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EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3233q2018.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3223q2018.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3213q2018.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3133q2018.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3123q2018.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3113q2018.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, 2018
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
601 Grant Street
Pittsburgh, PA
 (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 every Interactive Data File required to be submitted 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 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.
o Large accelerated filer
o Accelerated filer
o Emerging growth company
x Non-accelerated filer
o Smaller reporting company
 

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

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

There were 37,670,743 shares of common stock with a par value of $100 per share outstanding at October 31, 2018.





FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

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



i


PART I - FINANCIAL INFORMATION

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

Forward-Looking Information

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

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Bank's unaudited interim financial statements and notes and any Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2017 Form 10-K (2017 Form 10-K), including Risk Factors included in Item 1A of that report.

Executive Summary

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

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

Results of Operations. The Bank's net income totaled $98.5 million for the third quarter of 2018, compared to $83.9 million for the third quarter of 2017. This $14.6 million increase was driven primarily by higher net interest income and total other noninterest income. Net interest income was $120.1 million for the third quarter of 2018, compared to $109.3 million in

1


the third quarter of 2017. Interest income and expense were impacted by the rising interest rate environment. The net interest margin was 51 basis points and 45 basis points for the third quarter of 2018 and 2017, respectively.

For the nine months ended September 30, 2018, net income was $268.9 million compared to $258.7 million for the same prior-year period, an increase of $10.2 million. The increase was primarily due to higher net interest income, partially offset by a decrease in total other noninterest income. Net interest income was $346.7 million for the first nine months of 2018, compared to $328.0 million in the same period in 2017. Interest income and expense were impacted by the rising interest rate environment. The net interest margin was 49 basis points and 46 basis points for the first nine months of 2018 and 2017, respectively.

Financial Condition. Advances. Advances totaled $68.3 billion at September 30, 2018, a decrease of $6.0 billion compared to $74.3 billion at December 31, 2017. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. While the advance portfolio decreased compared to December 31, 2017, the term of advances also decreased slightly. At September 30, 2018, approximately 57% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 58% at December 31, 2017.

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

Liquidity. At September 30, 2018, the Bank held $9.6 billion of liquid assets compared to $10.2 billion at December 31, 2017. The Bank maintains its liquidity to meet member borrowing needs and regulatory standards and is comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury and Agency securities classified as trading investments.

Available-for-Sale (AFS) and Held-to-Maturity (HTM) Investments. The Bank also maintains investments classified as AFS and HTM to enhance earnings. The Bank held $10.9 billion in its investment portfolio at both September 30, 2018 and December 31, 2017.

Consolidated Obligations. The Bank's consolidated obligations totaled $87.6 billion at September 30, 2018, a decrease of $6.1 billion from December 31, 2017. At September 30, 2018, bonds represented 68% of the Bank's consolidated obligations, compared with 60% at December 31, 2017. Discount notes represented 32% of the Bank's consolidated obligations at September 30, 2018 compared with 40% at year-end 2017. The overall decrease in consolidated obligations is largely consistent with the change in advances.

Capital Position and Regulatory Requirements. Total capital at September 30, 2018 was $4.9 billion, relatively unchanged from year-end 2017. Total retained earnings at September 30, 2018 were $1,255.3 million, up $97.4 million from $1,157.9 million at year-end 2017, reflecting the Bank's net income for the first nine months of 2018 partially offset by dividends paid. Accumulated other comprehensive income (AOCI) was $95.0 million at September 30, 2018, a decrease of $15.9 million from December 31, 2017. This decrease was primarily due to changes in the fair values of securities within the AFS portfolio.

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

The Bank met all of its capital requirements as of September 30, 2018, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of June 30 2018, the Bank was deemed "adequately capitalized."


2


Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2017 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements.

Condensed Statements of Income
 
Three months ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
(in millions)
2018
 
2018
 
2018
 
2017
 
2017
Net interest income
$
120.1

 
$
117.1

 
$
109.6

 
$
107.5

 
$
109.3

Provision for credit losses

 
0.4

 
2.4

 
0.2

 
0.1

Other noninterest income
12.0

 
7.6

 
1.7

 
6.0

 
6.5

Other expense
22.6

 
22.5

 
21.2

 
23.4

 
22.5

Income before assessments
109.5

 
101.8

 
87.7

 
89.9

 
93.2

Affordable Housing Program (AHP) assessment (1)
11.0

 
10.2

 
8.8

 
9.0

 
9.3

Net income
$
98.5

 
$
91.6

 
$
78.9

 
$
80.9

 
$
83.9

Dividends
$
58.8

 
$
56.1

 
$
56.6

 
$
42.5

 
$
41.9

Dividend payout ratio (2)
59.71
%
 
61.26
%
 
71.67
%
 
52.47
%
 
49.95
%
Return on average equity
7.99
%
 
7.41
%
 
6.63
%
 
6.76
%
 
6.93
%
Return on average assets
0.41
%
 
0.38
%
 
0.33
%
 
0.33
%
 
0.34
%
Net interest margin (3)
0.51
%
 
0.49
%
 
0.47
%
 
0.45
%
 
0.45
%
Regulatory capital ratio (4)
5.16
%
 
5.08
%
 
5.05
%
 
4.84
%
 
4.83
%
GAAP capital ratio (5)
5.24
%
 
5.17
%
 
5.15
%
 
4.94
%
 
4.95
%
Total average equity to average assets
5.14
%
 
5.13
%
 
5.05
%
 
4.95
%
 
4.90
%
Notes:
(1) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(2) Represents dividends paid as a percentage of net income for the respective periods presented.
(3) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(4) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock and retained earnings as a percentage of total assets at period-end.
(5) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.
 

3


 
Nine months ended
(in millions)
September 30, 2018
September 30, 2017
Net interest income
$
346.7

$
328.0

Provision for credit losses
2.8


Other noninterest income
21.3

26.2

Other expense
66.3

66.7

Income before assessments
298.9

287.5

AHP assessment (1)
30.0

28.8

Net income
$
268.9

$
258.7

Dividends
$
171.5

$
125.5

Dividend payout ratio (2)
63.75
%
48.52
%
Return on average equity
7.35
%
7.30
%
Return on average assets
0.38
%
0.36
%
Net interest margin (3)
0.49
%
0.46
%
Regulatory capital ratio (4)
5.16
%
4.83
%
GAAP capital ratio (5)
5.24
%
4.95
%
Total average equity to average assets
5.11
%
4.88
%
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)
 
2018
 
2018
 
2018
 
2017
 
2017
Cash and due from banks
 
$
158.6

 
$
161.9

 
$
252.6

 
$
3,415.0

 
$
2,068.7

Investments (1)
 
20,320.1

 
20,752.4

 
18,487.2

 
17,757.1

 
19,528.9

Advances
 
68,301.4

 
76,340.0

 
70,278.0

 
74,279.8

 
74,228.0

Mortgage loans held for portfolio, net
 
4,332.3

 
4,171.5

 
4,018.8

 
3,923.1

 
3,763.3

Total assets
 
93,481.9

 
101,814.3

 
93,369.3

 
99,663.0

 
99,864.6

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Discount notes
 
27,756.0

 
26,988.9

 
23,905.7

 
36,193.3

 
38,877.0

Bonds
 
59,836.8

 
68,681.9

 
63,706.0

 
57,533.7

 
55,140.2

Total consolidated obligations (2)
 
87,592.8

 
95,670.8

 
87,611.7

 
93,727.0

 
94,017.2

Deposits
 
502.2

 
551.1

 
612.4

 
538.1

 
627.1

Mandatorily redeemable capital stock
 
24.2

 
4.5

 
4.8

 
5.1

 
5.6

AHP payable
 
98.7

 
95.3

 
93.1

 
91.6

 
88.7

Total liabilities
 
88,585.0

 
96,547.4

 
88,564.1

 
94,735.5

 
94,924.7

Capital stock - putable
 
3,546.6

 
3,950.5

 
3,528.4

 
3,658.7

 
3,696.9

Unrestricted retained earnings
 
919.1

 
899.1

 
881.9

 
875.4

 
853.1

Restricted retained earnings
 
336.2

 
316.6

 
298.3

 
282.5

 
266.3

AOCI
 
95.0

 
100.7

 
96.6

 
110.9

 
123.6

Total capital
 
4,896.9

 
5,266.9

 
4,805.2

 
4,927.5

 
4,939.9

Notes:
(1) Includes trading, AFS and HTM investment securities, Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits.
(2) Aggregate FHLBank System-wide consolidated obligations (at par) were $1,019.1 billion at September 30, 2018, $1,059.9 billion at June 30, 2018, $1,019.2 billion at March 31, 2018, $1,034.3 billion at December 31, 2017, and $1,028.7 billion at September 30, 2017.

4



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, 2018 and 2017, which should be read in conjunction with the Bank's unaudited interim financial statements included in this Form 10-Q as well as the audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2017 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income totaled $98.5 million for the third quarter of 2018, compared to $83.9 million for the third quarter of 2017. This $14.6 million increase was driven primarily by higher net interest income and total other noninterest income. Net interest income was $120.1 million for the third quarter of 2018, compared to $109.3 million in the third quarter of 2017. Interest income and expense were impacted by the rising interest rate environment. Noninterest income was $12.0 million in the third quarter of 2018, compared to $6.5 million in the same prior-year period. This $5.5 million increase was primarily driven by net gains on derivatives and hedging activities of $7.8 million in the third quarter of 2018, compared to net losses of $0.5 million in the same period in 2017, partially offset by net losses on trading securities of $3.0 million in the third quarter of 2018, compared to net gains of $0.3 million in 2017. The Bank's return on average equity for the third quarter of 2018 was 7.99% compared to 6.93% for the third quarter of 2017.

For the nine months ended September 30, 2018, net income was $268.9 million compared to $258.7 million for the same prior-year period, an increase of $10.2 million. The increase was primarily due to higher net interest income, partially offset by a decrease in total other noninterest income. Net interest income was $346.7 million for the first nine months of 2018, compared to $328.0 million in the same period in 2017. Interest income and expense were impacted by the rising interest rate environment. Noninterest income was $21.3 million in the first nine months of 2018, compared to $26.2 million in the same period of 2017. This $4.9 million decrease was driven primarily by net losses on trading securities of $14.4 million in the first nine months of 2018, compared to net gains of $7.9 million in the same period in 2017, partially offset by net gains on derivatives and hedging activities of $16.0 million in the first nine months of 2018, compared to net losses of $0.4 million in the same prior-year period. The Bank's return on average equity for the first nine months of 2018 was 7.35% compared to 7.30% for the same prior year period.


5


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three and nine months ended September 30, 2018 and 2017.

Average Balances and Interest Yields/Rates Paid
 
Three months ended September 30,
 
2018
 
2017
(dollars in millions)
Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
 
Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 

 

 

 
 
 

 

Federal funds sold and securities purchased under agreements to resell (1)
$
6,680.7

$
32.9

1.96

 
$
8,155.1

$
23.8

1.16

Interest-bearing deposits (2)
815.0

3.8

1.84

 
383.6

0.8

0.82

Investment securities (3)
11,677.4

85.1

2.89

 
11,501.3

66.0

2.28

Advances (4)
70,765.2

432.0

2.42

 
72,774.1

269.3

1.47

Mortgage loans held for portfolio (5)
4,263.7

38.2

3.56

 
3,650.6

32.6

3.55

Total interest-earning assets
94,202.0

592.0

2.49

 
96,464.7

392.5

1.61

Other assets (6)
846.3

 

 

 
1,407.0

 
 
Total assets
$
95,048.3

 

 

 
$
97,871.7

 
 
Liabilities and capital:
 

 

 

 
 
 
 
Deposits (2)
$
462.3

$
2.0

1.74

 
$
584.6

$
1.5

1.04

Consolidated obligation discount notes
23,940.2

120.2

1.99

 
32,572.9

85.7

1.04

Consolidated obligation bonds (7)
65,001.0

349.3

2.13

 
59,390.1

195.9

1.31

Other borrowings
21.9

0.4

6.55

 
5.1

0.1

5.06

Total interest-bearing liabilities
89,425.4

471.9

2.09

 
92,552.7

283.2

1.21

Other liabilities
734.3

 
 
 
519.0

 
 
Total capital
4,888.6

 
 
 
4,800.0

 
 
Total liabilities and capital
$
95,048.3

 
 
 
$
97,871.7

 
 
Net interest spread
 
 
0.40

 
 
 
0.40

Impact of noninterest-bearing funds
 
 
0.11

 
 
 
0.05

Net interest income/net interest margin
 
$
120.1

0.51

 
 
$
109.3

0.45

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 $(272.3) million and $(3.1) million in 2018 and 2017, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The allowance for credit losses and 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 $(220.7) million and $(70.5) million in 2018 and 2017, respectively.

Net interest income for the third quarter of 2018 increased $10.8 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. Interest-earning assets decreased 2.3% primarily due to lower demand for advances and decreased purchases of Federal funds sold and securities purchased under agreements to resell, partially offset by increased purchases of mortgage loans held for portfolio. The rate earned on interest-earning assets increased 88 basis points primarily due to a higher yield on advances. Interest income increased across all categories. Interest

6


income on advances and 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 88 basis points due to higher funding costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds increased six basis points due to higher interest rates.
 
Nine months ended September 30,
 
2018
 
2017
(dollars in millions)
Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
 
Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 

 

 

 
 
 

 

Federal funds sold and securities purchased under agreements to resell (1)
$
7,150.6

$
91.1

1.70

 
$
6,894.5

$
49.7

0.96

Interest-bearing deposits (2)
611.2

7.5

1.63

 
283.5

1.6

0.73

Investment securities (3)
11,448.7

230.0

2.69

 
11,828.7

191.1

2.16

Advances (4)
71,663.1

1,162.2

2.17

 
73,237.0

712.7

1.30

Mortgage loans held for portfolio (5)
4,114.6

110.0

3.58

 
3,510.8

95.2

3.63

Total interest-earning assets
94,988.2

1,600.8

2.26

 
95,754.5

1,050.3

1.47

Other assets (6)
798.7

 

 

 
1,354.2

 
 
Total assets
$
95,786.9

 

 

 
$
97,108.7

 
 
Liabilities and capital:
 

 

 

 
 
 
 
Deposits (2)
$
490.2

$
5.7

1.54

 
$
562.1

$
3.4

0.82

Consolidated obligation discount notes
24,955.1

318.4

1.71

 
28,509.6

178.0

0.83

Consolidated obligation bonds (7)
64,786.1

929.5

1.92

 
62,762.0

540.7

1.15

Other borrowings
11.3

0.5

6.31

 
7.1

0.2

3.90

Total interest-bearing liabilities
90,242.7

1,254.1

1.86

 
91,840.8

722.3

1.05

Other liabilities
651.7

 
 
 
531.9

 
 
Total capital
4,892.5

 
 
 
4,736.0

 
 
Total liabilities and capital
$
95,786.9

 
 
 
$
97,108.7

 
 
Net interest spread
 
 
0.40

 
 
 
0.42

Impact of noninterest-bearing funds
 
 
0.09

 
 
 
0.04

Net interest income/net interest margin
 
$
346.7

0.49

 
 
$
328.0

0.46

Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $(235.5) million and $(15.9) million in 2018 and 2017, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The allowance for credit losses and 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 $(212.8) million and $(85.3) million in 2018 and 2017, respectively.

Net interest income for the first nine months of 2018 increased $18.7 million from the same prior year period due to an increase in interest income, partially offset by higher interest expense. Interest-earning assets were slightly lower as decreased advances and investment securities were mostly offset by increased purchases of Federal funds sold and securities purchased under agreements to resell and mortgage loans held for portfolio. The rate earned on interest-bearing assets increased 79 basis points primarily due to a higher yield on advances. Interest income increased across all categories. The increase was primarily driven by increase in interest rates. The rate paid on interest-bearing liabilities increased 81 basis points due to higher funding

7


costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds increased five basis points due to higher interest rates.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three and nine months ended September 30, 2018 and 2017.
 
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2018 compared to 2017
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
Volume
Rate
Total
 
Volume
Rate
Total
Federal funds sold
 
$
(4.9
)
$
14.0

$
9.1

 
$
1.9

$
39.5

$
41.4

Interest-bearing deposits
 
1.4

1.6

3.0

 
2.9

3.0

5.9

Investment securities
 
1.1

18.0

19.1

 
(6.3
)
45.2

38.9

Advances
 
(7.6
)
170.3

162.7

 
(15.6
)
465.1

449.5

Mortgage loans held for portfolio
 
5.5

0.1

5.6

 
16.2

(1.4
)
14.8

Total interest-earning assets
 
$
(4.5
)
$
204.0

$
199.5

 
$
(0.9
)
$
551.4

$
550.5

Interest-bearing deposits
 
$
(0.4
)
$
0.9

$
0.5

 
$
(0.4
)
$
2.7

$
2.3

Consolidated obligation discount notes
 
(27.4
)
61.9

34.5

 
(24.7
)
165.1

140.4

Consolidated obligation bonds
 
20.0

133.4

153.4

 
18.0

370.8

388.8

Other borrowings
 
0.3


0.3

 
0.1

0.2

0.3

Total interest-bearing liabilities
 
$
(7.5
)
$
196.2

$
188.7

 
$
(7.0
)
$
538.8

$
531.8

Total increase in net interest income
 
$
3.0

$
7.8

$
10.8

 
$
6.1

$
12.6

$
18.7


Interest income and interest expense increased in both the quarter-over-quarter and year-over-year comparisons. Higher rates drove the increases in both interest income and expense while volumes were down slightly. The rate increase was primarily due to an increase in market interest rates as the Federal funds target rate increased multiple times between January 2017 and September 2018.

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

The following table presents the average par balances of the Bank's advance portfolio for the three and nine months ended September 30, 2018 and 2017. These balances do not reflect any hedge accounting adjustments.
(in millions)
Three months ended September 30,
Nine months ended September 30,
Product
2018
2017
2018
2017
RepoPlus/Mid-Term Repo
$
20,637.0

$
23,724.0

$
22,223.8

$
21,852.7

Core (Term)
50,365.3

48,714.5

49,639.5

51,062.6

Convertible Select
35.5

339.5

35.5

339.5

Total par value
$
71,037.8

$
72,778.0

$
71,898.8

$
73,254.8


Variances in total advances shown above were driven primarily by changes in large member activity.


8


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, 2018 and 2017. Derivative and hedging activities are discussed below.
Three Months Ended
September 30, 2018
(dollars in millions)
 
Average Balance
 
Interest Inc./
 Exp. with Derivatives
 
Avg.
Yield/
Rate (%)
 
Interest Inc./ Exp. without
Derivatives
 
Avg.
Yield/
Rate (%)
 
Impact of
Derivatives(1)
 
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
70,765.2

 
$
432.0

 
2.42

 
$
417.6

 
2.34

 
$
14.4

 
0.08

Mortgage loans held for
 portfolio
 
4,263.7

 
38.2

 
3.56

 
39.2

 
3.64

 
(1.0
)
 
(0.08
)
All other interest-earning
 assets
 
19,173.1

 
121.8

 
2.52

 
122.1

 
2.53

 
(0.3
)
 
(0.01
)
Total interest-earning
 assets
 
$
94,202.0

 
$
592.0

 
2.49

 
$
578.9

 
2.44

 
$
13.1

 
0.05

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
65,001.0

 
$
349.3

 
2.13

 
$
321.4

 
1.96

 
$
27.9

 
0.17

All other interest-bearing
 liabilities
 
24,424.4

 
122.6

 
1.99

 
122.6

 
1.99

 

 

Total interest-bearing
 liabilities
 
$
89,425.4

 
$
471.9

 
2.09

 
$
444.0

 
1.97

 
$
27.9

 
0.12

Net interest income/net
 interest spread
 
 
 
$
120.1

 
0.40

 
$
134.9

 
0.47

 
$
(14.8
)
 
(0.07
)
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
)

9


Nine Months Ended
September 30, 2018
(dollars in millions)
 
Average Balance
 
Interest Inc./
 Exp. with Derivatives
 
Avg.
Yield/
Rate (%)
 
Interest Inc./ Exp. without
Derivatives
 
Avg.
Yield/
Rate (%)
 
Impact of
Derivatives(1)
 
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
71,663.1

 
$
1,162.2

 
2.17

 
$
1,140.1

 
2.13

 
$
22.1

 
0.04

Mortgage loans held for
 portfolio
 
4,114.6

 
110.0

 
3.58

 
112.6

 
3.66

 
(2.6
)
 
(0.08
)
All other interest-earning
 assets
 
19,210.5

 
328.6

 
2.29

 
332.5

 
2.31

 
(3.9
)
 
(0.02
)
Total interest-earning
 assets
 
$
94,988.2

 
$
1,600.8

 
2.26

 
$
1,585.2

 
2.23

 
$
15.6

 
0.03

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation
 bonds
 
$
64,786.1

 
$
929.5

 
1.92

 
$
870.3

 
1.80

 
$
59.2

 
0.12

All other interest-bearing
 liabilities
 
25,456.6

 
324.6

 
1.70

 
324.6

 
1.70

 

 

Total interest-bearing
 liabilities
 
$
90,242.7

 
$
1,254.1

 
1.86

 
$
1,194.9

 
1.77

 
$
59.2

 
0.09

Net interest income/net
 interest spread
 
 
 
$
346.7

 
0.40

 
$
390.3

 
0.46

 
$
(43.6
)
 
(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
)
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, 2018 and 2017. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

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

10


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 was $47 thousand for the third quarter of 2018 and was $137 thousand for the same period in 2017. For the nine months ended September 30, 2018 and 2017, the provision for credit losses on mortgage loans held for portfolio and BOB loans was $2.8 million and $45 thousand, respectively. The nine month increase was primarily due to a non-recurring adjustment to the MPF Plus product.

Other Noninterest Income
 
Three months ended September 30,
Nine months ended September 30,
(in millions)
2018
2017
2018
2017
Net OTTI losses, credit portion
$

$

$
(0.4
)
$
(0.7
)
Net gains (losses) on trading securities
(3.0
)
0.3

(14.4
)
7.9

Net gains (losses) on derivatives and hedging activities
7.8

(0.5
)
16.0

(0.4
)
Standby letters of credit fees
5.8

6.1

17.3

18.2

Other, net
1.4

0.6

2.8

1.2

Total other noninterest income
$
12.0

$
6.5

$
21.3

$
26.2


The change in the Bank's total other noninterest income for the third quarter of 2018 compared to the same prior year period was due primarily to net gains on derivatives and hedging activities partially offset by net losses on trading securities. The change in the Bank's total other noninterest income for the first nine months of 2018 compared to the same prior year period was due primarily to net losses on trading securities partially offset by net gains on derivatives and hedging activities. The net losses on trading securities reflects the impact of fair market value changes in Agency and U.S. Treasury investments held in the Bank's trading portfolio, partially offset by a net gain of $3.9 million on the sale of $156.3 million of Agency securities during the third quarter of 2018. The activity related to derivatives and hedging is discussed in more detail below.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, TBAs, 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.


11


The following tables detail the net effect of derivatives and hedging activities for the three and nine months ended September 30, 2018 and 2017.
 
Three months ended September 30, 2018
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net interest income:
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$

$

$
(1.0
)
$
(0.2
)
$

$

$
(1.2
)
  Net interest settlements included in net interest
    income (2)
14.4

(0.3
)

(27.7
)


(13.6
)
Total effect on net interest income
$
14.4

$
(0.3
)
$
(1.0
)
$
(27.9
)
$

$

$
(14.8
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
(0.2
)
$
0.2

$

$
2.6

$

$

$
2.6

Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
0.5

7.1

4.1

(6.9
)
1.4


6.2

Other (3)





(1.0
)
(1.0
)
Total net gains (losses) on derivatives and hedging activities
$
0.3

$
7.3

$
4.1

$
(4.3
)
$
1.4

$
(1.0
)
$
7.8

Total net effect of derivatives and hedging activities
$
14.7

$
7.0

$
3.1

$
(32.2
)
$
1.4

$
(1.0
)
$
(7.0
)
 
Three months ended September 30, 2017
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net interest income:
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.1
)
$
(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
)

12


 
Nine months ended September 30, 2018
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net interest income:
 
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(0.1
)
$
(0.1
)
$
(2.6
)
$
(0.2
)
$

$

$
(3.0
)
  Net interest settlements included in net interest income(2)
22.2

(3.8
)

(59.0
)


(40.6
)
Total effect on net interest income
$
22.1

$
(3.9
)
$
(2.6
)
$
(59.2
)
$

$

$
(43.6
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.3

$
2.8

$

$
(1.0
)
$

$

$
2.1

Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
5.7

33.3

16.6

(39.1
)
(0.4
)

16.1

Other (3)





(2.2
)
(2.2
)
Total net gains (losses) on derivatives and hedging activities
$
6.0

$
36.1

$
16.6

$
(40.1
)
$
(0.4
)
$
(2.2
)
$
16.0

Total net effect of derivatives and hedging activities
$
28.1

$
32.2

$
14.0

$
(99.3
)
$
(0.4
)
$
(2.2
)
$
(27.6
)
 
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
)
Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(2) Represents interest income/expense on derivatives included in net interest income.
(3) Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

Fair value hedges. The Bank uses interest rate swaps to hedge a large portion of its fixed-rate advances and consolidated obligations and a small portion of its fixed rate investment securities. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). Most of these hedge relationships are subject to fair value hedge accounting treatment. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative and the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time. During the third quarter of 2018, the Bank recorded net gains of $2.6 million compared to net losses of $(0.5) million for the third quarter of 2017. For the nine months ended September 30, 2018 and 2017, the Bank recorded net gains of $2.1 million compared to net loses of $(0.3) million, respectively. The total notional amount increased to $34.8 billion at September 30, 2018, up from $30.0 billion at December 31, 2017.


13


Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. For economic hedges, the Bank recorded net gains of $6.2 million in third quarter of 2018 compared to net losses of $(0.2) million for the third quarter of 2017. For the nine months ended September 30, 2018, the Bank recorded net gains of $16.1 million compared to net losses of $(0.6) million for the period ended September 30, 2017. The net gains for 2018 were driven by rising LIBOR rates and their impact on derivatives hedging the Bank's assets. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $9.5 billion at September 30, 2018 and $14.8 billion at December 31, 2017. The decrease in economic hedge notional from December 31, 2017 to September 30, 2018 was primarily due to the maturity of $3.0 billion in interest rate floors which were used to hedge against certain interest rate movements.

Other Expense

The Bank's total other expenses increased $0.1 million to $22.6 million for the third quarter of 2018, compared to the same prior year period. For the first nine months of 2018 compared to the same prior year period, the Bank's total other expense decreased $0.4 million, to $66.3 million. Total other expenses included the Bank's voluntary contributions to its pension plan. These contributions totaled $2.0 million in the second quarter of both 2018 and 2017, $5.0 million for the first nine months of 2018 and $6.0 million for the first nine months of 2017.

Financial Condition

The following should be read in conjunction with the Bank's unaudited interim financial statements in this Form 10-Q and the audited financial statements in the Bank's 2017 Form 10-K.

Assets

Total assets were $93.5 billion at September 30, 2018, compared with $99.7 billion at December 31, 2017, a decrease of $6.2 billion. The decrease was primarily due to lower advances. Advances totaled $68.3 billion at September 30, 2018, a decrease of $6.0 billion compared to $74.3 billion at December 31, 2017.

The Bank's core mission activities include the issuance of advances and acquiring member assets through the Mortgage Partnership Finance® (MPF®) program. The core mission asset ratio, defined as the ratio of par amount of advances and MPF loans relative to consolidated obligations using full year average balances, was 84.4% and 83.5% as of September 30, 2018 and December 31, 2017, respectively.

Advances. Advances (par) totaled $68.6 billion at September 30, 2018 compared to $74.4 billion at December 31, 2017. The Bank had advances to 185 borrowing members, both at September 30, 2018 and December 31, 2017. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest borrowers decreased to 74.3% of total advances as of September 30, 2018, compared to 77.3% at December 31, 2017.


14


The following table provides information on advances at par by contractual maturity at September 30, 2018 and December 31, 2017.
 
September 30,
December 31,
(in millions)
2018
2017
Fixed-rate
 
 
Due in 1 year or less (1)
$
17,619.1

$
19,776.3

Due after 1 year through 3 years
10,919.1

9,504.1

Due after 3 years through 5 years
5,274.9

4,074.4

Thereafter
634.3

661.9

Total par value
$
34,447.4

$
34,016.7

 
 
 
Variable-rate
 
 
Due in 1 year or less (1)
$
8,214.8

$
10,220.4

Due after 1 year through 3 years
18,719.3

18,788.3

Due after 3 years through 5 years
55.0

4,500.0

Thereafter
3.1

3.1

Total par value
$
26,992.2

$
33,511.8

 
 
 
Variable-rate, callable or prepayable(2)
 
 
Due in 1 year or less
$
3,750.0

$
1,400.0

Due after 1 year through 3 years
2,940.0

1,790.0

Due after 3 years through 5 years
10.0

3,010.0

Total par value
$
6,700.0

$
6,200.0

 
 
 
Other(3)
 
 
Due in 1 year or less
$
51.1

$
210.2

Due after 1 year through 3 years
156.7

160.5

Due after 3 years through 5 years
126.3

115.8

Thereafter
130.6

168.9

Total par value
$
464.7

$
655.4

Total par balance
$
68,604.3

$
74,383.9

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

The Bank had no putable advances at September 30, 2018 or December 31, 2017.

15


The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding advance balance during the nine months ended September 30, 2018 and 2017. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 billion to $25 billion), Mid-size ($1.2 billion to $4 billion) and Community Financial Institutions (CFIs) (under $1.2 billion).
 
 
September 30,
September 30,
Member Classification
 
2018
2017
Large
 
6

6

Regional
 
17

14

Mid-size
 
26

23

CFI (1)
 
173

177

Insurance
 
16

13

Total borrowing members during the period
 
238

233

Total membership
 
294

300

Percentage of members borrowing during the period
 
81.0
%
77.7
%
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions and community development financial institutions (CDFIs) with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

The following table provides information at par on advances by member classification at September 30, 2018 and December 31, 2017.
(in millions)
September 30, 2018
December 31, 2017
Member Classification
Large
$
51,465.0

$
57,480.0

Regional
7,648.6

7,691.5

Mid-size
3,891.1

4,157.6

CFI
3,555.7

3,528.2

Insurance
1,542.1

1,512.7

Non-member
501.8

13.9

Total
$
68,604.3

$
74,383.9


As of September 30, 2018, total advances decreased 7.8% compared with balances at December 31, 2017. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs.

See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of this Item 2 for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of September 30, 2018.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, totaled $4.3 billion and $3.9 billion at September 30, 2018 and December 31, 2017 respectively.

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

16


(in millions)
September 30, 2018
December 31, 2017
Advances (1)
$
68,301.4

$
74,279.8

Mortgage loans held for portfolio, net (2)
4,332.3

3,923.1

Nonaccrual mortgage loans (3)
16.9

22.8

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

4.8

BOB loans, net
17.1

14.1

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

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of September 30, 2018, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.3% of the MPF Original portfolio and 2.3% of the MPF Plus portfolio compared with 0.6% and 2.6%, respectively, at December 31, 2017. The MPF 35 portfolio delinquency remains minimal at 0.04 % and 0.01%, at September 30, 2018 and December 31, 2017, respectively.

Allowance for Credit Losses (ACL). The Bank has not incurred any losses on advances since its inception in 1932. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is not appropriate under GAAP. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in the Bank's 2017 Form 10-K.

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

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

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

Mortgage loans are assessed by a third party's credit model at acquisition and a CE is calculated based on loan attributes and the Bank’s risk tolerance on its entire MPF portfolio. Credit losses on a mortgage loan may only be absorbed by the CE amount in the master commitment related to the loan. In addition, the CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the first loss account (FLA). Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF 35 and MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank.

17


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, 2018 and December 31, 2017.
 
MPF CE structure
September 30, 2018
ACL
September 30, 2018
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge - offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
5.3

$
78.4

$
5.1

$
(1.1
)
$
(3.6
)
$
0.4

MPF 35
6.2

63.7

0.2


(0.2
)

MPF Plus
16.6

8.0

8.7


(1.5
)
7.2

Total
$
28.1

$
150.1

$
14.0

$
(1.1
)
$
(5.3
)
$
7.6

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

$
78.7

$
6.0

$
(1.1
)
$
(4.4
)
$
0.5

MPF 35
4.2

38.0

0.2


(0.2
)

MPF Plus
16.9

10.0

9.5


(4.0
)
5.5

Total
$
26.0

$
126.7

$
15.7

$
(1.1
)
$
(8.6
)
$
6.0


The ACL on mortgage loans increased $1.6 million during the first nine months of 2018. The increase is primarily due to a non-recurring adjustment to the MPF Plus product. The ACL associated with MPF Original remained consistent, and the ACL associated with the MPF 35 program remained zero due to the nature of its credit structure and performance.

During the third quarter of 2018, a significant hurricane (Florence) impacted the southeastern coast of the United States. The Bank has analyzed the potential impact that the damage related to this hurricane might have on the Bank’s mortgage loans held for portfolio. Based on the information available, the Bank does not anticipate any related losses to be material. The Bank continues to evaluate the impact of the hurricane 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.

18


Investments. At September 30, 2018, the sum of the Bank's interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell was $8.8 billion, an increase of approximately $2.4 billion from December 31, 2017. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements. Investment securities, including trading, AFS, and HTM securities, totaled $11.5 billion at September 30, 2018, compared to $11.3 billion at December 31, 2017. Details of the investment securities portfolio follow.
 
 
Carrying Value
(in millions)
 
September 30, 2018
 
December 31, 2017
Trading securities:
 
 
 
 
Non-MBS:
 
 
 
 
U.S. Treasury obligations
 
$
348.0

 
$

Mutual funds (1)
 

 
9.7

Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
 
280.7

 
389.6

Total trading securities
 
$
628.7

 
$
399.3

Yield on trading securities
 
2.52
%
 
2.89
%
AFS securities:
 
 
 
 
Mutual funds (1)
 
$

 
$
2.0

GSE and TVA obligations
 
1,766.0

 
2,820.8

State or local agency obligations
 
244.6

 
269.4

MBS:
 
 
 
 
      U.S. obligations single family MBS
 
158.7

 
179.3

      GSE single-family MBS
 
2,698.8

 
2,665.8

      GSE multifamily MBS
 
2,478.4

 
2,582.6

Private label residential MBS
 
439.6

 
524.5

Total AFS securities
 
$
7,786.1

 
$
9,044.4

Yield on AFS securities
 
2.91
%
 
2.28
%
HTM securities:
 
 
 
 
Certificates of deposit
 
$
875.0

 
$
175.0

State or local agency obligations
 
107.8

 
122.4

MBS:
 
 
 
 
      U.S. obligations single family MBS
 
346.0

 
424.4

      GSE single-family MBS
 
896.7

 
156.6

      GSE multifamily MBS
 
644.5

 
726.0

Private label residential MBS
 
219.7

 
278.7

Total HTM securities
 
$
3,089.7

 
$
1,883.1

Yield on HTM securities
 
2.99
%
 
2.71
%
Total investment securities
 
$
11,504.5

 
$
11,326.8

Yield on investment securities
 
2.91
%
 
2.37
%
Note:
(1) Reclassified to "Other assets" in the Statement of Condition as a result of adopting ASU 2016-01, effective January 1, 2018. Refer to Note 1 in this Form 10-Q.

19


As of September 30, 2018, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions)
Total
Book Value
Total
Fair Value
Freddie Mac
$
3,073.4

$
3,064.5

Fannie Mae
3,928.3

3,925.8

Federal Farm Credit Banks
1,683.9

1,683.9

Total
$
8,685.6

$
8,674.2


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

Liabilities and Capital

Deposits. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at September 30, 2018 decreased to $502.2 million from $538.1 million at December 31, 2017.

Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $87.6 billion at September 30, 2018, an decrease of $6.1 billion from December 31, 2017. The decrease in total consolidated obligations was mainly due to the advance balance decrease in 2018.

At September 30, 2018, the Bank’s bonds outstanding increased to $59.8 billion compared to $57.5 billion at December 31, 2017. Conversely, discount notes outstanding at September 30, 2018 decreased to $27.8 billion from $36.2 billion at December 31, 2017. The shorter-term discount notes were issued near year-end 2017 to make additional liquidity available to members, if needed, and caused the shift in bonds compared to discount notes outstanding for the first nine months of 2018.

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

Commitments and Off-Balance Sheet Items. As of September 30, 2018, the Bank was obligated to fund approximately $17.8 million in additional advances and BOB loans, $30.8 million of mortgage loans, and to issue $1.5 billion in consolidated obligations. In addition, the Bank had $21.0 billion in outstanding standby letters of credit as of September 30, 2018. 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; (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 $554 million as of September 30, 2018. The Bank's retained earnings were $1,255.3 million at September 30, 2018.

Retained earnings increased $97.4 million to $1,255.3 million at September 30, 2018, compared to $1,157.9 million at December 31, 2017. The increase in retained earnings during the first nine months of 2018 reflected net income that was

20


partially offset by $171.5 million of dividends paid. Total retained earnings at September 30, 2018 included unrestricted retained earnings of $919.1 million and restricted retained earnings (RRE) of $336.2 million.

Capital Resources

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

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
(in millions)
September 30, 2018
December 31, 2017
Permanent capital:
 
 
Capital stock (1)
$
3,570.8

$
3,663.8

Retained earnings
1,255.3

1,157.9

Total permanent capital
$
4,826.1

$
4,821.7

RBC requirement:
 
 
Credit risk capital
$
367.1

$
390.4

Market risk capital
575.1

418.9

Operations risk capital
282.7

242.8

Total RBC requirement
$
1,224.9

$
1,052.1

Excess permanent capital over RBC requirement
$
3,601.2

$
3,769.6

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

The increase in the total RBC requirement as of September 30, 2018 is mainly related to the change in the market risk capital component. The change was driven by an increase in floating rate debt outstanding and an increase in the severity of the scenarios modeled as a result of higher short-term interest rates. The Finance Agency has issued an Advisory Bulletin effective for RBC reporting beginning with the fourth quarter of 2018, which revises the market risk scenario methodology and significantly lessens the influence of the level of rates on the scenarios under the current requirements. The Bank continues to maintain significant excess permanent capital over the RBC requirement.

On September 18, 2018, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2018. 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, 2018.


21


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, 2018.
(dollars in millions)
September 30, 2018
December 31, 2017
Regulatory Capital Ratio
 
 
Minimum capital (4.0% of total assets)
$
3,739.3

$
3,986.5

Regulatory capital
4,826.1

4,821.7

Total assets
93,481.9

99,663.0

Regulatory capital ratio (regulatory capital as a percentage of total assets)
5.2
%
4.8
%
 
 
 
Leverage Ratio
 
 
Minimum leverage capital (5.0% of total assets)
$
4,674.1

$
4,983.2

Leverage capital (permanent capital multiplied by a 1.5 weighting factor)
7,239.2

7,232.5

Leverage ratio (leverage capital as a percentage of total assets)
7.7
%
7.3
%

The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
(dollars in millions)
 
September 30, 2018
December 31, 2017
Commercial banks
 
151

$
3,138.1

155

$
3,259.3

Savings institutions
 
58

220.7

60

207.1

Insurance companies
 
28

112.3

28

130.0

Credit unions
 
55

75.1

53

62.0

Community Development Financial Institution (CDFI)
 
2

0.4

2

0.3

Total member institutions / total GAAP capital stock
 
294

$
3,546.6

298

$
3,658.7

Mandatorily redeemable capital stock
 
 
24.2

 
5.1

Total capital stock
 
 
$
3,570.8



$
3,663.8


The Bank lost seven members in the first nine months of 2018 and added three new members. One member merged with another institution outside of the Bank's district; one member moved their principal place of business outside of the Bank's district; and five members merged with another institution within the Bank's district.

Critical Accounting Policies and Estimates

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

The Bank made no changes to its critical accounting policies during the nine months ended September 30, 2018.

In addition to evaluating the Bank's private label MBS portfolio under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of the Bank's private label MBS under a more stressed housing price scenario. This additional scenario was used to determine the amount of credit losses, if any, that would have been recorded in earnings during the quarter ended September 30, 2018, if the more stressed housing price scenario had been used in the Bank's OTTI assessment as of September 30, 2018. The more stressed scenario results were immaterial. A more detailed discussion of this analysis is in the OTTI section of Credit and Counterparty Risk - Investments of this Item 2.

22



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

Advisory Bulletin (AB) 2018-07 Federal Home Loan Bank Liquidity Guidance (Liquidity Guidance AB). On August 23, 2018, the Finance Agency issued a final AB on FHLBank liquidity that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. As of March 31, 2019, the Liquidity Guidance AB rescinds 2009 liquidity guidance previously issued by the Finance Agency. Contemporaneously with the issuance of the Liquidity Guidance AB, the Finance Agency issued a supervisory letter that identifies initial thresholds for measures of liquidity.

The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

With respect to base case liquidity, the Finance Agency revised previous guidance that required the FHLBanks to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, the FHLBanks will be required to hold positive cash flow assuming no access to capital markets for an increased period of between ten and 30 calendar days, with a specific measurement period set forth in the supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding standby letters of credit commitments, as specified in the supervisory letter.

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10% to -20%) and one-year (-25% to -35%) maturity horizons, with specific initial percentages within these ranges identified in the supervisory letter. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short term debt funding, which may increase debt rollover risk.

The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans and an adjustment to the FHLBank’s core mission achievement calculation. Portions of the Liquidity Guidance AB will be implemented beginning December 31, 2018, with further implementation on March 31, 2019, and full implementation on December 31, 2019.

While the Bank is still analyzing the impact of the Liquidity Guidance AB, it will require the Bank to hold an additional amount of liquid assets to meet the new guidance, which could reduce the Bank’s ability to invest in higher-yielding assets. Further, the Bank’s cost of funding may increase if it is required to achieve the appropriate funding gap with longer term funding. The Bank does not believe these changes will have a material effect on the Bank’s financial condition or results of operations.

Proposed Amendment to Finance Agency Rule Regarding Golden Parachute and Indemnification Payments. On August 28, 2018, the Finance Agency proposed amending its rule on golden parachute payments (Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the Finance Agency’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards that the Finance Agency would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance (OF) to an entity-affiliated party when such entity is in troubled condition, in conservatorship or receivership, or insolvent. The proposed amendments would:

focus these standards on payments to and agreements with executive officers, broad-based plans, such as severance plans, covering large numbers of employees and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoings;
revise and clarify definitions, exemptions and procedures to implement the Finance Agency’s supervisory approach; and
align procedures and outcomes of review with requirements of the Finance Agency’s rule on executive compensation.

23



Comments on the proposed rule were due by October 12, 2018. Ten of the FHLBanks and the OF provided a joint comment letter related to clarifying certain provisions of the proposed amendment. The Bank is currently assessing the effect of the proposed rule but does not anticipate that, if adopted, it would materially impact the Bank.

Final Rule on Indemnification Payments. On October 4, 2018, the Finance Agency published a final rule establishing standards for identifying when an indemnification payment by an FHLBank or the OF to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the Finance Agency is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:

premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Finance Agency or a civil money penalty imposed by the Finance Agency;
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and
amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).

The rule also outlines the process the board of directors must undergo prior to making a permitted payment. The rule became effective November 5, 2018. The Bank does not expect the rule will materially impact the Bank.

Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration and Finance Agency Amendments to Rule on Margin and Capital Requirements for Covered Swap Entities. On September 21, 2018, the OCC, FRB, FDIC, Farm Credit Administration, and the Finance Agency adopted amendments, effective November 9, 2018, to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s and FDIC’s final qualified financial contract (QFC) rules. The amendments also clarify that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC rules. The Bank does not expect these amendments to materially affect its financial condition or results of operations.

OCC, FRB, and FDIC Proposed Rule on Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements. On October 31, 2018, the OCC, the FRB and the FDIC issued a proposed rule, with a comment deadline of January 22, 2019, that would establish risk-based categories for determining applicability of requirements under the regulatory capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule for large U.S. banking organizations. The proposed rule establishes four categories of standards and applies tailored capital and liquidity requirements for banking organizations subject to each category. Organizations in the lowest risk category, those with $100 billion to $250 billion in total consolidated assets (Category IV), would no longer be subject to standardized liquidity requirements. Organizations in the next lowest risk category, those with $250 billion or more in total consolidated assets that are not “global systemically important banking organizations” (GSIBs) (Category III), would be subject to reduced liquidity requirements equivalent to between 70 and 85 percent of the currently required liquidity coverage ratio. Organizations in the highest risk categories, those with $700 billion or more in total consolidated assets (Category II) and GSIBs (Category I), would continue to be subject to existing capital and liquidity requirements. These changes could result in reduced advance levels for the Bank.

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:

24



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

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

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

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 140.3% at September 30, 2018 and 136.3% at December 31, 2017. The increase was primarily due to the growth in retained earnings and the decline in capital stock as a result of lower advances.

Qualitative and Quantitative Disclosures Regarding Market Risk

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

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

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

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

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

The following table presents the Bank's duration of equity exposure at September 30, 2018 and December 31, 2017. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" could not be meaningfully measured for these periods and therefore is not presented. The "down 100 basis point" scenario results became

25


meaningful during the first quarter of 2018 due to an increase in short term interest rates and therefore is only presented for September 30, 2018.
(in years)
Down 100 basis points
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual Duration of Equity:
 
 
 
 
September 30, 2018
(0.2)
0.1
0.4
0.6
December 31, 2017
n/a
0.0
0.2
0.6

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

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

The ROE spread volatility presented in the table below reflects spreads relative to 3-month LIBOR. Management uses both parallel and non-parallel rate scenarios to assess interest rate risk. The steeper and flatter yield curve shift scenarios are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the low rate environment, management replaced a "down 200 basis points parallel rate" scenario with a "down 100 basis point longer term rate" shock as an additional non-parallel rate scenario that reflects a decline in longer-term rates. Due to increases in short-term interest rates, the Bank had re-introduced a "down 50 basis point parallel rate" scenario during the first quarter of 2017. As a result of further increases in short term interest rates, the Bank replaced this "down 50 basis point parallel rate" scenario with a "down 100 basis point parallel rate" scenario during the first quarter of 2018.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term
Rate Shock
Down 100 bps Parallel Shock
100 bps Steeper
100 bps Flatter
Up 200 bps
Parallel Shock
September 30, 2018
1
(30)
(33)
30
37
December 31, 2017
(13)
n/a
(8)
2
(10)

Changes in ROE spread volatility in the first nine months of 2018 primarily reflect the impact of balance sheet management actions (e.g. funding decisions). 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, 2018 and December 31, 2017.

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



26


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

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure (TCE) to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. At September 30, 2018, aggregate TCE was $91.0 billion, comprised of approximately $68.6 billion in advance principal outstanding, $22.0 billion in letters of credit (including forward commitments), $16.1 million in advance commitments, and $365.5 million in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes a maximum borrowing capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank’s Member Products Policy. Details regarding this policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2017 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position. At September 30, 2018 and December 31, 2017, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an estimated collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank.

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

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


27


The following table presents the Bank’s top five members with respect to their TCE at September 30, 2018.
 
September 30, 2018
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
22,893.6

25.2
%
Ally Bank, UT (2)
17,570.3

19.3

TD Bank, National Association, DE
10,757.8

11.8

Chase Bank USA, N.A., DE
8,010.4

8.8

Santander Bank, N.A., DE (3)
3,797.9

4.2

 
63,030.0

69.3

Other financial institutions
27,943.6

30.7

Total TCE outstanding
$
90,973.6

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.

Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of September 30, 2018.
 
September 30, 2018
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
20,035.0

29.2
%
Ally Bank, UT (2)
17,525.0

25.5

Chase Bank USA, N.A., DE
8,000.0

11.7

Santander Bank, N.A., DE (3)
3,150.0

4.6

First National Bank of Pennsylvania, PA
2,255.0

3.3

 
50,965.0

74.3

Other borrowers
17,639.3

25.7

Total advances
$
68,604.3

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, 2018 balances for the five largest borrowers totaled $54.4 billion, or 75.7% of total average advances outstanding. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank has never incurred any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.

Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of September 30, 2018 and December 31, 2017. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances.
(dollars in millions)
September 30, 2018
December 31, 2017
Letters of credit:
 
 
   Public unit deposit
$
21,024.4

$
18,948.8

   Other

17.1

Total (1)
$
21,024.4

$
18,965.9

Notes:
(1) For September 30, 2018 and December 31, 2017, respectively, excludes approved requests to issue future standby letters of credit of $92.6 million and $44.1 million; also excludes available master standby letters of credit of $870.7 million and $676.3 million at September 30, 2018 and December 31, 2017, respectively.


28


At September 30, 2018, the Bank had a concentration of letters of credit with two members (TD Bank and PNC Bank) totaling $12.7 billion or 60.5% of the total amount. At December 31, 2017, $12.2 billion or 64.2% of the letters of credit were concentrated with these same two members.

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

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

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

For all of the Bank's members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of September 30, 2018 and December 31, 2017. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
September 30, 2018
December 31, 2017
All members
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
106,529.6

46.3
%
$
107,527.6

46.0
%
High quality investment securities
9,981.0

4.3

12,512.0

5.4

ORERC(1)/CFI eligible collateral
93,720.4

40.7

94,033.0

40.2

Multi-family residential mortgage loans
20,046.0

8.7

19,626.8

8.4

Total eligible collateral value
$
230,277.0

100.0
%
$
233,699.4

100.0
%
Total TCE
$
90,973.6

 
$
94,420.0

 
Collateralization ratio (eligible collateral value to TCE outstanding)
253.1
%
 
247.5
%
 
(1) Other real estate related collateral.

29


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, 2018 and December 31, 2017.
 
September 30, 2018
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family residential
  mortgage loans
$
82,766.8

40.9
%
$
19,751.3

93.1
%
$
14.6

1.4
%
$
102,532.7

45.7
%
High quality investment securities
7,415.5

3.7

1,469.0

6.9

1,021.8

96.3

9,906.3

4.4

ORERC/CFI eligible collateral
92,058.9

45.5



24.2

2.3

92,083.1

41.0

Multi-family residential mortgage
  loans
19,949.9

9.9



0.1


19,950.0

8.9

Total eligible collateral value
$
202,191.1

100.0
%
$
21,220.3

100.0
%
$
1,060.7

100.0
%
$
224,472.1

100.0
%
Total TCE
$
78,579.4

86.4
%
$
11,532.8

12.7
%
$
861.4

0.9
%
$
90,973.6

100.0
%
Number of members
195

88.2
%
12

5.4
%
14

6.4
%
221

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

39.2
%
$
24,665.6

93.7
%
$
4.7

0.7
%
$
103,327.5

45.4
%
High quality investment securities
10,080.7

5.0

1,651.1

6.3

684.9

95.7

12,416.7

5.5

ORERC/CFI eligible collateral
92,192.4

46.1



24.8

3.5

92,217.2

40.5

Multi-family residential mortgage
  loans
19,507.9

9.7



0.8

0.1

19,508.7

8.6

Total eligible collateral value
$
200,438.2

100.0
%
$
26,316.7

100.0
%
$
715.2

100.0
%
$
227,470.1

100.0
%
Total TCE
$
76,914.8

81.5
%
$
17,132.0

18.1
%
$
373.2

0.4
%
$
94,420.0

100.0
%
Number of members
200

89.2
%
10

4.5
%
14

6.3
%
224

100.0
%

Credit and Counterparty Risk - Investments

The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. The Bank considers a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, credit ratings based on NRSROs, and/or the financial health of the underlying issuer.


30


Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of September 30, 2018 and December 31, 2017, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
 
September 30, 2018 (1)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Unrated
Total
Money market investments:
 
 
 
 
 
 
 
  Interest-bearing deposits
$

$

$
865.0

$

$

$

$
865.0

  Securities purchased under agreements to resell
2,000.0




1,000.0


3,000.0

  Federal funds sold

870.0

4,075.0




4,945.0

Total money market investments
2,000.0

870.0

4,940.0


1,000.0


8,810.0

Investment securities:
 
 
 
 
 
 
 
  U.S. Treasury obligations

348.0





348.0

  Certificates of deposit

100.0

775.0




875.0

  GSE and TVA obligations

2,046.7





2,046.7

  State or local agency obligations
25.5

326.9





352.4

Total non-MBS
25.5

2,821.6

775.0




3,622.1

  U.S. obligations single family MBS

504.7





504.7

  GSE single-family MBS

3,595.5





3,595.5

  GSE multifamily MBS

3,122.9





3,122.9

  Private label residential MBS

5.6

29.6

84.9

339.9

199.3

659.3

Total MBS

7,228.7

29.6

84.9

339.9

199.3

7,882.4

Total investments
$
2,025.5

$
10,920.3

$
5,744.6

$
84.9

$
1,339.9

$
199.3

$
20,314.5

 
December 31, 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




500.0


500.0

  Federal funds sold

2,650.0

3,000.0




5,650.0

Total money market investments

2,650.0

3,275.0


500.0


6,425.0

Investment securities:
 
 
 
 
 
 
 
  Certificates of deposit

50.0

125.0




175.0

  GSE and TVA obligations

3,210.4





3,210.4

  State or local agency obligations
27.2

364.6





391.8

  Other (2)





11.7

11.7

Total non-MBS
27.2

3,625.0

125.0



11.7

3,788.9

  U.S. obligations single family MBS

603.7





603.7

  GSE single-family MBS

2,822.4





2,822.4

  GSE multifamily MBS

3,308.6





3,308.6

  Private label residential MBS

5.2

18.4

106.1

547.1

126.4

803.2

Total MBS

6,739.9

18.4

106.1

547.1

126.4

7,537.9

Total investments
$
27.2

$
13,014.9

$
3,418.4

$
106.1

$
1,047.1

$
138.1

$
17,751.8

Notes:
(1) Balances exclude total accrued interest of $33.5 million and $29.7 million for September 30, 2018 and December 31, 2017, respectively.
(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. Effective January 1, 2018, the mutual fund equity investments were reclassified to "Other assets" in the Statement of Condition as a result of adopting ASU 2016-01. Refer to Note 1 in this Form 10-Q.


31


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. 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 at maturity or 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, 2018, the Bank had unsecured exposure to 15 counterparties totaling $6.7 billion, with five counterparties each 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, 2018 and December 31, 2017. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
 
 
Carrying Value (1)
September 30, 2018
December 31, 2017
Interest-bearing deposits
$
865.0

$
275.0

Certificates of deposit
875.0

175.0

Federal funds sold
4,945.0

5,650.0

Total
$
6,685.0

$
6,100.0

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, 2018, 51.5% of the Bank’s unsecured investment credit exposures 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, 2018, 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

32


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, 2018 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
Total
Domestic
$

$
3,240.0

$
3,240.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
  Australia
100.0


100.0

  Canada

1,200.0

1,200.0

  France

100.0

100.0

  Germany

250.0

250.0

  Netherlands

750.0

750.0

  Norway

175.0

175.0

  Sweden
870.0


870.0

  Total U.S. branches and agency offices of foreign commercial banks
970.0

2,475.0

3,445.0

Total unsecured investment credit exposure
$
970.0

$
5,715.0

$
6,685.0

(in millions)
 
 
 
December 31, 2017 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
Total
Domestic
$
950.0

$
675.0

$
1,625.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
  Australia
950.0


950.0

  Canada
50.0

1,375.0

1,425.0

  France

50.0

50.0

  Netherlands

650.0

650.0

  Norway

650.0

650.0

  Sweden
750.0


750.0

  Total U.S. branches and agency offices of foreign commercial banks
1,750.0

2,725.0

4,475.0

Total unsecured investment credit exposure
$
2,700.0

$
3,400.0

$
6,100.0

Notes:
(1) Does not reflect any changes in ratings, outlook or watch status occurring after September 30, 2018.
(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 September 30, 2018 or December 31, 2017.


33


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, 2018
Carrying Value
Domicile of Counterparty
Overnight
Due 2 days through 30 days
Due 31 days through 90 days
Total
Domestic
$
3,240.0

$

$

$
3,240.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
  Australia


100.0

100.0

  Canada
950.0

200.0

50.0

1,200.0

  France

100.0


100.0

  Germany

200.0

50.0

250.0

  Netherlands
750.0



750.0

  Norway

50.0

125.0

175.0

  Sweden
870.0



870.0

  Total U.S. branches and agency offices of foreign commercial banks
2,570.0

550.0

325.0

3,445.0

Total unsecured investment credit exposure
$
5,810.0

$
550.0

$
325.0

$
6,685.0

(in millions)
 
 
 
December 31, 2017
Carrying Value
Domicile of Counterparty
Overnight
Due 31 days through 90 days
Total
Domestic
$
1,625.0

$

$
1,625.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
  Australia
950.0


950.0

  Canada
1,300.0

125.0

1,425.0

  France

50.0

50.0

  Netherlands
650.0


650.0

  Norway
650.0


650.0

  Sweden
750.0


750.0

  Total U.S. branches and agency offices of foreign commercial banks
4,300.0

175.0

4,475.0

Total unsecured investment credit exposure
$
5,925.0

$
175.0

$
6,100.0


U.S. Treasury Obligations. The Bank invests in U.S. Treasury obligations that are explicitly fully guaranteed by the U.S. government. This portfolio totaled $348.0 million at September 30, 2018. There was no balance as of December 31, 2017.

Agency/GSE Securities and Agency/GSE MBS. The Bank invests in and is subject to credit risk related to securities issued by Federal Agencies or U.S. government corporations. In addition, the Bank invests in MBS issued by these same entities that are directly supported by underlying mortgage loans. Both the securities and MBS are either explicitly or implicitly guaranteed by the U.S. government. These portfolios totaled $9.3 billion at September 30, 2018 and $9.9 billion at December 31, 2017, respectively.

State and Local Agency Obligations. The Bank invests in and is subject to credit risk related to a portfolio of state and local agency obligations (i.e., Housing Finance Agency bonds) that are directly or indirectly supported by underlying mortgage loans. These portfolios totaled $352.4 million and $391.8 million at September 30, 2018 and December 31, 2017, respectively.

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,

34


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. In late 2007, the Bank discontinued the purchase of private label MBS. The carrying value of the Bank’s private label MBS portfolio at September 30, 2018 was $659.3 million, which was a decrease of $143.9 million from December 31, 2017. This decline was primarily due to repayments.

Unrealized gains of OTTI securities in AOCI at September 30, 2018 were $77.9 million compared to $72.9 million at December 31, 2017. The weighted average prices on OTTI securities were 89.8 and 89.5 at September 30, 2018 and December 31, 2017, 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, 2018, 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 2017 Form 10-K.

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.


35


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, 2018.
 
Private Label MBS
(dollars in millions)
Prime
Alt-A
Subprime
Total
Par by lowest external long-
 term rating:
 
 
 
 
  AA
$
5.6

$

$

$
5.6

  A
12.0

17.6


29.6

  BBB
72.7

9.4

3.2

85.3

Below investment grade:
 
 
 
 
  BB
64.7

16.2


80.9

  B
14.4

2.9


17.3

  CCC
67.7

106.1


173.8

  CC

39.1


39.1

  D
44.0

10.2


54.2

  Unrated
92.3

131.8


224.1

    Total
$
373.4

$
333.3

$
3.2

$
709.9

Amortized cost
$
319.7

$
258.6

$
3.2

$
581.5

Gross unrealized losses (1)
(0.2
)

(0.1
)
(0.3
)
Fair value
359.9

300.3

3.1

663.3

OTTI (2)
 
 
 
 
Total OTTI losses
$

$

$

$

OTTI losses reclassified to (from) AOCI
(0.2
)
(0.2
)

(0.4
)
Net OTTI losses, credit portion
$
(0.2
)
$
(0.2
)
$

$
(0.4
)
Weighted average fair value/par
96.4
%
90.1
%
96.9
%
93.4
%
Original weighted average credit support
6.8

10.3

12.5

8.5

Weighted-average credit support - current
8.1

3.7

47.0

6.2

Weighted avg. collateral delinquency (3)
10.0

13.9

11.3

11.8

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 were both $17.9 million at September 30, 2018.
(2) For the nine months ended September 30, 2018.
(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 both the three months ended September 30, 2018 and three months ended September 30, 2017, and $0.4 million and $0.7 million during the nine months ended September 30, 2018 and 2017, 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.


36


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 2018 analysis are presented below.
 
Significant Inputs for Private Label Residential MBS
Category at origination
Prepayment Rates
Default Rates
Loss Severities
Current Credit Enhancement
 
Weighted Avg %
Weighted Avg %
Weighted Avg %
Weighted Avg %
Prime
13.7
9.7
24.2
7.5
Alt-A
14.2
18.2
36.9
3.9
Subprime
4.3
25.4
53.2
47.0
Total Private Label Residential MBS
13.9
14.0
30.5
5.9

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, 2018
September 30, 2017
Number of private label MBS with an OTTI charge:
 
 
   Life-to-date
60

60

   Still outstanding
38

38

Total OTTI credit loss recorded life-to-date
$
457.4

$
456.8

Principal write-downs on private label MBS
(149.6
)
(153.4
)
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
)
(7.1
)
Remaining amount of previously recognized OTTI credit losses
$
184.2

$
179.8


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 $5.4 million and $7.7 million for the third quarter of 2018 and 2017, respectively; $15.6 million and $21.3 million for the first nine months of 2018 and 2017, respectively; and $154.4 million life-to-date. The OTTI recovered through interest income was recognized on 34 and 36 private label MBS securities for the first nine months of 2018 and 2017, 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 2018 and 2017.

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 issued guidance which will amend the accounting for credit losses beginning January 1, 2020. 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

37


that were in an unrealized loss position at September 30, 2018. 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 $4.3 billion and $3.9 billion after an allowance for credit losses of $7.6 million at September 30, 2018 and $6.0 million at December 31, 2017, 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 monitors the financial condition of these mortgage insurers. PMI for MPF Program loans must be issued by a mortgage insurance company on the approved qualified insurer 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, 2018, five 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, 2018, all of the SMI exposure is fully collateralized.

The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of September 30, 2018 was $5.9 million and $2.4 million, respectively. The corresponding amounts at December 31, 2017 were $6.4 million and $2.6 million.

BOB Loans. See Note 1 - Summary of Significant Accounting Policies in Item 8 in the Bank's 2017 Form 10-K for a description of the BOB program. At September 30, 2018, the allowance for credit losses on BOB loans was $2.6 million, an increase of $0.7 million from December 31, 2017.

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. Variation margin payments are characterized as daily settlement payments, rather than collateral. Initial margin is considered cash collateral. 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.

38


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, 2018.

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, 2018.

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, 2018 and December 31, 2017.
(in millions)
September 30, 2018
Credit Rating (1)
Notional Amount
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
 
 
 
 
    A
$
728.9

$
3.3

$
(1.4
)
$
1.9

    BBB
145.0

0.6


0.6

Liability positions with credit exposure:
 
 
 
 
  Uncleared derivatives
 
 
 
 
    A
3,717.4

(28.8
)
29.4

0.6

  Cleared derivatives (2)
36,091.5


102.9

102.9

Total derivative positions with credit exposure to non-member counterparties
40,682.8

(24.9
)
130.9

106.0

Member institutions (3)
30.7




Total
$
40,713.5

$
(24.9
)
$
130.9

$
106.0

Derivative positions without credit exposure
3,639.9

 
 
 
Total notional
$
44,353.4

 
 
 

39


(in millions)
December 31, 2017
Credit Rating (1)
Notional Amount
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
 
 
 
 
    A
$
234.0

$
0.3

$

$
0.3

Liability positions with credit exposure:
 
 
 
 
  Uncleared derivatives
 
 
 
 
    A
3,861.9

(7.7
)
8.0

0.3

  Cleared derivatives (2)
33,528.4

(0.7
)
80.8

80.1

Total derivative positions with credit exposure to non-member counterparties
37,624.3

(8.1
)
88.8

80.7

Member institutions (3)
25.5




Total
$
37,649.8

$
(8.1
)
$
88.8

$
80.7

Derivative positions without credit exposure
7,134.2

 
 
 
Total notional
$
44,784.0

 
 
 
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after September 30, 2018. 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) Represents derivative transactions cleared through Clearing Houses.
(3) 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, 2018 and December 31, 2017.
Notional Greater Than 10%
September 30, 2018
December 31, 2017
(dollars in millions)
Derivative Counterparty
Credit Rating
Notional
% of Notional
Credit Rating
Notional
% of Notional
Barclays Bank
(1) 
(1) 
(1) 
A
$
3,416.9

30.4
Citibank, NA
A
$
2,480.0

30.0
A
2,510.0

22.3
Morgan Stanley Capital
BBB
1,360.7

16.5
BBB
1,288.8

11.5
All others
n/a
4,421.3

53.5
n/a
4,039.9

35.8
 Total
 
$
8,262.0

100.0
 
$
11,255.6

100.0
Net Credit Exposure
  Greater Than 10%
September 30, 2018
December 31, 2017
(dollars in millions)
Derivative Counterparty
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
BNP Paribas
A
$
1.8

57.6
A
$
0.3

50.4
Citigroup Financial
BBB
0.6

19.1
(2) 
(2) 
(2) 
Credit Suisse
A
0.4

10.6
(2) 
(2) 
(2) 
Barclays Bank
(2) 
(2) 
(2) 
A
0.2

31.6
Societe Generale
(2) 
(2) 
(2) 
A
0.1

18.0
All others
n/a
0.3

12.7
n/a

 Total
 
$
3.1

100.0
 
$
0.6

100.0
Notes:
(1) The percentage of notional was not greater than 10%.
(2) The counterparty had no credit exposure for the period-end.


40


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, 2018
December 31, 2017
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
$
18.3

$
18.3

$
18.6

$
8.7

$
8.7

$
8.1

France
14.0

14.0

13.7

6.7

6.7

6.7

United Kingdom
0.1



1.1

1.1

1.3

Germany
9.2

5.1

5.0

4.1

0.7

0.6

Total
$
41.6

$
37.4

$
37.3

$
20.6

$
17.2

$
16.7

Note: The average maturity of these derivative contracts is October 2023 at September 30, 2018 and July 2022 at December 31, 2017, 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, 2018
December 31, 2017
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
$
1.9

$

$

$
0.2

$

$

Switzerland
0.1

0.1





United Kingdom
1.5

1.5

1.4




Total
$
3.5

$
1.6

$
1.4

$
0.2

$

$

Note: The average maturity of these derivative contracts is November 2021 at September 30, 2018 and August 2020 at December 31, 2017, 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.


41


Liquidity and Funding Risk

As a wholesale bank, the Bank employs financial strategies which 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. In addition, the Bank is required to maintain a level of liquidity in accordance with the FHLBank Act, FHFA regulations and policies established by its management and board of directors. The Bank's liquidity resources are designed to support these strategies and requirements and are described further in the Bank's 2017 Form 10-K.

Asset/Liability Maturity Profile. The Bank is focused on maintaining adequate liquidity and funding balances with its financial assets and financial liabilities, and the FHLBanks work collectively to manage system-wide liquidity and funding needs. The FHLBanks jointly monitor the combined risks, primarily by tracking the maturities of financial assets and financial liabilities. The Bank also monitors the funding balance between financial assets and financial liabilities and is committed to prudent risk management practices. External factors including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities.

Sources of Liquidity. The Bank's primary sources of liquidity are proceeds from the issuance of consolidated obligations and a liquidity investment portfolio, along with maturing advances and proceeds from the issuance of capital stock.

Consolidated Obligations. The Bank’s ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of various debt structures at attractive rates. Investor demand for FHLBank debt remains strong as money market reform continues to provide strong demand for discount and floating rate notes. 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, 2018. These ratings measure the likelihood of timely payment of principal and interest. Note 10 - Consolidated Obligations to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank’s consolidated obligations.

Liquidity Investment Portfolio. The Bank’s operating liquidity is comprised of cash, interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell. In addition, U.S. Treasury and GSE obligations that are classified as trading securities are also included in operating liquidity.

Contingency Liquidity. The Bank’s access to the capital markets has never been interrupted to the extent that the Bank’s ability to meet its obligations was compromised, and the Bank currently has no reason to believe that its ability to issue consolidated obligations will be impeded to that extent. The Bank maintains a contingency liquidity portfolio in the event it is unable to access the capital markets. In addition to its liquidity investment portfolio above, the Bank's sources of contingency liquidity include advances maturing within five days, certificates of deposit, unencumbered repurchase-eligible assets within its AFS and HTM securities portfolios and MBS repayments expected within five days. Uses of contingency liquidity include net settlements of consolidated obligations, member loan commitments, mortgage loan purchase commitments, deposit outflows and maturing other borrowed funds. Excess contingency liquidity is calculated as the difference between sources and uses of contingency liquidity. At September 30, 2018 and December 31, 2017, excess contingency liquidity was approximately $16.9 billion and $25.6 billion, respectively.

Funding and Debt Issuance. Changes or disruptions in the capital markets could limit the Bank’s ability to issue consolidated obligations. During the first half of 2018, the Bank maintained continual access to funding. Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have sought the FHLBank’s short-term debt as an asset of choice. This has led to advantageous funding opportunities and increased utilization of debt maturing in one year or less. The FHLBanks have comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates.

Refinancing Risk. There are inherent risks in utilizing short-term funding to support longer-dated assets and the Bank may be exposed to refinancing and investor concentration risks (collectively, refinancing risk). Refinancing risk includes the risk the Bank could have difficulty in rolling over short-term obligations when market conditions change. In managing and monitoring the amounts of financial assets that require refinancing, the Bank considers their contractual maturities, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments, embedded call optionality, and scheduled amortizations). 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).


42


Interest Rate Risk. The Bank may use a portion of the short-term consolidated obligations issued to fund both short- and long-term LIBOR-indexed assets. However, funding longer-term LIBOR-indexed assets with shorter-term liabilities generally does not expose the Bank to interest rate risk because the rates on the LIBOR-indexed assets reset similar to the liabilities. The Bank measures and monitors interest rate-risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, and duration gap.

Regulatory Liquidity Requirements. The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance. 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 during that period, an FHLBank will automatically renew maturing and called advances for all members except very large members, provided that the member is well-rated by its primary Federal regulator or its state regulator equivalent for insurance companies and is well-rated by the Bank's internal credit rating system. The Bank was in compliance with these requirements at September 30, 2018. Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2017 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 2017 Form 10-K for additional information.

Operational and Business Risks

Operational Risk. Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events and encompasses risks related to housing mission-related activities, including activities associated with affordable housing programs or goals. The Bank considers various sources of risk of unexpected loss, including human error, fraud, unenforceability of legal contracts, deficiencies in internal controls and/or information systems, or damage from fire, theft, natural disaster or acts of terrorism. Generally, the category of operational risk includes loss exposures of a physical or procedural nature. Specifically, operational risk includes compliance, fraud, information/transaction, legal, cyber, vendor and people risk. The Bank has established operational risk policies and procedures to manage each of the specific operational risks.

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 2017 Form 10-K.


43


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)
2018
2017
2018
2017
Interest income:
 

 

 

 
Advances
$
431,987

$
269,193

$
1,162,228

$
712,543

Prepayment fees on advances, net
8

47

12

179

Interest-bearing deposits
3,787

794

7,454

1,548

Securities purchased under agreements to resell
3,119

337

5,567

972

Federal funds sold
29,806

23,530

85,511

48,749

Trading securities
3,414

2,817

9,152

8,449

Available-for-sale (AFS) securities
57,068

50,109

164,903

140,328

Held-to-maturity (HTM) securities
24,590

13,145

55,969

42,395

Mortgage loans held for portfolio
38,213

32,645

110,041

95,255

Total interest income
591,992

392,617

1,600,837

1,050,418

Interest expense:
 
 
 
 
Consolidated obligations - discount notes
120,249

85,748

318,436

178,042

Consolidated obligations - bonds
349,285

195,890

929,504

540,690

Mandatorily redeemable capital stock
362

64

524

191

Deposits
2,031

1,528

5,657

3,445

Other borrowings

1

9

17

Total interest expense
471,927

283,231

1,254,130

722,385

Net interest income
120,065

109,386

346,707

328,033

Provision for credit losses
47

137

2,842

45

Net interest income after provision for credit losses
120,018

109,249

343,865

327,988

Other noninterest income (loss):
 
 
 
 
Total OTTI losses (Note 5)




OTTI losses reclassified to (from) AOCI (Note 5)
(17
)
(38
)
(359
)
(702
)
Net OTTI losses, credit portion (Note 5)
(17
)
(38
)
(359
)
(702
)
Net gains (losses) on trading securities (Note 2)
(3,001
)
320

(14,403
)
7,926

Net gains (losses) on derivatives and hedging activities (Note 9)
7,831

(495
)
16,002

(360
)
Standby letters of credit fees
5,853

6,124

17,336

18,168

Other, net
1,347

521

2,757

1,188

Total other noninterest income
12,013

6,432

21,333

26,220

Other expense:
 
 
 
 
Compensation and benefits
12,588

12,565

36,737

37,841

Other operating
7,426

7,517

21,640

21,405

Finance Agency
1,408

1,290

4,364

3,989

Office of Finance
1,188

1,129

3,595

3,504

Total other expense
22,610

22,501

66,336

66,739

Income before assessments
109,421

93,180

298,862

287,469

Affordable Housing Program (AHP) assessment
10,978

9,324

29,938

28,766

Net income
$
98,443

$
83,856

$
268,924

$
258,703


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

44


Federal Home Loan Bank of Pittsburgh
Statements of Comprehensive Income (unaudited)
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Net income
$
98,443

$
83,856

$
268,924

$
258,703

Other comprehensive income (loss):
 
 
 
 
Net unrealized gains (losses) on AFS securities
(7,447
)
101

(21,348
)
63,130

Net non-credit portion of OTTI gains (losses) on AFS securities
1,582

1,132

4,986

7,838

Reclassification of net (gains) losses included in net income relating to hedging activities
(8
)
(8
)
(20
)
(19
)
Pension and post-retirement benefits
148

147

444

319

Total other comprehensive income (loss)
(5,725
)
1,372

(15,938
)
71,268

Total comprehensive income
$
92,718

$
85,228

$
252,986

$
329,971


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



45


Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(in thousands)
September 30, 2018
December 31, 2017
ASSETS
 

 

Cash and due from banks
$
158,628

$
3,414,992

Interest-bearing deposits
870,572

280,340

Federal funds sold
4,945,000

5,650,000

Securities purchased under agreements to resell
3,000,000

500,000

Investment securities:
 
 
 Trading securities (Note 2)
628,708

399,296

 AFS securities at fair value (Note 3)
7,786,065

9,044,387

 HTM securities; fair value of $3,081,059 and $1,894,534, respectively (Note 4)
3,089,676

1,883,051

Total investment securities
11,504,449

11,326,734

Advances, net (Note 6)
68,301,422

74,279,798

Mortgage loans held for portfolio (Note 7), net of allowance for credit losses of
    $7,618 and $5,954, respectively (Note 8)
4,332,256

3,923,123

Banking on Business (BOB) loans, net of allowance for credit losses of
    $2,586 and $1,964, respectively
17,157

14,083

Accrued interest receivable
207,133

164,459

Premises, software and equipment, net
8,317

8,179

Derivative assets (Note 9)
106,076

80,756

Other assets
30,919

20,542

Total assets
$
93,481,929

$
99,663,006


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


46


Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(continued)
(in thousands, except par value)
September 30, 2018
December 31, 2017
LIABILITIES AND CAPITAL
 

 

Liabilities
 

 

Deposits:
 
 
Interest-bearing
$
478,054

$
514,275

Noninterest-bearing
24,117

23,801

Total deposits
502,171

538,076

Consolidated obligations: (Note 10)
 
 
Discount notes
27,755,931

36,193,289

Bonds
59,836,825

57,533,722

Total consolidated obligations
87,592,756

93,727,011

Mandatorily redeemable capital stock (Note 11)
24,224

5,113

Accrued interest payable
185,233

118,473

AHP payable
98,686

91,563

Derivative liabilities (Note 9)
23,929

19,521

Other liabilities
157,973

235,761

Total liabilities
88,584,972

94,735,518

Commitments and contingencies (Note 14)


Capital (Note 11)
 
 
Capital stock - putable ($100 par value) issued and outstanding
      35,466 and 36,587 shares, respectively
3,546,572

3,658,656

Retained earnings:
 
 

Unrestricted
919,101

875,395

Restricted
336,258

282,473

Total retained earnings
1,255,359

1,157,868

Accumulated Other Comprehensive Income (AOCI)
95,026

110,964

Total capital
4,896,957

4,927,488

Total liabilities and capital
$
93,481,929

$
99,663,006


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


47


Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
 
 
Nine months ended September 30,
(in thousands)
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 

Net income
 
$
268,924

 
$
258,703

Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
 

 

Depreciation and amortization
 
(23,489
)
 
21,405

Net change in derivative and hedging activities
 
225,738

 
(9,390
)
Net OTTI credit losses
 
359

 
702

Other adjustments
 
2,845

 
45

Net change in:
 
 
 
 
Trading securities
 
(239,069
)
 
(9,068
)
Accrued interest receivable
 
(42,798
)
 
(29,222
)
Other assets
 
(3,751
)
 
(716
)
Accrued interest payable
 
66,762

 
(88
)
Other liabilities
 
27,062

 
12,039

Net cash provided by operating activities
 
$
282,583

 
$
244,410

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits (including $(232) and $(164) (to) other FHLBanks for mortgage loan program)
 
$
(656,415
)
 
$
(258,314
)
Securities purchased under agreements to resell
 
(2,500,000
)
 
500,000

Federal funds sold
 
705,000

 
(2,803,000
)
AFS securities:
 
 
 
 
Proceeds
 
1,977,377

 
1,011,058

Purchases
 
(870,249
)
 
(888,666
)
HTM securities:
 
 
 
 
Net change in short-term
 
(700,000
)
 
(50,000
)
Proceeds from long-term
 
273,232

 
423,542

Purchases of long-term
 
(780,994
)
 
(98,286
)
Advances:
 
 
 
 
Repaid
 
999,888,251

 
707,793,045

Originated
 
(994,112,448
)
 
(705,224,029
)
Mortgage loans held for portfolio:
 
 
 
 
Proceeds
 
321,551

 
339,025

Purchases
 
(746,769
)
 
(725,752
)
Proceeds from sales of foreclosed assets
 
7,036

 
5,904

Premises, software and equipment:
 
 
 
 
Purchases
 
(2,323
)
 
(1,224
)
Net cash provided by investing activities
 
$
2,803,249

 
$
23,303


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

48


Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
(continued)
 
 
Nine months ended September 30,
(in thousands)
 
2018
 
2017
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
$
(34,511
)
 
$
68,543

Net proceeds from issuance of consolidated obligations:
 


 
 
Discount notes
 
305,179,971

 
174,665,491

Bonds
 
43,237,480

 
33,094,565

Payments for maturing and retiring consolidated obligations:
 


 
 
Discount notes
 
(313,612,417
)
 
(164,333,819
)
Bonds
 
(40,848,313
)
 
(45,097,746
)
Proceeds from issuance of capital stock
 
4,069,981

 
3,225,176

Payments for repurchase/redemption of capital stock
 
(4,139,332
)
 
(3,282,563
)
Payments for repurchase/redemption of mandatorily redeemable capital stock
 
(23,622
)
 
(745
)
Cash dividends paid
 
(171,433
)
 
(125,510
)
Net cash (used in) financing activities
 
$
(6,342,196
)
 
$
(1,786,608
)
Net increase (decrease) in cash and due from banks
 
$
(3,256,364
)
 
$
(1,518,895
)
Cash and due from banks at beginning of the period
 
3,414,992

 
3,587,605

Cash and due from banks at end of the period
 
$
158,628

 
$
2,068,710

Supplemental disclosures:
 
 
 
 
Interest paid
 
$
1,207,897

 
$
696,918

AHP payments
 
22,815

 
16,735

Transfers of mortgage loans to real estate owned
 
3,460

 
4,144

Variation margin recharacterized as settlement payments on derivative contracts
 

 
44,674


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

49


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, 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


 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
Restricted
Total
 
AOCI
Total Capital
December 31, 2017
36,587

 
$
3,658,656

 
$
875,395

$
282,473

$
1,157,868

 
$
110,964

$
4,927,488

Comprehensive income

 

 
215,139

53,785

268,924

 
(15,938
)
252,986

Issuance of capital stock
40,700

 
4,069,981

 



 

4,069,981

Repurchase/redemption of capital stock
(41,394
)
 
(4,139,332
)
 



 

(4,139,332
)
Net shares reclassified to mandatorily
   redeemable capital stock
(427
)
 
(42,733
)
 



 

(42,733
)
Cash dividends

 

 
(171,433
)

(171,433
)
 

(171,433
)
September 30, 2018
35,466

 
$
3,546,572

 
$
919,101

$
336,258

$
1,255,359

 
$
95,026

$
4,896,957


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


50


Federal Home Loan Bank of Pittsburgh
Notes to Unaudited Financial Statements

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 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 the 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, 2017 included in the Bank's 2017 Form 10-K.


51

Notes to Unaudited Financial Statements (continued)




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

The Bank adopted the following new accounting standards during the nine months ended September 30, 2018.
Standard
Description
Adoption Date and Transition
Effect on the Financial Statements or Other Significant Matters
Accounting Standards Update (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.
The Bank adopted this ASU on January 1, 2018. The presentation of service costs separately was adopted on a retrospective basis. The limiting of capitalization to service costs was adopted on a prospective basis.
The adoption of this ASU did not materially impact the Bank’s results of operations. It resulted in an immaterial reclassification of other pension costs from "Compensation and benefits" to "Other operating" in the Statement of Income for all periods presented.

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.
The Bank adopted this ASU on January 1, 2018 on a modified retrospective basis.
The adoption of this ASU resulted in the Bank including interest paid on consolidated obligation discount notes in its "Interest paid" supplemental disclosure in the Statement of Cash Flows for all periods presented.
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.
The Bank adopted this ASU on January 1, 2018 on a modified retrospective basis.
The adoption of this ASU did not materially impact the Bank’s financial condition or results of operations. The Bank reclassified immaterial investments from "Trading securities" and "AFS securities" to "Other assets" in the Statement of Condition on January 1, 2018. The Bank also reflected the reduced disclosure requirements for financial instruments not recognized at fair value in the financial statements.

52

Notes to Unaudited Financial Statements (continued)




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 real estate owned (REO).
This Bank adopted this ASU on January 1, 2018 on a modified retrospective basis.
The adoption of these ASUs did 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.

53

Notes to Unaudited Financial Statements (continued)




The following table provides a brief description of recently issued 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
ASU 2018-16: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
This ASU adds the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes to facilitate the transition of the replacement of LIBOR.
This ASU is effective for the Bank beginning January 1, 2019 and will be adopted on a prospective basis.
The Bank is evaluating the impact of this ASU on its financial statements.
ASU 2018-15: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Service Arrangement That Is a Service Contract
This ASU is focused on reducing diversity in practice by aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement with internal-use software.
This ASU is effective for the Bank beginning January 1, 2020 and will be adopted on a prospective basis.
The Bank is evaluating the impact of this ASU on its financial statements. The Bank does not believe the impact will be material.
ASU 2018-14: Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU adds, removes, and clarifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
This ASU will be effective for the Bank for the fiscal year ending December 31, 2020.
The Bank is evaluating the impact of this ASU on its disclosures, though the expected impact is not significant. The Bank will update its financial statement disclosures to reflect the updated requirements.
ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement
This ASU adds, removes, and modifies certain fair value disclosure requirements.
This ASU is effective for the Bank beginning January 1, 2020 and permits early adoption of the removed and modified disclosure requirements.
The Bank is evaluating the impact of this ASU on its disclosures, though the expected impact is not significant. The Bank will update its financial statement disclosures to reflect the updated requirements.
ASU 2018-08:
Contributions Received and Contributions Made
This ASU clarifies the distinction between exchange transactions and contributions, including whether a contribution is conditional.
This ASU is effective for the Bank beginning January 1, 2019 and will be adopted on a modified prospective basis.
The Bank is evaluating the impact of this ASU on its financial statements, though the expected impact is not significant. The Bank will apply the amended guidance when accounting for contributions made.
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. The guidance will be applied to existing hedging relationships as of the beginning of the year of adoption.
The Bank has evaluated this guidance and it is not expected to affect the Bank’s application of hedge accounting for existing hedge strategies, with the following exceptions: 1) designation of a fallback long-haul method for its short-cut hedge strategies and 2) use of qualitative hedge effectiveness assessments for an appropriate subset of fair value hedge relationships. Upon adoption, this guidance will prospectively affect the Bank’s income statement presentation for fair value hedge relationships and will require certain new disclosures. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.
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, though the expected impact is not significant.

54

Notes to Unaudited Financial Statements (continued)




Standard
Description
Effective Date and Transition
Effect on the Financial Statements or Other Significant Matters
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.
ASU 2016-02: Leases, as amended
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 January 1, 2019 and will be adopted on a modified retrospective basis as of the effective date. Upon adoption, the Bank will not be required to restate comparative reporting periods.
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 operating leases it expects to capitalize. 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 its 2017 Form 10-K. Substantially all of these payments represent the building lease.

Note 2 – Trading Securities

The following table presents trading securities as of September 30, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Mutual funds (1)
$

$
9,657

U.S. Treasury obligations
348,048


GSE and TVA obligations
280,660

389,639

Total
$
628,708

$
399,296

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

The following table presents net gains (losses) on trading securities for the third quarter and the first nine months of 2018 and 2017.
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Net unrealized gains (losses) on trading securities held at period-end
$
(2,578
)
$
320

$
(10,292
)
$
7,926

Net unrealized and realized gains (losses) on trading securities sold/matured during the period
(423
)

(4,111
)

Net gains (losses) on trading securities
$
(3,001
)
$
320

$
(14,403
)
$
7,926



55

Notes to Unaudited Financial Statements (continued)




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

The following tables present AFS securities as of September 30, 2018 and December 31, 2017.
 
September 30, 2018
(in thousands)
Amortized Cost (1)
 
OTTI Recognized in AOCI (2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
GSE and TVA obligations
$
1,733,110

 
$

 
$
36,209

 
$
(3,312
)
 
$
1,766,007

State or local agency obligations
252,248

 

 
1,048

 
(8,657
)
 
244,639

Total non-MBS
$
1,985,358

 
$

 
$
37,257

 
$
(11,969
)
 
$
2,010,646

MBS:
 
 
 
 
 
 
 
 
 
U.S. obligations single family MBS
$
157,896

 
$

 
$
727

 
$

 
$
158,623

GSE single-family MBS
2,695,654

 

 
12,195

 
(9,080
)
 
2,698,769

GSE multifamily MBS
2,487,536

 

 
985

 
(10,154
)
 
2,478,367

Private label residential MBS
361,820

 

 
77,939

 
(99
)
 
439,660

Total MBS
$
5,702,906

 
$

 
$
91,846

 
$
(19,333
)
 
$
5,775,419

Total AFS securities
$
7,688,264

 
$

 
$
129,103

 
$
(31,302
)
 
$
7,786,065

 
December 31, 2017
(in thousands)
Amortized Cost (1)
 
OTTI Recognized in AOCI (2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds (3)
$
2,015

 
$

 
$

 
$

 
$
2,015

GSE and TVA obligations
2,798,838

 

 
27,460

 
(5,519
)
 
2,820,779

State or local agency obligations
264,812

 

 
5,546

 
(994
)
 
269,364

Total non-MBS
$
3,065,665

 
$

 
$
33,006

 
$
(6,513
)
 
$
3,092,158

MBS:
 
 
 
 
 
 
 
 
 
U.S. obligations single family MBS
$
178,882

 
$

 
$
465

 
$
(74
)
 
$
179,273

GSE single-family MBS
2,654,315

 

 
15,238

 
(3,758
)
 
2,665,795

GSE multifamily MBS
2,579,625

 

 
5,162

 
(2,169
)
 
2,582,618

Private label residential MBS
451,737

 

 
72,953

 
(147
)
 
524,543

Total MBS
$
5,864,559

 
$

 
$
93,818

 
$
(6,148
)
 
$
5,952,229

Total AFS securities
$
8,930,224

 
$

 
$
126,824

 
$
(12,661
)
 
$
9,044,387

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.
(3) Reclassified to "Other assets" in the Statement of Condition as a result of adopting ASU 2016-01, effective January 1, 2018. Refer to Note 1 in this Form 10-Q.

As of September 30, 2018, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $18.4 million, credit losses of $184.2 million and OTTI-related accretion adjustments of $73.7 million. As of December 31, 2017, these amounts were $16.3 million, $178.8 million and $62.1 million, respectively.


56

Notes to Unaudited Financial Statements (continued)




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, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Non-credit portion of OTTI losses
$

$

Net unrealized gains on OTTI securities since their last OTTI credit charge
77,939

72,953

Net non-credit portion of OTTI gains on AFS securities in AOCI
$
77,939

$
72,953


The following tables summarize the AFS securities with unrealized losses as of September 30, 2018 and December 31, 2017. 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, 2018
 
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
$
44,126

 
$
(271
)
 
$
272,379

 
$
(3,041
)
 
$
316,505

 
$
(3,312
)
State or local agency obligations
73,340

 
(2,109
)
 
76,677

 
(6,548
)
 
150,017

 
(8,657
)
Total non-MBS
$
117,466

 
$
(2,380
)
 
$
349,056

 
$
(9,589
)
 
$
466,522

 
$
(11,969
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE single-family MBS
$
514,836

 
$
(3,089
)
 
$
108,397

 
$
(5,991
)
 
$
623,233

 
$
(9,080
)
GSE multifamily MBS
1,474,261

 
(7,614
)
 
124,226

 
(2,540
)
 
1,598,487

 
(10,154
)
Private label residential MBS

 

 
3,061

 
(99
)
 
3,061

 
(99
)
Total MBS
$
1,989,097

 
$
(10,703
)
 
$
235,684

 
$
(8,630
)
 
$
2,224,781

 
$
(19,333
)
Total
$
2,106,563

 
$
(13,083
)
 
$
584,740

 
$
(18,219
)
 
$
2,691,303

 
$
(31,302
)
 
December 31, 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
$
12,386

 
$
(114
)
 
$
1,262,810

 
$
(5,405
)
 
$
1,275,196

 
$
(5,519
)
State or local agency obligations
4,371

 
(78
)
 
77,859

 
(916
)
 
82,230

 
(994
)
Total non-MBS
$
16,757

 
$
(192
)
 
$
1,340,669

 
$
(6,321
)
 
$
1,357,426

 
$
(6,513
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single family MBS
$

 
$

 
$
37,330

 
$
(74
)
 
$
37,330

 
$
(74
)
GSE single-family MBS
150,170

 
(651
)
 
272,925

 
(3,107
)
 
423,095

 
(3,758
)
GSE multifamily MBS
424,932

 
(2,096
)
 
10,796

 
(73
)
 
435,728

 
(2,169
)
Private label residential MBS

 

 
3,013

 
(147
)
 
3,013

 
(147
)
Total MBS
$
575,102

 
$
(2,747
)
 
$
324,064

 
$
(3,401
)
 
$
899,166

 
$
(6,148
)
Total
$
591,859

 
$
(2,939
)
 
$
1,664,733

 
$
(9,722
)
 
$
2,256,592

 
$
(12,661
)
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.


57

Notes to Unaudited Financial Statements (continued)




Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of September 30, 2018 and December 31, 2017 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, 2018
December 31, 2017
Year of Maturity
Amortized Cost
 
Fair Value
Amortized Cost
 
Fair Value
Due in one year or less
$
334,963

 
$
333,857

$
1,002,015

 
$
999,160

Due after one year through five years
395,655

 
400,820

607,802

 
611,231

Due after five years through ten years
659,078

 
674,582

676,975

 
687,993

Due in more than ten years
595,662

 
601,387

778,873

 
793,774

Total non-MBS
1,985,358

 
2,010,646

3,065,665

 
3,092,158

MBS
5,702,906

 
5,775,419

5,864,559

 
5,952,229

Total AFS securities
$
7,688,264

 
$
7,786,065

$
8,930,224

 
$
9,044,387


Interest Rate Payment Terms.  The following table details interest payment terms at September 30, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Amortized cost of AFS non-MBS:
 
 
 Fixed-rate
$
1,900,395

$
2,980,770

 Variable-rate
84,963

84,895

Total non-MBS
$
1,985,358

$
3,065,665

Amortized cost of AFS MBS:
 
 
Fixed-rate
$
1,283,711

$
1,142,290

Variable-rate
4,419,195

4,722,269

Total MBS
$
5,702,906

$
5,864,559

Total amortized cost of AFS securities
$
7,688,264

$
8,930,224



58

Notes to Unaudited Financial Statements (continued)




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

The following tables present HTM securities as of September 30, 2018 and December 31, 2017.
 
 
September 30, 2018
(in thousands)
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
875,000

 
$
11

 
$
(25
)
 
$
874,986

State or local agency obligations
 
107,800

 

 
(4,235
)
 
103,565

Total non-MBS
 
$
982,800

 
$
11

 
$
(4,260
)
 
$
978,551

MBS:
 
 
 
 
 
 
 
 
U.S. obligations single-family MBS
 
$
346,009

 
$
3,045

 
$

 
$
349,054

GSE single-family MBS
 
896,692

 
1,344

 
(3,636
)
 
894,400

GSE multifamily MBS
 
644,540

 
2,016

 
(11,110
)
 
635,446

Private label residential MBS
 
219,635

 
4,202

 
(229
)
 
223,608

Total MBS
 
$
2,106,876

 
$
10,607

 
$
(14,975
)
 
$
2,102,508

Total HTM securities
 
$
3,089,676

 
$
10,618

 
$
(19,235
)
 
$
3,081,059

 
 
December 31, 2017
(in thousands)
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
175,000

 
$
30

 
$

 
$
175,030

State or local agency obligations
 
122,400

 
62

 
(5,571
)
 
116,891

Total non-MBS
 
$
297,400

 
$
92

 
$
(5,571
)
 
$
291,921

MBS:
 
 
 
 
 
 
 
 
U.S. obligations single-family MBS
 
$
424,341

 
$
4,112

 
$

 
$
428,453

GSE single-family MBS
 
156,597

 
2,323

 
(39
)
 
158,881

GSE multifamily MBS
 
726,008

 
9,186

 
(3,298
)
 
731,896

Private label residential MBS
 
278,705

 
4,953

 
(275
)
 
283,383

Total MBS
 
$
1,585,651

 
$
20,574

 
$
(3,612
)
 
$
1,602,613

Total HTM securities
 
$
1,883,051

 
$
20,666

 
$
(9,183
)
 
$
1,894,534



59

Notes to Unaudited Financial Statements (continued)




The following tables summarize the HTM securities with unrealized losses as of September 30, 2018 and December 31, 2017. 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, 2018
 
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
$
474,975

$
(25
)
$

$

$
474,975

$
(25
)
State or local agency obligations


102,535

(4,235
)
102,535

(4,235
)
Total non-MBS
$
474,975

$
(25
)
$
102,535

$
(4,235
)
$
577,510

$
(4,260
)
MBS:
 
 

 
 
 
 
GSE single-family MBS
$
793,390

$
(3,601
)
$
4,753

$
(35
)
$
798,143

$
(3,636
)
GSE multifamily MBS
156,149

(3,582
)
181,036

(7,528
)
337,185

(11,110
)
Private label residential MBS
2,636

(19
)
11,854

(210
)
14,490

(229
)
Total MBS
$
952,175

$
(7,202
)
$
197,643

$
(7,773
)
$
1,149,818

$
(14,975
)
Total
$
1,427,150

$
(7,227
)
$
300,178

$
(12,008
)
$
1,727,328

$
(19,235
)
 
December 31, 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:
 
 
 
 
 
 
State or local agency obligations
$

$

$
105,119

$
(5,571
)
$
105,119

$
(5,571
)
MBS:
 
 
 
 
 
 
GSE single-family MBS
$

$

$
5,633

$
(39
)
$
5,633

$
(39
)
GSE multifamily MBS
169,089

(790
)
94,241

(2,508
)
263,330

(3,298
)
Private label residential MBS


27,079

(275
)
27,079

(275
)
Total MBS
$
169,089

$
(790
)
$
126,953

$
(2,822
)
$
296,042

$
(3,612
)
Total
$
169,089

$
(790
)
$
232,072

$
(8,393
)
$
401,161

$
(9,183
)

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of September 30, 2018 and December 31, 2017 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, 2018
 
December 31, 2017
Year of Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
Due in one year or less
 
$
875,000

 
$
874,986

 
$
175,000

 
$
175,030

Due after one year through five years
 
1,030

 
1,030

 

 

Due after five years through ten years
 
28,305

 
27,665

 
42,010

 
41,211

Due after ten years
 
78,465

 
74,870

 
80,390

 
75,680

Total non-MBS
 
982,800

 
978,551

 
297,400

 
291,921

MBS
 
2,106,876

 
2,102,508

 
1,585,651

 
1,602,613

Total HTM securities
 
$
3,089,676

 
$
3,081,059

 
$
1,883,051

 
$
1,894,534



60

Notes to Unaudited Financial Statements (continued)




Interest Rate Payment Terms. The following table details interest rate payment terms at September 30, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
 
December 31, 2017
Amortized cost of HTM non-MBS:
 

 
 

Fixed-rate
$
875,000

 
$
175,000

Variable-rate
107,800

 
122,400

Total non-MBS
$
982,800

 
$
297,400

Amortized cost of HTM MBS:
 
 
 
Fixed-rate
$
1,464,255

 
$
787,395

Variable-rate
642,621

 
798,256

Total MBS
$
2,106,876

 
$
1,585,651

Total HTM securities
$
3,089,676

 
$
1,883,051


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 any difference 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 2017 Form 10-K. For information about how the Bank projects cash flows expected to be collected, see Note 7 - OTTI to the audited financial statements in the Bank’s 2017 Form 10-K.

The Bank performed a cash flow analysis using two third-party models to assess whether the amortized cost basis of its private label residential MBS will be recovered. During the third quarter of 2018, the OTTI Governance Committee developed a short-term housing price forecast using whole percentages with changes ranging from (10.0)% to 15.0% over the 12 month period beginning July 1, 2018. For the vast majority of markets the short-term forecast has changes from 3.0% to 7.0%. 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, 2018. The "Total OTTI securities" balances below summarize the Bank’s securities as of September 30, 2018 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
 
$
203,707

 
$
150,766

 
$
187,661

Alt-A
 
282,538

 
207,894

 
248,938

Total OTTI securities
 
486,245

 
358,660

 
436,599

Private label MBS with no OTTI
 
3,160

 
3,160

 
3,061

Total AFS private label MBS
 
$
489,405

 
$
361,820

 
$
439,660

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.


61

Notes to Unaudited 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, 2018 and 2017.
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Beginning balance
$
201,105

$
223,353

$
210,875

$
236,460

Additions:
 
 
 
 
Additional OTTI credit losses for which an OTTI charge was previously recognized(1)
17

38

359

702

Reductions:
 
 
 
 
Securities sold and matured during the period

286


95

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(5,441
)
(7,712
)
(15,553
)
(21,292
)
Ending balance
$
195,681

$
215,965

$
195,681

$
215,965

Notes:
(1) For the three months ended September 30, 2018 and 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 the applicable year. For the nine months ended September 30, 2018 and 2017, additional OTTI credit losses for which an OTTI charge was previously recognized relate to all securities that were previously impaired prior to January 1 of the applicable year.

All Other AFS and HTM Investments. At September 30, 2018, 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, 2018.


62

Notes to Unaudited Financial Statements (continued)




Note 6 – Advances

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

At September 30, 2018 and December 31, 2017, the Bank had advances outstanding, including AHP advances, with interest rates ranging from 0.83% to 7.40%. AHP subsidized advances have an interest rate of 5.50%.

The following table details the Bank’s advances portfolio by year of contractual maturity as of September 30, 2018 and December 31, 2017.
(dollars in thousands)
 
September 30, 2018
 
December 31, 2017
Year of Contractual Maturity
 
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
 
$
29,634,962

 
2.29
 
$
31,606,861

 
1.56
%
Due after 1 year through 2 years
 
16,935,248

 
2.29
 
11,786,189

 
1.63

Due after 2 years through 3 years
 
15,799,848

 
2.42
 
18,456,775

 
1.71

Due after 3 years through 4 years
 
3,986,719

 
2.46
 
10,445,920

 
1.85

Due after 4 years through 5 years
 
1,479,537

 
2.71
 
1,254,184

 
2.14

Thereafter
 
767,997

 
2.79
 
833,938

 
2.72

Total par value
 
68,604,311

 
2.34
 
74,383,867

 
1.67
%
Discount on AHP advances
 

 
 
 
(1
)
 
 
Deferred prepayment fees
 
(70
)
 
 
 
(613
)
 
 
Hedging adjustments
 
(302,819
)
 
 
 
(103,455
)
 
 
Total book value
 
$
68,301,422

 
 
 
$
74,279,798

 
 

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. In addition, 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, 2018 and December 31, 2017, 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.


63

Notes to Unaudited 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, 2018 and December 31, 2017.
 
Year of Contractual Maturity or
Next Call Date
 
Year of Contractual Maturity or Next Convertible Date
(in thousands)
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Due in 1 year or less
$
30,684,962

 
$
35,856,861

 
$
29,654,962

 
$
31,632,361

Due after 1 year through 2 years
16,395,248

 
11,771,189

 
16,935,248

 
11,780,689

Due after 2 years through 3 years
15,299,848

 
17,231,775

 
15,799,848

 
18,456,775

Due after 3 years through 4 years
3,976,719

 
7,445,920

 
3,986,719

 
10,445,920

Due after 4 years through 5 years
1,479,537

 
1,244,184

 
1,473,537

 
1,254,184

Thereafter
767,997

 
833,938

 
753,997

 
813,938

Total par value
$
68,604,311

 
$
74,383,867

 
$
68,604,311

 
$
74,383,867


Interest Rate Payment Terms.  The following table details interest rate payment terms for advances as of September 30, 2018 and December 31, 2017.
(in thousands)
 
September 30, 2018
 
December 31, 2017
Fixed-rate – overnight
 
$
1,957,646

 
$
3,988,232

Fixed-rate – term:
 
 
 
 
Due in 1 year or less
 
15,712,554

 
15,998,268

Thereafter
 
17,241,949

 
14,685,606

Total fixed-rate
 
34,912,149

 
34,672,106

Variable-rate:
 
 
 
 
Due in 1 year or less
 
11,964,762

 
11,620,361

Thereafter
 
21,727,400

 
28,091,400

Total variable-rate
 
33,692,162

 
39,711,761

Total par value
 
$
68,604,311

 
$
74,383,867


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, 2018, the Bank had advances of $51.0 billion outstanding to the five largest borrowers, which represented 74.3% 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, 2018.

As of December 31, 2017, the Bank had advances of $57.5 billion outstanding to the five largest borrowers, which represented 77.3% 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, 2017.

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


64

Notes to Unaudited 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, 2018 and December 31, 2017 for mortgage loans held for portfolio.
(in thousands)
September 30, 2018
December 31, 2017
Fixed-rate long-term single-family mortgages (1)
$
4,039,386

$
3,592,083

Fixed-rate medium-term single-family mortgages (1)
212,544

246,493

Total par value
4,251,930

3,838,576

Premiums
72,785

70,197

Discounts
(3,827
)
(3,418
)
Hedging adjustments
18,986

23,722

Total mortgage loans held for portfolio
$
4,339,874

$
3,929,077

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, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
 
December 31, 2017
Conventional loans
$
4,059,508

 
$
3,631,292

Government-guaranteed/insured loans
192,422

 
207,284

Total par value
$
4,251,930

 
$
3,838,576


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. This approach includes an ongoing review of each borrower’s financial condition in conjunction with the Bank's 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. The Bank perfects its security interest in all pledged collateral. The FHLBank Act

65

Notes to Unaudited Financial Statements (continued)




affords any security interest granted to the Bank by a member (or an affiliate of a 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, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, 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 enhancements. 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, 2018 and December 31, 2017 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 are incurred by the Bank. At September 30, 2018 and December 31, 2017, the MPF exposure under the FLA was $28.4 million and $26.3 million, respectively. The Bank records CE fees paid to PFIs as a

66

Notes to Unaudited Financial Statements (continued)




reduction to mortgage loan interest income. The Bank incurred CE fees of $1.2 million and $0.9 million for the third quarter 2018 and 2017, and $3.3 million and $2.7 million for the nine months ended September 30, 2018 and 2017, respectively.

Individually Evaluated Mortgage Loans. The Bank evaluates certain conventional mortgage loans for impairment individually. This includes impaired loans considered collateral-dependent loans 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)
2018
2017
2018
2017
Balance, beginning of period
$
8,054

$
6,341

$
5,954

$
6,231

(Charge-offs) Recoveries, net (1)
(152
)
(141
)
(558
)
(151
)
Provision (benefit) for credit losses
(284
)
(88
)
2,222

32

Balance, September 30
$
7,618

$
6,112

$
7,618

$
6,112

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, 2018
December 31, 2017
Ending balance, individually evaluated for impairment
$
6,781

$
5,218

Ending balance, collectively evaluated for impairment
837

736

Total allowance for credit losses
$
7,618

$
5,954

Recorded investment balance, end of period:
 
 
Individually evaluated for impairment, with or without a related allowance
$
47,930

$
52,505

Collectively evaluated for impairment
4,114,668

3,682,167

Total recorded investment
$
4,162,598

$
3,734,672





67

Notes to Unaudited Financial Statements (continued)




Credit Quality Indicators - Mortgage Loans. Key credit quality indicators include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans.
(in thousands)
September 30, 2018
Recorded investment: (1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
Past due 30-59 days
$
31,817

$
8,540

$
40,357

Past due 60-89 days
7,453

2,964

10,417

Past due 90 days or more
12,607

3,590

16,197

Total past due loans
$
51,877

$
15,094

$
66,971

Total current loans
4,110,721

183,867

4,294,588

Total loans
$
4,162,598

$
198,961

$
4,361,559

Other delinquency statistics:
 
 
 
In process of foreclosures, included above (3)
$
5,795

$
1,130

$
6,925

Serious delinquency rate (4)
0.3
%
1.8
%
0.4
%
Past due 90 days or more still accruing interest
$

$
3,590

$
3,590

Loans on nonaccrual status
$
15,564

$

$
15,564

(in thousands)
December 31, 2017
Recorded investment: (1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
Past due 30-59 days
$
39,677

$
11,390

$
51,067

Past due 60-89 days
7,039

2,887

9,926

Past due 90 days or more
17,738

4,959

22,697

Total past due loans
$
64,454

$
19,236

$
83,690

Total current loans
3,670,218

195,382

3,865,600

Total loans
$
3,734,672

$
214,618

$
3,949,290

Other delinquency statistics:
 
 
 
In process of foreclosures, included above (3)
$
9,978

$
1,055

$
11,033

Serious delinquency rate (4)
0.5
%
2.3
%
0.6
%
Past due 90 days or more still accruing interest
$

$
4,959

$
4,959

Loans on nonaccrual status
$
20,695

$

$
20,695

Notes:
(1) The recorded investment in a loan is the unpaid principal balance, adjusted for charge-offs of estimated losses, accrued interest, net deferred loan fees or costs, unamortized premiums, unaccreted discounts and adjustments for hedging. The recorded investment is not net of any valuation allowance.
(2) The Bank has not recorded any allowance for credit losses on government-guaranteed or -insured mortgage loans at September 30, 2018, and December 31, 2017.
(3) 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.
(4) 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.


68

Notes to Unaudited Financial Statements (continued)




Individually Evaluated Impaired Loans - Mortgage Loans. Information regarding individually evaluated impaired loans is as follows. As indicated above, these loans include impaired loans considered collateral-dependent.
 
September 30, 2018
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
Conventional MPF loans
$
29,736

$
29,407

$

With a related allowance:
 
 
 
Conventional MPF loans
18,194

17,927

6,781

Total:
 
 
 
Conventional MPF loans
$
47,930

$
47,334

$
6,781

 
December 31, 2017
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
Conventional MPF loans
$
30,824

$
30,497

$

With a related allowance:
 
 
 
Conventional MPF loans
21,681

21,360

5,218

Total:
 
 
 
Conventional MPF loans
$
52,505

$
51,857

$
5,218


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 $9.6 million and $11.1 million as of September 30, 2018 and December 31, 2017, 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 $2.8 million and $3.9 million of REO reported in Other assets on the Statement of Condition at September 30, 2018 and December 31, 2017, respectively.

Purchases, Sales and Reclassifications. During the nine months ended September 30, 2018 and 2017, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.


69

Notes to Unaudited 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 - Derivatives and Hedging Activities to the audited financial statements in the Bank's 2017 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 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 and fair value of derivative instruments and total derivatives assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
September 30, 2018
(in thousands)
Notional Amount of Derivatives
Derivative Assets
Derivative Liabilities
Derivatives designated as hedging instruments:
 

 

 

Interest rate swaps
$
34,811,934

$
4,400

$
83,519

Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
$
6,025,730

$
14,745

$
35,667

Interest rate caps or floors
3,485,000

2,670


Mortgage delivery commitments
30,756

4

71

Total derivatives not designated as hedging instruments:
$
9,541,486

$
17,419

$
35,738

Total derivatives before netting and collateral adjustments
$
44,353,420

$
21,819

$
119,257

Netting adjustments and cash collateral (1)
 
84,257

(95,328
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
$
106,076

$
23,929


70

Notes to Unaudited Financial Statements (continued)




 
December 31, 2017 (2)
(in thousands)
Notional Amount of Derivatives
Derivative Assets
Derivative Liabilities
Derivatives designated as hedging instruments:
 

 

 

Interest rate swaps
$
30,017,995

$
4,185

$
45,302

Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
$
8,285,437

$
3,727

$
17,423

Interest rate caps
6,455,000

1,464


Mortgage delivery commitments
25,487

4

61

Total derivatives not designated as hedging instruments:
$
14,765,924

$
5,195

$
17,484

Total derivatives before netting and collateral adjustments
$
44,783,919

$
9,380

$
62,786

Netting adjustments and cash collateral (1)
 
71,376

(43,265
)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition
 
$
80,756

$
19,521

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. Cash collateral posted and related accrued interest was $181.0 million and $114.6 million at September 30, 2018 and December 31, 2017, respectively. Cash collateral received was $1.4 million for September 30, 2018 and immaterial for December 31, 2017.
(2) To conform with current presentation, $11.2 million of variation margin received from the Clearing House has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included in netting adjustments and cash collateral.

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)
2018
2017
2018
2017
Derivatives designated as hedging instruments:
 
 
 

 

Interest rate swaps (1)
$
2,680

$
(494
)
$
2,101

$
(291
)
Derivatives not designated as hedging instruments:
 
 
 

 

Economic hedges:
 
 
 

 

Interest rate swaps
$
9,331

$
2,029

$
25,467

$
6,369

Interest rate caps or floors
(388
)
(532
)
885

(3,177
)
Net interest settlements
(2,033
)
(1,569
)
(8,192
)
(3,178
)
       To Be Announced (TBA)
(46
)

(46
)

Mortgage delivery commitments
(714
)
(175
)
(2,050
)
(602
)
Other
7

8

19

18

Total net gains (losses) related to derivatives not designated as hedging instruments
$
6,157

$
(239
)
$
16,083

$
(570
)
Other - price alignment amount on cleared derivatives
(1,006
)
238

(2,182
)
501

Net gains (losses) on derivatives and hedging activities
$
7,831

$
(495
)
$
16,002

$
(360
)
Note:
(1) Pertains to total net gains (losses) for fair value hedge ineffectiveness.


71

Notes to Unaudited 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, 2018 and 2017.
(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, 2018
 

 

 

 

Hedged item type:
 

 

 

 

Advances
$
33,114

$
(33,317
)
$
(203
)
$
14,352

Consolidated obligations – bonds
9,498

(6,874
)
2,624

(27,712
)
       AFS securities
15,244

(14,985
)
259

(252
)
Total
$
57,856

$
(55,176
)
$
2,680

$
(13,612
)
Nine months ended September 30, 2018
 
 
 
 
   Hedged item type:
 
 
 
 
       Advances
$
199,529

$
(199,270
)
$
259

$
22,191

       Consolidated obligations – bonds
(86,959
)
85,990

(969
)
(59,019
)
       AFS securities
69,139

(66,328
)
2,811

(3,844
)
Total
$
181,709

$
(179,608
)
$
2,101

$
(40,672
)
(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
)
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 $(1.2) million and $(1.5) million for the third quarter of 2018 and 2017, respectively, and $(3.0) million and $(3.1) million for the nine months ended September 30, 2018 and 2017, 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 2018 or 2017.

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.


72

Notes to Unaudited Financial Statements (continued)




Generally, the Bank is subject to certain ISDA agreements for uncleared derivatives 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, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that that require the Bank to deliver additional collateral due to a credit downgrade and were in a net liability position (before cash collateral and related accrued interest) at September 30, 2018 was $11.3 million for which the Bank has posted cash collateral of $1.5 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 $7.8 million of collateral to its derivative counterparties at September 30, 2018.

Cleared Derivatives. For cleared derivatives, Derivative Clearing Organizations (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 Bank uses CME Clearing as the Clearing House for all cleared derivative transactions. Variation margin payments are characterized as daily settlement payments, rather than collateral. Initial margin is considered cash collateral.

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, 2018.

Offsetting of Derivative Assets and Derivative Liabilities. When it has met the netting requirements, the Bank presents derivative instruments, related cash collateral received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty. 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 nets derivative fair values on all of its transactions through a particular clearing agent with a particular Clearing House (including settled variation margin) into one net asset or net liability exposure.  Initial margin posted to the clearing house is presented as a derivative asset.


73

Notes to Unaudited Financial Statements (continued)




The following tables present separately the fair 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. Net amounts reflect the adjustments of collateral received from or pledged to counterparties.
 
Derivative Assets
(in thousands)
September 30, 2018
December 31, 2017 (2)
Derivative instruments meeting netting requirements:
 
 
Gross recognized amount:
 
 
        Uncleared derivatives
$
19,057

$
5,875

      Cleared derivatives
2,758

3,501

 Total gross recognized amount
21,815

9,376

Gross amounts of netting adjustments and cash collateral
 
 
        Uncleared derivatives
(15,903
)
(5,246
)
      Cleared derivatives
100,160

76,622

Total gross amounts of netting adjustments and cash collateral
84,257

71,376

Net amounts after netting adjustments and cash collateral
 
 
        Uncleared derivatives
3,154

629

      Cleared derivatives
102,918

80,123

Total net amounts after netting adjustments and cash collateral
106,072

80,752

 Derivative instruments not meeting netting requirements: (1)
 
 
     Uncleared derivatives
4

4

     Cleared derivatives


     Total derivative instruments not meeting netting requirements:
4

4

Total derivative assets:
 
 
       Uncleared derivatives
3,158

633

     Cleared derivatives
102,918

80,123

Total derivative assets as reported in the Statement of Condition
106,076

80,756

Net unsecured amount:
 
 
       Uncleared derivatives
3,158

633

       Cleared derivatives
102,918

80,123

Total net unsecured amount
$
106,076

$
80,756



74

Notes to Unaudited Financial Statements (continued)




 
Derivative Liabilities
(in thousands)
September 30, 2018
December 31, 2017 (2)
Derivative instruments meeting netting requirements:
 
 
Gross recognized amount:
 
 
        Uncleared derivatives
$
104,061

$
47,315

      Cleared derivatives
15,125

15,409

     Total gross recognized amount
119,186

62,724

Gross amounts of netting adjustments and cash collateral
 
 
        Uncleared derivatives
(92,569
)
(39,063
)
      Cleared derivatives
(2,759
)
(4,202
)
Total gross amounts of netting adjustments and cash collateral
(95,328
)
(43,265
)
Net amounts after netting adjustments and cash collateral
 
 
        Uncleared derivatives
11,492

8,252

      Cleared derivatives
12,366

11,207

Total net amounts after netting adjustments and cash collateral
23,858

19,459

 Derivative instruments not meeting netting requirements: (1)
 
 
        Uncleared derivatives
71

62

      Cleared derivatives


     Total derivative instruments not meeting netting requirements:
71

62

Total derivative liabilities
 
 
        Uncleared derivatives
11,563

8,314

      Cleared derivatives
12,366

11,207

Total derivative liabilities as reported in the Statement of Condition
23,929

19,521

Net unsecured amount:
 
 
        Uncleared derivatives
11,563

8,314

      Cleared derivatives
12,366

11,207

Total net unsecured amount
$
23,929

$
19,521

Note:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).
(2) To conform with current presentation, $11.2 million of variation margin received from the Clearing House for daily settled contracts has been allocated to the individual instruments as of December 31, 2017. Previously, this amount was included in netting adjustments and cash collateral.


75

Notes to Unaudited 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 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, 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 $1,019.1 billion and $1,034.3 billion at September 30, 2018 and December 31, 2017, 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 2017 Form 10-K.

The following table details interest rate payment terms for the Bank's consolidated obligation bonds as of September 30, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Par value of consolidated bonds:
 

 

Fixed-rate
$
26,411,120

$
26,714,743

Step-up
1,810,000

1,675,000

Floating-rate
31,397,500

28,837,500

Conversion bonds - fixed to floating
390,000

390,000

Total par value
60,008,620

57,617,243

Bond premiums
64,522

65,198

Bond discounts
(8,791
)
(7,927
)
Concession fees
(7,307
)
(6,417
)
Hedging adjustments
(220,219
)
(134,375
)
Total book value
$
59,836,825

$
57,533,722



76

Notes to Unaudited 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, 2018 and December 31, 2017.
 
September 30, 2018
December 31, 2017
(dollars in thousands)
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in 1 year or less
$
37,193,620

1.89
%
$
28,357,115

1.33
%
Due after 1 year through 2 years
11,193,100

2.11

17,184,710

1.44

Due after 2 years through 3 years
3,331,200

2.15

4,062,040

1.78

Due after 3 years through 4 years
2,419,150

2.35

2,357,115

2.11

Due after 4 years through 5 years
1,550,050

2.59

1,701,520

2.12

Thereafter
4,321,500

2.70

3,937,150

2.41

Index amortizing notes


17,593

5.39

Total par value
$
60,008,620

2.04
%
$
57,617,243

1.53
%

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of September 30, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Noncallable
$
53,641,620

$
52,328,243

Callable
6,367,000

5,289,000

Total par value
$
60,008,620

$
57,617,243


The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of September 30, 2018 and December 31, 2017.
(in thousands)
Year of Contractual Maturity or Next Call Date
September 30, 2018
December 31, 2017
Due in 1 year or less
$
43,472,620

$
33,384,115

Due after 1 year through 2 years
10,561,100

17,061,710

Due after 2 years through 3 years
2,506,200

3,587,040

Due after 3 years through 4 years
1,784,150

1,477,115

Due after 4 years through 5 years
793,050

1,236,520

Thereafter
891,500

853,150

Index amortizing notes

17,593

Total par value
$
60,008,620

$
57,617,243


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, 2018 and December 31, 2017.
(dollars in thousands)
September 30, 2018
December 31, 2017
Book value
$
27,755,931

$
36,193,289

Par value
27,827,067

36,253,187

Weighted average interest rate (1)
2.08
%
1.24
%
Note:
(1) Represents an implied rate.


77

Notes to Unaudited 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 2017 Form 10-K. At September 30, 2018, 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 $3.2 billion in B1 membership stock and B2 activity stock, respectively, at September 30, 2018. The Bank had $0.4 billion and $3.3 billion in B1 membership stock and B2 activity stock, respectively, at December 31, 2017.

The following table demonstrates the Bank’s compliance with the regulatory capital requirements at September 30, 2018 and December 31, 2017.
 
September 30, 2018
December 31, 2017
(dollars in thousands)
Required
Actual
Required
Actual
Regulatory capital requirements:
 

 

 

 

RBC
$
1,224,887

$
4,826,156

$
1,052,052

$
4,821,638

Total capital-to-asset ratio
4.0
%
5.2
%
4.0
%
4.8
%
Total regulatory capital
3,739,277

4,826,156

3,986,520

4,821,638

Leverage ratio
5.0
%
7.7
%
5.0
%
7.3
%
Leverage capital
4,674,096

7,239,233

4,983,150

7,232,457


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, 2018, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2018. 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, 2018.

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, 2018 and December 31, 2017.
(dollars in thousands)
September 30, 2018
Member (1)
Capital Stock
% of Total
PNC Bank, N.A., Pittsburgh, PA
$
987,400

27.7
%
Ally Bank, Midvale, UT
731,532

20.5

(dollars in thousands)
December 31, 2017
Member (1)
Capital Stock
% of Total
PNC Bank, N.A., Pittsburgh, PA
$
910,400

24.8
%
Ally Bank, Midvale, UT
745,387

20.3

Chase Bank USA, N.A., Wilmington, DE
589,254

16.1

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. The Bank is a cooperative whose member financial institutions and former members own all of the relevant Bank's issued and outstanding capital stock. Shares cannot be purchased or sold except between the Bank and its members at the shares' par value of $100, as mandated by the Bank's capital plan.

At September 30, 2018 and December 31, 2017, the Bank had $24.2 million and $5.1 million, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum

78

Notes to Unaudited Financial Statements (continued)




regulatory capital requirements. Estimated dividends on mandatorily redeemable capital stock recorded as interest expense were immaterial during the three and nine months ended September 30, 2018 and 2017.

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the nine months ended September 30, 2018 and 2017.
 
Nine months ended September 30,
(in thousands)
2018
2017
Balance, beginning of the period
$
5,113

$
5,216

Capital stock subject to mandatory redemption reclassified from capital
42,733

1,155

Redemption/repurchase of mandatorily redeemable stock
(23,622
)
(745
)
Balance, end of the period
$
24,224

$
5,626


As of September 30, 2018, 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, 2018 and December 31, 2017.
(in thousands)
September 30, 2018
December 31, 2017
Due in 1 year or less
$
305

$

Due after 1 year through 2 years
3,897

342

Due after 2 years through 3 years

4,256

Due after 3 years through 4 years


Due after 4 years through 5 years
20,022

515

Total
$
24,224

$
5,113


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. The Bank 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 the Bank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. At September 30, 2018, retained earnings were $1,255.3 million, including $919.1 million of unrestricted retained earnings and $336.2 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.


79

Notes to Unaudited Financial Statements (continued)




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. Dividends are based on stockholders' average balances for the previous quarter. Dividends paid through the first, second, and third quarters of 2018 and 2017 are presented in the table below.
 
Dividend - Annual Yield
 
2018
2017
 
Membership
Activity
Membership
Activity
February
3.5%
6.75%
2.0%
5.0%
April
3.5%
6.75%
2.0%
5.0%
July
3.5%
6.75%
2.0%
5.0%

In October 2018, the Bank paid a quarterly dividend equal to an annual yield of 6.75% and 3.5% on activity and membership stock, respectively.

The following table summarizes the changes in AOCI for the three months ended September 30, 2018 and 2017.
(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, 2017
$
50,194

$
74,130

$

$
212

$
(2,344
)
$
122,192

Other comprehensive income (loss) before reclassification:
 
 
 
 
 
 
Net unrealized gains
101

108




209

Net change in fair value of OTTI securities

986




986

Reclassifications from OCI to net income:
 
 
 
 
 
 
Non-credit 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

 
 
 
 
 
 
 
June 30, 2018
$
27,309

$
76,357

$

$
188

$
(3,103
)
$
100,751

Other comprehensive income (loss) before reclassification:
 
 
 
 
 
 
Net unrealized gains
(7,447
)
1,565




(5,882
)
Reclassifications from OCI to net income:
 
 
 
 
 
 
Non-credit OTTI to credit OTTI

17




17

Amortization on hedging activities



(8
)

(8
)
Pension and post-retirement




148

148

September 30, 2018
$
19,862

$
77,939

$

$
180

$
(2,955
)
$
95,026



80

Notes to Unaudited Financial Statements (continued)




The following table summarizes the changes in AOCI for the nine months ended September 30, 2018 and 2017.
(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, 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

 
 
 
 
 
 
 
December 31, 2017
$
41,210

$
72,953

$

$
200

$
(3,399
)
$
110,964

Other comprehensive income (loss) before reclassification:
 
 
 
 
 
 
Net unrealized gains (losses)
(21,348
)
4,627




(16,721
)
Reclassifications from OCI to net income:
 
 
 
 
 
 
Noncredit OTTI to credit OTTI

359




359

Amortization on hedging activities



(20
)

(20
)
Pension and post-retirement




444

444

September 30, 2018
$
19,862

$
77,939

$

$
180

$
(2,955
)
$
95,026



81

Notes to Unaudited Financial Statements (continued)




Note 12 – Transactions with Related Parties

The following table includes significant outstanding related party member-activity balances.
(in thousands)
September 30, 2018
December 31, 2017
Advances
$
42,038,252

$
56,819,556

Letters of credit (1)
4,842,599

4,612,680

MPF loans
581,869

696,204

Deposits
8,686

32,420

Capital stock
1,978,382

2,470,117

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 prepayment of fess on advances and interest expense on deposits were immaterial for the periods presented.
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Interest income on advances (1)
$
253,623

$
202,054

$
806,072

$
528,648

Interest income on MPF loans
7,984

11,153

25,469

32,721

Letters of credit fees
1,412

1,597

4,363

5,133

Note:
(1) For the three and nine months ended September 30, 2018, balances include contractual interest income of $241.6 million and $786.7 million, net interest settlements on derivatives in fair value hedge relationships of $12.0 million and $19.2 million and total amortization of basis adjustments was immaterial. 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.

The following table includes the MPF activity of the related party members.
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Total MPF loan volume purchased
$
2,083

$
5,708

$
7,521

$
15,739


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)
2018
2017
2018
2017
Servicing fee expense
$
795

$
639

$
2,253

$
1,815

(in thousands)
September 30, 2018
December 31, 2017
Interest-bearing deposits maintained with FHLBank of Chicago
$
5,572

$
5,340


From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three and nine months ended September 30, 2018, there was no borrowing or lending activity between the Bank and other FHLBanks. 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, and there were no lending 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, 2018 and 2017, there were no transfers of debt between the Bank and another FHLBank.


82

Notes to Unaudited 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, 2018 and 2017.

In the ordinary course of business, the Bank may utilize products and services, provided at normal market rates and terms, from its members to support its operations. Additional discussions regarding related party transactions can be found in Note 18 to the audited financial statements in the Bank's 2017 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. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). These estimates are based on recent market data and other pertinent information available to the Bank at September 30, 2018 and December 31, 2017. 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, 2018 and December 31, 2017 are presented in the table below.
Fair Value Summary Table
 
September 30, 2018
(in thousands)
Carrying
Value
Level 1
Level 2
Level 3
Netting Adjustments and Cash Collateral (1)
Estimated
Fair Value
                       Assets:
 

 
 
 
 
 

Cash and due from banks
$
158,628

$
158,628

$

$

$

$
158,628

Interest-bearing deposits
870,572

865,000

5,572



870,572

Federal funds sold
4,945,000


4,944,976



4,944,976

Securities purchased under agreement to resell (2)
3,000,000


2,999,962



2,999,962

Trading securities
628,708


628,708



628,708

AFS securities
7,786,065


7,346,405

439,660


7,786,065

HTM securities
3,089,676


2,857,451

223,608


3,081,059

Advances
68,301,422


68,233,678



68,233,678

Mortgage loans held for portfolio, net
4,332,256


4,199,965



4,199,965

BOB loans, net
17,157



17,157


17,157

Accrued interest receivable
207,133


207,133



207,133

Derivative assets
106,076


21,819


84,257

106,076

                     Liabilities:
 

 

 

 

 

 

Deposits
$
502,171

$

$
502,171

$

$

$
502,171

Discount notes
27,755,931


27,748,158



27,748,158

Bonds
59,836,825


59,523,506



59,523,506

Mandatorily redeemable capital stock (3)
24,224

24,584




24,584

Accrued interest payable (3)
185,233


184,872



184,872

Derivative liabilities
23,929


119,257


(95,328
)
23,929



83

Notes to Unaudited Financial Statements (continued)




 
December 31, 2017
(in thousands)
Carrying
Value
Level 1
Level 2
Level 3
Netting Adjustments and Cash Collateral (1)
Estimated
Fair Value
                       Assets:
 
 
 
 
 
 
Cash and due from banks
$
3,414,992

$
3,414,992

$

$

$

$
3,414,992

Interest-bearing deposits
280,340

275,000

5,340



280,340

Federal funds sold
5,650,000


5,649,868



5,649,868

Securities purchased under agreement to resell (2)
500,000


499,999



499,999

Trading securities
399,296

9,657

389,639



399,296

AFS securities
9,044,387

2,015

8,517,829

524,543


9,044,387

HTM securities
1,883,051


1,611,151

283,383


1,894,534

Advances
74,279,798


74,242,369



74,242,369

Mortgage loans held for portfolio, net
3,923,123


3,921,976



3,921,976

BOB loans, net
14,083



14,083


14,083

Accrued interest receivable
164,459


164,459



164,459

Derivative assets (4)
80,756


9,380


71,376

80,756

                        Liabilities:
 
 
 
 
 
 
Deposits
$
538,076

$

$
538,076

$

$

$
538,076

Discount notes
36,193,289


36,185,419



36,185,419

Bonds
57,533,722


57,439,681



57,439,681

Mandatorily redeemable capital stock (3)
5,113

5,201




5,201

Accrued interest payable (3)
118,473


118,384



118,384

Derivative liabilities (4)
19,521


62,786


(43,265
)
19,521

Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held and related interest accrued or placed by the Bank with the same clearing agent and/or counterparties.
(2) 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, 2018 and December 31, 2017. These instruments’ maturity term is overnight.
(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.
(4) To conform with current presentation, $11.2 million in variation margin received on cleared derivatives has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with Netting Adjustments and Cash Collateral.

Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs used to measure fair value by maximizing the use of observable inputs. 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.


84

Notes to Unaudited Financial Statements (continued)




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 the beginning of the quarter in which the changes occur. There were no such transfers during the nine months ended September 30, 2018 and 2017.

Summary of Valuation Methodologies and Primary Inputs

The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below.

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 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. 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.
 
As of September 30, 2018, for substantially all of its MBS, the Bank received a price from all of its vendors and the default price was the final price. In addition, there were minimal outliers to evaluate. 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, 2018, the Bank classified private label MBS as Level 3.

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

85

Notes to Unaudited Financial Statements (continued)




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 through contractual term.
Forward interest rate assumption. LIBOR Swap curve or OIS curve through contractual term.
Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Mortgage delivery commitments:
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. Variation margin payments are daily settlement payments rather than collateral. 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.

Impaired Mortgage Loans Held for Portfolio and Real Estate Owned. 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.

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.


86

Notes to Unaudited 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, 2018 and December 31, 2017. 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, 2018
(in thousands)
 
Level 1
Level 2
Level 3
Netting Adjustment and Cash Collateral(1)
Total
Recurring fair value measurements - Assets
 
 

 

 

 

 

Trading securities:
 
 

 

 

 

 

Non MBS:
 
 
 
 
 
 
U.S. Treasury obligations
 
$

$
348,048

$

$

$
348,048

GSE and TVA obligations
 

280,660



280,660

Total trading securities
 
$

$
628,708

$

$

$
628,708

AFS securities:
 
 

 

 

 

 

Non MBS:
 
 
 
 
 
 
GSE and TVA obligations
 
$

$
1,766,007

$

$

$
1,766,007

State or local agency obligations
 

244,639



244,639

MBS:
 
 
 
 
 
 
 U.S. obligations single family MBS
 

158,623



158,623

 GSE single-family MBS
 

2,698,769



2,698,769

 GSE multifamily MBS
 

2,478,367



2,478,367

 Private label residential MBS
 


439,660


439,660

Total AFS securities
 
$

$
7,346,405

$
439,660

$

$
7,786,065

Derivative assets:
 
 

 

 

 

 

Interest rate related
 
$

$
21,815

$

$
84,257

$
106,072

Mortgage delivery commitments
 

4



4

Total derivative assets
 
$

$
21,819

$

$
84,257

$
106,076

Total recurring assets at fair value
 
$

$
7,996,932

$
439,660

$
84,257

$
8,520,849

Recurring fair value measurements - Liabilities
 
 

 

 

 

 

Derivative liabilities:
 
 

 

 

 

 

Interest rate related
 
$

$
119,186

$

$
(95,328
)
$
23,858

Mortgage delivery commitments
 

71



71

Total recurring liabilities at fair value (3)
 
$

$
119,257

$

$
(95,328
)
$
23,929

Non-recurring fair value measurements - Assets
 
 
 
 
 
 
Impaired mortgage loans held for portfolio
 
$

$

$
7,250

$

$
7,250

Real estate owned
 


5,841


5,841

Total non-recurring assets at fair value
 
$

$

$
13,091

$

$
13,091



87

Notes to Unaudited Financial Statements (continued)




 
 
December 31, 2017
(in thousands)
 
Level 1
Level 2
Level 3
Netting Adjustment and Cash Collateral(2)
Total
Recurring fair value measurements - Assets
 
 

 

 

 

 

Trading securities:
 
 

 

 

 

 

Non MBS:
 
 
 
 
 
 
GSE and TVA obligations
 
$

$
389,639

$

$

$
389,639

Mutual funds
 
9,657




9,657

Total trading securities
 
$
9,657

$
389,639

$

$

$
399,296

AFS securities:
 
 

 

 

 

 

Non MBS:
 
 
 
 
 
 
GSE and TVA obligations
 
$

$
2,820,779

$

$

2,820,779

State or local agency obligations
 

269,364



269,364

Mutual funds
 
2,015




2,015

MBS:
 
 
 
 
 
 
 U.S. obligations single family MBS
 

179,273



179,273

 GSE single-family MBS
 

2,665,795



2,665,795

 GSE multifamily MBS
 

2,582,618



2,582,618

Private label residential MBS
 


524,543


524,543

Total AFS securities
 
$
2,015

$
8,517,829

$
524,543

$

$
9,044,387

Derivative assets:
 
 
 
 
 
 
Interest rate related (2)
 
$

$
9,376

$

$
71,376

$
80,752

Mortgage delivery commitments
 

4



4

Total derivative assets
 
$

$
9,380

$

$
71,376

$
80,756

Total recurring assets at fair value
 
$
11,672

$
8,916,848

$
524,543

$
71,376

$
9,524,439

Recurring fair value measurements - Liabilities
 
 

 

 

 

 

Derivative liabilities:
 
 

 

 

 

 

Interest rate related (2)
 
$

$
62,725

$

$
(43,265
)
$
19,460

Mortgage delivery commitments
 

61



61

Total recurring liabilities at fair value (3)
 
$

$
62,786

$

$
(43,265
)
$
19,521

Non-recurring fair value measurements - Assets
 
 
 
 
 
 
Impaired mortgage loans held for portfolio
 
$

$

$
17,329

$

$
17,329

Real estate owned
 


8,096


8,096

Total non-recurring assets at fair value
 
$

$

$
25,425

$

$
25,425

Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the Bank with the same clearing agent and/or counterparties.
(2) To conform with current presentation, $11.2 million in variation margin received on cleared derivatives has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with Netting Adjustments and Cash Collateral.
(3) Derivative liabilities represent the total liabilities at fair value.

There were no transfers between Levels 1 or 2 during the first nine months of 2018 and 2017.


88

Notes to Unaudited 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 three and nine months ended September 30, 2018 and 2017. 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 2018 or 2017.
 
AFS Private
Label MBS-Residential
 
Three months ended September 30,
Nine months ended September 30,
(in thousands)
2018
2017
2018
2017
Balance, beginning of period
$
475,713

$
610,376

$
524,543

$
673,976

Total gains (losses) (realized/unrealized) included in:
 
 
 
 
Accretion of credit losses in interest income
4,098

6,203

11,677

16,669

Net OTTI losses, credit portion
(17
)
(38
)
(359
)
(702
)
Net unrealized gains on AFS in OCI
18

53

48

144

Reclassification of non-credit portion included in net income
17

38

359

702

Net change in fair value on OTTI AFS in OCI

986


(652
)
Unrealized gains on OTTI AFS in OCI
1,565

108

4,627

7,788

Purchases, issuances, sales, and settlements:
 
 
 
 
Settlements
(41,734
)
(60,643
)
(101,235
)
(140,842
)
Balance at September 30
$
439,660

$
557,083

$
439,660

$
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
$
4,081

$
4,432

$
11,318

$
13,500



89

Notes to Unaudited 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, 2018
 
December 31, 2017
Notional amount
Expiration Date Within One Year
Expiration Date After One Year
Total
 
Total
Standby letters of credit outstanding (1) (2)
$
21,024,430

$

$
21,024,430

 
$
18,965,939

Commitments to fund additional advances and BOB loans
17,754


17,754

 
43,972

Commitments to fund or purchase mortgage loans
30,756


30,756

 
25,487

Unsettled consolidated obligation bonds, at par
977,000


977,000

 
1,076,200

Unsettled consolidated obligation discount notes, at par
550,000


550,000

 
565,000

Notes:
(1) Excludes approved requests to issue future standby letters of credit of $92.6 million and $44.1 million at September 30, 2018 and December 31, 2017, respectively.
(2) Letters of credit in the amount of $2.9 billion and $2.2 billion at September 30, 2018 and December 31, 2017, 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 $3.3 million and $3.9 million as of September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding of $9.1 billion and $8.0 billion at September 30, 2018 and December 31, 2017, 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 in this Form 10-Q 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.

90


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, 2018.

Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the third quarter of 2018 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

For a complete discussion of Risk Factors, see Item 1A. Risk Factors in the Bank's 2017 Form 10-K. Other than as noted below, management believes that there have been no material changes from the Risk Factors disclosed in the Bank's 2017 Form 10-K.

The intention of the United Kingdom’s Financial Conduct Authority (FCA) is to cease sustaining LIBOR after 2021. The introduction of alternative interest rates could adversely affect the Bank’s business, financial condition, and results of operations and increase operational risk.

In July 2017, the Chief Executive of the FCA announced the FCA’s intention to cease sustaining LIBOR after 2021. The Federal Reserve Board convened the Alternative Reference Rates Committee (ARRC) to identify a set of alternative reference interest rates for possible use as market benchmarks. The ARRC has identified the Secured Overnight Financing Rate (SOFR) as such an alternative rate and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018.

The Bank is not able to predict with certainty that LIBOR will cease to be available after 2021. However, during the second half of 2018, certain market participants issued debt securities indexed to SOFR. While the Bank is planning for LIBOR to cease to exist, the market’s transition from LIBOR to an alternative rate (e.g., SOFR) is expected to be complicated. Risks relating to the market demand for the Bank’s products, changes in legacy contractual terms on the Bank’s financial assets and liabilities, and critical vendors being able to adjust systems to properly process and account for an alternative rate are examples of the risks. Additionally, the introduction of an alternative rate also may create additional basis risk for market participants including the Bank, as an alternative index is utilized along with LIBOR.

The Bank will be prepared to participate in SOFR-indexed debt issuance and offer SOFR-indexed advances. The Bank’s operational risk will increase with SOFR-indexed activity, until the Bank is able to update certain systems to process a new index. It is unknown at this time what the full impact to the Bank’s business, results of operations, and financial condition will be with the transition away from LIBOR.


91


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
 
 
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer
Filed herewith.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer
Filed herewith.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting Officer
Filed herewith.
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.
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.
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.


92


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 8, 2018


By: /s/ David G. Paulson
David G. Paulson
Chief Financial Officer
(Principal Financial Officer and Authorized Officer)


By: /s/ Edward V. Weller
Edward V. Weller
Chief Accounting Officer
(Authorized Officer)

93