10-Q 1 fhlbpit10q20150331.htm 10-Q FHLB Pit 10Q 2015.03.31


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 March 31, 2015
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 32,506,813 shares of common stock with a par value of $100 per share outstanding at April 30, 2015.





FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

 
 
 
 
 
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
    Notes to Financial Statements (unaudited)
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Risk Management
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Item 4: Controls and Procedures
Part II - OTHER INFORMATION
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
Signature





























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 related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; 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 Federal Home Loan Bank (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; technology risks; and timing and volume of market activity. This Management's Discussion and Analysis (MD&A) 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 2014 Form 10-K (2014 Form 10-K), including Risk Factors included in Item 1A of that report.

Executive Summary

Overview. The Bank's financial condition and results of operations 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 first quarter of 2015, funding spreads (i.e., the cost of FHLBank debt relative to LIBOR) generally improved due to more favorable market conditions.

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 manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 1-month or 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 capital and short-term investments will be limited in light of the Federal Reserve’s policy of maintaining the Federal funds rate at zero to 25 basis points. 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.

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. 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. The Bank continues to adjust as necessary its prepayment estimates in its models to ensure they reflect actual borrower activity. In addition, the Bank's higher yielding private label mortgage-backed securities (MBS) portfolio continues its expected runoff. As higher coupon mortgage loans prepay and mature along with higher yielding private

1


label MBS, the 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 investments and a possible decrease in the net interest margin.

Results of Operations. During the first quarter of 2015, the Bank recorded net income of $71.1 million, a decrease of $8.8 million from $79.9 million in the first quarter of 2014. The decrease relates in large part to the settlements of claims against certain defendants arising from investments the Bank made in private label MBS, net of legal fees and expenses, which were $15.3 million in the first quarter of 2015 compared to $36.6 million in the first quarter of 2014. This decrease of $21.3 million was partially offset by higher net interest income. Net interest income for the first quarter of 2015 was $75.5 million, compared to $62.3 million in the first quarter of 2014. The increase was primarily due to interest income on increased average advance balances in the first quarter of 2015 as compared to same prior year period. The net interest margin was 37 basis points in both the first quarter of 2015 and 2014.

Financial Condition. Advances. Advances totaled $62.3 billion at March 31, 2015 compared to $63.4 billion at December 31, 2014. Demand for advances has declined primarily due to the decreased short-term liquidity needs of a few large members. While the size of the advance portfolio decreased during the first quarter of 2015, the term of an advance increased. At March 31, 2015, approximately 57% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 53% at December 31, 2014.

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) advance pricing; (4) current and future credit market conditions; (5) housing market trends; and (6) the shape of the yield curve.

Investments. At March 31, 2015, the Bank held $16.7 billion of total investment securities, including trading, available-for-sale (AFS) and held-to-maturity (HTM) investment securities, as well as interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2014, these investments totaled $16.5 billion. The increase of $0.2 billion was primarily driven by an increase in Federal funds sold due to market-driven demand.

Consolidated Obligations. The Bank's consolidated obligations totaled $82.3 billion at March 31, 2015, an increase of $1.5 billion from December 31, 2014. This growth in consolidated obligations was due to increases in bonds, primarily to support the Bank's liquidity position. At March 31, 2015, bonds represented 55% of the Bank's consolidated obligations, compared with 54% at December 31, 2014. Discount notes represented 45% of the Bank's consolidated obligations at March 31, 2015 compared with 46% at year-end 2014.

Capital Position and Regulatory Requirements. Total retained earnings at March 31, 2015 were $808.9 million, down from $837.5 million at year-end 2014 reflecting the Bank's net income for the first quarter of 2015 which was more than offset by dividends paid. As noted below, the Bank paid both a regular and special dividend in February 2015 totaling $99.7 million. Total accumulated other comprehensive income (AOCI) was $149.1 million at March 31, 2015, an increase of $24.6 million from December 31, 2014. This improvement was due to the increase in fair values of securities within the AFS portfolio.

In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. This dividend was based on average member capital for the fourth quarter 2014. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. On April 30, 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% and 3.0% on activity stock and membership stock, respectively. These dividends were based on stockholders' average balances for the first quarter.

The Bank met all of its capital requirements as of March 31, 2015, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of December 31, 2014, the Bank was deemed "adequately capitalized."


2


Financial Highlights

The following financial highlights for the Condensed Statements of Condition as of December 31, 2014 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements except for the three months ended December 31, 2014 which have been derived from the Bank's 2014 Form 10-K.

Condensed Statements of Income
 
Three months ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions, except per share data)
2015
 
2014
 
2014
 
2014
 
2014
Net interest income
$
75.5

 
$
82.7

 
$
72.3

 
$
65.8

 
$
62.3

Provision (benefit) for credit losses
(0.5)

 
(0.2)

 
(0.4)

 
0.4

 
(3.9)

Other noninterest income:
 
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
6.8

 
5.9

 
(0.1
)
 
6.8

 
9.8

   Net gains (losses) on derivatives and
    hedging activities
(7.6)

 
(19.0)

 
0.2

 
(9.5)

 
(9.2)

Gains on litigation settlements, net
15.3

 
20.2

 
14.1

 

 
36.6

Other, net
6.5

 
5.2

 
5.0

 
5.1

 
4.5

Total other noninterest income
21.0

 
12.3

 
19.2

 
2.4

 
41.7

Other expense
18.0

 
23.8

 
17.5

 
18.2

 
19.1

Income before assessments
79.0

 
71.4

 
74.4

 
49.6

 
88.8

Affordable Housing Program (AHP) assessment(1)
7.9

 
7.1

 
7.4

 
5.0

 
8.9

Net income
$
71.1

 
$
64.3

 
$
67.0

 
$
44.6

 
$
79.9

Earnings per share (2)
$
2.42

 
$
2.32

 
$
2.22

 
$
1.59

 
$
2.75

Dividends
 
$
99.7

 
$
30.4

 
$
28.0

 
$
28.7

 
$
16.8

Dividend payout ratio (3)
 
140.27
%
 
47.45
%
 
41.78
%
 
64.30
%
 
21.02
%
Return on average equity
 
7.38
%
 
6.88
%
 
6.79
%
 
4.90
%
 
8.76
%
Return on average assets
 
0.34
%
 
0.33
%
 
0.36
%
 
0.26
%
 
0.48
%
Net interest margin (4)
 
0.37
%
 
0.44
%
 
0.39
%
 
0.39
%
 
0.37
%
Regulatory capital ratio (5)
 
4.43
%
 
4.53
%
 
5.08
%
 
5.21
%
 
5.32
%
GAAP capital ratio (6)
 
4.60
%
 
4.67
%
 
5.22
%
 
5.37
%
 
5.42
%
Total average equity to average assets
 
4.67
%
 
4.86
%
 
5.32
%
 
5.30
%
 
5.43
%
Notes:
(1) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(2) Calculated based on net income and weighted average shares outstanding.
(3) Represents dividends paid as a percentage of net income for the respective periods presented.
(4) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(5) 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.
(6) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

3


Condensed Statements of Condition
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions)
 
2015
 
2014
 
2014
 
2014
 
2014
Cash and due from banks
 
$
5,124.2

 
$
2,451.1

 
$
5,508.4

 
$
1,267.9

 
$
1,141.3

Investments (1)
 
16,729.6

 
16,528.4

 
14,536.9

 
14,400.4

 
13,978.5

Advances
 
62,346.0

 
63,408.4

 
53,054.3

 
54,624.4

 
46,063.9

Mortgage loans held for portfolio, net (2)
 
3,074.3

 
3,123.3

 
3,116.3

 
3,140.6

 
3,174.3

Total assets
 
87,463.1

 
85,677.1

 
76,399.7

 
73,628.8

 
64,555.7

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
37,077.8

 
37,058.1

 
31,536.6

 
31,218.5

 
21,942.2

Bonds
 
45,241.4

 
43,714.5

 
39,889.1

 
37,500.6

 
37,901.4

Total consolidated obligations, net (3)
 
82,319.2

 
80,772.6

 
71,425.7

 
68,719.1

 
59,843.6

Deposits
 
750.9

 
641.2

 
665.9

 
700.0

 
780.4

Mandatorily redeemable capital stock
 
0.6

 
0.6

 
0.8

 
2.9

 
1.9

AHP payable
 
62.0

 
56.0

 
52.0

 
46.7

 
43.9

Total liabilities
 
83,441.4

 
81,674.1

 
72,408.5

 
69,674.3

 
61,055.2

Capital stock - putable
 
3,063.7

 
3,041.0

 
3,079.3

 
3,071.1

 
2,681.4

Unrestricted retained earnings
 
683.4

 
726.3

 
705.4

 
679.8

 
672.7

Restricted retained earnings
 
125.5

 
111.2

 
98.4

 
85.0

 
76.1

AOCI
 
149.1

 
124.5

 
108.1

 
118.6

 
70.3

Total capital
 
4,021.7

 
4,003.0

 
3,991.2

 
3,954.5

 
3,500.5

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold and interest-bearing deposits.
(2) Includes allowance for credit losses of $6.6 million at March 31, 2015, $7.3 million at December 31, 2014, $7.7 million at September 30, 2014, $7.5 million at June 30, 2014 and $7.3 million at March 31, 2014.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $812.2 billion at March 31, 2015, $847.2 billion at December 31, 2014, $816.9 billion at September 30, 2014, $800.0 billion at June 30, 2014 and $753.9 billion at March 31, 2014.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2015 and 2014, 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 2014 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank recorded net income of $71.1 million for the first quarter of 2015, a decrease of $8.8 million compared to $79.9 million for the first quarter of 2014. This decrease relates in large part to the settlements of claims against certain defendants arising from investments the Bank made in private label MBS, net of legal fees and expenses, which was $15.3 million in the first quarter of 2015 compared to $36.6 million in the first quarter of 2014. This decrease of $21.3 million was partially offset by higher net interest income. Net interest income was $75.5 million for the first quarter of 2015 compared to $62.3 million for the first quarter of 2014, an increase of $13.2 million. This increase was primarily due to higher interest income on advances. Interest income on advances for the first quarter of 2015 was $73.7 million, an increase of $13.7 million compared to $60.0 million in the first quarter of 2014. The Bank's return on average equity for the first quarter of 2015 was 7.38%, compared to 8.76% for the first quarter of 2014.


4


Net Interest Income

The following table summarizes 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 months ended March 31, 2015 and 2014.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended March 31,
 
 
2015
 
2014
(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)
 
$
7,088.1

 
$
1.6

 
0.09

 
$
5,664.9

 
$
0.6

 
0.05

Interest-bearing deposits (2)
 
323.6

 
0.1

 
0.10

 
504.6

 
0.1

 
0.07

Investment securities (3)
 
11,651.7

 
55.9

 
1.95

 
10,769.0

 
54.7

 
2.06

Advances (4)
 
59,884.1

 
74.8

 
0.51

 
47,319.7

 
63.1

 
0.54

Mortgage loans held for portfolio (5)
 
3,100.7

 
30.7

 
4.02

 
3,206.5

 
33.4

 
4.22

Total interest-earning assets
 
82,048.2

 
163.1

 
0.81

 
67,464.7

 
151.9

 
0.91

Allowance for credit losses
 
(8.9
)
 
 

 
 

 
(13.4
)
 
 
 
 
Other assets (6)
 
1,750.9

 
 

 
 

 
633.8

 
 
 
 
Total assets
 
$
83,790.2

 
 

 
 

 
$
68,085.1

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
704.6

 
$
0.1

 
0.03

 
$
729.7

 
$
0.1

 
0.03

Consolidated obligation discount notes
 
34,062.6

 
9.1

 
0.11

 
25,534.7

 
6.0

 
0.10

Consolidated obligation bonds (7)
 
44,344.4

 
78.4

 
0.72

 
37,207.3

 
83.5

 
0.91

Other borrowings
 
2.2

 

 
1.00

 
6.1

 

 
1.08

Total interest-bearing liabilities
 
79,113.8

 
87.6

 
0.45

 
63,477.8

 
89.6

 
0.57

Other liabilities
 
766.0

 
 
 
 
 
907.2

 
 
 
 
Total capital
 
3,910.4

 
 
 
 
 
3,700.1

 
 
 
 
Total liabilities and capital
 
$
83,790.2

 
 
 
 
 
$
68,085.1

 
 
 
 
Net interest spread
 
 
 
 
 
0.36

 
 
 
 
 
0.34

Impact of noninterest-bearing funds
 
 
 
 
 
0.01

 
 
 
 
 
0.03

Net interest income/net interest margin
 
 
 
$
75.5

 
0.37

 
 
 
$
62.3

 
0.37

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 Statements 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 $0.3 billion and $0.5 billion in 2015 and 2014, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The non-credit 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 less than one million and $(44.2) million in 2015 and 2014, respectively.

Net interest income for the first quarter of 2015 increased $13.2 million from the first quarter of 2014 primarily due to an increase in interest income. Interest earning assets increased 21.6% with higher demand for advances and increased purchases of Federal funds sold and securities purchased under agreement to resell being partially offset by a lower amount of mortgage loans held for portfolio as the run-off exceeded new purchases. Higher interest income on advances was partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased as advance volume more

5


than offset a decline in yield. Interest income on mortgage loans declined due to lower volume. The rate paid on interest-bearing liabilities declined 12 basis points due to lower funding costs on bonds and an increase in the level of discount notes relative to the total debt portfolio.

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 months ended March 31, 2015 and 2014.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume
 
 
2015 compared to 2014
 
 
Three months ended March 31
(in millions)
 
Volume
 
Rate
 
Total
Federal funds sold
 
$
0.3

 
$
0.7

 
$
1.0

Investment securities
 
4.3

 
(3.1
)
 
1.2

Advances
 
15.9

 
(4.2
)
 
11.7

Mortgage loans held for portfolio
 
(1.2
)
 
(1.5
)
 
(2.7
)
Total interest-earning assets
 
$
19.3

 
$
(8.1
)
 
$
11.2

Consolidated obligation discount notes
 
2.2

 
0.9

 
3.1

Consolidated obligation bonds
 
14.4

 
(19.5
)
 
(5.1
)
Total interest-bearing liabilities
 
$
16.6

 
$
(18.6
)
 
$
(2.0
)
Total increase in net interest income
 
$
2.7

 
$
10.5

 
$
13.2


Interest income increased in the first quarter of 2015 compared to the first quarter of 2014 due to volume increases partially offset by rate decreases. At the same time interest expense decreased due to rate declines that were partially offset by volume increases. Higher average advances drove the interest income increase. A decrease in rates paid on consolidated obligation bonds more than offset a volume increase resulting in the interest expense decrease.
Average investment balances increased in the first quarter of 2015 compared to the first quarter of 2014. The increase was driven by higher volumes of Agency notes that were partially offset by lower MBS balances. The rate decrease for investment securities was primarily due to the increased amount of lower-yielding Agency notes in the portfolio.
The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2015 and 2014. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Three months ended March 31,
Product
 
2015
 
2014
Repo/Mid-Term Repo
 
$
21,540.9

 
$
16,506.3

Core (Term)
 
36,155.0

 
28,127.3

Convertible Select
 
1,893.0

 
2,150.0

Total par value
 
$
59,588.9

 
$
46,783.6

The increase in advance volume from first quarter 2014 to first quarter 2015 led to an increase in interest income, partially offset by a decrease in the yield. Competitively priced advance rates and members' liquidity needs contributed to the increase in advance balances. The yield on advances declined as the first quarter 2015 portfolio was comprised of more short-term and variable rate advances with relatively lower yields.
The average mortgage loans held for portfolio balance declined from first quarter 2014 to first quarter 2015 due to the continued run-off of the Mortgage Partnership Finance (MPF) Plus portfolio. The Bank has not purchased loans into this portion of the portfolio since July 2006, and the run-off more than offset purchases of new loans into the MPF Original portion of the portfolio. Interest income decreased as the newer loans have generally lower yields than the loans that are paying down.
The average consolidated obligations portfolio balance increased in first quarter 2015 from first quarter 2014 as average discount note and bond balances both increased. However, interest expense on the portfolio declined due to a decrease in rates paid on bonds, which more than offset the volume increase. The rate decrease on bonds was primarily due to longer term debt

6


that was called or matured and then replaced with lower cost debt. 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.
Interest Income Derivative Effects. The following tables quantify the effects of the Bank's derivative activities on interest income and interest expense for the three months ended March 31, 2015 and 2014. Derivative and hedging activities are discussed below.
Three Months Ended
March 31, 2015
(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
 
$
59,884.1

 
$
74.8

 
0.51

 
$
123.3

 
0.83

 
$
(48.5
)
 
(0.32
)
Mortgage loans held for
 portfolio
 
3,100.7

 
30.7

 
4.02

 
31.6

 
4.14

 
(0.9
)
 
(0.12
)
All other interest-earning
 assets
 
19,063.4

 
57.6

 
1.22

 
61.0

 
1.30

 
(3.4
)
 
(0.08
)
Total interest-earning
 assets
 
$
82,048.2

 
$
163.1

 
0.81

 
$
215.9

 
1.07

 
$
(52.8
)
 
(0.26
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
44,344.4

 
$
78.4

 
0.72

 
$
144.4

 
1.32

 
$
(66.0
)
 
(0.60
)
All other interest-bearing
 liabilities
 
34,769.4

 
9.2

 
0.11

 
9.2

 
0.11

 

 

Total interest-bearing
 liabilities
 
$
79,113.8

 
$
87.6

 
0.45

 
$
153.6

 
0.79

 
$
(66.0
)
 
(0.34
)
Net interest income/net
 interest spread
 
 
 
$
75.5

 
0.36

 
$
62.3

 
0.28

 
$
13.2

 
0.08

Three Months Ended
March 31, 2014
(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
$
47,319.7

 
$
63.1

 
0.54

 
$
127.1

 
1.09

 
$
(64.0
)
 
(0.55
)
Mortgage loans held for
 portfolio
3,206.5

 
33.4

 
4.22

 
34.1

 
4.30

 
(0.7
)
 
(0.08
)
All other interest-earning
 assets
16,938.5

 
55.4

 
1.33

 
58.0

 
1.39

 
(2.6
)
 
(0.06
)
Total interest-earning
 assets
$
67,464.7

 
$
151.9

 
0.91

 
$
219.2

 
1.32

 
$
(67.3
)
 
(0.41
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
37,207.3

 
$
83.5

 
0.91

 
$
145.7

 
1.59

 
$
(62.2
)
 
(0.68
)
All other interest-bearing
 liabilities
26,270.5

 
6.1

 
0.09

 
6.1

 
0.09

 

 

Total interest-bearing
 liabilities
$
63,477.8

 
$
89.6

 
0.57

 
$
151.8

 
0.97

 
$
(62.2
)
 
(0.40
)
Net interest income/net
 interest spread
 
 
$
62.3

 
0.34

 
$
67.4

 
0.35

 
$
(5.1
)
 
(0.01
)
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.

7



The use of derivatives increased net interest income and net interest spread for the three months ended March 31, 2015. The use of derivatives decreased net interest income for the three months ended March 31, 2014 and had little impact on net interest spread for the three months ended March 31, 2014. 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.
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 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 avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for the first quarter of 2015 was $(0.5) million compared to $(3.9) million for the same period in 2014. The benefit was primarily due to a decrease in delinquencies, overall improvement in the housing market and a change in the allowance estimate as a result of the adoption of certain provisions of AB 2012-02 which is discussed in more detail in the Financial Condition section of this Item 2.

Other Noninterest Income
 
Three months ended March 31,
 
(in millions)
2015
2014
 
Net gains on trading securities
$
6.8

$
9.8

 
Net (losses) on derivatives and hedging activities
(7.6
)
(9.2
)
 
Gains on litigation settlements, net
15.3

36.6

 
Standby letters of credit fees
5.9

4.0

 
Other, net
0.6

0.5

 
Total other noninterest income
$
21.0

$
41.7

 

The Bank's lower total other noninterest income for the first quarter of 2015 compared to the same prior year period was due to a decrease in settlements of litigation claims, net of legal fees and expenses, arising from investments the Bank made in private label MBS, partially offset by higher standby letter of credit fees. The increase in standby letter of credit fees was due to higher volume and an increase in the rate on letters of credit.

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 hedging 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 or the Bank does not elect to apply 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 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

8


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.

The following tables detail the net effect of derivatives and hedging activities for the three months ended March 31, 2015 and 2014.
 
Three months ended March 31, 2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.5
)
$

$
(0.9
)
$
4.4

$

$
2.0

  Net interest settlements included in net interest income (2)
(47.0
)
(3.4
)

61.6


11.2

Total effect on net interest income
$
(48.5
)
$
(3.4
)
$
(0.9
)
$
66.0

$

$
13.2

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.2

$
(0.3
)
$

$
0.7

$

$
0.6

Gains (losses) on derivatives not receiving hedge accounting
(4.6
)
(24.2
)
(3.2
)
23.7

0.1

(8.2
)
Total net gains (losses) on derivatives and hedging activities
$
(4.4
)
$
(24.5
)
$
(3.2
)
$
24.4

$
0.1

$
(7.6
)
Total net effect of derivatives and hedging activities
$
(52.9
)
$
(27.9
)
$
(4.1
)
$
90.4

$
0.1

$
5.6

 
Three months ended March 31, 2014
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(3.6
)
$

$
(0.7
)
$
7.7

$

$
3.4

  Net interest settlements included in net interest income (2)
(60.4
)
(2.6
)

54.5


(8.5
)
Total effect on net interest income
$
(64.0
)
$
(2.6
)
$
(0.7
)
$
62.2

$

$
(5.1
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.8

$
(0.4
)
$

$
0.1

$

$
0.5

Gains (losses) on derivatives not receiving hedge accounting
(1.9
)
(22.8
)
(4.4
)
19.1

0.3

(9.7
)
Total net gains (losses) on derivatives and hedging activities
$
(1.1
)
$
(23.2
)
$
(4.4
)
$
19.2

$
0.3

$
(9.2
)
Total net effect of derivatives and hedging activities
$
(65.1
)
$
(25.8
)
$
(5.1
)
$
81.4

$
0.3

$
(14.3
)
Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(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 first quarter of 2015, total ineffectiveness related to these fair value hedges resulted in net gains of $0.6 million compared to net gains of $0.5 million during the first quarter of 2014. The total notional amount increased to $35.8 billion at March 31, 2015 from $32.2 billion at December 31, 2014. 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" financial statement line item. For economic hedges, the Bank recorded net losses of $(8.2)

9


million in the first quarter of 2015 compared to net losses of $(9.7) million for the first quarter of 2014. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $9.4 billion at March 31, 2015 and $12.7 billion at December 31, 2014.

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 2014 Form 10-K.

Assets

Total assets were $87.5 billion at March 31, 2015, compared to $85.7 billion at December 31, 2014. The increase of $1.8 billion was primarily due to increased short-term liquidity balances, partially offset by a decline in advances. Short-term liquidity balances, which include cash and Federal funds sold, were $10.0 billion at March 31, 2015, an increase of $3.0 billion from $7.0 billion at December 31, 2014. Advances totaled $62.3 billion at March 31, 2015, down slightly from $63.4 billion at December 31, 2014.

The Finance Agency has communicated its interest in keeping all of the FHLBanks focused on activities related to their missions, such as making advances. Advances are central to the Bank’s mission and, along with MPF loans, are critical to the Bank’s continuing ability to meet the needs of its membership and their communities. At March 31, 2015, advances and MPF loans totaled $65.4 billion. The Bank's plan is to keep this mission activity above 70% of consolidated obligation balances. At March 31, 2015, this percentage was 79.5%.

Advances. Advances (par) totaled $62.1 billion at March 31, 2015 compared to $63.1 billion at December 31, 2014. At March 31, 2015, the Bank had advances outstanding to 180 borrowing members, compared to 189 borrowing members at December 31, 2014. 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 borrowers represented 73.1% of total advances as of March 31, 2015 compared to 73.8% at December 31, 2014.

The following table provides information on advances at par by product type at March 31, 2015 and December 31, 2014.
 
March 31,
December 31,
in millions
2015
2014
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
7,975.3

$
7,975.3

    Core (Term)
22,492.2

21,242.2

      Total adjustable/variable-rate indexed
$
30,467.5

$
29,217.5

Fixed rate:
 
 
    Repo/Mid-Term Repo
$
22,254.3

$
25,011.7

    Core (Term)
7,191.8

6,723.8

      Total fixed rate
$
29,446.1

$
31,735.5

Convertible
$
1,893.0

$
1,923.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
$
247.2

$
250.0

Total par balance
$
62,053.8

$
63,126.0


The Bank had no outstanding putable or returnable advances at March 31, 2015 or December 31, 2014. In the second quarter of 2015, the Bank introduced a new adjustable, returnable advance product which has a floating rate and can be returned at a predetermined time.


10


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 three months ended March 31, 2015 and the year ended December 31, 2014.
 
 
March 31,
December 31,
Member Asset Size
 
2015
2014
Less than $100 million
 
19

25

Between $100 million and $500 million
 
101

130

Between $500 million and $1 billion
 
36

45

Between $1 billion and $5 billion
 
29

33

Greater than $5 billion
 
18

19

Total borrowing members during the period
 
203

252

Total membership
 
302

304

Percentage of members borrowing during the period
 
67.2
%
82.9
%
Total borrowing members with outstanding loan balances at period-end
 
180

189

Percentage of members borrowing at period-end
 
59.6
%
62.2
%

During the first three months of 2015, the Bank has experienced a net decrease of two members. The Bank added two new members and lost four members. These four members merged with other institutions within the Bank's district.

The following table provides information at par on advances by member classification at March 31, 2015 and December 31, 2014. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and Community Financial Institutions (CFI) (under $1.1 billion).
(in thousands)
March 31, 2015
December 31, 2014
Increase/(Decrease)
Member Classification
Large
$
46,590.1

$
47,825.2

(2.6
)%
Regional
8,057.4

8,041.9

0.2

Mid-size
2,320.9

2,657.6

(12.7
)
CFI (1)
3,748.0

3,963.9

(5.4
)
Insurance
1,333.4

633.4

110.5

Non-member
4.0

4.0


Total
$
62,053.8

$
63,126.0

(1.7
)%
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

As of March 31, 2015, total advances decreased 1.7% compared with balances at December 31, 2014, as advances decreased in three of the five member classifications. The overall decrease was primarily driven by lower demand for short-term funding from the Large members. The decrease in Mid-size was primarily due to one member who was reclassified from Mid-size to Regional due to an increase in its asset size.

See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of this 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 March 31, 2015.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, decreased $49.0 million, to $3.1 billion at March 31, 2015. This decline was primarily driven by the continued runoff of the existing MPF Plus portfolio. The Bank’s focus is on purchasing MPF loans originated by community and regional member banks in its district rather than large national originators. In the second quarter of 2015, the Bank introduced a new MPF product called MPF 35. It is similar to the Original MPF product but has a credit enhancement (CE) structure that is based partly on performance, a first loss account (FLA) equal to 35 basis points, and an option for the participating financial institution's (PFI) CE obligation to be covered by a third party.

11



The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for PFIs under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.
 
 
March 31,
 
December 31,
(in millions)
 
2015
 
2014
Advances(1)
 
$
62,346.0

 
$
63,408.4

Mortgage loans held for portfolio, net(2)
 
3,074.3

 
3,123.3

Nonaccrual mortgage loans(3)
 
42.4

 
44.6

Mortgage loans 90 days or more delinquent and still accruing interest(4)
 
6.0

 
6.8

BOB loans, net
 
11.3

 
11.6

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 and do not include performing TDRs of $11.7 million at March 31, 2015 and $12.8 million at December 31, 2014.
(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 remained stable since year-end 2014 and the Original MPF portfolio continues to out-perform the market based on national delinquency statistics. As of both March 31, 2015 and December 31, 2014, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.6% of the Original MPF portfolio and 3.8% of the MPF Plus portfolio.

Allowance for Credit Losses (ACL). The Bank has not incurred any losses on advances since its inception. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is unnecessary. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in the Bank's 2014 Form10-K.

The ACL on mortgage loans is based on the losses inherent in the Bank's mortgage loan portfolio after taking into consideration the CE structure of the MPF Program. The losses inherent in the portfolio are based on either an individual or collective assessment of the mortgage loans. The Bank purchases government-guaranteed and/or -insured and conventional fixed-rate residential mortgage loans. Because the credit risk on the government-guaranteed/insured loans is predominantly assumed by other entities, only conventional mortgage loans are evaluated for an ACL.

The Bank’s conventional mortgage loan portfolio is comprised of large groups of smaller-balance homogeneous loans made to borrowers by PFIs that are secured by residential real estate. A mortgage loan is considered impaired when it is probable that all contractual principal and interest payments will not be collected as scheduled based on current information and events. The Bank evaluates certain conventional mortgage loans for impairment individually. Beginning January 1, 2015, the Bank adopted the charge-off provisions of AB 2012-02. As a result, the estimated credit loss on individually evaluated MPF loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established, if required.

The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability and loss given default. Probability of default and loss given default are based on the prior 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 including a factor that reduces estimated proceeds from primary mortgage insurance (PMI) given the credit deterioration experienced by those companies.

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 FLA. Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF Plus can be recaptured by withholding fees paid to

12


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 March 31, 2015 and December 31, 2014.
 
MPF CE structure
March 31, 2015
ACL
March 31, 2015
(in millions)
FLA
Available CE
Estimate of Credit loss
Reduction to the ACL due
to CE
ACL
Original MPF
$
3.3

$
163.2

$
4.8

$
(4.4
)
$
0.4

MPF Plus
19.6

35.0

14.9

(8.7
)
6.2

Total
$
22.9

$
198.2

$
19.7

$
(13.1
)
$
6.6

 
MPF CE structure
December 31, 2014
ACL
December 31, 2014
(in millions)
FLA
Available CE
Estimate of Credit loss
Reduction to the ACL due
to CE
ACL
Original MPF
$
3.2

$
157.2

$
3.5

$
(2.9
)
$
0.6

MPF Plus
20.0

35.8

15.7

(9.0
)
6.7

Total
$
23.2

$
193.0

$
19.2

$
(11.9
)
$
7.3



13


Investments. At March 31, 2015, the sum of the Bank's interest-bearing deposits and Federal funds sold increased approximately $330.0 million from December 31, 2014 to $4.9 billion. 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 including trading, AFS, and HTM securities, totaled $11.8 billion at March 31, 2015 compared to $11.9 billion at December 31, 2014. Details of the investment securities portfolio follow.
 
 
Carrying Value
(in millions)
 
March 31, 2015
 
December 31, 2014
Trading securities:
 
 
 
 
Mutual funds
 
$
5.1

 
$
4.7

Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
 
290.7

 
276.3

Total trading securities
 
$
295.8

 
$
281.0

Yield on trading securities
 
2.85
%
 
2.86
%
AFS securities:
 
 
 
 
Mutual funds
 
$
2.0

 
$
2.0

GSE and TVA obligations
 
3,388.6

 
3,233.7

State or local agency obligations
 
127.0

 
99.0

MBS:
 
 
 
 
      Other U.S. obligations single family MBS
 
316.1

 
329.4

      GSE single-family MBS
 
2,753.2

 
2,882.1

      GSE multifamily MBS
 
886.4

 
879.8

Private label residential MBS
 
946.9

 
971.1

Private label home equity line of credit (HELOCs)
 
11.2

 
11.7

Total AFS securities
 
$
8,431.4

 
$
8,408.8

Yield on AFS securities
 
1.84
%
 
1.73
%
HTM securities:
 
 
 
 
GSE securities
 
$
12.2

 
$
13.0

State or local agency obligations
 
183.4

 
184.4

MBS:
 
 
 
 
      Other U.S. obligations single family MBS
 
1,052.7

 
1,122.5

      GSE single-family MBS
 
385.3

 
417.2

      GSE multifamily MBS
 
796.0

 
818.1

Private label residential MBS
 
649.7

 
691.6

Total HTM securities
 
$
3,079.3

 
$
3,246.8

Yield on HTM securities
 
2.05
%
 
2.04
%
Total investment securities
 
$
11,806.5

 
$
11,936.6

Yield on total investment securities
 
1.92
%
 
1.84
%

The increase in yield on AFS securities from 1.73% at December 31, 2014 to 1.84% at March 31, 2015 was due primarily to the increase in yield on four securities that have previously incurred OTTI. Recoveries of OTTI occur through interest income, which happen if there is a significant increase in estimated cash flows whereby the Bank increases the yield on the Bank’s investment and recognizes recovery as interest income over the life of the investment.


14


As of March 31, 2015, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions)
 
Total
Book Value
 
Total
Fair Value
Freddie Mac
 
$
4,758.0

 
$
4,792.7

Fannie Mae
 
2,379.5

 
2,398.8

Federal Farm Credit Banks
 
1,293.6

 
1,293.6

Ginnie Mae
 
1,109.1

 
1,115.1

Total
 
$
9,540.2

 
$
9,600.2


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 March 31, 2015, the Bank was obligated to fund approximately $29.3 million in additional advances and BOB loans, $21.7 million of mortgage loans and $20.4 billion in outstanding standby letters of credit, and to issue $960.9 million 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 market value of equity to par value of capital stock (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 four risk elements that comprise the Bank's total retained earnings target: (1) market risk (which includes private label MBS risk); (2) credit risk; (3) operating risk; and (4) 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. The framework also assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $462 million as of March 31, 2015.

Retained earnings decreased $28.6 million to $808.9 million at March 31, 2015, compared to $837.5 million at December 31, 2014. The decrease in retained earnings during the first three months of 2015 reflected net income that was more than offset by $99.7 million of dividends paid. Total retained earnings at March 31, 2015 included unrestricted retained earnings of $683.4 million and restricted retained earnings (RRE) of $125.5 million.


15


Capital Resources

The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q, the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data and the Capital Resources section of Item 1. Business in the Bank's 2014 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.
 
 
March 31,
 
December 31,
(in millions)
 
2015
 
2014
Permanent capital:
 
 
 
 
Capital stock (1)
 
$
3,064.3

 
$
3,041.6

Retained earnings
 
808.9

 
837.5

Total permanent capital
 
$
3,873.2

 
$
3,879.1

RBC requirement:
 
 
 
 
Credit risk capital
 
$
541.8

 
$
544.8

Market risk capital
 
93.2

 
107.0

Operations risk capital
 
190.5

 
195.6

Total RBC requirement
 
$
825.5

 
$
847.4

Excess permanent capital over RBC requirement
 
$
3,047.7

 
$
3,031.7

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

On March 23, 2015, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2014. 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 March 31, 2015.

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 March 31, 2015.
 
 
March 31,
 
December 31,
(dollars in millions)
 
2015
 
2014
Regulatory Capital Ratio
 
 
 
 
Minimum regulatory capital (4.0% of total assets)
 
$
3,498.5

 
$
3,427.1

Regulatory capital
 
3,873.2

 
3,879.1

Total assets
 
87,463.1

 
85,677.1

Regulatory capital ratio (regulatory capital as a percentage of total assets)
 
4.4
%
 
4.5
%
Leverage Ratio
 
 
 
 
Minimum leverage capital (5.0% of total assets)
 
$
4,373.2

 
$
4,283.9

Leverage capital (regulatory capital multiplied by a 1.5 weighting factor)
 
5,809.8

 
5,818.7

Leverage ratio (leverage capital as a percentage of total assets)
 
6.6
%
 
6.8
%

The decline in ratios from December 31, 2014 to March 31, 2015 is primarily due to the increase in total assets.

16


The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
(dollars in millions)
 
March 31, 2015
December 31, 2014
Commercial banks
 
177

$
2,664.6

179

$
2,687.5

Thrifts
 
70

249.1

72

254.9

Insurance companies
 
11

109.9

10

57.1

Credit unions
 
43

40.0

42

41.4

Community Development Financial Institution (CDFI)
 
1

0.1

1

0.1

Total member institutions / total GAAP capital stock
 
302

$
3,063.7

304

$
3,041.0

Mandatorily redeemable capital stock
 
 
0.6

 
0.6

Total capital stock
 
 
$
3,064.3



$
3,041.6


Critical Accounting Policies and Estimates

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 2014 Form 10-K describes the most significant accounting policies used by the Bank. In addition, the Bank's critical accounting policies and estimates are presented in Item 7. Management's Discussion and Analysis in the Bank's 2014 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.

During the three months ended March 31, 2015, the Bank updated its Critical Accounting Policy and Estimates for its Allowance for Credit Losses on Mortgage Loans Held for Portfolio as a result of adoption of the charge-off provisions of the Finance Agency Advisory Bulletin 2012-02, as clarified by Advisory Bulletin 2013-02 (AB 2012-02). AB 2012-02 requires the Bank to charge off the portion of a loan deemed to be a loss. Beginning January 1, 2015, the Bank reduced its loan balance and the related allowance for loan losses by the amount of the charge-off, or established a CE Receivable for losses expected to be recovered through the CE of the MPF Program. This adoption had an immaterial impact on the Bank's financial statements.

The Bank made no other changes to its critical accounting policies during the three months ended March 31, 2015.

In addition to evaluating the Bank's private label MBS portfolio under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of the Bank's private label MBS under a more stressful housing price scenario. This additional scenario was used to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended March 31, 2015 if the more stressful housing price scenario had been used in the Bank's OTTI assessment as of March 31, 2015. The more stressful scenario results were immaterial. A more detailed discussion of this analysis is in the OTTI section of Credit and Counterparty Risk - Investments of this Item 2.

Proposed and Recently Issued Accounting Guidance. See Note 1 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the unaudited financial statements in this Form 10-Q for information on new accounting pronouncements impacting the financial statements or becoming effective for the Bank in future periods.

Legislative and Regulatory Developments

None.

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 has a Risk Governance Policy and a Member Products Policy, both of 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 and consistent with the Bank’s risk appetite.

17


The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.

Risk Governance

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. In addition, the Bank’s risks are affected by current and projected financial and residential market trends including those described in Item 1A. Risk Factors in the Bank's 2014 Form 10-K. 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 2014 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. This is one of the risk metrics used to evaluate the adequacy of retained earnings which is used to develop dividend payment recommendations and support the repurchase of excess capital stock.

The current Board-approved floor for MV/CS is 90.0%. 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. See the “Capital and Retained Earnings” discussion in Financial Condition in this Item 2 for details regarding the Bank’s retained earnings policy.

The MV/CS ratio was 134.2% at March 31, 2015 and 135.3% at December 31, 2014. The decline was primarily due to the decrease in retained earnings as first quarter net income was more than offset by dividends paid.

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, the Bank does not accept subprime residential mortgage loans (defined as FICO score of 660 or below) as qualifying collateral unless there are certain mitigating factors including an LTV ratio of 65% or less (100% if loan level data is provided by the member for valuation) and one of the following: (1) a debt-to-income ratio of 35% (50 % if loan level data is provided by member) or less or (2) a satisfactory payment history over the past 12 months (no 30-day delinquencies). The Bank requires members to identify the amount of subprime and nontraditional mortgage collateral in their Qualifying Collateral Report (QCR) each quarter and provide periodic certification that they comply with the FFIEC guidance. Loans identified as subprime which do not have the mitigating factors described above are not included when determining a member’s MBC.

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), missing (unknown) FICO score loans and nontraditional loans and securities. A limit of 25% has also been established for total exposure related to nontraditional, subprime and low FICO whole mortgage loans acquired through the Bank’s MPF program.

Qualitative and Quantitative Disclosures Regarding Market Risk

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

The Bank's Market Risk Models. Significant resources are devoted to ensuring that the level of market risk in the balance sheet is accurately measured, thus allowing management to monitor the risk against policy and regulatory limits. The Bank uses externally developed models to evaluate its financial position and market risk. One of the most critical market-based models relates to the prepayment of principal on mortgage-related instruments. Management regularly reviews the major assumptions and methodologies used in its models, as well as the performance of the models relative to empirical results.

The Bank regularly validates the models used to measure market risk. Such model validations are performed by third-party specialists or the Bank's model validation department, both of which are considered to be independent. The model validations 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

18


that is 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 the Bank's Asset Liability Committee (ALCO), which is responsible for reviewing and approving the approaches used in the evaluation of such risks 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 expressed in 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.

The following table presents the Bank's duration of equity exposure at March 31, 2015 and December 31, 2014. 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 is therefore not presented.
(in years)
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual duration of equity:
 
 
 
March 31, 2015
(0.7)
0.4
1.2
December 31, 2014
(0.4)
0.7
1.5
 
Duration of equity changes from prior year-end primarily reflect the effect of lower long-term interest rates and additional fixed rate debt. The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes 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.

Return on Equity (ROE) Spread Volatility. Interest rate risk is also measured based on the volatility in the Bank’s projected return on capital in excess of the return of an established benchmark market index. Beginning December 31, 2014, the Bank began using ROE spread as the basis for this measure. ROE spread is defined as the Bank's return on average equity, including capital stock and retained earnings, in excess of the average of 3-month LIBOR. ROE spread volatility is a measure of the variability of the Bank’s projected ROE spread in response to shifts in interest rates and represents the change in ROE spread compared to the current base forecasted ROE spread. ROE spread volatility is measured over a rolling forward 12 month period for selected interest rate scenarios and excludes the income sensitivity resulting from mark to market changes which are separately measured by the Earnings-at-Risk measure described below.

The ROE spread volatility presented in the table below reflects spreads relative to 3-month LIBOR. Management uses both parallel and non-parallel rate scenarios to assess interest rate risk. The steeper and flatter yield curve shift scenarios 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 a down 200 basis points parallel rate scenario with a down 100 basis point longer term rate shock as an additional non-parallel rate scenario that reflects a decline in longer term rates.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term Rate Shock
100 bps Steeper
100 bps Flatter
Up 200 bps Parallel Shock
March 31, 2015
44
2
121
160
December 31, 2014
19
(25)
92
125

The changes in ROE spread volatility from December 31, 2014 were mainly the result of lower long-term interest rates and additional fixed rate debt. The Board's limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at March 31, 2015 and December 31, 2014.


19


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 also monitor the actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis.

During the first quarter of 2015, the daily exposure limit of EaR as approved by the Board was $3.5 million, and the Bank's ALCO operating guideline was $2.8 million. The daily forward-looking exposure was below the applicable Board limit and operating guidelines during the first three months of 2015. At March 31, 2015, EaR measured $1.9 million.

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

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure to the Bank or TCE, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; member derivatives; and MPF credit enhancement and related obligations. This credit risk is managed 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. This may include collateral pledged by a member’s affiliate. At March 31, 2015, aggregate TCE was $82.9 billion, comprised of approximately $62.1 billion in advance principal outstanding, $20.5 billion in letters of credit (including $122.3 million in forward commitments), and $0.3 billion in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees. In addition, at March 31, 2015, the Bank had $28.5 million in advance commitments.

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 2014 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 rating (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 financial analysis method is used to analyze insurance company exposure. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on various forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.

During the first three months of 2015, there were four failures of FDIC-insured institutions nationwide. None of those institutions were a member of the Bank.

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 advance exposure, other than those losses reserved through the MPF program.


20


The following table presents the Bank’s top ten financial institutions with respect to their TCE at March 31, 2015.
 
March 31, 2015
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
27,128.3

32.7
%
Santander Bank, N.A, DE (2)
12,551.2

15.1

TD Bank, National Association, DE
9,370.8

11.3

Chase Bank USA, N.A., DE
8,751.1

10.5

Ally Bank, UT (3)
3,803.3

4.6

Citizens Bank of Pennsylvania, PA (4)
2,957.6

3.6

Customers Bank, PA
2,449.8

3.0

First Commonwealth Bank, PA
1,074.0

1.3

Fulton Bank, N.A., PA
1,039.6

1.3

Susquehanna Bank, PA
918.6

1.1

 
$
70,044.3

84.5
%
Other financial institutions
12,833.6
15.5

Total TCE outstanding
$
82,877.9

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(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.

Member Advance Concentration Risk. The following table lists the Bank’s top ten borrowers based on advance balances at par as of March 31, 2015.
 
March 31, 2015
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
20,870.1

33.6
%
Santander Bank, N.A, DE (2)
9,670.0

15.6

Chase Bank USA, N.A., DE
8,750.0

14.1

Ally Bank, UT (3)
3,800.0

6.1

TD Bank, National Association, DE
2,250.0

3.6

Customers Bank, PA
1,545.0

2.5

Citizens Bank of Pennsylvania, PA (4)
1,250.0

2.0

First Commonwealth Bank, PA
1,044.3

1.7

Susquehanna Bank, PA
908.9

1.5

First National Bank of Pennsylvania, PA
900.0

1.5

 
$
50,988.3

82.2
%
Other borrowers
11,065.5

17.8

Total advances
$
62,053.8

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(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 average year-to-date March 31, 2015 balances for the ten largest borrowers totaled $48.9 billion, or 82% of total average advances outstanding. During the three months ended March 31, 2015, the maximum outstanding balance to any one borrower was $20.9 billion. The advances made by the Bank to each of 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. The Bank has implemented specific credit and collateral review monitoring for these members.


21


Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of March 31, 2015 and December 31, 2014. The letter of credit product is collateralized under the same procedures and guidelines that apply to advances.
(dollars in millions)
March 31, 2015
December 31, 2014
Letters of credit:
 
 
   Public unit deposit
$
20,356.2

$
19,918.8

   Other
22.9

23.3

Total (1)
$
20,379.1

$
19,942.1

Notes:
(1) Excludes approved requests to issue future standby letters of credit of $122.3 million and $146.8 million, respectively.

At March 31, 2015, the Bank had a concentration of letters of credit with two members totaling $13.3 billion or 65.7% of the total outstanding amount. At December 31, 2014, $13.4 billion or 67.0% were concentrated with two members.

Collateral Policies and Practices. All members are required to maintain eligible collateral to secure their TCE. Refer to the Risk Management section of the Bank's 2014 Form 10-K for additional information related to the Bank’s Collateral Policy.

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. Under a specific agreement, the Bank obtains a lien against specified eligible collateral assets of the member or its affiliate (as applicable) to secure the member’s obligations with the Bank. The member provides a detailed listing, as an addendum to the specific collateral agreement, identifying those assets pledged as collateral. Details regarding average lending values provided under both blanket liens and specific liens and delivery arrangements are available in the "Credit and Counterparty Risk - TCE and Collateral" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2014 Form 10-K.

For all of the Bank's members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of March 31, 2015 and December 31, 2014. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
March 31, 2015
December 31, 2014
All members
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
84,741.3

43.6
%
$
78,615.9

43.0
%
High quality investment securities(1)
8,413.9

4.3

6,070.2

3.3

ORERC/CFI eligible collateral
86,617.2

44.5

83,472.1

45.6

Multi-family residential mortgage loans
14,684.6

7.6

14,758.0

8.1

Total eligible collateral value
$
194,457.0

100.0
%
$
182,916.2

100.0
%
Total TCE
$
82,877.9

 
$
83,539.1

 
Collateralization ratio (eligible collateral value to TCE
outstanding)
234.6
%
 
219.0
%
 
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. Agency securities, TLGP investments, GSE MBS commercial and residential private label MBS with a minimum credit rating of single A, which the Bank considers as part of its valuation of the collateral. In addition, municipal securities with a real estate connection (e.g. include a lien on real estate) and REFCORP bonds have been added to the Bank's definition of high quality investment securities.


22


For only member borrowers, the following tables present information on a combined basis regarding the type of collateral securing the outstanding credit exposure and the collateral status as of March 31, 2015 and December 31, 2014.
 
March 31, 2015
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
64,101.9

38.3
%
$
15,670.4

87.3
%
$
265.5

26.2
%
$
80,037.8

42.9
%
High quality investment securities(1)
5,868.6

3.5

2,285.7

12.7

63.7

6.3

8,218.0

4.4

ORERC/CFI eligible collateral
83,067.7

49.6



655.4

64.8

83,723.1

44.9

Multi-family residential mortgage
  loans
14,454.1

8.6



27.7

2.7

14,481.8

7.8

Total eligible collateral value
$
167,492.3

100.0
%
$
17,956.1

100.0
%
$
1,012.3

100.0
%
$
186,460.7

100.0
%
Total TCE
$
72,699.3

87.7
%
$
10,094.4

12.2
%
$
84.2

0.1
%
$
82,877.9

100.0
%
Number of members
196

92.0
%
8

3.8
%
9

4.2
%
213

100.0
%
 
December 31, 2014
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
62,977.8

38.8
%
$
11,047.9

86.6
%
$
234.4

27.4
%
$
74,260.1

42.2
%
High quality investment securities(1)
4,254.0

2.6

1,710.4

13.4

75.1

8.8

6,039.5

3.4

ORERC/CFI eligible collateral
80,563.3

49.6



521.6

61.0

81,084.9

46.1

Multi-family residential mortgage
  loans
14,570.9

9.0



24.0

2.8

14,594.9

8.3

Total eligible collateral value
$
162,366.0

100.0
%
$
12,758.3

100.0
%
$
855.1

100.0
%
$
175,979.4

100.0
%
Total TCE
$
74,056.7

88.7
%
$
9,393.2

11.2
%
$
89.2

0.1
%
$
83,539.1

100.0
%
Number of members
208

92.8
%
8

3.6
%
8

3.6
%
224

100.0
%
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. Agency securities, TLGP investments, GSE MBS, commercial and residential private label MBS with a minimum credit rating of single A.A, which the Bank considers as part of its valuation of the collateral. In addition, municipal securities with a real estate connection (e.g. include a lien on real estate) and REFCORP bonds have been added to the Bank's definition of high quality investment securities. Members under blanket lien delivered status have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily, and private label residential MBS are subject to weekly ratings reviews.

Credit and Counterparty Risk - Investments

Investment Quality and External Credit Ratings. The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. The Bank considers a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, credit ratings based on NRSROs, and/or the financial health of the underlying issuer. As of March 31, 2015 and December 31, 2014, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $1.9 billion and $2.0 billion, respectively.


23


The following tables present the Bank’s investment carrying values as of March 31, 2015 and December 31, 2014 based on the lowest long-term credit rating from the NRSROs (Moody’s, S&P and Fitch).
 
March 31, 2015 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below BBB
Total
Money market investments:
 
 
 
 
 
 
  Federal funds sold
$

$
900.0

$
3,935.0

$
80.0

$

$
4,915.0

Total money market investments

900.0

3,935.0

80.0


4,915.0

Investment securities:
 
 
 
 
 
 
  GSE and TVA obligations

3,691.5




3,691.5

  State or local agency obligations
12.7

297.7




310.4

Total non-MBS
12.7

3,989.2




4,001.9

  Other U.S. obligations single family MBS

1,368.8




1,368.8

  GSE single-family MBS

3,138.5




3,138.5

  GSE multifamily MBS

1,682.4




1,682.4

  Private label residential MBS

4.3

18.2

268.9

1,301.6

1,593.0

  HELOCs




11.2

11.2

Total MBS

6,194.0

18.2

268.9

1,312.8

7,793.9

Total investments
$
12.7

$
11,083.2

$
3,953.2

$
348.9

$
1,312.8

$
16,710.8

 
December 31, 2014 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below BBB
Total
Money market investments:
 
 
 
 
 
 
  Federal funds sold
$

$
800.0

$
3,555.0

$
230.0

$

$
4,585.0

Total money market investments

800.0

3,555.0

230.0


4,585.0

Investment securities:
 
 
 
 
 
 
  GSE and TVA obligations

3,523.0




3,523.0

  State or local agency obligations
12.9

270.5




283.4

Total non-MBS
12.9

3,793.5




3,806.4

  Other U.S. obligations single family MBS

1,451.9




1,451.9

  GSE single-family MBS

3,299.3




3,299.3

  GSE multifamily MBS

1,697.9




1,697.9

  Private label residential MBS

4.7

26.5

277.1

1,350.8

1,659.1

  HELOCs




11.7

11.7

Total MBS

6,453.8

26.5

277.1

1,362.5

8,119.9

Total investments
$
12.9

$
11,047.3

$
3,581.5

$
507.1

$
1,362.5

$
16,511.3

Notes:
(1) 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 $7.1 million and $6.7 million at March 31, 2015 and December 31, 2014, respectively.
(2) Balances exclude a $3.6 million private label MBS security which was not rated at both March 31, 2015 and December 31, 2014.
(3) Balances exclude total accrued interest of $20.3 million and $21.8 million at March 31, 2015 and December 31, 2014, 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 placement of the counterparty on negative watch by one or more NRSROs. 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. The Bank does not rely solely on any NRSRO rating in deriving its final internal credit rating.

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

24


FHLBanks. In addition, the Bank maintains a contingency liquidity plan in the event of operational disruptions at the Bank and the Office of Finance (OF). 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 may 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;
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, which include those investment types listed above, on an unsecured basis with large financial institutions with long-term credit ratings no lower than BBB. Management actively monitors the credit quality of these counterparties.

As of March 31, 2015, the Bank had unsecured exposure to 11 counterparties totaling $4.9 billion with eight counterparties each exceeding 10% of the total exposure. The following table presents the Banks' unsecured credit exposure with private counterparties by investment type at March 31, 2015 and December 31, 2014. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions) Carrying Value (1)
 
 
 
March 31, 2015
December 31, 2014
Federal funds sold
$
4,915.0

$
4,585.0

Total
$
4,915.0

$
4,585.0

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

As of March 31, 2015, 94% of the Bank’s unsecured investment credit exposure in Federal funds sold were 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. For overnight exposures only, the Bank's total unsecured exposure to a counterparty may not exceed twice the applicable regulatory limit, or a total of 2% to 30% of the eligible amount of regulatory capital, based on the counterparty's credit rating. As of March 31, 2015, the Bank was in compliance with the regulatory limits established for unsecured credit.

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 its 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. Bank management has limited its unsecured investment activity with all European private counterparties to overnight maturities only.


25


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 NRSROs used. This table does not reflect the foreign sovereign government's credit rating.
(in millions)
 
 
 
 
March 31, 2015 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
BBB
Total
Domestic
$

$
210.0

$
80.0

$
290.0

U.S. branches and agency offices of foreign commercial banks
 
 
 
 
  Australia
900.0



900.0

  Canada

1,650.0


1,650.0

  Finland

500.0


500.0

  Netherlands

500.0


500.0

  Norway

575.0


575.0

  Sweden

500.0


500.0

  Total U.S. branches and agency offices of foreign commercial banks
900.0

3,725.0


4,625.0

Total unsecured investment credit exposure
$
900.0

$
3,935.0

$
80.0

$
4,915.0

(in millions)
 
 
 
 
December 31, 2014 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
BBB
Total
Domestic
$

$
680.0

$
80.0

$
760.0

U.S. subsidiaries of foreign commercial banks


150.0

150.0

  Total domestic and U.S. subsidiaries of foreign commercial banks

680.0

230.0

910.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
  Australia
800.0



800.0

  Canada

1,375.0


1,375.0

  Finland

500.0


500.0

  Netherlands

500.0


500.0

  Norway

500.0


500.0

  Total U.S. branches and agency offices of foreign commercial banks
800.0

2,875.0


3,675.0

Total unsecured investment credit exposure
$
800.0

$
3,555.0

$
230.0

$
4,585.0

Notes:
(1) Does not reflect any changes in ratings, outlook or watch status occurring after March 31, 2015.
(2) These ratings represent the lowest rating available for each security owned by the Bank based on the NRSROs used by the Bank. The Bank’s internal ratings may differ from those obtained from the NRSROs.
(3) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(4) Represents the NRSRO rating of the counterparty not the country. There were no AAA rated investments at either March 31, 2015 or December 31, 2014.

At March 31, 2015 and December 31, 2014, all the unsecured investments held by the Bank had overnight maturities.

U.S. 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 or U.S government corporations, 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/TVA 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 $4.0 billion and $3.8 billion at March 31, 2015 and December 31, 2014, respectively.


26


Agency and GSE MBS. The Bank invests in and is subject to credit risk related to MBS issued or guaranteed by Federal agencies and GSEs that are directly supported by underlying mortgage loans. The Bank’s total agency and GSE MBS portfolio decreased $259.4 million from December 31, 2014 to $6.2 billion at March 31, 2015. This decrease was due to paydowns, partially offset by an increase in fair value of the agency and MBS portfolio held as AFS securities.

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 $66.6 million from December 31, 2014 to $1.6 billion at March 31, 2015. This decline was primarily due to repayments, partially offset by an increase in the fair value of private label MBS held as AFS.

The slight increase in fair values on OTTI securities during the first three months of 2015 increased the unrealized gains in AOCI from $94.5 million at December 31, 2014 to $96.5 million as of March 31, 2015. The weighted average price on these OTTI securities increased slightly from 88 at December 31, 2014 to 89 at March 31, 2015. These fair values are determined using unobservable inputs (i.e., Level 3) derived from four third-party pricing services. The Bank uses the unadjusted prices received from the third-party pricing services in its process relating to fair value calculations and methodologies as described further in the Critical Accounting Policies section in Item 7. Management’s Discussion and Analysis in the Bank's 2014 Form 10-K.

Approximately 21% of the Bank’s MBS portfolio at March 31, 2015 was issued by private label issuers. In late 2007, the Bank discontinued the purchase of private label MBS.

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 and to reduce the documentation requirements of the borrower.

27


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, collateral type, and the security's credit rating as of March 31, 2015. The Bank has not purchased any 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:
 
 
 
 
 
  AA
$

$

$

$
4.3

$
4.3

  A



7.6

7.6

  BBB


20.5

166.4

186.9

Below investment grade:




 
  BB

7.7

37.8

114.0

159.5

  B


14.9

82.0

96.9

  CCC

7.4

5.6

25.8

38.8

  CC

20.3

5.2


25.5

  C
17.2

60.2



77.4

  D
207.3

116.3

37.2


360.8

  Unrated



3.6

3.6

    Total
$
224.5

$
211.9

$
121.2

$
403.7

$
961.3

Amortized cost
$
171.8

$
180.9

$
113.2

$
400.9

$
866.8

Gross unrealized losses (1)


(2.7
)
(3.6
)
(6.3
)
Fair value
200.9

197.1

116.3

399.7

914.0

OTTI (2):
 
 
 
 
 
Total OTTI losses
$

$

$

$

$

OTTI losses reclassified (from) AOCI





Net OTTI losses, credit portion
$

$

$

$

$

Weighted average fair value/par
89.5
%
93.0
%
96.0
%
99.0
%
95.1
%
Original weighted average credit support
7.2

8.3

4.5

5.5

6.4

Weighted-average credit support - current
0.1

1.4

8.2

12.9

6.8

Weighted avg. collateral delinquency(3)
12.6

12.6

10.8

9.6

11.1



28


 
Private Label MBS by Vintage - Alt-A (3) (4)
(dollars in millions)
2007
2006
2005
2004 and earlier
Total
Par by lowest external long-
 term rating:
 
 
 
 
 
  A
$

$

$

$
10.4

$
10.4

  BBB


3.6

75.9

79.5

Below investment grade:
 
 
 


 
  BB



4.4

4.4

  B


24.1

6.8

30.9

  CCC

74.4

44.2

34.1

152.7

  CC


7.3

1.7

9.0

  D
167.7

268.0

43.9


479.6

    Total
$
167.7

$
342.4

$
123.1

$
133.3

$
766.5

Amortized cost
$
128.4

$
267.2

$
115.8

$
128.5

$
639.9

Gross unrealized losses (1)


(1.5
)
(0.5
)
(2.0
)
Fair value
138.0

298.6

115.9

132.0

684.5

OTTI (2):




 
Total OTTI losses
$

$

$

$

$

OTTI losses reclassified (from) AOCI





Net OTTI losses, credit portion
$

$

$

$

$

Weighted average fair value/par
82.3
%
87.2
%
94.2
%
99.0
%
89.3
%
Original weighted average credit support
13.3

10.2

6.0

5.3

9.3

Weighted-average credit support - current


8.0

22.6

5.2

Weighted avg. collateral delinquency(3)
21.5

18.2

10.4

12.4

16.6

Notes:
(1) Represents total gross unrealized losses including non-credit-related other-than-temporary impairment recognized in AOCI. The unpaid principal balance and amortized cost of private label MBS in a gross unrealized loss position was $410.3 million and $408.3 million, respectively at March 31, 2015.
(2) For the three months ended March 31, 2015.
(3) Delinquency information is presented at the cross-collateralization level.
(4) Includes HELOCs.

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.

OTTI. The Bank did not recognize any credit-related OTTI charges in earnings during the three months ended March 31, 2015 and 2014. 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. This process is described in Note 5 - OTTI to the unaudited financial statements included in this Form 10-Q.

29


The Bank’s quarterly OTTI analysis is based on current and forecasted economic trends. Significant assumptions used on the Bank’s private label MBS as part of its first quarter 2015 analysis are presented below.
 
Significant Inputs for Private Label Residential MBS
 
Prepayment Rates
Default Rates
Loss Severities
Current Credit Enhancement
 
Weighted Avg %
Weighted Avg %
Weighted Avg %
Weighted Avg %
Prime
16.4
7.6
27.2
5.9
Alt-A
16.2
16.5
38.0
5.3
Subprime
8.5
19.5
68.4
36.3
Total Private Label Residential MBS
16.3
11.7
32.2
5.8

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, with the remainder in subprime and HELOC. The Bank has recognized life to date OTTI (in millions) as follows:
(dollars in millions)
March 31, 2015
March 31, 2014
Number of private label MBS with an OTTI charge:
 
 
   Life-to-date
57

57

   Still outstanding
45

48

Total OTTI credit loss recorded life-to-date
$
454.0

$
454.0

Principal write-downs on private label MBS
(125.1
)
(106.4
)
Credit losses on private label MBS no longer owned:
 
 
   Private label MBS sold
(106.0
)
(106.0
)
   Private label MBS matured (less principal write-downs realized)
(4.4
)
(1.1
)
Remaining amount of previously recognized OTTI credit losses
$
218.5

$
240.5


The table above excludes recoveries of OTTI through interest income, which occur if there is a significant increase in estimated cash flows whereby the Bank increases the yield on the Bank’s investment and recognizes recovery as interest income over the life of the investment. Interest income was $7.0 million and $5.9 million for the first quarter of 2015 and 2014, respectively; and $66.5 million life-to-date. The interest income was recognized on 36 and 37 private label MBS securities during the first quarter of 2015 and 2014, respectively. The same private label MBS can have multiple increases in cash flows that are deemed to be significant.

The Bank transfers private label MBS from HTM to AFS when an OTTI credit loss is recorded on a security. The Bank believes that a credit loss constitutes evidence of 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 it makes economic sense. There were no transfers during the first three months of 2015 and 2014.

Management will continue to evaluate all impaired securities, including those on which OTTI has been recorded. Material credit losses have occurred on private label MBS 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. 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, the Bank performed a cash flow analysis under one additional scenario which was agreed to by the OTTI Governance Committee that represented meaningful, plausible and more adverse external assumptions. This more adverse scenario decreases the short-term forecast by five percentage points, and slows housing price recovery rates 33%. 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 securities included in this stress scenario were only those that were in an unrealized loss position at March 31, 2015. Additionally, the maximum credit loss under the adverse case was limited to the amount of the security's unrealized loss. 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 results of the analysis were immaterial.


30


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 $3.1 billion at both March 31, 2015 and December 31, 2014 after an allowance for credit losses of $6.6 million and $7.3 million, respectively.

Mortgage Insurers. The Bank’s MPF Program currently has credit exposure to ten mortgage insurance companies which provide PMI and/or Supplemental Mortgage Insurance (SMI) for 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 a mortgage insurance company on the Bank's approved mortgage insurance company list whenever PMI coverage is required.

None of the Bank’s mortgage insurers currently maintain a rating by at least one NRSRO of A+ or better. 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 March 31, 2015, 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-. The Finance Agency guidelines require mortgage insurers that underwrite SMI to be rated AA- or better. This requirement has been temporarily waived by the Finance Agency provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of March 31, 2015, $52.8 million of SMI exposure had been secured by two PFIs.

The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of March 31, 2015 was $12.8 million and $5.2 million, respectively. As of December 31, 2014, these amounts were $13.9 million and $5.5 million, respectively.

BOB Loans. The Bank's BOB loan program is targeted to small businesses in the Bank's district to assist in the growth and development of small businesses, including both start-up and expansion. The Bank makes funds available to members to extend credit to an approved small business borrower, thereby enabling small businesses to qualify for credit that otherwise may not be available. See Item 1. Business in the Bank's 2014 Form 10-K for additional information about the BOB loan program. The allowance for credit losses on BOB loans was $1.7 million and $1.8 million at March 31, 2015 and December 31, 2014, respectively.

Derivative Counterparties. Derivative transactions may be either executed with a counterparty (referred to as bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). For bilateral derivatives, 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. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

The Bank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements.

Bilateral Derivatives. The Bank is subject to non-performance by counterparties to its bilateral derivative transactions. The Bank requires collateral on bilateral derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative transactions with counterparties as of March 31, 2015.

Cleared Derivatives. The Bank is subject to credit risk due to non-performance by the Clearing Houses and clearing agent. The requirement that the Bank post initial and variation margin, through the clearing agent, to the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their obligations. Initial

31


margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market. The Bank's use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of March 31, 2015.

The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments. The maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables as well as the netting requirements to net assets and liabilities. The following table presents the derivative positions with non-member counterparties and member institutions to which the Bank has credit exposure at March 31, 2015 and December 31, 2014.

(in millions)
March 31, 2015
Credit Rating (1)
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged To (From) Counterparties
Net Credit Exposure to Counterparties
Non-member counterparties
 
 
 
 
Asset positions with credit
   exposure:
 
 
 
 
  Bilateral derivatives
 
 
 
 
    AA
$
213.0

$
0.4

$

$
0.4

    A
1,356.7

1.9

(0.8
)
1.1

Liability positions with credit
   exposure:
 
 
 
 
  Cleared derivatives (2)
23,862.7

(181.4
)
230.9

49.5

Total derivative positions with credit exposure to non-member counterparties
25,432.4

(179.1
)
230.1

51.0

Member institutions (3)
21.7

0.6


0.6

Total
$
25,454.1

$
(178.5
)
$
230.1

$
51.6

Derivative positions without credit exposure
19,746.6

 
 
 
Total notional
$
45,200.7

 
 
 

32


(in millions)
December 31, 2014
Credit Rating (1)
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged To (From) Counterparties
Net Credit Exposure to Counterparties
Non-member counterparties
 
 
 
 
Asset positions with credit
   exposure:
 
 
 
 
  Bilateral derivatives
 
 
 
 
    AA
$
200.0

$
2.6

$

$
2.6

    A
385.0

1.6


1.6

Liability positions with credit
exposure:
 
 
 
 
  Bilateral derivatives
 
 
 
 
    A
1,325.0

(16.6
)
18.0

1.4

  Cleared derivatives (2)
23,373.5

(174.9
)
204.4

29.5

Total derivative positions with credit exposure to non-member counterparties
25,283.5

(187.3
)
222.4

35.1

Member institutions (3)
18.3

0.4


0.4

Total
$
25,301.8

$
(186.9
)
$
222.4

$
35.5

Derivative positions without credit exposure
19,551.2

 
 
 
Total notional
$
44,853.0

 
 
 
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after March 31, 2015. The ratings presented in this table represent the lowest long-term counterparty credit rating available for each counterparty based on the NRSROs used by the Bank.
(2) Represents derivative transactions cleared through Clearing Houses.
(3) Member institutions include mortgage delivery commitments.

The following tables summarize the Bank’s bilateral derivative counterparties which represent more than 10% of the Bank’s total notional amount outstanding and net credit exposure as of March 31, 2015 and December 31, 2014.
Notional Greater Than 10%
March 31, 2015
December 31, 2014
(dollars in millions)
Derivative Counterparty
Credit Rating
Notional
% of Notional
Credit Rating
Notional
% of Notional
Deutsche Bank AG
A
$
4,621.1

21.7
A
$
4,567.4

21.3
Morgan Stanley Capital
BBB
3,910.1

18.3
BBB
3,328.6

15.5
JP Morgan Chase Bank, NA
A
2,665.4

12.5
A
2,885.6

13.4
All others
n/a
10,141.3

47.5
n/a
10,697.9

49.8
 Total
 
$
21,337.9

100.0
 
$
21,479.5

100.0


33


Net Credit Exposure
  Greater Than 10%
March 31, 2015
December 31, 2014
(dollars in millions)
Derivative Counterparty
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
BNP Paribas
A
$
0.7

34.5
(2) 
(2) 

(2) 
BNY Mellon
AA
0.4

17.2
(2) 
(2) 

(2) 
Royal Bank of Canada
(1) 
(1) 

(1) 
AA
$
2.6

43.0
HSBC Bank USA, NA
(1) 
(1) 

(1) 
A
1.2

19.7
Goldman Sachs Group, Inc.
(1) 
(1) 

(1) 
A
0.7

11.3
All others
n/a
1.0

48.3
n/a
1.5

26.0
 Total
 
$
2.1

100.0
 
$
6.0

100.0
Notes:
(1) The percentage of net credit exposure was not greater than 10%.
(2) The counterparty had no credit exposure as of December 31, 2014.

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. In terms of counterparty credit risk exposure, European financial institutions are exposed to the Bank as shown below.
(in millions)
March 31, 2015
December 31, 2014
Country of Counterparty
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged by the Bank
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged by the Bank
Switzerland
$
37.6

$
37.6

$
37.6

$
37.5

$
37.5

$
37.8

United Kingdom
22.0

17.0

16.7

25.7

20.7

20.6

Germany
15.4

0.4

0.4

41.6

26.6

27.6

Total
$
75.0

$
55.0

$
54.7

$
104.8

$
84.8

$
86.0

Note: The average maturity of these derivative contracts is November 2018 and October 2018 at March 31, 2015 and December 31, 2014, respectively. 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, as presented in the tables below.
(in millions)
March 31, 2015
December 31, 2014
Country of Counterparty
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged to the Bank
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged to the Bank
France
$
1.8

$
0.7

$
0.8

$
0.6

$
0.6

$
3.1

United Kingdom
2.1

2.0

2.1

3.8

2.6

3.9

Switzerland



0.4



Total
$
3.9

$
2.7

$
2.9

$
4.8

$
3.2

$
7.0

Note: The average maturity of these derivative contracts is March 2019 at both March 31, 2015 and December 31. 2014. 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.


34


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 and are described further in the Bank's 2014 Form 10-K.

Consolidated obligations bonds and discount notes are rated Aaa with stable outlook/P-1 by Moody’s and AA+ with stable outlook/A-1+ by S&P, as of March 31, 2015. These ratings measure the likelihood of timely payment of principal and interest. At March 31, 2015, the Bank’s consolidated obligation bonds outstanding increased to $45.2 billion compared to $43.7 billion at December 31, 2014. 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 were $37.1 billion at both March 31, 2015 and December 31, 2014.

During the first three months of 2015, short-term funding spreads relative to LIBOR remained relatively stable. 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 March 31, 2015, callable bonds issued by the Bank were up approximately $724.0 million from December 31, 2014. Note 10 - Consolidated Obligations to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank’s consolidated obligations.

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 requirements are designed to enhance the Bank’s protection against temporary disruptions in access to the debt markets. Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2014 Form 10-K for additional information. The Bank was in compliance with these requirements at March 31, 2015.

Contingency Liquidity. In their asset/liability management planning, members may look to the Bank to provide standby 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 securities purchased under agreements to resell. At March 31, 2015 and December 31, 2014, excess contingency liquidity was approximately $20.8 billion and $19.7 billion, respectively.

Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2014 Form 10-K for additional information.

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 of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2014 Form 10-K for additional information.


35


Operating and Business Risks

Operating Risk. Operating risk is defined as the risk of unexpected loss resulting from human error, system malfunctions, man-made or natural disasters, fraud, legal risk, compliance risk, or circumvention or failure of internal controls. The Bank has established operating policies and procedures to manage each of the specific operating risks which are categorized as financial reporting, compliance, fraud, legal, information and personnel.

Business 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. This risk includes the potential for strategic business constraints to be imposed through regulatory, legislative or political changes. The Bank’s Risk Management Committee monitors economic indicators and the external environment in which the Bank operates and attempts to mitigate this risk through long-term strategic planning. For additional information, on operating and business risks, see the "Operating and Business Risks" discussion in the Risk Management section of Item 7. in the Bank's 2014 Form 10-K.


36


Item 1: Financial Statements (unaudited)

Federal Home Loan Bank of Pittsburgh
Statements of Income (unaudited)
 
Three months ended March 31,
(in thousands, except per share amounts)
2015
2014
Interest income:
 

 

Advances
$
73,741

$
59,973

Prepayment fees on advances, net
1,068

3,091

Interest-bearing deposits
79

83

Securities purchased under agreements to resell
161

13

Federal funds sold
1,379

705

Trading securities
1,997

1,838

Available-for-sale (AFS) securities
37,233

32,884

Held-to-maturity (HTM) securities
16,703

19,970

Mortgage loans held for portfolio
30,756

33,364

Total interest income
163,117

151,921

Interest expense:
 
 
Consolidated obligations - discount notes
9,102

6,036

Consolidated obligations - bonds
78,423

83,525

Mandatorily redeemable capital stock
1

14

Deposits
55

55

Other borrowings
4

3

Total interest expense
87,585

89,633

Net interest income
75,532

62,288

Provision (benefit) for credit losses
(461
)
(3,873
)
Net interest income after provision (benefit) for credit losses
75,993

66,161

Other noninterest income (loss):
 
 
Net gains on trading securities (Note 2)
6,777

9,792

Net gains (losses) on derivatives and hedging activities (Note 9)
(7,572
)
(9,199
)
Gains on litigation settlements, net
15,263

36,610

Standby letters of credit fees
5,949

4,022

Other, net
566

449

Total other noninterest income
20,983

41,674

Other expense:
 
 
Compensation and benefits
10,321

10,822

Other operating
5,266

6,104

Finance Agency
1,380

1,249

Office of Finance
987

893

Total other expense
17,954

19,068

Income before assessments
79,022

88,767

AHP assessment
7,902

8,878

Net income
$
71,120

$
79,889

Earnings per share:
 
 
Weighted avg shares outstanding (excludes mandatorily redeemable capital stock)
29,367

29,072

Basic and diluted earnings per share
$
2.42

$
2.75

Dividends per share
$
3.40

$
0.58

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

37


Federal Home Loan Bank of Pittsburgh
Statements of Comprehensive Income (unaudited)
 
Three months ended March 31,
(in thousands)
2015
2014
Net income
$
71,120

$
79,889

Other comprehensive income (loss):
 
 
Net unrealized gains on AFS
22,488

24,528

Net change in fair value of OTTI securities
2,061

1,443

Reclassification of net losses (gains) included in net income relating to hedging activities
(8
)

Pension and post-retirement benefits
82

39

Total other comprehensive income
24,623

26,010

Total comprehensive income
$
95,743

$
105,899

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



38


Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(in thousands)
March 31, 2015
December 31, 2014
ASSETS
 

 

Cash and due from banks
$
5,124,196

$
2,451,131

Interest-bearing deposits
8,089

6,782

Federal funds sold
4,915,000

4,585,000

Investment securities:
 
 
 Trading securities (Note 2)
295,855

281,016

 AFS securities at fair value (Note 3)
8,431,371

8,408,835

HTM securities; fair value of $3,123,040 and $3,286,547 respectively (Note 4)
3,079,267

3,246,788

Total investment securities
11,806,493

11,936,639

Advances, net (Note 6)
62,346,031

63,408,355

Mortgage loans held for portfolio (Note 7), net of allowance for credit losses of
    $6,566 and $7,260 respectively (Note 8)
3,074,289

3,123,334

Banking on Business (BOB) loans, net of allowance for credit losses of
    $1,660 and $1,840, respectively (Note 8)
11,347

11,567

Accrued interest receivable
87,196

86,109

Premises, software and equipment, net
10,175

10,446

Derivative assets (Note 9)
52,054

36,217

Other assets
28,189

21,496

Total assets
$
87,463,059

$
85,677,076



39


Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(continued)
(in thousands, except par value)
March 31, 2015
December 31, 2014
LIABILITIES AND CAPITAL
 

 

Liabilities
 

 

Deposits:
 
 
Interest-bearing
$
716,982

$
601,454

Noninterest-bearing
33,945

39,726

Total deposits
750,927

641,180

Consolidated obligations, net: (Note 10)
 
 
Discount notes
37,077,804

37,058,118

Bonds
45,241,342

43,714,510

Total consolidated obligations, net
82,319,146

80,772,628

Mandatorily redeemable capital stock (Note 11)
569

586

Accrued interest payable
149,563

103,151

AHP payable
61,999

55,997

Derivative liabilities (Note 9)
62,311

58,964

Other liabilities
96,833

41,614

Total liabilities
83,441,348

81,674,120

Commitments and contingencies (Note 14)


Capital (Note 11)
 
 
Capital stock - putable ($100 par value) issued and outstanding
     30,638 and 30,410 shares
3,063,747

3,040,976

Retained earnings:
 
 

Unrestricted
683,446

726,309

Restricted
125,462

111,238

Total retained earnings
808,908

837,547

Accumulated other comprehensive income (AOCI)
149,056

124,433

Total capital
4,021,711

4,002,956

Total liabilities and capital
$
87,463,059

$
85,677,076

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


40


Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 

Net income
 
$
71,120

 
$
79,889

Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
 
 
 

Depreciation and amortization
 
(20,148
)
 
(13,480
)
Net change in derivative and hedging activities
 
(12,477
)
 
(15,998
)
Other adjustments
 
(461
)
 
(3,874
)
Net change in:
 
 
 

Trading securities
 
(14,839
)
 
(30,147
)
Accrued interest receivable
 
(1,081
)
 
12,731

Other assets
 
1,063

 
949

Accrued interest payable
 
46,410

 
46,185

Other liabilities
 
1,180

 
2,516

Net cash provided by operating activities
 
$
70,767

 
$
78,771

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits (including $(1,307) and $2,336
   to/from other FHLBanks for mortgage loan program)
 
$
36,895

 
$
(4,398
)
Federal funds sold
 
(330,000
)
 
45,000

AFS securities:
 
 
 
 
Proceeds
 
578,529

 
565,159

Purchases
 
(499,868
)
 
(701,512
)
HTM securities:
 
 
 
 
Proceeds from long-term maturities
 
167,323

 
173,892

Advances:
 
 
 
 
Proceeds
 
128,836,510

 
140,789,202

Made
 
(127,764,258
)
 
(136,655,622
)
Mortgage loans held for portfolio:
 
 
 
 
Proceeds
 
109,399

 
104,145

Purchases
 
(71,230
)
 
(54,609
)
Proceeds from sales of foreclosed assets
 
3,155

 
4,132

Premises, software and equipment:
 
 
 
 
Purchases
 
(704
)
 
(83
)
Net cash provided by investing activities
 
$
1,065,751

 
$
4,265,306

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

41


Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
(continued)
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Deposits and pass-through reserves
 
$
109,889

 
$
100,584

 Net payments for derivative contracts with financing element
 
(7,857
)
 
(7,989
)
Net proceeds from issuance of consolidated obligations:
 
 
 
 
Discount notes
 
38,654,859

 
20,904,544

Bonds
 
5,919,557

 
3,291,720

Payments for maturing and retiring consolidated obligations:
 
 
 
 
Discount notes
 
(38,637,702
)
 
(27,199,729
)
Bonds
 
(4,425,194
)
 
(3,117,510
)
Proceeds from issuance of capital stock
 
609,893

 
349,394

Payments for repurchase/redemption of mandatorily redeemable
  capital stock
 
(17
)
 
(157
)
Payments for repurchase/redemption of capital stock
 
(587,122
)
 
(628,203
)
Cash dividends paid
 
(99,759
)
 
(16,789
)
Net cash provided by (used in) financing activities
 
$
1,536,547

 
$
(6,324,135
)
Net increase (decrease) in cash and due from banks
 
$
2,673,065

 
$
(1,980,058
)
Cash and due from banks at beginning of the period
 
2,451,131

 
3,121,345

Cash and due from banks at end of the period
 
$
5,124,196

 
$
1,141,287

Supplemental disclosures:
 
 
 
 
Interest paid
 
$
53,255

 
$
54,438

AHP payments
 
1,900

 
1,348

Transfers of mortgage loans to real estate owned
 
1,491

 
3,508

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



42


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

 
Capital Stock - Putable
 
Retained Earnings
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
AOCI
Total Capital
December 31, 2013
29,622

 
$
2,962,143

 
$
625,636

 
$
60,083

 
$
685,719

$
44,340

$
3,692,202

Issuance of capital stock
3,494

 
349,394

 

 

 


349,394

Repurchase/redemption of capital stock
(6,282
)
 
(628,203
)
 

 

 


(628,203
)
Net shares reclassified to mandatorily
   redeemable capital stock
(20
)
 
(1,978
)
 

 

 


(1,978
)
Comprehensive income

 

 
63,911

 
15,978

 
79,889

26,010

105,899

Cash dividends

 

 
(16,789
)
 

 
(16,789
)

(16,789
)
March 31, 2014
26,814

 
$
2,681,356

 
$
672,758

 
$
76,061

 
$
748,819

$
70,350

$
3,500,525


 
Capital Stock - Putable
 
Retained Earnings
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
AOCI
Total Capital
December 31, 2014
30,410

 
$
3,040,976

 
$
726,309

 
$
111,238

 
$
837,547

$
124,433

$
4,002,956

Issuance of capital stock
6,099

 
609,893

 

 

 


609,893

Repurchase/redemption of capital stock
(5,871
)
 
(587,122
)
 

 

 


(587,122
)
Comprehensive income

 

 
56,896

 
14,224

 
71,120

24,623

95,743

Cash dividends

 

 
(99,759
)
 

 
(99,759
)

(99,759
)
March 31, 2015
30,638

 
$
3,063,747

 
$
683,446

 
$
125,462

 
$
808,908

$
149,056

$
4,021,711

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


43


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 are government-sponsored enterprises (GSEs) that 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 (as defined by Finance Agency regulation) in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet membership regulation 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 a member owns is based on membership requirements (membership asset value) and activity requirements (i.e., outstanding advances, letters of credit, and the principal balance of certain residential mortgage loans 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 12 - Transactions with Related Parties for additional information.

The Federal Housing Finance Agency (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 Federal Home Loan Bank Act (FHLBank Act), 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 10 - Consolidated Obligations 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 and issue 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. To the extent that any reclassifications were made, the reclassifications did not have a material impact on the Bank's financial statements. 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, 2014 included in the Bank's 2014 Form 10-K.


44

Notes to Financial Statements (continued)

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

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. In April 2012, the Finance Agency 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 or Advisory Bulletin), which is applicable to Fannie Mae, Freddie Mac and the FHLBanks. The Advisory Bulletin establishes guidelines for adverse classification of various assets, primarily MPF loans at the Bank. Among other requirements, this Advisory Bulletin requires that the Bank classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). The Bank implemented these classification provisions effective January 1, 2014. During the first quarter 2014, the Bank incorporated estimates of fair values on loans as applicable under the Advisory Bulletin in its calculation of the required “loss” on MPF loans. This change in the Bank's accounting estimate resulted in an immaterial benefit to the Bank's Allowance for Loan Losses at March 31, 2014. See Note 8 - Allowance for Credit Losses for more information.

The Advisory Bulletin also requires the Bank to charge-off the portion of the loan classified as a “loss.” The Advisory Bulletin specifies that, if the Bank subsequently receives full or partial payment of a previously charged-off loan, it may report a recovery of the amount charged-off either through loss reserves or as a reduction in foreclosed property expenses. As required, the Bank adopted the charge-off provisions of the Advisory Bulletin on January 1, 2015. Upon adoption of the charge-off provisions, the Bank’s allowance for loan losses on the impacted loans was eliminated and the corresponding recorded investment in the loans was reduced by the amount charged-off, unless it is expected to be recovered through credit enhancement (CE), for which the Bank recognizes a CE fee receivable. Under the Bank’s past accounting practices and upon adoption of the Advisory Bulletin, the ultimate amount of losses realized on the Bank’s loan portfolio will be the same over time; however, the timing of when the Bank recognizes the losses in its financial statements will differ. The adoption of the charge-off provisions of the Advisory Bulletin did not have a material impact on the Bank’s financial condition or results of operations.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. In January 2014, the FASB issued guidance clarifying when a loan should be de-recognized and the related real estate property recognized. This guidance allows the Bank to recognize properties as real estate owned once the borrower has voluntarily conveyed its interest in the property to the Bank through a deed in lieu of foreclosure or similar agreement. This guidance was effective for the Bank beginning January 1, 2015 and did not impact the Bank's financial condition or results of operations.

Revenue from Contracts with Customers. In May 2014, the FASB issued revised guidance for revenue recognition. This guidance will increase comparability across industries by providing a single, comprehensive revenue recognition model for all contracts with customers. The guidance will require recognition of revenue to reflect the economics of the transaction and will require expanded disclosures regarding revenue recognition. This guidance, which will be effective for the Bank beginning January 1, 2017, is not expected to materially impact the Bank's financial condition or results of operations.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB issued guidance amending the accounting for certain repurchase agreements, including repurchase-to-maturity transactions and repurchase financing transactions. This guidance was effective for the Bank beginning January 1, 2015 and did not have a material impact on the Bank's financial condition or results of operations. The guidance will also require expanded disclosures for transactions accounted for as secured borrowings and sales that will be effective beginning with the Bank's second quarter 2015 financial statements.

Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure. In August 2014, the FASB issued guidance to limit diversity in practice for classification of certain mortgage loans backed by a government guarantee upon foreclosure. Upon foreclosure, the mortgage loan should be de-recognized and a separate other receivable recognized for the amount of the loan balance expected to be recovered from the guarantor. This guidance was effective for the Bank beginning January 1, 2015 and did not impact the Bank's financial condition or results of operations.

Going Concern. In August 2014, the FASB issued guidance which requires all entities to perform an interim and annual assessment of their ability to continue as a going concern for one year from the date of issuance of their respective financial statements. The guidance also requires disclosures if there is “substantial doubt” of the entity’s ability to continue as a going concern. The Bank's initial quarterly assessment will be required to be completed on its December 31, 2016 financial statements.

45

Notes to Financial Statements (continued)


Extraordinary Items. In January 2015, the FASB issued guidance which eliminates the concept of extraordinary items. As a result, preparers and auditors no longer need to determine whether an event is extraordinary. However, the guidance continues to require separate presentation on the Statement of Income for items that are both unusual and infrequent. This guidance is effective for the Bank beginning January 1, 2016 and will not impact the Bank’s results of operations.

Consolidation. In February 2015, the FASB issued amendments to its existing consolidation guidance which may impact the Bank’s evaluation of which entities are considered to be VIEs and if the Bank is required to consolidate a VIE. The Bank is currently evaluating the impact of this updated guidance, which is effective for the Bank beginning January 1, 2016.

Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued guidance which requires the Bank to present debt issuance costs as a direct deduction from the related debt on the statement of condition, consistent with debt discounts. This guidance is effective for the Bank beginning January 1, 2016 and will be applied retrospectively. This guidance will result in a reclassification of debt issuance costs from Other Assets to Consolidated Obligations in the Bank's Statement of Condition, which is not expected to be material.

Cloud Computing Arrangements. In April 2015, the FASB issued guidance which clarifies circumstances under which a cloud computing arrangement should be accounted for as a license of internal-use software as opposed to a service contract. The Bank is currently evaluating the impact of this guidance, which is effective for the Bank beginning January 1, 2016 and may be applied prospectively.

Note 2 – Trading Securities

The following table presents trading securities as of March 31, 2015 and December 31, 2014.
(in thousands)
March 31, 2015
December 31, 2014
Non-MBS:
 
 
Mutual funds
$
5,122

$
4,721

GSE and Tennessee Valley Authority (TVA) obligations
290,733

276,295

Total
$
295,855

$
281,016


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 $5.2 million and $4.9 million at March 31, 2015 and December 31, 2014, respectively, and are included in Other liabilities in the Statement of Condition.

The following table presents net gains on trading securities for the first quarter of 2015 and 2014.
 
Three months ended March 31,
(in thousands)
2015
2014
Net unrealized gains on trading securities held at period-end
$
6,777

$
9,706

Net realized gains on securities sold/matured during the period

86

Net gains on trading securities
$
6,777

$
9,792



46

Notes to Financial Statements (continued)

Note 3 – Available-for-Sale (AFS) Securities

The following tables present AFS securities as of March 31, 2015 and December 31, 2014.
 
March 31, 2015
(in thousands)
Amortized Cost (1)
 
OTTI Recognized in AOCI (2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds
$
1,993

 
$

 
$
5

 
$

 
$
1,998

GSE and TVA obligations
3,365,599

 

 
24,383

 
(1,343
)
 
3,388,639

State or local agency obligations
126,279

 

 
1,879

 
(1,156
)
 
127,002

Total non-MBS
$
3,493,871

 
$

 
$
26,267

 
$
(2,499
)
 
$
3,517,639

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
$
315,614

 
$

 
$
479

 
$
(22
)
 
$
316,071

GSE single-family MBS
2,739,973

 

 
15,784

 
(2,565
)
 
2,753,192

GSE multifamily MBS
868,616

 

 
17,810

 

 
886,426

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS
852,904

 
(154
)
 
94,468

 
(306
)
 
946,912

HELOCs
8,933

 
(3
)
 
2,201

 

 
11,131

Total private label MBS
861,837

 
(157
)
 
96,669

 
(306
)
 
958,043

Total MBS
$
4,786,040

 
$
(157
)
 
$
130,742

 
$
(2,893
)
 
$
4,913,732

Total AFS securities
$
8,279,911

 
$
(157
)
 
$
157,009

 
$
(5,392
)
 
$
8,431,371

 
December 31, 2014
(in thousands)
Amortized Cost (1)
 
OTTI Recognized in AOCI (2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds
$
1,993

 
$

 
$
5

 
$

 
$
1,998

GSE and TVA obligations
3,221,543

 

 
17,661

 
(5,501
)
 
3,233,703

State or local agency obligations
98,616

 

 
752

 
(384
)
 
98,984

Total non-MBS
$
3,322,152

 
$

 
$
18,418

 
$
(5,885
)
 
$
3,334,685

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
$
328,787

 
$

 
$
592

 
$

 
$
329,379

GSE single-family MBS
2,869,855

 

 
16,433

 
(4,126
)
 
2,882,162

GSE multifamily MBS
872,509

 

 
9,511

 
(2,193
)
 
879,827

Private label MBS:
 
 
 
 
 
 
 
 


Private label residential MBS
879,376

 
(863
)
 
92,860

 
(290
)
 
971,083

HELOCs
9,245

 

 
2,454

 

 
11,699

Total private label MBS
888,621

 
(863
)
 
95,314

 
(290
)
 
982,782

Total MBS
$
4,959,772

 
$
(863
)
 
$
121,850

 
$
(6,609
)
 
$
5,074,150

Total AFS securities
$
8,281,924

 
$
(863
)
 
$
140,268

 
$
(12,494
)
 
$
8,408,835

Notes:
(1) Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, previous OTTI recognized in earnings, and/or fair value hedge accounting adjustments.
(2) Represents the non-credit portion of an OTTI recognized during the life of the security.

The Bank has established a Rabbi trust to secure a portion of the benefits under its supplemental retirement plan. The Rabbi trust assets are invested in mutual funds as disclosed above. These obligations were $7.1 million and $7.0 million at March 31, 2015 and December 31, 2014, respectively, and are included in Other liabilities in the Statement of Condition.

47

Notes to Financial Statements (continued)


As of March 31, 2015, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $9.9 million, credit losses of $218.5 million and OTTI-related accretion adjustments of $16.7 million. As of December 31, 2014, these amounts were $9.5 million, $222.5 million and $11.7 million, respectively.

The following table presents a reconciliation of the AFS OTTI loss recognized through AOCI to the total net non-credit portion of OTTI gains on AFS securities in AOCI as of March 31, 2015 and December 31, 2014.
(in thousands)
March 31, 2015
December 31, 2014
Non-credit portion of OTTI losses
$
(157
)
$
(863
)
Net unrealized gains on OTTI securities since their last OTTI credit charge
96,669

95,314

Net non-credit portion of OTTI gains on AFS securities in AOCI
$
96,512

$
94,451


The following tables summarize the AFS securities with unrealized losses as of March 31, 2015 and December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
March 31, 2015
 
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:
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA obligations
$
880,445

 
$
(1,034
)
 
$
323,516

 
$
(309
)
 
$
1,203,961

 
$
(1,343
)
State or local agency obligations
62,091

 
(1,051
)
 
3,895

 
(105
)
 
65,986

 
(1,156
)
Total non-MBS
$
942,536

 
$
(2,085
)
 
$
327,411

 
$
(414
)
 
$
1,269,947

 
$
(2,499
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
$
59,138

 
$
(22
)
 
$

 
$

 
$
59,138

 
$
(22
)
GSE single-family MBS
155,603

 
(136
)
 
207,108

 
(2,429
)
 
362,711

 
(2,565
)
Private label:
 
 
 
 
 
 
 
 
 
 
 
Private label residential MBS

 

 
17,962

 
(460
)
 
17,962

 
(460
)
HELOCs
1,451

 
(3
)
 

 

 
1,451

 
(3
)
Total private label MBS
1,451

 
(3
)
 
17,962

 
(460
)
 
19,413

 
(463
)
Total MBS
$
216,192

 
$
(161
)
 
$
225,070

 
$
(2,889
)
 
$
441,262

 
$
(3,050
)
Total
$
1,158,728

 
$
(2,246
)
 
$
552,481

 
$
(3,303
)
 
$
1,711,209

 
$
(5,549
)
 
 
December 31, 2014
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA obligations
 
$
1,783,202

 
$
(4,380
)
 
$
322,691

 
$
(1,121
)
 
$
2,105,893

 
$
(5,501
)
State or local agency obligations
 
1,576

 
(14
)
 
11,385

 
(370
)
 
12,961

 
(384
)
Total non-MBS
 
$
1,784,778

 
$
(4,394
)
 
$
334,076

 
$
(1,491
)
 
$
2,118,854

 
$
(5,885
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family MBS
 
$
19,405

 
$
(3
)
 
$
228,257

 
$
(4,123
)
 
$
247,662

 
$
(4,126
)
GSE multifamily MBS
 
15,322

 
(104
)
 
185,153

 
(2,089
)
 
200,475

 
(2,193
)
Private label residential MBS
 
58,553

 
(191
)
 
49,383

 
(962
)
 
107,936

 
(1,153
)
Total MBS
 
$
93,280

 
$
(298
)
 
$
462,793

 
$
(7,174
)
 
$
556,073

 
$
(7,472
)
Total
 
$
1,878,058

 
$
(4,692
)
 
$
796,869

 
$
(8,665
)
 
$
2,674,927

 
$
(13,357
)
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 3.

48

Notes to Financial Statements (continued)


Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of March 31, 2015 and December 31, 2014 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)
 
March 31, 2015
 
December 31, 2014
Year of Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
201,990

 
$
202,044

 
$
301,985

 
$
302,087

Due after one year through five years
 
2,213,742

 
2,213,999

 
2,058,695

 
2,054,517

Due after five years through ten years
 
708,646

 
730,343

 
662,805

 
676,064

Due in more than ten years
 
369,493

 
371,253

 
298,667

 
302,017

AFS securities excluding MBS
 
3,493,871

 
3,517,639

 
3,322,152

 
3,334,685

MBS
 
4,786,040

 
4,913,732

 
4,959,772

 
5,074,150

Total AFS securities
 
$
8,279,911

 
$
8,431,371

 
$
8,281,924

 
$
8,408,835


Interest Rate Payment Terms.  The following table details interest payment terms at March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Amortized cost of AFS securities other than MBS:
 
 
 
 
 Fixed-rate
 
$
3,174,124

 
$
2,902,430

 Variable-rate
 
319,747

 
419,722

Total non-MBS
 
$
3,493,871

 
$
3,322,152

Amortized cost of AFS MBS:
 
 
 
 
Fixed-rate
 
$
1,698,292

 
$
2,002,208

Variable-rate
 
3,087,748

 
2,957,564

Total MBS
 
$
4,786,040

 
$
4,959,772

Total amortized cost of AFS securities
 
$
8,279,911

 
$
8,281,924

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.


49

Notes to Financial Statements (continued)

Note 4 – Held-to-Maturity (HTM) Securities

The following tables present HTM securities as of March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
(in thousands)
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
GSE securities
 
$
12,174

 
$
281

 
$

 
$
12,455

State or local agency obligations
 
183,379

 
1,645

 
(14,128
)
 
170,896

Total non-MBS
 
$
195,553

 
$
1,926

 
$
(14,128
)
 
$
183,351

MBS:
 
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
 
$
1,052,741

 
$
6,710

 
$
(2
)
 
$
1,059,449

GSE single-family MBS
 
385,320

 
7,152

 
(81
)
 
392,391

GSE multifamily MBS
 
795,954

 
46,785

 

 
842,739

Private label residential MBS
 
649,699

 
3,565

 
(8,154
)
 
645,110

Total MBS
 
$
2,883,714

 
$
64,212

 
$
(8,237
)
 
$
2,939,689

Total HTM securities
 
$
3,079,267

 
$
66,138

 
$
(22,365
)
 
$
3,123,040

 
 
December 31, 2014
(in thousands)
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
GSE securities
 
$
13,041

 
$
382

 
$

 
$
13,423

State or local agency obligations
 
184,412

 
1,314

 
(15,445
)
 
170,281

Total non-MBS
 
$
197,453

 
$
1,696

 
$
(15,445
)
 
$
183,704

MBS:
 
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
 
$
1,122,537

 
$
8,604

 
$

 
$
1,131,141

GSE single-family MBS
 
417,217

 
7,226

 
(118
)
 
424,325

GSE multifamily MBS
 
818,037

 
43,431

 

 
861,468

Private label residential MBS
 
691,544

 
3,506

 
(9,141
)
 
685,909

Total MBS
 
$
3,049,335

 
$
62,767

 
$
(9,259
)
 
$
3,102,843

Total HTM securities
 
$
3,246,788

 
$
64,463

 
$
(24,704
)
 
$
3,286,547




50

Notes to Financial Statements (continued)

The following tables summarize the HTM securities with unrealized losses as of March 31, 2015 and December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
March 31, 2015
 
 
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
 
$
3,375

 
$
(40
)
 
$
117,792

 
$
(14,088
)
 
$
121,167

 
$
(14,128
)
MBS:
 
 
 
 

 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
 
$
20,635

 
$
(2
)
 
$

 
$

 
$
20,635

 
$
(2
)
GSE single-family MBS
 

 

 
10,681

 
(81
)
 
10,681

 
(81
)
Private label residential MBS
 
159,134

 
(1,088
)
 
221,168

 
(7,066
)
 
380,302

 
(8,154
)
Total MBS
 
$
179,769

 
$
(1,090
)
 
$
231,849

 
$
(7,147
)
 
$
411,618

 
$
(8,237
)
Total
 
$
183,144

 
$
(1,130
)
 
$
349,641

 
$
(21,235
)
 
$
532,785

 
$
(22,365
)
 
 
December 31, 2014
 
 
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
 
$
3,361

 
$
(54
)
 
$
116,488

 
$
(15,391
)
 
$
119,849

 
$
(15,445
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family MBS
 
$

 
$

 
$
11,058

 
$
(118
)
 
$
11,058

 
$
(118
)
Private label residential MBS
 
185,673

 
(1,291
)
 
233,287

 
(7,850
)
 
418,960

 
(9,141
)
Total MBS
 
$
185,673

 
$
(1,291
)
 
$
244,345

 
$
(7,968
)
 
$
430,018

 
$
(9,259
)
Total
 
$
189,034

 
$
(1,345
)
 
$
360,833

 
$
(23,359
)
 
$
549,867

 
$
(24,704
)


51

Notes to Financial Statements (continued)

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of March 31, 2015 and December 31, 2014 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)
 
March 31, 2015
 
December 31, 2014
Year of Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
Due in one year or less
 
$
12,174

 
$
12,455

 
$
13,042

 
$
13,423

Due after one year through five years
 
3,415

 
3,375

 
3,415

 
3,361

Due after five years through ten years
 
21,807

 
22,301

 
21,807

 
22,263

Due after ten years
 
158,157

 
145,220

 
159,189

 
144,657

HTM securities excluding MBS
 
195,553

 
183,351

 
197,453

 
183,704

MBS
 
2,883,714

 
2,939,689

 
3,049,335

 
3,102,843

Total HTM securities
 
$
3,079,267

 
$
3,123,040

 
$
3,246,788

 
$
3,286,547


Interest Rate Payment Terms. The following table details interest rate payment terms at March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Amortized cost of HTM securities other than MBS:
 
 

 
 

Fixed-rate
 
$
42,553

 
$
44,453

Variable-rate
 
153,000

 
153,000

Total non-MBS
 
$
195,553

 
$
197,453

Amortized cost of HTM MBS:
 
 
 
 
Fixed-rate
 
$
1,063,616

 
$
1,114,059

Variable-rate
 
1,820,098

 
1,935,276

Total MBS
 
$
2,883,714

 
$
3,049,335

Total HTM securities
 
$
3,079,267

 
$
3,246,788

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.

Note 5 – Other-Than-Temporary Impairment (OTTI)

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. The Bank assesses whether there is OTTI by performing an analysis to determine if any securities will incur a credit loss, which could be up to the difference between the security's amortized cost basis and its fair value, and records any difference in its Statement of Income. For information on the Bank’s accounting for OTTI, see Note 1 - Summary of Significant Accounting Policies to the audited financial statements in the Bank's 2014 Form 10-K. For information about how the Bank projects cash flows expected to be collected, see Note 7 - Other-than-Temporary Impairment Analysis to the audited financial statements in the Bank’s 2014 Form 10-K.

A significant input to the projection of cash flows expected to be collected 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. During the first quarter of 2015, the OTTI Governance Committee developed a short-term housing price forecast using whole percentages ranging from (3.0)% to 8.0% over the 12 month period beginning January 1, 2015. For the vast majority of markets the short-term forecast has changes from 1.0% to 5.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

All of the Bank's other-than-temporarily impaired securities were classified as AFS at March 31, 2015. The "Total OTTI securities" balances below summarize the Bank’s securities as of March 31, 2015 for which an OTTI has been recognized

52

Notes to Financial Statements (continued)

during the life of the security. The "Private label MBS with no OTTI" balances below represent AFS securities on which an OTTI was not taken. The sum of these two totals reflects the entire AFS private label MBS portfolio.
 
 
OTTI Recognized During the Life of the Security
(in thousands)
 
Unpaid Principal Balance
 
Amortized Cost (1)
 
Fair Value
Private label residential MBS:
 
 

 
 

 
 

Prime
 
$
486,233

 
$
394,492

 
$
445,194

Alt-A
 
576,153

 
453,620

 
497,048

Subprime
 
2,092

 
1,253

 
1,437

HELOCs
 
12,430

 
8,933

 
11,131

Total OTTI securities
 
1,076,908

 
858,298

 
954,810

Private label MBS with no OTTI
 
3,539

 
3,539

 
3,233

Total AFS private label MBS
 
$
1,080,447

 
$
861,837

 
$
958,043

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

The following table presents 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 months ended March 31, 2015 and 2014.
 
Three months ended March 31,
 
(in thousands)
2015
2014
 
Beginning balance
$
290,935

$
314,224

 
Reductions:
 
 
 
Securities sold and matured during the period (1)

(76
)
 
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(7,019
)
(5,948
)
 
Ending balance
$
283,916

$
308,200

 
Notes:
(1) Represents reductions related to securities sold or having reached final maturity during the period, and therefore are no longer held by the Bank at the end of the period.

All Other AFS and HTM Investments. At March 31, 2015, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered to be temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions based on the creditworthiness of the underlying creditor, guarantor, or implicit government support, and the Bank neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell any such security before its anticipated recovery. As a result, the Bank did not consider any of these other investments to be other-than-temporarily impaired at March 31, 2015.

Note 6 – 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 March 31, 2015 and December 31, 2014, the Bank had advances outstanding, including AHP advances, with interest rates ranging from zero to 7.40%. AHP subsidized loans have interest rates ranging from zero to 5.50%.
 

53

Notes to Financial Statements (continued)

The following table details the Bank’s advances portfolio by year of contractual maturity as of March 31, 2015 and December 31, 2014.
(dollars in thousands)
 
March 31, 2015
 
December 31, 2014
Year of Contractual Maturity
 
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
 
$
26,931,449

 
0.44
%
 
$
29,380,685

 
0.42
%
Due after 1 year through 2 years
 
9,218,391

 
1.26

 
7,754,473

 
1.22

Due after 2 years through 3 years
 
14,652,926

 
1.03

 
12,764,348

 
1.14

Due after 3 years through 4 years
 
6,854,258

 
0.90

 
9,361,638

 
0.82

Due after 4 years through 5 years
 
3,314,508

 
0.80

 
3,373,989

 
0.84

Thereafter
 
1,082,287

 
2.65

 
490,823

 
2.77

Total par value
 
62,053,819

 
0.81
%
 
63,125,956

 
0.76
%
Discount on AHP advances
 
(52
)
 
 
 
(66
)
 
 
Deferred prepayment fees
 
(7,507
)
 
 
 
(8,600
)
 
 
Hedging adjustments
 
299,771

 
 
 
291,065

 
 
Total book value
 
$
62,346,031

 
 
 
$
63,408,355

 
 

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 the 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. Both at March 31, 2015 and December 31, 2014, the Bank had convertible advances outstanding of $1.9 billion.

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). If the call option is exercised, replacement funding may be available. At March 31, 2015 and December 31, 2014, the Bank did not have any outstanding returnable advances. At March 31, 2015 and December 31, 2014, the Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative.

The following table summarizes advances by (i) year of contractual maturity or next call date and (ii) year of contractual maturity or next convertible date as of March 31, 2015 and December 31, 2014.
 
Year of Contractual Maturity or
Next Call Date
 
Year of Contractual Maturity or Next Convertible Date
(in thousands)
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
Due in 1 year or less
$
26,931,449

 
$
29,380,685

 
$
28,700,449

 
$
31,164,685

Due after 1 year through 2 years
9,218,391

 
7,754,473

 
8,075,891

 
6,846,973

Due after 2 years through 3 years
14,652,926

 
12,764,348

 
14,164,926

 
12,179,348

Due after 3 years through 4 years
6,854,258

 
9,361,638

 
6,741,258

 
9,095,638

Due after 4 years through 5 years
3,314,508

 
3,373,989

 
3,309,008

 
3,368,489

Thereafter
1,082,287

 
490,823

 
1,062,287

 
470,823

Total par value
$
62,053,819

 
$
63,125,956

 
$
62,053,819

 
$
63,125,956



54

Notes to Financial Statements (continued)

Interest Rate Payment Terms.  The following table details interest rate payment terms for advances as of March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Fixed-rate – overnight
 
$
1,774,797

 
$
2,012,230

Fixed-rate – term:
 
 
 
 
Due in 1 year or less
 
17,799,975

 
20,740,508

Thereafter
 
10,233,443

 
9,116,344

Total fixed-rate
 
29,808,215

 
31,869,082

Variable-rate:
 
 
 
 
Due in 1 year or less
 
7,356,677

 
6,627,947

Thereafter
 
24,888,927

 
24,628,927

Total variable-rate
 
32,245,604

 
31,256,874

Total par value
 
$
62,053,819

 
$
63,125,956


Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of March 31, 2015, the Bank had advances of $45.3 billion outstanding to its five largest borrowers, which represented 73.1% of total advances outstanding. Of these five, three had outstanding advance balances that were each in excess of 10% of the total portfolio at March 31, 2015.

As of December 31, 2014, the Bank had advances of $46.6 billion outstanding to its five largest borrowers, which represented 73.8% of total advances outstanding. Of these five, three had outstanding advance balances in excess of 10% of the total portfolio at December 31, 2014.

See Note 8 for information related to the Bank's allowance for credit losses.


55

Notes to Financial Statements (continued)

Note 7 – 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. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are sold to the Bank. See Note 12 for further information regarding transactions with related parties.

The following table presents balances as of March 31, 2015 and December 31, 2014 for mortgage loans held for portfolio.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Fixed-rate long-term single-family mortgages (1)
 
$
2,607,236

 
$
2,640,633

Fixed-rate medium-term single-family mortgages (1)
 
400,714

 
417,830

Total par value
 
3,007,950

 
3,058,463

Premiums
 
50,680

 
51,214

Discounts
 
(4,599
)
 
(4,872
)
Hedging adjustments
 
26,824

 
25,789

Total mortgage loans held for portfolio
 
$
3,080,855

 
$
3,130,594

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

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Conventional loans
 
$
2,736,342

 
$
2,779,962

Government-guaranteed/insured loans
 
271,608

 
278,501

Total par value
 
$
3,007,950

 
$
3,058,463


See Note 8 - Allowance for Credit Losses for information related to the Bank's credit risk on mortgage loans and allowance for credit losses.

Note 8 – 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. This 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 and lending policies to limit risk of loss while balancing each borrower's need for a reliable source of funding. In addition, the Bank lends to its members in accordance with the FHLBank Act and Finance Agency regulations. Specifically, the FHLBank 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 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 require 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 deliver physical possession or control of the collateral to the Bank or its custodians. However, notwithstanding financial condition, the Bank always takes possession or control of securities used as collateral if they are used for maximum borrowing capacity (MBC) or to secure advances. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a member

56

Notes to Financial Statements (continued)

(or an affiliate of 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 March 31, 2015, the Bank had rights to collateral on a member-by-member basis with a value in excess of its outstanding extensions of credit.

The Bank continues to evaluate and, as necessary, make changes to its collateral guidelines based on current market conditions. At March 31, 2015, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, the Bank did not have any credit products considered to be troubled debt restructurings (TDRs).

Based upon the collateral held as security, its credit extension policies, collateral policies, management’s credit analysis and the repayment history on credit products, the Bank has not incurred any credit losses on credit products since inception. Accordingly, the Bank has not recorded any allowance for credit losses for these products. Additionally, at March 31, 2015 and December 31, 2014, 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), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) 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 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 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 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). 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. Estimated losses exceeding the CE, if any, are incurred by the Bank. At March 31, 2015 and December 31, 2014, the MPF exposure under the FLA was $22.9 million and $23.1 million, respectively. The Bank records CE fees paid to PFIs as a reduction to mortgage loan interest income. The Bank incurred CE fees of $0.8 million during each of the first quarters of 2015 and 2014.

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 experienced by PMI companies, estimated future claim payments from these companies have been reduced and factored into estimated loan losses. The resulting estimated losses are reduced by the CEs the Bank expects to be eligible to receive. The CEs are contractually set and calculated by a master commitment agreement between the Bank and the PFI. Losses in excess of the CEs are incurred by the Bank.

57

Notes to Financial Statements (continued)


Individually Evaluated Mortgage Loans. The Bank evaluates certain conventional mortgage loans for impairment individually. Prior to January 1, 2014, these loans were limited to TDRs. Beginning January 1, 2014, the Bank adopted the classification provisions required by AB 2012-02 as described in Note 1 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations. As a result, the population of individually evaluated mortgage loans expanded to include impaired loans considered collateral-dependent loans where repayment is expected to be provided by the sale of the underlying property, which are comprised primarily of MPF loans that are 180 days or more delinquent and other loans where the borrower has filed for bankruptcy.

The estimated credit losses on impaired collateral-dependent loans are separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual basis. The incurred loss on each loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs and recovery through PMI. The estimated fair value is determined based on a value provided by a third party's retail-based Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations. During 2014, the resulting loss was reduced by available CE. Beginning January 1, 2015, the Bank adopted the charge-off provisions of AB 2012-02. As a result, the estimated credit loss on individually evaluated MPF loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established, if required.

Rollforward of Allowance for Credit Losses. Mortgage Loans - Conventional MPF.
 
 
 
Three months ended March 31,
(in thousands)
 
 
2015
 
2014
Balance, beginning of period
 
 
$
7,260

 
$
11,359

(Charge-offs) Recoveries, net (1)
 
 
(102
)
 

Provision (benefit) for credit losses
 
 
(592
)
 
(4,041
)
Balance, March 31
 
 
$
6,566

 
$
7,318

Notes:
(1) Net charge-offs that the Bank does not expect to recover through CE receivable.

Allowances for Credit Losses and Recorded Investment by Impairment Methodology. Mortgage Loans - Conventional MPF.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Ending balance, individually evaluated for impairment
 
$
5,362

 
$
6,034

Ending balance, collectively evaluated for impairment
 
1,204

 
1,226

Total allowance for credit losses
 
$
6,566

 
$
7,260

Recorded investment balance, end of period:
 
 
 
 
Individually evaluated for impairment, with or without a related allowance
 
$
63,161

 
$
68,144

Collectively evaluated for impairment
 
2,751,924

 
2,789,826

Total recorded investment
 
$
2,815,085

 
$
2,857,970


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.


58

Notes to Financial Statements (continued)

Rollforward of Allowance for Credit Losses. BOB Loans.  
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Balance, Beginning of period
 
$
1,840

 
$
2,231

(Charge-offs) Recoveries, net
 
(284
)
 
(200
)
Provision for credit losses
 
104

 
111

Balance, March 31
 
$
1,660

 
$
2,142


Allowances for Credit Losses and Recorded Investment by Impairment Methodology. BOB Loans.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Ending balance, individually evaluated for impairment
 
$

 
$

Ending balance, collectively evaluated for impairment
 
1,660

 
1,840

Total allowance for credit losses
 
$
1,660

 
$
1,840

Recorded investment balance, end of period:
 
 

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

 
$

Collectively evaluated for impairment
 
13,124

 
13,518

Total recorded investment
 
$
13,124

 
$
13,518


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.
(in thousands)
 
March 31, 2015
Recorded investment: (1)
 
Conventional MPF Loans
 
Government-Guaranteed or Insured
 
BOB Loans
 
Total
Past due 30-59 days
 
$
42,201

 
$
14,370

 
$

 
$
56,571

Past due 60-89 days
 
10,255

 
3,382

 

 
13,637

Past due 90 days or more
 
34,088

 
6,176

 
147

 
40,411

Total past due loans
 
$
86,544

 
$
23,928

 
$
147

 
$
110,619

Total current loans
 
2,728,541

 
257,853

 
12,977

 
2,999,371

Total loans
 
$
2,815,085

 
$
281,781

 
$
13,124

 
$
3,109,990

Other delinquency statistics:
 
 
 
 
 
 
 
 
In process of foreclosures, included above (2)
 
$
22,827

 
$
2,902

 
$

 
$
25,729

Serious delinquency rate (3)
 
1.2
%
 
2.2
%
 
1.1
%
 
1.3
%
Past due 90 days or more still accruing interest
 
$

 
$
6,176

 
$

 
$
6,176

Loans on nonaccrual status (4)
 
$
38,075

 
$

 
$
147

 
$
38,222



59

Notes to Financial Statements (continued)

(in thousands)
 
December 31, 2014
Recorded investment: (1)
 
Conventional MPF Loans
 
Government-Guaranteed or Insured
 
BOB Loans
 
Total
Past due 30-59 days
 
$
50,680

 
$
19,238

 
$
124

 
$
70,042

Past due 60-89 days
 
11,841

 
6,034

 
73

 
17,948

Past due 90 days or more
 
41,983

 
7,024

 
8

 
49,015

Total past due loans
 
$
104,504

 
$
32,296

 
$
205

 
$
137,005

Total current loans
 
2,753,466

 
256,606

 
13,313

 
3,023,385

Total loans
 
$
2,857,970

 
$
288,902

 
$
13,518

 
$
3,160,390

Other delinquency statistics:
 
 
 
 
 
 
 
 
In process of foreclosures, included above (2)
 
$
26,981

 
$
2,389

 
$

 
$
29,370

Serious delinquency rate (3)
 
1.5
%
 
2.4
%
 
0.1
%
 
1.6
%
Past due 90 days or more still accruing interest
 
$

 
$
7,024

 
$

 
$
7,024

Loans on nonaccrual status (4)
 
$
45,900

 
$

 
$
205

 
$
46,105

Notes:
(1) The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for charge-offs of estimated losses, accrued interest, net deferred loan fees or costs, unamortized premiums or unaccreted discounts and adjustments for fair value hedges. 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.

Individually Evaluated Impaired Loans. Information regarding individually evaluated impaired loans is as follows. As indicated above, these loans include impaired loans considered collateral-dependent. BOB loans are not significant and are excluded from the tables below.
 
 
March 31, 2015
(in thousands)
 
Recorded Investment
 
Unpaid
Principal Balance
 
Related Allowance for Credit Losses
With no related allowance:
 
 
 
 
 
 
Conventional MPF loans
 
$
34,445

 
$
34,116

 
$

With a related allowance:
 
 
 
 
 
 
Conventional MPF loans
 
28,716

 
28,485

 
5,362

Total:
 
 
 
 
 
 
Conventional MPF loans
 
$
63,161

 
$
62,601

 
$
5,362

 
 
December 31, 2014
(in thousands)
 
Recorded Investment
 
Unpaid
Principal Balance
 
Related Allowance for Credit Losses
With no related allowance:
 
 
 
 
 
 
Conventional MPF loans
 
$
31,749

 
$
31,448

 
$

With a related allowance:
 
 
 
 
 
 
Conventional MPF loans
 
36,395

 
36,175

 
6,034

Total:
 
 
 
 
 
 
Conventional MPF loans
 
$
68,144

 
$
67,623

 
$
6,034



60

Notes to Financial Statements (continued)

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 impaired.
 
 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
(in thousands)
 
Average Recorded Investment(1)
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Conventional MPF loans
 
$
63,923

 
$
423

 
$
79,993

 
$
322

Notes:
(1) Includes gross charge-offs.

Beginning January 1, 2014, with the adoption of AB 2012-02, the Bank now considers all loans that are 180 days or more delinquent or where the borrower has filed for bankruptcy to be individually impaired loans.

TDRs. TDRs are considered to have occurred when a concession is granted to the debtor that would not have been considered had it not been for 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 Bank also considers a TDR to have occurred when a borrower files for Chapter 7 bankruptcy, the bankruptcy court discharges the borrower’s obligation, and the borrower does not reaffirm the debt. As of March 31, 2015 and December 31, 2014, the recorded investment in mortgage loans classified as TDRs was $16.0 million and $16.8 million, respectively. The financial amounts related to TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

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 the reporting date. BOB loan TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

Real Estate Owned (REO). The Bank had $6.3 million and $6.9 million of REO reported in Other assets on the Statement of Condition at March 31, 2015 and December 31, 2014, respectively.

Purchases, Sales and Reclassifications. During the three months ended March 31, 2015 and 2014, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.

Note 9 – 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 strategy 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 derivative transactions, see Note 11 to the audited financial statements in the Bank's 2014 Form 10-K.

Derivative transactions may be executed either with a counterparty (referred to as bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearing House), the derivative transaction is novated and the executing counterparty is replaced with the Clearing House. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. For bilateral derivatives, 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.

Financial Statement Effect and Additional Financial Information. The following tables summarize the notional and fair value of derivative instruments as of March 31, 2015 and December 31, 2014.

61

Notes to Financial Statements (continued)

 
 
March 31, 2015
(in thousands)
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives in hedge accounting relationships:
 
 

 
 

 
 

Interest rate swaps
 
$
35,828,625

 
$
104,126

 
$
375,909

Derivatives not in hedge accounting relationships:
 
 
 
 
 
 
Interest rate swaps
 
$
8,650,294

 
$
26,281

 
$
64,427

Interest rate swaptions
 
25,000

 
83

 

Interest rate caps
 
675,000

 
4,137

 

Mortgage delivery commitments
 
21,726

 
633

 

Total derivatives not in hedge accounting relationships
 
$
9,372,020

 
$
31,134

 
$
64,427

Total derivatives before netting and collateral adjustments
 
$
45,200,645

 
$
135,260

 
$
440,336

Netting adjustments and cash collateral(1)
 
 
 
(83,206
)
 
(378,025
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
 
 
$
52,054

 
$
62,311

 
 
December 31, 2014
(in thousands)
 
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives in hedge accounting relationships:
 
 

 
 

 
 

Interest rate swaps
 
$
32,196,669

 
$
84,205

 
$
414,760

Derivatives not in hedge accounting relationships:
 
 
 
 
 
 
Interest rate swaps
 
$
11,937,989

 
$
21,396

 
$
52,925

Interest rate swaptions
 
25,000

 
1,312

 

Interest rate caps
 
675,000

 
4,425

 

Mortgage delivery commitments
 
18,308

 
434

 

Total derivatives not in hedge accounting relationships
 
$
12,656,297

 
$
27,567

 
$
52,925

Total derivatives before netting and collateral adjustments
 
$
44,852,966

 
$
111,772

 
$
467,685

Netting adjustments and cash collateral(1)
 
 
 
(75,555
)
 
(408,721
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
 
 
$
36,217

 
$
58,964

Note:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparties. Cash collateral posted was $306.7 million and $345.0 million at March 31, 2015 and December 31, 2014. Cash collateral received was $11.9 million and $11.8 million at March 31, 2015 and December 31, 2014.


62

Notes to Financial Statements (continued)

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income.
 
 
Three months ended March 31,
(in thousands)
 
2015
2014
Derivatives designated as hedging instruments:
 
 

 

Interest rate swaps
 
$
585

$
512

Derivatives not designated as hedging instruments:
 
 

 

Economic hedges:
 
 

 

Interest rate swaps
 
$
(15,850
)
$
(15,773
)
Interest rate swaptions
 
139

(48
)
Interest rate caps
 
(288
)
(1,554
)
Net interest settlements
 
5,692

6,411

Mortgage delivery commitments
 
2,143

1,246

Other
 
7

7

Total net (losses) related to derivatives not designated as hedging instruments
 
$
(8,157
)
$
(9,711
)
Net (losses) on derivatives and hedging activities
 
$
(7,572
)
$
(9,199
)

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 three months ended March 31, 2015 and 2014.
(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 March 31, 2015
 
 
 
 
 
 
 
 
   Hedged item type:
 
 
 
 
 
 
 
 
       Advances
 
$
(10,013
)
 
$
10,175

 
$
162

 
$
(46,994
)
       Consolidated obligations – bonds
 
54,590

 
(53,895
)
 
695

 
61,615

       AFS securities
 
(11,735
)
 
11,463

 
(272
)
 
(3,432
)
Total
 
$
32,842

 
$
(32,257
)
 
$
585

 
$
11,189

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2014
 
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
 
Advances
 
$
48,010

 
$
(47,263
)
 
$
747

 
$
(60,390
)
Consolidated obligations – bonds
 
45,796

 
(45,655
)
 
141

 
54,437

       AFS securities
 
(9,137
)
 
8,761

 
(376
)
 
(2,544
)
Total
 
$
84,669

 
$
(84,157
)
 
$
512

 
$
(8,497
)
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. These amounts do not include $2.0 million and $3.5 million for the three months ended March 31, 2015 and 2014, respectively, of amortization/accretion of the basis adjustment related to discontinued fair value hedging relationships.

The Bank had no active cash flow hedging relationships during the first three months of 2015 or 2014.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The Bank manages counterparty credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations. For bilateral derivatives, the degree of credit risk depends on the extent to which netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all bilateral derivatives.

63

Notes to Financial Statements (continued)


For cleared derivatives, the Clearing Houses are the Bank's counterparties. The Clearing House notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the FHLBank of the required initial and variation margin. The requirement that the Bank post initial and variation margin through the clearing agent, on behalf of the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their respective obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of their respective clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, for changes in the value of cleared derivatives. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including a bankruptcy, insolvency or similar proceeding involving the Clearing Houses or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearing House.

Based on credit analyses and collateral requirements, the Bank does not anticipate credit losses related to its derivative agreements. See Note 13 - Estimated Fair Values for discussion regarding the Bank's fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.

Generally, the Bank’s ISDA agreements for bilateral derivatives contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank's 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 bilateral derivative instruments in net liability positions. The aggregate fair value of all bilateral derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2015 was $133.7 million, for which the Bank has posted cash collateral with a fair value of approximately $75.9 million. 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 $33.4 million of collateral to its derivative counterparties at March 31, 2015.

For cleared derivatives, the Clearing House determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agents at March 31, 2015.


64

Notes to Financial Statements (continued)

Offsetting of Derivative Assets and Derivative Liabilities. The Bank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. The following tables present separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
 
Derivative Assets
(in thousands)
 
March 31, 2015
 
December 31, 2014
Derivative instruments meeting netting requirements:
 
 
 
 
Gross recognized amount:
 
 
 
 
         Bilateral derivatives
 
$
101,392

 
$
102,570

      Cleared derivatives
 
33,235

 
8,768

 Total gross recognized amount
 
134,627

 
111,338

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
          Bilateral derivatives
 
(99,445
)
 
(96,286
)
       Cleared derivatives
 
16,239

 
20,731

  Total gross amounts of netting adjustments and cash collateral
 
(83,206
)
 
(75,555
)
Net amounts after netting adjustments:
 
 
 
 
         Bilateral derivatives
 
1,947

 
6,284

       Cleared derivatives
 
49,474

 
29,499

 Total net amounts after netting adjustments
 
51,421

 
35,783

 Derivative instruments not meeting netting requirements: (1)
 
 
 
 
     Bilateral derivatives
 
633

 
434

     Cleared derivatives
 

 

     Derivative instruments not meeting netting requirements
 
633

 
434

Total derivative assets
 
 
 
 
         Bilateral derivatives
 
2,580

 
6,718

       Cleared derivatives
 
49,474

 
29,499

Total derivative assets as reported in the Statement of Condition
 
52,054

 
36,217

Non-cash collateral received or pledged not offset:
 
 
 
 
  Can be sold or repledged
 
 
 
 
     Bilateral derivatives
 
(471
)
 
(636
)
     Cleared derivatives
 

 

 Non-cash Collateral received or pledged - Can be sold or repledged
 
(471
)
 
(636
)
Net unsecured amount:
 
 
 
 
     Bilateral derivatives
 
2,109

 
6,082

     Cleared derivatives
 
49,474

 
29,499

Total net unsecured amount
 
$
51,583

 
$
35,581



65

Notes to Financial Statements (continued)

 
Derivative Liabilities
(in thousands)
 
March 31, 2015
 
December 31, 2014
Derivative instruments meeting netting requirements:
 
 
 
 
Gross recognized amount:
 
 
 
 
         Bilateral derivatives
 
$
225,678

 
$
283,979

      Cleared derivatives
 
214,658

 
183,706

     Total gross recognized amount
 
440,336

 
467,685

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
          Bilateral derivatives
 
(163,367
)
 
(225,015
)
       Cleared derivatives
 
(214,658
)
 
(183,706
)
    Total gross amounts of netting adjustments and cash collateral
 
(378,025
)
 
(408,721
)
Net amounts after netting adjustments:
 
 
 
 
         Bilateral derivatives
 
62,311

 
58,964

       Cleared derivatives
 

 

     Total net amounts after offsetting adjustments
 
62,311

 
58,964

Total derivative liabilities
 
 
 
 
          Bilateral derivatives
 
62,311

 
58,964

       Cleared derivatives
 

 

Total derivative liabilities as reported in the Statement of Condition
 
62,311

 
58,964

Net unsecured amount:
 
 
 
 
     Bilateral derivatives
 
62,311

 
58,964

Net unsecured amount
 
$
62,311

 
$
58,964

Notes:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments and certain interest-rate futures or forwards).


66

Notes to Financial Statements (continued)

Note 10 – Consolidated Obligations

Consolidated obligations consist of consolidated bonds and discount notes. The Bank records as a liability its specific portion of consolidated obligations for which it is the primary obligor. Although the Bank is primarily liable for its portion of consolidated obligations, the Bank is also jointly and severally liable with the other eleven FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations whether or not the consolidated obligation represents a primary liability of such FHLBank.
Although an FHLBank has never paid the principal or interest payments due on a consolidated obligation on behalf of another FHLBank, if one FHLBank is required to make such payments on behalf of another FHLBank, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for any payments made on its behalf and other associated costs including interest to be determined by the Finance Agency. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, then the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. The par amount of the 12 FHLBanks’ outstanding consolidated obligations were $812.2 billion and $847.2 billion at March 31, 2015 and December 31, 2014, respectively.
Additional 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 2014 Form 10-K.

The following table details interest rate payment terms for the Bank's consolidated obligation bonds as of March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Par value of consolidated bonds:
 
 

 
 

Fixed-rate
 
$
37,868,671

 
$
36,296,100

Step-up
 
3,040,000

 
3,116,000

Floating-rate
 
4,175,000

 
4,190,000

Total par value
 
45,083,671

 
43,602,100

Bond premiums
 
142,176

 
147,824

Bond discounts
 
(10,754
)
 
(12,111
)
Hedging adjustments
 
26,249

 
(23,303
)
Total book value
 
$
45,241,342

 
$
43,714,510


Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
Year of Contractual Maturity
 
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
 
$
15,415,510

 
0.82
%
 
$
15,033,450

 
1.00
%
Due after 1 year through 2 years
 
10,035,015

 
1.42

 
9,316,860

 
1.42

Due after 2 years through 3 years
 
5,996,640

 
1.66

 
5,346,515

 
1.64

Due after 3 years through 4 years
 
4,701,005

 
1.47

 
4,709,300

 
1.50

Due after 4 years through 5 years
 
3,336,885

 
1.77

 
2,911,350

 
1.72

Thereafter
 
5,303,650

 
2.44

 
5,959,265

 
2.35

Index amortizing notes
 
294,966

 
4.11

 
325,360

 
4.14

Total par value
 
$
45,083,671

 
1.42
%
 
$
43,602,100

 
1.48
%


67

Notes to Financial Statements (continued)

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Noncallable
 
$
31,145,671

 
$
30,388,100

Callable
 
13,938,000

 
13,214,000

Total par value
 
$
45,083,671

 
$
43,602,100


The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of March 31, 2015 and December 31, 2014.
(in thousands)
Year of Contractual Maturity or Next Call Date
 
March 31, 2015
 
December 31, 2014
Due in 1 year or less
 
$
29,238,510

 
$
28,232,450

Due after 1 year through 2 years
 
8,303,015

 
8,114,860

Due after 2 years through 3 years
 
3,576,640

 
3,551,515

Due after 3 years through 4 years
 
1,687,005

 
1,390,300

Due after 4 years through 5 years
 
984,885

 
1,028,350

Thereafter
 
998,650

 
959,265

Index amortizing notes
 
294,966

 
325,360

Total par value
 
$
45,083,671

 
$
43,602,100


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 as of March 31, 2015 and December 31, 2014.
(dollars in thousands)
 
March 31, 2015
 
December 31, 2014
Book value
 
$
37,077,804

 
$
37,058,118

Par value
 
37,086,558

 
37,065,745

Weighted average interest rate (1)
 
0.11
%
 
0.10
%
Note:
(1) Represents an implied rate.

Note 11 – 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 regulatory capital; and (3) leverage capital. Regulatory capital does not include AOCI but does include mandatorily redeemable capital stock. See details regarding these requirements and the Bank’s Capital Plan in Note 16 to the audited financial statements in the Bank’s 2014 Form 10-K. At March 31, 2015, the Bank was in compliance with all regulatory capital requirements.

The Bank has two subclasses of capital stock: B1 membership stock and B2 activity. Subclass B1 membership stock totaled $319.2 million and $290.4 million at March 31, 2015 and December 31, 2014, respectively. Subclass B2 activity stock was $2.744 billion and $2.751 billion at March 31, 2015 and December 31, 2014, respectively.

68

Notes to Financial Statements (continued)

The following table demonstrates the Bank’s compliance with its regulatory capital requirements at March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 
 

 
 

 
 

 
 

Risk-based capital
 
$
825,495

 
$
3,873,224

 
$
847,424

 
$
3,879,108

Total capital-to-asset ratio
 
4.0
%
 
4.4
%
 
4.0
%
 
4.5
%
Total regulatory capital
 
3,498,522

 
3,873,224

 
3,427,083

 
3,879,108

Leverage ratio
 
5.0
%
 
6.6
%
 
5.0
%
 
6.8
%
Leverage capital
 
4,373,153

 
5,809,836

 
4,283,854

 
5,818,663


The decline in ratios from December 31, 2014 to March 31, 2015 is primarily due to the increase in total assets. When the Finance Agency implemented the prompt corrective action provisions of the Housing and Economic Recovery Act of 2008 (Housing Act), it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On March 23, 2015, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2014. 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 March 31, 2015.

Capital Concentrations. The following tables present member holdings of 10% or more of the Bank’s total capital stock, including mandatorily redeemable capital stock, outstanding as of March 31, 2015 and December 31, 2014.
(dollars in thousands)
 
March 31, 2015
Member (1)
 
Capital Stock
 
% of Total
PNC Bank, N.A., Wilmington, DE
 
$
926,305

 
30.2
%
Santander Bank, N.A., Wilmington, DE
 
433,306

 
14.1

Chase Bank USA, N.A.,Wilmington, DE
 
366,117

 
11.9

(dollars in thousands)
 
December 31, 2014
Member (1)
 
Capital Stock
 
% of Total
PNC Bank, N.A., Wilmington, DE
 
$
876,305

 
28.8
%
Santander Bank, N.A., Wilmington, DE
 
424,955

 
14.0

Chase Bank USA, N.A.,Wilmington, DE
 
362,050

 
11.9

Note:
(1) For Bank membership purposes, the principal place of business for PNC Bank, N.A. 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 issued and outstanding capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at the shares' $100 per share par value, as mandated by each FHLBank's capital plan.

At March 31, 2015 and December 31, 2014, the Bank had $569 thousand and $586 thousand, 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. Estimated dividends on mandatorily redeemable capital stock which were recorded as interest expense were immaterial during March 31, 2015 and March 31, 2014.


69

Notes to Financial Statements (continued)

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the three months ended March 31, 2015 and 2014.
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Balance, beginning of the period
 
$
586

 
$
40

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

 
1,978

Net redemption/repurchase of mandatorily redeemable capital stock
 
(17
)
 
(157
)
Balance, end of period
 
$
569

 
$
1,861


As of March 31, 2015, the total mandatorily redeemable capital stock reflected the balance for two institutions, one of which was merged out of district and is considered to be a nonmember. The other institution has notified the Bank of its intention to voluntary redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at March 31, 2015 and December 31, 2014.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Due in 1 year or less
 
$

 
$

Due after 1 year through 2 years
 

 

Due after 2 years through 3 years
 

 

Due after 3 years through 4 years
 
70

 

Due after 4 years through 5 years
 
499

 
586

Total
 
$
569

 
$
586


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. 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. At March 31, 2015, retained earnings were $808.9 million, including $683.4 million of unrestricted retained earnings and $125.5 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. In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. This dividend was based on average member capital for the fourth quarter 2014. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. In April 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% and 3.0% on activity stock and membership stock, respectively. These dividends were based on stockholders' average balances for the previous quarter.

70

Notes to Financial Statements (continued)

The following table summarizes the changes in AOCI for March 31, 2015 and 2014 respectively.
(in thousands)
Net Unrealized Gains(Losses) on AFS
 
Non-credit OTTI Gains(Losses) on AFS
 
Non-credit OTTI Gains(Losses) on HTM
 
Net Unrealized Gains (Losses) on Hedging Activities
 
Pension and Post-Retirement Plans
 
Total
December 31, 2013
$
(32,481
)
 
$
77,642

 
$

 
$
287

 
$
(1,108
)
 
$
44,340

Other comprehensive income (loss) before
  reclassification:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
24,528

 
(575
)
 

 

 

 
23,953

Net change in fair value of OTTI securities

 
2,018

 

 

 

 
2,018

Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 
 
 
Pension and post-retirement

 

 

 

 
39

 
39

March 31, 2014
$
(7,953
)
 
$
79,085

 
$

 
$
287

 
$
(1,069
)
 
$
70,350

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
32,460

 
$
94,451

 
$

 
$
272

 
$
(2,750
)
 
$
124,433

Other comprehensive income (loss) before
  reclassification:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains
22,488

 
1,355

 

 

 

 
23,843

Net change in fair value of OTTI securities

 
706

 

 

 

 
706

Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 
 
 
Amortization on hedging activities

 

 

 
(8
)
 

 
(8
)
Pension and post-retirement

 

 

 

 
82

 
82

March 31, 2015
$
54,948

 
$
96,512

 
$

 
$
264

 
$
(2,668
)
 
$
149,056




71

Notes to Financial Statements (continued)

Note 12 – Transactions with Related Parties

The following table includes significant outstanding related party member balances.
(in thousands)
 
March 31, 2015
 
December 31, 2014
Investments
 
$
155,995

 
$
157,025

Advances
 
40,468,917

 
38,765,267

Letters of credit (1)
 
9,520,383

 
9,608,983

MPF loans
 
1,261,559

 
1,326,807

Deposits
 
6,887

 
13,678

Capital stock
 
1,793,565

 
1,714,432

Note:
(1) Letters of credit are off-balance sheet commitments.

The following table summarizes the effects on the Statement of Income corresponding to the related party member balances above. Amounts related to Federal funds sold, interest income on investments, and interest expense on deposits were immaterial for the periods presented.
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Interest income on advances (1)
 
$
39,053

 
$
32,803

Interest income on MPF loans
 
17,623

 
21,306

Letter of credit fees
 
3,028

 
1,882

Prepayment fees on advances
 

 
3,090

Note:
(1) For the three months ended March 31, 2015, balances include contractual interest income of $72.8 million, net interest settlements on derivatives in fair value hedge relationships of $(33.4) million and total amortization of basis adjustments of $(0.4) million. For the three months ended March 31, 2014, balances include contractual interest income of $83.6 million, net interest settlements on derivatives in fair value hedge relationships of $(48.7) million and total amortization of basis adjustments of $(2.1) million.

The following table includes the MPF activity of the related party members.
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Total MPF loan volume purchased
 
$
1,407

 
$
889


The following table summarizes the effect of the MPF activities with FHLBank of Chicago.
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Servicing fee expense
 
$
268

 
$
237

(in thousands)
 
March 31, 2015
 
December 31, 2014
Interest-bearing deposits maintained with FHLBank of Chicago
 
$
8,089

 
$
6,782


From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three months ended March 31, 2015 and 2014, there was no borrowing or lending activity between the Bank and other FHLBanks.

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 three months ended March 31, 2015 and 2014, 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

72

Notes to Financial Statements (continued)

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 three months ended March 31, 2015 and 2014.

Additional discussions regarding related party transactions can be found in Note 19 to the audited financial statements in the Bank's 2014 Form 10-K.

Note 13 – Estimated Fair Values

Fair value amounts have been determined by the Bank using available market information and appropriate valuation methods. These estimates are based on recent market data and other pertinent information available to the Bank at March 31, 2015 and December 31, 2014. Although the management of the Bank believes that the valuation methods are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to 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 March 31, 2015 and December 31, 2014 are presented in the table below.
Fair Value Summary Table
 
March 31, 2015
(in thousands)
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjust. (2)
 
Estimated
Fair Value
                       Assets:
 

 
 
 
 
 
 
 
 
 
 

Cash and due from banks
$
5,124,196

 
$
5,124,196

 
$

 
$

 
$

 
$
5,124,196

Interest-bearing deposits
8,089

 

 
8,089

 

 

 
8,089

Federal funds sold
4,915,000

 

 
4,914,986

 

 

 
4,914,986

Trading securities
295,855

 
5,122

 
290,733

 

 

 
295,855

AFS securities
8,431,371

 
1,998

 
7,471,330

 
958,043

 

 
8,431,371

HTM securities
3,079,267

 

 
2,477,930

 
645,110

 

 
3,123,040

Advances
62,346,031

 

 
62,425,319

 

 

 
62,425,319

Mortgage loans held for portfolio, net
3,074,289

 

 
3,279,503

 

 

 
3,279,503

BOB loans, net
11,347

 

 

 
11,347

 

 
11,347

Accrued interest receivable
87,196

 

 
87,196

 

 

 
87,196

Derivative assets
52,054

 

 
135,260

 

 
(83,206
)
 
52,054

                     Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Deposits
$
750,927

 
$

 
$
750,931

 
$

 
$

 
$
750,931

Discount notes
37,077,804

 

 
37,079,968

 

 

 
37,079,968

Bonds
45,241,342

 

 
45,470,892

 

 

 
45,470,892

Mandatorily redeemable capital stock (1)
569

 
576

 

 

 

 
576

Accrued interest payable (1)
149,563

 

 
149,556

 

 

 
149,556

Derivative liabilities
62,311

 

 
440,336

 

 
(378,025
)
 
62,311



73

Notes to Financial Statements (continued)

 
December 31, 2014
(in thousands)
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjust. (2)
 
Estimated
Fair Value
                       Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
2,451,131

 
$
2,451,131

 
$

 
$

 
$

 
$
2,451,131

Interest-bearing deposits
6,782

 

 
6,782

 

 

 
6,782

Federal funds sold
4,585,000

 

 
4,584,981

 

 

 
4,584,981

Trading securities
281,016

 
4,721

 
276,295

 

 

 
281,016

AFS securities
8,408,835

 
1,998

 
7,424,055

 
982,782

 

 
8,408,835

HTM securities
3,246,788

 

 
2,600,638

 
685,909

 

 
3,286,547

Advances
63,408,355

 

 
63,471,078

 

 

 
63,471,078

Mortgage loans held for portfolio, net
3,123,334

 

 
3,312,186

 

 

 
3,312,186

BOB loans, net
11,567

 

 

 
11,567

 

 
11,567

Accrued interest receivable
86,109

 

 
86,109

 

 

 
86,109

Derivative assets
36,217

 

 
111,772

 

 
(75,555
)
 
36,217

                        Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
641,180

 
$

 
$
641,183

 
$

 
$

 
$
641,183

Discount notes
37,058,118

 

 
37,059,347

 

 

 
37,059,347

Bonds
43,714,510

 

 
43,881,951

 

 

 
43,881,951

Mandatorily redeemable capital stock (1)
586

 
705

 

 

 

 
705

Accrued interest payable (1)
103,151

 

 
103,032

 

 

 
103,032

Derivative liabilities
58,964

 

 
467,685

 

 
(408,721
)
 
58,964

Notes:
(1) The estimated fair value amount for the mandatorily redeemable capital stock line item includes accrued dividend interest; this amount is excluded from the estimated fair value for the accrued interest payable line item.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.

Fair Value Hierarchy.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; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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 three months ended March 31, 2015 and 2014.


74

Notes to Financial Statements (continued)

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 future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.

Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the 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: U.S. 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.

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.
 
The Bank also reviewed the final fair value estimates of its private label MBS holdings as of March 31, 2015 for reasonableness using an implied yield test. On certain securities, the Bank calculated an implied yield 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 to dealer 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 March 31, 2015, 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 including inputs 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. Based on the current lack of significant market activity for private label residential MBS, the Bank believes that as of March 31, 2015, private label residential MBS inputs should be classified as Level 3.


75

Notes to Financial Statements (continued)

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.

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

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 Bank is subject to credit risk on bilateral derivatives transactions due to the potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank has entered into netting arrangements for its bilateral derivative transactions. 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 those counterparties’ credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. For cleared derivatives, the Bank's credit risk exposure is mitigated because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives. 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 clearing agent and/or by counterparty pursuant to the provisions of each of the Bank’s 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:
Discount rate assumption. Overnight Index Swap (OIS) curve.
Forward interest rate assumption. 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. The OF constructs an internal curve, referred to as the CO

76

Notes to Financial Statements (continued)

curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally its par value plus estimated dividends at the time of reclassification and any subsequently estimated dividend. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System's cooperative structure.

Commitments. For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The Bank issues standby letters of credit for a fee. The unamortized fee is the letter of credit's carrying value and represents its fair value. The fair value of the Bank's commitments to extend credit for advances and letters of credit was immaterial at March 31, 2015 and December 31, 2014.

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.


77

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 Statements of Condition at March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1)
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

Trading securities:
 
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
 
$

 
$
290,733

 
$

 
$

 
$
290,733

Mutual funds
 
5,122

 

 

 

 
5,122

Total trading securities
 
$
5,122

 
$
290,733

 
$

 
$

 
$
295,855

AFS securities:
 
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
 
$

 
$
3,388,639

 
$

 
$

 
$
3,388,639

State or local agency obligations
 

 
127,002

 

 

 
127,002

 Mutual funds
 
1,998

 

 

 

 
1,998

 Other U.S. obligations single family MBS
 

 
316,071

 

 

 
316,071

 GSE single-family MBS
 

 
2,753,192

 

 

 
2,753,192

 GSE multifamily MBS
 

 
886,426

 

 

 
886,426

 Private label MBS:
 
 
 
 
 
 
 
 
 
 
Private label residential MBS
 

 

 
946,912

 

 
946,912

HELOCs
 

 

 
11,131

 

 
11,131

Total AFS securities
 
$
1,998

 
$
7,471,330

 
$
958,043

 
$

 
$
8,431,371

Derivative assets:
 
 

 
 

 
 

 
 

 
 

Interest rate related
 
$

 
$
134,627

 
$

 
$
(83,206
)
 
$
51,421

Mortgage delivery commitments
 

 
633

 

 

 
633

Total derivative assets
 
$

 
$
135,260

 
$

 
$
(83,206
)
 
$
52,054

Total assets at fair value
 
$
7,120

 
$
7,897,323

 
$
958,043

 
$
(83,206
)
 
$
8,779,280

Liabilities:
 
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

 
 

Interest rate related
 
$

 
$
440,336

 
$

 
$
(378,025
)
 
$
62,311

Total derivative liabilities (2)
 
$

 
$
440,336

 
$

 
$
(378,025
)
 
$
62,311


78

Notes to Financial Statements (continued)

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

 
 

 
 

 
 

 
 

Trading securities:
 
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
 
$

 
$
276,295

 
$

 
$

 
$
276,295

Mutual funds
 
4,721

 

 

 

 
4,721

Total trading securities
 
$
4,721

 
$
276,295

 
$

 
$

 
$
281,016

AFS securities:
 
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
 
$

 
$
3,233,703

 
$

 
$

 
3,233,703

   State or local agency obligations
 

 
98,984

 

 

 
98,984

 Mutual funds
 
1,998

 

 

 

 
1,998

 Other U.S. obligations single family MBS
 

 
329,379

 

 

 
329,379

 GSE single-family MBS
 

 
2,882,162

 

 

 
2,882,162

 GSE multifamily MBS
 

 
879,827

 

 

 
879,827

Private label MBS:
 
 
 
 
 
 
 
 
 

Private label residential MBS
 

 

 
971,083

 

 
971,083

HELOCs
 

 

 
11,699

 

 
11,699

Total AFS securities
 
$
1,998

 
$
7,424,055

 
$
982,782

 
$

 
$
8,408,835

Derivative assets:
 
 
 
 
 
 
 
 
 
 
Interest rate related
 
$

 
$
111,338

 
$

 
$
(75,555
)
 
$
35,783

Mortgage delivery commitments
 

 
434

 

 

 
434

Total derivative assets
 
$

 
$
111,772

 
$

 
$
(75,555
)
 
$
36,217

Total assets at fair value
 
$
6,719

 
$
7,812,122

 
$
982,782

 
$
(75,555
)
 
$
8,726,068

Liabilities:
 
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

 
 

Interest rate related
 
$

 
$
467,685

 
$

 
$
(408,721
)
 
$
58,964

Total derivative liabilities (2)
 
$

 
$
467,685

 
$

 
$
(408,721
)
 
$
58,964

Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.
(2) Derivative liabilities represent the total liabilities at fair value.

There were no transfers between Levels 1 or 2 during the first three months of 2015 or 2014.


79

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 three months ended March 31, 2015 and 2014. 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. There were no Level 3 transfers during the first three months of 2015 or 2014.
(in thousands)
 
AFS Private
Label MBS-Residential
Three Months Ended
March 31, 2015
 
AFS Private
Label MBS- HELOCs
Three Months Ended
March 31, 2015
Balance at January 1
 
$
971,083

 
$
11,699

Total gains (losses) (realized/unrealized) included in:
 
 
 
 
Accretion of credit losses in interest income
 
4,659

 
378

Net unrealized (losses) on AFS in OCI
 
(15
)
 

Net change in fair value on OTTI AFS in OCI
 
709

 
(3
)
Unrealized gains (losses) on OTTI AFS in OCI
 
1,608

 
(253
)
Purchases, issuances, sales, and settlements:
 
 
 
 
Settlements
 
(31,132
)
 
(690
)
Balance at March 31
 
$
946,912

 
$
11,131

Total amount of gains for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at March 31, 2015
 
$
4,659

 
$
378

(in thousands)
 
AFS Private
Label MBS-Residential
Three Months Ended
March 31, 2014
 
AFS Private
Label MBS- HELOCs
Three Months Ended
March 31, 2014
Balance at January 1
 
$
1,123,624

 
$
14,428

Total gains (losses) (realized/unrealized) included in:
 
 
 
 
Accretion of credit losses in interest income
 
2,936

 
330

Net unrealized (losses) on AFS in OCI
 
(30
)
 

Net change in fair value on OTTI AFS in OCI
 
1,998

 
20

Unrealized gains (losses) on OTTI AFS in OCI
 
(684
)
 
109

Purchases, issuances, sales, and settlements:
 
 
 
 
Settlements
 
(50,823
)
 
(864
)
Balance at March 31
 
$
1,077,021

 
$
14,023

Total amount of gains for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at March 31, 2014
 
$
2,936

 
$
330



80

Notes to Financial Statements (continued)

Note 14 – Commitments and Contingencies

The following table presents the Bank's various off-balance sheet commitments which are described in detail below.
(in thousands)
March 31, 2015
 
December 31, 2014

Notional amount
Expiration Date Within One Year
Expiration Date After One Year
Total
 
Total
Standby letters of credit outstanding (1) (3)
$
20,379,054

$

$
20,379,054

 
$
19,942,125

Commitments to fund additional advances and BOB loans
29,290


29,290

 
21,124

Commitments to fund or purchase mortgage loans
21,726


21,726

 
18,308

Unsettled consolidated obligation bonds, at par (2)
460,865


460,865

 
95,530

Unsettled consolidated obligation discount notes, at par
500,000


500,000

 
500,000

Notes:
(1) Excludes approved requests to issue future standby letters of credit of $122.3 million and $146.8 million at March 31, 2015 and December 31, 2014, respectively.
(2) Includes $415.9 million and $83.1 million of consolidated obligation bonds which were hedged with associated interest rate swaps at March 31, 2015 and December 31, 2014, respectively.
(3) $5.2 billion of these letters of credit have annual renewal language that, as long as both parties agree, permit the letter of credit to be renewed for an additional year with a maximum renewal period of 5 years.

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 5 years.

Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $4.3 million and $4.8 million as of March 31, 2015 and December 31, 2014, 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 Statements of Condition.

The Bank does not have any legally binding or unconditional unused lines of credit for advances at March 31, 2015 and December 31, 2014. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding at March 31, 2015 and December 31, 2014 of $7.7 billion and $7.4 billion, respectively.

Commitments to Fund or Purchase Mortgage Loans. The Bank may enter into commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF program. These delivery commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives.

Pledged Collateral. The Bank may pledge cash and securities, as collateral, related to derivatives. Refer to Note 9 - Derivatives and Hedging Activities for additional information about the Bank's pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. The Bank is subject to legal proceedings arising in the normal course of business. The Bank would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. 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 the Bank's financial condition, results of operations or cash flows.
 
Notes 6, 9, 10, 11, and 12 also discuss other commitments and contingencies.

81


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, chief financial officer, and chief accounting 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, chief financial officer, and chief accounting officer concluded that the Bank’s disclosure controls and procedures were effective as of March 31, 2015.

Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the first quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 1A: Risk Factors

For a complete discussion of Risk Factors, see Item 1A. Risk Factors in the Bank’s 2014 Form 10-K.

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.



82


Item 6: Exhibits
 
Exhibit 10.5.2
 
Supplemental Executive Retirement Plan as amended March 26, 2015
Exhibit 10.6.2
 
Supplement Thrift Plan as amended March 26, 2015
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 31.3
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting 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 32.3
 
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 Accounting 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: May 7, 2015


By: /s/ David G. Paulson
David G. Paulson
Chief Financial Officer


By: /s/ Edward V. Weller
Edward V. Weller
Chief Accounting Officer

83