total recorded investment
$
18,072



 

86
Notes to Financial Statements (continued)

Credit Quality Indicators. Key credit quality indicators for mortgage and BOB loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. The tables below summarize the Bank's key credit quality indicators for mortgage and BOB loans at June 30, 2012 and December 31, 2011.
(in thousands)
June 30, 2012
Recorded investment:(1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans
BOB Loans
 
Total
Past due 30-59 days
$
50,631

$
19,954

$
—

 
$
70,585

Past due 60-89 days
11,513

5,101

240

 
16,854

Past due 90 days or more
78,175

7,639

309

 
86,123

  Total past due loans
$
140,319

$
32,694

$
549

 
$
173,562

  Total current loans
3,154,958

327,032

15,575

 
3,497,565

  Total loans
$
3,295,277

$
359,726

$
16,124

 
$
3,671,127

Other delinquency statistics:
 
 
 
 
 
In process of foreclosures, included above (2)
$
57,657

$
2,138

$
—

 
$
59,795

Serious delinquency rate (3)
2.4
%
2.1
%
1.9
%
 
2.4
%
Past due 90 days or more still accruing interest
$
—

$
7,639

$
—

 
$
7,639

Loans on nonaccrual status (4)
$
81,973

$
—

$
549

 
$
82,522


(in thousands)
December 31, 2011
Recorded investment:(1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans
BOB Loans
 
Total
Past due 30-59 days
$
60,998

$
25,077

$
332

 
$
86,407

Past due 60-89 days
16,810

9,290

40

 
26,140

Past due 90 days or more
83,636

8,687

676

 
92,999

  Total past due loans
$
161,444

$
43,054

$
1,048

 
$
205,546

  Total current loans
3,402,834

311,648

16,341

 
3,730,823

  Total loans
$
3,564,278

$
354,702

$
17,389

 
$
3,936,369

Other delinquency statistics:
 
 
 
 
 
In process of foreclosures, included above (2)
$
60,533

$
2,015

$
—

 
$
62,548

Serious delinquency rate (3)
2.4
%
2.5
%
3.9
%
 
2.4
%
Past due 90 days or more still accruing interest
$
—

$
8,687

$
—

 
$
8,687

Loans on nonaccrual status (4)
$
87,488

$
—

$
1,148

 
$
88,636

Notes:
(1)The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, adjustments for fair value hedges and direct write-downs. The recorded investment is not net of any valuation allowance.
(2) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.
(4) Generally represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.

Real Estate Owned (REO). The Bank had $9.6 million and $9.8 million of REO in other assets at June 30, 2012 and December 31, 2011, respectively.

TDRs. TDRs are considered to have occurred when a concession is granted to the debtor that otherwise would not have been considered had it not been for the economic or legal reasons related to the debtor's financial difficulties. 

Mortgage Loans - Conventional MPF. The Bank offers a loan modification program for its MPF Program. The loans modified under this program are considered TDRs. The loan modification program modifies borrower's monthly payment for a period of up to 36 months to no more than a housing expense ratio of 31% of their monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years and a housing expense ratio

87
Notes to Financial Statements (continued)

not to exceed 31%. This will result in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments is unchanged in the modified loan. If the 31% ratio is still not met, the interest rate is reduced for up to 36 months in 0.125% increments below the original note rate, to a floor rate of 3%, resulting in reduced monthly principal and interest payments during the 36 month period, until the target 31% housing expense ratio is met or the 3% interest rate floor is hit. 

A TDR is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls incurred as of the reporting date as well as the economic loss attributable to delaying or decreasing the original contractual principal and interest, if applicable. All mortgage loans individually evaluated for impairment were considered TDRs at June 30, 2012, totaling $4.5 million.

BOB Loans. The Bank offers a BOB loan deferral which the Bank considers a TDR. A deferred BOB loan is not required to pay principal or accrue interest for up to a one-year period. The credit loss is measured by factoring expected shortfalls incurred as of reporting date. There were no deferred BOB loans which were considered TDRs and individually evaluated for impairment at June 30, 2012.

TDR Modifications. The following table presents the pre-modification and post-modification recorded investment balance, as of the modification date, for all TDRs for the second quarter and the first six months of 2012.
 
Three Months Ended June 30, 2012
(in thousands)
Pre-Modification
Post-Modification
Conventional MPF loans
$
298

$
298

BOB loans
—

—

  Total
$
298

$
298


 
Six Months Ended June 30, 2012
(in thousands)
Pre-Modification
Post-Modification
Conventional MPF loans
$
961

$
926

BOB loans
—

—

  Total
$
961

$
926


Certain TDRs may experience a payment default, which the Bank considers to be a loan 60 days or more delinquent. Conventional MPF loans modified during the previous 12 months which experienced a payment default during the second quarter and first six months of 2012 were immaterial.


88
Notes to Financial Statements (continued)

Individually Evaluated Impaired Loans. At June 30, 2012 and December 31, 2011 only certain loans individually evaluated for impairment were considered impaired. The table below presents the recorded investment, unpaid principal balance and related allowance associated with these loans.
 
June 30, 2012
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
  Conventional MPF loans
$
509

$
507

$
—

 
 
 
 
With a related allowance:
 
 
 
  Conventional MPF loans
$
3,951

$
3,924

$
157

 
 
 
 
Total:
 
 
 
  Conventional MPF loans
$
4,460

$
4,431

$
157


 
December 31, 2011
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
  Conventional MPF loans
$
645

$
640

$
—

 
 
 
 
With a related allowance:
 
 
 
  Conventional MPF loans
$
3,421

$
3,410

$
128

  BOB loans
100

100

36

 
 
 
 
Total:
 
 
 
  Conventional MPF loans
$
4,066

$
4,050

$
128

  BOB loans
100

100

36


The table below presents the average recorded investment of individually impaired loans and related interest income recognized. The Bank included the individually impaired loans as of the date on which they became a TDR. However, prior to third quarter 2011 conventional MPF loans were not accounted for as TDRs because they were deemed to be immaterial. Deferred BOB loans were deemed to be TDRs effective July 1, 2011. There were no loans individually assessed at June 30, 2011.
 
Three Months Ended June 30, 2012
Six Months Ended June 30, 2012
(in thousands)
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
Conventional MPF loans
$
4,557

$
64

$
4,620

$
132

BOB loans
—

—

17

—

  Total
$
4,557

$
64

$
4,637

$
132


Purchases, Sales and Reclassifications. During the three and six months ended June 30, 2012 and 2011, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.


89
Notes to Financial Statements (continued)

Note 10 – Derivatives and Hedging Activities

Nature of Business Activity. The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and funding sources that finance these assets. The goal of the Bank's interest rate risk management strategies is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources. For additional information on the Bank's interest rate exchange agreements and the use of these agreements, see Note 11 to the audited financial statements in the Bank's 2011 Form 10-K.

Financial Statement Effect and Additional Financial Information. The following tables summarize the notional and fair value of derivative instruments as of June 30, 2012 and December 31, 2011.
 
June 30, 2012
(in thousands)
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives in hedge accounting relationships:
 

 
 

 
 

Interest rate swaps
$
28,281,637

 
$
345,897

 
$
1,215,139

Derivatives not in hedge accounting relationships:
 
 
 
 
 
Interest rate swaps
$
2,450,839

 
$
6,633

 
$
8,757

Interest rate caps
1,466,750

 
2,090

 
—

Mortgage delivery commitments
22,897

 
244

 
4

Total derivatives not in hedge accounting relationships
$
3,940,486

 
$
8,967

 
$
8,761

Total derivatives before netting and collateral adjustments
$
32,222,123

 
$
354,864

 
$
1,223,900

Netting adjustments
 
 
(306,992
)
 
(306,992
)
Cash collateral and related accrued interest
 
 
(21,018
)
 
(505,900
)
Total collateral and netting adjustments(1)
 
 
(328,010
)
 
(812,892
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
 
$
26,854

 
$
411,008

 
December 31, 2011
(in thousands)
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives in hedge accounting relationships:
 

 
 

 
 

Interest rate swaps
$
27,389,135

 
$
368,159

 
$
1,306,235

Derivatives not in hedge accounting relationships:
 
 
 
 
 
Interest rate swaps
$
2,241,681

 
$
1,378

 
$
7,029

Interest rate caps
1,466,750

 
4,146

 
15

Mortgage delivery commitments
13,984

 
158

 
8

Total derivatives not in hedge accounting relationships
$
3,722,415

 
$
5,682

 
$
7,052

Total derivatives before netting and collateral adjustments
$
31,111,550

 
$
373,841

 
$
1,313,287

Netting adjustments
 
 
(329,297
)
 
(329,297
)
Cash collateral and related accrued interest
 
 
(8,288
)
 
(542,015
)
Total collateral and netting adjustments(1)
 
 
(337,585
)
 
(871,312
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
 
$
36,256

 
$
441,975

Note:
(1)Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties.


90
Notes to Financial Statements (continued)

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statement of Income.
 
Three Months Ended June 30
 
Six Months Ended June 30
(in thousands)
2012
 
2011
 
2012
 
2011
Derivatives and hedged items in fair value hedging
  relationships:
 

 
 

 
 

 
 
Interest rate swaps - fair value hedge ineffectiveness
$
(708
)
 
$
(92
)
 
$
1,962

 
$
752

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 
Economic hedges:
 

 
 

 
 

 
 
Interest rate swaps
$
(3,797
)
 
$
426

 
$
(1,425
)
 
$
173

Interest rate caps or floors
(1,591
)
 
(1,728
)
 
(2,041
)
 
(2,159
)
Net interest settlements
(409
)
 
(35
)
 
(1,390
)
 
327

Mortgage delivery commitments
1,654

 
658

 
2,045

 
791

Other
3

 
34

 
8

 
223

Total net gains (losses) related to derivatives not designated
  as hedging instruments
$
(4,140
)
 
$
(645
)
 
$
(2,803
)
 
$
(645
)
Net gains (losses) on derivatives and hedging activities
$
(4,848
)
 
$
(737
)
 
$
(841
)
 
$
107


The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the second quarter and the first six months of 2012 and 2011.
(in thousands)
Gains/(Losses) on Derivative
 
Gains/(Losses) on Hedged Item
 
Net Fair Value Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income(1)
Three Months Ended June 30, 2012
 

 
 

 
 

 
 

Hedged item type:
 

 
 

 
 

 
 

Advances
$
(8,105
)
 
$
6,935

 
$
(1,170
)
 
$
(96,676
)
Consolidated obligations – bonds
7,524

 
(7,062
)
 
462

 
46,750

Total
$
(581
)
 
$
(127
)
 
$
(708
)
 
$
(49,926
)
Six months ended June 30, 2012
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
Advances
$
82,360

 
$
(81,624
)
 
$
736

 
$
(196,226
)
Consolidated obligations – bonds
(15,091
)
 
16,317

 
1,226

 
86,347

Total
$
67,269

 
$
(65,307
)
 
$
1,962

 
$
(109,879
)



91
Notes to Financial Statements (continued)

(in thousands)
Gains/(Losses) on Derivative
 
Gains/(Losses) on Hedged Item
 
Net Fair Value Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income(1)
Three Months Ended June 30, 2011
 

 
 

 
 

 
 

Hedged item type:
 

 
 

 
 

 
 

Advances
$
(116,586
)
 
$
115,440

 
$
(1,146
)
 
$
(124,375
)
Consolidated obligations – bonds
90,011

 
(88,957
)
 
1,054

 
56,038

Total
$
(26,575
)
 
$
26,483

 
$
(92
)
 
$
(68,337
)
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
Advances
$
44,598

 
$
(44,194
)
 
$
404

 
$
(252,769
)
Consolidated obligations – bonds
15,811

 
(15,463
)
 
348

 
116,906

Total
$
60,409

 
$
(59,657
)
 
$
752

 
$
(135,863
)
Note:
(1)Represents the net interest settlements on derivatives in fair value hedge relationships presented in the interest income/expense line item of the respective hedged item.

The Bank had no active cash flow hedging relationships during 2012 or 2011. As of June 30, 2012, the deferred net gains (losses) on derivative instruments in AOCI expected to be reclassified to earnings during the next twelve months, as well as the losses reclassified from AOCI into income, were not material.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The Bank manages counterparty credit risk through credit analysis, reliance on netting provisions in its International Swaps and Derivatives Association (ISDA) agreements, collateral requirements and adherence to the requirements set forth in its ISDA agreements, policies and regulations. The deterioration in the credit/financial markets has heightened the Bank’s awareness of derivative default risk. In response, the Bank has worked toward lessening this risk by (1) verifying that the derivative counterparties are in full compliance with existing ISDA requirements through enhanced monitoring efforts; (2) at times, substituting securities for cash collateral, which would allow a more detailed identification of the Bank’s particular collateral; and (3) attempting to negotiate revised ISDA Master Agreement terms, when necessary, that should help to mitigate losses in the event of a counterparty default. These agreement negotiations may include establishing tri-party collateral agreements where possible to further protect the Bank’s collateral. The Bank’s ISDA Master Agreements typically require segregation of the Bank’s collateral posted with the counterparty and typically do not permit rehypothecation.

The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank requires collateral agreements that establish collateral delivery thresholds by counterparty. The maximum credit risk is defined as the estimated cost of replacing interest rate swaps, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, assuming the counterparty defaults and the related collateral, if any, is of no value to the Bank.

The following table presents credit risk exposure on derivative instruments, excluding circumstances where a counterparty's pledged collateral to the Bank exceeds the Bank's net position.
(in thousands)
June 30, 2012
December 31, 2011
Credit risk exposure(1)
$
47,872

$
44,544

Less:
 
 
  Cash collateral
21,018

8,288

Exposure net of collateral
$
26,854

$
36,256

Note:
(1) Includes net accrued interest receivable of $4.9 million and $3.1 million at June 30, 2012 and December 31, 2011, respectively.

Generally, the Bank’s ISDA agreements contain provisions that require the Bank to post additional collateral with its

92
Notes to Financial Statements (continued)

counterparties if there is deterioration in its credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at June 30, 2012 was $916.9 million for which the Bank has posted cash and securities collateral with a fair value of approximately $842.0 million in the normal course of business. If the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would have been required to deliver up to an additional $60.2 million of collateral to its derivative counterparties at June 30, 2012.

The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Note 15 discusses assets pledged by the Bank to these counterparties. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.


Note 11 – Consolidated Obligations

Detailed information regarding consolidated obligations including general terms and interest rate payment terms can be found in Note 14 to the audited financial statements in the Bank's 2011 Form 10-K.
The following table details interest rate payment terms for consolidated obligation bonds as of June 30, 2012 and December 31, 2011.
 
June 30,
 
December 31,
(in thousands)
2012
 
2011
Par value of consolidated bonds:
 

 
 

Fixed-rate
$
31,144,630

 
$
34,298,965

Step-up
2,193,000

 
215,000

Floating-rate
610,000

 
620,000

Total par value
33,947,630

 
35,133,965

Bond premiums
110,116

 
125,933

Bond discounts
(20,790
)
 
(23,290
)
Hedging adjustments
344,204

 
376,428

Total book value
$
34,381,160

 
$
35,613,036


At June 30, 2012 and December 31, 2011, 53.0% and 52.6%, respectively, of the Banks' fixed-rate bonds were swapped to a floating rate and 1.6% and 3.2%, respectively, of the Banks' variable-rate bonds were swapped to a different variable-rate index.

Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of June 30, 2012 and December 31, 2011.
 
June 30, 2012
 
December 31, 2011
(dollars in thousands)
Year of Contractual Maturity
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
$
13,021,100

 
1.16
%
 
$
15,402,750

 
1.02
%
Due after 1 year through 2 years
6,823,525

 
2.14

 
4,692,105

 
2.58

Due after 2 years through 3 years
4,706,740

 
2.86

 
3,673,570

 
2.87

Due after 3 years through 4 years
1,870,840

 
3.02

 
4,490,540

 
2.82

Due after 4 years through 5 years
1,525,150

 
2.90

 
1,588,490

 
3.40

Thereafter
4,597,190

 
2.83

 
3,104,090

 
4.04

Index amortizing notes
1,403,085

 
4.54

 
2,182,420

 
4.65

Total par value
$
33,947,630

 
2.14
%
 
$
35,133,965

 
2.25
%


93
Notes to Financial Statements (continued)

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of June 30, 2012 and December 31, 2011.
 
June 30,
 
December 31,
(in thousands)
2012
 
2011
Noncallable
$
28,472,130

 
$
32,250,465

Callable
5,475,500

 
2,883,500

Total par value
$
33,947,630

 
$
35,133,965


The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of June 30, 2012 and December 31, 2011.
(in thousands)
Year of Contractual Maturity or Next Call Date
June 30,
2012
 
December 31,
2011
Due in 1 year or less
$
18,081,100

 
$
17,205,750

Due after 1 year through 2 years
4,868,525

 
4,678,105

Due after 2 years through 3 years
4,738,240

 
3,612,070

Due after 3 years through 4 years
1,874,840

 
4,383,540

Due after 4 years through 5 years
1,130,150

 
1,383,490

Thereafter
1,851,690

 
1,688,590

Index amortizing notes
1,403,085

 
2,182,420

Total par value
$
33,947,630

 
$
35,133,965


Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The following table details the Bank’s consolidated obligation discount notes, all of which are due within one year, as of June 30, 2012 and December 31, 2011.
 
June 30,
 
December 31,
(dollars in thousands)
2012
 
2011
Book value
$
16,262,691

 
$
10,921,498

Par value
16,267,000

 
10,922,000

Weighted average interest rate (1)
0.12
%
 
0.03
%
Note:
(1) Represents an implied rate.


94
Notes to Financial Statements (continued)

Note 12 – Capital

The Bank is subject to three capital requirements under its current capital plan structure and the Finance Agency rules and regulations: (1) risk-based capital; (2) total capital; and (3) leverage capital. See details regarding these requirements and the Bank’s capital plan in Note 17 to the audited financial statements in the Bank’s 2011 Form 10-K.

At June 30, 2012, the Bank was in compliance with all regulatory capital requirements. Mandatorily redeemable capital stock is considered capital for determining the Bank's compliance with its regulatory requirements. At June 30, 2012 and December 31, 2011 all of the Bank's capital stock outstanding was Class B stock.

The following table demonstrates the Bank’s compliance with these capital requirements at June 30, 2012 and December 31, 2011.
 
June 30, 2012
 
December 31, 2011
(dollars in thousands)
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 

 
 

 
 

 
 

  Risk-based capital
$
978,219

 
$
3,796,246

 
$
1,062,070

 
$
3,870,876

  Total capital-to-asset ratio
4.0
%
 
6.8
%
 
4.0
%
 
7.4
%
  Total regulatory capital
2,242,089

 
3,796,246

 
2,079,771

 
3,870,876

  Leverage ratio
5.0
%
 
10.2
%
 
5.0
%
 
11.2
%
  Leverage capital
2,802,612

 
5,694,369

 
2,599,714

 
5,806,313


The slight decline in the ratios from December 31, 2011 to June 30, 2012 is due to the repurchases of excess capital stock. When the Finance Agency implemented the prompt corrective action provisions of the Housing Act, it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On June 19, 2012, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended March 31, 2012. In its determination, the Finance Agency expressed concerns regarding the Bank's capital position. The Finance Agency believes that the Bank's retained earnings are not sufficient and the poor quality of its private label MBS portfolio creates uncertainty about the Bank's earnings prospects and ability to build retained earnings at a satisfactory pace. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended June 30, 2012.

Capital Concentrations. The following table presents member holdings of 10% or more of the Bank’s total capital stock including mandatorily redeemable capital stock outstanding as of June 30, 2012 and December 31, 2011.
(dollars in thousands)
June 30, 2012
 
December 31, 2011
Member(1)
Capital Stock
 
% of Total
 
Capital Stock
 
% of Total
Sovereign Bank, N.A., Wilmington, DE
$
612,870

 
18.5
%
 
$
555,370

 
16.2
%
PNC Bank, N.A., Wilmington, DE
367,007

 
11.1
%
 
342,331

 
10.0
%
Ally Bank, Midvale, UT
346,438

 
10.4
%
 
383,865

 
11.2
%
ING Bank, FSB, Wilmington, DE
334,250

 
10.1
%
 
370,360

 
10.8
%
Notes:
(1)For Bank membership purposes, principal place of business of Ally Bank is Horsham, PA. For PNC Bank, the principal place of business is Pittsburgh, PA.

Mandatorily Redeemable Capital Stock. Each FHLBank is a cooperative whose member financial institutions and former members own all of the relevant FHLBank's capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at its $100 per share par value, as mandated by each FHLBank's capital plan.

At June 30, 2012 and December 31, 2011, the Bank had $207.7 million and $45.7 million, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements. For the quarter ended and six months ended June 30, 2012, estimated dividends on mandatorily redeemable capital stock totaling $53 thousand and $114 thousand, respectively, were recorded as interest expense. No dividends were paid on mandatorily redeemable stock during 2011.

95
Notes to Financial Statements (continued)


The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the six months ended June 30, 2012 and 2011.
 
Six Months Ended June 30
(in thousands)
2012
2011
Balance, beginning of the period
$
45,673

$
34,215

Capital stock subject to mandatory redemption reclassified from capital stock:
 
 
Due to withdrawals (includes mergers)
183,205

665

Redemption of mandatorily redeemable capital stock:
 
 
  Withdrawals
—

(10
)
  Other redemptions (1)
(21,152
)
(3,398
)
Balance, end of the period
$
207,726

$
31,472

Note:
(1) Reflects the impact on mandatorily redeemable capital stock related to partial excess capital stock repurchases.

As of June 30, 2012, the total mandatorily redeemable capital stock reflected balances for 12 institutions. Two institutions were taken over by the FDIC and their charters were dissolved. One institution voluntarily dissolved its charter with OTS. Seven institutions were merged out of district and are considered nonmembers. One institution's charter was converted to an uninsured trust company, which is ineligible for membership. One institution has notified the Bank to voluntarily withdraw from membership and redeem their capital stock. These redemptions were not complete as of June 30, 2012.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at June 30, 2012 and December 31, 2011.
(in thousands)
June 30,
2012
 
December 31,
2011
Due in 1 year or less
$
—

 
$
—

Due after 1 year through 2 years
2,981

 
71

Due after 2 years through 3 years
21,878

 
3,276

Due after 3 years through 4 years
757

 
25,038

Due after 4 years through 5 years
182,110

 
17,288

Total
$
207,726

 
$
45,673


The year of redemption in the table above is the end of the five-year redemption period for the mandatorily redeemable capital stock. Under the Finance Agency regulations and the terms of the Bank's Capital Plan, capital stock supporting advances and other activity with the Bank (e.g., letters of credit, mortgage loans, etc.) is not redeemable prior to the payoff or maturity of the associated advance or other activity, which may extend beyond five years.

Dividends and Retained Earnings. As prescribed in the FHLBanks' JCEA as amended, upon full satisfaction of the REFCORP obligation, each FHLBank is required to contribute 20% of its net income each quarter to a restricted retained earnings (RRE) account until the balance of that account equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. On August 5, 2011, the Finance Agency certified that the FHLBanks fully satisfied their REFCORP obligation. Therefore, starting in third quarter of 2011, the Bank allocated 20% of its net income to a separate RRE account. At June 30, 2012, retained earnings were $478.7 million, including $465.1 million of unrestricted retained earnings and $13.6 million of RRE.

The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of the Bank’s retained earnings. The Bank’s retained earnings policy and capital adequacy metric utilize this guidance.

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. During 2011, the Bank did not pay a dividend. On February 23, 2012, April 30, 2012, and

96
Notes to Financial Statements (continued)

July 31, 2012, the Bank paid a dividend equal to an annual yield of 0.10%. The dividend was calculated on stockholders' average balances for the previous quarter.

The Bank has executed partial repurchases of excess capital stock since the fourth quarter of 2010. The total amount of member excess capital stock at June 30, 2012 was $1.0 billion. The Bank repurchased approximately $278 million of excess capital stock in the first half of 2012. The Bank also repurchased approximately $200 million in excess capital stock on July 31, 2012.

The following table summarizes the changes in AOCI for the six months ended June 30, 2012 and 2011.
(in thousands)
Net Unrealized Gains(Losses) on AFS
 
Noncredit OTTI Gains(Losses) on AFS
 
Noncredit OTTI Gains(Losses) on HTM
 
Net Unrealized Gains (Losses) on Hedging Activities
 
Pension and Post-Retirement Plans
 
Total
December 31, 2011
$
5,891

 
$
(168,114
)
 
$
—

 
$
286

 
$
(428
)
 
$
(162,365
)
Net unrealized gains
12,343

 
7,510

 
—

 
—

 
—

 
19,853

Noncredit component of OTTI losses
—

 
—

 
(662
)
 
—

 
—

 
(662
)
Net change in fair value of OTTI securities
—

 
55,254

 
—

 
—

 
—

 
55,254

Reclassification adjustment of noncredit OTTI
   losses included in net income
—

 
9,309

 
—

 
—

 
—

 
9,309

Noncredit OTTI losses transferred from HTM
   to AFS
—

 
(662
)
 
662

 
—

 
—

 
—

Pension and post-retirement benefits
—

 
—

 
—

 
—

 
25

 
25

June 30, 2012
$
18,234

 
$
(96,703
)
 
$
—

 
$
286

 
$
(403
)
 
$
(78,586
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
$
(962
)
 
$
(222,533
)
 
$
—

 
$
270

 
$
(116
)
 
$
(223,341
)
Net unrealized gains (losses)
(194
)
 
10,714

 
—

 
—

 
—

 
10,520

Net change in fair value of OTTI securities
—

 
59,802

 
—

 
—

 
—

 
59,802

Noncredit component of OTTI losses
—

 
—

 
(2,697
)
 
—

 
—

 
(2,697
)
Reclassification adjustment of noncredit OTTI
   losses included in net income
—

 
30,934

 
—

 
—

 
—

 
30,934

Noncredit OTTI losses transferred from HTM
   to AFS
—

 
(2,697
)
 
2,697

 
—

 
—

 
—

Reclassifications included in net income
—

 
(7,278
)
 
—

 
15

 
—

 
(7,263
)
Pension and post-retirement benefits
—

 
—

 
—

 
—

 
(8
)
 
(8
)
June 30, 2011
$
(1,156
)
 
$
(131,058
)
 
$
—

 
$
285

 
$
(124
)
 
$
(132,053
)
 
 
 
 
 
 
 
 
 
 
 
 



97
Notes to Financial Statements (continued)

Note 13 – Transactions with Related Parties

The following table includes significant outstanding related party member balances.
 
June 30,
 
December 31,
(in thousands)
2012
 
2011
Federal funds sold
$
—

 
$
200,000

Investments
191,020

 
201,670

Advances
24,217,253

 
20,708,461

Letters of credit
45,730

 
197,298

MPF loans
2,463,225

 
2,765,971

Deposits
2,990

 
22,697

Capital stock
1,793,011

 
1,792,872


The following table summarizes the Statement of Income effects corresponding to the related party member balances above.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Federal funds sold
$
80

 
$
27

 
$
121

 
$
73

Interest income on investments
460

 
619

 
1,017

 
1,276

Interest income on advances (1)
36,271

 
26,768

 
69,744

 
54,680

Prepayment fees on advances, net
198

 
—

 
210

 
—

Letters of credit fees
23

 
37

 
62

 
67

Interest income on MPF loans
33,850

 
42,669

 
70,397

 
87,549

Interest expense on deposits
1

 
3

 
1

 
9

Note:
(1) For the three and six months ended June 30, 2012, respectively, it includes contractual interest income of $120.7 million and $242.5 million, net interest settlements on derivatives in fair value hedge relationships of $(79.0) million and $(159.7) million and total amortization of basis adjustments of $(5.4) million and $(13.0) million. For the three and six months ended June 30, 2011, respectively, it includes contractual interest income of $131.3 million and $264.9 million, net interest settlements on derivatives in fair value hedge relationships of $(95.6) million and $(192.7) million and total amortization of basis adjustments of $(8.9) million and $(17.5) million.

The following table includes the MPF activity of the related party members.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Total MPF loan volume purchased
$
25,850

 
$
—

 
$
31,575

 
$
—


The following table summarizes the effect of the MPF activities with FHLBank of Chicago.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Servicing fee expense
$
180

 
$
167

 
$
355

 
$
331

Interest income on MPF deposits
2

 
1

 
3

 
4


 
June 30,
 
December 31,
(in thousands)
2012
 
2011
Interest-bearing deposits maintained with FHLBank of Chicago
$
5,495

 
$
16,180


From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. For the second quarter and first six months of 2012 and 2011, there was no borrowing or lending activity between the Bank and other FHLBanks.

98
Notes to Financial Statements (continued)


Subject to mutually agreed upon terms, on occasion, an FHLBank may transfer its primary debt obligations to another FHLBank, which becomes the primary obligor on the transferred debt upon completion of the transfer. During the second quarter and the first six months of 2012 and 2011, there were no transfers of debt between the Bank and another FHLBank.

From time to time, a member of one FHLBank may be acquired by a member of another FHLBank. When such an acquisition occurs, the two FHLBanks may agree to transfer at fair value the loans of the acquired member to the FHLBank of the surviving member. The FHLBanks may also agree to the purchase and sale of any related hedging instrument. The Bank had no such activity during the second quarter and the first six months of 2012 and 2011.

Additional discussions regarding related party transactions can be found in Note 19 to the audited financial statements in the Bank's 2011 Form 10-K.


99
Notes to Financial Statements (continued)

Note 14 – Estimated Fair Values

Fair value amounts, have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at June 30, 2012 and December 31, 2011. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values.

The carrying value and estimated fair value of the Bank’s financial instruments at June 30, 2012 and December 31, 2011 are presented in the table below. This table does not represent an estimate of the overall market value of the Bank as a going-concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

Fair Value Summary Table
 
June 30, 2012
 
December 31, 2011
(in thousands)
Carrying
Value
Level 1
Level 2
Level 3
Netting Adjust.
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Assets:
 

 
 
 
 
 

 
 

 
 

Cash and due from banks
$
287,177

$
287,177

$
—

$
—

$
—

$
287,177

 
$
634,278

 
$
634,278

Interest-bearing deposits
5,495

—

5,495

—

—

5,495

 
16,180

 
16,180

Securities purchased under agreement to resell
1,915,000

—

1,914,994

—

—

1,914,994

 
—

 
—

Federal funds sold
1,200,000

—

1,199,992

—

—

1,199,992

 
2,450,000

 
2,449,936

Trading securities
733,845

3,894

729,951

—

—

733,845

 
984,285

 
984,285

AFS securities
5,582,084

1,998

4,091,746

1,488,340

—

5,582,084

 
4,356,147

 
4,356,147

HTM securities
8,877,260

—

7,553,033

1,339,260

—

8,892,293

 
8,832,845

 
8,782,348

Advances
33,617,182

—

33,831,469

—

—

33,831,469

 
30,604,801

 
30,853,987

Mortgage loans held for portfolio, net
3,620,949

—

3,908,034

—

—

3,908,034

 
3,883,127

 
4,168,409

BOB loans, net
13,217

—

—

13,217

—

13,217

 
14,016

 
14,016

Accrued interest receivable
123,078

—

123,078

—

—

123,078

 
132,152

 
132,152

Derivative assets
26,854

—

354,864

—

(328,010
)
26,854

 
36,256

 
36,256

 
 
 
 
 
 
 
 
 

 
 
Liabilities:
 

 
 
 
 
 
 
 

 
 
Deposits
$
1,102,677

$
—

$
1,102,679

$
—

$
—

$
1,102,679

 
$
1,099,694

 
$
1,099,715

Discount notes
16,262,691

—

16,263,113

—

—

16,263,113

 
10,921,498

 
10,921,703

Bonds
34,381,160

—

35,106,098

—

—

35,106,098

 
35,613,036

 
36,474,950

Mandatorily redeemable capital stock
207,726

207,779

—

—

—

207,779

 
45,673

 
45,673

Accrued interest payable
120,820

—

120,820

—

—

120,820

 
125,564

 
125,564

Derivative liabilities
411,008

—

1,223,900

—

(812,892
)
411,008

 
441,975

 
441,975


100
Notes to Financial Statements (continued)

Fair Value Hierarchy. The Bank records trading securities, AFS, derivative assets and derivative liabilities at fair value. The fair value hierarchy is used to prioritize the inputs used to measure fair value for those assets and liabilities carried at fair value on the Statement of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; and (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities).

Level 3 Inputs - Unobservable inputs for the asset or liability.

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during the six months ended June 30, 2012 and 2011.

Summary of Valuation Methodologies and Primary Inputs

Cash and Due from Banks. The fair values equal the carrying values.

Interest Bearing Deposits. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.

Securities Purchased Under Agreement to Resell. The fair values are determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. For securities with variable rates or fixed rates with three months or less to maturity or repricing, the fair values approximate the carrying values.

Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms.

Investment Securities – non-MBS. The Bank uses the income approach to determine the estimated fair value of non-MBS investment securities. The significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves used by the Bank and the related instrument types they measure are as follows:

•
Treasury curve: US Treasury obligations
•
LIBOR Swap curve: certificates of deposit
•
CO curve: Government-sponsored enterprises, state and local agency, and other U.S. obligations

Investment Securities – MBS.  To value MBS holdings, the Bank obtains prices from four designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many MBS do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. The Bank considers these inputs to be Level 2 inputs. However, based on the current lack of significant market activity for private label residential MBS, the Bank believes as of June 30, 2012 private label residential MBS inputs should be classified as Level 3.


101
Notes to Financial Statements (continued)

During the year, the Bank conducts reviews of the four pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures for agency and private label MBS. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.

The Bank's valuation technique first requires the establishment of a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
 
As an additional step, the Bank reviewed the final fair value estimates of its private-label MBS holdings as of June 30, 2012 for reasonableness using an implied yield test. The Bank calculated an implied yield for each of its private label MBS using the estimated fair value derived from the process described above and the security's projected cash flows from the Bank's OTTI process and compared such yield to the market yield for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.

As of June 30, 2012, four vendor prices were received for a majority of the Bank's MBS holdings, and the final prices for a majority of those securities were computed by averaging the four prices. Based on the Bank's reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes the final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy.

Mutual Funds Offsetting Deferred Compensation and Employee Benefit Plan Obligations. Fair values for publicly traded mutual funds are based on quoted market prices.

Advances. The Bank determines the fair value by calculating the present value of expected future cash flows from the advances. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine fair value of advances are the LIBOR curve, a volatility assumption for advances with optionality, and a spread adjustment.

Mortgage Loans Held For Portfolio. The fair value is determined based on quoted market prices for new MBS issued by U.S. GSEs. Prices are then adjusted for differences in coupon, seasoning and credit quality between the Bank’s mortgage loans and the referenced MBS. The prices of the referenced MBS are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in the prepayment rates can have a material effect on the fair value estimates. Prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.

Accrued Interest Receivable and Payable. The fair values approximate the carrying value.

Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. Because these estimates are made as of a specific point in time, they are susceptible to material near-term changes.

The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance by the derivatives counterparties, all of which are highly rated institutions. To mitigate this risk, the Bank has entered into master-netting agreements for interest rate exchange agreements with highly rated institutions. In addition, the Bank has entered into bilateral security agreements with all active derivatives counterparties that provide for delivery of collateral at specified levels tied to

102
Notes to Financial Statements (continued)

those counterparties’ credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. The Bank has evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.

The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by counterparty pursuant to the provisions of each of the Bank’s master netting agreements. If these netted amounts are positive, they are classified as an asset; if negative, a liability.

The discounted cash flow analysis used to determine the fair value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

Interest-rate related:
•
LIBOR Swap Curve.
•
Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.
    
Mortgage delivery commitments:
•
To Be Announced (TBA) securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement.

BOB Loans. The fair value approximates the carrying value.

Deposits. The Bank determines the fair value by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations. The Bank’s internal valuation model determines fair values of consolidated obligations bonds and discount notes by calculating the present value of expected cash flows using market-based yield curves. The inputs used to determine fair value of consolidated obligations are a CO curve and a LIBOR swap curve, a volatility assumption for consolidated obligations with optionality, and a spread adjustment.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value as indicated by contemporaneous member purchases and sales at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently-declared dividend. FHLBank stock can only be acquired and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System's cooperative structure.

Commitments. The fair value of the Banks' commitments to extend credit for advances and letters of credit was immaterial at June 30, 2012 and December 31, 2011. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

Commitments to Extend Credit for Mortgage Loans. Certain mortgage loan purchase commitments are recorded as derivatives at their fair value.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. These estimates are susceptible to material near term changes because they are made as of a specific point in time.


103
Notes to Financial Statements (continued)

Fair Value on a Recurring Basis. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring basis on its Statement of Condition at June 30, 2012 and December 31, 2011.

 
June 30, 2012
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1) 
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury bills
$
—

 
$
729,951

 
$
—

 
$
—

 
$
729,951

Mutual funds offsetting deferred compensation
3,894

 
—

 
—

 
—

 
3,894

Total trading securities
$
3,894

 
$
729,951

 
$
—

 
$
—

 
$
733,845

AFS securities:
 

 
 

 
 

 
 

 
 

  Other U.S. obligations
$
—

 
$
20,925

 
$
—

 
$
—

 
$
20,925

  GSE securities
—

 
973,747

 
—

 
—

 
973,747

  State and local Agency
—

 
12,679

 
—

 
—

 
12,679

Mutual funds partially securing employee benefit plan obligations
1,998

 
—

 
—

 
—

 
1,998

GSE residential MBS
—

 
3,084,395

 
—

 
—

 
3,084,395

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential
—

 
—

 
1,473,966

 
—

 
1,473,966

HELOCs
—

 
—

 
14,374

 
—

 
14,374

Total AFS securities
$
1,998

 
$
4,091,746

 
$
1,488,340

 
$
—

 
$
5,582,084

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest rate related
$
—

 
$
354,620

 
$
—

 
$
(328,010
)
 
$
26,610

Mortgage delivery commitments
—

 
244

 
—

 
—

 
244

Total derivative assets
$
—

 
$
354,864

 
$
—

 
$
(328,010
)
 
$
26,854

Total assets at fair value
$
5,892

 
$
5,176,561

 
$
1,488,340

 
$
(328,010
)
 
$
6,342,783

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 

 
 

 
 

 
 

 
 

Interest rate related
$
—

 
$
1,223,896

 
$
—

 
$
(812,892
)
 
$
411,004

Mortgage delivery commitments
—

 
4

 
—

 
—

 
4

Total derivative liabilities (2)
$
—

 
$
1,223,900

 
$
—

 
$
(812,892
)
 
$
411,008

 

104
Notes to Financial Statements (continued)


 
December 31, 2011
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1) 
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 

 
 

 
 

 
 

 
 

U.S. Treasury bills
$
—

 
$
729,994

 
$
—

 
$
—

 
$
729,994

TLGP investments
—

 
250,080

 
—

 
—

 
250,080

Mutual funds offsetting deferred compensation
4,211

 
—

 
—

 
—

 
4,211

Total trading securities
$
4,211

 
$
980,074

 
$
—

 
$
—

 
$
984,285

AFS securities:
 

 
 

 
 

 
 

 
 

  GSE securities
$
—

 
$
900,574

 
$
—

 
$
—

 
$
900,574

Mutual funds partially securing employee benefit plan obligations
1,998

 
—

 
—

 
$
—

 
$
1,998

GSE residential MBS
—

 
1,807,141

 
—

 
—

 
1,807,141

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential
—

 
—

 
1,631,361

 
—

 
1,631,361

HELOCs
—

 
—

 
15,073

 
—

 
15,073

Total AFS securities
$
1,998

 
$
2,707,715

 
$
1,646,434

 
$
—

 
$
4,356,147

Derivative assets:
 
 
 
 
 
 
 
 
 
      Interest rate related
$
—

 
$
373,683

 
$
—

 
$
(337,585
)
 
$
36,098

      Mortgage delivery commitments
—

 
158

 
—

 
—

 
158

Total derivative assets
$
—

 
$
373,841

 
$
—

 
$
(337,585
)
 
$
36,256

Total assets at fair value
$
6,209

 
$
4,061,630

 
$
1,646,434

 
$
(337,585
)
 
$
5,376,688

Liabilities:
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 

 
 

 
 

 
 

 
 

      Interest rate related
$
—

 
$
1,313,279

 
$
—

 
$
(871,312
)
 
$
441,967

      Mortgage delivery commitments
—

 
8

 
—

 
—

 
8

Total derivative liabilities (2)
$
—

 
$
1,313,287

 
$
—

 
$
(871,312
)
 
$
441,975

 Note:
(1)Amounts represent the effect of legally enforceable master netting agreements on derivatives that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties.
(2) Derivative liabilities represent the total liabilities at fair value.
     
There were no transfers between Levels 1 and 2 during the first six months of 2012 or 2011.


105
Notes to Financial Statements (continued)

Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statement of Condition using significant unobservable inputs (Level 3) for the first six months of 2012 and 2011. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur. Transfers are reported as of the beginning of the period.
(in thousands)
AFS Private
Label MBS-Residential
Six Months Ended
June 30, 2012
 
AFS Private
Label MBS- HELOCs
Six Months Ended
June 30, 2012
Balance at January 1
$
1,631,361

 
$
15,073

Total gains (losses) (realized/unrealized) included in:
 
 
 
Accretion of credit losses in interest income
(3,187
)
 
472

Net OTTI losses, credit portion
(9,680
)
 
(1,084
)
Net unrealized gains (losses) on AFS in OCI
(169
)
 
—

Reclassification of non-credit portion included in net income
8,225

 
1,084

Net change in fair value on OTTI AFS in OCI
54,810

 
444

Unrealized gains (losses) on OTTI AFS and included in OCI
7,448

 
62

Purchases, issuances, sales, and settlements:
 
 
 
Settlements
(226,110
)
 
(1,677
)
Transfer of OTTI securities, from HTM to AFS
11,268

 
—

Balance at June 30
$
1,473,966

 
$
14,374

Total amount of losses for the years presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at June 30, 2012
$
(12,866
)
 
$
(612
)
(in thousands)
AFS Private
Label MBS-Residential
Six Months Ended
June 30, 2011
 
AFS Private
Label MBS-HELOCs
Six Months Ended
June 30, 2011
Balance at January 1
$
2,200,438

 
$
15,357

Total gains (losses) (realized/unrealized) included in:
 
 
 
Net gains on sale of AFS securities
7,278

 
—

Net OTTI losses, credit portion
(30,296
)
 
(638
)
AOCI
89,862

 
4,792

Purchases, issuances, sales, and settlements:
 
 
 
Sales
(132,362
)
 
—

Settlements
(303,780
)
 
(2,057
)
Transfer of OTTI securities, from HTM to AFS
90,925

 
—

Balance at June 30
$
1,922,065

 
$
17,454

Total amount of losses for the years presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at June 30, 2011
$
(30,296
)
 
$
(638
)

During the first six months of 2012, the Bank transferred one private label MBS from its HTM portfolio to its AFS portfolio, in the period in which the OTTI charge was recorded. During the first six months of 2011, the Bank transferred 4 private label MBS from its held-to-maturity portfolio to its available-for-sale portfolio. Because transfers of OTTI securities are separately reported in the quarter in which they occur, the net OTTI losses and noncredit losses recognized on these securities are not separately reflected in the tables above. Further details, including the OTTI charges relating to this transfer and the rationale for the transfer, are presented in Notes 4 and 6 to the Financial Statements.


106
Notes to Financial Statements (continued)

Note 15 – Commitments and Contingencies

The following table presents the Bank's various off-balance sheet commitments which are described in detail below.
(in thousands)
June 30, 2012
December 31, 2011

Notional amount
Expire Within One Year
 
Expire After One Year
 
Total
Total
Standby letters of credit outstanding (1)
$
6,485,852

 
$
240,560

 
$
6,726,412

$
6,702,082

Commitments to fund additional advances and BOB loans
1,006,081

 
10,000

 
1,016,081

553,134

Commitments to fund or purchase mortgage loans
22,897

 
—

 
22,897

13,984

Unsettled consolidated obligation bonds, at par (2)
2,148,500

 
—

 
2,148,500

55,000

Notes:
(1) Includes approved requests to issue future standby letters of credit of $210.8 million and $126.3 million at June 30, 2012 and December 31, 2011, respectively.
(2) Includes $2.1 billion and $55.0 million of consolidated obligation bonds which were hedged with associated interest rate swaps at June 30, 2012 and December 31, 2011, respectively.

Commitments to Extend Credit on Standby Letters of Credit, Additional Advances and BOB Loans. Standby letters of credit are issued on behalf of members for a fee. A standby letter of credit is a financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member’s Demand Deposit Account (DDA). Any remaining amounts not covered by the withdrawal from the member’s DDA are converted into a collateralized advance. The original terms of these standby letters of credit, including related commitments, range from less than one month to 4.5 years, including a final expiration in 2014. Commitments that legally bind and unconditionally obligate the Bank for additional advances, including BOB loans, may be outstanding for periods of up to two years.

Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $574 thousand and $799 thousand as of June 30, 2012 and December 31, 2011, respectively. The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. The Bank has established parameters for the review, assessment, monitoring and measurement of credit risk related to these standby letters of credit.

Based on management’s credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policy and Finance Agency regulations, the Bank has not recorded any additional liability on these commitments and standby letters of credit. Excluding BOB, commitments and standby letters of credit are collateralized at the time of issuance. The Bank records a liability with respect to BOB commitments, which is reflected in other liabilities on the Statement of Condition.

The Bank does not have any legally binding or unconditional unused lines of credit for advances at June 30, 2012 and December 31, 2011. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding at June 30, 2012 and December 31, 2011 of $7.1 billion and $7.3 billion, respectively.

Commitments to Fund or Purchase Mortgage Loans. Commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF program totaled $22.9 million and $14.0 million at June 30, 2012 and December 31, 2011, respectively. Delivery commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives.

Pledged Collateral. The Bank generally executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of June 30, 2012, the Bank had pledged total collateral of $842.0 million, including cash of $505.8 million and securities that cannot be sold or repledged with a fair value of $336.2 million, to certain of its derivative counterparties. As of December 31, 2011, the Bank had pledged total collateral of $886.7 million, including cash of $542.0 million and securities that cannot be sold or repledged with a fair value of $344.7 million to certain of its derivative counterparties. As previously noted, the Bank’s ISDA Master Agreements typically require segregation of the Bank’s collateral posted with the counterparty. The Bank reported $ 336.2 million and $344.7 million of the collateral as trading securities as of June 30, 2012 and December 31, 2011 respectively.

Legal Proceedings. The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on its financial condition or results of operations.

107
Notes to Financial Statements (continued)

 
Notes 7, 10, 11, 12, and 13 also discuss other commitments and contingencies.


Item 3:  Quantitative and Qualitative Disclosures about Market Risk

See the Risk Management section in Part I, Item 2. Management’s Discussion and Analysis in this Form 10-Q.

Item 4: Controls and Procedures

Under the supervision and with the participation of the Bank’s management, including the chief executive officer and chief financial officer, the Bank conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 1934 Act). Based on this evaluation, the Bank’s chief executive officer and chief financial officer concluded that the Bank’s disclosure controls and procedures were effective as of June 30, 2012.
 
Internal Control Over Financial Reporting

A new general ledger system was successfully implemented during the second quarter 2012. This system enhanced internal controls related to the financial close and reporting process. There were no other changes in internal control over financial reporting that occurred during the second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


108

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

On September 23, 2009, the Bank filed two complaints in state court, the Court of Common Pleas of Allegheny County, Pennsylvania relating to nine private label MBS bonds purchased from J.P. Morgan Securities, Inc. (J.P. Morgan) in an aggregate original principal amount of approximately $1.68 billion. In addition to J.P. Morgan, the parties include: J.P. Morgan Mortgage Acquisition Corp.; J.P. Morgan Mortgage Acceptance Corporation I; Chase Home Finance L.L.C.; Chase Mortgage Finance Corporation; J.P. Morgan Chase & Co.; Moody’s Corporation; Moody’s Investors Service Inc.; The McGraw-Hill Companies, Inc.; and Fitch, Inc. The Bank’s complaints assert claims for fraud, negligent misrepresentation and violations of state and Federal securities laws. Chase Bank USA, N.A. (Chase Bank), which is affiliated with J.P. Morgan Chase & Co., is a member of the Bank but is not a defendant in these actions. Chase Bank held 5.1% and 5.5% of the Bank’s capital stock as of June 30, 2012 and December 31, 2011 respectively.

On October 2, 2009, the Bank filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against: The McGraw-Hill Companies, Inc.; Fitch, Inc.; Moody’s Corporation; and Moody’s Investors Service, Inc., the rating agencies for certain private label MBS bonds purchased by the Bank in the aggregate original principal amount of approximately $640.0 million. The Bank’s complaint asserts claims for fraud, negligent misrepresentation and violations of Federal securities laws.

On October 13, 2009, the Bank filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against: Countrywide Securities Corporation, Countrywide Home Loans, Inc., various other Countrywide related entities; Moody’s Corporation; Moody’s Investors Service, Inc.; The McGraw-Hill Companies, Inc.; and Fitch, Inc. in regard to five Countrywide private label MBS bonds in the aggregate original principal amount of approximately $366.0 million. The Bank’s complaint asserts claims for fraud, negligent misrepresentation and violations of state and Federal securities laws.

The defendants in each of the private label MBS lawsuits discussed above filed motions to dismiss with the court. By order dated November 29, 2010, the court determined that the Bank's claims against the majority of defendants can continue and the litigation is in the discovery phase. Countrywide and J.P. Morgan defendants have filed motions for partial summary judgment, and a hearing on the motions was held on April 24, 2012.

In addition, the Bank has filed a proof of claim against Lehman Brothers Holdings, Inc. and Structured Asset Securities Corp. in regard to certain private label MBS purchased by the Bank in the aggregate original principal amount of approximately $910 million.

The Bank may also be subject to various other legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any other proceedings that might have a material effect on the Bank’s financial condition, results of operations, cash flow or liquidity.

Item 1A: Risk Factors

For a complete discussion of Risk Factors, see Item 1A. Risk Factors in the Bank’s 2011 Form 10-K. Other than as noted below, management believes that there have been no material changes from the Risk Factors disclosed in the Bank's 2011 Form  10-K.

As of June 30, 2012, the Bank was rated Aaa/Negative Outlook for unsecured long-term debt by Moody's and was rated AA+ with a negative outlook by S&P. These ratings reflect the benefit of the implicit support the FHLBanks receive from the U.S. government and are unchanged from the ratings as of December 31, 2011.

As of July 31, 2012, FHLBank System consolidated obligation bonds have been assigned Aaa/Negative Outlook and
AA+/Negative Outlook ratings by Moody's and S&P, respectively. Consolidated obligation discount notes have been assigned a P-1 and A-1+ rating by Moody's and S&P, respectively. All FHLBanks except the FHLBank of Seattle have been assigned a short-term rating of P-1 and A-1+ by Moody's and S&P, respectively, and a long-term rating of Aaa/Negative Outlook and AA+/Negative Outlook by Moody's and S&P, respectively. On July 31, 2012, S&P lowered the FHLBank of Seattle’s long-term issuer credit rating to AA/Negative Outlook from AA+/Negative Outlook. The FHLBank of Seattle’s short-term rating remains unchanged at A-1+.


109



Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.


Item 3: Defaults upon Senior Securities

None.


Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None

Item 6: Exhibits
Exhibit 31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer
Exhibit 31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer
Exhibit 101
 
Interactive Data File (XBRL)



SIGNATURE

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 Pittsburgh
(Registrant)




Date: August 8, 2012



By: /s/ Kristina K. Williams
Kristina K. Williams
Chief Operating Officer & Chief Financial Officer



110