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EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3132q2015.htm
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EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3222q2015.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 34,039,624 shares of common stock with a par value of $100 per share outstanding at July 31, 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 second 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 second quarter of 2015, the Bank recorded net income of $80.6 million, an increase of $36.0 million from $44.6 million in the second quarter of 2014. This increase was driven primarily by higher net gains on derivatives and hedging activities and higher net interest income, partially offset by net losses on trading securities. Net interest income in the second quarter of 2015 was $81.1 million, compared to $65.8 million in the second quarter of 2014. The increase was primarily due to increased interest income on advances driven by higher average advance volumes, partially offset by decreased interest income on mortgage loans held for portfolio. The net interest margin was 37 basis points and 39 basis points in the second quarter of 2015 and 2014, respectively.

During the six months ended June 30, 2015, the Bank recorded net income of $151.7 million, an increase of $27.2 million from $124.5 million for the six months ended June 30, 2014. This increase was driven primarily by higher net gains on derivatives and hedging activities and higher net interest income, partially offset by lower gains on litigation settlements (net of legal fees and expenses) and net losses on trading securities. Net interest income for the six months ended June 30, 2015 was $156.6 million, compared to $128.1 million for the six months ended June 30, 2014. The increase was primarily due to increased interest income on advances driven by higher average advance volumes, partially offset by decreased interest income on mortgage loans held for portfolio and decreased prepayment fees. The net interest margin was 37 basis points and 38 basis points for the six months ended 2015 and 2014, respectively.

Financial Condition. Advances. Advances totaled $71.5 billion at June 30, 2015 compared to $63.4 billion at December 31, 2014. Advance volume growth was broad-based across member classifications due to increased liquidity needs and loan demand. While the size of the advance portfolio increased during the second quarter of 2015, the term of advances also increased. At June 30, 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 June 30, 2015, the Bank held $13.9 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 decrease of $2.6 billion was primarily driven by a decrease in Federal funds sold due to market-driven demand.

Consolidated Obligations. The Bank's consolidated obligations totaled $88.6 billion at June 30, 2015, an increase of $7.8 billion from December 31, 2014. The increase in consolidated obligations supported the Bank's advance growth in the second quarter. Bonds represented 54% of the Bank's consolidated obligations at both June 30, 2015 and at December 31, 2014. Discount notes represented 46% of the Bank's consolidated obligations at June 30, 2015 and at year-end 2014.

Capital Position and Regulatory Requirements. Total retained earnings at June 30, 2015 were $854.8 million, up from $837.5 million at year-end 2014 reflecting the Bank's net income for the first six months of 2015 which was partially offset by dividends paid. Total accumulated other comprehensive income (AOCI) was $112.1 million at June 30, 2015, an decrease of $12.4 million from December 31, 2014. This decrease was primarily due to the changes in the fair values of securities within the AFS portfolio.

The Bank paid quarterly dividends in both April and July 2015 equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock.. These dividends were based on stockholders' average balances for the first quarter (April dividend) and second quarter (July dividend).

The Bank met all of its capital requirements as of June 30, 2015, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of March 31, 2015, the Bank was deemed "adequately capitalized."

As previously announced, the FHLBank of Des Moines and the FHLBank of Seattle entered into a definitive agreement to merge the two FHLBanks. The merger was completed on May 31, 2015.


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
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
(in millions, except per share data)
2015
 
2015
 
2014
 
2014
 
2014
Net interest income
$
81.1

 
$
75.5

 
$
82.7

 
$
72.3

 
$
65.8

Provision (benefit) for credit losses
0.3

 
(0.5
)
 
(0.2
)
 
(0.4
)
 
0.4

Other noninterest income:
 
 
 
 
 
 
 
 
 
Net OTTI losses, credit portion (1)
(0.5
)
 

 

 

 

Net gains (losses) on trading securities
(10.1
)
 
6.8

 
5.9

 
(0.1
)
 
6.8

   Net gains (losses) on derivatives and
    hedging activities
29.1

 
(7.6
)
 
(19.0)

 
0.2

 
(9.5
)
Gains on litigation settlements, net

 
15.3

 
20.2

 
14.1

 

Other, net
7.7

 
6.5

 
5.2

 
5.0

 
5.1

Total other noninterest income
26.2

 
21.0

 
12.3

 
19.2

 
2.4

Other expense
17.4

 
18.0

 
23.8

 
17.5

 
18.2

Income before assessments
89.6

 
79.0

 
71.4

 
74.4

 
49.6

Affordable Housing Program (AHP) assessment(2)
9.0

 
7.9

 
7.1

 
7.4

 
5.0

Net income
$
80.6

 
$
71.1

 
$
64.3

 
$
67.0

 
$
44.6

Earnings per share (3)
$
2.53

 
$
2.42

 
$
2.32

 
$
2.22

 
$
1.59

 
 
 
 
 
 
 
 
 
 
Dividends
$
34.7

 
$
99.7

 
$
30.4

 
$
28.0

 
$
28.7

Dividend payout ratio (4)
43.05
%
 
140.27
%
 
47.45
%
 
41.78
%
 
64.30
%
Return on average equity
7.79
%
 
7.38
%
 
6.88
%
 
6.79
%
 
4.90
%
Return on average assets
0.37
%
 
0.34
%
 
0.33
%
 
0.36
%
 
0.26
%
Net interest margin (5)
0.37
%
 
0.37
%
 
0.44
%
 
0.39
%
 
0.39
%
Regulatory capital ratio (6)
4.55
%
 
4.43
%
 
4.53
%
 
5.08
%
 
5.21
%
GAAP capital ratio (7)
4.67
%
 
4.60
%
 
4.67
%
 
5.22
%
 
5.37
%
Total average equity to average assets
4.71
%
 
4.67
%
 
4.86
%
 
5.32
%
 
5.30
%

3


 
Six months ended
(in millions, except per share data)
June 30, 2015
June 30, 2014
Net interest income
$
156.6

$
128.1

Provision (benefit) for credit losses
(0.2
)
(3.5
)
Other noninterest income (loss):
 

Net OTTI losses, credit portion (1)
(0.5
)

   Net gains (losses) on trading securities
(3.3
)
16.6

   Net gains (losses) on derivatives and hedging activities
21.5

(18.7
)
Gains on litigation settlements, net
15.3

36.6

Other, net
14.2

9.6

Total other noninterest income
47.2

44.1

Other expense
35.4

37.3

Income before assessments
168.6

138.4

AHP assessment (2)
16.9

13.9

Net income
$
151.7

$
124.5

Earnings per share (3)
$
4.95

$
4.36

 
 
 
Dividends
$
134.4

$
45.5

Dividend payout ratio (4)
88.61
%
36.51
%
Return on average equity
7.59
%
6.83
%
Return on average assets
0.36
%
0.37
%
Net interest margin (5)
0.37
%
0.38
%
Regulatory capital ratio (6)
4.55
%
5.21
%
GAAP capital ratio (7)
4.67
%
5.37
%
Total average equity to average assets
4.69
%
5.37
%
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) 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.
(3) Calculated based on net income and weighted average shares outstanding.
(4) Represents dividends paid as a percentage of net income for the respective periods presented.
(5) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(6) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(7) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

4


Condensed Statements of Condition
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
(in millions)
 
2015
 
2015
 
2014
 
2014
 
2014
Cash and due from banks
 
$
5,377.2

 
$
5,124.2

 
$
2,451.1

 
$
5,508.4

 
$
1,267.9

Investments (1)
 
13,914.3

 
16,729.6

 
16,528.4

 
14,536.9

 
14,400.4

Advances
 
71,489.2

 
62,346.0

 
63,408.4

 
53,054.3

 
54,624.4

Mortgage loans held for portfolio, net (2)
 
3,053.0

 
3,074.3

 
3,123.3

 
3,116.3

 
3,140.6

Total assets
 
94,039.5

 
87,463.1

 
85,677.1

 
76,399.7

 
73,628.8

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
41,061.1

 
37,077.8

 
37,058.1

 
31,536.6

 
31,218.5

Bonds
 
47,552.9

 
45,241.4

 
43,714.5

 
39,889.1

 
37,500.6

Total consolidated obligations, net (3)
 
88,614.0

 
82,319.2

 
80,772.6

 
71,425.7

 
68,719.1

Deposits
 
670.4

 
750.9

 
641.2

 
665.9

 
700.0

Mandatorily redeemable capital stock
 
0.6

 
0.6

 
0.6

 
0.8

 
2.9

AHP payable
 
67.7

 
62.0

 
56.0

 
52.0

 
46.7

Total liabilities
 
89,647.4

 
83,441.4

 
81,674.1

 
72,408.5

 
69,674.3

Capital stock - putable
 
3,425.2

 
3,063.7

 
3,041.0

 
3,079.3

 
3,071.1

Unrestricted retained earnings
 
713.2

 
683.4

 
726.3

 
705.4

 
679.8

Restricted retained earnings
 
141.6

 
125.5

 
111.2

 
98.4

 
85.0

AOCI
 
112.1

 
149.1

 
124.5

 
108.1

 
118.6

Total capital
 
4,392.1

 
4,021.7

 
4,003.0

 
3,991.2

 
3,954.5

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold and interest-bearing deposits.
(2) Includes allowance for credit losses of $6.3 million at June 30, 2015, $6.6 million at March 31, 2015, $7.3 million at December 31, 2014, $7.7 million at September 30, 2014 and at $7.5 million at June 30, 2014.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $852.8 billion at June 30, 2015, $812.2 billion at March 31, 2015, $847.2 billion at December 31, 2014, $816.9 billion at September 30, 2014, and $800.0 billion at June 30, 2014.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three and six months ended June 30, 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 $80.6 million for the second quarter of 2015, an increase of $36.0 million compared to $44.6 million for the second quarter of 2014. This increase was driven primarily by higher net gains on derivatives and hedging activities and higher net interest income, partially offset by net losses on trading securities. Net interest income was $81.1 million for the second quarter of 2015 compared to $65.8 million for the second quarter of 2014, an increase of $15.3 million. This increase in net interest income was primarily due to increased interest income on advances driven by higher average advance volumes, partially offset by decreased interest income on mortgage loans held for portfolio. Interest income on advances for the second quarter of 2015 was $81.6 million, an increase of $19.6 million compared to $62.0 million in the second quarter of 2014. The Bank's return on average equity for the second quarter of 2015 was 7.79%, compared to 4.90% for the second quarter of 2014.

The Bank recorded net income of $151.7 million for the first six months of 2015, compared to $124.5 million for the same prior-year period, an increase of $27.2 million. The increase was primarily due to net gains on derivatives and hedging activities and higher net interest income, partially offset by lower gains on litigation settlements (net of legal fees and expenses) and net losses on trading securities. Net interest income was $156.6 million for the first six months of 2015, an increase of $28.5 million compared to $128.1 million in the prior-year period. This increase was primarily due to increased interest income on advances driven by higher average advance volumes, partially offset by decreased interest income on mortgage loans held for portfolio and decreased prepayment fees. Interest income on advances in the six months ended June 30, 2015

5


was $155.3 million compared to $122.0 million in the same period of 2014. The decline in gains on litigation settlements relates to the settlement of claims against certain defendants arising from investments the Bank made in private-label MBS, net of legal fees an expenses, which was $15.3 million in the first six months of 2015 compared to $36.6 million in the same prior-year period. The Bank's return on average equity for the first half of 2015 was 7.59% and was 6.83% for the comparable prior year period.

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 and six months ended June 30, 2015 and 2014.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended June 30,
 
 
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)
 
$
6,637.8

 
$
1.6

 
0.10

 
$
5,163.8

 
$
1.1

 
0.07

Interest-bearing deposits (2)
 
286.9

 
0.1

 
0.10

 
471.5

 
0.1

 
0.08

Investment securities (3)
 
11,364.5

 
56.0

 
1.98

 
11,209.0

 
56.1

 
2.01

Advances (4)
 
65,369.6

 
81.8

 
0.50

 
48,222.7

 
63.8

 
0.53

Mortgage loans held for portfolio (5)
 
3,069.3

 
29.8

 
3.88

 
3,165.6

 
32.8

 
4.16

Total interest-earning assets
 
86,728.1

 
169.3

 
0.78

 
68,232.6

 
153.9

 
0.91

Allowance for credit losses
 
(8.1
)
 
 

 
 

 
(9.4
)
 
 
 
 
Other assets (6)
 
1,432.8

 
 

 
 

 
775.4

 
 
 
 
Total assets
 
$
88,152.8

 
 

 
 

 
$
68,998.6

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
727.0

 
$

 
0.03

 
$
715.8

 
$

 
0.03

Consolidated obligation discount notes
 
35,083.8

 
10.3

 
0.12

 
25,207.6

 
5.6

 
0.09

Consolidated obligation bonds (7)
 
47,307.9

 
77.9

 
0.66

 
38,471.5

 
82.5

 
0.86

Other borrowings
 
0.6

 

 
6.41

 
3.7

 

 
2.34

Total interest-bearing liabilities
 
83,119.3

 
88.2

 
0.42

 
64,398.6

 
88.1

 
0.55

Other liabilities
 
880.1

 
 
 
 
 
944.8

 
 
 
 
Total capital
 
4,153.4

 
 
 
 
 
3,655.2

 
 
 
 
Total liabilities and capital
 
$
88,152.8

 
 
 
 
 
$
68,998.6

 
 
 
 
Net interest spread
 
 
 
 
 
0.36

 
 
 
 
 
0.36

Impact of noninterest-bearing funds
 
 
 
 
 
0.01

 
 
 
 
 
0.03

Net interest income/net interest margin
 
 
 
$
81.1

 
0.37

 
 
 
$
65.8

 
0.39

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 $13.2 million and $(22.3) million in 2015 and 2014, respectively.

6



Net interest income for the second quarter of 2015 increased $15.3 million from the second quarter of 2014 due to an increase in interest income. Interest earning assets increased 27.1% 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 than offset a decline in yield. Interest income on mortgage loans held for portfolio declined due to both lower volume and the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities declined 13 basis points due to lower funding costs on bonds and an increase in the level of discount notes relative to the total debt portfolio.
 
 
Six months ended June 30,
 
 
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)
 
$
6,861.7

 
$
3.2

 
0.09

 
$
5,413.0

 
$
1.7

 
0.06

Interest-bearing deposits (2)
 
305.2

 
0.2

 
0.10

 
487.9

 
0.2

 
0.07

Investment securities (3)
 
11,507.3

 
111.9

 
1.96

 
10,990.3

 
110.8

 
2.03

Advances (4)
 
62,642.0

 
156.6

 
0.50

 
47,773.6

 
126.9

 
0.54

Mortgage loans held for portfolio (5)
 
3,084.9

 
60.5

 
3.95

 
3,185.9

 
66.2

 
4.19

Total interest-earning assets
 
84,401.1

 
332.4

 
0.80

 
67,850.7

 
305.8

 
0.91

Allowance for credit losses
 
(8.5
)
 
 

 
 

 
(11.4
)
 
 
 
 
Other assets (6)
 
1,591.0

 
 

 
 

 
705.0

 
 
 
 
Total assets
 
$
85,983.6

 
 

 
 

 
$
68,544.3

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
715.8

 
$
0.1

 
0.03

 
$
722.6

 
$
0.1

 
0.03

Consolidated obligation discount notes
 
34,576.1

 
19.4

 
0.11

 
25,370.3

 
11.6

 
0.09

Consolidated obligation bonds (7)
 
45,834.3

 
156.3

 
0.69

 
37,842.9

 
166.0

 
0.88

Other borrowings
 
1.4

 

 
2.11

 
4.9

 

 
1.56

Total interest-bearing liabilities
 
81,127.6

 
175.8

 
0.44

 
63,940.7

 
177.7

 
0.56

Other liabilities
 
823.4

 
 
 
 
 
926.1

 
 
 
 
Total capital
 
4,032.6

 
 
 
 
 
3,677.5

 
 
 
 
Total liabilities and capital
 
$
85,983.6

 
 
 
 
 
$
68,544.3

 
 
 
 
Net interest spread
 
 
 
 
 
0.36

 
 
 
 
 
0.35

Impact of noninterest-bearing funds
 
 
 
 
 
0.01

 
 
 
 
 
0.03

Net interest income/net interest margin
 
 
 
$
156.6

 
0.37

 
 
 
$
128.1

 
0.38

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 $6.8 million and $(33.2) million in 2015 and 2014, respectively.

Net interest income for the first half of 2015 increased $28.5 million from the same prior year period primarily due to increased interest income on advances, partially offset by decreased interest income on mortgage loans held for portfolio and

7


lower prepayment fees. Interest-earning assets increased 24.4% with higher demand for advances, an increase in purchases of investments and 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, investment securities, and Federal funds sold and securities purchased under agreement to resell were partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances and investment securities increased as volumes more than offset a decline in yields. Interest income on Federal funds sold and securities purchased under agreement to resell increased due to both higher volume and an increase in yield. Interest income on mortgage loans held for portfolio declined due to both lower volume and the run-off of higher-yielding assets that have been replaced with lower-yielding assets. 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 and six months ended June 30, 2015 and 2014.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume
 
 
2015 compared to 2014
 
 
Three months ended June 30
 
Six months ended June 30
(in millions)
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Federal funds sold
 
$
0.2

 
$
0.3

 
$
0.5

 
$
0.5

 
$
1.0

 
$
1.5

Investment securities
 
0.8

 
(0.9
)
 
(0.1
)
 
5.1

 
(4.0
)
 
1.1

Advances
 
21.6

 
(3.6
)
 
18.0

 
37.5

 
(7.8
)
 
29.7

Mortgage loans held for portfolio
 
(0.9
)
 
(2.1
)
 
(3.0
)
 
(2.0
)
 
(3.7
)
 
(5.7
)
Total interest-earning assets
 
$
21.7

 
$
(6.3
)
 
$
15.4

 
$
41.1

 
$
(14.5
)
 
$
26.6

Consolidated obligation discount notes
 
2.6

 
2.1

 
4.7

 
4.8

 
3.0

 
7.8

Consolidated obligation bonds
 
16.7

 
(21.3
)
 
(4.6
)
 
31.2

 
(40.9
)
 
(9.7
)
Total interest-bearing liabilities
 
$
19.3

 
$
(19.2
)
 
$
0.1

 
$
36.0

 
$
(37.9
)
 
$
(1.9
)
Total increase in net interest income
 
$
2.4

 
$
12.9

 
$
15.3

 
$
5.1

 
$
23.4

 
$
28.5


In the quarter-over-quarter and year-over-year comparisons, interest income increased due to volume increases partially offset by rate decreases. At the same time interest expense decreased slightly year-over-year and was flat in the quarterly comparison. Higher advance volume drove the interest income increase in both comparisons. Interest expense reflected higher consolidated obligations volumes that were mostly offset by rate decreases in both comparisons.
Average investment balances increased quarter-over-quarter and year-over-year. The increase in both comparisons was driven by higher volumes of Agency notes that were partially offset by lower MBS balances. The rate decrease for investment securities in both comparisons 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 six months ended June 30, 2015 and 2014. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Three months ended June 30,
 
Six months ended June 30,
Product
 
2015
2014
 
2015
2014
Repo/Mid-Term Repo
 
$
23,282.7

$
16,590.3

 
$
22,416.6

$
16,548.5

Core (Term)
 
39,971.3

29,105.0

 
38,098.6

28,609.1

Convertible Select
 
1,839.8

2,038.9

 
1,841.4

2,103.9

Total par value
 
$
65,093.8

$
47,734.2

 
$
62,356.6

$
47,261.5

The increase in advance volume led to an increase in interest income, partially offset by a decrease in the yield in both the quarter-over-quarter and year-over-year comparison. Members' liquidity needs and loan demand contributed to the increase in advance balances. The yield on advances declined as the 2015 portfolios were comprised of more variable rate advances with relatively lower yields.
The average mortgage loans held for portfolio balance declined quarter-over-quarter and year-over-year due to the continued run-off of the Mortgage Partnership Finance (MPF) Plus portfolio. The Bank has not purchased loans into this

8


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 quarter-over-quarter and year-over-year 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 that was called or matured and then replaced with lower cost debt. A portion of the bond portfolio is currently swapped to 1-month or 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 and six months ended June 30, 2015 and 2014. Derivative and hedging activities are discussed below.
Three Months Ended
June 30, 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
 
$
65,369.6

 
$
81.8

 
0.50

 
$
131.4

 
0.81

 
$
(49.6
)
 
(0.31
)
Mortgage loans held for
 portfolio
 
3,069.3

 
29.8

 
3.88

 
30.9

 
4.04

 
(1.1
)
 
(0.16
)
All other interest-earning
 assets
 
18,289.2

 
57.7

 
1.27

 
62.1

 
1.36

 
(4.4
)
 
(0.09
)
Total interest-earning
 assets
 
$
86,728.1

 
$
169.3

 
0.78

 
$
224.4

 
1.03

 
$
(55.1
)
 
(0.25
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
47,307.9

 
$
77.9

 
0.66

 
$
143.4

 
1.22

 
$
(65.5
)
 
(0.56
)
All other interest-bearing
 liabilities
 
35,811.4

 
10.3

 
0.12

 
10.3

 
0.12

 

 

Total interest-bearing
 liabilities
 
$
83,119.3

 
$
88.2

 
0.42

 
$
153.7

 
0.74

 
$
(65.5
)
 
(0.32
)
Net interest income/net
 interest spread
 
 
 
$
81.1

 
0.36

 
$
70.7

 
0.29

 
$
10.4

 
0.07


9


Three Months Ended
June 30, 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
$
48,222.7

 
$
63.8

 
0.53

 
$
122.2

 
1.02

 
$
(58.4
)
 
(0.49
)
Mortgage loans held for
 portfolio
3,165.6

 
32.8

 
4.16

 
33.4

 
4.24

 
(0.6
)
 
(0.08
)
All other interest-earning
 assets
16,844.3

 
57.3

 
1.36

 
60.1

 
1.43

 
(2.8
)
 
(0.07
)
Total interest-earning
 assets
$
68,232.6

 
$
153.9

 
0.91

 
$
215.7

 
1.27

 
$
(61.8
)
 
(0.36
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
38,471.5

 
$
82.5

 
0.86

 
$
148.6

 
1.55

 
$
(66.1
)
 
(0.69
)
All other interest-bearing
 liabilities
25,927.1

 
5.6

 
0.09

 
5.6

 
0.09

 

 

Total interest-bearing
 liabilities
$
64,398.6

 
$
88.1

 
0.55

 
$
154.2

 
0.96

 
$
(66.1
)
 
(0.41
)
Net interest income/net
 interest spread
 
 
$
65.8

 
0.36

 
$
61.5

 
0.31

 
$
4.3

 
0.05


Six Months Ended
June 30, 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
 
$
62,642.0

 
$
156.6

 
0.50

 
$
254.7

 
0.82

 
$
(98.1
)
 
(0.32
)
Mortgage loans held for
 portfolio
 
3,084.9

 
60.5

 
3.95

 
62.5

 
4.09

 
(2.0
)
 
(0.14
)
All other interest-earning
 assets
 
18,674.2

 
115.3

 
1.24

 
123.1

 
1.33

 
(7.8
)
 
(0.09
)
Total interest-earning
 assets
 
$
84,401.1

 
$
332.4

 
0.80

 
$
440.3

 
1.06

 
$
(107.9
)
 
(0.26
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
45,834.3

 
$
156.3

 
0.69

 
$
287.8

 
1.27

 
$
(131.5
)
 
(0.58
)
All other interest-bearing
 liabilities
 
35,293.3

 
19.5

 
0.11

 
19.5

 
0.11

 

 

Total interest-bearing
 liabilities
 
$
81,127.6

 
$
175.8

 
0.44

 
$
307.3

 
0.77

 
$
(131.5
)
 
(0.33
)
Net interest income/net
 interest spread
 
 
 
$
156.6

 
0.36

 
$
133.0

 
0.29

 
$
23.6

 
0.07




10


Six Months Ended
June 30, 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
$
47,773.6

 
$
126.9

 
0.54

 
$
249.3

 
1.05

 
$
(122.4
)
 
(0.51
)
Mortgage loans held for
 portfolio
3,185.9

 
66.2

 
4.19

 
67.5

 
4.27

 
(1.3
)
 
(0.08
)
All other interest-earning
 assets
16,891.2

 
112.7

 
1.35

 
118.1

 
1.41

 
(5.4
)
 
(0.06
)
Total interest-earning
 assets
$
67,850.7

 
$
305.8

 
0.91

 
$
434.9

 
1.29

 
$
(129.1
)
 
(0.38
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
37,842.9

 
$
166.0

 
0.88

 
$
294.3

 
1.57

 
$
(128.3
)
 
(0.69
)
All other interest-bearing
 liabilities
26,097.8

 
11.7

 
0.09

 
11.7

 
0.09

 

 

Total interest-bearing
 liabilities
$
63,940.7

 
$
177.7

 
0.56

 
$
306.0

 
0.96

 
$
(128.3
)
 
(0.40
)
Net interest income/net
 interest spread
 
 
$
128.1

 
0.35

 
$
128.9

 
0.33

 
$
(0.8
)
 
0.02

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

The use of derivatives increased net interest income and net interest spread for the three months ended June 30, 2015 and 2014 and for the six months ended June 30, 2015. The use of derivatives had little impact on net interest income and net interest spread for the six months ended June 30, 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 second quarter of 2015 was $0.3 million compared to $0.4 million for the same period in 2014.

For the six months ended June 30, 2015 and 2014, the provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $(0.2) million and $(3.5) million, respectively. 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.


11


Other Noninterest Income
 
Three months ended June 30,
 
Six months ended June 30,
(in millions)
2015
2014
 
2015
2014
Total OTTI losses
$
(1.5
)
$

 
$
(1.5
)
$

OTTI losses reclassified to AOCI
1.0


 
1.0


Net OTTI losses, credit portion
(0.5
)

 
(0.5
)

Net gains (losses) on trading securities
(10.1
)
6.8

 
(3.3
)
16.6

Net gains (losses) on derivatives and hedging activities
29.1

(9.5
)
 
21.5

(18.7
)
Gains on litigation settlements, net


 
15.3

36.6

Standby letters of credit fees
7.0

3.9

 
12.9

7.9

Other, net
0.7

1.2

 
1.3

1.7

Total other noninterest income
$
26.2

$
2.4

 
$
47.2

$
44.1


The Bank's higher total other noninterest income for the second quarter of 2015 compared to the same prior year period was due primarily to net gains on derivatives and hedging activities and higher standby letters of credit fees partially offset by net losses on trading securities. The Bank's higher total noninterest income for first half of 2015 compared to the same prior year period was due primarily to net gains on derivatives and hedging activities and higher standby letter of credit fees. These were partially offset by lower gains on litigation settlements, net of legal fees and expenses, arising from investments the Bank made in private label MBS and net losses on trading securities. The net losses on trading securities reflects the impact of fair market value changes on the Agency investments held in the Bank's trading portfolio. The activity related to derivatives and hedging activity is discussed in more detail below. The increase in standby letters 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 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.


12


The following tables detail the net effect of derivatives and hedging activities for the three and six months ended June 30, 2015 and 2014.
 
Three months ended June 30, 2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.2
)
$

$
(1.1
)
$
3.2

$

$
0.9

  Net interest settlements included in net interest income(2)
(48.4
)
(4.4
)

62.3


9.5

Total effect on net interest income
$
(49.6
)
$
(4.4
)
$
(1.1
)
$
65.5

$

$
10.4

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains on fair value hedges
$
0.5

$
2.2

$

$
0.1

$

$
2.8

Gains (losses) on derivatives not receiving hedge accounting
0.7

17.6

8.6

(0.8
)
0.2

26.3

Total net gains (losses) on derivatives and hedging activities
$
1.2

$
19.8

$
8.6

$
(0.7
)
$
0.2

$
29.1

Total net effect of derivatives and hedging activities
$
(48.4
)
$
15.4

$
7.5

$
64.8

$
0.2

$
39.5

 
Three months ended June 30, 2014
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.8
)
$

$
(0.6
)
$
7.0


$
4.6

  Net interest settlements included in net interest income(2)
(56.6
)
(2.8
)

59.1


(0.3
)
Total effect on net interest income
$
(58.4
)
$
(2.8
)
$
(0.6
)
$
66.1

$

$
4.3

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.3

$
(0.5
)
$

$
1.7

$

$
1.5

Gains (losses) on derivatives not receiving hedge accounting
(3.1
)
(26.1
)
(3.0
)
21.2


(11.0
)
Total net gains (losses) on derivatives and hedging activities
$
(2.8
)
$
(26.6
)
$
(3.0
)
$
22.9

$

$
(9.5
)
Total net effect of derivatives and hedging activities
$
(61.2
)
$
(29.4
)
$
(3.6
)
$
89.0

$

$
(5.2
)

 
Six months ended June 30, 2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(2.7
)
$

$
(2.0
)
$
7.6

$

$
2.9

  Net interest settlements included in net interest income(2)
(95.4
)
(7.8
)

123.9


$
20.7

Total effect on net interest income
$
(98.1
)
$
(7.8
)
$
(2.0
)
$
131.5

$

$
23.6

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

$
1.9

$

$
0.8

$

$
3.4

Gains (losses) on derivatives not receiving hedge accounting
(3.9
)
(6.7
)
5.4

23.0

0.3

$
18.1

Total net gains (losses) on derivatives and hedging activities
$
(3.2
)
$
(4.8
)
$
5.4

$
23.8

$
0.3

$
21.5

Total net effect of derivatives and hedging activities
$
(101.3
)
$
(12.6
)
$
3.4

$
155.3

$
0.3

$
45.1


13


 
Six months ended June 30, 2014
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(5.4
)
$

$
(1.3
)
$
14.7

$

$
8.0

  Net interest settlements included in net interest income(2)
(117.0
)
(5.4
)

113.6


(8.8
)
Total effect on net interest income
$
(122.4
)
$
(5.4
)
$
(1.3
)
$
128.3

$

$
(0.8
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
1.1

$
(0.9
)
$

$
1.8

$

$
2.0

Gains (losses) on derivatives not receiving hedge accounting
(5.0
)
(48.9
)
(7.4
)
40.3

0.3

(20.7
)
Total net gains (losses) on derivatives and hedging activities
$
(3.9
)
$
(49.8
)
$
(7.4
)
$
42.1

$
0.3

$
(18.7
)
Total net effect of derivatives and hedging activities
$
(126.3
)
$
(55.2
)
$
(8.7
)
$
170.4

$
0.3

$
(19.5
)
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 second quarter of 2015, total ineffectiveness related to these fair value hedges resulted in net gains of $2.8 million compared to net gains of $1.5 million during the second quarter of 2014. For the six months ended June 30, 2015 and 2014, the Bank recorded net gains of $3.4 million and $2.0 million, respectively. The total notional amount increased to $35.6 billion at June 30, 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 gains of $26.3 million in the second quarter of 2015 compared to net losses of $(11.0) million for the second quarter of 2014. The gains on economic hedges during the second quarter of 2015 were primarily driven by an increase in the notional amounts of economic asset swaps and an increase in interest rates. For the six months ended June 30, 2015, the Bank recorded net gains of $18.1 million compared to net losses of $(20.7) million, respectively. For the first half of 2015 and 2014, gains and losses on economic hedges were driven by changes to the composition of the economic hedge portfolio as well as changes in interest rates. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $11.0 billion at June 30, 2015 and $12.7 billion at December 31, 2014.

Other Expense

The Bank's total other expenses decreased $0.8 million, to $17.4 million, for the three months ended June 30, 2015 compared to the same prior year period. The Bank's total other expenses decreased $1.9 million, to $35.4 million, for the first half of 2015 compared to the same prior year period. Both decreases were due primarily to lower legal expenses in 2015.


14


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 $94.0 billion at June 30, 2015, compared to $85.7 billion at December 31, 2014. The increase was primarily due to higher advances, which totaled $71.5 billion at June 30, 2015, an increase of $8.1 billion compared to $63.4 billion at December 31, 2014. Advance volume growth was broad-based across member classifications due to increased liquidity needs and loan demand.

The Finance Agency has communicated its interest in keeping all of the FHLBanks focused on activities related to their missions, such as making advances. For additional information, refer to the Legislative and Regulatory Developments section of Item 2. in this Form 10-Q.

Advances. Advances (par) totaled $71.3 billion at June 30, 2015 compared to $63.1 billion at December 31, 2014. At June 30, 2015, the Bank had advances outstanding to 188 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 73.7% of total advances as of June 30, 2015 compared to 73.8% at December 31, 2014.

The following table provides information on advances at par by product type at June 30, 2015 and December 31, 2014.
 
June 30,
December 31,
in millions
2015
2014
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
10,834.6

$
9,314.7

    Core (Term)
21,692.2

21,242.2

    Returnables
4,500.0


      Total adjustable/variable-rate indexed
$
37,026.8

$
30,556.9

Fixed-rate:
 
 
    Repo/Mid-Term Repo
$
24,920.3

$
23,672.3

    Core (Term)
7,225.4

6,723.8

      Total fixed-rate
$
32,145.7

$
30,396.1

Convertible
$
1,835.0

$
1,923.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
$
251.9

$
250.0

Total par balance
$
71,259.4

$
63,126.0


The Bank had no outstanding putable advances at June 30, 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.


15


The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding average advance balance during the six months ended June 30, 2015 and the year ended December 31, 2014.
 
 
June 30,
December 31,
Member Asset Size
 
2015
2014
Less than $100 million
 
19

25

Between $100 million and $500 million
 
108

130

Between $500 million and $1 billion
 
39

45

Between $1 billion and $5 billion
 
30

33

Greater than $5 billion
 
20

19

Total borrowing members during the period
 
216

252

Total membership
 
307

304

Percentage of members borrowing during the period
 
70.4
%
82.9
%
Total borrowing members with outstanding loan balances at period-end
 
188

189

Percentage of members borrowing at period-end
 
61.2
%
62.2
%

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

The following table provides information at par on advances by member classification at June 30, 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)
June 30, 2015
December 31, 2014
Increase/(Decrease)
Member Classification
Large
$
53,760.2

$
47,825.2

12.4
 %
Regional
8,769.2

8,041.9

9.0

Mid-size
3,063.7

2,657.6

15.3

CFI (1)
3,873.8

3,963.9

(2.3
)
Insurance
1,783.4

633.4

181.6

Non-member
9.1

4.0

127.5

Total
$
71,259.4

$
63,126.0

12.9
 %
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 June 30, 2015, total advances increased 12.9% compared with balances at December 31, 2014. Increased advance volumes occurred across all of the member classifications with the exception of CFI, whose slight decline was primarily attributable to a reclassification of one member to Mid-size during the second quarter of 2015.

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 June 30, 2015.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, decreased $70.3 million, to $3.1 billion at June 30, 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) fee 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. In the third quarter of 2015, the Bank introduced a new MPF product called MPF Direct. It is operationally similar to MPF Xtra and allows PFIs to sell residential, jumbo fixed-rate mortgages to FHLBank Chicago, which concurrently sells them to a third party on a nonrecourse basis. PFIs which have completed all required documentation and

16


training are eligible to offer the product. MPF Direct does not have the credit structure of the traditional MPF Program, and there is no CE obligation assumed by the PFI or the Bank and no CE fees are paid. The Bank receives a nominal fee for facilitating MPF Direct transactions. Given the arrangement, these loans will not be reported on the Bank's Statement of Condition.

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 of 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.
(in millions)
June 30, 2015
December 31, 2014
Advances(1)
$
71,489.2

$
63,408.4

Mortgage loans held for portfolio, net(2)
3,053.0

3,123.3

Nonaccrual mortgage loans(3)
39.0

44.6

Mortgage loans 90 days or more delinquent and still accruing interest(4)
5.0

6.8

BOB loans, net
11.0

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 $12.7 million at June 30, 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 June 30, 2015, 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 3.6% of the MPF Plus portfolio compared with 0.6% and 3.8%, respectively, at December 31, 2014.

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.

17



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 the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at June 30, 2015 and December 31, 2014.
 
MPF CE structure
June 30, 2015
ACL
June 30, 2015
(in millions)
FLA
Available CE
Estimate of Credit loss
Reduction to the ACL due
to CE
ACL
Original MPF
$
3.5

$
163.7

$
4.6

$
(4.3
)
$
0.3

MPF Plus
19.3

33.6

13.9

(7.9
)
6.0

Total
$
22.8

$
197.3

$
18.5

$