Federal Home Loan Bank of Pittsburgh - FORM 10-Q

Federal Home Loan Bank of Pittsburgh - FORM 10-Q - November 9, 2017

Attached files

Attached files

Federal Home Loan Bank of Pittsburgh Reports

file	filename
EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3233q2017.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3223q2017.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3213q2017.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3133q2017.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3123q2017.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburgh	fhlbpitex3113q2017.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51395

FEDERAL HOME LOAN BANK OF PITTSBURGH

(Exact name of registrant as specified in its charter)



Federally Chartered Corporation		25-6001324
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 Grant Street Pittsburgh, PA 15219 (Address of principal executive offices)		15219 (Zip Code)

(412) 288-3400

(Registrant’s telephone number, including area code)

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

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

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



o Large accelerated filer	o Accelerated filer	o Emerging growth company
x Non-accelerated filer	o Smaller reporting company

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

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

There were 34,331,173 shares of common stock with a par value of $100 per share outstanding at October 31, 2017.

FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS






Part I - FINANCIAL INFORMATION	1
Item 1: Financial Statements (unaudited)	45
Notes to Financial Statements (unaudited)	52
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations	1
Risk Management	25
Item 3: Quantitative and Qualitative Disclosures about Market Risk	91
Item 4: Controls and Procedures	91
Part II - OTHER INFORMATION	91
Item 1: Legal Proceedings	91
Item 1A: Risk Factors	91
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	91
Item 3: Defaults upon Senior Securities	91
Item 4: Mine Safety Disclosures	91
Item 5: Other Information	91
Item 6: Exhibits	92
Signature	92

PART I - FINANCIAL INFORMATION

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

Forward-Looking Information

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

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Bank's unaudited interim financial statements and notes and any Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2016 Form 10-K (2016 Form 10-K), including Risk Factors included in Item 1A of that report.

Executive Summary

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

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 1-month or 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities. The Bank's net interest margin significantly increased during the first nine months of 2017. During a period in the first quarter of 2017, the Bank executed a significant amount of its funding when the funding spread (i.e., the cost of debt relative to LIBOR) had widened. During the remainder of the first nine months of 2017, funding spreads were at more normal levels.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products.

The Bank's higher yielding private label MBS portfolio continues its expected runoff. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During the third quarter of 2017, this accretion resulted in additional interest income of $7.7 million compared to $6.4 million in the third quarter of 2016.

Results of Operations. The Bank's net income for the third quarter of 2017 was $83.9 million compared to $54.8 million for the third quarter of 2016. This $29.1 million increase was driven primarily by higher net interest income. Net interest income was $109.3 million in the third quarter of 2017, an increase of $30.1 million compared to $79.2 million in the third quarter of 2016. Higher net interest income was primarily due to interest income on higher average advance balances, Federal funds sold and available-for-sale securities, partially offset by interest expense on higher average consolidated obligation balances. The net interest margin for the third quarter of 2017 was 45 basis points compared to 36 basis points in the third quarter of 2016.

For the nine months ended September 30, 2017, net income was $258.7 million, compared to $178.3 million for the same prior-year period. The $80.4 million increase was primarily due to higher net interest income and higher noninterest income, slightly offset by higher other expense. Net interest income was $328.0 million for the first nine months of 2017, an increase of $73.8 million compared to $254.2 million in the same prior-year period. This increase was primarily driven by interest income on higher average advance balances and Federal funds sold, partially offset by interest expense on higher average consolidated obligation balances. The amount of offsetting interest expense on consolidated obligations was reduced by improved funding spreads. Net interest income was also positively influenced by higher interest income on investment securities and mortgage loans held for portfolio, partially offset by a reduction in net prepayment fees on advances. The net interest margin was 46 basis points and 38 basis points for the first nine months of 2017 and 2016, respectively.

Financial Condition. Advances. Advances totaled $74.2 billion at September 30, 2017, a decrease of $2.6 billion compared to $76.8 billion at December 31, 2016. Decreases in advances to the Bank's large member classification were partially offset by increases in advances to other classifications. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. While the advance portfolio decreased in size during the third quarter of 2017 compared to December 31, 2016, the term of advances increased. At September 30, 2017, approximately 51% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 50% at December 31, 2016.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) members' regulatory requirements; (4) current and future credit market conditions; (5) housing market trends; (6) the shape of the yield curve and (7) advance pricing.

Investments. At September 30, 2017, the Bank held $19.5 billion of total investments, including trading, available-for-sale (AFS) and held-to-maturity (HTM) investment securities, as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2016, these investments totaled $17.2 billion. The increase of $2.3 billion, mainly represented by an increase in Federal funds sold, which reflects the Bank's management of its daily liquidity position.

Consolidated Obligations. The Bank's consolidated obligations totaled $94.0 billion at September 30, 2017, a decrease of $1.6 billion from December 31, 2016. At September 30, 2017, bonds represented 59% of the Bank's consolidated obligations, compared with 70% at December 31, 2016. Discount notes represented 41% of the Bank's consolidated obligations at September 30, 2017 compared with 30% at year-end 2016. During the third quarter of 2017, the Bank continued its focus on short-term discount note funding as spreads to LIBOR remained near the previous quarter's levels and market concern over a potential government shutdown in October led to discount note yields below Treasury bills.

Capital Position and Regulatory Requirements. Total capital at September 30, 2017 was $4.9 billion, compared to $4.8 billion at December 31, 2016. Total retained earnings at September 30, 2017 were $1,119.4 million, up $133.2 million from $986.2 million at year-end 2016, reflecting the Bank's net income for the first nine months of 2017, which was partially offset by dividends paid. Accumulated other comprehensive income (AOCI) was $123.6 million at September 30, 2017, an increase of $71.3 million from December 31, 2016. This increase was primarily due to changes in the fair values of securities within the AFS portfolio.

In February, April, July and October 2017, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 2.0% on activity stock and membership stock, respectively. These dividends were based on stockholders' average balances for the

fourth quarter of 2016 (February dividend), the first quarter of 2017 (April dividend), the second quarter of 2017 (July dividend) and the third quarter of 2017 (October dividend).

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

Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2016 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements except for the three months ended December 31, 2016, which have been derived from the Bank's 2016 Form 10-K.

Condensed Statements of Income



	Three months ended
	September 30,			June 30,			March 31,			December 31,			September 30,
(in millions)	2017			2017			2017			2016			2016
Net interest income	$	109.3		$	110.4		$	108.3		$	94.7		$	79.2
Provision (benefit) for credit losses	0.1			(0.1		)	—			0.1			0.7
Other noninterest income	6.5			7.0			12.7			21.2			1.6
Other expense	22.5			19.7			24.5			25.0			19.2
Income before assessments	93.2			97.8			96.5			90.8			60.9
Affordable Housing Program (AHP) assessment⁽¹⁾	9.3			9.8			9.7			9.1			6.1
Net income	$	83.9		$	88.0		$	86.8		$	81.7		$	54.8

Dividends	$	41.9		$	42.0		$	41.6		$	37.7		$	37.6
Dividend payout ratio ⁽²⁾	49.95		%	47.76		%	47.90		%	46.12		%	68.73		%
Return on average equity	6.93		%	7.49		%	7.50		%	7.10		%	5.10		%
Return on average assets	0.34		%	0.37		%	0.36		%	0.34		%	0.24		%
Net interest margin ⁽³⁾	0.45		%	0.47		%	0.46		%	0.40		%	0.36		%
Regulatory capital ratio ⁽⁴⁾	4.83		%	4.78		%	4.79		%	4.69		%	4.70		%
GAAP capital ratio ⁽⁵⁾	4.95		%	4.89		%	4.87		%	4.73		%	4.83		%
Total average equity to average assets	4.90		%	4.88		%	4.84		%	4.75		%	4.75		%



	Nine months ended
(in millions)	September 30, 2017			September 30, 2016
Net interest income	$	328.0		$	254.2
Provision for credit losses	—			1.1
Other noninterest income	26.2			3.8
Other expense	66.7			58.8
Income before assessments	287.5			198.1
AHP assessment ⁽¹⁾	28.8			19.8
Net income	$	258.7		$	178.3

Dividends	$	125.5		$	117.3
Dividend payout ratio⁽²⁾	48.52		%	65.84		%
Return on average equity	7.30		%	5.55		%
Return on average assets	0.36		%	0.26		%
Net interest margin ⁽³⁾	0.46		%	0.38		%
Regulatory capital ratio ⁽⁴⁾	4.83		%	4.70		%
GAAP capital ratio ⁽⁵⁾	4.95		%	4.83		%
Total average equity to average assets	4.88		%	4.71		%

Notes:

⁽¹⁾ Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.

⁽²⁾ Represents dividends paid as a percentage of net income for the respective periods presented.

⁽³⁾ Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.

⁽⁴⁾ Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.

⁽⁵⁾ GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

Condensed Statements of Condition



	September 30,		June 30,		March 31,		December 31,		September 30,
(in millions)	2017		2017		2017		2016		2016
Cash and due from banks	$	2,068.7	$	4,010.4	$	2,550.8	$	3,587.6	$	2,943.9
Investments ⁽¹⁾	19,528.9		18,943.1		18,722.3		17,227.3		17,553.0
Advances	74,228.0		74,080.2		70,316.7		76,808.7		71,831.9
Mortgage loans held for portfolio, net ⁽²⁾	3,763.3		3,537.5		3,418.4		3,390.7		3,269.3
Total assets	99,864.6		100,828.6		95,231.6		101,260.0		95,834.4
Consolidated obligations, net:
Discount notes	38,877.0		31,928.8		24,190.7		28,500.3		22,636.3
Bonds	55,140.2		62,910.9		65,481.2		67,156.0		67,682.3
Total consolidated obligations, net ⁽³⁾	94,017.2		94,839.7		89,671.9		95,656.3		90,318.6
Deposits	627.1		590.4		602.6		558.9		619.1
Mandatorily redeemable capital stock	5.6		5.0		5.2		5.2		5.4
AHP payable	88.7		86.1		81.2		76.7		73.8
Total liabilities	94,924.7		95,896.4		90,595.0		96,466.1		91,206.3
Capital stock - putable	3,696.9		3,732.6		3,523.1		3,755.4		3,556.5
Unrestricted retained earnings	853.1		827.9		799.5		771.7		744.0
Restricted retained earnings	266.3		249.5		231.9		214.5		198.2
AOCI	123.6		122.2		82.1		52.3		129.4
Total capital	4,939.9		4,932.2		4,636.6		4,793.9		4,628.1

Notes:

⁽¹⁾ Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits.

⁽²⁾ Includes allowance for credit losses of $6.1 million at September 30, 2017, $6.3 million at June 30, 2017, $6.2 million at March 31, 2017, $6.2 million at December 31, 2016, and $6.5 million at September 30, 2016.

⁽³⁾ Aggregate FHLBank System-wide consolidated obligations (at par) were $1,028.7 billion at September 30, 2017, $1,011.5 billion at June 30, 2017, $959.3 billion at March 31, 2017, $989.3 billion at December 31, 2016, and $967.7 billion at September 30, 2016.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three and nine months ended September 30, 2017 and 2016, which should be read in conjunction with the Bank's unaudited interim financial statements included in this Form 10-Q as well as the audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2016 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for the third quarter of 2017 was $83.9 million compared to $54.8 million for the third quarter of 2016. This $29.1 million increase was primarily driven by higher net interest income. Net interest income was $109.3 million for the third quarter of 2017, an increase of $30.1 million compared to $79.2 million in the third quarter of 2016. Higher net interest income was primarily due to interest income on higher average advance balances, Federal funds sold and available-for-sale securities, partially offset by interest expense on higher average consolidated obligation balances. The Bank's return on average equity for the third quarter of 2017 was 6.93% compared to 5.10% for the third quarter of 2016.

For the nine months ended September 30, 2017, net income was $258.7 million compared to $178.3 million for the same prior-year period. The $80.4 million increase was primarily due to higher net interest income and higher noninterest income, slightly offset by higher other expense. Net interest income was $328.0 million for the first nine months of 2017, an increase of $73.8 million compared to $254.2 million in the same prior-year period. This increase was primarily driven by interest income on higher average advance balances and Federal funds sold, partially offset by interest expense on higher average consolidated obligation balances. The amount of offsetting interest expense on consolidated obligations was reduced by improved funding spreads. Net interest income was also positively influenced by higher interest income on investment securities and mortgage loans held for portfolio, partially offset by a reduction in net prepayment fees on advances. Noninterest income was $26.2 million for the first nine months of 2017, compared to $3.8 million in the same prior-year period. This $22.4 million increase was primarily driven by lower net losses on derivatives and hedging activities, partially offset by lower net gains on trading securities and net realized gains on sales of available-for-sale securities in 2016 that did not recur in 2017. Total other expense increased $7.9 million for the first nine months of 2017 compared to prior-year period, primarily due to higher compensation and benefits expense. The Bank's return on average equity for the first nine months of 2017 was 7.30% compared to 5.55% for the comparable prior year period.

Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three and nine months ended September 30, 2017 and 2016.

Average Balances and Interest Yields/Rates Paid



	Three months ended September 30,
	2017						2016
(dollars in millions)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)
Assets:
Federal funds sold and securities purchased under agreements to resell ⁽¹⁾	$	8,155.1		$	23.8	1.16	$	7,556.4		$	7.5	0.39
Interest-bearing deposits ⁽²⁾	383.6			0.8		0.82	412.0			0.4		0.37
Investment securities ⁽³⁾	11,501.3			66.0		2.28	11,793.4			56.3		1.90
Advances ⁽⁴⁾	72,774.1			269.3		1.47	65,030.5			144.8		0.89
Mortgage loans held for portfolio ⁽⁵⁾	3,650.6			32.6		3.55	3,207.8			29.3		3.64
Total interest-earning assets	96,464.7			392.5		1.61	88,000.1			238.3		1.08
Allowance for credit losses	(8.2		)				(7.7		)
Other assets ⁽⁶⁾	1,415.2						1,866.9
Total assets	$	97,871.7					$	89,859.3
Liabilities and capital:
Deposits ⁽²⁾	$	584.6		$	1.5	1.04	$	646.3		$	0.4	0.25
Consolidated obligation discount notes	32,572.9			85.7		1.04	21,331.0			24.5		0.46
Consolidated obligation bonds ⁽⁷⁾	59,390.1			195.9		1.31	62,637.5			134.1		0.85
Other borrowings	5.1			0.1		5.06	5.6			0.1		5.20
Total interest-bearing liabilities	92,552.7			283.2		1.21	84,620.4			159.1		0.75
Other liabilities	519.0						969.9
Total capital	4,800.0						4,269.0
Total liabilities and capital	$	97,871.7					$	89,859.3
Net interest spread						0.40						0.33
Impact of noninterest-bearing funds						0.05						0.03
Net interest income/net interest margin				$	109.3	0.45				$	79.2	0.36

Notes:

⁽¹⁾ The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.

⁽²⁾ Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.

⁽³⁾ Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of recognized OTTI reflected in AOCI.

⁽⁴⁾ Average balances reflect noninterest-earning hedge accounting adjustments of $(3.1) million and $171.2 million in 2017 and 2016, respectively.

⁽⁵⁾ Nonaccrual mortgage loans are included in average balances in determining the average rate.

⁽⁶⁾The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.

⁽⁷⁾ Average balances reflect noninterest-bearing hedge accounting adjustments of $(70.5) million and $29.2 million in 2017 and 2016, respectively.

Net interest income for the third quarter of 2017 increased $30.1 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. Interest-earning assets increased 9.6% primarily due to higher demand for advances, increased purchases of mortgage loans held for portfolio and increased purchases of Federal funds sold and securities purchased agreement to resell. The rate earned on interest-earning assets increased 53 basis points primarily due

to a higher yield on advances. Interest income increased on advances, investment securities, Federal funds sold and securities purchased under agreements to resell, and mortgage loans held for portfolio. Interest income on advances, Federal funds sold and securities purchased under agreements to resell increased due to both higher volume and an increase in yield. Interest income on investment securities increased due to an increase in yield. Interest income on mortgage loans held for portfolio increased due to increased volume, which more than offset the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 46 basis points due to higher funding costs on consolidated obligation bonds and discount notes.



	Nine months ended September 30,
	2017						2016
(dollars in millions)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)
Assets:
Federal funds sold and securities purchased under agreements to resell ⁽¹⁾	$	6,894.5		$	49.7	0.96	$	7,435.1		$	20.7	0.37
Interest-bearing deposits ⁽²⁾	283.5			1.6		0.73	405.2			1.0		0.34
Investment securities ⁽³⁾	11,828.7			191.1		2.16	11,503.3			167.8		1.95
Advances ⁽⁴⁾	73,237.0			712.7		1.30	67,022.2			433.3		0.86
Mortgage loans held for portfolio ⁽⁵⁾	3,510.8			95.2		3.63	3,133.7			87.9		3.75
Total interest-earning assets	95,754.5			1,050.3		1.47	89,499.5			710.7		1.06
Allowance for credit losses	(8.3		)				(7.8		)
Other assets ⁽⁶⁾	1,362.5						1,556.8
Total assets	$	97,108.7					$	91,048.5
Liabilities and capital:
Deposits ⁽²⁾	$	562.1		$	3.4	0.82	$	654.9		$	1.2	0.25
Consolidated obligation discount notes	28,509.6			178.0		0.83	25,980.7			84.6		0.44
Consolidated obligation bonds ⁽⁷⁾	62,762.0			540.7		1.15	59,231.8			370.4		0.84
Other borrowings	7.1			0.2		3.90	6.7			0.3		4.81
Total interest-bearing liabilities	91,840.8			722.3		1.05	85,874.1			456.5		0.71
Other liabilities	531.9						882.0
Total capital	4,736.0						4,292.4
Total liabilities and capital	$	97,108.7					$	91,048.5
Net interest spread						0.42						0.35
Impact of noninterest-bearing funds						0.04						0.03
Net interest income/net interest margin				$	328.0	0.46				$	254.2	0.38

Notes:

⁽⁴⁾ Average balances reflect noninterest-earning hedge accounting adjustments of $(15.9) million and $199.2 million in 2017 and 2016, respectively.

⁽⁵⁾ Nonaccrual mortgage loans are included in average balances in determining the average rate.

⁽⁶⁾The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.

⁽⁷⁾ Average balances reflect noninterest-bearing hedge accounting adjustments of $(85.3) million and $31.0 million in 2017 and 2016, respectively.

Net interest income for the first nine months of 2017 increased $73.8 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. The amount of offsetting interest expense on consolidated obligation bonds and discount notes was reduced by improved funding spreads. Interest-earning assets increased 7.0% primarily due to higher demand for advances, increased purchases of investment securities and increased purchases of m

ortgage loans held for portfolio, partially offset by decreased purchases of Federal funds sold and securities purchased under agreements to resell. The rate earned on interest-earning assets increased 41 basis points primarily due to a higher yield on advances. Interest income increased on advances, investment securities, Federal funds sold and securities purchased under agreements to resell. Interest income on advances and investment securities increased due to both higher volume and an increase in yield. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to an increase in yield. Interest income on mortgage loans held for portfolio increased due to increased volume, which more than offset the run-off of higher-yielding assets that have been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 34 basis points due to higher funding costs on consolidated obligation bonds and discount notes.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three and nine months ended September 30, 2017 and 2016.



	Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2017 compared to 2016
	Three months ended September 30,								Nine months ended September 30,
(in millions)	Volume			Rate			Total		Volume			Rate			Total
Federal funds sold	$	0.6		$	15.7		$	16.3	$	(1.6	)	$	30.6		$	29.0
Interest-bearing deposits	—			0.4			0.4		(0.3		)	0.9			0.6
Investment securities	(1.3		)	11.0			9.7		4.6			18.7			23.3
Advances	19.6			104.9			124.5		42.8			236.6			279.4
Mortgage loans held for portfolio	4.0			(0.7		)	3.3		10.2			(2.9		)	7.3
Total interest-earning assets	$	22.9		$	131.3		$	154.2	$	55.7		$	283.9		$	339.6
Interest-bearing deposits	$	(0.1	)	$	1.2		$	1.1	$	(0.2	)	$	2.4		$	2.2
Consolidated obligation discount notes	18.0			43.2			61.2		8.9			84.5			93.4
Consolidated obligation bonds	(6.9		)	68.7			61.8		22.8			147.5			170.3
Other borrowings	—			—			—		—			(0.1		)	(0.1		)
Total interest-bearing liabilities	$	11.0		$	113.1		$	124.1	$	31.5		$	234.3		$	265.8
Total increase in net interest income	$	11.9		$	18.2		$	30.1	$	24.2		$	49.6		$	73.8

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

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

The following table presents the average par balances of the Bank's advance portfolio for the three and nine months ended September 30, 2017 and 2016. These balances do not reflect any hedge accounting adjustments.



(in millions)	Three months ended September 30,				Nine months ended September 30,
Product	2017		2016		2017		2016
RepoPlus/Mid-Term Repo	$	23,724.0	$	18,092.0	$	21,852.7	$	18,440.0
Core (Term)	48,714.5		46,108.9		51,062.6		47,724.4
Convertible Select	339.5		659.5		339.5		659.5
Total par value	$	72,778.0	$	64,860.4	$	73,254.8	$	66,823.9

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

Interest Income Derivative Effects. The following tables quantify the effects of the Bank's derivative activities on interest income and interest expense for the three and nine months ended September 30, 2017 and 2016. Derivative and hedging activities are discussed below.



Three Months Ended September 30, 2017 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives(1)			Incr./ (Decr.) (%)
Assets:
Advances	$	72,774.1	$	269.3	1.47	$	276.6	1.51	$	(7.3	)	(0.04	)
Mortgage loans held for portfolio	3,650.6		32.6		3.55	33.6		3.66	(1.0		)	(0.11	)
All other interest-earning assets	20,040.0		90.6		1.80	94.6		1.87	(4.0		)	(0.07	)
Total interest-earning assets	$	96,464.7	$	392.5	1.61	$	404.8	1.67	$	(12.3	)	(0.06	)
Liabilities:
Consolidated obligation bonds	$	59,390.1	$	195.9	1.31	$	194.8	1.30	$	1.1		0.01
All other interest-bearing liabilities	33,162.6		87.3		1.04	87.3		1.04	—			—
Total interest-bearing liabilities	$	92,552.7	$	283.2	1.21	$	282.1	1.21	$	1.1		—
Net interest income/net interest spread			$	109.3	0.40	$	122.7	0.46	$	(13.4	)	(0.06	)



Three Months Ended September 30, 2016 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives(1)			Incr./ (Decr.) (%)
Assets:
Advances	$	65,030.5	$	144.8	0.89	$	165.0	1.01	$	(20.2	)	(0.12	)
Mortgage loans held for portfolio	3,207.8		29.3		3.64	30.6		3.80	(1.3		)	(0.16	)
All other interest-earning assets	19,761.8		64.2		1.29	70.0		1.41	(5.8		)	(0.12	)
Total interest-earning assets	$	88,000.1	$	238.3	1.08	$	265.6	1.20	$	(27.3	)	(0.12	)
Liabilities:
Consolidated obligation bonds	$	62,637.5	$	134.1	0.85	$	148.0	0.94	$	(13.9	)	(0.09	)
All other interest-bearing liabilities	21,982.9		25.0		0.45	25.0		0.45	—			—
Total interest-bearing liabilities	$	84,620.4	$	159.1	0.75	$	173.0	0.81	$	(13.9	)	(0.06	)
Net interest income/net interest spread			$	79.2	0.33	$	92.6	0.39	$	(13.4	)	(0.06	)



Nine Months Ended September 30, 2017 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives(1)			Incr./ (Decr.) (%)
Assets:
Advances	$	73,237.0	$	712.7	1.30	$	738.5	1.35	$	(25.8	)	(0.05	)
Mortgage loans held for portfolio	3,510.8		95.2		3.63	98.1		3.74	(2.9		)	(0.11	)
All other interest-earning assets	19,006.7		242.4		1.71	255.6		1.80	(13.2		)	(0.09	)
Total interest-earning assets	$	95,754.5	$	1,050.3	1.47	$	1,092.2	1.53	$	(41.9	)	(0.06	)
Liabilities:
Consolidated obligation bonds	$	62,762.0	$	540.7	1.15	$	549.2	1.17	$	(8.5	)	(0.02	)
All other interest-bearing liabilities	29,078.8		181.6		0.84	181.6		0.84	—			—
Total interest-bearing liabilities	$	91,840.8	$	722.3	1.05	$	730.8	1.06	$	(8.5	)	(0.01	)
Net interest income/net interest spread			$	328.0	0.42	$	361.4	0.47	$	(33.4	)	(0.05	)



Nine Months Ended September 30, 2016 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives(1)			Incr./ (Decr.) (%)
Assets:
Advances	$	67,022.2	$	433.3	0.86	$	522.7	1.04	$	(89.4	)	(0.18	)
Mortgage loans held for portfolio	3,133.7		87.9		3.75	91.5		3.90	(3.6		)	(0.15	)
All other interest-earning assets	19,343.6		189.5		1.31	207.4		1.43	(17.9		)	(0.12	)
Total interest-earning assets	$	89,499.5	$	710.7	1.06	$	821.6	1.23	$	(110.9	)	(0.17	)
Liabilities:
Consolidated obligation bonds	$	59,231.8	$	370.4	0.84	$	430.8	0.97	$	(60.4	)	(0.13	)
All other interest-bearing liabilities	26,642.3		86.1		0.43	86.1		0.43	—			—
Total interest-bearing liabilities	$	85,874.1	$	456.5	0.71	$	516.9	0.80	$	(60.4	)	(0.09	)
Net interest income/net interest spread			$	254.2	0.35	$	304.7	0.43	$	(50.5	)	(0.08	)

Note:

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

The use of derivatives reduced net interest income and net interest spread for the three and nine months ended September 30, 2017 and 2016. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations, which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is

to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.

The Bank uses many different funding and hedging strategies. These strategies involve closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision for Credit Losses. The provision for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for the third quarter of 2017 was $0.1 million compared to $0.7 million for the same period in 2016. For the nine months ended September 30, 2017 and 2016, the provision for credit losses on mortgage loans held for portfolio and BOB loans was $45 thousand and $1.1 million, respectively.

Other Noninterest Income



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2017			2016			2017			2016
Net OTTI losses, credit portion	$	—		$	—		$	(0.7	)	$	(0.2	)
Net gains (losses) on trading securities	0.3			(2.6		)	7.9			25.6
Net realized gains (losses) from sales of AFS securities	—			(0.1		)	—			12.6
Net (losses) on derivatives and hedging activities	(0.5		)	(2.4		)	(0.4		)	(54.4		)
Gains on litigation settlements, net	—			0.1			—			0.6
Standby letters of credit fees	6.1			6.1			18.2			18.5
Other, net	0.6			0.5			1.2			1.1
Total other noninterest income	$	6.5		$	1.6		$	26.2		$	3.8

The change in the Bank's total other noninterest income for the third quarter of 2017 compared to the same prior year period was due primarily to net gains on trading securities and lower net losses on derivatives and hedging activities. The change in the Bank's total other noninterest income for the first nine months of 2017 compared to the same prior year period was due primarily to lower net losses on derivatives and hedging activities, partially offset by lower net gains on trading securities and no net realized gains from the sales of AFS securities.

The activity related to derivatives and hedging is discussed in more detail below. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank's trading portfolio. During the first and third quarters of 2016, the Bank sold Agency, private label MBS and home equity line of credit (HELOC) securities from its AFS portfolio. The Bank did not have any AFS security sales in the first nine months of 2017.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, caps, floors and swaption agreements, referred to collectively as interest rate exchange agreements and more broadly as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives' fair values are recorded in the Statements of Income.

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but either they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.

The following tables detail the net effect of derivatives and hedging activities for the three and nine months ended September 30, 2017 and 2016.



	Three months ended September 30, 2017
(in millions)	Advances			Investments			Mortgage Loans			Bonds			Discount Notes			Balance Sheet		Other		Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(0.1	)	$	(0.1	)	$	(1.0	)	$	(0.2	)	$	—		$	—	$	—	$	(1.4	)
Net interest settlements included in net interest income ⁽²⁾	(7.2		)	(3.9		)	—			(0.9		)	—			—		—		(12.0		)
Total effect on net interest income	$	(7.3	)	$	(4.0	)	$	(1.0	)	$	(1.1	)	$	—		$	—	$	—	$	(13.4	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	0.1		$	—		$	—		$	(0.6	)	$	—		$	—	$	—	$	(0.5	)
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements	0.6			(1.6		)	(1.0		)	1.9			(0.1		)	—		—		(0.2		)
Other ⁽³⁾	—			—			—			—			—			—		0.2		0.2
Total net gains (losses) on derivatives and hedging activities	$	0.7		$	(1.6	)	$	(1.0	)	$	1.3		$	(0.1	)	$	—	$	0.2	$	(0.5	)
Total net effect of derivatives and hedging activities	$	(6.6	)	$	(5.6	)	$	(2.0	)	$	0.2		$	(0.1	)	$	—	$	0.2	$	(13.9	)



	Three months ended September 30, 2016
(in millions)	Advances			Investments			Mortgage Loans			Bonds			Discount Notes			Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(0.3	)	$	—		$	(1.3	)	$	—		$	—		$	(1.6	)
Net interest settlements included in net interest income⁽²⁾	(19.9		)	(5.8		)	—			13.9			—			(11.8		)
Total effect on net interest income	$	(20.2	)	$	(5.8	)	$	(1.3	)	$	13.9		$	—		$	(13.4	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	0.4		$	—		$	—		$	(0.6	)	$	—		$	(0.2	)
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements	4.8			6.2			1.4			(13.0		)	(1.6		)	(2.2		)
Total net gains (losses) on derivatives and hedging activities	$	5.2		$	6.2		$	1.4		$	(13.6	)	$	(1.6	)	$	(2.4	)
Total net effect of derivatives and hedging activities	$	(15.0	)	$	0.4		$	0.1		$	0.3		$	(1.6	)	$	(15.8	)



	Nine months ended September 30, 2017
(in millions)	Advances			Investments			Mortgage Loans			Bonds		Discount Notes			Balance Sheet			Other		Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(0.6	)	$	(0.1	)	$	(2.9	)	$	0.6	$	—		$	—		$	—	$	(3.0	)
Net interest settlements included in net interest income⁽²⁾	(25.2		)	(13.1		)	—			7.9		—			—			—		(30.4		)
Total effect on net interest income	$	(25.8	)	$	(13.2	)	$	(2.9	)	$	8.5	$	—		$	—		$	—	$	(33.4	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	—		$	(0.7	)	$	—		$	0.4	$	—		$	—		$	—	$	(0.3	)
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements	(0.2		)	(12.9		)	(5.0		)	17.9		(0.3		)	(0.1		)	—		(0.6		)
Other ⁽³⁾	—			—			—			—		—			—			0.5		0.5
Total net gains (losses) on derivatives and hedging activities	$	(0.2	)	$	(13.6	)	$	(5.0	)	$	18.3	$	(0.3	)	$	(0.1	)	$	0.5	$	(0.4	)
Total net effect of derivatives and hedging activities	$	(26.0	)	$	(26.8	)	$	(7.9	)	$	26.8	$	(0.3	)	$	(0.1	)	$	0.5	$	(33.8	)



	Nine months ended September 30, 2016
(in millions)	Advances			Investments			Mortgage Loans			Bonds			Discount Notes		Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(1.9	)	$	—		$	(3.6	)	$	1.6		$	—	$	(3.9	)
Net interest settlements included in net interest income⁽²⁾	(87.5		)	(17.9		)	—			58.8			—		(46.6		)
Total effect on net interest income	$	(89.4	)	$	(17.9	)	$	(3.6	)	$	60.4		$	—	$	(50.5	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	2.2		$	(5.7	)	$	—		$	(1.8	)	$	—	$	(5.3	)
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements	(13.7		)	(63.1		)	(21.6		)	49.1			0.2		(49.1		)
Total net gains (losses) on derivatives and hedging activities	$	(11.5	)	$	(68.8	)	$	(21.6	)	$	47.3		$	0.2	$	(54.4	)
Total net effect of derivatives and hedging activities	$	(100.9	)	$	(86.7	)	$	(25.2	)	$	107.7		$	0.2	$	(104.9	)

Notes:

⁽¹⁾Represents the amortization/accretion of hedging fair value adjustments.

⁽²⁾Represents interest income/expense on derivatives included in net interest income.

⁽³⁾ Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. Refer to Note 9 - Derivatives and Hedging Activities in this Form 10-Q.

Fair value hedges. The Bank uses interest rate swaps to hedge a large portion of its fixed-rate advances and consolidated obligations and a small portion of its fixed rate investment securities. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). Most of these hedge relationships are subject to fair value hedge accounting treatment. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative and the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time. During the third quarter of 2017, the Bank recorded net losses of $(0.5) million compared to net losses of $(0.2) the third quarter of 2016. For the nine months ended September 30, 2017 and 2016, the Bank recorded net losses of $(0.3) million and $(5.3) million, respectively. The total notional amount decreased to $26.1 billion at September 30, 2017, down from $29.1 billion at December 31, 2016.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the "Net gains (losses) on derivatives and

hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(0.2) million and $(2.2) million for the third quarter of 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the Bank recorded net losses of $(0.6) million and $(49.1) million, respectively. The larger losses on economic hedges observed during the first nine months of 2016 compared to the same period in 2017 were due to large decreases in mid and long term interest rates during the first nine months of 2016. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $14.4 billion at September 30, 2017 and $10.6 billion at December 31, 2016.

Other Expense

The Bank's total other expenses increased $3.3 million to $22.5 million for the third quarter of 2017, compared to the same prior year period. For the first nine months of 2017 compared to the same prior year period, the Bank's total other expense increased $7.9 million, to $66.7 million. These increases were primarily due to higher compensation and benefits related expenses, including a $4.0 million and a $2.0 million voluntary contribution to the Bank's pension plan in the first and third quarters of 2017, respectively. There was a $2.0 million voluntary contribution to the Bank's pension plan in the second quarter of 2016.

Financial Condition

The following should be read in conjunction with the Bank's unaudited interim financial statements in this Form 10-Q and the audited financial statements in the Bank's 2016 Form 10-K.

Assets

Total assets were $99.9 billion at September 30, 2017, compared with $101.3 billion at December 31, 2016 a decrease of $1.4 billion. The decrease was primarily due to lower advances. Advances totaled $74.2 billion at September 30, 2017, a decrease of $2.6 billion compared to $76.8 billion at December 31, 2016.

The Bank's core mission activities primarily include the issuance of advances. In addition, the Bank acquires member assets through the Mortgage Partnership Finance^® (MPF^®) program. The Bank's average par amounts for advances and MPF loans as of September 30, 2017 totaled $76.7 billion, resulting in a core mission asset ratio of 83.9%.

Advances. Advances (par) totaled $74.3 billion at September 30, 2017 compared to $76.8 billion at December 31, 2016. At September 30, 2017, the Bank had advances to 185 borrowing members, compared to 184 borrowing members at December 31, 2016. The percentage of borrowing members to total members was 61.7% and 60.5% at September 30, 2017 and December 31, 2016, respectively. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members decreased to 75.9% of total advances as of September 30, 2017, compared to 79.7% at December 31, 2016.

The following table provides information on advances at par by contractual maturity at September 30, 2017 and December 31, 2016.



	September 30,		December 31,
(in millions)	2017		2016
Fixed-rate
Due in 1 year or less	$	23,807.3	$	20,563.9
Due after 1 year through 3 years	8,305.9		5,817.9
Due after 3 years through 5 years	3,688.2		2,793.5
Thereafter	677.0		664.7
Total par value	$	36,478.4	$	29,840.0

Variable-rate
Due in 1 year or less	$	10,545.3	$	12,998.1
Due after 1 year through 3 years	14,731.3		12,292.5
Due after 3 years through 5 years	5,052.0		8,552.0
Thereafter	3.1		3.1
Total par value	$	30,331.7	$	33,845.7

Variable-rate, callable or prepayable⁽¹⁾
Due in 1 year or less	$	1,900.0	$	4,700.0
Due after 1 year through 3 years	1,790.0		3,375.0
Due after 3 years through 5 years	3,010.0		4,225.0
Total par value	$	6,700.0	$	12,300.0

Other⁽²⁾
Due in 1 year or less	$	320.2	$	309.9
Due after 1 year through 3 years	167.3		302.3
Due after 3 years through 5 years	105.2		79.7
Thereafter	162.8		157.7
Total par value	$	755.5	$	849.6
Total par balance	$	74,265.6	$	76,835.3

Notes:

⁽¹⁾Prepayable advances are those advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees.

⁽²⁾ Includes fixed-rate amortizing/mortgage matched, convertible, and other advances.

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

The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding advance balance during the nine months ended September 30, 2017 and 2016. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and Community Financial Institutions (CFIs) (under $1.1 billion).



	September 30,		September 30,
Member Asset Size	2017		2016
Large	6		5
Regional	14		13
Mid-size	23		24
CFI ⁽¹⁾	177		173
Insurance	13		8
Total borrowing members during the period	233		223
Total membership	300		304
Percentage of members borrowing during the period	77.7	%	73.4	%

Notes:

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

The Bank added three new members and lost seven members in the first nine months of 2017. Two members merged with other institutions outside of the Bank's district, and five members merged with other institutions within the Bank's district.

The following table provides information at par on advances by member classification at September 30, 2017 and December 31, 2016.



(in millions)	September 30, 2017		December 31, 2016
Member Classification	September 30, 2017		December 31, 2016
Large	$	57,125.0	$	61,230.0
Regional	7,984.7		6,579.0
Mid-size	3,674.6		3,681.9
CFI	3,559.4		3,613.1
Insurance	1,897.7		1,729.3
Non-member	24.2		2.0
Total	$	74,265.6	$	76,835.3

As of September 30, 2017, total advances decreased 3.3% compared with balances at December 31, 2016. Decreases in advances to the Bank's large member classification were partially offset by increases in advances to other classifications. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs.

See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of this Item 2 for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of September 30, 2017.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, totaled $3.8 billion and $3.4 billion at September 30, 2017 and December 31, 2016 respectively.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording of interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for participating financial institutions (PFIs) under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank. Balances regarding the

Bank’s loan products are summarized below.



(in millions)	September 30, 2017		December 31, 2016
Advances⁽¹⁾	$	74,228.0	$	76,808.7
Mortgage loans held for portfolio, net⁽²⁾	3,763.3		3,390.7
Nonaccrual mortgage loans⁽³⁾	23.0		26.6
Mortgage loans 90 days or more delinquent and still accruing interest⁽⁴⁾	4.1		4.0
BOB loans, net	13.0		12.3

Notes:

⁽¹⁾ There are no advances which are past due or on nonaccrual status.

⁽²⁾ All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.

⁽³⁾ Nonaccrual mortgage loans are reported net of interest applied to principal and do not include performing TDRs of $9.0 million at September 30, 2017 and $11.5 million at December 31, 2016.

⁽⁴⁾ Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable since year-end 2016 and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of September 30, 2017, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.5% of the MPF Original portfolio and 2.6% of the MPF Plus portfolio compared with 0.6% and 2.9%, respectively, at December 31, 2016. The MPF 35 portfolio delinquency remains minimal at 0.03% as it is relatively new.

Allowance for Credit Losses (ACL). The Bank has not incurred any losses on advances since its inception in 1932. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is not appropriate under GAAP. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in the Bank's 2016 Form 10-K.

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

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

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

The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the first loss account (FLA). Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF 35 and MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank.

The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at September 30, 2017 and December 31, 2016.



	MPF CE structure September 30, 2017				ACL September 30, 2017
(in millions)	FLA		Available CE		Estimate of Credit Loss		Charge - offs			Reduction to the ACL due to CE			ACL
MPF Original	$	4.8	$	88.2	$	4.8	$	(0.1	)	$	(4.2	)	$	0.5
MPF 35	3.3		29.6		0.2		—			(0.2		)	—
MPF Plus	17.1		12.7		11.7		—			(6.1		)	5.6
Total	$	25.2	$	130.5	$	16.7	$	(0.1	)	$	(10.5	)	$	6.1



	MPF CE structure December 31, 2016				ACL December 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	$	5.8	$	130.7	$	5.8	$	(1.0	)	$	(4.3	)	$	0.5
MPF Plus	18.0		18.3		13.7		—			(8.0		)	5.7
Total	$	23.8	$	149.0	$	19.5	$	(1.0	)	$	(12.3	)	$	6.2

During the third quarter of 2017, two significant hurricanes (Harvey, Irma) impacted the southeastern coasts of the United States. The Bank has analyzed the potential impact that the damage related to these hurricanes might have on the Bank’s mortgage loans held for portfolio. Based on the information currently available, the Bank does not anticipate any related losses to be material. The Bank continues to evaluate the impact of the hurricanes and if additional information becomes available indicating that any of the Bank's mortgage loans have been impaired and the amount of the loss can be reasonably estimated, the Bank will record appropriate reserves at that time.

Investments. At September 30, 2017, the sum of the Bank's interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell was $7.8 billion, an increase of approximately $2.6 billion from December 31, 2016. 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 $11.7 billion at September 30, 2017, compared to $12.0 billion at December 31, 2016. Details of the investment securities portfolio follow.



	Carrying Value
(in millions)	September 30, 2017			December 31, 2016
Trading securities:
Mutual funds	$	9.1		$	7.1
Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations	395.2			388.1
Total trading securities	$	404.3		$	395.2
Yield on trading securities	2.89		%	2.91		%
AFS securities:
Mutual funds	$	2.0		$	2.0
GSE and TVA obligations	3,096.9			3,183.2
State or local agency obligations	269.6			236.4
MBS:
Other U.S. obligations single family MBS	187.9			216.4
GSE single-family MBS	2,740.9			3,213.2
GSE multifamily MBS	2,174.5			1,512.9
Private label residential MBS	557.1			674.0
Total AFS securities	$	9,028.9		$	9,038.1
Yield on AFS securities	2.19		%	2.00		%
HTM securities:
Certificates of deposit	$	450.0		$	400.0
State or local agency obligations	127.2			131.9
MBS:
Other U.S. obligations single family MBS	457.7			583.5
GSE single-family MBS	168.5			212.1
GSE multifamily MBS	774.8			843.2
Private label residential MBS	311.4			395.4
Total HTM securities	$	2,289.6		$	2,566.1
Yield on HTM securities	2.44		%	2.23		%
Total investment securities	$	11,722.8		$	11,999.4
Yield on investment securities	2.26		%	2.08		%

As of September 30, 2017, 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	$	4,497.9	$	4,508.6
Fannie Mae	2,887.4		2,892.1
Federal Farm Credit Banks	1,857.7		1,857.7
Ginnie Mae	512.6		515.6
Total	$	9,755.6	$	9,774.0

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

Liabilities and Capital

Commitments and Off-Balance Sheet Items. As of September 30, 2017, the Bank was obligated to fund approximately $31.8 million in additional advances and BOB loans, $49.7 million of mortgage loans and $20.8 billion in outstanding standby letters of credit, and to issue $136.4 million in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

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

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

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The framework includes four risk elements that comprise the Bank's total retained earnings target: (1) market risk (which includes private label MBS risk); (2) credit risk; (3) operational risk; and (4) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $474 million as of September 30, 2017. The Bank's retained earnings were $1,119.4 million at September 30, 2017.

Retained earnings increased $133.2 million to $1,119.4 million at September 30, 2017, compared to $986.2 million at December 31, 2016. The increase in retained earnings during the first nine months of 2017 reflected net income that was partially offset by $125.5 million of dividends paid. Total retained earnings at September 30, 2017 included unrestricted retained earnings of $853.1 million and restricted retained earnings (RRE) of $266.3 million.

Capital Resources

The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q, the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data and the Capital Resources section of Item 1. Business in the Bank's 2016 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.



	September 30,		December 31,
(in millions)	2017		2016
Permanent capital:
Capital stock⁽¹⁾	$	3,702.5	$	3,760.6
Retained earnings	1,119.4		986.2
Total permanent capital	$	4,821.9	$	4,746.8
RBC requirement:
Credit risk capital	$	409.2	$	440.0
Market risk capital	299.8		258.1
Operations risk capital	212.7		209.4
Total RBC requirement	$	921.7	$	907.5
Excess permanent capital over RBC requirement	$	3,900.2	$	3,839.3

Note:

⁽¹⁾Capital stock includes mandatorily redeemable capital stock.

The increase in the total RBC requirement as of September 30, 2017 is mainly related to the change in the market risk capital component driven by increases in short term interest rates. On September 18, 2017, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2017. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended September 30, 2017.

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 September 30, 2017.



	September 30,			December 31,
(dollars in millions)	2017			2016
Regulatory Capital Ratio
Minimum capital (4.0% of total assets)	$	3,994.6		$	4,050.4
Regulatory capital	4,821.9			4,746.8
Total assets	99,864.6			101,260.0
Regulatory capital ratio (regulatory capital as a percentage of total assets)	4.8		%	4.7		%

Leverage Ratio
Minimum leverage capital (5.0% of total assets)	$	4,993.2		$	5,063.0
Leverage capital (permanent capital multiplied by a 1.5 weighting factor)	7,232.8			7,120.3
Leverage ratio (leverage capital as a percentage of total assets)	7.2		%	7.0		%

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)	September 30, 2017			December 31, 2016
Commercial banks	159	$	3,260.5	162	$	3,275.0
Savings institutions	61	229.6		64	293.7
Insurance companies	24	145.0		23	134.7
Credit unions	54	61.6		53	51.5
Community Development Financial Institution (CDFI)	2	0.2		2	0.5
Total member institutions / total GAAP capital stock	300	$	3,696.9	304	$	3,755.4
Mandatorily redeemable capital stock		5.6			5.2
Total capital stock		$	3,702.5		$	3,760.6

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 2016 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 2016 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 updated its critical accounting policy on Accounting for Derivatives during the nine months ended September 30, 2017. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. Initial margin continues to be considered cash collateral. See Note 9 - Derivatives and Hedging Activities in this Form 10-Q.

In addition to evaluating the Bank's private label MBS portfolio under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of the Bank's private label MBS under a more stressed housing price scenario. This additional scenario was used to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended September 30, 2017, if the more stressed housing price scenario had been used in the Bank's OTTI assessment as of September 30, 2017. The more stressed scenario results were immaterial. A more detailed discussion of this analysis is in the OTTI section of Credit and Counterparty Risk - Investments of this Item 2.

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

Legislative and Regulatory Developments

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

Information Security Management Advisory Bulletin. On September 28, 2017, the Finance Agency issued an Advisory Bulletin that supersedes previous guidance on an FHLBank’s information security program. The Advisory Bulletin describes three main components of an information security program and provides the expectation that each FHLBank will use a risk-based approach to implement its information security program. The Advisory Bulletin contains expectations related to (i) governance, including guidance related to roles and responsibilities, risk assessments, industry standards, and cyber-insurance; (ii) engineering and architecture, including guidance on network security, software security, and security of endpoints; and (iii) operations, including guidance on continuous monitoring, vulnerability management, baseline configuration, asset life cycle, awareness and training, incident response and recovery, user access management, data classification and protection, oversight of third parties, and threat intelligence sharing. The Bank does not expect this Advisory Bulletin to materially affect its financial condition or results of operations.

Minority and Women Inclusion. On July 25, 2017, the Finance Agency published a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations to clarify the scope of the FHLBanks’ obligation to promote diversity

and ensure inclusion. The final rule updates the existing Finance Agency regulations aimed at promoting diversity and the inclusion and use of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all FHLBank business and activities, including management, employment, and contracting. The final rule will:


•	require the FHLBanks to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusion into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;


•	encourage the FHLBanks to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;


•	require the FHLBanks to develop policies that address reasonable accommodations for employees to observe their religious beliefs;

•

require the FHLBanks to provide information in their annual reports to the Finance Agency about their efforts to advance diversity and inclusion through financial transactions, identification of ways in which FHLBanks might be able to improve MWDOB business with the FHLBank by enhancing customer access by MWDOB businesses, including through its affordable housing and community investment programs and strategies for promoting the diversity of supervisors and managers; and


•	require the FHLBanks to classify and provide additional data in their annual reports about the number of and amounts paid under its contracts with MWDOB.

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

FHLBank Capital Requirements. On July 3, 2017, the Finance Agency published a proposed rule to adopt, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the Finance Agency) pertaining to the capital requirements for the FHLBanks. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by a NRSRO, and instead, require that the FHLBanks establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing rule do not carry a capital charge, to align with the Dodd-Frank Act’s clearing mandate. The proposed rule also would revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The Finance Agency proposes to retain, for now, the percentages used in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place, the Finance Agency also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBanks and address these liquidity requirements in a separate rulemaking.

The Bank submitted a joint comment letter with the other FHLBanks on August 31, 2017. The Bank is continuing to evaluate the proposed rule's effect on its financial condition and results of operations.

Mandatory Contractual Stay Requirements for Qualified Financial Contracts (QFCs). On September 12, 2017, the Federal Reserve Board (FRB) published a final rule, effective November 13, 2017, requiring certain global systemically important banking institutions (GSIBs) regulated by the FRB to amend their covered QFCs to limit a counterparty’s immediate termination or exercise of default rights under the QFCs in the event of bankruptcy or receivership of the GSIB or an affiliate of the GSIB. Covered QFCs include derivatives, repurchase agreements (known as “repos”) and reverse repos, and securities lending and borrowing agreements. On September 27, 2017, the Federal Deposit Insurance Corporation (FDIC) adopted a substantively identical final rule, effective January 1, 2018, with respect to QFCs entered into with certain FDIC-supervised institutions.

Although the Bank is not a covered entity under these rules, as a counterparty to covered entities under QFCs, it may be required to amend QFCs entered into with FRB-regulated GSIBs or applicable FDIC-supervised institutions. These rules may impact the Bank's ability to terminate business relationships with covered entities and could adversely impact the amount it recovers in the event of the bankruptcy or receivership of a covered entity. The Bank does not expect these final rules to materially affect its financial condition or results of operations.

Risk Management

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

Risk Governance

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

•market and interest rate risk;

•use and reliance on models;

•credit and counterparty risk;

•liquidity and funding risk; and

•operational risk and business risk.

In addition, the Bank’s risks are affected by current and projected financial and residential mortgage market trends, including those described in Item 1A. Risk Factors in the Bank's 2016 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 2016 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.

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 135.4% at September 30, 2017 and 128.9% at December 31, 2016. The increase was primarily due to interest rate changes and an increase in retained earnings.

Qualitative and Quantitative Disclosures Regarding Market Risk

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

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

The Bank regularly validates the models used to measure market risk. Such model validations are performed by third-party specialists or the Bank's model risk management department, which are separate from the model owner. The model validations are supplemented by additional validation processes performed by the Bank, most notably benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group

that is separate from the model owner. Results of the validation process, as well as any changes in valuation methodologies and the benchmarking analysis, are reported to the Bank's Asset and Liability Committee (ALCO), which is responsible for reviewing and approving the approaches used in the valuation of such risks to ensure that they are well controlled and effective and result in reasonable fair values.

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

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

The following table presents the Bank's duration of equity exposure at September 30, 2017 and December 31, 2016. 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. A low level of interest rates and model restrictions can also prevent rates from being shocked in a parallel manner and distort the Base Case duration of equity measure. The Bank had previously incorporated smaller interest rate shocks when determining Base Case duration of equity to mitigate this effect. Given the recent increase in short-term interest rates, the Bank reverted back to using larger interest rate shocks on the base case scenario in the first quarter of 2017. This methodology change had a minimal impact on the measured Base Case duration of equity. During the second quarter of 2017, the Bank changed the asset/liability management model used to determine duration of equity. This change had an immaterial impact on the duration of equity results.



(in years)	Base Case	Up 100 basis points	Up 200 basis points
Actual Duration of Equity:
September 30, 2017	(0.1)	0.1	0.4
December 31, 2016	0.2	0.4	0.8

Duration of equity changes in the first nine months of 2017 primarily reflect the impact of balance sheet management actions (e.g., funding and hedging decisions). 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. Due to the recent increase in short-term interest rates, the Bank re-introduced a down parallel rate scenario (i.e., down 50 basis points) during the first quarter of 2017.



ROE Spread Volatility Increase/(Decline)
(in basis points)	Down 100 bps Longer Term Rate Shock	Down 50 bps Parallel Shock	100 bps Steeper	100 bps Flatter	Up 200 bps Parallel Shock
September 30, 2017	(4)	(17)	(39)	41	43
December 31, 2016	7	(27)	(63)	54	62

The changes in ROE spread volatility in the first nine months of 2017 were mainly the result of balance sheet management actions (e.g., funding and hedging decisions). These actions affected ROE spread volatility differently in each scenario, as displayed in the table above. For each scenario, the Board's limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at September 30, 2017 and December 31, 2016.

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 nine months of 2017, the daily limit of mark-to-market risk as approved by the Board was $4.0 million. The daily exposure was within this guideline throughout the first nine months of 2017. At September 30, 2017, mark-to-market risk measured $2.2 million.

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

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure (TCE) to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. This may include collateral pledged by a member’s affiliate. At September 30, 2017, aggregate TCE was $96.2 billion, comprised of approximately $74.3 billion in advance principal outstanding, $21.6 billion in letters of credit (including forward commitments), $31.8 million in advance commitments, and $286.1 million in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes maximum borrowing capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank’s Member Products Policy. Details regarding this policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2016 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 non-member housing associates is closely monitored for compliance with financial criteria as set forth in the Bank’s credit policies. The Bank has developed an internal credit rating (ICR) system that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member’s asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results 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 nine months of 2017, there were six failures of FDIC-insured institutions nationwide. None of these institutions were 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 the mortgage loan exposure in the MPF program.

The following table presents the Bank’s top five members with respect to their TCE at September 30, 2017.



	September 30, 2017
(dollars in millions)	TCE		% of Total
PNC Bank, National Association, DE ⁽¹⁾	$	24,731.8	25.7	%
Chase Bank USA, N.A., DE	14,964.5		15.5
Ally Bank, UT⁽²⁾	13,999.8		14.6
TD Bank, National Association, DE	9,588.2		10.0
Santander Bank, N.A., DE ⁽³⁾	5,323.2		5.5
	68,607.5		71.3
Other financial institutions	27,600.4		28.7
Total TCE outstanding	$	96,207.9	100.0	%

Notes:

⁽¹⁾ For Bank membership purposes, principal place of business is Pittsburgh, PA.

⁽²⁾ For Bank membership purposes, principal place of business is Horsham, PA.

⁽³⁾ Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.

Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of September 30, 2017.



	September 30, 2017
(dollars in millions)	Advance Balance		% of Total
PNC Bank, National Association, DE ⁽¹⁾	$	20,535.0	27.7	%
Chase Bank USA, N.A., DE	14,950.0		20.1
Ally Bank, UT⁽²⁾	13,975.0		18.8
Santander Bank, N.A., DE⁽³⁾	4,550.0		6.1
First National Bank of Pennsylvania, PA	2,365.0		3.2
	56,375.0		75.9
Other borrowers	17,890.6		24.1
Total advances	$	74,265.6	100.0	%

Notes:

⁽¹⁾ For Bank membership purposes, principal place of business is Pittsburgh, PA.

⁽²⁾ For Bank membership purposes, principal place of business is Horsham, PA.

⁽³⁾ Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.

The average year-to-date September 30, 2017 balances for the five largest borrowers totaled $55.9 billion, or 76.4% of total average advances outstanding. During the first nine months of 2017, the maximum outstanding balance to any one borrower was $23.5 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 has never incurred any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.

Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of September 30, 2017 and December 31, 2016. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances.



(dollars in millions)	September 30, 2017		December 31, 2016
Letters of credit:
Public unit deposit	$	20,772.0	$	19,715.0
Other	17.1		21.8
Total ⁽¹⁾	$	20,789.1	$	19,736.8

Notes:

⁽¹⁾For September 30, 2017 and December 31, 2016 respectively, excludes approved requests to issue future standby letters of credit of $131.4 million and $467.0 million; also excludes available master standby letters of credit of $705.7 million and $635.9 million at September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017, the Bank had a concentration of letters of credit with two members (TD Bank and PNC Bank) totaling $13.0 billion or 62.7% of the total outstanding amount. At December 31, 2016, $12.5 billion or 63.5% 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. In June 2017, the Board of Directors approved an MBC cap for members with total assets greater than $50 billion. The cap is equal to the lower of 30% of the member's total assets or their calculated MBC. For all other depository members, the cap remains the lesser of 50% of total assets or their calculated MBC. Refer to the Risk Management section of the Bank's 2016 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 2016 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 September 30, 2017 and December 31, 2016. The amount of excess collateral by individual borrowers varies significantly.



(dollars in millions)	September 30, 2017					December 31, 2016
All members	Amount			Percentage		Amount			Percentage
One-to-four single family residential mortgage loans	$	104,629.7		45.1	%	$	96,323.8		44.4	%
High quality investment securities⁽¹⁾	12,633.5			5.5		11,279.0			5.2
ORERC⁽²⁾/CFIeligible collateral	94,932.6			41.0		90,177.3			41.6
Multi-family residential mortgage loans	19,512.9			8.4		19,187.1			8.8
Total eligible collateral value	$	231,708.7		100.0	%	$	216,967.2		100.0	%
Total TCE	$	96,207.9				$	98,104.8
Collateralization ratio (eligible collateral value to TCE outstanding)	240.8		%			221.2		%

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 (or portions thereof) with a real estate nexus (e.g., proceeds primarily used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily and all non-government or agency securities are subject to weekly ratings reviews. Reported amount also includes pledged FHLBank cash deposits.

⁽²⁾Other real estate related collateral.

For member borrowers, the following tables present information on a combined basis regarding the type of collateral securing their outstanding credit exposure and the collateral status as of September 30, 2017 and December 31, 2016.



	September 30, 2017
(dollars in millions)	Blanket Lien				Listing				Delivery				Total
(dollars in millions)	Amount		%		Amount		%		Amount		%		Amount		%
One-to-four single family residential mortgage loans	$	74,497.7	38.1	%	$	26,045.5	89.4	%	$	12.0	1.2	%	$	100,555.2	44.6	%
High quality investment securities⁽¹⁾	8,592.2		4.4		3,073.2		10.6		937.3		97.6		12,602.7		5.6
ORERC/CFI eligible collateral	92,987.0		47.6		—		—		10.1		1.1		92,997.1		41.2
Multi-family residential mortgage loans	19,376.9		9.9		—		—		1.0		0.1		19,377.9		8.6
Total eligible collateral value	$	195,453.8	100.0	%	$	29,118.7	100.0	%	$	960.4	100.0	%	$	225,532.9	100.0	%
Total TCE	$	77,537.6	80.6	%	$	18,329.7	19.1	%	$	340.6	0.3	%	$	96,207.9	100.0	%
Number of members	203		89.8	%	14		6.2	%	9		4.0	%	226		100.0	%



	December 31, 2016
(dollars in millions)	Blanket Lien				Listing				Delivery				Total
(dollars in millions)	Amount		%		Amount		%		Amount		%		Amount		%
One-to-four single family residential mortgage loans	$	70,375.2	37.8	%	$	22,188.8	92.3	%	$	6.5	0.7	%	$	92,570.5	43.8	%
High quality investment securities⁽¹⁾	8,550.9		4.6		1,787.5		7.4		909.4		97.6		11,247.8		5.3
ORERC/CFI eligible collateral	88,362.1		47.4		82.1		0.3		15.7		1.7		88,459.9		41.9
Multi-family residential mortgage loans	19,086.3		10.2		6.7		—		—		—		19,093.0		9.0
Total eligible collateral value	$	186,374.5	100.0	%	$	24,065.1	100.0	%	$	931.6	100.0	%	$	211,371.2	100.0	%
Total TCE	$	74,861.8	76.3	%	$	22,841.3	23.3	%	$	401.7	0.4	%	$	98,104.8	100.0	%
Number of members	200		90.9	%	13		5.9	%	7		3.2	%	220		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 (or portions thereof) with a real estate nexus (e.g., proceeds primarily used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily, and all non-government or agency securities are subject to weekly ratings reviews. Reported amount also includes pledged FHLBank cash deposits.

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 September 30, 2017 and December 31, 2016, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $1.7 billion and $1.8 billion, respectively.

Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of September 30, 2017 and December 31, 2016, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).



	September 30, 2017 ⁽¹⁾
	Long-Term Rating
(in millions)	AAA		AA		A		BBB		Below Investment Grade		Unrated		Total
Money market investments:
Interest-bearing deposits	$	—	$	—	$	275.0	$	—	$	—	$	—	$	275.0
Securities purchased under agreements to resell	1,000.0		—		—		—		500.0		—		1,500.0
Federal funds sold	—		1,450.0		4,575.0		—		—		—		6,025.0
Total money market investments	1,000.0		1,450.0		4,850.0		—		500.0		—		7,800.0
Investment securities:
Certificates of deposit	—		250.0		200.0		—		—		—		450.0
GSE and TVA obligations	—		3,492.1		—		—		—		—		3,492.1
State or local agency obligations	27.4		369.4		—		—		—		—		396.8
Other ⁽²⁾	—		—		—		—		—		11.1		11.1
Total non-MBS	27.4		4,111.5		200.0		—		—		11.1		4,350.0
Other U.S. obligations single family MBS	—		645.6		—		—		—		—		645.6
GSE single-family MBS	—		2,909.5		—		—		—		—		2,909.5
GSE multifamily MBS	—		2,949.2		—		—		—		—		2,949.2
Private label residential MBS	—		17.8		19.5		115.3		580.3		135.6		868.5
Total MBS	—		6,522.1		19.5		115.3		580.3		135.6		7,372.8
Total investments	$	1,027.4	$	12,083.6	$	5,069.5	$	115.3	$	1,080.3	$	146.7	$	19,522.8



	December 31, 2016 ⁽¹⁾
	Long-Term Rating
(in millions)	AAA		AA		A		BBB		Below Investment Grade		Unrated		Total
Money market investments:
Securities purchased under agreements to resell	$	2,000.0	$	—	$	—	$	—	$	—	$	—	$	2,000.0
Federal funds sold	—		950.0		2,272.0		—		—		—		3,222.0
Total money market investments	2,000.0		950.0		2,272.0		—		—		—		5,222.0
Investment securities:
Certificates of deposit	—		—		400.0		—		—		—		400.0
GSE and TVA obligations	—		3,571.3		—		—		—		—		3,571.3
State or local agency obligations	28.4		339.9		—		—		—		—		368.3
Other ⁽²⁾	—		—		—		—		—		9.1		9.1
Total non-MBS	28.4		3,911.2		400.0		—		—		9.1		4,348.7
Other U.S. obligations single family MBS	—		799.9		—		—		—		—		799.9
GSE single-family MBS	—		3,425.3		—		—		—		—		3,425.3
GSE multifamily MBS	—		2,356.1		—		—		—		—		2,356.1
Private label residential MBS	—		18.9		17.3		159.5		871.8		1.9		1,069.4
Total MBS	—		6,600.2		17.3		159.5		871.8		1.9		7,650.7
Total investments	$	2,028.4	$	11,461.4	$	2,689.3	$	159.5	$	871.8	$	11.0	$	17,221.4

Notes:

⁽¹⁾ Balances exclude total accrued interest of $28.1 million for both September 30, 2017 and December 31, 2016.

⁽²⁾ Includes various deposits not held as investments as well as mutual fund equity investments held by the Bank through Rabbi trusts which are not generally assigned a credit rating.

The Bank also manages credit risk based on an internal credit rating system. For purposes of determining the internal credit rating, the Bank measures credit exposure through a process which includes internal credit review and various external factors,

including placement of the counterparty on negative watch by one or more NRSROs. For internal reporting purposes, the incorporation of negative credit watch into the credit rating analysis of an investment may translate into a downgrade of one credit rating level from the external rating. The Bank does not rely solely on any NRSRO rating in deriving its final internal credit rating.

Short-term Investments. The Bank maintains a short-term investment portfolio to provide funds to meet the credit needs of its members and to maintain liquidity. The FHLBank Act and Finance Agency regulations set liquidity requirements for the FHLBanks. In addition, the Bank maintains a contingency liquidity plan in the event of operational disruptions at the Bank and the Office of Finance (OF). See the Liquidity and Funding Risk section of this Item 2 for a discussion of the Bank’s liquidity management.

Within the portfolio of short-term investments, the Bank faces credit risk from unsecured exposures. The Bank's unsecured credit investments have maturities generally ranging between overnight and six months and may include the following types:


•	Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest;


•	Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on an overnight and term basis; and


•	Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer on demand.

Under the Bank’s Risk Governance Policy, the Bank can place money market investments, which include those investment types listed above, on an unsecured basis with large financial institutions with long-term credit ratings no lower than BBB. Management actively monitors the credit quality of these counterparties.

As of September 30, 2017, the Bank had unsecured exposure to 14 counterparties totaling $6.8 billion, with one counterparty exceeding 10% of the total exposure. The following table presents the Bank's unsecured credit exposure with non-governmental counterparties by investment type at September 30, 2017 and December 31, 2016. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.



(in millions)
Carrying Value ⁽¹⁾
	September 30, 2017		December 31, 2016
Interest-bearing deposits	$	275.0	$	—
Certificates of deposit	450.0		400.0
Federal funds sold	6,025.0		3,222.0
Total	$	6,750.0	$	3,622.0

Note:

⁽¹⁾ Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.

As of September 30, 2017, 80.7% of the Bank’s unsecured investment credit exposure were to U.S. branches and agency offices of foreign commercial banks. The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support, and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, the Bank may limit or suspend existing exposures.

Finance Agency regulations include limits on the amount of unsecured credit the Bank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty's overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of the Bank's total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. This percentage is 1% to 15% and is based on the counterparty's credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments, and derivative transactions.

Finance Agency regulation also permits the Bank to extend additional unsecured credit for overnight transactions and for sales of Federal funds subject to continuing contracts that renew automatically. For overnight exposures only, the Bank's total unsecured exposure to a counterparty may not exceed twice the applicable regulatory limit, or a total of 2% to 30% of the

eligible amount of regulatory capital, based on the counterparty's credit rating. As of September 30, 2017, the Bank was in compliance with the regulatory limits established for unsecured credit.

The Bank's unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. The Bank's unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties.

The following table presents the long-term credit ratings of the unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's immediate parent for U.S. subsidiaries or branches and agency offices of foreign commercial banks based on the NRSROs used. This table does not reflect the foreign sovereign government's credit rating.



(in millions)
September 30, 2017 ^{(1) (2)}
Carrying Value
Domicile of Counterparty	Investment Grade ⁽³⁾ ⁽⁴⁾
	AA		A		Total
Domestic	$	—	$	1,300.0	$	1,300.0
U.S. branches and agency offices of foreign commercial banks:
Australia	500.0		—		500.0
Canada	250.0		1,650.0		1,900.0
France	—		800.0		800.0
Netherlands	—		650.0		650.0
Norway	—		650.0		650.0
Sweden	950.0		—		950.0
Total U.S. branches and agency offices of foreign commercial banks	1,700.0		3,750.0		5,450.0
Total unsecured investment credit exposure	$	1,700.0	$	5,050.0	$	6,750.0



(in millions)
December 31, 2016 ^{(1) (2)}
Carrying Value
Domicile of Counterparty	Investment Grade ⁽³⁾ ⁽⁴⁾
	AA		A		Total
Domestic	$	—	$	550.0	$	550.0
U.S. subsidiaries of foreign commercial banks	—		72.0		72.0
Total domestic and U.S. subsidiaries of foreign commercial banks	—		622.0		622.0
U.S. branches and agency offices of foreign commercial banks:
Canada	—		850.0		850.0
Finland	950.0		—		950.0
France	—		300.0		300.0
Netherlands	—		700.0		700.0
Norway	—		200.0		200.0
Total U.S. branches and agency offices of foreign commercial banks	950.0		2,050.0		3,000.0
Total unsecured investment credit exposure	$	950.0	$	2,672.0	$	3,622.0

Notes:

⁽¹⁾ Does not reflect any changes in ratings, outlook or watch status occurring after September 30, 2017.

⁽²⁾ These ratings represent the lowest rating available for each security owned by the Bank based on the NRSROs used by the Bank. The Bank’s internal ratings may differ from those obtained from the NRSROs.

⁽³⁾ Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.

⁽⁴⁾ Represents the NRSRO rating of the counterparty not the country. There were no AAA-rated investments at either September 30, 2017 or December 31, 2016.

The following table presents the remaining contractual maturity of the Bank's unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. subsidiaries or branches and agency offices of foreign commercial banks. The Bank also mitigates the credit risk on investments by generally investing in investments that have short-term maturities.



(in millions)
September 30, 2017
Carrying Value
Domicile of Counterparty	Overnight		Due 31 days through 90 days		Total
Domestic	$	1,300.0	$	—	$	1,300.0
U.S. branches and agency offices of foreign commercial banks:
Australia	500.0		—		500.0
Canada	1,650.0		250.0		1,900.0
France	600.0		200.0		800.0
Netherlands	650.0		—		650.0
Norway	650.0		—		650.0
Sweden	950.0		—		950.0
Total U.S. branches and agency offices of foreign commercial banks	5,000.0		450.0		5,450.0
Total unsecured investment credit exposure	$	6,300.0	$	450.0	$	6,750.0



(in millions)
December 31, 2016
Carrying Value
Domicile of Counterparty	Overnight		Due 31 days through 90 days		Total
Domestic	$	550.0	$	—	$	550.0
U.S. subsidiaries of foreign commercial banks	72.0		—		72.0
Total domestic and U.S. subsidiaries of foreign commercial banks	622.0		—		622.0
U.S. branches and agency offices of foreign commercial banks:
Canada	700.0		150.0		850.0
Finland	950.0		—		950.0
France	50.0		250.0		300.0
Netherlands	700.0		—		700.0
Norway	200.0		—		200.0
Total U.S. branches and agency offices of foreign commercial banks	2,600.0		400.0		3,000.0
Total unsecured investment credit exposure	$	3,222.0	$	400.0	$	3,622.0

U.S. Treasury Bills, Agency Securities, GSE Securities and State and Local Agency Obligations. In addition to U.S. Treasury bills and securities issued or guaranteed by U.S. Agencies or U.S. government corporations, the Bank invests in and is subject to credit risk related to GSE securities and state and local agency obligations. As a secondary liquidity portfolio, the Bank purchases investments such as U.S. Treasury, U.S. Agency and GSE/TVA securities. Further, the Bank maintains a portfolio of state and local agency obligations to enhance net interest income. These portfolios totaled $3.9 billion, both at September 30, 2017 and December 31, 2016.

Agency and GSE MBS. The Bank invests in and is subject to credit risk related to MBS issued or guaranteed by Federal agencies and GSEs that are directly supported by underlying mortgage loans. The Bank’s total agency and GSE MBS portfolio was $6.5 billion at September 30, 2017 and $6.6 billion at December 31, 2016.

Private Label MBS. The Bank also holds investments in private label MBS, which are supported by underlying mortgage loans. The Bank made investments in private label MBS that were rated AAA at the time of purchase with the exception of one, which was rated AA at the time of purchase. However, since the time of purchase, there have been significant downgrades. Current ratings are in the table below. The carrying value of the Bank’s private label MBS portfolio at September 30, 2017 was

$868.5 million, which was a decrease of $200.9 million from December 31, 2016. This decline was primarily due to repayments.

Unrealized gains of OTTI securities in AOCI at September 30, 2017 was $75.3 million compared to $67.4 million at December 31, 2016. The weighted average prices on OTTI securities were 89.7 and 87.2 at September 30, 2017 and December 31, 2016, respectively. These fair values are determined using unobservable inputs (i.e., Level 3) derived from multiple third-party pricing services. There continues to be unobservable inputs and a lack of significant market activity for private label MBS; therefore, as of September 30, 2017, the Bank classified private label MBS as Level 3. The Bank uses the unadjusted prices received from the third-party pricing services in its process relating to fair value calculations and methodologies as described further in the Critical Accounting Policies and Estimates section in Item 7. Management’s Discussion and Analysis in the Bank's 2016 Form 10-K.

Approximately 11.8% of the Bank’s MBS portfolio at September 30, 2017 was issued by private label issuers. In late 2007, the Bank discontinued the purchase of private label MBS.

Participants in the mortgage market have often characterized single family loans based upon their overall credit quality at the time of origination, generally considering them to be Prime, Alt-A or subprime. There has been no universally accepted definition of these segments or classifications. The subprime segment of the mortgage market primarily served borrowers with poorer credit payment histories, and such loans typically had a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than Prime loans. Further, many mortgage participants classified single family loans with credit characteristics that range between Prime and subprime categories as Alt-A because these loans had a combination of characteristics of each category or may have been underwritten with low or no documentation compared to a full documentation mortgage loan. Industry participants often used this classification principally to describe loans for which the underwriting process was less rigorous and the documentation requirements of the borrower were reduced.

Private Label MBS Collateral Statistics. The following tables provide collateral performance and credit enhancement information for the Bank’s private label MBS portfolio by par and by collateral type as of September 30, 2017.



	Private Label MBS
(dollars in millions)	Prime			Alt-A			Subprime			Total
Par by lowest external long- term rating:
AA	$	5.5		$	12.2		$	—		$	17.7
A	—			19.5			—			19.5
BBB	106.7			6.1			3.2			116.0
Below investment grade:
BB	81.7			10.0			—			91.7
B	44.9			27.6			—			72.5
CCC	67.4			79.2			—			146.6
CC	—			35.8			—			35.8
C	0.8			—			—			0.8
D	166.7			107.1			—			273.8
Unrated	26.4			132.8			—			159.2
Total	$	500.1		$	430.3		$	3.2		$	933.6
Amortized cost	$	442.0		$	348.2		$	3.2		$	793.4
Gross unrealized losses ⁽¹⁾	(0.2		)	(0.2		)	(0.2		)	(0.6		)
Fair value	483.6			385.9			3.0			872.5
OTTI ⁽²⁾:
Total OTTI losses	$	—		$	—		$	—		$	—
OTTI losses reclassified to (from) AOCI	—			(0.7		)	—			(0.7		)
Net OTTI losses, credit portion	$	—		$	(0.7	)	$	—		$	(0.7	)
Weighted average fair value/par	96.7		%	89.7		%	93.8		%	93.5		%
Original weighted average credit support	6.7			10.1			12.5			8.3
Weighted-average credit support - current	7.5			5.4			52.0			6.7
Weighted avg. collateral delinquency ⁽³⁾	9.9			14.8			18.6			12.2

Notes:

⁽¹⁾Represents total gross unrealized losses including non-credit-related other-than-temporary impairment recognized in AOCI. The unpaid principal balance and amortized cost of private label MBS in a gross unrealized loss position was $49.8 million and $49.9 million, respectively at September 30, 2017.

⁽²⁾For the nine months ended September 30, 2017.

⁽³⁾Delinquency information is presented at the cross-collateralization level.

OTTI. The Bank recognized an insignificant amount of credit-related OTTI charges in earnings during the three months ended September 30, 2017 and none during the three months ended September 30, 2016, and $0.7 million and $0.2 million during the nine months ended September 30, 2017, and 2016, respectively. Because the Bank does not intend to sell and it is not more likely than not that the Bank will be required to sell any OTTI securities before anticipated recovery of their amortized cost basis, the Bank does not have an additional OTTI charge for the difference between amortized cost and fair value. The Bank has not recorded OTTI on any other type of security (i.e., U.S. Agency MBS or non-MBS securities).

The Bank’s estimate of cash flows has a significant impact on the determination of credit losses. Cash flows expected to be collected are based on the performance and type of private label MBS and the Bank’s expectations of the economic environment. To ensure consistency in determination of the OTTI for private label MBS among all FHLBanks, each quarter the Bank works with the OTTI Governance Committee to update its OTTI analysis based on actual loan performance and current housing market assumptions in the collateral loss projection models, which generate the estimated cash flows from the Bank’s private label MBS. This process is described in Note 5 - OTTI to the unaudited financial statements included in this Form 10-Q.

The Bank’s quarterly OTTI analysis is based on current and forecasted economic trends. Significant assumptions used on the Bank’s private label MBS as part of its third quarter of 2017 analysis are presented below.



	Significant Inputs for Private Label Residential MBS
	Prepayment Rates	Default Rates	Loss Severities	Current Credit Enhancement
	Weighted Avg %	Weighted Avg %	Weighted Avg %	Weighted Avg %
Prime	13.2	6.5	25.0	6.9
Alt-A	13.3	19.7	37.1	5.4
Subprime	4.2	28.4	58.1	52.0
Total Private Label Residential MBS	13.2	12.9	30.9	6.4

The Bank’s life-to-date credit losses are concentrated in its 2006 and 2007 vintage bonds. These vintages represent 92% of life-to-date credit losses, of which 48% relates to Prime and 44% relates to Alt-A, with the remainder in subprime and HELOC. The Bank has recognized life to date OTTI as follows:



(dollars in millions)	September 30, 2017			September 30, 2016
Number of private label MBS with an OTTI charge:
Life-to-date	60			60
Still outstanding	38			40
Total OTTI credit loss recorded life-to-date	$	456.8		$	456.1
Principal write-downs on private label MBS	(153.4		)	(140.9		)
Credit losses on private label MBS no longer owned:
Private label MBS sold	(116.5		)	(116.5		)
Private label MBS matured (less principal write-downs realized)	(7.1		)	(4.4		)
Remaining amount of previously recognized OTTI credit losses	$	179.8		$	194.3

The table above excludes recoveries of OTTI through interest income, which occur if there is a significant increase in estimated cash flows whereby the Bank increases the yield on the Bank’s investment and recognizes recovery as interest income over the life of the investment. OTTI recovered through interest income on these securities was $7.7 million and $6.4 million for the third quarters of 2017 and 2016, respectively; $21.3 million and $18.5 million for the first nine months of 2017 and 2016, respectively; and $133.5 million life-to-date. The OTTI recovered through interest income was recognized on 36 and 37 private label MBS securities for the first nine months of 2017 and 2016, respectively. The same private label MBS can have multiple increases in cash flows that are deemed to be significant.

The Bank transfers private label MBS from HTM to AFS when an OTTI credit loss is recorded on a security. The Bank believes that a credit loss constitutes evidence of deterioration in the credit quality of the security. The Bank believes that the transfer increases its flexibility to potentially sell other-than-temporarily-impaired securities if it makes economic sense. There were no transfers during the first nine months of 2017 and 2016.

Management will continue to evaluate all impaired securities, including those on which OTTI has been recorded. Material credit losses have occurred on private label MBS and may occur in the future. The specific amount of credit losses will depend on the actual performance of the underlying loan collateral, payments received on the securities themselves, as well as the Bank’s future modeling assumptions. Those securities for which the Bank is recognizing recovery of OTTI may be more likely to incur a credit loss due to the nature of the accounting. The Bank cannot estimate the future amount of any additional credit losses. The FASB recently issued guidance which will amend the accounting for credit losses. See Note 1 to the Financial Statements for additional discussion.

As discussed above, the projection of cash flows expected to be collected on private label MBS involves significant judgment with respect to key modeling assumptions. Therefore, on all private label MBS, the Bank performed a cash flow analysis under one additional scenario which was agreed to by the OTTI Governance Committee that represented meaningful, plausible and more adverse external assumptions. This more adverse scenario decreases the short-term housing price forecast by five percentage points and slows housing price recovery rates by 33%. The adverse scenario estimated cash flows were generated using the same model (Prime, Alt-A or subprime) as the base scenario. Using a model with more severe assumptions could increase the estimated credit loss recorded by the Bank. The securities included in this stress scenario were only those

that were in an unrealized loss position at September 30, 2017. Additionally, the maximum credit loss under the adverse case was limited to the amount of the security's unrealized loss. The adverse case housing price forecast is not management’s current best estimate of cash flows and is therefore not used as a basis for determining OTTI. The results of the analysis were immaterial.

Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives

Mortgage Loans. The Finance Agency has authorized the Bank to hold mortgage loans under the MPF Program whereby the Bank acquires mortgage loans from participating members in a shared credit risk structure. These assets carry CEs, although the CE is not rated. The CE was originally established to be sufficient such that a Master Commitment (MC) has a AA credit rating. The Bank has revised this requirement to a BBB credit rating for all new MCs and legacy MCs for specific products. The Bank had net mortgage loans held for portfolio of $3.8 billion and $3.4 billion after an allowance for credit losses of $6.1 million at September 30, 2017 and $6.2 million at December 31, 2016, respectively.

Mortgage Insurers. The Bank’s MPF Program currently has credit exposure to nine mortgage insurance companies which provide PMI and/or Supplemental Mortgage Insurance (SMI) for the Bank’s various products. The Bank closely monitors the financial condition of these mortgage insurers. PMI for MPF Program loans must be issued by a mortgage insurance company on the approved mortgage insurance company list whenever PMI coverage is required.

None of the Bank’s mortgage insurers currently maintain a rating by at least one NRSRO of A+ or better. Given the credit deterioration of PMI providers, the estimate of the allowance for credit losses includes projected reduced claim payments. As required by the MPF Program, for originations with PMI, the ratings model currently requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below A+.

The MPF Plus product required SMI under the MPF Program when each pool was established. At September 30, 2017, seven of the 14 MPF Plus pools still have SMI policies in place. The Bank does not currently offer the MPF Plus product and has not purchased loans under MPF Plus Commitments since July 2006. Per MPF Program guidelines, the existing MPF Plus product exposure is required to be secured by the PFI once the SMI company is rated below AA-. The Finance Agency guidelines require mortgage insurers that underwrite SMI to be rated AA- or better. This requirement has been temporarily waived by the Finance Agency provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of September 30, 2017, $19.0 million of SMI exposure had been secured by two PFIs.

The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of September 30, 2017 was $6.9 million and $2.7 million, respectively. As of December 31, 2016, the unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI amounts was $8.7 million and $3.5 million, respectively.

BOB Loans. See Note 1 - Summary of Significant Accounting Policies in Item 8 in the Bank's 2016 Form 10-K for a description of the BOB program. At September 30, 2017, the allowance for credit losses on BOB loans was $1.9 million, a decrease of $0.3 million from December 31, 2016.

Derivative Counterparties. To manage interest rate risk, the Bank enters into derivative contracts. Derivative transactions may be either executed with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). For uncleared derivatives, the Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

The Bank uses CME Clearing as the Clearing House for all cleared derivative transactions. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. Initial margin is considered cash collateral. A discussion of the update to the Bank's accounting policy is in the Critical Accounting Policies and Estimates section of this Item 2.

The Bank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements, daily settlement and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements.

Uncleared Derivatives. The Bank is subject to non-performance by counterparties to its uncleared derivative transactions. The Bank requires collateral on uncleared derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of September 30, 2017.

Cleared Derivatives. The Bank is subject to credit risk exposure to the Clearing Houses and clearing agent. The requirement that the Bank post initial margin and exchange variation margin settlement payments, through the clearing agent, to the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount accumulated through daily settlement of the current exposure arising from changes in the market value of the position since the trade was executed. The Bank's use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral postings and variation margin settlement payments are made daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2017.

The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments. The maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral, including initial margin and variation margin settlements on cleared derivatives. In determining maximum credit risk, the Bank considers accrued interest receivables and payables as well as the netting requirements to net assets and liabilities. The following table presents the derivative positions with non-member counterparties and member institutions to which the Bank has credit exposure at September 30, 2017 and December 31, 2016.



(in millions)	September 30, 2017
Credit Rating ⁽¹⁾	Notional Amount		Net Present Value Before Collateral and Variation Margin for Daily Settled Contracts			Cash Collateral Pledged To (From) Counterparties and Variation Margin for Daily Settled Contracts ⁽²⁾		Net Credit Exposure to Counterparties
Non-member counterparties
Asset positions with credit exposure:
Uncleared derivatives
A	$	236.5	$	0.4		$	—	$	0.4
Liability positions with credit exposure:
Uncleared derivatives
A	3,416.9		(3.5		)	3.8		0.3
Cleared derivatives ⁽³⁾	29,188.9		(65.8		)	150.1		84.3
Total derivative positions with credit exposure to non-member counterparties	32,842.3		(68.9		)	153.9		85.0
Member institutions ⁽⁴⁾	49.7		—			—		—
Total	$	32,892.0	$	(68.9	)	$	153.9	$	85.0
Derivative positions without credit exposure	7,582.2
Total notional	$	40,474.2



(in millions)	December 31, 2016
Credit Rating ⁽¹⁾	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged To (From) Counterparties		Net Credit Exposure to Counterparties
Non-member counterparties
Asset positions with credit exposure:
Uncleared derivatives
AA	$	18.0	$	—		$	—	$	—
A	269.3		0.3			—		0.3
Liability positions with credit exposure:
Uncleared derivatives
A	2,601.4		(17.2		)	19.8		2.6
BBB	1,605.7		(15.7		)	15.8		0.1
Cleared derivatives⁽³⁾	32,772.9		(50.1		)	129.0		78.9
Total derivative positions with credit exposure to non-member counterparties	37,267.3		(82.7		)	164.6		81.9
Member institutions ⁽⁴⁾	15.4		—			—		—
Total	$	37,282.7	$	(82.7	)	$	164.6	$	81.9
Derivative positions without credit exposure	2,491.4
Total notional	$	39,774.1

Notes:

⁽¹⁾This table does not reflect any changes in rating, outlook or watch status occurring after September 30, 2017. The ratings presented in this table represent the lowest long-term counterparty credit rating available for each counterparty based on the NRSROs used by the Bank.

⁽²⁾ Includes accumulated variation margin payments for daily settled contracts of $65.7 million at September 30, 2017.

⁽³⁾ Represents derivative transactions cleared through Clearing Houses.

⁽⁴⁾ Member institutions include mortgage delivery commitments.

The following tables summarize the Bank’s uncleared derivative counterparties which represent more than 10% of the Bank’s total notional amount outstanding and net credit exposure as of September 30, 2017 and December 31, 2016.



Notional Greater Than 10%	September 30, 2017				December 31, 2016
(dollars in millions) Derivative Counterparty	Credit Rating	Notional		% of Notional	Credit Rating	Notional		% of Notional
Barclays Bank	A	$	3,416.9	30.3	⁽¹⁾	⁽¹⁾		⁽¹⁾
Citibank, NA	A	2,485.0		22.0	⁽¹⁾	⁽¹⁾		⁽¹⁾
Bank of America, NA	⁽¹⁾	⁽¹⁾		⁽¹⁾	A	$	1,130.6	16.2
Morgan Stanley Capital	BBB	1,235.2		10.9	BBB	1,605.7		22.9
Deutsche Bank AG	⁽¹⁾	⁽¹⁾		⁽¹⁾	BBB	784.5		11.2
All others	n/a	4,148.3		36.8	n/a	3,480.4		49.7
Total		$	11,285.4	100.0		$	7,001.2	100.0



Net Credit Exposure Greater Than 10%	September 30, 2017				December 31, 2016
(dollars in millions) Derivative Counterparty	Credit Rating	Net Credit Exposure		% of Net Credit Exposure	Credit Rating	Net Credit Exposure		% of Net Credit Exposure
Barclays Bank	A	$	0.4	50.5	⁽³⁾	⁽³⁾		⁽³⁾
BNP Paribas	A	0.3		49.5	⁽²⁾	⁽²⁾		⁽²⁾
Credit Suisse	⁽³⁾	⁽³⁾		⁽³⁾	A	$	1.4	45.9
Bank of America, NA	⁽³⁾	⁽³⁾		⁽³⁾	A	0.9		29.7
All others	n/a	—		—	n/a	0.7		24.4
Total		$	0.7	100.0		$	3.0	100.0

Notes:

⁽¹⁾ The percentage of notional was not greater than 10%.

⁽²⁾ The percentage of net credit exposure was not greater than 10%.

⁽³⁾ The counterparty had no credit exposure for the period-end.

To manage interest rate risk, the Bank enters into derivative contracts. Some of these derivatives are with U.S. branches of financial institutions located in Europe. In terms of counterparty credit risk exposure, European financial institutions are exposed to the Bank as shown below.



(in millions)	September 30, 2017						December 31, 2016
Country of Counterparty	Market Value of Total Exposure		Collateral Obligation (Net Exposure)		Collateral Pledged by the Bank		Market Value of Total Exposure		Collateral Obligation (Net Exposure)		Collateral Pledged by the Bank
Switzerland	$	6.1	$	6.1	$	6.3	$	11.3	$	11.3	$	12.3
France	4.8		4.8		4.5		10.1		10.1		6.8
United Kingdom	3.5		3.5		3.8		3.5		—		—
Germany	2.5		—		—		3.8		—		—
Total	$	16.9	$	14.4	$	14.6	$	28.7	$	21.4	$	19.1

Note: The average maturity of these derivative contracts is May 2022 at September 30, 2017 and November 2021 at December 31, 2016, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

In addition, the Bank is exposed to counterparty credit risk with U.S. branches of European financial institutions, as presented in the tables below.



(in millions)	September 30, 2017						December 31, 2016
Country of Counterparty	Market Value of Total Exposure		Collateral Obligation (Net Exposure)		Collateral Pledged to the Bank		Market Value of Total Exposure		Collateral Obligation (Net Exposure)		Collateral Pledged to the Bank
France	$	0.4	$	—	$	—	$	—	$	—	$	—
Germany	0.2		—		0.4		0.1		—		—
Switzerland	—		—		—		0.3		—		—
Total	$	0.6	$	—	$	0.4	$	0.4	$	—	$	—

Note: The average maturity of these derivative contracts is April 2020 at September 30, 2017 and October 2019 at December 31, 2016, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

To appropriately assess potential credit risk to its European holdings, the Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications for changes to credit quality. The Bank also actively monitors its counterparties' approximate indirect exposure to European sovereign debt and considers this exposure as a component of its credit risk review process.

Liquidity and Funding Risk

As a wholesale bank, the Bank employs financial strategies that are designed to enable it to expand and contract its assets, liabilities and capital in response to changes in member credit demand, membership composition and other market factors. The Bank's liquidity resources are designed to support these strategies through a focus on maintaining a liquidity and funding balance between its financial assets and financial liabilities and are described further in the Bank's 2016 Form 10-K. The Bank and the OF jointly monitor the combined refinancing risk of the FHLBank system. In managing and monitoring the amounts of assets that require refunding, the Bank may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations).

Consolidated obligation bonds and discount notes are rated Aaa with stable outlook/P-1 by Moody’s and AA+ with stable outlook/A-1+ by S & P, as of September 30, 2017. These ratings measure the likelihood of timely payment of principal and interest. At September 30, 2017, the Bank’s consolidated obligation bonds outstanding decreased to $55.1 billion compared to $67.2 billion at December 31, 2016. The Bank also issues discount notes, which are shorter-term consolidated obligations. Total discount notes outstanding at September 30, 2017 increased to $38.9 billion compared to $28.5 billion at December 31, 2016.

The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating-rate assets. At September 30, 2017, callable bonds issued by the Bank were down approximately $0.5 billion from December 31, 2016. Note 10 - Consolidated Obligations to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank’s consolidated obligations.

The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. Under these policies and guidelines, the Bank is required to maintain sufficient liquidity in an amount at least equal to its anticipated net cash outflows under two different scenarios. One scenario assumes that the Bank cannot access the capital markets for a period of 15 days and that, during that time, members do not renew any maturing, prepaid and called advances. The second scenario assumes that the Bank cannot access the capital markets for five days and that, during that period, it will automatically renew maturing and called advances for all members except very large, highly rated members. These requirements are designed to enhance the Bank’s protection against temporary disruptions in access to the debt markets. Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2016 Form 10-K for additional information. The Bank was in compliance with these requirements at September 30, 2017.

Contingency Liquidity. In their asset/liability management planning, members may look to the Bank to provide standby liquidity. The Bank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. To satisfy these requirements and objectives, the Bank’s primary sources of liquidity are the issuance of new consolidated obligation bonds and discount notes and short-term investments, such as Federal funds sold and overnight securities purchased under agreements to resell. At September 30, 2017 and December 31, 2016, excess contingency liquidity was approximately $20.7 billion and $27.6 billion, respectively.

Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2016 Form 10-K for additional information.

Joint and Several Liability. Although the Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. The Finance Agency, in its discretion and notwithstanding any other provisions, may at any time order any FHLBank to make principal or interest payments due on any consolidated obligation, even in the absence of default by the primary obligor. To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-paying FHLBank, which has a corresponding obligation to reimburse the FHLBank to the extent of such assistance and other associated costs. However, if the Finance Agency determines that the non-paying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and authorize the FHLBanks to issue consolidated obligations, through the OF as its agent. The Bank is not permitted to issue individual debt without Finance Agency approval. See Note 14 - Consolidated Obligations of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2016 Form 10-K for additional information.

Operational and Business Risks

Operational Risk. Operational risk is defined as the risk of unexpected loss resulting from human error, system malfunctions, man-made or natural disasters, fraud, legal risk, compliance risk, or circumvention or failure of internal controls. The Bank has established operational risk policies and procedures to manage each of the specific operational risks, which are categorized as financial reporting, compliance, fraud, legal, information and personnel.

Business Risk. Business risk is the risk of an adverse impact on the Bank’s profitability or financial or business strategies resulting from external factors that may occur in the short-term and/or long-term. This risk includes the potential for strategic business constraints to be imposed through regulatory, legislative or political changes. The Bank’s Risk Management Committee monitors economic indicators and the external environment in which the Bank operates and attempts to mitigate this risk through long-term strategic planning. For additional information, on operating and business risks, see the "Operating and Business Risks" discussion in the Risk Management section of Item 7. in the Bank's 2016 Form 10-K.

The United Kingdom’s Financial Conduct Authority (FCA), a regulator of financial services firms and financial markets in the U.K., has stated that they will plan for a phase out of regulatory oversight of LIBOR interest rate indices. The FCA has indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate(s). Other financial services regulators and industry groups, including the International Swaps and Derivatives Association (ISDA), are evaluating the possible phase-out of LIBOR and the development of alternative interest rate indices or reference rate(s). As noted throughout this Form 10-Q, many of the Bank’s assets and liabilities are indexed to LIBOR. While it is unclear as to what the overall financial impact of these developments will be to the Bank, management will continue to monitor any alternative reference rate proposals as they are developed.

Item 1: Financial Statements (unaudited)

Federal Home Loan Bank of Pittsburgh

Statements of Income (unaudited)



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2017			2016			2017			2016
Interest income:
Advances	$	269,193		$	143,017		$	712,543		$	410,702
Prepayment fees on advances, net	47			1,844			179			22,597
Interest-bearing deposits	794			387			1,548			1,047
Securities purchased under agreements to resell	337			1,344			972			2,837
Federal funds sold	23,530			6,145			48,749			17,832
Trading securities	2,817			2,817			8,449			8,449
Available-for-sale (AFS) securities	50,109			39,244			140,328			116,644
Held-to-maturity (HTM) securities	13,145			14,172			42,395			42,637
Mortgage loans held for portfolio	32,645			29,311			95,255			87,948
Total interest income	392,617			238,281			1,050,418			710,693
Interest expense:
Consolidated obligations - discount notes	85,748			24,574			178,042			84,677
Consolidated obligations - bonds	195,890			134,080			540,690			370,406
Mandatorily redeemable capital stock	64			70			191			227
Deposits	1,528			401			3,445			1,214
Other borrowings	1			3			17			12
Total interest expense	283,231			159,128			722,385			456,536
Net interest income	109,386			79,153			328,033			254,157
Provision for credit losses	137			704			45			1,142
Net interest income after provision for credit losses	109,249			78,449			327,988			253,015
Other noninterest income (loss):
Total OTTI losses (Note 5)	—			—			—			—
OTTI losses reclassified to (from) AOCI (Note 5)	(38		)	—			(702		)	(239		)
Net OTTI losses, credit portion (Note 5)	(38		)	—			(702		)	(239		)
Net gains (losses) on trading securities (Note 2)	320			(2,531		)	7,926			25,631
Net realized gains (losses) from sales of AFS securities (Note 3)	—			(117		)	—			12,591
Net (losses) on derivatives and hedging activities (Note 9)	(495		)	(2,365		)	(360		)	(54,372		)
Gains on litigation settlements, net	—			82			—			545
Standby letters of credit fees	6,124			6,079			18,168			18,478
Other, net	521			452			1,188			1,123
Total other noninterest income	6,432			1,600			26,220			3,757
Other expense:
Compensation and benefits	12,780			10,003			38,488			31,977
Other operating	7,302			6,632			20,758			19,090
Finance Agency	1,290			1,401			3,989			4,457
Office of Finance	1,129			1,174			3,504			3,167
Total other expense	22,501			19,210			66,739			58,691
Income before assessments	93,180			60,839			287,469			198,081
Affordable Housing Program (AHP) assessment	9,324			6,091			28,766			19,831
Net income	$	83,856		$	54,748		$	258,703		$	178,250

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Statements of Comprehensive Income (unaudited)



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2017			2016			2017			2016
Net income	$	83,856		$	54,748		$	258,703		$	178,250
Other comprehensive income (loss):
Net unrealized gains (losses) on AFS securities:
Unrealized gains (losses)	101			(6,948		)	63,130			64,897
Reclassification of realized (gains) included in net income	—			—			—			(11,291		)
Total net unrealized gains (losses) on AFS	101			(6,948		)	63,130			53,606
Net non-credit portion of OTTI gains (losses) on AFS securities:
Net change in fair value of OTTI securities	1,094			2,891			7,136			(3,993		)
Reclassification of net (gains) losses included in net income	—			117			—			(1,300		)
Net amount of impairment losses reclassified to noninterest income	38			—			702			239
Total net non-credit portion of OTTI gains (losses) on AFS securities	1,132			3,008			7,838			(5,054		)
Reclassification of net (gains) included in net income relating to hedging activities	(8		)	(8		)	(19		)	(20		)
Pension and post-retirement benefits	147			173			319			259
Total other comprehensive income (loss)	1,372			(3,775		)	71,268			48,791
Total comprehensive income	$	85,228		$	50,973		$	329,971		$	227,041

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Statements of Condition (unaudited)



(in thousands)	September 30, 2017		December 31, 2016
ASSETS
Cash and due from banks	$	2,068,710	$	3,587,605
Interest-bearing deposits	281,073		5,909
Federal funds sold	6,025,000		3,222,000
Securities purchased under agreements to resell	1,500,000		2,000,000
Investment securities:
Trading securities (Note 2)	404,315		395,247
AFS securities at fair value (Note 3)	9,028,864		9,038,081
HTM securities; fair value of $2,303,345 and $2,576,982 respectively (Note 4)	2,289,653		2,566,135
Total investment securities	11,722,832		11,999,463
Advances, net (Note 6)	74,227,996		76,808,704
Mortgage loans held for portfolio (Note 7), net of allowance for credit losses of $6,112 and $6,231, respectively (Note 8)	3,763,262		3,390,727
Banking on Business (BOB) loans, net of allowance for credit losses of $1,937 and $2,177, respectively	12,949		12,276
Accrued interest receivable	153,434		124,247
Premises, software and equipment, net	7,891		9,762
Derivative assets (Note 9)	85,005		81,891
Other assets	16,423		17,492
Total assets	$	99,864,575	$	101,260,076

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Statements of Condition (unaudited)

(continued)



(in thousands, except par value)	September 30, 2017		December 31, 2016
LIABILITIES AND CAPITAL
Liabilities
Deposits:
Interest-bearing	$	607,169	$	505,430
Noninterest-bearing	19,882		53,461
Total deposits	627,051		558,891
Consolidated obligations, net: (Note 10)
Discount notes	38,877,041		28,500,341
Bonds	55,140,239		67,156,031
Total consolidated obligations, net	94,017,280		95,656,372
Mandatorily redeemable capital stock (Note 11)	5,626		5,216
Accrued interest payable	117,095		117,183
AHP payable	88,743		76,712
Derivative liabilities (Note 9)	9,477		14,010
Other liabilities	59,469		37,777
Total liabilities	94,924,741		96,466,161
Commitments and contingencies (Note 14)
Capital (Note 11)
Capital stock - putable ($100 par value) issued and outstanding 36,969 and 37,554 shares, respectively	3,696,869		3,755,411
Retained earnings:
Unrestricted	853,114		771,661
Restricted	266,287		214,547
Total retained earnings	1,119,401		986,208
Accumulated Other Comprehensive Income (AOCI)	123,564		52,296
Total capital	4,939,834		4,793,915
Total liabilities and capital	$	99,864,575	$	101,260,076

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Statements of Cash Flows (unaudited)



	Nine months ended September 30,
(in thousands)	2017			2016
OPERATING ACTIVITIES
Net income	$	258,703		$	178,250
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	21,405			(41,717		)
Net change in derivative and hedging activities	(9,390		)	46,046
Net OTTI credit losses	702			239
Net realized (gains) from sales of AFS securities	—			(12,591		)
Other adjustments	45			1,138
Net change in:
Trading securities	(9,068		)	(26,516		)
Accrued interest receivable	(29,222		)	(7,387		)
Other assets	(716		)	1,068
Accrued interest payable	(88		)	31,319
Other liabilities	12,039			(9,878		)
Net cash provided by operating activities	$	244,410		$	159,971
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits (including $(164) and $(2,573) from/(to) other FHLBanks for mortgage loan program)	$	(258,314	)	$	(107,802	)
Securities purchased under agreements to resell	500,000			500,000
Federal funds sold	(2,803,000		)	330,000
AFS securities:
Proceeds (includes $206,608 from sale of AFS securities in 2016)	1,011,058			2,285,778
Purchases	(888,666		)	(3,201,633		)
HTM securities:
Net change in short-term	(50,000		)	(1,500,000		)
Proceeds from long-term maturities	423,542			448,460
Purchases of long-term	(98,286		)	(71,498		)
Advances:
Proceeds	707,793,045			567,752,580
Made	(705,224,029		)	(565,115,153		)
Mortgage loans held for portfolio:
Proceeds	339,025			345,046
Purchases	(725,752		)	(539,228		)
Proceeds from sales of foreclosed assets	5,904			8,254
Premises, software and equipment:
Proceeds from sale	—			335
Purchases	(1,224		)	(1,949		)
Net cash provided by investing activities	$	23,303		$	1,133,190
The accompanying notes are an integral part of these financial statements.




Federal Home Loan Bank of Pittsburgh Statements of Cash Flows (unaudited)
(continued)
	Nine months ended September 30,
(in thousands)	2017			2016
FINANCING ACTIVITIES
Net change in:
Deposits and pass-through reserves	$	68,543		$	(60,363	)
Net payments for derivative contracts with financing element	—			(18,504		)
Net proceeds from issuance of consolidated obligations:
Discount notes	174,665,491			72,605,830
Bonds	33,094,565			54,753,367
Payments for maturing and retiring consolidated obligations:
Discount notes	(164,333,819		)	(92,250,936		)
Bonds	(45,097,746		)	(35,654,475		)
Proceeds from issuance of capital stock	3,225,176			2,522,688
Payments for repurchase/redemption of mandatorily redeemable capital stock	(745		)	(45,469		)
Payments for repurchase/redemption of capital stock	(3,282,563		)	(2,461,035		)
Cash dividends paid	(125,510		)	(117,366		)
Net cash (used in) financing activities	$	(1,786,608	)	$	(726,263	)
Net increase (decrease) in cash and due from banks	$	(1,518,895	)	$	566,898
Cash and due from banks at beginning of the period	3,587,605			2,376,964
Cash and due from banks at end of the period	$	2,068,710		$	2,943,862
Supplemental disclosures:
Interest paid	$	563,904		$	381,949
AHP payments	16,735			16,962
Transfers of mortgage loans to real estate owned	4,144			4,560
Variation margin recharacterized as settlement payments on derivative contracts	44,674			—

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Statements of Changes in Capital (unaudited)



	Capital Stock - Putable					Retained Earnings
(in thousands)	Shares		Par Value			Unrestricted			Restricted		Total			AOCI		Total Capital
December 31, 2015	35,396		$	3,539,648		$	718,727		$	162,543	$	881,270		$	80,683	$	4,501,601
Comprehensive income	—		—			142,600			35,650		178,250			48,791		227,041
Issuance of capital stock	25,227		2,522,688			—			—		—			—		2,522,688
Repurchase/redemption of capital stock	(24,610	)	(2,461,035		)	—			—		—			—		(2,461,035		)
Net shares reclassified to mandatorily redeemable capital stock	(448	)	(44,832		)	—			—		—			—		(44,832		)
Cash dividends	—		—			(117,366		)	—		(117,366		)	—		(117,366		)
September 30, 2016	35,565		$	3,556,469		$	743,961		$	198,193	$	942,154		$	129,474	$	4,628,097



	Capital Stock - Putable					Retained Earnings
(in thousands)	Shares		Par Value			Unrestricted			Restricted		Total			AOCI		Total Capital
December 31, 2016	37,554		$	3,755,411		$	771,661		$	214,547	$	986,208		$	52,296	$	4,793,915
Comprehensive income	—		—			206,963			51,740		258,703			71,268		329,971
Issuance of capital stock	32,252		3,225,176			—			—		—			—		3,225,176
Repurchase/redemption of capital stock	(32,825	)	(3,282,563		)	—			—		—			—		(3,282,563		)
Net shares reclassified to mandatorily redeemable capital stock	(12	)	(1,155		)	—			—		—			—		(1,155		)
Cash dividends	—		—			(125,510		)	—		(125,510		)	—		(125,510		)
September 30, 2017	36,969		$	3,696,869		$	853,114		$	266,287	$	1,119,401		$	123,564	$	4,939,834

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Bank of Pittsburgh

Notes to Financial Statements (unaudited)

Background Information

The Bank, a federally chartered corporation, is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by increasing the availability of credit for residential mortgages and community development. The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank. All holders of the Bank’s capital stock may, to the extent declared by the Board, receive dividends on their capital stock. Regulated financial depositories and insurance companies engaged in residential housing finance that maintain their principal place of business (as defined by Finance Agency regulation) in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet membership regulation standards are also eligible to become Bank members. State and local housing associates that meet certain statutory and regulatory criteria may also borrow from the Bank. While eligible to borrow, state and local housing associates are not members of the Bank and, as such, do not hold capital stock.

All members must purchase stock in the Bank. The amount of capital stock a member owns is based on membership requirements (membership asset value) and activity requirements (i.e., outstanding advances, letters of credit, and the principal balance of certain residential mortgage loans sold to the Bank). The Bank considers those members with capital stock outstanding in excess of 10% of total capital stock outstanding to be related parties. See Note 12 - Transactions with Related Parties for additional information.

The Federal Housing Finance Agency (Finance Agency) is the independent regulator of the FHLBanks. The mission of the Finance Agency is to ensure the FHLBanks operate in a safe and sound manner so they serve as a reliable source for liquidity and funding for housing finance and community investment. Each FHLBank operates as a separate entity with its own management, employees and board of directors. The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.

As provided by the Federal Home Loan Bank Act (FHLBank Act) or Finance Agency regulation, the Bank’s debt instruments, referred to as consolidated obligations, are the joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBanks. These funds are primarily used to provide advances, purchase mortgages from members through the MPF Program and purchase certain investments. See Note 10 - Consolidated Obligations for additional information. The Office of Finance (OF) is a joint office of the FHLBanks established to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare the combined quarterly and annual financial reports of all 11 FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The Bank primarily invests these funds in short-term investments to provide liquidity. The Bank also provides member institutions with correspondent services, such as wire transfer, safekeeping and settlement with the Federal Reserve.

The accounting and financial reporting policies of the Bank conform to U.S. Generally Accepted Accounting Principles (GAAP). Preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In addition, from time to time certain amounts in the prior period may be reclassified to conform to the current presentation. To the extent that any reclassifications were made, the reclassifications did not have a material impact on the Bank's financial statements. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2016 included in the Bank's 2016 Form 10-K.

Notes to Financial Statements (continued)

Note 1 – Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations

The Bank did not adopt any new accounting standards during the nine months ended September 30, 2017.

The following table provides a brief description of recently issued, not yet adopted, accounting standards which may have an impact on the Bank.



Standard	Description	Effective Date and Transition	Effect on the Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) 2017-12: Targeted Improvements to Accounting for Hedging Activities	This ASU makes amendments to the accounting for derivatives and hedging activities intended to better portray the economics of the transactions.	This ASU is effective for the Bank beginning January 1, 2019 and permits for early adoption. The guidance will be applied to existing hedging relationships as of the beginning of the year of adoption.	The Bank is continuing to evaluate the impact of this ASU on its financial statements. The Bank's hedging strategies, documentation, effectiveness testing, and presentation and disclosure may be impacted by this ASU.
ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities	This ASU requires that the amortization period for premiums on certain purchased callable debt securities be shortened to the earliest call date, rather than contractual maturity.	This ASU is effective for the Bank beginning January 1, 2019 and will be adopted on a modified retrospective basis.	The Bank is continuing to evaluate the impact of this ASU on its financial statements. The Bank does not believe that the impact will be material to its financial condition or results of operations as it does not typically purchase callable debt securities at premiums and believes this ASU is only applicable to purchased investments.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	This ASU requires entities to disaggregate the service cost component of net benefit cost from other components and present the other components outside of income from operations. It also requires that only the service cost component be eligible for capitalization.	This ASU is effective for the Bank beginning January 1, 2018. The presentation of service costs separately will be adopted on a retrospective basis, and the limiting of capitalization to service costs will be adopted on a prospective basis.	The Bank is continuing to evaluate the impact of this ASU, which may affect the presentation of other components of net benefit cost on its financial statements. The ASU is expected to impact the Bank's non-qualified defined benefit plans, but is not expected to impact its qualified, multi-employer defined benefit plan. The Bank does not anticipate that the impact will be material.
ASU 2016-15: Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments	This ASU is focused on reducing diversity in practice in the Statement of Cash Flows by providing clarification on eight classification issues.	This ASU is effective for the Bank no later than January 1, 2018 and will be adopted on a retrospective basis.	The Bank is continuing to evaluate the impact of this ASU on its financial statements, but it expects this ASU will not have any impact on its Statement of Cash Flows.
ASU 2016-13: Financial Instruments - Credit Losses	This ASU makes substantial changes to the accounting for credit losses on certain financial instruments. It replaces the current incurred loss model with a new model based on lifetime expected credit losses, which the FASB believes will result in more timely recognition of credit losses.	This ASU is effective for the Bank no later than January 1, 2020 and will generally be adopted on a modified retrospective basis, with the exception of previously-OTTI AFS debt securities, for which the guidance will be applied prospectively.	The Bank is continuing to evaluate the impact of this ASU on its financial statements and will continue to monitor interpretations made by standard-setters and regulators. The Bank expects its allowance for credit losses on MPF loans to increase; however, the Bank does not currently have an estimate of the amount of the expected increase. The Bank has not yet determined the impact this standard will have on its private label MBS securities. The Bank will continue to evaluate the appropriateness of an allowance for credit losses on other specific elements of its financial statements.

Notes to Financial Statements (continued)



Standard	Description	Effective Date and Transition	Effect on the Financial Statements or Other Significant Matters
ASU 2016-02: Leases	This ASU amends the accounting for leases. It will require lessees to recognize a right-of-use asset and lease liability for virtually all leases.	This ASU is effective for the Bank no later than January 1, 2019 and will be adopted on a modified retrospective basis.	The Bank is continuing to evaluate the impact of this ASU on its financial statements. Upon adoption, the Bank will increase its assets and liabilities for capitalized leases. The Bank’s most significant lease is its headquarters. Future minimum lease payments under current accounting standards are disclosed in Note 20 - Commitments and Contingencies in the Bank's 2016 Form 10-K. Substantially all of these payments represent the building lease.
ASU 2016-01: Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities	This ASU amends certain requirements for accounting for the recognition and measurement of financial instruments. Most notably, this guidance revises the accounting for equity securities, financial instruments measured under the fair value option, and certain disclosure requirements for fair value of financial instruments.	This ASU is effective for the Bank beginning January 1, 2018 and will be adopted on a modified retrospective basis.	This ASU will not materially impact the Bank’s financial condition or results of operations. It will result in the reclassification of an immaterial equity investment to trading securities. The Bank will update its financial statement disclosures to reflect the updated disclosure requirements for financial instruments not recognized at fair value in the financial statements and to meet the disaggregation requirements of this guidance.
ASU 2014-09: Revenue from Contracts with Customers in conjunction with ASU 2017-05: Gains and Losses from the Derecognition of Nonfinancial Assets	ASU 2014-09 was issued to increase comparability across industries by providing a single, comprehensive revenue recognition model for all contracts with customers. It will require recognition of revenue to reflect the economics of the transaction and will require expanded disclosures regarding revenue recognition. ASU 2017-05 clarifies that the guidance in ASU 2014-09 should also be applied to the accounting for derecognition of nonfinancial assets, including sales of real estate assets such as REO.	These ASUs are effective for the Bank beginning January 1, 2018 and may be adopted on either a full or modified retrospective basis.	The adoption of these ASUs will not impact the Bank's financial condition or results of operations, as the majority of the Bank’s revenue is derived from financial instruments, which are excluded from the scope of this guidance.

Note 2 – Trading Securities

The following table presents trading securities as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Mutual funds	$	9,063	$	7,092
GSE and TVA obligations	395,252		388,155
Total	$	404,315	$	395,247

The mutual funds are held in a Rabbi trust to generate returns that seek to offset changes in liabilities related to market risk of certain deferred compensation agreements. These deferred compensation liabilities were $9.2 million and $7.2 million at September 30, 2017 and December 31, 2016, respectively, and are included in Other liabilities in the Statement of Condition.

Notes to Financial Statements (continued)

The following table presents net gains (losses) on trading securities for the third quarter and the first nine months of 2017 and 2016.



	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2017		2016			2017		2016
Net unrealized gains (losses) on trading securities held at period-end	$	320	$	(2,531	)	$	7,926	$	25,631
Net realized gains on trading securities sold/matured during the period	—		—			—		—
Net gains (losses) on trading securities	$	320	$	(2,531	)	$	7,926	$	25,631

Note 3 – Available-for-Sale (AFS) Securities

The following tables present AFS securities as of September 30, 2017 and December 31, 2016.



	September 30, 2017
(in thousands)	Amortized Cost ⁽¹⁾		OTTI Recognized in AOCI ⁽²⁾		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-MBS:
Mutual funds	$	2,010	$	—	$	—	$	—		$	2,010
GSE and TVA obligations	3,065,699		—		34,564		(3,388		)	3,096,875
State or local agency obligations	269,566		—		3,576		(3,554		)	269,588
Total non-MBS	$	3,337,275	$	—	$	38,140	$	(6,942	)	$	3,368,473
MBS:
Other U.S. obligations single family MBS	$	187,921	$	—	$	231	$	(238	)	$	187,914
GSE single-family MBS	2,729,233		—		14,297		(2,616		)	2,740,914
GSE multifamily MBS	2,166,894		—		8,053		(467		)	2,174,480
Private label residential MBS	481,984		—		75,262		(163		)	557,083
Total MBS	$	5,566,032	$	—	$	97,843	$	(3,484	)	$	5,660,391
Total AFS securities	$	8,903,307	$	—	$	135,983	$	(10,426	)	$	9,028,864



	December 31, 2016
(in thousands)	Amortized Cost ⁽¹⁾		OTTI Recognized in AOCI ⁽²⁾			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-MBS:
Mutual funds	$	2,000	$	—		$	—	$	—		$	2,000
GSE and TVA obligations	3,181,110		—			11,889		(9,806		)	3,183,193
State or local agency obligations	249,675		—			879		(14,142		)	236,412
Total non-MBS	$	3,432,785	$	—		$	12,768	$	(23,948	)	$	3,421,605
MBS:
Other U.S. obligations single family MBS	$	217,577	$	—		$	—	$	(1,143	)	$	216,434
GSE single-family MBS	3,218,268		—			5,577		(10,683		)	3,213,162
GSE multifamily MBS	1,508,003		—			6,112		(1,211		)	1,512,904
Private label residential MBS	606,859		(11		)	67,435		(307		)	673,976
Total MBS	$	5,550,707	$	(11	)	$	79,124	$	(13,344	)	$	5,616,476
Total AFS securities	$	8,983,492	$	(11	)	$	91,892	$	(37,292	)	$	9,038,081

Notes:

⁽¹⁾ Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, OTTI recognized, and/or fair value hedge accounting adjustments.

⁽²⁾ Represents the non-credit portion of an OTTI recognized during the life of the security.

Notes to Financial Statements (continued)

The Bank has established a Rabbi trust to secure a portion of the Bank's benefit obligation under its supplemental retirement plan. The Rabbi trust assets are invested in mutual funds. These obligations were $9.6 million and $9.0 million at September 30, 2017 and December 31, 2016, respectively, and are included in Other liabilities in the Statement of Condition.

As of September 30, 2017, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $16.1 million, credit losses of $179.8 million and OTTI-related accretion adjustments of $58.1 million. As of December 31, 2016, these amounts were $14.9 million, $192.6 million and $43.8 million, respectively.

The following table presents a reconciliation of the AFS OTTI loss recognized through AOCI to the total net non-credit portion of OTTI gains on AFS securities in AOCI as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Non-credit portion of OTTI losses	$	—	$	(11	)
Net unrealized gains on OTTI securities since their last OTTI credit charge	75,262		67,435
Net non-credit portion of OTTI gains on AFS securities in AOCI	$	75,262	$	67,424

The following tables summarize the AFS securities with unrealized losses as of September 30, 2017 and December 31, 2016. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.



	September 30, 2017
	Less than 12 Months					Greater than 12 Months					Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses ⁽¹⁾
Non-MBS:
GSE and TVA obligations	$	217,282	$	(637	)	$	1,108,821	$	(2,751	)	$	1,326,103	$	(3,388	)
State or local agency obligations	39,920		(615		)	75,836		(2,939		)	115,756		(3,554		)
Total non-MBS	$	257,202	$	(1,252	)	$	1,184,657	$	(5,690	)	$	1,441,859	$	(6,942	)
MBS:
Other U.S. obligations single family MBS	$	10,501	$	(1	)	$	67,973	$	(237	)	$	78,474	$	(238	)
GSE single-family MBS	87,526		(300		)	309,722		(2,316		)	397,248		(2,616		)
GSE multifamily MBS	385,026		(454		)	11,788		(13		)	396,814		(467		)
Private label residential MBS	—		—			2,997		(163		)	2,997		(163		)
Total MBS	$	483,053	$	(755	)	$	392,480	$	(2,729	)	$	875,533	$	(3,484	)
Total	$	740,255	$	(2,007	)	$	1,577,137	$	(8,419	)	$	2,317,392	$	(10,426	)

Notes to Financial Statements (continued)



	December 31, 2016
	Less than 12 Months					Greater than 12 Months					Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses ⁽¹⁾
Non-MBS:
GSE and TVA obligations	$	1,976,842	$	(8,334	)	$	155,292	$	(1,472	)	$	2,132,134	$	(9,806	)
State or local agency obligations	161,288		(14,142		)	—		—			161,288		(14,142		)
Total non-MBS	$	2,138,130	$	(22,476	)	$	155,292	$	(1,472	)	$	2,293,422	$	(23,948	)
MBS:
Other U.S. obligations single family MBS	$	145,946	$	(523	)	$	70,487	$	(620	)	$	216,433	$	(1,143	)
GSE single-family MBS	1,775,502		(7,920		)	351,883		(2,763		)	2,127,385		(10,683		)
GSE multifamily MBS	461,916		(992		)	92,755		(219		)	554,671		(1,211		)
Private label residential MBS	47,364		(11		)	2,853		(307		)	50,217		(318		)
Total MBS	$	2,430,728	$	(9,446	)	$	517,978	$	(3,909	)	$	2,948,706	$	(13,355	)
Total	$	4,568,858	$	(31,922	)	$	673,270	$	(5,381	)	$	5,242,128	$	(37,303	)

Note:

⁽¹⁾Total unrealized losses equal the sum of “OTTI Recognized in AOCI” and “Gross Unrealized Losses” in the first two tables of this Note 3.

Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of September 30, 2017 and December 31, 2016 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.



(in thousands)	September 30, 2017				December 31, 2016
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1,255,975	$	1,253,922	$	378,123	$	378,071
Due after one year through five years	594,656		601,498		1,408,405		1,405,080
Due after five years through ten years	683,527		697,496		644,126		651,857
Due in more than ten years	803,117		815,557		1,002,131		986,597
AFS securities excluding MBS	3,337,275		3,368,473		3,432,785		3,421,605
MBS	5,566,032		5,660,391		5,550,707		5,616,476
Total AFS securities	$	8,903,307	$	9,028,864	$	8,983,492	$	9,038,081

Interest Rate Payment Terms. The following table details interest payment terms at September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Amortized cost of AFS securities other than MBS:
Fixed-rate	$	3,252,403	$	3,347,980
Variable-rate	84,872		84,805
Total non-MBS	$	3,337,275	$	3,432,785
Amortized cost of AFS MBS:
Fixed-rate	$	1,226,306	$	1,343,699
Variable-rate	4,339,726		4,207,008
Total MBS	$	5,566,032	$	5,550,707
Total amortized cost of AFS securities	$	8,903,307	$	8,983,492

Notes to Financial Statements (continued)

Realized Gains (Losses) on AFS Securities. The following table provides a summary of proceeds, gross gains and losses on sales of AFS securities for the three and nine months ended September 30, 2017 and 2016, respectively.



	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2017		2016			2017		2016
Proceeds from sale of AFS securities	$	—	$	8,609		$	—	$	206,608
Gross gains on sale of AFS securities	—		215			—		12,923
Gross losses on sale of AFS securities	—		(332		)	—		(332		)

Note 4 – Held-to-Maturity (HTM) Securities

The following tables present HTM securities as of September 30, 2017 and December 31, 2016.



	September 30, 2017
(in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Non-MBS:
Certificates of deposit	$	450,000	$	14	$	(4	)	$	450,010
State or local agency obligations	127,195		—		(9,268		)	117,927
Total non-MBS	$	577,195	$	14	$	(9,272	)	$	567,937
MBS:
Other U.S. obligations single-family MBS	$	457,749	$	3,600	$	—		$	461,349
GSE single-family MBS	168,539		2,882		(33		)	171,388
GSE multifamily MBS	774,753		14,321		(1,825		)	787,249
Private label residential MBS	311,417		4,465		(460		)	315,422
Total MBS	$	1,712,458	$	25,268	$	(2,318	)	$	1,735,408
Total HTM securities	$	2,289,653	$	25,282	$	(11,590	)	$	2,303,345



	December 31, 2016
(in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Non-MBS:
Certificates of deposit	$	400,000	$	61	$	(2	)	$	400,059
State or local agency obligations	131,925		—		(10,519		)	121,406
Total non-MBS	$	531,925	$	61	$	(10,521	)	$	521,465
MBS:
Other U.S. obligations single-family MBS	$	583,550	$	3,320	$	(138	)	$	586,732
GSE single-family MBS	212,097		3,097		(23		)	215,171
GSE multifamily MBS	843,167		19,288		(3,569		)	858,886
Private label residential MBS	395,396		1,932		(2,600		)	394,728
Total MBS	$	2,034,210	$	27,637	$	(6,330	)	$	2,055,517
Total HTM securities	$	2,566,135	$	27,698	$	(16,851	)	$	2,576,982

Notes to Financial Statements (continued)

The following tables summarize the HTM securities with unrealized losses as of September 30, 2017 and December 31, 2016. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.



	September 30, 2017
	Less than 12 Months					Greater than 12 Months					Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-MBS:
Certificates of deposit	$	149,996	$	(4	)	$	—	$	—		$	149,996	$	(4	)
State or local agency obligations	12,639		(91		)	105,288		(9,177		)	117,927		(9,268		)
Total non-MBS	$	162,635	$	(95	)	$	105,288	$	(9,177	)	$	267,923	$	(9,272	)
MBS:
GSE single-family MBS	$	—	$	—		$	5,965	$	(33	)	$	5,965	$	(33	)
GSE multifamily MBS	119,999		(1,825		)	—		—			119,999		(1,825		)
Private label residential MBS	1,202		(2		)	45,042		(458		)	46,244		(460		)
Total MBS	$	121,201	$	(1,827	)	$	51,007	$	(491	)	$	172,208	$	(2,318	)
Total	$	283,836	$	(1,922	)	$	156,295	$	(9,668	)	$	440,131	$	(11,590	)



	December 31, 2016
	Less than 12 Months					Greater than 12 Months					Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-MBS:
Certificates of deposit	$	124,998	$	(2	)	$	—	$	—		$	124,998	$	(2	)
State or local agency obligations	13,612		(128		)	107,794		(10,391		)	121,406		(10,519		)
Total non-MBS	$	138,610	$	(130	)	$	107,794	$	(10,391	)	$	246,404	$	(10,521	)
MBS:
Other U.S. obligations single-family MBS	$	53,513	$	(109	)	$	41,253	$	(29	)	$	94,766	$	(138	)
GSE single-family MBS	—		—			7,133		(23		)	7,133		(23		)
GSE multifamily MBS	165,914		(3,569		)	—		—			165,914		(3,569		)
Private label residential MBS	10,961		(115		)	222,585		(2,485		)	233,546		(2,600		)
Total MBS	$	230,388	$	(3,793	)	$	270,971	$	(2,537	)	$	501,359	$	(6,330	)
Total	$	368,998	$	(3,923	)	$	378,765	$	(12,928	)	$	747,763	$	(16,851	)

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of September 30, 2017 and December 31, 2016 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.



(in thousands)	September 30, 2017				December 31, 2016
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Non-MBS:
Due in one year or less	$	450,000	$	450,010	$	400,000	$	400,059
Due after one year through five years	—		—		—		—
Due after five years through ten years	44,935		43,077		47,850		45,605
Due after ten years	82,260		74,850		84,075		75,801
Total non-MBS	577,195		567,937		531,925		521,465
MBS	1,712,458		1,735,408		2,034,210		2,055,517
Total HTM securities	$	2,289,653	$	2,303,345	$	2,566,135	$	2,576,982

Notes to Financial Statements (continued)

Interest Rate Payment Terms. The following table details interest rate payment terms at September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Amortized cost of HTM securities other than MBS:
Fixed-rate	$	450,000	$	400,000
Variable-rate	127,195		131,925
Total non-MBS	$	577,195	$	531,925
Amortized cost of HTM MBS:
Fixed-rate	$	854,966	$	952,329
Variable-rate	857,492		1,081,881
Total MBS	$	1,712,458	$	2,034,210
Total HTM securities	$	2,289,653	$	2,566,135

Note 5 – Other-Than-Temporary Impairment (OTTI)

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. The Bank assesses whether there is OTTI by performing an analysis to determine if any securities will incur a credit loss, the amount of which could be up to the difference between the security's amortized cost basis and its fair value, and records the amount of credit losses in its Statement of Income. For information on the Bank’s accounting for OTTI, see Note 1 - Summary of Significant Accounting Policies to the audited financial statements in the Bank's 2016 Form 10-K. For information about how the Bank projects cash flows expected to be collected, see Note 7 - Other-than-Temporary Impairment Analysis to the audited financial statements in the Bank’s 2016 Form 10-K.

A significant input to the projection of cash flows expected to be collected is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) which is based upon an assessment of the individual housing markets. During the third quarter of 2017, the OTTI Governance Committee developed a short-term housing price forecast using whole percentages with changes ranging from (6.0)% to 13.0% over the 12 month period beginning July 1, 2017. For the vast majority of markets the short-term forecast has changes from 1.0% to 6.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

All of the Bank's other-than-temporarily impaired securities were classified as AFS as of September 30, 2017. The "Total OTTI securities" balances below summarize the Bank’s securities as of September 30, 2017 for which an OTTI has been recognized during the life of the security. The "Private label MBS with no OTTI" balances below represent AFS securities on which an OTTI was not taken. The sum of these two amounts reflects the total AFS private label MBS balance.



	OTTI Recognized During the Life of the Security
(in thousands)	Unpaid Principal Balance		Amortized Cost ⁽¹⁾		Fair Value
Private label residential MBS:
Prime	$	267,846	$	210,954	$	249,306
Alt-A	349,786		267,870		304,780
Total OTTI securities	617,632		478,824		554,086
Private label MBS with no OTTI	3,160		3,160		2,997
Total AFS private label MBS	$	620,792	$	481,984	$	557,083

Notes:

⁽¹⁾ Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, and/or OTTI recognized.

Notes to Financial Statements (continued)

The following table presents the rollforward of the amounts related to OTTI credit losses recognized during the life of the security for which a portion of the OTTI charges was recognized in AOCI for the three and nine months ended September 30, 2017 and 2016.



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2017			2016			2017			2016
Beginning balance	$	223,353		$	251,487		$	236,460		$	265,379
Additions:
Additional OTTI credit losses for which an OTTI charge was previously recognized⁽¹⁾	38			—			702			239
Reductions:
Securities sold and matured during the period⁽²⁾	286			(1,794		)	95			(3,875		)
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)	(7,712		)	(6,406		)	(21,292		)	(18,456		)
Ending balance	$	215,965		$	243,287		$	215,965		$	243,287

Notes:

⁽¹⁾ For the three months ended September 30, 2017, additional OTTI credit losses for which an OTTI charge was previously recognized relate to all securities that were previously impaired prior to July 1 of that year. For the nine months ended September 30, 2017, additional OTTI credit losses for which an OTTI charge was previously recognized relates to all securities that were also previously impaired prior to January 1 of that year.

⁽²⁾Represents reductions related to securities sold or having reached final maturity during the period, and therefore are no longer held by the Bank at the end of the period.

All Other AFS and HTM Investments. At September 30, 2017, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered to be temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions based on the creditworthiness of the underlying creditor, guarantor, or implicit government support, and the Bank neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell any such security before its anticipated recovery. As a result, the Bank did not consider any of these other investments to be other-than-temporarily impaired at September 30, 2017.

Notes to Financial Statements (continued)

Note 6 – Advances

General Terms. The Bank offers fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to ten years, and the interest rates reset periodically at a fixed spread to LIBOR or other specified indices.

At September 30, 2017 and December 31, 2016, the Bank had advances outstanding, including AHP advances, with interest rates ranging from 0.76% to 7.40%. AHP subsidized advances have interest rates ranging from 2.00% to 5.50%.

The following table details the Bank’s advances portfolio by year of contractual maturity as of September 30, 2017 and December 31, 2016.



(dollars in thousands)	September 30, 2017					December 31, 2016
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in 1 year or less	$	36,572,864		1.36	%	$	38,571,864		0.91	%
Due after 1 year through 2 years	10,896,366			1.49		14,310,133			1.14
Due after 2 years through 3 years	14,098,096			1.61		7,477,536			1.29
Due after 3 years through 4 years	10,931,580			1.71		8,488,404			1.22
Due after 4 years through 5 years	923,782			2.01		7,161,763			1.23
Thereafter	842,922			2.71		825,608			2.64
Total par value	74,265,610			1.50	%	76,835,308			1.07	%
Discount on AHP advances	(1		)			(2		)
Deferred prepayment fees	(825		)			(4,625		)
Hedging adjustments	(36,788		)			(21,977		)
Total book value	$	74,227,996				$	76,808,704

The Bank also offers convertible advances. Convertible advances allow the Bank to convert an advance from one interest rate structure to another. When issuing convertible advances, the Bank may purchase put options from a member that allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed-rate advance without the conversion feature. Variable to fixed-rate convertible advances have a defined lockout period during which the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances may convert to fixed-rate advances. The fixed rates on the converted advances are determined at origination. At September 30, 2017 and December 31, 2016, the Bank had convertible advances outstanding of $0.3 billion and $0.5 billion, respectively.

The Bank offers certain advances to members that provide a member the right, based upon predetermined exercise dates, to prepay the advance prior to maturity without incurring prepayment or termination fees (returnable advances). At September 30, 2017 and December 31, 2016, the Bank had $6.7 billion and $12.3 billion of returnable advances, respectively. At September 30, 2017 and December 31, 2016, the Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative.

Notes to Financial Statements (continued)

The following table summarizes advances by the earlier of (i) year of contractual maturity or next call date and (ii) year of contractual maturity or next convertible date as of September 30, 2017 and December 31, 2016.



	Year of Contractual Maturity or Next Call Date				Year of Contractual Maturity or Next Convertible Date
(in thousands)	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Due in 1 year or less	$	36,622,864	$	40,221,864	$	36,613,364	$	38,791,364
Due after 1 year through 2 years	10,896,366		12,700,133		10,875,866		14,116,133
Due after 2 years through 3 years	14,058,096		7,462,536		14,098,096		7,472,036
Due after 3 years through 4 years	10,931,580		8,463,404		10,931,580		8,488,404
Due after 4 years through 5 years	913,782		7,161,763		923,782		7,161,763
Thereafter	842,922		825,608		822,922		805,608
Total par value	$	74,265,610	$	76,835,308	$	74,265,610	$	76,835,308

Interest Rate Payment Terms. The following table details interest rate payment terms for advances as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Fixed-rate – overnight	$	2,740,493	$	4,696,431
Fixed-rate – term:
Due in 1 year or less	21,387,023		16,177,369
Thereafter	13,106,346		9,815,844
Total fixed-rate	37,233,862		30,689,644
Variable-rate:
Due in 1 year or less	12,445,348		17,698,064
Thereafter	24,586,400		28,447,600
Total variable-rate	37,031,748		46,145,664
Total par value	$	74,265,610	$	76,835,308

Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of September 30, 2017, the Bank had advances of $56.4 billion outstanding to the five largest borrowers, which represented 75.9% of total advances outstanding. Of these five, three had outstanding advance balances that were each in excess of 10% of the total portfolio at September 30, 2017.

As of December 31, 2016, the Bank had advances of $61.2 billion outstanding to the five largest borrowers, which represented 79.7% of total advances outstanding. Of these five, three had outstanding advance balances that were each in excess of 10% of the total portfolio at December 31, 2016.

See Note 8 for information related to the Bank's allowance for credit losses.

Notes to Financial Statements (continued)

Note 7 – Mortgage Loans Held for Portfolio

Under the MPF Program, the Bank invests in mortgage loans that it purchases from its participating members and housing associates. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are sold to the Bank. See Note 12 for further information regarding transactions with related parties.

The following table presents balances as of September 30, 2017 and December 31, 2016 for mortgage loans held for portfolio.



(in thousands)	September 30, 2017			December 31, 2016
Fixed-rate long-term single-family mortgages ⁽¹⁾	$	3,420,691		$	3,013,181
Fixed-rate medium-term single-family mortgages ⁽¹⁾	258,955			299,900
Total par value	3,679,646			3,313,081
Premiums	67,995			59,032
Discounts	(3,553		)	(3,926		)
Hedging adjustments	25,286			28,771
Total mortgage loans held for portfolio	$	3,769,374		$	3,396,958

Note:

⁽¹⁾ Long-term is defined as greater than 15 years. Medium-term is defined as a term of 15 years or less.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Conventional loans	$	3,467,109	$	3,088,810
Government-guaranteed/insured loans	212,537		224,271
Total par value	$	3,679,646	$	3,313,081

See Note 8 - Allowance for Credit Losses for information related to the Bank's credit risk on mortgage loans and allowance for credit losses.

Note 8 – Allowance for Credit Losses

The Bank has established an allowance methodology for each of the Bank’s portfolio segments: credit products, government-guaranteed or insured MPF loans held for portfolio, conventional MPF loans held for portfolio, and BOB loans.

Credit Products. The Bank manages its total credit exposure (TCE), which includes advances, letters of credit, advance commitments, and other credit product exposure, through an integrated approach. This approach generally requires a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition and is coupled with collateral and lending policies to limit risk of loss while balancing each borrower's need for a reliable source of funding. In addition, the Bank lends to its members in accordance with the FHLBank Act and Finance Agency regulations. Specifically, the FHLBank Act requires the Bank to obtain collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral weightings, or haircuts, to the value of the collateral. The Bank accepts cash, certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture, and community development loans. The Bank’s capital stock owned by the borrowing member is pledged as secondary collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can require additional or substitute collateral to help ensure that credit products continue to be secured by adequate collateral. Management of the Bank believes that these policies effectively manage the Bank’s credit risk from credit products.

Based upon the financial condition of the member, the Bank either allows a member to retain physical possession of the collateral assigned to the Bank or requires the member to specifically deliver physical possession or control of the collateral to the Bank or its custodians. However, regardless of the member's financial condition, the Bank always takes possession or control of securities used as collateral if they are used for MBC or to secure advances. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a member (or an affiliate of a

Notes to Financial Statements (continued)

member) priority over the claims or rights of any other party, except for claims or rights of a third party that would be otherwise entitled to priority under applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the Bank considers the payment status, collateral types and concentration levels, and borrower’s financial condition to be indicators of credit quality on its credit products. At September 30, 2017 and December 31, 2016, the Bank had rights to collateral on a member-by-member basis with a value in excess of its outstanding extensions of credit.

The Bank continues to evaluate and, as necessary, make changes to its collateral guidelines based on current market conditions. At September 30, 2017 and December 31, 2016, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, the Bank did not have any credit products considered to be troubled debt restructurings (TDRs).

Based upon the collateral held as security, its credit extension policies, collateral policies, management’s credit analysis and the repayment history on credit products, the Bank has not incurred any credit losses on credit products since inception. Accordingly, the Bank has not recorded any allowance for credit losses for these products.

BOB Loans. Both the probability of default and loss given default are determined and used to estimate the allowance for credit losses on BOB loans. Loss given default is considered to be 100% due to the fact that the BOB program has no collateral or credit enhancement requirements. The probability of default is based on the actual performance of the BOB program. The Bank considers BOB loans that are delinquent to be nonperforming assets. The allowance for credit losses on BOB loans was immaterial as of September 30, 2017 and December 31, 2016 and is not included in any of the tables that follow.

TDRs - BOB Loans. The Bank offers a BOB loan deferral, which the Bank considers a TDR. A deferred BOB loan is not required to pay principal or accrue interest for a period up to one year. The credit loss is measured by factoring expected shortfalls incurred as of the reporting date. BOB loan TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

Mortgage Loans - Government-Guaranteed or Insured. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) of the Department of Agriculture and/or by Housing and Urban Development (HUD). Any losses from such loans are expected to be recovered from those entities. If not, losses from such loans must be contractually absorbed by the servicers. Therefore, there is no allowance for credit losses on government-guaranteed or insured mortgage loans.

Mortgage Loans - Conventional MPF. The allowances for conventional loans are determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses includes: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; and/or (3) reviewing homogeneous pools of residential mortgage loans.

The Bank’s allowance for credit losses takes into consideration the credit enhancement (CE) associated with conventional mortgage loans under the MPF Program. Specifically, the determination of the allowance generally considers expected Primary Mortgage Insurance (PMI), Supplemental Mortgage Insurance (SMI), and other CE amounts. Any incurred losses that are expected to be recovered from the CE reduce the Bank’s allowance for credit losses.

For conventional MPF loans, credit losses that are not fully covered by PMI are allocated to the Bank up to an agreed-upon amount, referred to as the first loss account (FLA). The FLA functions as a tracking mechanism for determining the point after which the participating financial institution (PFI) is required to cover losses. The Bank pays the PFI a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the second layer of losses up to an agreed-upon CE amount. The CE amount may be a direct obligation of the PFI and/or an SMI policy paid for by the PFI, and may include performance-based fees which can be withheld to cover losses allocated to the Bank (referred to as recaptured CE fees). The PFI is required to pledge collateral to secure any portion of its CE amount that is a direct obligation. A receivable which is assessed for collectability is generally established for losses expected to be recovered by withholding CE fees. Estimated losses exceeding the CE, if any, are incurred by the Bank. At September 30, 2017 and December 31, 2016, the MPF exposure under the FLA was $25.5 million and $24.0 million, respectively. The Bank records CE fees paid to PFIs as a reduction to mortgage loan interest income. The Bank incurred CE fees of $0.9 million and $0.8 million for the third quarter

Notes to Financial Statements (continued)

2017 and 2016, respectively, and $2.7 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Individually Evaluated Mortgage Loans. The Bank evaluates certain conventional mortgage loans for impairment individually. This includes impaired loans considered collateral-dependent where repayment is expected to be provided by the sale of the underlying property, which primarily consists of MPF loans that are 180 days or more delinquent, TDRs and other loans where the borrower has filed for bankruptcy.

The estimated credit losses on impaired collateral-dependent loans are separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual basis. The incurred loss on each loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs and recovery through PMI. The estimated fair value is determined based on a value provided by a third party's retail-based Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations. The resulting loss is reduced by available CE. 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.

Collectively Evaluated Mortgage Loans. For the remainder of the portfolio, the Bank evaluates the homogeneous mortgage loan portfolio collectively for impairment. The allowance for credit loss methodology for mortgage loans considers loan pool specific attribute data, applies loss severities and incorporates the CEs of the MPF Program and PMI. The probability of default and loss given default are based on the actual 12-month historical performance of the Bank’s mortgage loans. Actual probability of default was determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default was determined based on realized losses incurred on the sale of mortgage loan collateral over the previous 12 months. The resulting estimated losses are reduced by the CEs the Bank expects to be eligible to receive. The CEs are contractually set and calculated by a master commitment agreement between the Bank and the PFI. Losses in excess of the CEs are incurred by the Bank.

Rollforward of Allowance for Credit Losses - Mortgage Loans - Conventional MPF.



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2017			2016			2017			2016
Balance, beginning of period	$	6,341		$	5,927		$	6,231		$	5,665
(Charge-offs) Recoveries, net⁽¹⁾	(141		)	(59		)	(151		)	14
Provision (benefit) for credit losses	(88		)	647			32			836
Balance, September 30	$	6,112		$	6,515		$	6,112		$	6,515

Notes:

⁽¹⁾Net charge-offs that the Bank does not expect to recover through CE receivable.

Allowances for Credit Losses and Recorded Investment by Impairment Methodology - Mortgage Loans - Conventional MPF.



(in thousands)	September 30, 2017		December 31, 2016
Ending balance, individually evaluated for impairment	$	4,913	$	5,105
Ending balance, collectively evaluated for impairment	1,199		1,126
Total allowance for credit losses	$	6,112	$	6,231
Recorded investment balance, end of period:
Individually evaluated for impairment, with or without a related allowance	$	54,812	$	58,522
Collectively evaluated for impairment	3,513,468		3,122,847
Total recorded investment	$	3,568,280	$	3,181,369

Notes to Financial Statements (continued)

Credit Quality Indicators - Mortgage Loans. Key credit quality indicators loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans.



(in thousands)	September 30, 2017
Recorded investment: ⁽¹⁾	Conventional MPF Loans			Government-Guaranteed or Insured Loans			Total
Past due 30-59 days	$	37,865		$	10,263		$	48,128
Past due 60-89 days	9,237			3,341			12,578
Past due 90 days or more	17,881			4,318			22,199
Total past due loans	$	64,983		$	17,922		$	82,905
Total current loans	3,503,297			202,170			3,705,467
Total loans	$	3,568,280		$	220,092		$	3,788,372
Other delinquency statistics:
In process of foreclosures, included above ⁽²⁾	$	10,429		$	659		$	11,088
Serious delinquency rate ⁽³⁾	0.5		%	2.0		%	0.6		%
Past due 90 days or more still accruing interest	$	—		$	4,318		$	4,318
Loans on nonaccrual status	$	21,062		$	—		$	21,062



(in thousands)	December 31, 2016
Recorded investment: ⁽¹⁾	Conventional MPF Loans			Government-Guaranteed or Insured Loans			Total
Past due 30-59 days	$	45,687		$	14,293		$	59,980
Past due 60-89 days	9,194			3,371			12,565
Past due 90 days or more	21,386			4,179			25,565
Total past due loans	$	76,267		$	21,843		$	98,110
Total current loans	3,105,102			210,624			3,315,726
Total loans	$	3,181,369		$	232,467		$	3,413,836
Other delinquency statistics:
In process of foreclosures, included above ⁽²⁾	$	11,464		$	1,077		$	12,541
Serious delinquency rate ⁽³⁾	0.7		%	1.8		%	0.8		%
Past due 90 days or more still accruing interest	$	—		$	4,179		$	4,179
Loans on nonaccrual status	$	24,092		$	—		$	24,092

Notes:

⁽¹⁾The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for charge-offs of estimated losses, accrued interest, net deferred loan fees or costs, unamortized premiums or unaccreted discounts and adjustments for fair value hedges. The recorded investment is not net of any valuation allowance.

⁽²⁾ Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.

⁽³⁾ Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.

Notes to Financial Statements (continued)

Individually Evaluated Impaired Loans - Mortgage Loans. Information regarding individually evaluated impaired mortgage loans is as follows. As indicated above, these loans include impaired loans considered collateral-dependent.



	September 30, 2017
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Credit Losses
With no related allowance:
Conventional MPF loans	$	32,512	$	32,162	$	—
With a related allowance:
Conventional MPF loans	22,300		22,026		4,913
Total:
Conventional MPF loans	$	54,812	$	54,188	$	4,913



	December 31, 2016
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Credit Losses
With no related allowance:
Conventional MPF loans	$	34,687	$	34,344	$	—
With a related allowance:
Conventional MPF loans	23,835		23,577		5,105
Total:
Conventional MPF loans	$	58,522	$	57,921	$	5,105

TDRs - Mortgage Loans - Conventional MPF. TDRs are considered to have occurred when a concession is granted to the debtor that would not have been considered had it not been for economic or legal reasons related to the debtor's financial difficulties. The Bank offers a loan modification program for its MPF Program. The loans modified under this program are considered TDRs. The Bank also considers a TDR to have occurred when a borrower files for Chapter 7 bankruptcy, the bankruptcy court discharges the borrower’s obligation, and the borrower does not reaffirm the debt. The recorded investment in mortgage loans classified as TDRs was $11.4 million and $14.1 million as of September 30, 2017 and December 31, 2016, respectively. The financial amounts related to TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

Real Estate Owned (REO). The Bank had $4.4 million and $3.9 million of REO reported in Other assets on the Statement of Condition at September 30, 2017 and December 31, 2016, respectively.

Purchases, Sales and Reclassifications. During the nine months ended September 30, 2017 and 2016, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.

Notes to Financial Statements (continued)

Note 9 – Derivatives and Hedging Activities

Nature of Business Activity. The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and interest-bearing liabilities that finance these assets. The goal of the Bank's interest rate risk management strategy is not to eliminate interest rate risk but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures that include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities. For additional information on the Bank's derivative transactions, see Note 11 to the audited financial statements in the Bank's 2016 Form 10-K.

Derivative transactions may be executed either with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivatives Clearing Organization (referred to as cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearing House), the derivative transaction is novated and the executing counterparty is replaced with the Clearing House. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. The Bank transacts uncleared derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations.

Financial Statement Effect and Additional Financial Information. The following tables summarize the notional amount, net present value of derivative instruments including related accrued interest (excluding fair value adjustments related to variation margin on daily settled contracts) and total derivatives assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments, cash collateral and variation margin for daily settled contracts.



	September 30, 2017
(in thousands)	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	26,052,326	$	65,136	$	128,164
Derivatives not designated as hedging instruments:
Interest rate swaps	$	7,917,195	$	13,410	$	52,317
Interest rate caps or floors	6,455,000		2,531		—
Mortgage delivery commitments	49,737		2		183
Total derivatives not designated as hedging instruments:	$	14,421,932	$	15,943	$	52,500
Total derivatives before netting and collateral adjustments	$	40,474,258	$	81,079	$	180,664
Netting adjustments, cash collateral, and variation margin for daily settled contracts⁽¹⁾			3,926		(171,187		)
Derivative assets and derivative liabilities as reported on the Statement of Condition			$	85,005	$	9,477

Notes to Financial Statements (continued)



	December 31, 2016
(in thousands)	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	29,133,421	$	71,335		$	142,648
Derivatives not designated as hedging instruments:
Interest rate swaps	$	9,370,245	$	21,429		$	58,158
Interest rate caps	1,255,000		4,686			—
Mortgage delivery commitments	15,450		26			98
Total derivatives not designated as hedging instruments:	$	10,640,695	$	26,141		$	58,256
Total derivatives before netting and collateral adjustments	$	39,774,116	$	97,476		$	200,904
Netting adjustments and cash collateral⁽¹⁾			(15,585		)	(186,894		)
Derivative assets and derivative liabilities as reported on the Statement of Condition			$	81,891		$	14,010

Note:

⁽¹⁾ Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparties. The September 30, 2017 table also includes fair value adjustment for which variation margin is characterized as a daily settled contract. At September 30, 2017, cash collateral posted was $109.8 million while variation margin for daily settled contracts was $65.7 million. At December 31, 2016, cash collateral posted was $171.3 million. Cash collateral received was immaterial for both September 30, 2017 and December 31, 2016.

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statement of Income.



	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2017			2016			2017			2016
Derivatives designated as hedging instruments:
Interest rate swaps ⁽¹⁾	$	(494	)	$	(142	)	$	(291	)	$	(5,285	)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	$	2,029		$	(3,471	)	$	6,369		$	(50,951	)
Interest rate caps or floors	(532		)	(192		)	(3,177		)	(2,846		)
Net interest settlements	(1,569		)	1,252			(3,178		)	2,277
Mortgage delivery commitments	(175		)	182			(602		)	2,417
Other	8			6			18			16
Total net (losses) related to derivatives not designated as hedging instruments	$	(239	)	$	(2,223	)	$	(570	)	$	(49,087	)
Other - price alignment amount on derivatives for which variation margin is characterized as a daily settled contract	238			—			501			—
Net (losses) on derivatives and hedging activities	$	(495	)	$	(2,365	)	$	(360	)	$	(54,372	)

Note:

⁽¹⁾Pertains to total net gains (losses) for fair value hedge ineffectiveness.

Notes to Financial Statements (continued)

The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and nine months ended September 30, 2017 and 2016.



(in thousands)	Gains/(Losses) on Derivative			Gains/(Losses) on Hedged Item			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income ⁽¹⁾
Three months ended September 30, 2017
Hedged item type:
Advances	$	19,171		$	(19,064	)	$	107		$	(7,186	)
Consolidated obligations – bonds	(5,042		)	4,463			(579		)	(875		)
AFS securities	554			(576		)	(22		)	(3,870		)
Total	$	14,683		$	(15,177	)	$	(494	)	$	(11,931	)
Nine months ended September 30, 2017
Hedged item type:
Advances	$	14,166		$	(14,166	)	$	—		$	(25,149	)
Consolidated obligations – bonds	7,264			(6,862		)	402			7,952
AFS securities	(6,857		)	6,164			(693		)	(13,143		)
Total	$	14,573		$	(14,864	)	$	(291	)	$	(30,340	)



(in thousands)	Gains/(Losses) on Derivative			Gains/(Losses) on Hedged Item			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income ⁽¹⁾
Three months ended September 30, 2016
Hedged item type:
Advances	$	63,409		$	(63,064	)	$	345		$	(19,883	)
Consolidated obligations – bonds	(38,166		)	37,561			(605		)	13,858
AFS securities	11,438			(11,320		)	118			(5,811		)
Total	$	36,681		$	(36,823	)	$	(142	)	$	(11,836	)
Nine months ended September 30, 2016
Hedged item type:
Advances	$	37,307		$	(35,137	)	$	2,170		$	(87,505	)
Consolidated obligations – bonds	22,316			(24,107		)	(1,791		)	58,795
AFS securities	(89,774		)	84,110			(5,664		)	(17,926		)
Total	$	(30,151	)	$	24,866		$	(5,285	)	$	(46,636	)

Note:

⁽¹⁾ Represents the net interest settlements on derivatives in fair value hedge relationships presented in the interest income/expense line item of the respective hedged item. These amounts do not include $(1.5) million and $(1.5) million for the third quarter of 2017 and 2016, respectively, and $(3.1) million and $(3.9) million for the nine months ended September 30, 2017 and 2016, respectively, of amortization/accretion of the basis adjustment related to discontinued fair value hedging relationships.

The Bank had no active cash flow hedging relationships during the first nine months of 2017 or 2016.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The Bank manages counterparty credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

Uncleared Derivatives. For uncleared derivatives, the degree of credit risk depends on the extent to which netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives.

Notes to Financial Statements (continued)

Generally, the Bank’s ISDA agreements for uncleared derivatives contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank's credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating were to be lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at September 30, 2017 was $33.9 million, for which the Bank has posted cash collateral with a fair value of approximately $25.4 million. If the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would have been required to deliver up to an additional $2.7 million of collateral to its derivative counterparties at September 30, 2017.

Cleared Derivatives. For cleared derivatives, the Clearing Houses are the Bank's counterparties. The Clearing House notifies the clearing agent of the required initial and variation margin. The requirement that the Bank post initial margin and exchange variation margin settlement payments through the clearing agent, which notifies the Bank on behalf of the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their respective obligations. The use of cleared derivatives is intended to mitigate credit risk exposure through the use of a central counterparty instead of individual counterparties. Collateral postings and variation margin settlement payments are made daily, through a clearing agent, for changes in the value of cleared derivatives. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of their respective clearing agents. Variation margin is paid daily to settle the exposure arising from changes in the market value of the position. The amount disclosed is the accumulated variation margin paid.

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including a bankruptcy, insolvency or similar proceeding involving the Clearing Houses or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearing House.

Based on credit analyses and collateral requirements, the Bank does not anticipate credit losses related to its derivative agreements. See Note 13 - Estimated Fair Values for discussion regarding the Bank's fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.

For cleared derivatives, the Clearing House determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The Bank was not required by its clearing agents to post additional initial margin at September 30, 2017.

Notes to Financial Statements (continued)

Offsetting of Derivative Assets and Derivative Liabilities. When it has met the netting requirements, the Bank presents derivative instruments, related cash collateral, including initial and certain variation margin, received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty. The following tables present separately the net present value of derivative instruments meeting or not meeting netting requirements. Gross recognized amounts do not include the related collateral received from or pledged to counterparties and variation margin for daily settled contracts. Net amounts reflect the adjustments of collateral received from or pledged to counterparties and variation margin for daily settled contracts.



	Derivative Assets
(in thousands)	September 30, 2017			December 31, 2016
Derivative instruments meeting netting requirements:
Gross recognized amount:
Uncleared derivatives	$	7,040		$	13,778
Cleared derivatives	74,037			83,672
Total gross recognized amount	81,077			97,450
Gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts⁽¹⁾
Uncleared derivatives	(6,332		)	(10,792		)
Cleared derivatives	10,258			(4,793		)
Total gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts⁽¹⁾	3,926			(15,585		)
Net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts
Uncleared derivatives	708			2,986
Cleared derivatives	84,295			78,879
Total net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts	85,003			81,865
Derivative instruments not meeting netting requirements: ⁽²⁾
Uncleared derivatives	2			26
Cleared derivatives	—			—
Total derivative instruments not meeting netting requirements:	2			26
Total derivative assets:
Uncleared derivatives	710			3,012
Cleared derivatives	84,295			78,879
Total derivative assets as reported in the Statement of Condition	85,005			81,891
Net unsecured amount:
Uncleared derivatives	710			3,012
Cleared derivatives	84,295			78,879
Total net unsecured amount	$	85,005		$	81,891

Notes to Financial Statements (continued)



	Derivative Liabilities
(in thousands)	September 30, 2017			December 31, 2016
Derivative instruments meeting netting requirements:
Gross recognized amount:
Uncleared derivatives	$	40,600		$	67,047
Cleared derivatives	139,881			133,759
Total gross recognized amount	180,481			200,806
Gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts⁽¹⁾
Uncleared derivatives	(31,306		)	(53,135		)
Cleared derivatives	(139,881		)	(133,759		)
Total gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts⁽¹⁾	(171,187		)	(186,894		)
Net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts
Uncleared derivatives	9,294			13,912
Cleared derivatives	—			—
Total net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts	9,294			13,912
Derivative instruments not meeting netting requirements: ⁽²⁾
Uncleared derivatives	183			98
Cleared derivatives	—			—
Total derivative instruments not meeting netting requirements:	183			98
Total derivative liabilities
Uncleared derivatives	9,477			14,010
Cleared derivatives	—			—
Total derivative liabilities as reported in the Statement of Condition	9,477			14,010
Net unsecured amount:
Uncleared derivatives	9,477			14,010
Cleared derivatives	—			—
Total net unsecured amount	$	9,477		$	14,010

Note:

⁽¹⁾Variation margin for daily settled contracts was $65.7 million at September 30, 2017.

⁽²⁾Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments and certain interest rate futures or forwards).

Notes to Financial Statements (continued)

Note 10 – Consolidated Obligations

Consolidated obligations consist of consolidated bonds and consolidated discount notes. The FHLBanks issue consolidated obligations through the OF as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants to have issued on its behalf. The OF tracks the amount of debt issued on behalf of each FHLBank. The Bank records as a liability its specific portion of consolidated obligations for which it is the primary obligor.

Although the Bank is primarily liable for its portion of consolidated obligations, the Bank is also jointly and severally liable with the other ten FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations whether or not the consolidated obligation represents a primary liability of such FHLBank.

Although an FHLBank has never paid the principal or interest payments due on a consolidated obligation on behalf of another FHLBank, if one FHLBank is required to make such payments on behalf of another FHLBank, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for any payments made on its behalf and other associated costs including interest to be determined by the Finance Agency. If the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, then the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. However, the Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. The par amounts of the FHLBanks’ outstanding consolidated obligations were $1,028.7 billion and $989.3 billion at September 30, 2017 and December 31, 2016, respectively.

Additional detailed information regarding consolidated obligations including general terms and interest rate payment terms can be found in Note 14 to the audited financial statements in the Bank's 2016 Form 10-K.

The following table details interest rate payment terms for the Bank's consolidated obligation bonds as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017			December 31, 2016
Par value of consolidated bonds:
Fixed-rate	$	25,209,190		$	30,020,671
Step-up	1,715,000			1,620,000
Floating-rate	27,865,000			35,155,000
Conversion bonds - fixed to floating	390,000			400,000
Total par value	55,179,190			67,195,671
Bond premiums	62,367			68,812
Bond discounts	(7,165		)	(7,732		)
Concession fees	(6,436		)	(6,706		)
Hedging adjustments	(87,717		)	(94,014		)
Total book value	$	55,140,239		$	67,156,031

Notes to Financial Statements (continued)

Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of September 30, 2017 and December 31, 2016.



	September 30, 2017				December 31, 2016
(dollars in thousands) Year of Contractual Maturity	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
Due in 1 year or less	$	30,550,970	1.20	%	$	45,660,600	0.77	%
Due after 1 year through 2 years	13,876,510		1.30		8,767,580		1.16
Due after 2 years through 3 years	3,365,000		1.72		4,575,505		1.36
Due after 3 years through 4 years	1,699,830		1.84		2,225,710		1.74
Due after 4 years through 5 years	1,730,750		2.22		1,884,400		2.05
Thereafter	3,937,350		2.39		3,958,850		2.26
Index amortizing notes	18,780		5.39		123,026		4.74
Total par value	$	55,179,190	1.39	%	$	67,195,671	1.02	%

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Noncallable	$	50,057,190	$	61,585,171
Callable	5,122,000		5,610,500
Total par value	$	55,179,190	$	67,195,671

The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of September 30, 2017 and December 31, 2016.



(in thousands) Year of Contractual Maturity or Next Call Date	September 30, 2017		December 31, 2016
Due in 1 year or less	$	35,495,970	$	50,586,100
Due after 1 year through 2 years	13,723,510		8,482,580
Due after 2 years through 3 years	3,055,000		4,375,505
Due after 3 years through 4 years	919,830		1,649,210
Due after 4 years through 5 years	1,065,750		849,400
Thereafter	900,350		1,129,850
Index amortizing notes	18,780		123,026
Total par value	$	55,179,190	$	67,195,671

Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The following table details the Bank’s consolidated obligation discount notes as of September 30, 2017 and December 31, 2016.



(dollars in thousands)	September 30, 2017			December 31, 2016
Book value	$	38,877,041		$	28,500,341
Par value	38,949,145			28,529,619
Weighted average interest rate ⁽¹⁾	1.05		%	0.51		%

Notes:

⁽¹⁾ Represents an implied rate.

Notes to Financial Statements (continued)

Note 11 – Capital

The Bank is subject to three capital requirements under its current Capital Plan Structure and the Finance Agency rules and regulations: (1) risk-based capital; (2) total regulatory capital; and (3) leverage capital. Regulatory capital does not include AOCI, but does include mandatorily redeemable capital stock. See details regarding these requirements and the Bank’s Capital Plan in Note 16 to the audited financial statements in the Bank’s 2016 Form 10-K. At September 30, 2017, the Bank was in compliance with all regulatory capital requirements.

The Bank has two subclasses of capital stock: B1 membership stock and B2 activity stock. The Bank had $0.4 billion and $3.3 billion in B1 membership stock and B2 activity stock at September 30, 2017, respectively. The Bank had $0.3 billion and $3.4 billion in B1 membership stock and B2 activity stock at December 31, 2016, respectively.

The following table demonstrates the Bank’s compliance with the regulatory capital requirements at September 30, 2017 and December 31, 2016.



	September 30, 2017						December 31, 2016
(dollars in thousands)	Required			Actual			Required			Actual
Regulatory capital requirements:
RBC	$	921,686		$	4,821,896		$	907,515		$	4,746,834
Total capital-to-asset ratio	4.0		%	4.8		%	4.0		%	4.7		%
Total regulatory capital	3,994,583			4,821,896			4,050,403			4,746,834
Leverage ratio	5.0		%	7.2		%	5.0		%	7.0		%
Leverage capital	4,993,229			7,232,844			5,063,004			7,120,252

When the Finance Agency implemented the prompt corrective action provisions of the Housing and Economic Recovery Act of 2008 (Housing Act), it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On September 18, 2017, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2017. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended September 30, 2017.

Capital Concentrations. The following tables present member holdings of 10% or more of the Bank’s total capital stock, including mandatorily redeemable capital stock, outstanding as of September 30, 2017 and December 31, 2016.



(dollars in thousands)	September 30, 2017
Member ⁽¹⁾	Capital Stock		% of Total
PNC Bank, N.A., Pittsburgh, PA	$	957,525	25.9	%
Chase Bank USA, N.A., Wilmington, DE	620,728		16.8
Ally Bank, Midvale, UT	581,387		15.7



(dollars in thousands)	December 31, 2016
Member ⁽¹⁾	Capital Stock		% of Total
Chase Bank USA, N.A., Wilmington, DE	$	873,834	23.2	%
PNC Bank, N.A., Pittsburgh, PA	859,402		22.9
Ally Bank, Midvale, UT	577,404		15.4

Note:

⁽¹⁾For Bank membership purposes, the principal place of business for PNC Bank is Pittsburgh, PA. For Ally Bank, the principal place of business is Horsham, PA.

Mandatorily Redeemable Capital Stock. Each FHLBank is a cooperative whose member financial institutions and former members own all of the relevant FHLBank's issued and outstanding capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at the shares' par value of $100 per share, as mandated by each FHLBank's capital plan.

The Bank had $5.6 million and $5.2 million in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements at September 30, 2017 and

Notes to Financial Statements (continued)

December 31, 2016, respectively. Estimated dividends on mandatorily redeemable capital stock recorded as interest expense were immaterial during the three and nine months ended September 30, 2017 and 2016.

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the nine months ended September 30, 2017 and 2016.



	Nine months ended September 30,
(in thousands)	2017			2016
Balance, beginning of the period	$	5,216		$	6,053
Capital stock subject to mandatory redemption reclassified from capital	1,155			44,832
Redemption/repurchase of mandatorily redeemable stock	(745		)	(45,469		)
Balance, end of the period	$	5,626		$	5,416

As of September 30, 2017, the total mandatorily redeemable capital stock reflected the balance for five institutions. Four institutions were merged out of district and are considered to be non-members. One other institution has notified the Bank of its intention to voluntarily redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at September 30, 2017 and December 31, 2016.



(in thousands)	September 30, 2017		December 31, 2016
Due in 1 year or less	$	—	$	—
Due after 1 year through 2 years	348		—
Due after 2 years through 3 years	4,388		419
Due after 3 years through 4 years	—		4,797
Due after 4 years through 5 years	890		—
Total	$	5,626	$	5,216

Under the terms of the Bank’s Capital Plan, membership capital stock is redeemable five years from the date of membership termination or withdrawal notice from the member. If the membership is terminated due to a merger or consolidation, the membership capital stock is deemed to be excess stock and is repurchased. The activity capital stock (i.e., supporting advances, letters of credit and MPF) relating to termination, withdrawal, mergers or consolidation is recalculated based on the underlying activity. Any excess activity capital stock is repurchased on an ongoing basis as part of the Bank’s excess stock repurchase program that is in effect at the time. Therefore, the redemption period could be less than five years if the stock becomes excess stock. However, the redemption period could extend beyond five years if the underlying activity is still outstanding.

Dividends and Retained Earnings. Each FHLBank is required to contribute 20% of its net income each quarter to a restricted retained earnings (RRE) account until the balance of that account equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. At September 30, 2017, retained earnings were $1,119.4 million, including $853.1 million of unrestricted retained earnings and $266.3 million of RRE.

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 the Bank’s retained earnings. The Bank’s retained earnings policy and capital adequacy metric utilize this guidance.

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. In February, April, July, and October 2017, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 2.0% on activity stock and membership stock, respectively.

Notes to Financial Statements (continued)

The following table summarizes the changes in AOCI for the three months ended September 30, 2017 and 2016.



(in thousands)	Net Unrealized Gains(Losses) on AFS			Non-credit OTTI Gains(Losses) on AFS		Non-credit OTTI Gains(Losses) on HTM		Net Unrealized Gains (Losses) on Hedging Activities			Pension and Post-Retirement Plans			Total
June 30, 2016	$	69,302		$	64,908	$	—	$	235		$	(1,196	)	$	133,249
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)	(6,948		)	1,845		—		—			—			(5,103		)
Net change in fair value of OTTI securities	—			1,046		—		—			—			1,046
Reclassifications from OCI to net income:
Reclassification adjustment for net (gains) losses included in net income	—			117		—		—			—			117
Amortization on hedging activities	—			—		—		(8		)	—			(8		)
Pension and post-retirement	—			—		—		—			173			173
September 30, 2016	$	62,354		$	67,916	$	—	$	227		$	(1,023	)	$	129,474

June 30, 2017	$	50,194		$	74,130	$	—	$	212		$	(2,344	)	$	122,192
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)	101			108		—		—			—			209
Net change in fair value of OTTI securities	—			986		—		—			—			986
Reclassifications from OCI to net income:
Noncredit OTTI to credit OTTI	—			38		—		—			—			38
Amortization on hedging activities	—			—		—		(8		)	—			(8		)
Pension and post-retirement	—			—		—		—			147			147
September 30, 2017	$	50,295		$	75,262	$	—	$	204		$	(2,197	)	$	123,564

Notes to Financial Statements (continued)

The following table summarizes the changes in AOCI for the nine months ended September 30, 2017 and 2016.



(in thousands)	Net Unrealized Gains(Losses) on AFS			Non-credit OTTI Gains(Losses) on AFS			Non-credit OTTI Gains(Losses) on HTM		Net Unrealized Gains (Losses) on Hedging Activities			Pension and Post-Retirement Plans			Total
December 31, 2015	$	8,748		$	72,970		$	—	$	247		$	(1,282	)	$	80,683
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)	64,897			(4,277		)	—		—			—			60,620
Net change in fair value of OTTI securities	—			284			—		—			—			284
Reclassifications from OCI to net income:
Reclassification adjustment for net (gains) losses included in net income	(11,291		)	(1,300		)	—		—			—			(12,591		)
Noncredit OTTI to credit OTTI	—			239			—		—			—			239
Amortization on hedging activities	—			—			—		(20		)	—			(20		)
Pension and post-retirement	—			—			—		—			259			259
September 30, 2016	$	62,354		$	67,916		$	—	$	227		$	(1,023	)	$	129,474

December 31, 2016	$	(12,835	)	$	67,424		$	—	$	223		$	(2,516	)	$	52,296
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)	63,130			7,788			—		—			—			70,918
Net change in fair value of OTTI securities	—			(652		)	—		—			—			(652		)
Reclassifications from OCI to net income:
Noncredit OTTI to credit OTTI	—			702			—		—			—			702
Amortization on hedging activities	—			—			—		(19		)	—			(19		)
Pension and post-retirement	—			—			—		—			319			319
September 30, 2017	$	50,295		$	75,262		$	—	$	204		$	(2,197	)	$	123,564

Notes to Financial Statements (continued)

Note 12 – Transactions with Related Parties

The following table includes significant outstanding related party member-activity balances.



(in thousands)	September 30, 2017		December 31, 2016
Advances	$	55,984,537	$	60,916,692
Letters of credit ⁽¹⁾	5,846,906		6,236,508
MPF loans	731,676		880,877
Deposits	10,311		16,510
Capital stock	2,499,756		2,707,466

Note:

⁽¹⁾ Letters of credit are off-balance sheet commitments.

The following table summarizes the effects on the Statement of Income corresponding to the related party member balances above. Amounts related to interest expense on deposits were immaterial for the periods presented.



	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2017		2016		2017		2016
Interest income on advances ⁽¹⁾	$	202,054	$	88,106	$	528,648	$	243,382
Interest income on MPF loans	11,153		12,797		32,721		40,056
Letters of credit fees	1,597		2,070		5,133		6,645
Prepayment fees on advances	—		1,823		35		8,370

Note:

⁽¹⁾ For the three and nine months ended September 30, 2017, balances include contractual interest income of $204.8 million and $539.4 million, net interest settlements on derivatives in fair value hedge relationships of $(4.0) million and $(13.4) million and total amortization of basis adjustments was $1.2 million and $2.6 million. For the three and nine months ended September 30, 2016, balances include contractual interest income of $95.1 million and $287.9 million, net interest settlements on derivatives in fair value hedge relationships of $(7.6) million and $(45.7) million and total amortization of basis adjustments was $0.6 million and $1.2 million.

The following table includes the MPF activity of the related party members.



	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2017		2016		2017		2016
Total MPF loan volume purchased	$	5,708	$	6,033	$	15,739	$	14,006

The following table summarizes the effect of the MPF activities with FHLBank of Chicago.



	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2017		2016		2017		2016
Servicing fee expense	$	639	$	364	$	1,815	$	998

From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three months ended September 30, 2017, there was no borrowing or lending activity between the Bank and other FHLBanks. During the nine months ended September 30, 2017, the total amount borrowed from and repaid to other FHLBanks was $400.0 million. There were no loans to other FHLBanks during the same period. During the three and nine months ended September 30, 2016, there was no borrowing or lending activity between the Bank and other FHLBanks.

Subject to mutually agreed upon terms, on occasion, an FHLBank may transfer at fair value its primary debt obligations to another FHLBank, which becomes the primary obligor on the transferred debt upon completion of the transfer. During the nine months ended September 30, 2017 and 2016, there were no transfers of debt between the Bank and another FHLBank.

Notes to Financial Statements (continued)

From time to time, a member of one FHLBank may be acquired by a member of another FHLBank. When such an acquisition occurs, the two FHLBanks may agree to transfer at fair value the loans of the acquired member to the FHLBank of the surviving member. The FHLBanks may also agree to the purchase and sale of any related hedging instrument. The Bank had no such activity during the nine months ended September 30, 2017 and 2016.

Additional discussions regarding related party transactions can be found in Note 18 to the audited financial statements in the Bank's 2016 Form 10-K.

Note 13 – Estimated Fair Values

Fair value amounts have been determined by the Bank using available market information and appropriate valuation methods. These estimates are based on recent market data and other pertinent information available to the Bank at September 30, 2017 and December 31, 2016. Although the management of the Bank believes that the valuation methods are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values.

The carrying value and estimated fair value of the Bank’s financial instruments at September 30, 2017 and December 31, 2016 are presented in the table below.



Fair Value Summary Table
	September 30, 2017
(in thousands)	Carrying Value		Level 1		Level 2 ⁽¹⁾		Level 3		Netting Adjust. ⁽²⁾			Estimated Fair Value
Assets:
Cash and due from banks	$	2,068,710	$	2,068,710	$	—	$	—	$	—		$	2,068,710
Interest-bearing deposits	281,073		275,000		6,073		—		—			281,073
Federal funds sold	6,025,000		—		6,024,920		—		—			6,024,920
Securities purchased under agreement to resell	1,500,000		—		1,499,979		—		—			1,499,979
Trading securities	404,315		9,063		395,252		—		—			404,315
AFS securities	9,028,864		2,010		8,469,771		557,083		—			9,028,864
HTM securities	2,289,653		—		1,987,923		315,422		—			2,303,345
Advances	74,227,996		—		74,294,496		—		—			74,294,496
Mortgage loans held for portfolio, net	3,763,262		—		3,780,633		—		—			3,780,633
BOB loans, net	12,949		—		—		12,949		—			12,949
Accrued interest receivable	153,434		—		153,434		—		—			153,434
Derivative assets	85,005		—		81,079		—		3,926			85,005
Liabilities:
Deposits	$	627,051	$	—	$	627,051	$	—	$	—		$	627,051
Discount notes	38,877,041		—		38,876,826		—		—			38,876,826
Bonds	55,140,239		—		55,160,698		—		—			55,160,698
Mandatorily redeemable capital stock ⁽³⁾	5,626		5,690		—		—		—			5,690
Accrued interest payable ⁽³⁾	117,095		—		117,031		—		—			117,031
Derivative liabilities	9,477		—		180,664		—		(171,187		)	9,477

Notes to Financial Statements (continued)



	December 31, 2016
(in thousands)	Carrying Value		Level 1		Level 2		Level 3		Netting Adjust. ⁽²⁾			Estimated Fair Value
Assets:
Cash and due from banks	$	3,587,605	$	3,587,605	$	—	$	—	$	—		$	3,587,605
Interest-bearing deposits	5,909		—		5,909		—		—			5,909
Federal funds sold	3,222,000		—		3,221,945		—		—			3,221,945
Securities purchased under agreement to resell	2,000,000		—		1,999,962		—		—			1,999,962
Trading securities	395,247		7,092		388,155		—		—			395,247
AFS securities	9,038,081		2,000		8,362,105		673,976		—			9,038,081
HTM securities	2,566,135		—		2,182,254		394,728		—			2,576,982
Advances	76,808,704		—		76,843,531		—		—			76,843,531
Mortgage loans held for portfolio, net	3,390,727		—		3,403,217		—		—			3,403,217
BOB loans, net	12,276		—		—		12,276		—			12,276
Accrued interest receivable	124,247		—		124,247		—		—			124,247
Derivative assets	81,891		—		97,476		—		(15,585		)	81,891
Liabilities:
Deposits	$	558,891	$	—	$	558,895	$	—	$	—		$	558,895
Discount notes	28,500,341		—		28,499,258		—		—			28,499,258
Bonds	67,156,031		—		67,163,445		—		—			67,163,445
Mandatorily redeemable capital stock ⁽³⁾	5,216		5,286		—		—		—			5,286
Accrued interest payable ⁽³⁾	117,183		—		117,113		—		—			117,113
Derivative liabilities	14,010		—		200,904		—		(186,894		)	14,010

Notes:

⁽¹⁾As of September 30, 2017, the amounts reported for cleared derivatives, which are part of the Level 2 amounts in the Derivative assets and Derivative liabilities above, are the net present values of the derivative instruments excluding accumulated variation margin payments.

⁽²⁾Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties. As of September 30, 2017, the Bank continues to report accumulated variation margin paid on cleared derivatives with collateral, although they are accounted for as daily settlement payments. This is consistent with disclosure as further described in Note 9 - Derivatives and Hedging Activities in this Form 10-Q. Variation margin for daily settled contracts was $65.7 million at September 30, 2017.

⁽³⁾ The estimated fair value amount for the mandatorily redeemable capital stock line item includes accrued dividend interest; this amount is excluded from the estimated fair value for the accrued interest payable line item.

Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs used to measure fair value for those assets and liabilities carried at fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for the asset or liability.

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of

Notes to Financial Statements (continued)

the beginning of the quarter in which the changes occur. There were no such transfers during the nine months ended September 30, 2017 and 2016.

Summary of Valuation Methodologies and Primary Inputs

Cash and Due from Banks. The fair values equal the carrying values.

Interest-Bearing Deposits. The fair value is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms. These instruments’ maturity term is overnight. For certain interest-bearing deposits, fair values equal the carrying values due to the nature of the interest bearing deposit.

Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms. These instruments’ maturity term is overnight.

Securities Purchased Under Agreements to Resell. The fair values are determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at September 30, 2017 and December 31, 2016. These instruments’ maturity term is overnight.

Investment Securities – non-MBS. The Bank uses either the income or market approach to determine the estimated fair value of non-MBS investment securities.

For instruments that use the income approach, the significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves and the related instrument types are as follows:

•Treasury curve: U.S. Treasury obligations

•LIBOR Swap curve: certificates of deposit

•CO curve: GSE and other U.S. obligations

The Bank uses a market approach for its state and local agency bonds. The Bank obtains prices from multiple designated third-party vendors when available, and the default price is the average of the prices obtained. Otherwise, the approach is generally consistent with the approach outlined below for Investment Securities - MBS.

Investment Securities – MBS. To value MBS holdings, the Bank obtains prices from multiple designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many MBS do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities, as applicable. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

During the year, the Bank conducts reviews of its pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures for agency and private label MBS. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.

The Bank's valuation technique first requires the establishment of a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Notes to Financial Statements (continued)

As of September 30, 2017, multiple vendor prices, when available, were received on the Bank's MBS holdings. The final prices for those securities were computed by averaging the prices received from the multiple vendors. Based on the Bank's reviews of the pricing methods including inputs and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes the final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. There continues to be unobservable inputs and a lack of significant market activity for private label MBS; therefore, as of September 30, 2017, the Bank classified private label MBS as Level 3.

Mutual Funds Offsetting Deferred Compensation and Employee Benefit Plan Obligations. Fair values for publicly traded mutual funds are based on quoted market prices.

Advances. The Bank determines the fair value by calculating the present value of expected future cash flows from the advances. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine fair value of advances are the LIBOR curve, a volatility assumption for advances with optionality, and a spread adjustment.

Mortgage Loans Held For Portfolio. The fair value is determined based on quoted market prices for new MBS issued by U.S. GSEs. Prices are then adjusted for differences in coupon, seasoning and credit quality between the Bank’s mortgage loans and the referenced MBS and a price adjustment reflective of a secondary mortgage market participant. The prices of the referenced MBS are highly dependent upon the underlying prepayment assumptions used in the secondary market.

Accrued Interest Receivable and Payable. The fair values approximate the carrying values.

Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates and the selection of discount rates that appropriately reflect market and credit risks. In addition, the fair value estimates for these instruments include accrued interest receivable/payable which approximate their carrying values due to their short-term nature.

The discounted cash flow analysis used to determine the net present value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

Interest-rate related:


•	Discount rate assumption. Overnight Index Swap (OIS) curve.


•	Forward interest rate assumption. LIBOR Swap Curve.


•	Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Mortgage delivery commitments:


•	To Be Announced (TBA) securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement and a pricing adjustment reflective of the secondary mortgage market.

The Bank is subject to credit risk on uncleared derivatives transactions due to the potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank has entered into netting arrangements and security agreements that provide for delivery of collateral at specified levels. As a result, uncleared derivatives are recognized as collateralized-to-market and the fair value of uncleared derivatives excludes netting adjustments and collateral. The Bank has evaluated the potential for fair value adjustment due to uncleared counterparty credit risk and has concluded that no adjustments are necessary.

The Bank's credit risk exposure on cleared derivatives is mitigated by the substitution of a central counterparty for individual counterparties. In addition, the CME Clearing rulebook requires delivery of initial margin to offset future changes in value and daily delivery of variation margin to offset changes in market value. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. Therefore, the fair value of cleared derivatives is reduced on a trade by trade basis by variation

Notes to Financial Statements (continued)

margin due to its treatment as a settlement. The Bank's disclosure on cleared derivatives is described above and in Note 9 - Derivatives and Hedging Activities in this Form 10-Q. Initial margin continues to be treated as collateral and accounted for separately.

The fair values of derivatives are netted by clearing agent and/or by counterparty pursuant to the provisions of each of the Bank’s netting agreements. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

BOB Loans. The fair value approximates the carrying value.

Deposits. The Bank determines the fair value by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the cost of deposits with similar terms. Substantially all of these instruments’ maturity terms are overnight.

Consolidated Obligations. The Bank’s internal valuation model determines fair values of consolidated obligations bonds and discount notes by calculating the present value of expected cash flows using market-based yield curves. The inputs used to determine fair value of consolidated obligations are a CO curve and a LIBOR swap curve, a volatility assumption for consolidated obligations with optionality, and a spread adjustment. The OF constructs an internal curve, referred to as the CO curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally its par value plus estimated dividends. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System's cooperative structure.

Commitments. For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The Bank issues standby letters of credit for a fee. The unamortized fee is the letter of credit's carrying value and represents its fair value. The fair value of the Bank's commitments to extend credit for advances and letters of credit was immaterial at September 30, 2017 and December 31, 2016.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. These estimates are susceptible to material near term changes because they are made as of a specific point in time.

Notes to Financial Statements (continued)

Fair Value Measurements. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring or non-recurring basis on its Statement of Condition at September 30, 2017 and December 31, 2016. The Bank measures certain mortgage loans held for portfolio at fair value when a charge-off is recognized and subsequently when the fair value less costs to sell is lower than the carrying amount. Real estate owned is measured using fair value when the assets' fair value less costs to sell is lower than the carrying amount.



	September 30, 2017
(in thousands)	Level 1		Level 2⁽¹⁾		Level 3		Netting Adjustment⁽²⁾			Total
Recurring fair value measurements - Assets
Trading securities:
Non MBS:
GSE and TVA obligations	$	—	$	395,252	$	—	$	—		$	395,252
Mutual funds	9,063		—		—		—			9,063
Total trading securities	$	9,063	$	395,252	$	—	$	—		$	404,315
AFS securities:
Non MBS:
GSE and TVA obligations	$	—	$	3,096,875	$	—	$	—		$	3,096,875
State or local agency obligations	—		269,588		—		—			269,588
Mutual funds	2,010		—		—		—			2,010
MBS:
Other U.S. obligations single family MBS	—		187,914		—		—			187,914
GSE single-family MBS	—		2,740,914		—		—			2,740,914
GSE multifamily MBS	—		2,174,480		—		—			2,174,480
Private label residential MBS	—		—		557,083		—			557,083
Total AFS securities	$	2,010	$	8,469,771	$	557,083	$	—		$	9,028,864
Derivative assets:
Interest rate related	$	—	$	81,077	$	—	$	3,926		$	85,003
Mortgage delivery commitments	—		2		—		—			2
Total derivative assets	$	—	$	81,079	$	—	$	3,926		$	85,005
Total recurring assets at fair value	$	11,073	$	8,946,102	$	557,083	$	3,926		$	9,518,184
Recurring fair value measurements - Liabilities
Derivative liabilities:
Interest rate related	$	—	$	180,481	$	—	$	(171,187	)	$	9,294
Mortgage delivery commitments	—		183		—		—			183
Total recurring liabilities at fair value ⁽³⁾	$	—	$	180,664	$	—	$	(171,187	)	$	9,477
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio ⁽⁴⁾	$	—	$	—	$	12,921	$	—		$	12,921
Real estate owned ⁽⁴⁾	—		—		6,009		—			6,009
Total non-recurring assets at fair value	$	—	$	—	$	18,930	$	—		$	18,930

Notes to Financial Statements (continued)



	December 31, 2016
(in thousands)	Level 1		Level 2		Level 3		Netting Adjustment⁽²⁾			Total
Recurring fair value measurements - Assets
Trading securities:
Non MBS:
GSE and TVA obligations	$	—	$	388,155	$	—	$	—		$	388,155
Mutual funds	7,092		—		—		—			7,092
Total trading securities	$	7,092	$	388,155	$	—	$	—		$	395,247
AFS securities:
Non MBS:
GSE and TVA obligations	$	—	$	3,183,193	$	—	$	—		3,183,193
State or local agency obligations	—		236,412		—		—			236,412
Mutual funds	2,000		—		—		—			2,000
MBS:
Other U.S. obligations single family MBS	—		216,434		—		—			216,434
GSE single-family MBS	—		3,213,162		—		—			3,213,162
GSE multifamily MBS	—		1,512,904		—		—			1,512,904
Private label residential MBS	—		—		673,976		—			673,976
Total AFS securities	$	2,000	$	8,362,105	$	673,976	$	—		$	9,038,081
Derivative assets:
Interest rate related	$	—	$	97,450	$	—	$	(15,585	)	$	81,865
Mortgage delivery commitments	—		26		—		—			26
Total derivative assets	$	—	$	97,476	$	—	$	(15,585	)	$	81,891
Total recurring assets at fair value	$	9,092	$	8,847,736	$	673,976	$	(15,585	)	$	9,515,219
Recurring fair value measurements - Liabilities
Derivative liabilities:
Interest rate related	$	—	$	200,806	$	—	$	(186,894	)	$	13,912
Mortgage delivery commitments	—		98		—		—			98
Total recurring liabilities at fair value ⁽³⁾	$	—	$	200,904	$	—	$	(186,894	)	$	14,010
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio ⁽⁴⁾	$	—	$	—	$	13,359	$	—		$	13,359
Real estate owned ⁽⁴⁾	—		—		6,475		—			6,475
Total non-recurring assets at fair value	$	—	$	—	$	19,834	$	—		$	19,834

Notes:

⁽³⁾ Derivative liabilities represent the total liabilities at fair value.

⁽⁴⁾ The estimated fair values of impaired mortgage loans held for portfolio and real estate owned are determined based on values provided by a third party's retail-based AVM. The Bank adjusts the AVM value based on the amount it has historically received on liquidation.

There were no transfers between Levels 1 or 2 during the first nine months of 2017 and 2016.

Notes to Financial Statements (continued)

Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statement of Condition using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017 and 2016. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications each quarter. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur. Transfers are reported as of the beginning of the period. There were no Level 3 transfers during the first nine months of 2017 or 2016.



	AFS Private Label MBS-Residential
(in thousands)	Three months ended September 30, 2017			Nine months ended September 30, 2017
Balance, beginning of period	$	610,376		$	673,976
Total gains (losses) (realized/unrealized) included in:
Accretion of credit losses in interest income	6,203			16,669
Net OTTI losses, credit portion	(38		)	(702		)
Net unrealized gains on AFS in OCI	53			144
Reclassification of non-credit portion included in net income	38			702
Net change in fair value on OTTI AFS in OCI	986			(652		)
Unrealized gains on OTTI AFS in OCI	108			7,788
Purchases, issuances, sales, and settlements:
Settlements	(60,643		)	(140,842		)
Balance at September 30	$	557,083		$	557,083
Total amount of gains for the periods presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30, 2017	$	4,432		$	13,500



	AFS Private Label MBS-Residential						AFS Private Label MBS-HELOCs⁽¹⁾
(in thousands)	Three months ended September 30, 2016			Nine months ended September 30, 2016			Nine months ended September 30, 2016
Balance, beginning of period	$	747,911		$	822,740		$	9,168
Total gains (losses) (realized/unrealized) included in:
Sale of AFS	(117		)	(117		)	1,417
Accretion of credit losses in interest income	4,749			13,345			203
Net OTTI losses, credit portion	—			(239		)	—
Net unrealized (losses) on AFS in OCI	(15		)	(62		)	—
Reclassification of non-credit portion included in net income	117			356			(1,417		)
Net change in fair value on OTTI AFS in OCI	1,046			284			—
Unrealized gains (losses) on OTTI AFS in OCI	1,845			(4,098		)	(179		)
Purchases, issuances, sales, and settlements:
Sales	(8,609		)	(8,609		)	(8,510		)
Settlements	(40,939		)	(117,612		)	(682		)
Balance at September 30	$	705,988		$	705,988		$	—
Total amount of gains for the periods presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30, 2016	$	4,749		$	13,106		$	—

Note:

⁽¹⁾All AFS Private Label MBS - HELOCs were sold during the first quarter of 2016.

Notes to Financial Statements (continued)

Note 14 – Commitments and Contingencies

The following table presents the Bank's various off-balance sheet commitments which are described in detail below.



(in thousands)	September 30, 2017						December 31, 2016
Notional amount	Expiration Date Within One Year		Expiration Date After One Year		Total		Total
Standby letters of credit outstanding ^{(1) (2)}	$	20,788,376	$	712	$	20,789,088	$	19,736,792
Commitments to fund additional advances and BOB loans	31,752		—		31,752		158,167
Commitments to fund or purchase mortgage loans	49,737		—		49,737		15,450
Unsettled consolidated obligation bonds, at par	109,950		—		109,950		2,015,000
Unsettled consolidated obligation discount notes, at par	26,405		—		26,405		—

Notes:

⁽¹⁾ Excludes approved requests to issue future standby letters of credit of $131.4 million and $467.0 million at September 30, 2017 and December 31, 2016, respectively.

⁽²⁾Letters of credit in the amount of $3.8 billion and $7.0 billion at September 30, 2017 and December 31, 2016, respectively, have annual renewal language that, as long as both parties agree, permit the letter of credit to be renewed for an additional year with a maximum renewal period of approximately 5 years.

Commitments to Extend Credit on Standby Letters of Credit, Additional Advances and BOB Loans. Standby letters of credit are issued on behalf of members for a fee. A standby letter of credit is a financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member’s Demand Deposit Account (DDA). Any remaining amounts not covered by the withdrawal from the member’s DDA are converted into a collateralized overnight advance.

Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $3.8 million and $5.0 million as of September 30, 2017 and December 31, 2016, respectively. The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. The Bank has established parameters for the review, assessment, monitoring and measurement of credit risk related to these standby letters of credit.

Based on management’s credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policy and Finance Agency regulations, the Bank has not recorded any additional liability on these commitments and standby letters of credit. Refer to Note 8 - Allowance for Credit Losses in this Form 10-Q. Excluding BOB, commitments and standby letters of credit are collateralized at the time of issuance. The Bank records a liability with respect to BOB commitments, which is reflected in Other liabilities on the Statement of Condition.

The Bank does not have any legally binding or unconditional unused lines of credit for advances at September 30, 2017 and December 31, 2016. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding of $8.5 billion and $7.1 billion at September 30, 2017 and December 31, 2016, respectively.

Commitments to Fund or Purchase Mortgage Loans. The Bank may enter into commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF Program. These delivery commitments are generally for periods not to exceed 60 days. Such commitments are recorded as derivatives.

Pledged Collateral. The Bank may pledge cash and securities, as collateral, related to derivatives. Refer to Note 9 - Derivatives and Hedging Activities for additional information about the Bank's pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. The Bank is subject to legal proceedings arising in the normal course of business. The Bank would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank's financial condition, results of operations or cash flows.

Notes 6, 9, 10, 11, and 12 also discuss other commitments and contingencies.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

See the Risk Management section in Part I, Item 2. Management’s Discussion and Analysis in this Form 10-Q.

Item 4: Controls and Procedures

Under the supervision and with the participation of the Bank’s management, including the chief executive officer, chief financial officer, and chief accounting officer, the Bank conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 1934 Act). Based on this evaluation, the Bank’s chief executive officer, chief financial officer, and chief accounting officer concluded that the Bank’s disclosure controls and procedures were effective as of September 30, 2017.

Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the third quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 1A: Risk Factors

There are no material changes in the Bank's Risk Factors from those previously disclosed in Part I, Item 1A. Risk Factors in the Bank’s 2016 Form 10-K.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3: Defaults upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

Item 6: Exhibits




Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer	Filed herewith.
Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer	Filed herewith.
Exhibit 31.3	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting Officer	Filed herewith.
Exhibit 32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer	Furnished herewith.
Exhibit 32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer	Furnished herewith.
Exhibit 32.3	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting Officer	Furnished herewith.
Exhibit 101	Interactive Data File (XBRL)	Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Federal Home Loan Bank of Pittsburgh

(Registrant)

Date: November 9, 2017

By: /s/ David G. Paulson

David G. Paulson

Chief Financial Officer

By: /s/ Edward V. Weller

Edward V. Weller

Chief Accounting Officer

(in thousands)

September 30, 2017

December 31, 2016

Interest-bearing deposits maintained with FHLBank of Chicago