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EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3213q2016.htm
EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3233q2016.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3223q2016.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3133q2016.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3123q2016.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3113q2016.htm

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

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
[  ] 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 34,961,675 shares of common stock with a par value of $100 per share outstanding October 31, 2016.





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 (MBS); 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 and cyber-security 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 2015 Form 10-K (2015 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 global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets; all of which impact the interest rate environment.

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. 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. During the third quarter of 2016, funding spreads (i.e., the cost of FHLBank debt relative to LIBOR), particularly short-term funding spreads, improved considerably. This development was driven by the pending implementation of new regulations applicable to institutional money market funds. The reform measures, which took effect in October 2016, spurred an increase in 3-month LIBOR which increased investor demand for FHLBank short-term consolidated obligations during the quarter.

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

1


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 MBS portfolio continues its expected runoff. As higher coupon mortgage loans prepay and mature along with higher yielding private 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. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During the third quarter of 2016, this accretion resulted in additional interest income of $6.4 million compared to $6.8 million in the same prior-year period.

Results of Operations. The Bank's net income for the third quarter of 2016 was $54.8 million compared to $50.3 million for the third quarter of 2015. This $4.5 million increase was driven primarily by lower net losses on derivatives and hedging activities, partially offset by net losses on trading securities, lower net interest income and higher other expenses. Net interest income was $79.2 million in the third quarter of 2016 compared to $83.1 million in the third quarter of 2015. The decrease in net interest income in the third quarter of 2016 was primarily driven by increased interest expense on consolidated obligations, largely offset by higher interest income on advances. The net interest margin was 36 basis points in both the third quarter of 2016 and the third quarter of 2015.

For the nine months ended September 30, 2016, net income was $178.3 million, compared to $202.1 million for the same prior-year period. The $23.8 million decrease was primarily due to increased net losses on derivatives and hedging activities, along with lower gains on litigation settlements (net of legal fees and expenses) and higher other expenses, partially offset by net gains on trading securities, increased net interest income and net realized gains (losses) on sales of available-for-sale (AFS) securities. Net interest income was $254.2 million in the first nine months of 2016 compared to $239.7 million in the same prior-year period. The increase in net interest income in the first nine months of 2016 was primarily driven by increased interest income on advances, prepayment fees on advances and interest on Federal funds sold, partially offset by increased interest expense on consolidated obligations. The net interest margin was 38 basis points and 37 basis points for the first nine months of 2016 and 2015, respectively.

Financial Condition. Advances. Total advances were $71.8 billion at September 30, 2016, a decrease of $2.7 billion compared to $74.5 billion at December 31, 2015. The decline from year-end 2015 was primarily driven by certain prepayments and merger activity in the regional member classification. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. As the advance portfolio decreased in size during the third quarter of 2016, compared to December 31, 2015, the term of advances increased modestly. At September 30, 2016, approximately 56% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 55% at December 31, 2015.

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) members' regulatory requirements; (4) current and future credit market conditions; (5) housing market trends; (6) the shape of the yield curve and (7) advance pricing.

Investments. At September 30, 2016, the Bank held $17.6 billion of total investments, including trading, AFS and held-to-maturity (HTM) investment securities, as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2015, these investments totaled $16.1 billion. The increase of $1.5 billion was primarily driven by purchases of term certificates of deposit in the third quarter of 2016.

Consolidated Obligations. The Bank's consolidated obligations totaled $90.3 billion at September 30, 2016, a decrease of $0.6 billion from December 31, 2015. At September 30, 2016, bonds represented 75% of the Bank's consolidated obligations, compared with 53% at December 31, 2015. Discount notes represented 25% of the Bank's consolidated obligations at September 30, 2016 compared with 47% at year-end 2015. Investor demand for certain structures shifted during the first nine months of 2016, which included increased demand for floating-rate and short-term, fixed-rate bonds. In addition, the Bank reduced its refunding risk exposure by issuing longer term bonds.

In April 2016, Moody's affirmed the Aaa senior debt and P-1 ratings of the FHLBank System and affirmed the Aaa bank deposit and P-1 ratings of all 11 FHLBanks and the A2 subordinated debt of FHLBank Chicago. The outlook on the FHLBank System's and FHLBanks' ratings is stable.

Capital Position and Regulatory Requirements. Total capital at September 30, 2016 was $4.6 billion, compared to $4.5 billion at December 31, 2015. Total retained earnings at September 30, 2016 were $942.2 million, up $61.0 million from $881.2 million at year-end 2015, reflecting the Bank's net income for the first nine months of 2016 which was partially offset

2


by dividends paid. Accumulated other comprehensive income (AOCI) was $129.4 million at September 30, 2016, an increase of $48.7 million from December 31, 2015.

In February 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 3.0% on activity stock and membership stock, respectively. In April, July, and October 2016, the Bank paid quarterly dividends equal to an annual yield of 5.0% and 2.0% on activity stock and membership stock, respectively. These dividends were based on stockholders' average balances for the first quarter of 2016 (April dividend), the second quarter of 2016 (July dividend) and the third quarter of 2016 (October dividend).

The Bank met all of its capital requirements as of September 30, 2016, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of June 30, 2016, the Bank was deemed "adequately capitalized."

Financial Highlights

The following financial highlights for the Condensed Statements of Condition as of December 31, 2015 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, 2015 which have been derived from the Bank's 2015 Form 10-K.

Condensed Statements of Income
 
Three months ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
(in millions, except per share data)
2016
 
2016
 
2016
 
2015
 
2015
Net interest income
$
79.2

 
$
93.6

 
$
81.4

 
$
78.1

 
$
83.1

Provision (benefit) for credit losses
0.7

 
0.2

 
0.2

 
0.2

 
(0.2
)
Other noninterest income (loss):
 
 
 
 
 
 
 
 
 
Net OTTI losses, credit portion (1)

 

 
(0.2
)
 
(0.9
)
 
(0.4
)
Net gains (losses) on trading securities
(2.6
)
 
10.9

 
17.3

 
(3.8
)
 
8.7

Net realized gains (losses) from sales of AFS securities
(0.1
)
 

 
12.7

 

 

Net gains (losses) on derivatives and hedging activities
(2.4
)
 
(16.4
)
 
(35.6
)
 
7.3

 
(25.4
)
Gains on litigation settlements, net
0.1

 
0.5

 

 

 

Other, net
6.6

 
6.3

 
6.7

 
5.4

 
6.4

Total other noninterest income (loss)
1.6

 
1.3

 
0.9

 
8.0

 
(10.7
)
Other expense
19.2

 
20.3

 
19.3

 
25.5

 
16.7

Income before assessments
60.9

 
74.4

 
62.8

 
60.4

 
55.9

Affordable Housing Program (AHP) assessment(2)
6.1

 
7.4

 
6.3

 
6.0

 
5.6

Net income
$
54.8

 
$
67.0

 
$
56.5

 
$
54.4

 
$
50.3

Earnings per share (3)
$
1.71

 
$
2.08

 
$
1.67

 
$
1.65

 
$
1.51

 
 
 
 
 
 
 
 
 
 
Dividends
$
37.6

 
$
39.7

 
$
40.0

 
$
40.3

 
$
38.1

Dividend payout ratio (4)
68.73
%
 
59.29
%
 
70.81
%
 
73.91
%
 
75.69
%
Return on average equity
5.10
%
 
6.35
%
 
5.21
%
 
5.05
%
 
4.65
%
Return on average assets
0.24
%
 
0.30
%
 
0.24
%
 
0.23
%
 
0.22
%
Net interest margin (5)
0.36
%
 
0.43
%
 
0.36
%
 
0.34
%
 
0.36
%
Regulatory capital ratio (6)
4.70
%
 
4.79
%
 
4.59
%
 
4.60
%
 
4.51
%
GAAP capital ratio (7)
4.83
%
 
4.94
%
 
4.68
%
 
4.67
%
 
4.62
%
Total average equity to average assets
4.75
%
 
4.74
%
 
4.66
%
 
4.63
%
 
4.65
%


3


 
Nine months ended
(in millions, except per share data)
September 30, 2016
September 30, 2015
Net interest income
$
254.2

$
239.7

Provision (benefit) for credit losses
1.1

(0.4
)
Other noninterest income (loss):
 
 
Net OTTI losses, credit portion (1)
(0.2
)
(0.9
)
Net gains on trading securities
25.6

5.4

Net realized gains (losses) from sales of AFS securities
12.6


Net (losses) on derivatives and hedging activities
(54.4
)
(3.9
)
Gains on litigation settlements, net
0.6

15.3

Other, net
19.6

20.6

Total other noninterest income
3.8

36.5

Other expense
58.8

52.0

Income before assessments
198.1

224.6

AHP assessment (2)
19.8

22.5

Net income
$
178.3

$
202.1

Earnings per share (3)
$
5.45

$
6.41

 
 
 
Dividends
$
117.3

$
172.5

Dividend payout ratio (4)
65.84
%
85.39
%
Return on average equity
5.55
%
6.56
%
Return on average assets
0.26
%
0.31
%
Net interest margin (5)
0.38
%
0.37
%
Regulatory capital ratio (6)
4.70
%
4.51
%
GAAP capital ratio (7)
4.83
%
4.62
%
Total average equity to average assets
4.71
%
4.68
%
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
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
(in millions)
 
2016
 
2016
 
2016
 
2015
 
2015
Cash and due from banks
 
$
2,943.9

 
$
2,645.9

 
$
1,763.0

 
$
2,377.0

 
$
4,946.3

Investments (1)
 
17,553.0

 
14,528.7

 
17,802.2

 
16,144.0

 
15,380.9

Advances
 
71,831.9

 
66,336.4

 
69,021.9

 
74,504.8

 
68,804.3

Mortgage loans held for portfolio, net (2)
 
3,269.3

 
3,154.3

 
3,073.8

 
3,086.9

 
3,068.2

Total assets
 
95,834.4

 
86,906.5

 
91,904.9

 
96,329.8

 
92,428.9

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
22,636.3

 
20,814.2

 
28,006.4

 
42,275.5

 
33,960.5

Bonds
 
67,682.3

 
60,769.2

 
58,479.4

 
48,600.8

 
53,267.3

Total consolidated obligations, net (3)
 
90,318.6

 
81,583.4

 
86,485.8

 
90,876.3

 
87,227.8

Deposits
 
619.1

 
646.1

 
735.9

 
686.0

 
586.9

Mandatorily redeemable capital stock
 
5.4

 
5.7

 
5.9

 
6.0

 
6.2

AHP payable
 
73.8

 
73.8

 
73.1

 
70.9

 
69.2

Total liabilities
 
91,206.3

 
82,616.1

 
87,599.5

 
91,828.2

 
88,153.8

Capital stock - putable
 
3,556.5

 
3,232.1

 
3,313.7

 
3,539.7

 
3,294.0

Unrestricted retained earnings
 
744.0

 
737.8

 
723.9

 
718.7

 
715.4

Restricted retained earnings
 
198.2

 
187.2

 
173.8

 
162.5

 
151.6

AOCI
 
129.4

 
133.2

 
94.0

 
80.7

 
114.1

Total capital
 
4,628.1

 
4,290.3

 
4,305.4

 
4,501.6

 
4,275.1

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits.
(2) Includes allowance for credit losses of $6.5 million at September 30, 2016, $5.9 million at June 30, 2016, $6.0 million at March 31, 2016, $5.7 million at December 31, 2015, and $6.1 million at September 30, 2015.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $967.7 billion at September 30, 2016, $963.8 billion at June 30, 2016, $896.8 billion at March 31, 2016, $905.2 billion at December 31, 2015, and $856.5 billion at September 30, 2015.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three and nine months ended September 30, 2016 and 2015, 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 2015 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for the third quarter of 2016 was $54.8 million compared to $50.3 million for the third quarter of 2015. This $4.5 million increase was driven primarily by lower net losses on derivatives and hedging activities, partially offset by net losses on trading securities, lower net interest income and higher other expenses. Net losses on derivatives and hedging activities were $2.4 million in the third quarter of 2016 compared to net losses of $25.4 million in the third quarter of 2015. Partially offsetting this $23.0 million improvement, net losses on trading securities in the third quarter of 2016 were $2.6 million, compared to net gains of $8.7 million in the third quarter of 2015; net interest income was $79.2 million in the third quarter of 2016 compared to $83.1 million in the third quarter of 2015, and total other expense was $19.2 million in the third quarter of 2016 compared to $16.7 million in the third quarter of 2015. The decrease in net interest income in the third quarter of 2016 was primarily driven by increased interest expense on consolidated obligations, largely offset by higher interest income on advances. The Bank's return on average equity for the third quarter of 2016 was 5.10% compared to 4.65% for the third quarter of 2015.

For the nine months ended September 30, 2016, net income was $178.3 million compared to $202.1 million for the same prior-year period. The $23.8 million decrease was primarily due to increased net losses on derivatives and hedging activities, along with lower gains on litigation settlements (net of legal fees and expenses) and higher other expenses, partially offset by net gains on trading securities, increased net interest income and net realized gains (losses) on sales of available-for-sale securities. Net losses on derivatives and hedging activities for the nine months ended September 30, 2016 were $54.4 million,

5


an increase of $50.5 million compared to net losses of $3.9 million in the same period in 2015. Gains on litigation settlements (net of legal fees and expenses) arising from investments the Bank made in private-label mortgage-backed securities (MBS) were $0.6 million in the nine months ended September 30, 2016, compared to $15.3 million in the same year-ago period. Partially offsetting these items, net gains on trading securities in the nine months ended September 30, 2016 were $25.6 million compared to $5.4 million in the same period in 2015; net interest income was $254.2 million in the first nine months of 2016 compared to $239.7 million in the same prior-year period. In addition, results for the first nine months of 2016 included $12.6 million of net realized gains on sales of AFS securities. The increase in net interest income in the nine months ended September 30, 2016 was primarily driven by increased interest income on advances, prepayment fees on advances and interest on Federal funds sold, partially offset by increased interest expense on consolidated obligations. The Bank's return on average equity was 5.55% for the first nine months of 2016 and 6.56% 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 nine months ended September 30, 2016 and 2015.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended September 30,
 
 
2016
 
2015
(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)
 
$
7,556.4

 
$
7.5

 
0.39

 
$
7,855.9

 
$
2.3

 
0.12

Interest-bearing deposits (2)
 
412.0

 
0.4

 
0.37

 
293.4

 
0.1

 
0.13

Investment securities (3)
 
11,793.4

 
56.3

 
1.90

 
10,702.0

 
52.9

 
1.96

Advances (4)
 
65,030.5

 
144.8

 
0.89

 
68,967.5

 
92.8

 
0.53

Mortgage loans held for portfolio (5)
 
3,207.8

 
29.3

 
3.64

 
3,067.9

 
29.3

 
3.79

Total interest-earning assets
 
88,000.1

 
238.3

 
1.08

 
90,886.7

 
177.4

 
0.77

Allowance for credit losses
 
(7.7
)
 
 

 
 

 
(8.0
)
 
 
 
 
Other assets (6)
 
1,866.9

 
 

 
 

 
1,484.1

 
 
 
 
Total assets
 
$
89,859.3

 
 

 
 

 
$
92,362.8

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
646.3

 
$
0.4

 
0.25

 
$
598.6

 
$
0.1

 
0.03

Consolidated obligation discount notes
 
21,331.0

 
24.5

 
0.46

 
35,975.6

 
12.9

 
0.14

Consolidated obligation bonds (7)
 
62,637.5

 
134.1

 
0.85

 
50,723.8

 
81.2

 
0.64

Other borrowings
 
5.6

 
0.1

 
5.20

 
4.9

 
0.1

 
5.04

Total interest-bearing liabilities
 
84,620.4

 
159.1

 
0.75

 
87,302.9

 
94.3

 
0.43

Other liabilities
 
969.9

 
 
 
 
 
764.9

 
 
 
 
Total capital
 
4,269.0

 
 
 
 
 
4,295.0

 
 
 
 
Total liabilities and capital
 
$
89,859.3

 
 
 
 
 
$
92,362.8

 
 
 
 
Net interest spread
 
 
 
 
 
0.33

 
 
 
 
 
0.34

Impact of noninterest-bearing funds
 
 
 
 
 
0.03

 
 
 
 
 
0.02

Net interest income/net interest margin
 
 
 
$
79.2

 
0.36

 
 
 
$
83.1

 
0.36

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.

6


(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.2 billion in 2016 and 2015.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $29.2 million and $(1.9) million in 2016 and 2015, respectively.

Net interest income for the third quarter of 2016 decreased $3.9 million from the third quarter of 2015 due to an increase in interest expense, partially offset by higher interest income. Interest-earning assets decreased 3.2% primarily due to prepayment and maturity of short-term advances. Interest expense increased due to higher volume of consolidated obligation bonds and a 32 basis point increase in the rate paid on interest-bearing liabilities. Interest income on advances increased due to an increase in yield which more than offset the decrease in volume. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to an increase in yield. Interest income on investments increased due to higher volume.
 
 
Nine months ended September 30,
 
 
2016
 
2015
(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)
 
$
7,435.1

 
$
20.7

 
0.37

 
$
7,196.7

 
$
5.5

 
0.10

Interest-bearing deposits (2)
 
405.2

 
1.0

 
0.34

 
301.2

 
0.3

 
0.11

Investment securities (3)
 
11,503.3

 
167.8

 
1.95

 
11,235.9

 
164.8

 
1.96

Advances (4)
 
67,022.2

 
433.3

 
0.86

 
64,773.7

 
249.4

 
0.51

Mortgage loans held for portfolio (5)
 
3,133.7

 
87.9

 
3.75

 
3,079.2

 
89.8

 
3.90

Total interest-earning assets
 
89,499.5

 
710.7

 
1.06

 
86,586.7

 
509.8

 
0.79

Allowance for credit losses
 
(7.8
)
 
 

 
 

 
(8.3
)
 
 
 
 
Other assets (6)
 
1,556.8

 
 

 
 

 
1,554.9

 
 
 
 
Total assets
 
$
91,048.5

 
 

 
 

 
$
88,133.3

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
654.9

 
$
1.2

 
0.25

 
$
676.3

 
$
0.2

 
0.03

Consolidated obligation discount notes
 
25,980.7

 
84.6

 
0.44

 
35,047.7

 
32.3

 
0.12

Consolidated obligation bonds (7)
 
59,231.8

 
370.4

 
0.84

 
47,482.0

 
237.5

 
0.67

Other borrowings
 
6.7

 
0.3

 
4.81

 
2.6

 
0.1

 
3.98

Total interest-bearing liabilities
 
85,874.1

 
456.5

 
0.71

 
83,208.6

 
270.1

 
0.44

Other liabilities
 
882.0

 
 
 
 
 
803.7

 
 
 
 
Total capital
 
4,292.4

 
 
 
 
 
4,121.0

 
 
 
 
Total liabilities and capital
 
$
91,048.5

 
 
 
 
 
$
88,133.3

 
 
 
 
Net interest spread
 
 
 
 
 
0.35

 
 
 
 
 
0.35

Impact of noninterest-bearing funds
 
 
 
 
 
0.03

 
 
 
 
 
0.02

Net interest income/net interest margin
 
 
 
$
254.2

 
0.38

 
 
 
$
239.7

 
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 $0.2 billion and $0.3 billion in 2016 and 2015, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $31.0 million and $3.9 million in 2016 and 2015, respectively.


7


Net interest income for the first nine months of 2016 increased $14.5 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. Interest-earning assets increased 3.4% primarily due to higher demand for advances and increased purchases of investments, Federal funds sold and securities purchased under agreements to resell. Higher interest income on advances, investments, Federal funds sold and securities purchased under agreements to resell was partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased due to prepayment fees, higher volume, and an increase in yield. Interest income on investments increased due to higher volume. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to both higher volume and an increase in yield. Interest income on mortgage loans held for portfolio declined due to the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 27 basis points due to higher funding costs on consolidated obligations bonds and discount notes.

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 nine months ended September 30, 2016 and 2015.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2016 compared to 2015
 
 
 
 
Three months ended September 30
Nine months ended September 30
(in millions)
 
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold
 
$
(0.1
)
$
5.3

$
5.2

$
0.2

$
15.0

$
15.2

Interest-bearing deposits
 
0.1

0.2

0.3

0.1

0.6

0.7

Investment securities
 
5.2

(1.8
)
3.4

4.1

(1.1
)
3.0

Advances
 
(5.9
)
57.9

52.0

9.2

174.7

183.9

Mortgage loans held for portfolio
 
1.2

(1.2
)

1.6

(3.5
)
(1.9
)
Total interest-earning assets
 
$
0.5

$
60.4

$
60.9

$
15.2

$
185.7

$
200.9

Interest-bearing deposits
 
$

$
0.4

$
0.4

$

$
1.0

$
1.0

Consolidated obligation discount notes
 
(7.1
)
18.6

11.5

(10.3
)
62.6

52.3

Consolidated obligation bonds
 
21.4

31.5

52.9

66.4

66.5

132.9

Other borrowings
 



0.1

0.1

0.2

Total interest-bearing liabilities
 
$
14.3

$
50.5

$
64.8

$
56.2

$
130.2

$
186.4

Total increase (decrease) in net interest income
 
$
(13.8
)
$
9.9

$
(3.9
)
$
(41.0
)
$
55.5

$
14.5


Interest income and interest expense both increased quarter-over-quarter and year-over-year. Higher rates drove the interest income increase in both comparisons. Interest expense reflected higher rates on consolidated obligations along with a volume increase in consolidated obligation bonds.

The following table presents the average par balances of the Bank's advance portfolio for the three and nine months ended September 30, 2016 and 2015. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
Product
 
2016
2015
 
2016
2015
Repo/Mid-Term Repo
 
$
18,092.0

$
19,969.5

 
$
18,440

$
21,591.9

Core (Term)
 
46,108.9

47,049.1

 
47,724.4

41,174.8

Convertible Select
 
659.5

1,712.7

 
659.5

1,738.1

Total par value
 
$
64,860.4

$
68,731.3

 
$
66,823.9

$
64,504.8

Advance volume fluctuations in the comparisons were driven primarily by demand from larger members. The rate increase quarter-over-quarter and year-over-year was primarily due to an increase in market interest rates as the Federal funds target rate increased in mid-December 2015. Additional prepayment fees also contributed to the year-over-year increase.

Interest expense on the average consolidated obligations portfolio increased quarter-over-quarter and year-over-year. Rates paid on both discount notes and bonds rose as the Federal funds target rate increased in mid-December 2015. An increase in average bond balances in both comparisons also contributed to the increase. A portion of the bond portfolio is currently

8


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 and nine months ended September 30, 2016 and 2015. Derivative and hedging activities are discussed below.
Three Months Ended
September 30, 2016
(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
 
$
65,030.5

 
$
144.8

 
0.89

 
$
165.0

 
1.01

 
$
(20.2
)
 
(0.12
)
Mortgage loans held for
 portfolio
 
3,207.8

 
29.3

 
3.64

 
30.6

 
3.80

 
(1.3
)
 
(0.16
)
All other interest-earning
 assets
 
19,761.8

 
64.2

 
1.29

 
70.0

 
1.41

 
(5.8
)
 
(0.12
)
Total interest-earning
 assets
 
$
88,000.1

 
$
238.3

 
1.08

 
$
265.6

 
1.20

 
$
(27.3
)
 
(0.12
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
62,637.5

 
$
134.1

 
0.85

 
$
148.0

 
0.94

 
$
(13.9
)
 
(0.09
)
All other interest-bearing
 liabilities
 
21,982.9

 
25.0

 
0.45

 
25.0

 
0.45

 

 

Total interest-bearing
 liabilities
 
$
84,620.4

 
$
159.1

 
0.75

 
$
173.0

 
0.81

 
$
(13.9
)
 
(0.06
)
Net interest income/net
 interest spread
 
 
 
$
79.2

 
0.33

 
$
92.6

 
0.39

 
$
(13.4
)
 
(0.06
)
Three Months Ended
September 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
$
68,967.5

 
$
92.8

 
0.53

 
$
146.0

 
0.84

 
$
(53.2
)
 
(0.31
)
Mortgage loans held for
 portfolio
3,067.9

 
29.3

 
3.79

 
30.4

 
3.94

 
(1.1
)
 
(0.15
)
All other interest-earning
 assets
18,851.3

 
55.3

 
1.16

 
60.5

 
1.27

 
(5.2
)
 
(0.11
)
Total interest-earning
 assets
$
90,886.7

 
$
177.4

 
0.77

 
$
236.9

 
1.03

 
$
(59.5
)
 
(0.26
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
50,723.8

 
$
81.2

 
0.64

 
$
139.6

 
1.09

 
$
(58.4
)
 
(0.45
)
All other interest-bearing
 liabilities
36,579.1

 
13.1

 
0.14

 
13.1

 
0.14

 

 

Total interest-bearing
 liabilities
$
87,302.9

 
$
94.3

 
0.43

 
$
152.7

 
0.69

 
$
(58.4
)
 
(0.26
)
Net interest income/net
 interest spread
 
 
$
83.1

 
0.34

 
$
84.2

 
0.34

 
$
(1.1
)
 


9


Nine Months Ended
September 30, 2016
(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
 
$
67,022.2

 
$
433.3

 
0.86

 
$
522.7

 
1.04

 
$
(89.4
)
 
(0.18
)
Mortgage loans held for
 portfolio
 
3,133.7

 
87.9

 
3.75

 
91.5

 
3.90

 
(3.6
)
 
(0.15
)
All other interest-earning
 assets
 
19,343.6

 
189.5

 
1.31

 
207.4

 
1.43

 
(17.9
)
 
(0.12
)
Total interest-earning
 assets
 
$
89,499.5

 
$
710.7

 
1.06

 
$
821.6

 
1.23

 
$
(110.9
)
 
(0.17
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
59,231.8

 
$
370.4

 
0.84

 
$
430.8

 
0.97

 
$
(60.4
)
 
(0.13
)
All other interest-bearing
 liabilities
 
26,642.3

 
86.1

 
0.43

 
86.1

 
0.43

 

 

Total interest-bearing
 liabilities
 
$
85,874.1

 
$
456.5

 
0.71

 
$
516.9

 
0.80

 
$
(60.4
)
 
(0.09
)
Net interest income/net
 interest spread
 
 
 
$
254.2

 
0.35

 
$
304.7

 
0.43

 
$
(50.5
)
 
(0.08
)
Nine Months Ended
September 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
$
64,773.7

 
$
249.4

 
0.51

 
$
400.7

 
0.83

 
$
(151.3
)
 
(0.32
)
Mortgage loans held for
 portfolio
3,079.2

 
89.8

 
3.90

 
92.9

 
4.04

 
(3.1
)
 
(0.14
)
All other interest-earning
 assets
18,733.8

 
170.6

 
1.22

 
183.6

 
1.31

 
(13.0
)
 
(0.09
)
Total interest-earning
 assets
$
86,586.7

 
$
509.8

 
0.79

 
$
677.2

 
1.05

 
$
(167.4
)
 
(0.26
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
47,482.0

 
$
237.5

 
0.67

 
$
427.4

 
1.20

 
$
(189.9
)
 
(0.53
)
All other interest-bearing
 liabilities
35,726.6

 
32.6

 
0.12

 
32.6

 
0.12

 

 

Total interest-bearing
 liabilities
$
83,208.6

 
$
270.1

 
0.44

 
$
460.0

 
0.74

 
$
(189.9
)
 
(0.30
)
Net interest income/net
 interest spread
 
 
$
239.7

 
0.35

 
$
217.2

 
0.31

 
$
22.5

 
0.04

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 reduced net interest income and net interest spread for the three and nine months ended September 30, 2016. The use of derivatives had little impact to net interest income and net interest spread for the three months ended September 30, 2015. The use of derivatives increased net interest income and net interest spread for the nine months ended September 30, 2015. 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

10


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 third quarter of 2016 was $0.7 million compared to $(0.2) million for the same period in 2015. For the nine months ended September 30, 2016 and 2015, the provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $1.1 million and $(0.4) million, respectively. In 2015, the MPF portfolio had improvements in the credit performance which resulted in an overall provision benefit. In 2016, the credit performance of the MPF portfolio returned to more normal levels and a provision expense was recorded.


11


Other Noninterest Income
 
Three months ended September 30,
Nine months ended September 30,
(in millions)
2016
2015
2016
2015
Net OTTI losses, credit portion
$

$
(0.4
)
$
(0.2
)
$
(0.9
)
Net gains (losses) on trading securities
(2.6
)
8.7

25.6

5.4

Net realized gains (losses) from sales of AFS securities
(0.1
)

12.6


Net (losses) on derivatives and hedging activities
(2.4
)
(25.4
)
(54.4
)
(3.9
)
Gains on litigation settlements, net
0.1


0.6

15.3

Standby letters of credit fees
6.1

6.2

18.5

19.1

Other, net
0.5

0.2

1.1

1.5

Total other noninterest income (loss)
$
1.6

$
(10.7
)
$
3.8

$
36.5


The change in the Bank's total other noninterest income for the third quarter of 2016 compared to the same prior year period was due primarily to lower net losses on derivatives and hedging activities, partially offset by net losses on trading securities in 2016 compared with net gains in 2015. The change in the Bank's total other noninterest income for the first nine months of 2016 compared to the same prior year period was due primarily to higher net losses on derivatives and hedging activities and lower gains on litigation settlements, net of legal fees and expenses, arising from investments the Bank made in private label MBS. These amounts were partially offset by higher net gains on trading securities and net realized gains from the sales of AFS securities.

The activity related to derivatives and hedging is discussed in more detail below. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank's trading portfolio. During the first and third quarters of 2016, the Bank sold Agency, private label MBS and home equity line of credit (HELOC) securities from its AFS portfolio.

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 recorded in the Statements of Income.

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but either 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 nine months ended September 30, 2016 and 2015.
 
Three months ended September 30, 2016
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.3
)
$

$
(1.3
)
$

$

$
(1.6
)
  Net interest settlements included in net interest income(2)
(19.9
)
(5.8
)

13.9


(11.8
)
Total effect on net interest income
$
(20.2
)
$
(5.8
)
$
(1.3
)
$
13.9

$

$
(13.4
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.4

$

$

$
(0.6
)
$

$
(0.2
)
Gains (losses) on derivatives not receiving hedge accounting
4.8

6.2

1.4

(13.0
)
(1.6
)
(2.2
)
Total net gains (losses) on derivatives and hedging activities
$
5.2

$
6.2

$
1.4

$
(13.6
)
$
(1.6
)
$
(2.4
)
Total net effect of derivatives and hedging activities
$
(15.0
)
$
0.4

$
0.1

$
0.3

$
(1.6
)
$
(15.8
)
 
Three months ended September 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)
$
(1.3
)
$

$
(1.1
)
$
1.2


$
(1.2
)
  Net interest settlements included in net interest income(2)
(51.9
)
(5.2
)

57.2


0.1

Total effect on net interest income
$
(53.2
)
$
(5.2
)
$
(1.1
)
$
58.4

$

$
(1.1
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.2

$
(1.2
)
$

$
0.1

$

$
(0.9
)
Gains (losses) on derivatives not receiving hedge accounting
(10.2
)
(41.4
)
(12.2
)
39.2

0.1

(24.5
)
Total net gains (losses) on derivatives and hedging activities
$
(10.0
)
$
(42.6
)
$
(12.2
)
$
39.3

$
0.1

$
(25.4
)
Total net effect of derivatives and hedging activities
$
(63.2
)
$
(47.8
)
$
(13.3
)
$
97.7

$
0.1

$
(26.5
)
 
Nine months ended September 30, 2016
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.9
)
$

$
(3.6
)
$
1.6

$

$
(3.9
)
  Net interest settlements included in net interest income(2)
(87.5
)
(17.9
)

58.8


(46.6
)
Total effect on net interest income
$
(89.4
)
$
(17.9
)
$
(3.6
)
$
60.4

$

$
(50.5
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
2.2

$
(5.7
)
$

$
(1.8
)
$

$
(5.3
)
Gains (losses) on derivatives not receiving hedge accounting
(13.7
)
(63.1
)
(21.6
)
49.1

0.2

(49.1
)
Total net gains (losses) on derivatives and hedging activities
$
(11.5
)
$
(68.8
)
$
(21.6
)
$
47.3

$
0.2

$
(54.4
)
Total net effect of derivatives and hedging activities
$
(100.9
)
$
(86.7
)
$
(25.2
)
$
107.7

$
0.2

$
(104.9
)

13


 
Nine months ended September 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)
$
(4.0
)
$

$
(3.1
)
$
8.8

$

$
1.7

  Net interest settlements included in net interest income(2)
(147.3
)
(13.0
)

181.1


20.8

Total effect on net interest income
$
(151.3
)
$
(13.0
)
$
(3.1
)
$
189.9

$

$
22.5

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.9

$
0.8

$

$
0.8

$

$
2.5

Gains (losses) on derivatives not receiving hedge accounting
(14.1
)
(48.1
)
(6.8
)
62.2

0.4

(6.4
)
Total net gains (losses) on derivatives and hedging activities
$
(13.2
)
$
(47.3
)
$
(6.8
)
$
63.0

$
0.4

$
(3.9
)
Total net effect of derivatives and hedging activities
$
(164.5
)
$
(60.3
)
$
(9.9
)
$
252.9

$
0.4

$
18.6

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). 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. During the third quarter of 2016, the Bank recorded net losses of $(0.2) million compared to net losses of $(0.9) million during the third quarter of 2015. For the nine months ended September 30, 2016 and 2015, the Bank recorded net losses of $(5.3) million and net gains of $2.5 million, respectively The total notional amount increased to $34.1 billion at September 30, 2016, up from $30.4 billion at December 31, 2015.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(2.2) million in the third quarter of 2016 compared to net losses of $(24.5) million for the third quarter of 2015. For the nine months ended September 30, 2016 and 2015, the Bank recorded net losses of $(49.1) million and net losses of $(6.4) million, respectively. For the first nine months of 2016, the losses were concentrated in longer term economic hedges. Changes in the composition of the economic hedge portfolio, including an increase in the notional amount of economic asset swaps as well as decreases in mid-and-long term interest rates during first nine months of 2016, resulted in larger losses compared to the first nine months of 2015. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $16.1 billion at September 30, 2016 and $14.2 billion at December 31, 2015.

Other Expense

The Bank's total other expenses increased $2.5 million to $19.2 million for the three months ended September 30, 2016, compared to the same prior year period. For the first nine months of 2016 compared to the same prior year period, the Bank's total other expense increased $6.8 million, to $58.8 million. The increases in the third quarter and year-to-date 2016 periods were primarily due to higher compensation and benefits related expenses, technology related costs, and Finance Agency assessments. In addition, the increase noted in the first nine months of 2016 also was impacted by a $2.0 million voluntary contribution to the Bank's pension plan in the second quarter of 2016.

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 2015 Form 10-K.

Assets

Total assets were $95.8 billion at September 30, 2016, compared with $96.3 billion at December 31, 2015, a decrease of $0.5 billion. Advances totaled $71.8 billion at September 30, 2016, compared to $74.5 billion at December 31, 2015.

The Bank's core mission activities primarily include the issuance of advances. In addition, the Bank acquires member assets through the Mortgage Partnership Finance® (MPF®) program. As of September 30, 2016, the Bank's average par amounts for advances and MPF loans totaled $69.9 billion resulting in a core mission asset ratio of 82.1%.

Advances. Advances (par) totaled $71.7 billion at September 30, 2016 compared to $74.3 billion at December 31, 2015. At September 30, 2016, the Bank had advances to 181 borrowing members, compared to 199 borrowing members at December 31, 2015. The percentage of borrowing members to total members at period end was 59.5% and 64.8% for September 30, 2016 and December 31, 2015, respectively. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members increased slightly to 76.6% of total advances as of September 30, 2016, compared to 74.1% at December 31, 2015. However, for the five largest borrowers at each of these dates, there were some significant changes in total advances by member.

The following table provides information on advances at par by product type at September 30, 2016 and December 31, 2015.
 
September 30,
December 31,
in millions
2016
2015
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
5,903.5

$
9,233.8

    Core (Term)
27,963.6

21,163.6

    Returnables
12,500.0

11,900.0

      Total adjustable/variable-rate indexed
$
46,367.1

$
42,297.4

Fixed-rate:
 
 
    Repo/Mid-Term Repo
$
17,301.8

$
21,047.8

    Core (Term)
6,975.0

8,533.9

    Returnables

650.0

      Total fixed-rate
$
24,276.8

$
30,231.7

Convertible
$
659.5

$
1,462.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
$
394.5

$
342.2

Total par balance
$
71,697.9

$
74,333.3


The Bank had no putable advances at September 30, 2016 or December 31, 2015.

15


The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding advance balance during the nine months ended September 30, 2016 and 2015. 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).
 
 
September 30,
September 30,
Member Asset Size
 
2016
2015
Large
 
5

6

Regional
 
13

13

Mid-size
 
24

20

CFI (1)
 
173

189

Insurance
 
8

7

Total borrowing members during the period
 
223

235

Total membership
 
304

307

Percentage of members borrowing during the period
 
73.4
%
76.5
%
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.

The total number of members as of September 30, 2016 decreased to 304, compared to 307 as of December 31, 2015. The Bank added eight new members and lost 11 members. One member was placed into receivership with its charter being dissolved. With no credit exposure outstanding to the Bank, the institution was closed by the Pennsylvania Department of Banking and Securities on May 6, 2016. The Federal Deposit Insurance Corporation (FDIC) was appointed receiver, and it entered into a purchase and assumption agreement with an out-of-district institution to assume substantially all of the assets and deposits of the failed institution. One member merged with another institution outside of the Bank's district, and nine members merged with other institutions within the Bank's district.

The following table provides information at par on advances by member classification at September 30, 2016 and December 31, 2015.
(in thousands)
September 30, 2016
December 31, 2015
Increase/(Decrease)
Member Classification
Large
$
54,705.1

$
55,075.1

(0.7
)%
Regional
6,880.6

9,090.3

(24.3
)
Mid-size
3,526.6

3,443.7

2.4

CFI
3,445.4

4,262.2

(19.2
)
Insurance
3,138.1

2,459.8

27.6

Non-member
2.1

2.2

(4.5
)
Total
$
71,697.9

$
74,333.3

(3.5
)%

As of September 30, 2016, total advances decreased 3.5 % compared with balances at December 31, 2015. The decline from year-end 2015 in the Regional classification was primarily driven by certain prepayments and merger activity. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs.

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 September 30, 2016.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, was $3.3 billion and $3.1 billion at September 30, 2016, and December 31, 2015, respectively. The Bank’s focus is on purchasing MPF loans originated by the member institutions located in its district.

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,

16


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 participating financial institutions (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. Balances regarding the Bank’s products are summarized below.
(in millions)
September 30, 2016
December 31, 2015
Advances(1)
$
71,831.9

$
74,504.8

Mortgage loans held for portfolio, net(2)
3,269.3

3,086.9

Nonaccrual mortgage loans(3)
25.9

32.5

Mortgage loans 90 days or more delinquent and still accruing interest(4)
3.5

4.2

BOB loans, net
12.2

11.3

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 does not include performing TDRs of $12.1 million at September 30, 2016 and $14.8 million at December 31, 2015.
(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 been relatively stable since year-end 2015 and the MPF Original portfolio continues to out-perform the market based on national delinquency statistics. As of September 30, 2016, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.5% of the MPF Original portfolio and 2.8% of the MPF Plus portfolio compared with 0.5% and 3.3%, respectively, at December 31, 2015.

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 not appropriate under GAAP. 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 2015 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 credit enhancement (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 of 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 of default 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) based on 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 first loss account (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 September 30, 2016 and December 31, 2015.

17


 
MPF CE structure
September 30, 2016
ACL
September 30, 2016
(in millions)
FLA
Available CE
Estimate of Credit loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original & MPF 35
$
5.1

$
209.6

$
5.6

$
(0.8
)
$
(4.2
)
$
0.6

MPF Plus
18.0

18.5

14.2


(8.3
)
5.9

Total
$
23.1

$
228.1