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EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3231q2016.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3131q2016.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3121q2016.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3111q2016.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3211q2016.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3221q2016.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, 2016
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
601 Grant Street
Pittsburgh, PA 15219
 (Address of principal executive offices)
 
15219
 (Zip Code)
(412) 288-3400 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [x]Yes []No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [x] Yes [] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer
 
o Accelerated filer
x Non-accelerated filer
 
o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [] Yes [x] No

There were 33,092,625 shares of common stock with a par value of $100 per share outstanding April 29, 2016.





FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

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



i


PART I - FINANCIAL INFORMATION

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Statements contained in this Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Bank's unaudited interim financial statements and notes and Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2015 Form 10-K (2015 Form 10-K), including Risk Factors included in Item 1A of that report.

Executive Summary

Overview. The Bank's financial condition and results of operations are influenced by the interest rate environment, global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets.

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. Funding spreads (i.e., the cost of FHLBank debt relative to LIBOR) remained virtually unchanged during the first quarter of 2016. However, there was modest improvement in swap spreads at less than 2 years as investor demand increased for shorter term maturities on FHLBank consolidated obligations.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. The Bank continues to adjust as necessary its prepayment estimates in its models to ensure they reflect actual borrower activity. In addition, the Bank's higher yielding private label mortgage-backed securities (MBS) portfolio continues its expected runoff. As higher coupon mortgage loans prepay and mature along with higher yielding private

1


label MBS, the return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining loan portfolio and investments and a possible decrease in the net interest margin. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During the first quarter of 2016, this accretion resulted in additional interest income of $6.0 million compared to $7.0 million in the same prior-year period.

Results of Operations. The Bank's net income totaled $56.5 million for the first quarter of 2016, a decrease of $14.6 million compared to $71.1 million for the first quarter of 2015. This decrease was due to larger net losses on derivatives and hedging activity in 2016 and a 2015 gain on the settlement of claims against certain defendants arising from investments the Bank made in private label MBS. The decrease was partially offset by gains on the sale of available-for-sale (AFS) securities, higher net gains on trading securities, and higher net interest income in 2016.

Net interest income was $81.4 million for the first quarter of 2016, up $5.9 million compared to $75.5 million in the first quarter of 2015. Net interest income reflected a significant increase in interest income on advances partially offset by a significant increase in interest expense, primarily consolidated obligation bonds and discount notes. The net interest margin for the first quarter of 2016 was 36 basis points compared to 37 basis points in the first quarter of 2015.

Financial Condition. Advances. Total advances were $69.0 billion at March 31, 2016 a decrease of $5.5 billion compared to $74.5 billion at December 31, 2015. It is not uncommon for the Bank to experience variances in the overall portfolio driven primarily by changes in short-term advance demand from members. Although the advance portfolio decreased in size during the first quarter of 2016, the term of advances increased modestly. At March 31, 2016, approximately 57% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 55% at December 31, 2015.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) member’s 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, 2016, the Bank held $17.8 billion of total investment securities, including trading, AFS and held-to-maturity (HTM) investment securities, as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2015, these investments totaled $16.1 billion. The increase of $1.7 billion was primarily driven by an increase in Federal funds sold due to market-driven demand.

Consolidated Obligations. The Bank's consolidated obligations totaled $86.5 billion at March 31, 2016, a decrease of $4.4 billion from December 31, 2015. At March 31, 2016, bonds represented 68% of the Bank's consolidated obligations, compared with 53% at December 31, 2015. Discount notes represented 32% of the Bank's consolidated obligations at March 31, 2016 compared with 47% at year-end 2015.

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

Capital Position and Regulatory Requirements. Total capital at March 31, 2016 was $4.3 billion, compared to $4.5 billion at December 31, 2015. Total retained earnings at March 31, 2016 were $897.7 million, up $16.5 million from $881.2 million at year-end 2015 reflecting the Bank's net income for the first quarter of 2016 which was partially offset by dividends paid. Accumulated other comprehensive income (AOCI) was $94.0 million at March 31, 2016, an increase of $13.3 million from December 31, 2015. This increase was primarily due to the changes in the fair values of securities within the AFS portfolio.

In February 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 3.0% on activity stock and membership stock, respectively. In April 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 2.0% on activity stock and membership stock, respectively. These dividends were based on stockholders' average balances for the fourth quarter of 2015 (February dividend) and the first quarter of 2016 (April dividend).

The Bank met all of its capital requirements as of March 31, 2016, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of December 31, 2015, the Bank was deemed "adequately capitalized."


2


Financial Highlights

The following financial highlights for the Condensed Statements of Condition as of December 31, 2015 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements except for the three months ended December 31, 2015 which have been derived from the Bank's 2015 Form 10-K.

Condensed Statements of Income
 
Three months ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions, except per share data)
2016
 
2015
 
2015
 
2015
 
2015
Net interest income
$
81.4

 
$
78.1

 
$
83.1

 
$
81.1

 
$
75.5

Provision (benefit) for credit losses
0.2

 
0.2

 
(0.2
)
 
0.3

 
(0.5
)
Other noninterest income:
 
 
 
 
 
 
 
 
 
Net OTTI losses, credit portion (1)
(0.2
)
 
(0.9
)
 
(0.4
)
 
(0.5
)
 

Net gains (losses) on trading securities
17.3

 
(3.8
)
 
8.7

 
(10.1
)
 
6.8

Realized gains from sales of AFS securities
12.7

 

 

 

 

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

 
(25.4
)
 
29.1

 
(7.6
)
Gain on litigation settlement, net

 

 

 

 
15.3

Other, net
6.7

 
5.4

 
6.4

 
7.7

 
6.5

Total other noninterest income (loss)
0.9

 
8.0

 
(10.7
)
 
26.2

 
21.0

Other expense
19.3

 
25.5

 
16.7

 
17.4

 
18.0

Income before assessments
62.8

 
60.4

 
55.9

 
89.6

 
79.0

Affordable Housing Program (AHP) assessment(2)
6.3

 
6.0

 
5.6

 
9.0

 
7.9

Net income
$
56.5

 
$
54.4

 
$
50.3

 
$
80.6

 
$
71.1

Earnings per share (3)
$
1.67

 
$
1.65

 
$
1.51

 
$
2.53

 
$
2.42

 
 
 
 
 
 
 
 
 
 
Dividends
$
40.0

 
$
40.3

 
$
38.1

 
$
34.7

 
$
99.7

Dividend payout ratio (4)
70.81
%
 
73.91
%
 
75.69
%
 
43.05
%
 
140.27
%
Return on average equity
5.21
%
 
5.05
%
 
4.65
%
 
7.79
%
 
7.38
%
Return on average assets
0.24
%
 
0.23
%
 
0.22
%
 
0.37
%
 
0.34
%
Net interest margin (5)
0.36
%
 
0.34
%
 
0.36
%
 
0.37
%
 
0.37
%
Regulatory capital ratio (6)
4.59
%
 
4.60
%
 
4.51
%
 
4.55
%
 
4.43
%
GAAP capital ratio (7)
4.68
%
 
4.67
%
 
4.62
%
 
4.67
%
 
4.60
%
Total average equity to average assets
4.66
%
 
4.63
%
 
4.65
%
 
4.71
%
 
4.67
%
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(3) Calculated based on net income and weighted average shares outstanding.
(4) Represents dividends paid as a percentage of net income for the respective periods presented.
(5) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(6) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(7) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

3


Condensed Statements of Condition
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions)
 
2016
 
2015
 
2015
 
2015
 
2015
Cash and due from banks
 
$
1,763.0

 
$
2,377.0

 
$
4,946.3

 
$
5,377.2

 
$
5,124.2

Investments (1)
 
17,802.2

 
16,144.0

 
15,380.9

 
13,914.3

 
16,729.6

Advances
 
69,021.9

 
74,504.8

 
68,804.3

 
71,489.2

 
62,346.0

Mortgage loans held for portfolio, net (2)
 
3,073.8

 
3,086.9

 
3,068.2

 
3,053.0

 
3,074.3

Total assets
 
91,904.9

 
96,329.8

 
92,428.9

 
94,033.1

 
87,456.6

Consolidated obligations, net:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
28,006.4

 
42,275.5

 
33,960.5

 
41,060.6

 
37,077.4

Bonds
 
58,479.4

 
48,600.8

 
53,267.3

 
47,547.2

 
45,235.3

Total consolidated obligations, net (3)
 
86,485.8

 
90,876.3

 
87,227.8

 
88,607.8

 
82,312.7

Deposits
 
735.9

 
686.0

 
586.9

 
670.4

 
750.9

Mandatorily redeemable capital stock
 
5.9

 
6.0

 
6.2

 
0.6

 
0.6

AHP payable
 
73.1

 
70.9

 
69.2

 
67.7

 
62.0

Total liabilities
 
87,599.5

 
91,828.2

 
88,153.8

 
89,641.0

 
83,434.9

Capital stock - putable
 
3,313.7

 
3,539.7

 
3,294.0

 
3,425.2

 
3,063.7

Unrestricted retained earnings
 
723.9

 
718.7

 
715.4

 
713.2

 
683.4

Restricted retained earnings
 
173.8

 
162.5

 
151.6

 
141.6

 
125.5

AOCI
 
94.0

 
80.7

 
114.1

 
112.1

 
149.1

Total capital
 
4,305.4

 
4,501.6

 
4,275.1

 
4,392.1

 
4,021.7

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits.
(2) Includes allowance for credit losses of $6.0 million at March 31, 2016, $5.7 million at December 31, 2015, $6.1 million at September 30, 2015, $6.3 million at June 30, 2015 and $6.6 million at March 31, 2015.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $896.8 billion at March 31, 2016, $905.2 billion at December 31, 2015, $856.5 billion on September 30, 2015, $852.8 billion at June 30, 2015 and $812.2 billion at March 31, 2015.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2016 and 2015, which should be read in conjunction with the Bank's unaudited interim financial statements included in this Form 10-Q as well as the audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2015 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank's net income totaled $56.5 million for the first quarter of 2016, a decrease of $14.6 million compared to $71.1 million for the first quarter of 2015. This decrease was due to larger net losses on derivatives and hedging activities in 2016 and a 2015 gain on the settlement of claims against certain defendants arising from investments the Bank made in private label MBS. The decrease was partially offset by gains on the sale of AFS securities, higher net gains on trading securities and higher net interest income in 2016.

Net losses on derivatives and hedging activities were $35.6 million in the first quarter of 2016, compared to net losses of $7.6 million in the first quarter of 2015. There were no gains on legal settlements in 2016; in the first quarter of 2015, the Bank recorded $15.3 million related to the resolution of litigation (net of legal fees and expenses) related to matters arising from investments the Bank made in private label MBS. The Bank recognized gains on the sale of AFS securities of $12.7 million in the first quarter of 2016 and none in the first quarter of 2015. Net gains on trading securities in the first quarter of 2016 were $17.3 million, compared to $6.8 million in the first quarter of 2015.

Net interest income was $81.4 million in the first quarter of 2016, up $5.9 million compared to $75.5 million in the first quarter of 2015. Net interest income reflected a significant increase in interest income on advances partially offset by a significant increase in interest expense, primarily consolidated obligation bonds and discount notes. Interest income on

4


advances in the first quarter of 2016 was $131.9 million, an increase of $58.2 million compared to $73.7 million in the first quarter of 2015. Total interest expense was $143.4 million in the first quarter of 2016, an increase of $55.8 million compared to $87.6 million in the first quarter of 2015. The Bank's return on average equity for the first quarter of 2016 was 5.21% compared to 7.38% for the first quarter of 2015.

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, 2016 and 2015.

Average Balances and Interest Yields/Rates Paid
 
 
Three months ended March 31,
 
 
2016
 
2015
(dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense
 
Avg.
Yield/
Rate
(%)
 
Average
Balance
 
Interest
Income/
Expense
 
Avg.
Yield/
Rate
(%)
Assets:
 
 

 
 

 
 

 
 
 
 

 
 

Federal funds sold and securities purchased under agreements to resell (1)
 
$
7,647.4

 
$
6.7

 
0.35

 
$
7,088.1

 
$
1.6

 
0.09

Interest-bearing deposits (2)
 
411.0

 
0.3

 
0.33

 
323.6

 
0.1

 
0.10

Investment securities (3)
 
11,132.2

 
56.1

 
2.03

 
11,651.7

 
55.9

 
1.95

Advances (4)
 
70,117.2

 
132.0

 
0.76

 
59,884.1

 
74.8

 
0.51

Mortgage loans held for portfolio (5)
 
3,083.6

 
29.7

 
3.87

 
3,100.7

 
30.7

 
4.02

Total interest-earning assets
 
92,391.4

 
224.8

 
0.98

 
82,048.2

 
163.1

 
0.81

Allowance for credit losses
 
(7.7
)
 
 

 
 

 
(8.9
)
 
 
 
 
Other assets (6)
 
1,457.8

 
 

 
 

 
1,750.9

 
 
 
 
Total assets
 
$
93,841.5

 
 

 
 

 
$
83,790.2

 
 
 
 
Liabilities and capital:
 
 

 
 

 
 

 
 
 
 
 
 
Deposits (2)
 
$
643.5

 
$
0.4

 
0.25

 
$
704.6

 
$
0.1

 
0.03

Consolidated obligation discount notes
 
34,251.9

 
33.3

 
0.39

 
34,062.6

 
9.1

 
0.11

Consolidated obligation bonds (7)
 
53,731.7

 
109.6

 
0.82

 
44,344.4

 
78.4

 
0.72

Other borrowings
 
7.6

 
0.1

 
4.02

 
2.2

 

 
1.00

Total interest-bearing liabilities
 
88,634.7

 
143.4

 
0.65

 
79,113.8

 
87.6

 
0.45

Other liabilities
 
838.1

 
 
 
 
 
766.0

 
 
 
 
Total capital
 
4,368.7

 
 
 
 
 
3,910.4

 
 
 
 
Total liabilities and capital
 
$
93,841.5

 
 
 
 
 
$
83,790.2

 
 
 
 
Net interest spread
 
 
 
 
 
0.33

 
 
 
 
 
0.36

Impact of noninterest-bearing funds
 
 
 
 
 
0.03

 
 
 
 
 
0.01

Net interest income/net interest margin
 
 
 
$
81.4

 
0.36

 
 
 
$
75.5

 
0.37

Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.2 billion and $0.3 billion in 2016 and 2015, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $28.6 million and less than one million in 2016 and 2015, respectively.


5


Net interest income for the first quarter of 2016 increased $5.9 million from the first quarter of 2015 due to an increase in interest income. Interest earning assets increased 12.6% with higher demand for advances and increased purchases of Federal funds sold and securities purchased under agreements to resell being partially offset by a lower amount of investments and mortgage loans held for portfolio. Higher interest income on advances was partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased due to both higher volume and an increase in yield. Interest income on mortgage loans held for portfolio declined due to both lower volume and the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 20 basis points due to higher funding costs on bonds and discount notes.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three months ended March 31, 2016 and 2015.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume
 
 
 
 
Three months ended March 31
(in millions)
 
Volume
Rate
Total
Federal funds sold
 
$
0.1

$
5.0

$
5.1

Interest-bearing deposits
 

0.2

0.2

Investment securities
 
(2.1
)
2.3

0.2

Advances
 
15.3

41.9

57.2

Mortgage loans held for portfolio
 

(1.0
)
(1.0
)
Total interest-earning assets
 
$
13.3

$
48.4

$
61.7

Interest-bearing deposits
 
$

$
0.3

$
0.3

Consolidated obligation discount notes
 
0.1

24.1

24.2

Consolidated obligation bonds
 
18.9

12.3

31.2

Other borrowings
 

0.1

0.1

Total interest-bearing liabilities
 
$
19.0

$
36.8

$
55.8

Total increase in net interest income
 
$
(5.7
)
$
11.6

$
5.9


Interest income and interest expense both increased in the first quarter of 2016 compared to the first quarter of 2015 due to rate and volume increases. Higher rates coupled with greater advance volume drove the interest income increase. Interest expense reflected higher rates on consolidated obligations along with a volume increase.

The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2016 and 2015. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Three months ended March 31,
Product
 
2016
2015
Repo/Mid-Term Repo
 
$
19,025.0

$
21,540.9

Core (Term)
 
50,096.7

36,155.0

Convertible Select
 
762.0

1,893.0

Total par value
 
$
69,883.7

$
59,588.9

Advance volume growth in the quarter-over-quarter comparison was driven primarily by increased demand from larger members. The rate increase quarter-over-quarter was primarily due to an increase in market interest rates as the Federal funds target rate increased in mid-December 2015.

Interest expense on the average consolidated obligations portfolio increased in the first quarter of 2016 compared to the first quarter of 2015. Rates paid on both discount notes and bonds rose as the Federal funds target rate increased in mid-December 2015. A large increase in average bond balances quarter-over-quarter led to an increase in interest expense. 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.

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, 2016 and 2015. Derivative and hedging activities are discussed below.
Three Months Ended
March 31, 2016
(dollars in millions)
 
Average Balance
 
Interest Inc./
 Exp. with Derivatives
 
Avg.
Yield/
Rate (%)
 
Interest Inc./ Exp. without
Derivatives
 
Avg.
Yield/
Rate (%)
 
Impact of
Derivatives(1)
 
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
70,117.2

 
$
132.0

 
0.76

 
$
174.1

 
1.00

 
$
(42.1
)
 
(0.24
)
Mortgage loans held for
 portfolio
 
3,083.6

 
29.7

 
3.87

 
30.7

 
4.01

 
(1.0
)
 
(0.14
)
All other interest-earning
 assets
 
19,190.6

 
63.1

 
1.32

 
69.2

 
1.45

 
(6.1
)
 
(0.13
)
Total interest-earning
 assets
 
$
92,391.4

 
$
224.8

 
0.98

 
$
274.0

 
1.19

 
$
(49.2
)
 
(0.21
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
53,731.7

 
$
109.6

 
0.82

 
$
135.0

 
1.01

 
$
(25.4
)
 
(0.19
)
All other interest-bearing
 liabilities
 
34,903.0

 
33.8

 
0.39

 
33.8

 
0.39

 

 

Total interest-bearing
 liabilities
 
$
88,634.7

 
$
143.4

 
0.65

 
$
168.8

 
0.77

 
$
(25.4
)
 
(0.12
)
Net interest income/net
 interest spread
 
 
 
$
81.4

 
0.33

 
$
105.2

 
0.42

 
$
(23.8
)
 
(0.09
)
Three Months Ended
March 31, 2015
(dollars in millions)
Average Balance
 
Interest Inc./
 Exp. with Derivatives
 
Avg.
Yield/
Rate (%)
 
Interest Inc./ Exp. without
Derivatives
 
Avg.
Yield/
Rate (%)
 
Impact of
Derivatives(1)
 
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 

Advances
$
59,884.1

 
$
74.8

 
0.51

 
$
123.3

 
0.83

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

 
30.7

 
4.02

 
31.6

 
4.14

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

 
57.6

 
1.22

 
61.0

 
1.30

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

 
$
163.1

 
0.81

 
$
215.9

 
1.07

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

 
$
78.4

 
0.72

 
$
144.4

 
1.32

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

 
9.2

 
0.11

 
9.2

 
0.11

 

 

Total interest-bearing
 liabilities
$
79,113.8

 
$
87.6

 
0.45

 
$
153.6

 
0.79

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

 
0.36

 
$
62.3

 
0.28

 
$
13.2

 
0.08

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, 2016. The use of derivatives increased net interest income and net interest spread for the three months ended March 31, 2015. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the

7


average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.
The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.
The Bank uses many different funding and hedging strategies. One strategy involves closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for the first quarter of 2016 was $0.2 million compared to $(0.5) million for the same period in 2015.


8


Other Noninterest Income
 
Three months ended March 31,
(in millions)
2016
2015
Net OTTI losses, credit portion
$
(0.2
)
$

Net gains on trading securities
17.3

6.8

Realized gains from sales of AFS securities
12.7


Net (losses) on derivatives and hedging activities
(35.6
)
(7.6
)
Gain on litigation settlement, net

15.3

Standby letters of credit fees
6.3

5.9

Other, net
0.4

0.6

Total other noninterest income
$
0.9

$
21.0


The change in the Bank's total other noninterest income for the first quarter of 2016 compared to the same prior year period was due primarily to higher net losses on derivatives and hedging activities and a 2015 gain on the settlement of claims against certain defendants arising from investments the Bank made in private label MBS. The activity related to derivatives and hedging is discussed in more detail below. The decrease in total other noninterest income was partially offset by gains from sales of AFS securities and higher net gains on trading securities. During the first quarter of 2016, the Bank sold Agency and HELOC securities from its AFS portfolio. The net gains 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 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.


9


The following tables detail the net effect of derivatives and hedging activities for the three months ended March 31, 2016 and 2015.
 
Three months ended March 31, 2016
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.0
)
$

$
(1.0
)
$
1.0

$

$
(1.0
)
  Net interest settlements included in net interest income(2)
(41.1
)
(6.1
)

24.4


(22.8
)
Total effect on net interest income
$
(42.1
)
$
(6.1
)
$
(1.0
)
$
25.4

$

$
(23.8
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.3

$
(3.6
)
$

$
(1.8
)
$

$
(5.1
)
Gains (losses) on derivatives not receiving hedge accounting
(14.0
)
(47.2
)
(15.4
)
45.2

0.9

(30.5
)
Total net gains (losses) on derivatives and hedging activities
$
(13.7
)
$
(50.8
)
$
(15.4
)
$
43.4

$
0.9

$
(35.6
)
Total net effect of derivatives and hedging activities
$
(55.8
)
$
(56.9
)
$
(16.4
)
$
68.8

$
0.9

$
(59.4
)
 
Three months ended March 31, 2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(1.5
)
$

$
(0.9
)
$
4.4


$
2.0

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

61.6


11.2

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

$

$
13.2

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

$
(0.3
)
$

$
0.7

$

$
0.6

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

0.1

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

$
0.1

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

$
0.1

$
5.6

Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(2) Represents interest income/expense on derivatives included in net interest income

Fair Value Hedges. The Bank uses fair value hedge accounting treatment for most of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time. During the first quarter of 2016, total ineffectiveness related to these fair value hedges resulted in net losses of $(5.1) million compared to net gains of $0.6 million during the first quarter of 2015. The total notional amount increased to $32.7 billion at March 31, 2016 from $30.4 billion at December 31, 2015.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the changes in the fair value of the hedges in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(30.5) million in the first quarter of 2016 compared to net losses of $(8.2) million for the first quarter of 2015. The losses on economic hedges during the first quarter of 2016 were greater than the losses during the first quarter of 2015 due to changes in the composition of the economic hedge portfolio, including an increase in the notional of economic asset swaps, as well as

10


greater decreases in mid-and-long term interest rates during the first quarter of 2016 compared to the first quarter of 2015. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $17.0 billion at March 31, 2016 and $14.2 billion at December 31, 2015.

Financial Condition

The following should be read in conjunction with the Bank's unaudited interim financial statements in this Form 10-Q and the audited financial statements in the Bank's 2015 Form 10-K.

Assets

Total assets were $91.9 billion at March 31, 2016, compared with $96.3 billion at December 31, 2015. The decrease of $4.4 billion was primarily due to a decline in advances. Advances totaled $69.0 billion at March 31, 2016 compared to $74.5 billion at December 31, 2015.

The Bank's core mission activities primarily include the issuance of advances. In addition, the Bank acquires member assets through the Mortgage Partnership Finance (MPF) program. As of March 31, 2016, the Bank's average par amounts for advances and MPF loans totaled $72.9 billion resulting in a core mission asset ratio of 82.9%.

Advances. Advances (par) totaled $68.8 billion at March 31, 2016 compared to $74.3 billion at December 31, 2015. At March 31, 2016, the Bank had advances to 182 borrowing members, compared to 199 borrowing members at December 31, 2015. 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 represented 73.7% of total advances as of March 31, 2016 compared to 74.1% at December 31, 2015.

The following table provides information on advances at par by product type at March 31, 2016 and December 31, 2015.
 
March 31,
December 31,
in millions
2016
2015
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
7,681.3

$
9,233.8

    Core (Term)
21,163.6

21,163.6

    Returnables
12,350.0

11,900.0

      Total adjustable/variable-rate indexed
$
41,194.9

$
42,297.4

Fixed-rate:
 
 
    Repo/Mid-Term Repo
$
17,512.0

$
21,047.8

    Core (Term)
8,993.4

8,533.9

    Returnables

650.0

      Total fixed-rate
$
26,505.4

$
30,231.7

Convertible
$
762.0

$
1,462.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
$
328.8

$
342.2

Total par balance
$
68,791.1

$
74,333.3


The Bank had no putable advances at March 31, 2016 or December 31, 2015. In the first quarter of 2016, the Bank introduced new adjustable rate advance products which have a floating rate with rate caps and/or floors to protect against interest rate risk.

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, 2016 and the year ended December 31, 2015.
 
 
March 31,
December 31,
Member Asset Size
 
2016
2015
Less than $100 million
 
17

24

Between $100 million and $500 million
 
101

132

Between $500 million and $1 billion
 
38

44

Between $1 billion and $5 billion
 
31

35

Greater than $5 billion
 
19

21

Total borrowing members during the period
 
206

256

Total membership
 
304

307

Percentage of members borrowing during the period
 
67.8
%
83.4
%
Total borrowing members with outstanding loan balances at period-end
 
182

199

Percentage of members borrowing at period-end
 
59.9
%
64.8
%

During the first three months of 2016, the Bank has experienced a net decrease of three members. The Bank added two new members and lost five members due to mergers with other institutions within the Bank's district.

The following table provides information at par on advances by member classification at March 31, 2016 and December 31, 2015. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and Community Financial Institutions (CFI) (under $1.1 billion).
(in thousands)
March 31, 2016
December 31, 2015
Increase/(Decrease)
Member Classification
Large
$
50,690.1

$
55,075.1

(8.0
)%
Regional
8,577.4

9,090.3

(5.6
)
Mid-size
3,026.3

3,443.7

(12.1
)
CFI (1)
3,535.4

4,262.2

(17.1
)
Insurance
2,959.8

2,459.8

20.3

Non-member
2.1

2.2

(4.5
)
Total
$
68,791.1

$
74,333.3

(7.5
)%
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

As of March 31, 2016, total advances decreased 7.5% compared with balances at December 31, 2015. It is not uncommon for the Bank to experience variances in the overall portfolio driven primarily by changes in short-term advance demand from members.

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, 2016.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, was $3.1 billion at both March 31, 2016, and December 31, 2015. The Bank’s focus is on purchasing MPF loans from community and regional member banks in its district.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording of interest income. However, 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.

12


The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank. Balances regarding the Bank’s products are summarized below.
(in millions)
March 31, 2016
December 31, 2015
Advances(1)
$
69,021.9

$
74,504.8

Mortgage loans held for portfolio, net(2)
3,073.8

3,086.9

Nonaccrual mortgage loans(3)
31.8

32.5

Mortgage loans 90 days or more delinquent and still accruing interest(4)
4.0

4.2

BOB loans, net
10.9

11.3

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and does not include performing TDRs of $13.0 million at March 31, 2016 and $14.8 million at December 31, 2015.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable since year-end 2015 and the MPF Original portfolio continues to out-perform the market based on national delinquency statistics. As of March 31, 2016, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.6% of the MPF Original portfolio and 3.3% of the MPF Plus portfolio compared with 0.5% and 3.3%, respectively, at December 31, 2015.

Allowance for Credit Losses (ACL). The Bank has not incurred any losses on advances since its inception. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is unnecessary. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in the Bank's 2015 Form10-K.

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

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

The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability and loss given default. Probability of default and loss given default are based on the prior 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is based on realized losses incurred on the sale of mortgage loan collateral including a factor that reduces estimated proceeds from primary mortgage insurance (PMI) given the credit deterioration experienced by those companies.

The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the first loss account (FLA). Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at March 31, 2016 and December 31, 2015.

13


 
MPF CE structure
March 31, 2016
ACL
March 31, 2016
(in millions)
FLA
Available CE
Estimate of Credit loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original & MPF 35
$
4.0

$
184.9

$
5.6

$
(0.8
)
$
(4.3
)
$
0.5

MPF Plus
18.7

24.5

13.0


(7.5
)
5.5

Total
$
22.7

$
209.4

$
18.6

$
(0.8
)
$
(11.8
)
$
6.0

 
MPF CE structure
December 31, 2015
ACL
December 31, 2015
(in millions)
FLA
Available CE
Estimate of Credit loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original & MPF 35
$
3.7

$
177.1

$
5.2

$
(0.9
)
$
(4.1
)
$
0.2

MPF Plus
18.9

32.1

12.7


(7.2
)
5.5

Total
$
22.6

$
209.2

$
17.9

$
(0.9
)
$
(11.3
)
$
5.7



14


Investments. At March 31, 2016, the sum of the Bank's interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell was $6.2 billion, an increase of approximately $1.2 billion from December 31, 2015. 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 $11.6 billion at March 31, 2016 compared to $11.2 billion at December 31, 2015. Details of the investment securities portfolio follow.
 
 
Carrying Value
(in millions)
 
March 31, 2016
 
December 31, 2015
Trading securities:
 
 
 
 
Mutual funds
 
$
6.0

 
$
5.4

Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
 
406.5

 
389.3

Total trading securities
 
$
412.5

 
$
394.7

Yield on trading securities
 
2.92
%
 
2.92
%
AFS securities:
 
 
 
 
Mutual funds
 
$
2.0

 
$
2.0

GSE and TVA obligations
 
3,663.4

 
3,469.2

State or local agency obligations
 
165.5

 
134.2

MBS:
 
 
 
 
      Other U.S. obligations single family MBS
 
255.9

 
268.5

      GSE single-family MBS
 
2,745.4

 
2,383.6

      GSE multifamily MBS
 
1,110.9

 
1,010.5

Private label residential MBS
 
783.1

 
822.7

Private label home equity line of credit (HELOCs)
 

 
9.2

Total AFS securities
 
$
8,726.2

 
$
8,099.9

Yield on AFS securities
 
1.96
%
 
2.05
%
HTM securities:
 
 
 
 
State or local agency obligations
 
$
142.1

 
$
169.5

MBS:
 
 
 
 
      Other U.S. obligations single family MBS
 
758.4

 
819.6

      GSE single-family MBS
 
273.6

 
294.6

      GSE multifamily MBS
 
845.8

 
863.1

Private label residential MBS
 
487.6

 
516.5

Total HTM securities
 
$
2,507.5

 
$
2,663.3

Yield on HTM securities
 
2.24
%
 
2.23
%
Total investment securities
 
$
11,646.2

 
$
11,157.9

Yield on investment securities
 
2.05
%
 
2.12
%

    

15


As of March 31, 2016, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions)
 
Total
Book Value
 
Total
Fair Value
Freddie Mac
 
$
4,658.5

 
$
4,688.6

Fannie Mae
 
2,389.5

 
2,403.8

Federal Farm Credit Banks
 
1,887.4

 
1,887.4

Ginnie Mae
 
810.2

 
814.8

Total
 
$
9,745.6

 
$
9,794.6


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

Liabilities and Capital

Commitments and Off-Balance Sheet Items. As of March 31, 2016, the Bank was obligated to fund approximately $480.4 million in additional advances and BOB loans, $19.2 million of mortgage loans and $20.8 billion in outstanding standby letters of credit, and to issue $3.0 billion in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

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

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

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The framework includes four risk elements that comprise the Bank's total retained earnings target: (1) market risk (which includes private label MBS risk); (2) credit risk; (3) operating risk; and (4) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $426 million as of March 31, 2016. The Bank's retained earnings of $897.7 million at March 31, 2016 exceeded the target.

Retained earnings increased $16.5 million to $897.7 million at March 31, 2016, compared to $881.2 million at December 31, 2015. The increase in retained earnings during the three months ended March 31, 2016 reflected net income that was offset by $40.0 million of dividends paid. Total retained earnings at March 31, 2016 included unrestricted retained earnings of $723.9 million and restricted retained earnings (RRE) of $173.8 million.


16


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 2015 Form 10-K.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
 
 
March 31,
 
December 31,
(in millions)
 
2016
 
2015
Permanent capital:
 
 
 
 
Capital stock (1)
 
$
3,319.6

 
$
3,545.7

Retained earnings
 
897.7

 
881.2

Total permanent capital
 
$
4,217.3

 
$
4,426.9

RBC requirement:
 
 
 
 
Credit risk capital
 
$
472.1

 
$
477.0

Market risk capital
 
120.5

 
154.2

Operations risk capital
 
177.8

 
189.4

Total RBC requirement
 
$
770.4

 
$
820.6

Excess permanent capital over RBC requirement
 
$
3,446.9

 
$
3,606.3

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

On March 15, 2016, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2015. 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, 2016.

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, 2016.
 
 
March 31,
 
December 31,
(dollars in millions)
 
2016
 
2015
Regulatory Capital Ratio
 
 
 
 
Minimum capital (4.0% of total assets)
 
$
3,676.2

 
$
3,853.5

Regulatory capital
 
4,217.3

 
4,426.9

Total assets
 
91,904.9

 
96,329.8

Regulatory capital ratio (regulatory capital as a percentage of total assets)
 
4.6
%
 
4.6
%
 
 
 
 
 
Leverage Ratio
 
 
 
 
Minimum leverage capital (5.0% of total assets)
 
$
4,595.2

 
$
4,816.8

Leverage capital (permanent capital multiplied by a 1.5 weighting factor)
 
6,326.0

 
6,640.5

Leverage ratio (leverage capital as a percentage of total assets)
 
6.9
%
 
6.9
%


17


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, 2016
December 31, 2015
Commercial banks
 
167

$
2,788.7

170

$
3,055.3

Thrifts
 
67

300.8

69

278.1

Insurance companies
 
18

181.4

17

161.1

Credit unions
 
50

42.4

49

44.7

Community Development Financial Institution (CDFI)
 
2

0.4

2

0.5

Total member institutions / total GAAP capital stock
 
304

$
3,313.7

307

$
3,539.7

Mandatorily redeemable capital stock
 
 
5.9

 
6.0

Total capital stock
 
 
$
3,319.6



$
3,545.7


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 2015 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 2015 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, 2016.

In addition to evaluating the Bank's private label MBS portfolio under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of the Bank's private label MBS under a more stressful housing price scenario. This additional scenario was used to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended March 31, 2016 if the more stressful housing price scenario had been used in the Bank's OTTI assessment as of March 31, 2016. The more stressful scenario results were immaterial. A more detailed discussion of this analysis is in the OTTI section of Credit and Counterparty Risk - Investments of this Item 2.

Proposed and Recently Issued Accounting Guidance. The Financial Accounting Standards Board (FASB) has been working on various changes related to the accounting for financial instruments including credit losses and derivatives and hedging activities. The FASB's financial instruments projects may have a material impact on the Bank's reporting of its financial condition and results of operations. The Bank will continue to monitor the FASB's progress on these matters.

The FASB issued guidance which amends existing guidance on the classification and measurement of financial instruments. Although much of the existing requirements are not changed, this guidance revises the accounting for equity securities, financial liabilities measured under the fair value option, and certain disclosure requirements for fair value of financial instruments. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2018.

The FASB also issued guidance which amends the accounting for leases. The guidance will require lessees to recognize a right-of-use asset and lease liability for virtually all leases, other than short term leases. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2019.

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

Legislative and Regulatory Developments

The legislative and regulatory environment in which the Bank and its members operate continues to evolve as a result of regulations enacted pursuant to the Housing Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

18


(Dodd-Frank Act). The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance, community lending and liquidity mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.

Joint Proposed Rule on Incentive-Based Compensation Arrangements. On April 26, 2016, the Finance Agency, jointly with five other federal regulators, issued the rule contemplated by Section 956 of the Dodd-Frank Act, which requires implementation of regulations or guidelines to (1) prohibit incentive-based payment arrangements that these regulators determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.

The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). The proposed rule specifies that the Bank would fall into the middle category, Level 2. The proposed rule would supplement existing Finance Agency executive compensation rules.

The proposed rule would prohibit the Bank from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risks by “senior executive officers” and “significant risk-takers” (each as defined in the proposed rule, together, “covered persons”) that could lead to a material financial loss at the Bank. If adopted in its current form, the proposed rule would, among other things, impose requirements related to the Bank’s incentive-based compensation arrangements for covered persons, related to:

mandatory deferrals of 50% and 40% of annual incentive-based compensation payments for senior executive officers and significant risk takers, respectively, over no less than 3 years;
risk of downward adjustment and forfeiture of awards;
clawbacks of vested compensation; and
limits on the maximum incentive-based compensation opportunity.

Comments are due on the proposed rule by July 22, 2016. The Bank is currently assessing the effect of the proposed rule.

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, operating 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 market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operating and business risk, among others. In addition, the Bank’s risks are affected by current and projected financial and residential market trends including those described in Item 1A. Risk Factors in the Bank's 2015 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 2015 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.


19


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 127.2% at March 31, 2016 and 127.9% at December 31, 2015. The decline was primarily due to a decrease in the estimated fair value of MPF loans and a modest increase in funding and advance spreads relative to LIBOR, which were partially offset by the decrease in capital stock balances due to lower advance balances.

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

Limits have been established for exposure to low FICO® and nontraditional residential mortgages. A limit of 25% has been established for the percentage of member collateral that is categorized as low FICO® (with acceptable mitigating factors), missing (unknown) FICO® score loans and nontraditional loans and securities. A limit of 25% has also been established for total exposure related to nontraditional, subprime and low FICO® whole mortgage loans acquired through the Bank’s MPF program.

Qualitative and Quantitative Disclosures Regarding Market Risk

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

The Bank's Market Risk 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 validation department, both of which are considered to be independent. The model validations are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group that is independent of the model owner who is responsible for measuring risk and the units conducting the business transactions. Results of the validation process, as well as any changes in valuation methodologies, 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.


20


The following table presents the Bank's duration of equity exposure at March 31, 2016 and December 31, 2015. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" and "down 100 basis points" cannot be meaningfully measured for these periods and therefore is not presented.
(in years)
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual Duration of Equity:
 
 
 
March 31, 2016
0.3
0.8
1.2
December 31, 2015
(0.6)
0.2
0.8

Duration of equity changes in the first quarter of 2016 primarily reflect the impact of balance sheet management actions which more than offset the impact of lower long-term interest rates. The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes may have on duration of equity and other market risk measures, and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.

Return on Equity (ROE) Spread Volatility. Interest rate risk is also measured based on the volatility in the Bank’s projected return on capital in excess of the return of an established benchmark market index. 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 current low rate environment, management replaced a down 200 basis points parallel rate scenario with a down 100 basis point longer term rate shock as an additional non-parallel rate scenario that reflects a decline in longer term rates.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term Rate Shock
100 bps Steeper
100 bps Flatter
Up 200 bps Parallel Shock
March 31, 2016
9
19
32
39
December 31, 2015
32
(40)
108
143

The changes in ROE spread volatility in the first quarter of 2016 were mainly the result of the aging and replacement of term funding along with the lower long-term interest rate environment. These factors, along with other balance sheet management actions, affected ROE spread volatility differently in each scenario, as displayed in the table above. 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, 2016 and December 31, 2015.

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 three months of 2016, the daily limit of mark-to-market risk as approved by the Board was $3.5 million. The daily exposure was within this guideline throughout the first quarter of 2016. At March 31, 2016, mark-to-market risk measured $1.9 million.


21


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; member derivatives; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. This may include collateral pledged by a member’s affiliate. At March 31, 2016, aggregate TCE was $91.0 billion, comprised of approximately $68.8 billion in advance principal outstanding, $21.4 billion in letters of credit (including forward commitments), $0.5 billion in advance commitments, and $0.3 billion in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes an 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 2015 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position.

The financial condition of all members and eligible nonmember 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 for the previous four quarters are used, with the most recent quarter’s results given a higher weighting. Additionally, a member’s credit score can be adjusted for various qualitative factors, such as the financial condition of the member’s holding company. A rating in one of the higher number (i.e., worse) categories indicates that a member exhibits defined financial weaknesses. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. A separate financial analysis method is used to analyze insurance company exposure. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on various forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.

During the first three months of 2016, there was one failure of FDIC-insured institutions nationwide. The institution was not a member of the Bank.

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


22


The following table presents the Bank’s top ten members with respect to their TCE at March 31, 2016.
 
March 31, 2016
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
24,292.8

26.7
%
Santander Bank, N.A., DE (2)
14,824.7

16.3

Chase Bank USA, N.A., DE
10,305.3

11.3

TD Bank, National Association, DE
8,232.2

9.0

Ally Bank, UT (3)
6,382.2

7.0

Citizens Bank of Pennsylvania, PA
4,170.6

4.6

Customers Bank, PA
3,213.1

3.5

MetLife Insurance Company USA, DE
1,723.0

1.9

First Commonwealth Bank, PA
1,419.9

1.6

Northwest Savings Bank, PA
1,165.1

1.3

 
75,728.9

83.2

Other financial institutions
15,285.9

16.8

Total TCE outstanding
$
91,014.8

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

Member Advance Concentration Risk. The following table lists the Bank’s top ten borrowers based on advance balances at par as of March 31, 2016.
 
March 31, 2016
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
18,935.0

27.5
%
Santander Bank, N.A., DE (2)
12,835.0

18.6

Chase Bank USA, N.A., DE
10,300.0

15.0

Ally Bank, UT (3)
6,370.0

9.3

Citizens Bank of Pennsylvania, PA
2,250.0

3.3

MetLife Insurance Company USA, DE
1,720.0

2.5

Customers Bank, PA
1,633.7

2.4

First Commonwealth Bank, PA
1,418.2

2.0

WesBanco Bank, Inc., WV
1,023.3

1.5

National Penn Bank, PA
970.3

1.4

 
57,455.5

83.5

Other borrowers
11,335.6

16.5

Total advances
$
68,791.1

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

The average year-to-date March 31, 2016 balances for the ten largest borrowers totaled $58.8 billion, or 84.1% of total average advances outstanding. During the three months ended March 31, 2016, the maximum outstanding balance to any one borrower was $20.9 billion. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank does not expect to incur any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.


23


Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of March 31, 2016 and December 31, 2015. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances.
(dollars in millions)
March 31, 2016
December 31, 2015
Letters of credit:
 
 
   Public unit deposit
$
20,730.8

$
20,149.1

   Other
22.1

22.5

Total (1)
$
20,752.9

$
20,171.6

Notes:
(1) For March 31, 2016 and December 31, 2015 respectively, excludes approved requests to issue future standby letters of credit of $165.4 million and $136.4 million; also excludes available master standby letters of credit of $485.3 million and $479.4 million at March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016, the Bank had a concentration of letters of credit with two members (PNC Bank and TD Bank) totaling $13.5 billion or 63.2% of the total outstanding amount. At December 31, 2015, $12.9 billion or 63.9% 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 2015 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 2015 Form 10-K.

For all of the Bank's members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of March 31, 2016 and December 31, 2015. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
March 31, 2016
December 31, 2015
All members
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
83,066.7

40.9
%
$
82,284.4

41.7
%
High quality investment securities(1)
13,886.9

6.8

10,055.1

5.1

ORERC(2)/CFI eligible collateral
88,950.1

43.8

88,560.7

44.8

Multi-family residential mortgage loans
17,377.6

8.5

16,571.7

8.4

Total eligible collateral value
$
203,281.3

100.0
%
$
197,471.9

100.0
%
Total TCE
$
91,014.8

 
$
95,919.2

 
Collateralization ratio (eligible collateral value to TCE
outstanding)
223.3
%
 
205.9
%
 
Note:
(1) 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 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 private label residential MBS are subject to weekly ratings reviews.
(2) Other real estate related collateral


24


For only 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, 2016 and December 31, 2015.
 
March 31, 2016
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
66,776.9

37.4
%
$
11,480.4

71.3
%
$
111.4

20.7
%
$
78,368.7

40.2
%
High quality investment securities(1)
8,278.0

4.6

4,628.2

28.7

58.1

10.8

12,964.3

6.7

ORERC/CFI eligible collateral
86,131.1

48.3



352.5

65.5

86,483.6

44.3

Multi-family residential mortgage
  loans
17,222.9

9.7



16.2

3.0

17,239.1

8.8

Total eligible collateral value
$
178,408.9

100.0
%
$
16,108.6

100.0
%
$
538.2

100.0
%
$
195,055.7

100.0
%
Total TCE
$
77,638.9

85.3
%
$
13,284.7

14.6
%
$
91.2

0.1
%
$
91,014.8

100.0
%
Number of members
203

91.4
%
12

5.4
%
7

3.2
%
222

100.0
%
 
December 31, 2015
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
66,514.2

37.8
%
$
11,547.9

81.8
%
$
116.9

21.8
%
$
78,179.0

41.0
%
High quality investment securities(1)
6,509.8

3.7

2,564.9

18.2

54.5

10.2

9,129.2

4.8

ORERC/CFI eligible collateral
86,301.8

49.1



347.2

64.9

86,649.0

45.5

Multi-family residential mortgage
  loans
16,474.6

9.4



16.5

3.1

16,491.1

8.7

Total eligible collateral value
$
175,800.4

100.0
%
$
14,112.8

100.0
%
$
535.1

100.0
%
$
190,448.3

100.0
%
Total TCE
$
83,049.8

86.6
%
$
12,781.2

13.3
%
$
88.2

0.1
%
$
95,919.2

100.0
%
Number of members
211

91.7
%
11

4.8
%
8

3.5
%
230

100.0
%
Note:
(1) 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 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 private label residential MBS are subject to weekly ratings reviews.

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, 2016 and December 31, 2015, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $1.6 billion and $1.7 billion, respectively.


25


Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of March 31, 2016 and December 31, 2015 based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
 
March 31, 2016 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below BBB
Total
Money market investments:
 
 
 
 
 
 
  Securities purchased under agreements to resell
$

$

$

$

$
500.0

$
500.0

  Federal funds sold

2,150.0