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EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3232q2017.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3222q2017.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3212q2017.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3132q2017.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3122q2017.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3112q2017.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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer
o Accelerated filer
o Emerging growth company
x Non-accelerated filer
o Smaller reporting company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. []

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 35,984,635 shares of common stock with a par value of $100 per share outstanding July 31, 2017.





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 any Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2016 Form 10-K (2016 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. The Bank's net interest margin significantly increased during the first half of 2017. This was due to the fact that during a period in the first quarter of 2017, the Bank executed a majority of its funding when the funding spread (i.e., the cost of debt relative to LIBOR) had widened. The remainder of the first half of 2017 funding spreads were at more normal levels.

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.

1



The Bank's higher yielding private label MBS portfolio continues its expected runoff. 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 second quarter of 2017, this accretion resulted in additional interest income of $6.9 million compared to $6.0 million in the second quarter of 2016.

Results of Operations. The Bank's net income for the second quarter of 2017 was $88.0 million compared to $67.0 million for the second quarter of 2016. This $21.0 million increase was driven primarily by higher net interest income and lower net losses on derivatives and hedging activities, partially offset by lower net gains on trading securities. Net interest income was $110.4 million in the second quarter of 2017, an increase of $16.8 million compared to $93.6 million in the second quarter of 2016. Higher net interest income was primarily due to interest income on higher average advance balances partially offset by interest expense on higher average consolidated obligation balances. The amount of offsetting interest expense on consolidated obligations was reduced by improved funding spreads. The net interest margin for the second quarter of 2017 was 47 basis points compared to 43 basis points in the second quarter of 2016.

For the six months ended June 30, 2017, net income was $174.8 million, compared to $123.5 million for the same prior-year period, an increase of $51.3 million. The increase was primarily due to higher net interest income and higher noninterest income. Net interest income was $218.7 million in the first six months of 2017, an increase of $43.7 million compared to $175.0 million in the same period in 2016. The increase was primarily driven by interest income on higher average advance balances partially offset by interest expense on higher average consolidated obligation balances. The amount of offsetting interest expense on consolidated obligations was reduced by improved funding spreads. Net interest income was also positively influenced by higher interest income on Federal funds sold, investment securities, and mortgage loans held for portfolio, offset by a reduction in net prepayment fees on advances. The net interest margin was 46 basis points and 39 basis points for the first six months of 2017 and 2016, respectively.

Financial Condition. Advances. Advances totaled $74.1 billion at June 30, 2017, a decrease of $2.7 billion compared to$76.8 billion at December 31, 2016. Decreases in advances to the Bank's large member classification were primarily due to cyclical activity and were partially offset by increases in advances to other classifications. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. While the advance portfolio decreased in size during the second quarter of 2017 compared to December 31, 2016, the term of advances increased. At June 30, 2017, approximately 54% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 50% at December 31, 2016.

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 June 30, 2017, the Bank held $18.9 billion of total investments, including trading, available-for-sale (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, 2016, these investments totaled $17.2 billion. The increase of $1.7 billion, mainly represented by an increase in Federal funds sold, reflects the Bank's increased cash position to ensure liquidity at quarter end.

Consolidated Obligations. The Bank's consolidated obligations totaled $94.8 billion at June 30, 2017, a decrease of $0.8 billion from December 31, 2016. At June 30, 2017, bonds represented 66% of the Bank's consolidated obligations, compared with 70% at December 31, 2016. Discount notes represented 34% of the Bank's consolidated obligations at June 30, 2017 compared with 30% at year-end 2016. During the second quarter of 2017, the Bank shifted to more short-term discount note funding as spreads to LIBOR deteriorated during this period.

Capital Position and Regulatory Requirements. Total capital at June 30, 2017 was $4.9 billion, compared to $4.8 billion at December 31, 2016. Total retained earnings at June 30, 2017 were $1,077.4 million, up $91.2 million from $986.2 million at year-end 2016, reflecting the Bank's net income for the first half of 2017, which was partially offset by dividends paid. Accumulated other comprehensive income (AOCI) was $122.2 million at June 30, 2017, an increase of $69.9 million from December 31, 2016. This increase was primarily due to changes in the fair values of securities within the AFS portfolio.

In February, April and July 2017, the Bank paid a quarterly dividend 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 fourth quarter of 2016 (February dividend), the first quarter of 2017 (April dividend) and the second quarter of 2017 (July dividend).

2



The Bank met all of its capital requirements as of June 30, 2017, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of March 31, 2017, the Bank was deemed "adequately capitalized."

Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2016 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, 2016, which have been derived from the Bank's 2016 Form 10-K.

Condensed Statements of Income
 
Three months ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
(in millions)
2017
 
2017
 
2016
 
2016
 
2016
Net interest income
$
110.4

 
$
108.3

 
$
94.7

 
$
79.2

 
$
93.6

Provision (benefit) for credit losses
(0.1
)
 

 
0.1

 
0.7

 
0.2

Other noninterest income
7.0

 
12.7

 
21.2

 
1.6

 
1.3

Other expense
19.7

 
24.5

 
25.0

 
19.2

 
20.3

Income before assessments
97.8

 
96.5

 
90.8

 
60.9

 
74.4

Affordable Housing Program (AHP) assessment(1)
9.8

 
9.7

 
9.1

 
6.1

 
7.4

Net income
$
88.0

 
$
86.8

 
$
81.7

 
$
54.8

 
$
67.0

 
 
 
 
 
 
 
 
 
 
Dividends
$
42.0

 
$
41.6

 
$
37.7

 
$
37.6

 
$
39.7

Dividend payout ratio (2)
47.76
%
 
47.90
%
 
46.12
%
 
68.73
%
 
59.29
%
Return on average equity
7.49
%
 
7.50
%
 
7.10
%
 
5.10
%
 
6.35
%
Return on average assets
0.37
%
 
0.36
%
 
0.34
%
 
0.24
%
 
0.30
%
Net interest margin (3)
0.47
%
 
0.46
%
 
0.40
%
 
0.36
%
 
0.43
%
Regulatory capital ratio (4)
4.78
%
 
4.79
%
 
4.69
%
 
4.70
%
 
4.79
%
GAAP capital ratio (5)
4.89
%
 
4.87
%
 
4.73
%
 
4.83
%
 
4.94
%
Total average equity to average assets
4.88
%
 
4.84
%
 
4.75
%
 
4.75
%
 
4.74
%
 
Six months ended
(in millions, except per share data)
June 30, 2017
June 30, 2016
Net interest income
$
218.7

$
175.0

Provision (benefit) for credit losses
(0.1
)
0.4

Other noninterest income
19.7

2.2

Other expense
44.2

39.6

Income before assessments
194.3

137.2

AHP assessment (1)
19.5

13.7

Net income
$
174.8

$
123.5

 
 
 
Dividends
$
83.6

$
79.7

Dividend payout ratio (2)
47.83
%
64.56
%
Return on average equity
7.50
%
5.77
%
Return on average assets
0.36
%
0.27
%
Net interest margin (3)
0.46
%
0.39
%
Regulatory capital ratio (4)
4.78
%
4.79
%
GAAP capital ratio (5)
4.89
%
4.94
%
Total average equity to average assets
4.86
%
4.70
%

3


Notes:
(1) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(2) Represents dividends paid as a percentage of net income for the respective periods presented.
(3) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(4) 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.
(5) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

Condensed Statements of Condition
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
(in millions)
 
2017
 
2017
 
2016
 
2016
 
2016
Cash and due from banks
 
$
4,010.4

 
$
2,550.8

 
$
3,587.6

 
$
2,943.9

 
$
2,645.9

Investments (1)
 
18,943.1

 
18,722.3

 
17,227.3

 
17,553.0

 
14,528.7

Advances
 
74,080.2

 
70,316.7

 
76,808.7

 
71,831.9

 
66,336.4

Mortgage loans held for portfolio, net (2)
 
3,537.5

 
3,418.4

 
3,390.7

 
3,269.3

 
3,154.3

Total assets
 
100,828.6

 
95,231.6

 
101,260.0

 
95,834.4

 
86,906.5

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
31,928.8

 
24,190.7

 
28,500.3

 
22,636.3

 
20,814.2

Bonds
 
62,910.9

 
65,481.2

 
67,156.0

 
67,682.3

 
60,769.2

Total consolidated obligations, net (3)
 
94,839.7

 
89,671.9

 
95,656.3

 
90,318.6

 
81,583.4

Deposits
 
590.4

 
602.6

 
558.9

 
619.1

 
646.1

Mandatorily redeemable capital stock
 
5.0

 
5.2

 
5.2

 
5.4

 
5.7

AHP payable
 
86.1

 
81.2

 
76.7

 
73.8

 
73.8

Total liabilities
 
95,896.4

 
90,595.0

 
96,466.1

 
91,206.3

 
82,616.1

Capital stock - putable
 
3,732.6

 
3,523.1

 
3,755.4

 
3,556.5

 
3,232.1

Unrestricted retained earnings
 
827.9

 
799.5

 
771.7

 
744.0

 
737.8

Restricted retained earnings
 
249.5

 
231.9

 
214.5

 
198.2

 
187.2

AOCI
 
122.2

 
82.1

 
52.3

 
129.4

 
133.2

Total capital
 
4,932.2

 
4,636.6

 
4,793.9

 
4,628.1

 
4,290.3

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 $6.3 million at June 30, 2017, $6.2 million at March 31, 2017, $6.2 million at December 31, 2016, $6.5 million at September 30, 2016 and $5.9 million at June 30, 2016.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $1,011.5 billion at June 30, 2017, $959.3 billion at March 31, 2017, $989.3 billion at December 31, 2016, $967.7 billion at September 30, 2016, and $963.8 billion at June 30, 2016.

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, 2017 and 2016, 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 2016 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income totaled $88.0 million for the second quarter of 2017, compared to $67.0 million for the second quarter of 2016. This $21.0 million increase was driven primarily by higher net interest income and lower net losses on derivatives and hedging activities, partially offset by lower net gains on trading securities.

Net interest income was $110.4 million for the second quarter of 2017, an increase of $16.8 million compared to $93.6 million in the second quarter of 2016. Higher net interest income was primarily due to interest income on higher average advance balances partially offset by interest expense on higher average consolidated obligation balances. The amount of

4


offsetting interest expense on consolidated obligations was reduced by improved funding spreads. Net interest income was also positively influenced by higher interest income on Federal funds sold, investment securities, and mortgage loans held for portfolio, offset by a reduction in net prepayment fees on advances. Net losses on derivatives and hedging activities were $4.3 million in the second quarter of 2017, compared to net losses of $16.4 million in the second quarter of 2016, an improvement of $12.1 million. Net gains on trading securities were $5.3 million in the second quarter of 2017, a decrease of $5.6 million compared to $10.9 million in the second quarter of 2016. The Bank's return on average equity for the second quarter of 2017 was 7.49% compared to 6.35% for the second quarter of 2016.

For the six months ended June 30, 2017, net income was $174.8 million compared to $123.5 million for the same prior-year period, an increase of $51.3 million. The increase was primarily due to higher net interest income and higher noninterest income. Net interest income was $218.7 million for the first six months of 2017, an increase of $43.7 million compared to $175.0 million in the same period in 2016. The increase was primarily driven by interest income on higher average advance balances partially offset by interest expense on higher average consolidated obligation balances. The amount of offsetting interest expense on consolidated obligations was reduced by improved funding spreads. Net interest income was also positively influenced by higher interest income on Federal funds sold, investment securities, and mortgage loans held for portfolio, offset by a reduction in net prepayment fees on advances. Noninterest income was $19.7 million in the first six months of 2017 compared to $2.2 million in the same period of 2016. This $17.5 million increase was driven by improvement in net gains (losses) on derivatives and hedging activity, partially offset by lower net gains on trading securities and gains from sales of available-for-sale securities in 2016 which did not recur in 2017. Total other expense increased $4.6 million in the first six months of 2017 compared to the prior-year period, primarily due to higher compensation and benefits expense. The Bank's return on average equity for the first six months of 2017 was 7.50% compared to 5.77% for the comparable prior year period.


5


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, 2017 and 2016.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended June 30,
 
 
2017
 
2016
(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)
 
$
6,875.4

 
$
16.3

 
0.95

 
$
7,100.1

 
$
6.5

 
0.37

Interest-bearing deposits (2)
 
316.6

 
0.6

 
0.73

 
392.6

 
0.3

 
0.33

Investment securities (3)
 
11,596.7

 
62.7

 
2.17

 
11,581.1

 
55.4

 
1.92

Advances (4)
 
72,956.2

 
237.1

 
1.30

 
65,940.9

 
156.5

 
0.95

Mortgage loans held for portfolio (5)
 
3,467.4

 
31.8

 
3.68

 
3,108.7

 
28.9

 
3.74

Total interest-earning assets
 
95,212.3

 
348.5

 
1.47

 
88,123.4

 
247.6

 
1.13

Allowance for credit losses
 
(8.3
)
 
 

 
 

 
(7.9
)
 
 
 
 
Other assets (6)
 
1,323.2

 
 

 
 

 
1,342.3

 
 
 
 
Total assets
 
$
96,527.2

 
 

 
 

 
$
89,457.8

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
552.3

 
$
1.1

 
0.82

 
$
675.0

 
$
0.4

 
0.25

Consolidated obligation discount notes
 
28,427.6

 
57.4

 
0.81

 
22,410.3

 
26.8

 
0.48

Consolidated obligation bonds (7)
 
62,273.1

 
179.6

 
1.16

 
61,288.9

 
126.7

 
0.83

Other borrowings
 
9.5

 

 
3.13

 
6.8

 
0.1

 
5.36

Total interest-bearing liabilities
 
91,262.5

 
238.1

 
1.05

 
84,381.0

 
154.0

 
0.73

Other liabilities
 
551.0

 
 
 
 
 
837.0

 
 
 
 
Total capital
 
4,713.7

 
 
 
 
 
4,239.8

 
 
 
 
Total liabilities and capital
 
$
96,527.2

 
 
 
 
 
$
89,457.8

 
 
 
 
Net interest spread
 
 
 
 
 
0.42

 
 
 
 
 
0.40

Impact of noninterest-bearing funds
 
 
 
 
 
0.05

 
 
 
 
 
0.03

Net interest income/net interest margin
 
 
 
$
110.4

 
0.47

 
 
 
$
93.6

 
0.43

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 $(17.6) million and $193.1 million in 2017 and 2016, 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 $(89.0) million and $35.3 million in 2017 and 2016, respectively.

Net interest income for the second quarter of 2017 increased $16.8 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. The amount of offsetting interest expense on consolidated obligation bonds and discount notes was reduced by improved funding spreads. Interest-earning assets increased 8.0% primarily due to higher demand for advances and increased purchases of mortgage loans held for portfolio, partially offset

6


by decreased purchases of Federal funds sold and securities purchased under agreements to resell. The rate earned on interest-bearing assets increased 34 basis points primarily due to a higher yield on advances. Interest income increased on advances, investments, Federal funds sold and securities purchased under agreements to resell, and mortgage loans held for portfolio. Interest income on advances and investments increased due to both higher volume and an increase in yield. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to an increase in yield. Interest income on mortgage loans held for portfolio increased due to increased volume, which more than offset the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 32 basis points due to higher funding costs on consolidated obligation bonds and discount notes.
 
 
Six months ended June 30,
 
 
2017
 
2016
(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)
 
$
6,253.8

 
$
25.9

 
0.83

 
$
7,373.7

 
$
13.2

 
0.36

Interest-bearing deposits (2)
 
232.7

 
0.8

 
0.65

 
401.8

 
0.6

 
0.33

Investment securities (3)
 
11,995.1

 
125.1

 
2.10

 
11,356.6

 
111.5

 
1.97

Advances (4)
 
73,472.3

 
443.4

 
1.22

 
68,029.0

 
288.5

 
0.85

Mortgage loans held for portfolio (5)
 
3,439.6

 
62.6

 
3.67

 
3,096.2

 
58.6

 
3.81

Total interest-earning assets
 
95,393.5

 
657.8

 
1.39

 
90,257.3

 
472.4

 
1.05

Allowance for credit losses
 
(8.3
)
 
 

 
 

 
(7.8
)
 
 

 
 

Other assets (6)
 
1,335.7

 
 

 
 

 
1,400.1

 
 

 
 

Total assets
 
$
96,720.9

 
 

 
 

 
$
91,649.6

 
 

 
 

Liabilities and capital:
 
 

 
 

 
 

 
 

 
 

 
 

Deposits (2)
 
$
550.6

 
$
1.9

 
0.70

 
$
659.2

 
$
0.8

 
0.25

Consolidated obligation discount notes
 
26,444.2

 
92.3

 
0.70

 
28,331.1

 
60.1

 
0.43

Consolidated obligation bonds (7)
 
64,475.9

 
344.8

 
1.08

 
57,510.3

 
236.3

 
0.83

Other borrowings
 
8.2

 
0.1

 
3.53

 
7.2

 
0.2

 
4.65

Total interest-bearing liabilities
 
91,478.9

 
439.1

 
0.97

 
86,507.8

 
297.4

 
0.69

Other liabilities
 
538.5

 
 
 
 
 
837.5

 
 
 
 
Total capital
 
4,703.5

 
 
 
 
 
4,304.3

 
 
 
 
Total liabilities and capital
 
$
96,720.9

 
 
 
 
 
$
91,649.6

 
 
 
 
Net interest spread
 
 
 
 
 
0.42

 
 
 
 
 
0.36

Impact of noninterest-bearing funds
 
 
 
 
 
0.04

 
 
 
 
 
0.03

Net interest income/net interest margin
 
 
 
$
218.7

 
0.46

 
 
 
$
175.0

 
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 $(22.4) million and $213.4 million in 2017 and 2016, 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 $(92.8) million and $32.0 million in 2017 and 2016, respectively.

Net interest income for the first six months of 2017 increased $43.7 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. The amount of offsetting interest expense on consolidated obligation bonds and discount notes was reduced by improved funding spreads. Interest-earning assets increased

7


5.7% primarily due to higher demand for advances and increased purchases of investments, partially offset by decreased purchases of Federal funds sold and securities purchased under agreements to resell. The rate earned on interest-bearing assets increased 34 basis points primarily due to a higher yield on advances. Interest income increased on advances, investments, Federal funds sold and securities purchased under agreements to resell, and mortgage loans held for portfolio. Interest income on advances and investments increased due to both higher volume and an increase in yield. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to an increase in yield. Interest income on mortgage loans held for portfolio increased due to increased volume, which more than offset the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 28 basis points due to higher funding costs on consolidated obligation 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 six months ended June 30, 2017 and 2016.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2017 compared to 2016
 
 
Three months ended June 30,
 
Six months ended June 30,
(in millions)
 
Volume
Rate
Total
 
Volume
Rate
Total
Federal funds sold
 
$
(0.2
)
$
10.0

$
9.8

 
$
(2.3
)
$
15.0

$
12.7

Interest-bearing deposits
 

0.3

0.3

 
(0.3
)
0.5

0.2

Investment securities
 
0.2

7.1

7.3

 
6.1

7.5

13.6

Advances
 
18.5

62.1

80.6

 
23.6

131.3

154.9

Mortgage loans held for portfolio
 
3.4

(0.5
)
2.9

 
6.2

(2.2
)
4.0

Total interest-earning assets
 
$
21.9

$
79.0

$
100.9

 
$
33.3

$
152.1

$
185.4

Interest-bearing deposits
 
$
(0.1
)
$
0.8

$
0.7

 
$
(0.2
)
$
1.3

$
1.1

Consolidated obligation discount notes
 
8.8

21.8

30.6

 
(4.4
)
36.6

32.2

Consolidated obligation bonds
 
2.4

50.5

52.9

 
30.3

78.2

108.5

Other borrowings
 

(0.1
)
(0.1
)
 

(0.1
)
(0.1
)
Total interest-bearing liabilities
 
$
11.1

$
73.0

$
84.1

 
$
25.7

$
116.0

$
141.7

Total increase (decrease) in net interest income
 
$
10.8

$
6.0

$
16.8

 
$
7.6

$
36.1

$
43.7


Interest income and interest expense increased in both the quarter-over-quarter and year-over-year comparisons. While higher rates drove the increases in both interest income and interest expense, increased volumes were also a factor. The rate increase in both comparisons was primarily due to an increase in market interest rates as the Federal funds target rate increased in mid-December 2016, mid-March 2017 and again in mid-June 2017.

Interest expense on the average consolidated obligations portfolio increased in both comparisons. Rates paid on both discount notes and bonds rose due to the increases in the Federal funds target rate. In the quarter-over-quarter comparison average discount notes and bond balances both increased. In the year-over-year comparison, an increase in average bond balances was partially offset by a decrease in average discount note balances. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore, as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.


8


The following table presents the average par balances of the Bank's advance portfolio for the three and six months ended June 30, 2017 and 2016. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Three months ended June 30,
Six months ended June 30,
Product
 
2017
2016
2017
2016
RepoPlus/Mid-Term Repo
 
$
21,036.9

$
18,206.8

$
20,901.6

$
18,615.9

Core (Term)
 
51,509.6

46,842.5

52,166.2

48,498.9

Convertible Select
 
429.5

700.1

429.5

702.3

Total par value
 
$
72,976.0

$
65,749.4

$
73,497.3

$
67,817.1

Advance volume increases in the comparisons were driven primarily by demand from larger members.

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, 2017 and 2016. Derivative and hedging activities are discussed below.
Three Months Ended
June 30, 2017
(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
 
$
72,956.2

 
$
237.1

 
1.30

 
$
245.4

 
1.35

 
$
(8.3
)
 
(0.05
)
Mortgage loans held for
 portfolio
 
3,467.4

 
31.8

 
3.68

 
32.8

 
3.79

 
(1.0
)
 
(0.11
)
All other interest-earning
 assets
 
18,788.7

 
79.6

 
1.70

 
83.9

 
1.79

 
(4.3
)
 
(0.09
)
Total interest-earning
 assets
 
$
95,212.3

 
$
348.5

 
1.47

 
$
362.1

 
1.53

 
$
(13.6
)
 
(0.06
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
62,273.1

 
$
179.6

 
1.16

 
$
182.4

 
1.17

 
$
(2.8
)
 
(0.01
)
All other interest-bearing
 liabilities
 
28,989.4

 
58.5

 
0.81

 
58.5

 
0.81

 

 

Total interest-bearing
 liabilities
 
$
91,262.5

 
$
238.1

 
1.05

 
$
240.9

 
1.06

 
$
(2.8
)
 
(0.01
)
Net interest income/net
 interest spread
 
 
 
$
110.4

 
0.42

 
$
121.2

 
0.47

 
$
(10.8
)
 
(0.05
)

9


Three Months Ended
June 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
$
65,940.9

 
$
156.5

 
0.95

 
$
183.6

 
1.12

 
$
(27.1
)
 
(0.17
)
Mortgage loans held for
 portfolio
3,108.7

 
28.9

 
3.74

 
30.2

 
3.91

 
(1.3
)
 
(0.17
)
All other interest-earning
 assets
19,073.8

 
62.2

 
1.31

 
68.2

 
1.44

 
(6.0
)
 
(0.13
)
Total interest-earning
 assets
$
88,123.4

 
$
247.6

 
1.13

 
$
282.0

 
1.29

 
$
(34.4
)
 
(0.16
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
61,288.9

 
$
126.7

 
0.83

 
$
147.8

 
0.97

 
$
(21.1
)
 
(0.14
)
All other interest-bearing
 liabilities
23,092.1

 
27.3

 
0.48

 
27.3

 
0.48

 

 

Total interest-bearing
 liabilities
$
84,381.0

 
$
154.0

 
0.73

 
$
175.1

 
0.83

 
$
(21.1
)
 
(0.10
)
Net interest income/net
 interest spread
 
 
$
93.6

 
0.40

 
$
106.9

 
0.46

 
$
(13.3
)
 
(0.06
)
Six Months Ended
June 30, 2017
(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
 
$
73,472.3

 
$
443.4

 
1.22

 
$
461.9

 
1.27

 
$
(18.5
)
 
(0.05
)
Mortgage loans held for
 portfolio
 
3,439.6

 
62.6

 
3.67

 
64.5

 
3.78

 
(1.9
)
 
(0.11
)
All other interest-earning
 assets
 
18,481.6

 
151.8

 
1.66

 
161.0

 
1.76

 
(9.2
)
 
(0.10
)
Total interest-earning
 assets
 
$
95,393.5

 
$
657.8

 
1.39

 
$
687.4

 
1.45

 
$
(29.6
)
 
(0.06
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
64,475.9

 
$
344.8

 
1.08

 
$
354.4

 
1.11

 
$
(9.6
)
 
(0.03
)
All other interest-bearing
 liabilities
 
27,003.0

 
94.3

 
0.70

 
94.3

 
0.70

 

 

Total interest-bearing
 liabilities
 
$
91,478.9

 
$
439.1

 
0.97

 
$
448.7

 
0.99

 
$
(9.6
)
 
(0.02
)
Net interest income/net
 interest spread
 
 
 
$
218.7

 
0.42

 
$
238.7

 
0.46

 
$
(20.0
)
 
(0.04
)


10


Six Months Ended
June 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
 
$
68,029.0

 
$
288.5

 
0.85

 
$
357.7

 
1.06

 
$
(69.2
)
 
(0.21
)
Mortgage loans held for
 portfolio
 
3,096.2

 
58.6

 
3.81

 
60.9

 
3.96

 
(2.3
)
 
(0.15
)
All other interest-earning
 assets
 
19,132.1

 
125.3

 
1.32

 
137.4

 
1.45

 
(12.1
)
 
(0.13
)
Total interest-earning
 assets
 
$
90,257.3

 
$
472.4

 
1.05

 
$
556.0

 
1.24

 
$
(83.6
)
 
(0.19
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
57,510.3

 
$
236.3

 
0.83

 
$
282.8

 
0.99

 
$
(46.5
)
 
(0.16
)
All other interest-bearing
 liabilities
 
28,997.5

 
61.1

 
0.42

 
61.1

 
0.42

 

 

Total interest-bearing
 liabilities
 
$
86,507.8

 
$
297.4

 
0.69

 
$
343.9

 
0.80

 
$
(46.5
)
 
(0.11
)
Net interest income/net
 interest spread
 
 
 
$
175.0

 
0.36

 
$
212.1

 
0.44

 
$
(37.1
)
 
(0.08
)
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 six months ended June 30, 2017 and June 30, 2016. 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. These strategies involve 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 2017 was $(0.1) million compared to $0.2 million for the same period in 2016. For the six months ended June 30, 2017 and 2016, the provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $(0.1) million and $0.4 million, respectively.


11


Other Noninterest Income
 
Three months ended June 30,
Six months ended June 30,
(in millions)
2017
2016
2017
2016
Net OTTI losses, credit portion
$

$

$
(0.7
)
$
(0.2
)
Net gains on trading securities
5.3

10.9

7.6

28.2

Net realized gains from sales of AFS securities



12.7

Net gains (losses) on derivatives and hedging activities
(4.3
)
(16.4
)
0.1

(52.0
)
Gains on litigation settlement, net

0.5


0.5

Standby letters of credit fees
6.0

6.1

12.1

12.4

Other, net

0.2

0.6

0.6

Total other noninterest income
$
7.0

$
1.3

$
19.7

$
2.2


The change in the Bank's total other noninterest income for the second quarter of 2017 compared to the same prior year period was due primarily to lower net losses on derivatives and hedging activities, partially offset by lower net gains on trading securities. The change in the Bank's total other noninterest income for the first half of 2017 compared to the same prior year period was due primarily to net gains on derivatives and hedging activities, partially offset by lower net gains on trading securities and no 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 quarter of 2016, the Bank sold Agency and home equity line of credit (HELOC) securities from its AFS portfolio. The Bank did not have any AFS security sales in the first half of 2017.

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 six months ended June 30, 2017 and 2016.
 
Three months ended June 30, 2017
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Balance Sheet
Other
Total
Net interest income:
 
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.3
)
$

$
(1.0
)
$
0.3

$

$

$

$
(1.0
)
  Net interest settlements included in net interest income (2)
(8.0
)
(4.3
)

2.5




(9.8
)
Total effect on net interest income
$
(8.3
)
$
(4.3
)
$
(1.0
)
$
2.8

$

$

$

$
(10.8
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
(0.1
)
$
(0.8
)
$

$
0.5

$

$

$

$
(0.4
)
Gains (losses) on derivatives not receiving hedge accounting
(1.9
)
(11.2
)
(4.4
)
13.5


(0.1
)

(4.1
)
Other (3)






0.2

0.2

Total net gains (losses) on derivatives and hedging activities
$
(2.0
)
$
(12.0
)
$
(4.4
)
$
14.0

$

$
(0.1
)
$
0.2

$
(4.3
)
Total net effect of derivatives and hedging activities
$
(10.3
)
$
(16.3
)
$
(5.4
)
$
16.8

$

$
(0.1
)
$
0.2

$
(15.1
)
 
Three months ended June 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)
$
(0.6
)
$

$
(1.3
)
$
0.6

$

$
(1.3
)
  Net interest settlements included in net interest income(2)
(26.5
)
(6.0
)

20.5


(12.0
)
Total effect on net interest income
$
(27.1
)
$
(6.0
)
$
(1.3
)
$
21.1

$

$
(13.3
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
1.5

$
(2.1
)
$

$
0.6

$

$

Gains (losses) on derivatives not receiving hedge accounting
(4.5
)
(22.1
)
(7.6
)
16.9

0.9

(16.4
)
Total net gains (losses) on derivatives and hedging activities
$
(3.0
)
$
(24.2
)
$
(7.6
)
$
17.5

$
0.9

$
(16.4
)
Total net effect of derivatives and hedging activities
$
(30.1
)
$
(30.2
)
$
(8.9
)
$
38.6

$
0.9

$
(29.7
)

13


 
Six months ended June 30, 2017
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Balance Sheet
Other
Total
Net interest income:
 
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.5
)
$

$
(1.9
)
$
0.8

$

$

$

$
(1.6
)
  Net interest settlements included in net interest income(2)
(18.0
)
(9.2
)

8.8




(18.4
)
Total effect on net interest income
$
(18.5
)
$
(9.2
)
$
(1.9
)
$
9.6

$

$

$

$
(20.0
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
(0.1
)
$
(0.7
)
$

$
1.0

$

$

$

$
0.2

Gains (losses) on derivatives not receiving hedge accounting
(0.8
)
(11.3
)
(4.0
)
16.0

(0.2
)
(0.1
)

(0.4
)
Other (3)






0.3

0.3

Total net gains (losses) on derivatives and hedging activities
$
(0.9
)
$
(12.0
)
$
(4.0
)
$
17.0

$
(0.2
)
$
(0.1
)
$
0.3

$
0.1

Total net effect of derivatives and hedging activities
$
(19.4
)
$
(21.2
)
$
(5.9
)
$
26.6

$
(0.2
)
$
(0.1
)
$
0.3

$
(19.9
)
 
Six months ended June 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)
$
(1.6
)
$

$
(2.3
)
$
1.6

$

$
(2.3
)
  Net interest settlements included in net interest income(2)
(67.6
)
(12.1
)

44.9


(34.8
)
Total effect on net interest income
$
(69.2
)
$
(12.1
)
$
(2.3
)
$
46.5

$

$
(37.1
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
1.8

$
(5.7
)
$

$
(1.2
)
$

$
(5.1
)
Gains (losses) on derivatives not receiving hedge accounting
(18.5
)
(69.3
)
(23.0
)
62.1

1.8

(46.9
)
Total net gains (losses) on derivatives and hedging activities
$
(16.7
)
$
(75.0
)
$
(23.0
)
$
60.9

$
1.8

$
(52.0
)
Total net effect of derivatives and hedging activities
$
(85.9
)
$
(87.1
)
$
(25.3
)
$
107.4

$
1.8

$
(89.1
)
Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(2) Represents interest income/expense on derivatives included in net interest income
(3) Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. Refer to Note 9 - Derivatives and Hedging Activities in this Form 10-Q.

Fair value Hedges. The Bank uses interest rate swaps to hedge a large portion of its fixed-rate advances and consolidated obligations and a small portion of its fixed rate investment securities. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). Most of these hedge relationships are subject to fair value hedge accounting treatment. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative and 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 second quarter of 2017, the Bank recorded net losses of $(0.4) million compared to no material effect on the Bank's financial results during the second quarter of 2016. For the six months ended June 30, 2017 and 2016, the Bank recorded net gains of $0.2 million and net losses of $(5.1) million, respectively. The total notional amount decreased to $24.6 billion at June 30, 2017, down from $29.1 billion at December 31, 2016.

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

14


hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(4.1) million in the second quarter of 2017 compared to net losses of $(16.4) million for the second quarter of 2016. For the six months ended June 30, 2017, the Bank recorded net losses of $(0.4) million compared to net losses of $(46.9) million for the period ended June 30, 2016. The larger losses on economic hedges observed during the first half of 2016 compared to the same period in 2017 were due to large decreases in mid and long term interest rates during the first six months of 2016. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $10.7 billion at June 30, 2017 and $10.6 billion at December 31, 2016.

Other Expense

The Bank's total other expenses decreased $0.6 million to $19.7 million for the second quarter of 2017, compared to the same prior year period. For the first half of 2017 compared to the same prior year period, the Bank's total other expense increased $4.6 million, to $44.2 million. This increase was primarily due to higher compensation and benefits related expenses, including a $4.0 million voluntary contribution to the Bank's pension plan in the first quarter of 2017. There was a $2.0 million voluntary contribution to the Bank's pension plan in the second quarter of 2016.

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 2016 Form 10-K.

Assets

Total assets were $100.8 billion at June 30, 2017, compared with $101.3 billion at December 31, 2016. The decrease was primarily due to lower advances and securities purchased under resale agreements, partially offset by increased short-term liquidity balances, which include cash and Federal funds sold. Advances totaled $74.1 billion at June 30, 2017, a decrease of $2.7 billion compared to $76.8 billion at December 31, 2016.

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. The Bank's average par amounts for advances and MPF loans as of June 30, 2017 totaled $76.9 billion, resulting in a core mission asset ratio of 84.5%.

Advances. Advances (par) totaled $74.1 billion at June 30, 2017 compared to $76.8 billion at December 31, 2016. At June 30, 2017, the Bank had advances to 186 borrowing members, compared to 184 borrowing members at December 31, 2016. The percentage of borrowing members to total members was 61.8% and 60.5% at June 30, 2017 and December 31, 2016, 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 decreased to 75.3% of total advances as of June 30, 2017, compared to 79.7% at December 31, 2016.


15


The following table provides information on advances at par by contractual maturity at June 30, 2017 and December 31, 2016.
 
June 30,
December 31,
(in millions)
2017
2016
Fixed-rate
 
 
Due in 1 year or less
$
18,885.3

$
20,563.9

Due after 1 year through 3 years
7,598.8

5,817.9

Due after 3 years through 5 years
2,501.1

2,793.5

Thereafter
671.5

664.7

Total par value
$
29,656.7

$
29,840.0

 
 
 
Variable-rate
 
 
Due in 1 year or less
$
12,118.4

$
12,998.1

Due after 1 year through 3 years
13,224.5

12,292.5

Due after 3 years through 5 years
8,052.0

8,552.0

Thereafter
1,899.3

3.1

Total par value
$
35,294.2

$
33,845.7

 
 
 
Variable-rate, callable or prepayable(1)
 
 
Due in 1 year or less
$
2,600.0

$
4,700.0

Due after 1 year through 3 years
1,515.0

3,375.0

Due after 3 years through 5 years
4,235.0

4,225.0

Total par value
$
8,350.0

$
12,300.0

 
 
 
Other(2)
 
 
Due in 1 year or less
$
360.3

$
309.9

Due after 1 year through 3 years
180.3

302.3

Due after 3 years through 5 years
83.6

79.7

Thereafter
174.8

157.7

Total par value
$
799.0

$
849.6

Total par balance
$
74,099.9

$
76,835.3

Notes:
(1) Prepayable advances are those advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees.
(2) Includes fixed-rate amortizing/mortgage matched, convertible, and other advances.

The Bank had no putable advances at June 30, 2017 or December 31, 2016.

16


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 six months ended June 30, 2017 and 2016. Commercial Bank, Savings Institution, 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 (CFIs) (under $1.1 billion).
 
 
June 30,
June 30,
Member Asset Size
 
2017
2016
Large
 
6

5

Regional
 
13

13

Mid-size
 
23

25

CFI (1)
 
160

166

Insurance
 
9

8

Total borrowing members during the period
 
211

217

Total membership
 
301

302

Percentage of members borrowing during the period
 
70.1
%
71.9
%
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.

The Bank added 3 new members and lost six members in the first half of 2017. One member merged with another institution outside of the Bank's district, and five members merged with another institution within the Bank's district.

The following table provides information at par on advances by member classification at June 30, 2017 and December 31, 2016.
(in millions)
June 30, 2017
December 31, 2016
Increase/(Decrease)
Member Classification
Large
$
57,055.1

$
61,230.0

(6.8
)%
Regional
6,930.2

6,579.0

5.3

Mid-size
4,063.6

3,681.9

10.4

CFI
3,864.9

3,613.1

7.0

Insurance
2,180.9

1,729.3

26.1

Non-member
5.2

2.0

160.0

Total
$
74,099.9

$
76,835.3

(3.6
)%

As of June 30, 2017, total advances decreased 3.6% compared with balances at December 31, 2016. Decreases in advances to the Bank's large member classification were primarily due to cyclical activity and were partially offset by increases in advances to other classifications. 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 June 30, 2017.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, totaled $3.5 billion and $3.4 billion at June 30, 2017 and December 31, 2016 respectively.

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 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

17


Bank’s loan products are summarized below.
(in millions)
June 30, 2017
December 31, 2016
Advances(1)
$
74,080.2

$
76,808.7

Mortgage loans held for portfolio, net(2)
3,537.5

3,390.7

Nonaccrual mortgage loans(3)
23.9

26.6

Mortgage loans 90 days or more delinquent and still accruing interest(4)
3.7

4.0

BOB loans, net
11.9

12.3

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 do not include performing TDRs of $10.0 million at June 30, 2017 and $11.5 million at December 31, 2016.
(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 2016 and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of June 30, 2017, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.6% of the MPF Original portfolio and 2.6% of the MPF Plus portfolio compared with 0.6% and 2.9%, respectively, at December 31, 2016. The MPF 35 portfolio delinquency remains minimal at 0.03% as it is relatively new.

Allowance for Credit Losses (ACL). The Bank has not incurred any losses on advances since its inception in 1932. 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 2016 Form 10-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