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EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3231q2018.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3221q2018.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3211q2018.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3131q2018.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3121q2018.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3111q2018.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 March 31, 2018
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 37,907,138 shares of common stock with a par value of $100 per share outstanding at April 30, 2018.





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 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 2017 Form 10-K (2017 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 remained relatively stable during the first quarter of 2018.

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.

Results of Operations. The Bank's net income for the first quarter of 2018 was $78.9 million compared to $86.8 million for the first quarter of 2017. This $7.9 million decrease was driven by lower total noninterest income, partially offset by lower total other expense. Net interest income was relatively flat in the comparison.

1



Net interest income was $109.6 million for the first quarter of 2018, compared to $108.3 million in the first quarter of 2017. Interest income included higher interest income on advances, Federal funds sold, investment securities and mortgage loans held for portfolio. The offsetting interest expense was primarily related to consolidated obligations. The net interest margin was 47 basis points and 46 basis points for the first quarter of 2018 and 2017, respectively.

Financial Condition. Advances. Advances totaled $70.3 billion at March 31, 2018, a decrease of $4.0 billion compared to $74.3 billion at December 31, 2017. 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 compared to December 31, 2017, the term of advances increased. At March 31, 2018, approximately 62% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 58% at December 31, 2017.

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 March 31, 2018, the Bank held $18.5 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, 2017, these investments totaled $17.8 billion.

Consolidated Obligations. The Bank's consolidated obligations totaled $87.6 billion at March 31, 2018, a decrease of $6.1 billion from December 31, 2017. At March 31, 2018, bonds represented 73% of the Bank's consolidated obligations, compared with 60% at December 31, 2017. Discount notes represented 27% of the Bank's consolidated obligations at March 31, 2018 compared with 40% at year-end 2017. The overall decrease in consolidated obligations is largely consistent with the changes in advances and total assets.

Capital Position and Regulatory Requirements. Total capital at March 31, 2018 was $4.8 billion, compared to $4.9 billion at December 31, 2017. Total retained earnings at March 31, 2018 were $1,180.2 million, up $22.3 million from $1,157.9 million at year-end 2017, reflecting the Bank's net income for the first quarter of 2018, which was partially offset by dividends paid. Accumulated other comprehensive income (AOCI) was $96.6 million at March 31, 2018, a decrease of $14.3 million from December 31, 2017. This decrease was primarily due to changes in the fair values of securities within the AFS portfolio.

In February and April 2018, the Bank paid quarterly dividends of 6.75% annualized on activity stock and 3.5% annualized on membership stock. These dividends were based on stockholders' average balances for the fourth quarter of 2017 (February dividend) and the first quarter of 2018 (April dividend).

The Bank met all of its capital requirements as of March 31, 2018, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of December 31, 2017, the Bank was deemed "adequately capitalized."


2


Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2017 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, 2017, which have been derived from the Bank's 2017 Form 10-K.

Condensed Statements of Income
 
Three months ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions)
2018
 
2017
 
2017
 
2017
 
2017
Net interest income
$
109.6

 
$
107.5

 
$
109.3

 
$
110.4

 
$
108.3

Provision (benefit) for credit losses
2.4

 
0.2

 
0.1

 
(0.1
)
 

Other noninterest income
1.7

 
6.0

 
6.5

 
7.0

 
12.7

Other expense
21.2

 
23.4

 
22.5

 
19.7

 
24.5

Income before assessments
87.7

 
89.9

 
93.2

 
97.8

 
96.5

Affordable Housing Program (AHP) assessment (1)
8.8

 
9.0

 
9.3

 
9.8

 
9.7

Net income
$
78.9

 
$
80.9

 
$
83.9

 
$
88.0

 
$
86.8

 
 
 
 
 
 
 
 
 
 
Dividends
$
56.6

 
$
42.5

 
$
41.9

 
$
42.0

 
$
41.6

Dividend payout ratio (2)
71.67
%
 
52.47
%
 
49.95
%
 
47.76
%
 
47.90
%
Return on average equity
6.63
%
 
6.76
%
 
6.93
%
 
7.49
%
 
7.50
%
Return on average assets
0.33
%
 
0.33
%
 
0.34
%
 
0.37
%
 
0.36
%
Net interest margin (3)
0.47
%
 
0.45
%
 
0.45
%
 
0.47
%
 
0.46
%
Regulatory capital ratio (4)
5.05
%
 
4.84
%
 
4.83
%
 
4.78
%
 
4.79
%
GAAP capital ratio (5)
5.15
%
 
4.94
%
 
4.95
%
 
4.89
%
 
4.87
%
Total average equity to average assets
5.05
%
 
4.95
%
 
4.90
%
 
4.88
%
 
4.84
%
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.

3


Condensed Statements of Condition
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions)
 
2018
 
2017
 
2017
 
2017
 
2017
Cash and due from banks
 
$
252.6

 
$
3,415.0

 
$
2,068.7

 
$
4,010.4

 
$
2,550.8

Investments (1)
 
18,487.2

 
17,757.1

 
19,528.9

 
18,943.1

 
18,722.3

Advances
 
70,278.0

 
74,279.8

 
74,228.0

 
74,080.2

 
70,316.7

Mortgage loans held for portfolio, net
 
4,018.8

 
3,923.1

 
3,763.3

 
3,537.5

 
3,418.4

Total assets
 
93,369.3

 
99,663.0

 
99,864.6

 
100,828.6

 
95,231.6

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
23,905.7

 
36,193.3

 
38,877.0

 
31,928.8

 
24,190.7

Bonds
 
63,706.0

 
57,533.7

 
55,140.2

 
62,910.9

 
65,481.2

Total consolidated obligations (2)
 
87,611.7

 
93,727.0

 
94,017.2

 
94,839.7

 
89,671.9

Deposits
 
612.4

 
538.1

 
627.1

 
590.4

 
602.6

Mandatorily redeemable capital stock
 
4.8

 
5.1

 
5.6

 
5.0

 
5.2

AHP payable
 
93.1

 
91.6

 
88.7

 
86.1

 
81.2

Total liabilities
 
88,564.1

 
94,735.5

 
94,924.7

 
95,896.4

 
90,595.0

Capital stock - putable
 
3,528.4

 
3,658.7

 
3,696.9

 
3,732.6

 
3,523.1

Unrestricted retained earnings
 
881.9

 
875.4

 
853.1

 
827.9

 
799.5

Restricted retained earnings
 
298.3

 
282.5

 
266.3

 
249.5

 
231.9

AOCI
 
96.6

 
110.9

 
123.6

 
122.2

 
82.1

Total capital
 
4,805.2

 
4,927.5

 
4,939.9

 
4,932.2

 
4,636.6

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits.
(2) Aggregate FHLBank System-wide consolidated obligations (at par) were $1,019.2 billion at March 31, 2018, $1,034.3 billion at December 31, 2017, $1,028.7 billion at September 30, 2017, $1,011.5 billion at June 30, 2017 and $959.3 billion at March 31, 2017.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2018 and 2017, 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 2017 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income totaled $78.9 million for the first quarter of 2018, compared to $86.8 million for the first quarter of 2017. This $7.9 million decrease was driven by lower total noninterest income, partially offset by lower total other expense. Net interest income was relatively flat in the comparison.

Net interest income was $109.6 million for the first quarter of 2018, compared to $108.3 million in the first quarter of 2017. Interest income included higher interest income on advances, Federal funds sold, investment securities and mortgage loans held for portfolio. The offsetting interest expense was primarily related to consolidated obligations. Noninterest income in the first quarter of 2018 was $1.7 million, down $11.0 million compared to $12.7 million in the first quarter of 2017, primarily due to net losses on trading securities of $8.7 million in the first quarter of 2018, compared to $2.3 million in net gains in the same period in 2017. Total other expense decreased $3.3 million in the first quarter of 2018 compared to the first quarter of 2017, primarily due to lower compensation and benefits expenses. The Bank's return on average equity for the first quarter of 2018 was 6.63% compared to 7.50% for the first quarter of 2017.



4


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three months ended March 31, 2018 and 2017.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended March 31,
 
 
2018
 
2017
(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)
 
$
8,463.9

 
$
30.4

 
1.46

 
$
5,625.3

 
$
9.6

 
0.69

Interest-bearing deposits (2)
 
428.2

 
1.2

 
1.11

 
147.9

 
0.2

 
0.49

Investment securities (3)
 
11,087.0

 
67.5

 
2.47

 
12,398.0

 
62.4

 
2.04

Advances (4)
 
70,945.9

 
321.3

 
1.84

 
73,994.0

 
206.3

 
1.13

Mortgage loans held for portfolio (5)
 
3,981.3

 
35.5

 
3.61

 
3,411.5

 
30.8

 
3.66

Total interest-earning assets
 
94,906.3

 
455.9

 
1.95

 
95,576.7

 
309.3

 
1.31

Allowance for credit losses
 
(8.0
)
 
 

 
 

 
(8.3
)
 
 
 
 
Other assets (6)
 
813.5

 
 

 
 

 
1,348.4

 
 
 
 
Total assets
 
$
95,711.8

 
 

 
 

 
$
96,916.8

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
509.3

 
$
1.7

 
1.32

 
$
548.9

 
$
0.8

 
0.58

Consolidated obligation discount notes
 
27,963.6

 
95.8

 
1.39

 
24,438.8

 
34.9

 
0.58

Consolidated obligation bonds (7)
 
61,851.1

 
248.7

 
1.63

 
66,703.1

 
165.2

 
1.00

Other borrowings
 
7.2

 
0.1

 
5.35

 
6.8

 
0.1

 
4.11

Total interest-bearing liabilities
 
90,331.2

 
346.3

 
1.56

 
91,697.6

 
201.0

 
0.89

Other liabilities
 
551.5

 
 
 
 
 
526.1

 
 
 
 
Total capital
 
4,829.1

 
 
 
 
 
4,693.1

 
 
 
 
Total liabilities and capital
 
$
95,711.8

 
 
 
 
 
$
96,916.8

 
 
 
 
Net interest spread
 
 
 
 
 
0.39

 
 
 
 
 
0.42

Impact of noninterest-bearing funds
 
 
 
 
 
0.08

 
 
 
 
 
0.04

Net interest income/net interest margin
 
 
 
$
109.6

 
0.47

 
 
 
$
108.3

 
0.46

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 recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $(179.7) million and $(27.2) million in 2018 and 2017, 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 $(187.3) million and $(96.6) million in 2018 and 2017, respectively.

Net interest income for the first quarter of 2018 increased $1.3 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. Interest-earning assets decreased 0.7% primarily due to lower demand for advances and a lower amount of investment securities, partially offset by increased purchases of Federal funds sold and securities purchased agreements to resell. The rate earned on interest-earning assets increased 64 basis points primarily

5


due to a higher yield on advances. Interest income increased across all categories. Interest income on advances and investment securities increased due to an increase in yield. 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 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 67 basis points due to higher funding costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds increased 4 basis points primarily due to higher interest rates.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three months ended March 31, 2018 and 2017.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2018 compared to 2017
 
 
Three months ended March 31,
 
(in millions)
 
Volume
Rate
Total
 
Federal funds sold
 
$
6.5

$
14.3

$
20.8

 
Interest-bearing deposits
 
0.6

0.4

1.0

 
Investment securities
 
(7.1
)
12.2

5.1

 
Advances
 
(8.8
)
123.8

115.0

 
Mortgage loans held for portfolio
 
5.1

(0.4
)
4.7

 
Total interest-earning assets
 
$
(3.7
)
$
150.3

$
146.6

 
Interest-bearing deposits
 
$
(0.1
)
$
1.0

$
0.9

 
Consolidated obligation discount notes
 
5.7

55.2

60.9

 
Consolidated obligation bonds
 
(12.8
)
96.3

83.5

 
Total interest-bearing liabilities
 
$
(7.2
)
$
152.5

$
145.3

 
Total increase in net interest income
 
$
3.5

$
(2.2
)
$
1.3

 

Both interest income and interest expense increased in the first quarter of 2018 compared to the first quarter of 2017. Higher rates drove the increases in both interest income and expense partially offset by slightly lower volumes. The rate increase was primarily due to an increase in market interest rates as the Federal funds target rate increased four times between January 2017 and March 2018.

Interest expense on the average consolidated obligations portfolio increased in the first quarter of 2018 compared to the first quarter of 2017. Rates paid on both discount notes and bonds rose due to the rise in market interest rates. A decrease in average bond balances was partially offset by an increase 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.

The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2018 and 2017. These balances do not reflect any hedge accounting adjustments.
(in millions)
Three months ended March 31,
Product
2018
2017
RepoPlus/Mid-Term Repo
$
21,953.6

$
20,764.7

Core (Term)
49,053.8

52,825.1

Convertible Select
118.5

434.5

Total par value
$
71,125.9

$
74,024.3


The advance volume decrease in the comparison was driven primarily by demand from larger members.


6


Interest Income Derivative Effects. The following tables quantify the effects of the Bank's derivative activities on interest income and interest expense for the three months ended March 31, 2018 and 2017. Derivative and hedging activities are discussed below.
Three Months Ended
March 31, 2018
(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
 
$
70,945.9

 
$
321.3

 
1.84

 
$
324.1

 
1.85

 
$
(2.8
)
 
(0.01
)
Mortgage loans held for
 portfolio
 
3,981.3

 
35.5

 
3.61

 
36.3

 
3.69

 
(0.8
)
 
(0.08
)
All other interest-earning
 assets
 
19,979.1

 
99.1

 
2.01

 
101.8

 
2.07

 
(2.7
)
 
(0.06
)
Total interest-earning
 assets
 
$
94,906.3

 
$
455.9

 
1.95

 
$
462.2

 
1.98

 
$
(6.3
)
 
(0.03
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
61,851.1

 
$
248.7

 
1.63

 
$
241.1

 
1.58

 
$
7.6

 
0.05

All other interest-bearing
 liabilities
 
28,480.1

 
97.6

 
1.39

 
97.6

 
1.39

 

 

Total interest-bearing
 liabilities
 
$
90,331.2

 
$
346.3

 
1.56

 
$
338.7

 
1.52

 
$
7.6

 
0.04

Net interest income/net
 interest spread
 
 
 
$
109.6

 
0.39

 
$
123.5

 
0.46

 
$
(13.9
)
 
(0.07
)
Three Months Ended
March 31, 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
$
73,994.0

 
$
206.3

 
1.13

 
$
216.5

 
1.19

 
$
(10.2
)
 
(0.06
)
Mortgage loans held for
 portfolio
3,411.5

 
30.8

 
3.66

 
31.7

 
3.77

 
(0.9
)
 
(0.11
)
All other interest-earning
 assets
18,171.2

 
72.2

 
1.61

 
77.1

 
1.72

 
(4.9
)
 
(0.11
)
Total interest-earning
 assets
$
95,576.7

 
$
309.3

 
1.31

 
$
325.3

 
1.38

 
$
(16.0
)
 
(0.07
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
66,703.1

 
$
165.2

 
1.00

 
$
172.0

 
1.05

 
$
(6.8
)
 
(0.05
)
All other interest-bearing
 liabilities
24,994.5

 
35.8

 
0.58

 
35.8

 
0.58

 

 

Total interest-bearing
 liabilities
$
91,697.6

 
$
201.0

 
0.89

 
$
207.8

 
0.92

 
$
(6.8
)
 
(0.03
)
Net interest income/net
 interest spread
 
 
$
108.3

 
0.42

 
$
117.5

 
0.46

 
$
(9.2
)
 
(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 months ended March 31, 2018 and 2017. 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.

7


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 was $2.4 million for the first quarter of 2018 and was immaterial for the same period in 2017. The increase was primarily due to a non-recurring adjustment to the MPF Plus product.

Other Noninterest Income
 
Three months ended March 31,
(in millions)
2018
2017
Net OTTI losses, credit portion
$
(0.3
)
$
(0.7
)
Net gains (losses) on trading securities
(8.7
)
2.3

Net gains on derivatives and hedging activities
4.1

4.4

Standby letters of credit fees
5.8

6.1

Other, net
0.8

0.6

Total other noninterest income
$
1.7

$
12.7


The Bank's lower total other noninterest income for the first quarter of 2018 compared to the same prior year period was due primarily to net losses on trading securities. The net losses on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank's trading 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.


8


The following tables detail the net effect of derivatives and hedging activities for the three months ended March 31, 2018 and 2017.
 
Three months ended March 31, 2018
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net interest income:
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$

$

$
(0.8
)
$
0.2

$

$

$
(0.6
)
  Net interest settlements included in net interest
    income (2)
(2.8
)
(2.7
)

(7.8
)


(13.3
)
Total effect on net interest income
$
(2.8
)
$
(2.7
)
$
(0.8
)
$
(7.6
)
$

$

$
(13.9
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.3

$
1.8

$

$
(0.9
)
$

$

$
1.2

Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
4.2

19.2

9.6

(24.2
)
(5.5
)

3.3

Other (3)





(0.4
)
(0.4
)
Total net gains (losses) on derivatives and hedging activities
$
4.5

$
21.0

$
9.6

$
(25.1
)
$
(5.5
)
$
(0.4
)
$
4.1

Total net effect of derivatives and hedging activities
$
1.7

$
18.3

$
8.8

$
(32.7
)
$
(5.5
)
$
(0.4
)
$
(9.8
)
 
Three months ended March 31, 2017
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net interest income:
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.2
)
$

$
(0.9
)
$
0.5

$

$

$
(0.6
)
  Net interest settlements included in net interest income(2)
(10.0
)
(4.9
)

6.3



(8.6
)
Total effect on net interest income
$
(10.2
)
$
(4.9
)
$
(0.9
)
$
6.8

$

 
$
(9.2
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains on fair value hedges
$

$
0.1

$

$
0.5

$

$

$
0.6

Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
1.1

(0.1
)
0.4

2.5

(0.2
)

3.7

Other (3)





0.1

0.1

Total net gains (losses) on derivatives and hedging activities
$
1.1

$

$
0.4

$
3.0

$
(0.2
)
$
0.1

$
4.4

Total net effect of derivatives and hedging activities
$
(9.1
)
$
(4.9
)
$
(0.5
)
$
9.8

$
(0.2
)
$
0.1

$
(4.8
)
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.

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 first quarter of 2018, the Bank recorded net gains of $1.2 million compared to net gains of $0.6 million for the first quarter of 2017.The total notional amount increased to $33.1 billion at March 31, 2018, up from $30.0 billion at December 31, 2017.


9


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 gains of $3.3 million in first quarter of 2018 compared to $3.7 million for the first quarter of 2017. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $17.5 billion at March 31, 2018 and $14.8 billion at December 31, 2017. The increase in economic hedge notional from December 31, 2017 to March 31, 2018 was primarily due to new basis swaps executed in the first quarter of 2018 to hedge basis risk between 1 month and 3 month LIBOR.

Other Expense

The Bank's total other expenses decreased $3.3 million to $21.2 million for the first quarter of 2018, compared to the same prior year period. This decrease was primarily due to lower compensation and benefits related expenses. The Bank made a $1.0 million voluntary contribution to its pension plan in the first quarter of 2018, compared to a $4.0 million voluntary contribution in the first quarter of 2017.

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 2017 Form 10-K.

Assets

Total assets were $93.4 billion at March 31, 2018, compared with $99.7 billion at December 31, 2017, a decrease of $6.3 billion. The decrease was primarily due to a decline in advances. Advances totaled $70.3 billion at March 31, 2018, a decrease of $4.0 billion compared to $74.3 billion at December 31, 2017.

The Bank's core mission activities include the issuance of advances and acquiring member assets through the Mortgage Partnership Finance® (MPF®) program. The core mission asset ratio, defined as the ratio of par amount of advances and MPF loans relative to consolidated obligations using full year average balances, was 83.3% and 83.5% as of March 31, 2018 and December 31, 2017, respectively.

Advances. Advances (par) totaled $70.5 billion at March 31, 2018 compared to $74.4 billion at December 31, 2017. At March 31, 2018, the Bank had advances to 177 borrowing members, compared to 185 borrowing members at December 31, 2017. 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 77.1% of total advances as of March 31, 2018, compared to 77.3% at December 31, 2017.


10


The following table provides information on advances at par by contractual maturity at March 31, 2018 and December 31, 2017.
 
March 31,
December 31,
(in millions)
2018
2017
Fixed-rate
 
 
Due in 1 year or less (1)
$
18,097.3

$
19,776.3

Due after 1 year through 3 years
9,704.1

9,504.1

Due after 3 years through 5 years
6,149.7

4,074.4

Thereafter
658.7

661.9

Total par value
$
34,609.8

$
34,016.7

 
 
 
Variable-rate
 
 
Due in 1 year or less (1)
$
7,863.2

$
10,220.4

Due after 1 year through 3 years
19,729.3

18,788.3

Due after 3 years through 5 years
2,000.0

4,500.0

Thereafter
3.1

3.1

Total par value
$
29,595.6

$
33,511.8

 
 
 
Variable-rate, callable or prepayable(2)
 
 
Due in 1 year or less
$
950.0

$
1,400.0

Due after 1 year through 3 years
2,790.0

1,790.0

Due after 3 years through 5 years
2,010.0

3,010.0

Total par value
$
5,750.0

$
6,200.0

 
 
 
Other(3)
 
 
Due in 1 year or less
$
114.8

$
210.2

Due after 1 year through 3 years
167.5

160.5

Due after 3 years through 5 years
114.7

115.8

Thereafter
153.1

168.9

Total par value
$
550.1

$
655.4

Total par balance
$
70,505.5

$
74,383.9

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

The Bank had no putable advances at March 31, 2018 or December 31, 2017.

11


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 three months ended March 31, 2018 and 2017. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 billion to $25 billion), Mid-size ($1.2 billion to $4 billion) and Community Financial Institutions (CFIs) (under $1.2 billion).
 
 
March 31,
March 31,
Member Classification
 
2018
2017
Large
 
5

5

Regional
 
15

11

Mid-size
 
22

23

CFI (1)
 
154

154

Insurance
 
12

8

Total borrowing members during the period
 
208

201

Total membership
 
296

303

Percentage of members borrowing during the period
 
70.3
%
66.3
%
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 following table provides information at par on advances by member classification at March 31, 2018 and December 31, 2017.
(in millions)
March 31, 2018
December 31, 2017
Increase/(Decrease)
Member Classification
Large
$
53,640.0

$
57,480.0

(6.7
)%
Regional
7,347.4

7,691.5

(4.5
)
Mid-size
3,985.1

4,157.6

(4.2
)
CFI
3,797.9

3,528.2

7.6

Insurance
1,726.2

1,512.7

14.1

Non-member
8.9

13.9

(36.7
)
Total
$
70,505.5

$
74,383.9

(5.2
)%

As of March 31, 2018, total advances decreased 5.2% compared with balances at December 31, 2017. 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 March 31, 2018.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, totaled $4.0 billion and $3.9 billion at March 31, 2018 and December 31, 2017 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 Bank’s loan products are summarized below.

12


(in millions)
March 31, 2018
December 31, 2017
Advances (1)
$
70,278.0

$
74,279.8

Mortgage loans held for portfolio, net (2)
4,018.8

3,923.1

Nonaccrual mortgage loans (3)
19.7

22.8

Mortgage loans 90 days or more delinquent and still accruing interest (4)
4.8

4.8

BOB loans, net
14.2

14.1

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and do not include performing TDRs.
(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, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of March 31, 2018, 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 2.5% of the MPF Plus portfolio compared with 0.6% and 2.6%, respectively, at December 31, 2017. The MPF 35 portfolio delinquency remains minimal at 0.01%, for both March 31, 2018 and December 31, 2017, as it is still 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 2017 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 as scheduled based on current information and events. The Bank evaluates certain conventional mortgage loans for impairment individually and the related credit loss 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) given the credit deterioration experienced by those companies.

Mortgage loans are assessed by a third party's credit model at acquisition and a CE is calculated based on loan attributes and the Bank’s risk tolerance on its entire MPF portfolio. Credit losses on a mortgage loan may only be absorbed by the CE amount in the master commitment related to the loan. In addition, 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 35 and 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.

13


The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at March 31, 2018 and December 31, 2017.
 
MPF CE structure
March 31, 2018
ACL
March 31, 2018
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
5.1

$
76.7

$
6.1

$
(1.1
)
$
(4.2
)
$
0.8

MPF 35
4.8

44.0

0.3


(0.3
)

MPF Plus
16.8

9.2

9.2


(1.8
)
7.4

Total
$
26.7

$
129.9

$
15.6

$
(1.1
)
$
(6.3
)
$
8.2

 
MPF CE structure
December 31, 2017
ACL
December 31, 2017
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
4.9

$
78.7

$
6.0

$
(1.1
)
$
(4.4
)
$
0.5

MPF 35
4.2

38.0

0.2


(0.2
)

MPF Plus
16.9

10.0

9.5


(4.0
)
5.5

Total
$
26.0

$
126.7

$
15.7

$
(1.1
)
$
(8.6
)
$
6.0


The ACL on mortgage loans increased $2.2 million during 2018. The increase is primarily due to a non-recurring adjustment to the MPF Plus product. The ACL associated with MPF Original remained consistent, and the ACL associated with the MPF 35 program remained zero due to the nature of its credit structure and performance.



14


Investments. At March 31, 2018, the sum of the Bank's interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell was $7.4 billion, an increase of approximately $1.0 billion from December 31, 2017. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements. Investment securities, including trading, AFS, and HTM securities, totaled $11.1 billion at March 31, 2018, compared to $11.3 billion at December 31, 2017. Details of the investment securities portfolio follow.
 
 
Carrying Value
(in millions)
 
March 31, 2018
 
December 31, 2017
Trading securities:
 
 
 
 
Mutual funds (1)
 
$

 
$
9.7

Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
 
380.9

 
389.6

Total trading securities
 
$
380.9

 
$
399.3

Yield on trading securities
 
2.96
%
 
2.89
%
AFS securities:
 
 
 
 
Mutual funds (1)
 
$

 
$
2.0

GSE and TVA obligations
 
2,636.5

 
2,820.8

State or local agency obligations
 
261.6

 
269.4

MBS:
 
 
 
 
      U.S. obligations single family MBS
 
172.0

 
179.3

      GSE single-family MBS
 
2,607.8

 
2,665.8

      GSE multifamily MBS
 
2,554.6

 
2,582.6

Private label residential MBS
 
503.7

 
524.5

Total AFS securities
 
$
8,736.2

 
$
9,044.4

Yield on AFS securities
 
2.46
%
 
2.28
%
HTM securities:
 
 
 
 
Certificates of deposit
 
$
325.0

 
$
175.0

State or local agency obligations
 
122.4

 
122.4

MBS:
 
 
 
 
      U.S. obligations single family MBS
 
396.1

 
424.4

      GSE single-family MBS
 
145.8

 
156.6

      GSE multifamily MBS
 
714.7

 
726.0

Private label residential MBS
 
261.0

 
278.7

Total HTM securities
 
$
1,965.0

 
$
1,883.1

Yield on HTM securities
 
2.81
%
 
2.71
%
Total investment securities
 
$
11,082.1

 
$
11,326.8

Yield on investment securities
 
2.54
%
 
2.37
%
Note:
(1) Reclassified to "Other assets" in the Statement of Condition as a result of adopting ASU 2016-01, effective January 1, 2018. Refer to Note 1 in this Form 10-Q.

15


As of March 31, 2018, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions)
Total
Book Value
Total
Fair Value
Freddie Mac
$
3,813.9

$
3,810.6

Fannie Mae
3,329.5

3,330.7

Federal Farm Credit Banks
1,792.2

1,792.2

Total
$
8,935.6

$
8,933.5


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

Liabilities and Capital

Deposits. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at March 31, 2018 increased to $612.4 million from $538.1 million at December 31, 2017.

Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $87.6 billion at March 31, 2018, a decrease of $6.1 billion from December 31, 2017. The decrease in total consolidated obligations was mainly due to the advance balance decline during the first quarter of 2018.

At March 31, 2018, the Bank’s bonds outstanding increased to $63.7 billion compared to $57.5 billion at December 31, 2017. Conversely, discount notes outstanding at March 31, 2018 decreased to $23.9 billion from $36.2 billion at December 31, 2017. The shorter-term discount notes were issued near year-end 2017 to make additional liquidity available to members, if needed, and caused the shift in bonds compared to discount notes outstanding for the first quarter of 2018.

The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating rate assets. At March 31, 2018, callable bonds issued by the Bank were up approximately $0.4 billion from December 31, 2017. For additional information on the Bank's consolidated obligations, refer to Note 14 to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data of the Bank's 2017 Form 10-K.

Commitments and Off-Balance Sheet Items. As of March 31, 2018, the Bank was obligated to fund approximately $19.8 million in additional advances and BOB loans, $28.2 million of mortgage loans and $18.8 billion in outstanding standby letters of credit, and to issue $160.0 million in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

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

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

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The framework includes four risk elements that comprise the Bank's total retained earnings target: (1) market risk (which includes private label MBS risk); (2) credit risk; (3) operational risk; and (4) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $506 million as of March 31, 2018. The Bank's retained earnings were $1,180.2 million at March 31, 2018.

Retained earnings increased $22.3 million to $1,180.2 million at March 31, 2018, compared to $1,157.9 million at December 31, 2017. The increase in retained earnings during the first three months of 2018 reflected net income that was

16


partially offset by $56.6 million of dividends paid. Total retained earnings at March 31, 2018 included unrestricted retained earnings of $881.9 million and restricted retained earnings (RRE) of $298.3 million.

Capital Resources

The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q, the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data and the Capital Resources section of Item 1. Business in the Bank's 2017 Form 10-K.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
(in millions)
March 31, 2018
December 31, 2017
Permanent capital:
 
 
Capital stock (1)
$
3,533.2

$
3,663.8

Retained earnings
1,180.2

1,157.9

Total permanent capital
$
4,713.4

$
4,821.7

RBC requirement:
 
 
Credit risk capital
$
387.7

$
390.4

Market risk capital
629.2

418.9

Operations risk capital
305.1

242.8

Total RBC requirement
$
1,322.0

$
1,052.1

Excess permanent capital over RBC requirement
$
3,391.4

$
3,769.6

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

The increase in the total RBC requirement as of March 31, 2018 is mainly related to the change in the market risk capital component. The change was driven by an increase in floating rate debt outstanding and an increase in the severity of the scenarios modeled as a result of higher short-term interest rates. The Finance Agency has issued an Advisory Bulletin effective for RBC reporting beginning with the fourth quarter of 2018, which revises the market risk scenario methodology and significantly lessens the influence of the current level of rates on the scenarios. For further discussion of the Advisory Bulletin, refer to the Legislative and Regulatory Developments section of this Form 10-Q. The Bank continues to maintain significant excess permanent capital over the RBC requirement.

On March 20, 2018, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2017. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended March 31, 2018.


17


Regulatory Capital and Leverage Ratios

In addition to the RBC requirements, the Finance Agency has mandated maintenance of total regulatory capital and leverage ratios of at least 4.0% and 5.0% of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements. The Bank exceeded all regulatory capital requirements at March 31, 2018.
(dollars in millions)
March 31, 2018
December 31, 2017
Regulatory Capital Ratio
 
 
Minimum capital (4.0% of total assets)
$
3,734.8

$
3,986.5

Regulatory capital
4,713.4

4,821.7

Total assets
93,369.3

99,663.0

Regulatory capital ratio (regulatory capital as a percentage of total assets)
5.0
%
4.8
%
 
 
 
Leverage Ratio
 
 
Minimum leverage capital (5.0% of total assets)
$
4,668.5

$
4,983.2

Leverage capital (permanent capital multiplied by a 1.5 weighting factor)
7,070.1

7,232.5

Leverage ratio (leverage capital as a percentage of total assets)
7.6
%
7.3
%

The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
(dollars in millions)
 
March 31, 2018
December 31, 2017
Commercial banks
 
155

$
3,131.6

155

$
3,259.3

Savings institutions
 
58

200.2

60

207.1

Insurance companies
 
28

136.6

28

130.0

Credit unions
 
53

59.7

53

62.0

Community Development Financial Institution (CDFI)
 
2

0.3

2

0.3

Total member institutions / total GAAP capital stock
 
296

$
3,528.4

298

$
3,658.7

Mandatorily redeemable capital stock
 
 
4.8

 
5.1

Total capital stock
 
 
$
3,533.2



$
3,663.8


The Bank lost two members in the first three months of 2018. One member merged with another institution outside of the Bank's district, and one member merged with another institution within the Bank's district.

Critical Accounting Policies and Estimates

The Bank's financial statements are prepared by applying certain accounting policies. Note 1 - Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2017 Form 10-K describes the most significant accounting policies used by the Bank. In addition, the Bank's critical accounting policies and estimates are presented in Item 7. Management's Discussion and Analysis in the Bank's 2017 Form 10-K. Certain of these policies require management to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the Bank's reported results and financial position for the period or in future periods. Management views these policies as critical accounting policies.

The Bank made no changes to its critical accounting policies during the three months ended March 31, 2018.

In addition to evaluating the Bank's private label MBS portfolio under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of the Bank's private label MBS under a more stressed housing price scenario. This additional scenario was used to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended March 31, 2018, if the more stressed housing price scenario had been used in the Bank's OTTI assessment as of March 31, 2018. The more stressed scenario results were immaterial. A more detailed discussion of this analysis is in the OTTI section of Credit and Counterparty Risk - Investments of this Item 2.


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

Legislative and Regulatory Developments

Significant regulatory actions and developments for the period covered by this report are summarized below.

Finance Agency Proposed Amendments to AHP Regulations. On March 14, 2018, the Finance Agency published a proposed rule to amend the operating requirements of the FHLBanks’ AHP.  The proposal is open for public comment through June 12, 2018.  If adopted as proposed, among other updates, the AHP rule would: 

require an FHLBank to create its own scoring criteria that are designed to satisfy new regulatory outcome requirements, replacing the existing regulatory scoring guidelines;
permit an FHLBank to voluntarily increase its AHP homeownership set-aside funding program to 40% of annual available funds (up from the current rule’s 35% annual limit);
increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
remove the retention agreement requirement for owner-occupied units;
further align AHP monitoring with certain federal government funding programs;
increase threshold requirements for certain project types, such as projects dedicated to homeless or special needs populations; and
authorize an FHLBank using market research empirical data to create special targeted grant programs that would be a subset of the regular AHP competitive funding program. 

The rule, as proposed, would represent a substantial overhaul of the existing regulation on the FHLBanks’ AHP and fundamentally change the structure and methodology for awarding grants to affordable housing projects. The proposed rule would also increase AHP’s complexity and administrative burden.

The rule, as proposed, would require changes in the areas of operations, communications, and information systems of the Bank. It would also require increased Board and Affordable Housing Advisory Council action and increased communications and education with members and sponsors. The Bank does not believe that the rule, if adopted substantially as proposed, would be material to its financial condition or results of operation, since, among other things, it would not increase the annual AHP funding requirement.  However, the Bank expects there to be increased costs related to implementing the rule requirements and making related adjustments to its systems. In addition, if the rule is adopted as proposed, the Bank expects a possible change to the types of projects that may be funded on a go-forward basis in the Bank’s district, with a commensurate impact on AHP sponsors and their respective communities.

Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration and Finance Agency Proposed Rule on Margin and Capital Requirements for Covered Swap Entities. On February 21, 2018, the OCC, FRB, FDIC, Farm Credit Administration, and the Finance Agency published a proposed amendment to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s and FDIC’s final qualified financial contract (QFC) rules. It also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC rules. The QFC rules previously published by the OCC, FRB and FDIC require their respective regulated entities to amend covered QFCs to limit a counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).

Comments on the proposed rule were due by April 23, 2018. The Bank continues to evaluate the proposed rule, but does not expect this rule, if adopted substantially as proposed, to materially affect its financial condition or results of operations.

Finance Agency Advisory Bulletin on Scenario Determination for Market Risk Models Used for Risk-Based Capital. On February 7, 2018, the Finance Agency issued Advisory Bulletin 2018-01, which supersedes previous guidance on value-at-risk modeling and the calculation of market risk capital requirements, effective as of November 1, 2018. The Advisory Bulletin provides guidance to FHLBanks regarding the determination of market risk scenarios that are incorporated into the FHLBank’s internal market risk models. The guidance states that the continued use of proportional or haircut shocks to an FHLBank’s internal risk models will no longer be deemed satisfactory to the Finance Agency.


19


Instead, the Finance Agency will consider interest rate and market price scenarios that an FHLBank incorporates into its internal market risk model to be satisfactory if they meet the following criteria: (1) the scenarios are based on historical absolute interest rate changes, as applied to current interest rates; (2) the historical shocks represent changes in interest rates and market conditions observed over 120 business-day periods, and the methodology to apply those shocks to current interest rates incorporates the constraints described in the Advisory Bulletin; (3) the scenarios encompass shocks to interest rate volatility that reflect the historical relationship between interest rates and volatility; and (4) for assets backed by residential mortgage loans, the scenarios include shocks to option-adjusted spreads. The Bank does not expect this Advisory Bulletin to materially affect its financial condition or results of operations.

Finance Agency Advisory Bulletin on Use of Models and Methodologies for Internal Assessments of Mortgage Asset Credit Risk. On April 25, 2018, the Finance Agency issued Advisory Bulletin 2018-02, which supplements previous general guidance on model risk management, effective as of January 1, 2019. The Advisory Bulletin provides guidance regarding FHLBank use of models and methodologies for assessing credit risk associated with mortgage assets, including acquired member asset (AMA) mortgage pools, MBS, and collateralized mortgage obligations (CMOs). The guidance establishes criteria for selecting a mortgage asset credit risk model that is sufficiently robust to produce meaningful loss estimates. It is expected that the model will be capable of producing loan-level estimates of potential credit loss and be able to accept a macroeconomic stress scenario as an input. With respect to AMA mortgage pools, an FHLBank should use an appropriate model and methodology for estimating the amount of credit enhancement for an asset or pool. With respect to investments in MBS and CMOs, the guidance provides criteria an FHLBank should consider when selecting and using a mortgage asset credit risk model and stress test for purposes of documenting and determining that the related credit risk is consistent with those assets being deemed of “investment quality,” as required by the Finance Agency’s regulations.

The Bank does not expect this Advisory Bulletin to materially affect its financial condition or results of operations.

Risk Management

The Bank employs a corporate governance and internal control framework designed to support the effective management of the Bank’s business activities and the related inherent risks. As part of this framework, the Board has approved a Risk Governance Policy and a Member Products Policy, both of which are reviewed regularly and re-approved at least annually. The Risk Governance Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operational risk, and business risk in accordance with Finance Agency regulations and consistent with the Bank’s risk appetite. The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.

Risk Governance

The Bank’s lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include, among others:

market and interest rate risk;
credit and counterparty risk;
liquidity and funding risk; and
operational and business risk.

In addition, the Bank’s risks are affected by current and projected financial and residential mortgage market trends, including those described in Item 1A. Risk Factors in the Bank's 2017 Form 10-K. Details regarding the Bank's risk governance framework and processes are included in the "Risk Governance" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2017 Form 10-K.

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


20


The current Board-approved floor for MV/CS is 90.0%. MV/CS is measured against the floor monthly. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are restricted. See the “Capital and Retained Earnings” discussion in Financial Condition in this Item 2 for details regarding the Bank’s retained earnings policy.

The MV/CS ratio was 138.6% at March 31, 2018 and 136.3% at December 31, 2017. The increase was primarily the result of the increase in retained earnings and decrease in capital stock balances as a result of lower advances.

Qualitative and Quantitative Disclosures Regarding Market Risk

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

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

The Bank regularly validates the models used to measure market risk. Such model validations are performed by third-party specialists or the Bank's model risk management department, which are separate from the model owner. The model validations are supplemented by additional validation processes performed by the Bank, most notably benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group that is separate from the model owner. Results of the validation process, as well as any changes in valuation methodologies and the benchmarking analysis, are reported to the Bank's Asset and Liability Committee (ALCO), which is responsible for reviewing and approving the approaches used in the valuation of such risks to ensure that they are well controlled and effective and result in reasonable fair values.

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

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

The following table presents the Bank's duration of equity exposure at March 31, 2018 and December 31, 2017. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" could not be meaningfully measured for these periods and therefore is not presented. The "down 100 basis point" scenario results became meaningful during the first quarter of 2018 due to an increase in short term interest rates and therefore is only presented for March 31, 2018.
(in years)
Down 100 basis points
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual Duration of Equity:
 
 
 
 
March 31, 2018
(0.1)
0.0
0.2
0.5
December 31, 2017
n/a
0.0
0.2
0.6

Duration of equity changes in the first three months of 2018 were minimal. The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes may have on duration of equity and other market risk measures and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.


21


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

The ROE spread volatility presented in the table below reflects spreads relative to 3-month LIBOR. Management uses both parallel and non-parallel rate scenarios to assess interest rate risk. The steeper and flatter yield curve shift scenarios are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the low rate environment, management replaced a "down 200 basis points parallel rate" scenario with a "down 100 basis point longer term rate" shock as an additional non-parallel rate scenario that reflects a decline in longer-term rates. Due to increases in short-term interest rates, the Bank had re-introduced a "down 50 basis point parallel rate" scenario during the first quarter of 2017. As a result of further increases in short term interest rates, the Bank replaced this "down 50 basis point parallel rate" scenario with a "down 100 basis point parallel rate" scenario during the first quarter of 2018.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term
Rate Shock
Down 100 bps Parallel Shock
100 bps Steeper
100 bps Flatter
Up 200 bps
Parallel Shock
March 31, 2018
(4)
(19)
(16)
11
1
December 31, 2017
(13)
n/a
(8)
2
(10)

Changes in ROE spread volatility in the first three months of 2018 were minimal. For each scenario, the Board's limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at March 31, 2018 and December 31, 2017.

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

During the first quarter of 2018, the daily limit of mark-to-market risk as approved by the Board was $4.5 million. The daily exposure was within the applicable guideline throughout the first quarter of 2018. At March 31, 2018, mark-to-market risk measured $2.0 million.


22


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

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure (TCE) to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. At March 31, 2018, aggregate TCE was $90.6 billion, comprised of approximately $70.5 billion in advance principal outstanding, $19.8 billion in letters of credit (including forward commitments), $17.6 million in advance commitments, and $316.3 million in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes a maximum borrowing capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank’s Member Products Policy. Details regarding this policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2017 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position. At March 31, 2018 and December 31, 2017, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an estimated collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank.

The financial condition of all members and eligible non-member housing associates is closely monitored for compliance with financial criteria as set forth in the Bank’s credit policies. The Bank has developed an internal credit rating (ICR) system that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member’s asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results which include net income, capital levels, reserve coverage and other factors for the previous four quarters are used. The most recent quarter’s results are given a higher weighting. Additionally, a member’s credit score can be adjusted for various qualitative factors, such as the financial condition of the member’s holding company. A rating in one of the higher number (i.e., worse) categories indicates that a member exhibits well defined financial weaknesses as described in the policy. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. Insurance company members are rated on the same credit scale as depository institutions, but the analysis includes both quantitative and qualitative factors. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on various forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.

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


23


The following table presents the Bank’s top five members with respect to their TCE at March 31, 2018.
 
March 31, 2018
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
22,589.0

24.9
%
Ally Bank, UT (2)
18,586.5

20.5

Chase Bank USA, N.A., DE
12,215.5

13.5

TD Bank, National Association, DE
9,811.6

10.8

Customers Bank, PA
4,178.2

4.6

 
67,380.8

74.3

Other financial institutions
23,287.7

25.7

Total TCE outstanding
$
90,668.5

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) For Bank membership purposes, principal place of business is Horsham, PA.

Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of March 31, 2018.
 
March 31, 2018
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
19,535.0

27.7
%
Ally Bank, UT (2)
18,550.0

26.3

Chase Bank USA, N.A., DE
12,200.0

17.3

Customers Bank, PA
2,252.6

3.2

First National Bank of Pennsylvania, PA
1,855.0

2.6

 
54,392.6

77.1

Other borrowers
16,112.9

22.9

Total advances
$
70,505.5

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) For Bank membership purposes, principal place of business is Horsham, PA.

The average year-to-date March 31, 2018 balances for the five largest borrowers totaled $54.1 billion, or 76.1% of total average advances outstanding. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank has never incurred any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.

Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of March 31, 2018 and December 31, 2017. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances.
(dollars in millions)
March 31, 2018
December 31, 2017
Letters of credit:
 
 
   Public unit deposit
$
18,784.9

$
18,948.8

   Other
16.4

17.1

Total (1)
$
18,801.3

$
18,965.9

Notes:
(1) For March 31, 2018 and December 31, 2017 respectively, excludes approved requests to issue future standby letters of credit of $271.1 million and $44.1 million; also excludes available master standby letters of credit of $756.7 million and $676.3 million at March 31, 2018 and December 31, 2017, respectively.


24


At March 31, 2018, the Bank had a concentration of letters of credit with two members (TD Bank and PNC Bank) totaling $12.2 billion or 64.9% of the total amount. At December 31, 2017, $12.2 billion or 64.2% of the letters of credit were concentrated with these same two members.

Collateral Policies and Practices. All members are required to maintain eligible collateral to secure their TCE. Refer to the Risk Management section of the Bank's 2017 Form 10-K for additional information related to the Bank’s Collateral Policy.

Collateral Agreements and Valuation. The Bank provides members with two types of collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. Under a blanket lien agreement, the Bank obtains a lien against all of the member’s unencumbered eligible collateral assets and most ineligible assets to secure the member’s obligations with the Bank. Under a specific collateral pledge agreement, the Bank obtains a lien against specific eligible collateral assets of the member or its affiliate (if applicable) to secure the member’s obligations with the Bank. The member provides a detailed listing, as an addendum to the specific collateral agreement, identifying those assets pledged as collateral or delivered to the Bank or its third party custodian. Details regarding average lending values provided under both blanket liens and specific liens and delivery arrangements are available in the "Credit and Counterparty Risk - TCE and Collateral" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2017 Form 10-K.

High quality investment securities are defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE MBS, commercial and residential private label MBS with a minimum credit rating of single A, which the Bank considers as part of its evaluation of the collateral. In addition, municipal securities (or portions thereof) with a real estate nexus (e.g. proceeds primarily used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily and all non-government or agency securities are subject to weekly ratings reviews. Reported amount also includes pledged FHLBank cash deposits.

For all of the Bank's members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of March 31, 2018 and December 31, 2017. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
March 31, 2018
December 31, 2017
All members
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
106,745.7

45.2
%
$
107,527.6

46.0
%
High quality investment securities
14,907.5

6.3

12,512.0

5.4

ORERC(1)/CFI eligible collateral
95,019.4

40.2

94,033.0

40.2

Multi-family residential mortgage loans
19,549.9

8.3

19,626.8

8.4

Total eligible collateral value
$
236,222.5

100.0
%
$
233,699.4

100.0
%
Total TCE
$
90,668.5

 
$
94,420.0

 
Collateralization ratio (eligible collateral value to TCE outstanding)
260.5
%
 
247.5
%
 
(1) Other real estate related collateral.

25


For member borrowers, the following tables present information on a combined basis regarding the type of collateral securing their outstanding credit exposure and the collateral status as of March 31, 2018 and December 31, 2017.
 
March 31, 2018
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
78,581.8

38.9
%
$
23,432.1

89.3
%
$
4.9

0.6
%
$
102,018.8

44.6
%
High quality investment securities
11,218.1

5.6

2,806.6

10.7

793.4

96.4

14,818.1

6.5

ORERC/CFI eligible collateral
92,637.7

45.9



24.9

3.0

92,662.6

40.5

Multi-family residential mortgage
  loans
19,326.0

9.6



0.3


19,326.3

8.4

Total eligible collateral value
$
201,763.6

100.0
%
$
26,238.7

100.0
%
$
823.5

100.0
%
$
228,825.8

100.0
%
Total TCE
$
76,096.6

83.9
%
$
14,271.0

15.8
%
$
300.9

0.3
%
$
90,668.5

100.0
%
Number of members
195

87.8
%
13

5.9
%
14

6.3
%
222

100.0
%
 
December 31, 2017
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
78,657.2

39.2
%
$
24,665.6

93.7
%
$
4.7

0.7
%
$
103,327.5

45.4
%
High quality investment securities
10,080.7

5.0

1,651.1

6.3

684.9

95.7

12,416.7

5.5

ORERC/CFI eligible collateral
92,192.4

46.1



24.8

3.5

92,217.2

40.5

Multi-family residential mortgage
  loans
19,507.9

9.7



0.8

0.1

19,508.7

8.6

Total eligible collateral value
$
200,438.2

100.0
%
$
26,316.7

100.0
%
$
715.2

100.0
%
$
227,470.1

100.0
%
Total TCE
$
76,914.8

81.5
%
$
17,132.0

18.1
%
$
373.2

0.4
%
$
94,420.0

100.0
%
Number of members
200

89.2
%
10

4.5
%
14

6.3
%
224

100.0
%

Credit and Counterparty Risk - Investments

The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. The Bank considers a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, credit ratings based on NRSROs, and/or the financial health of the underlying issuer. As of March 31, 2018 and December 31, 2017, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $1.7 billion and $1.6 billion, respectively.


26


Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of March 31, 2018 and December 31, 2017, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
 
March 31, 2018 (1)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Unrated
Total
Money market investments:
 
 
 
 
 
 
 
  Interest-bearing deposits
$

$

$
275.0

$

$

$

$
275.0

  Securities purchased under agreements to resell




500.0


500.0

  Federal funds sold

3,050.0

3,575.0




6,625.0

Total money market investments

3,050.0

3,850.0


500.0


7,400.0

Investment securities: