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EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3231q2020.htm
EX-32.2 - COO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3221q2020.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3211q2020.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3131q2020.htm
EX-31.2 - COO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3121q2020.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex3111q2020.htm
EX-10.1 - AGREEMENT, DATED 3/24/20, WITH EXECUTIVE OFFICER YEALY - Federal Home Loan Bank of Pittsburghfhlbpitex1011q2020.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered

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, a 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 30,487,311 shares of common stock with a par value of $100 per share outstanding at April 30, 2020.



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; including but not limited to, the possible discontinuance of the London Interbank Offered Rate (LIBOR) and the related effect on the Bank's LIBOR-based financial products, investments and contracts; the occurrence of man-made or natural disasters, global pandemics, conflicts or terrorist attacks or other geopolitical events; political, legislative, regulatory, litigation, or judicial events or actions; risks related to mortgage-backed securities (MBS); changes in the assumptions used to estimate credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; changes in expectations regarding the Bank’s payment of dividends; membership changes; changes in the demand by Bank members for Bank advances; an increase in advance 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 and all risks and uncertainties addressed throughout this report, as well as the Bank's 2019 Form 10-K (2019 Form 10-K), including Risk Factors included in Item 1A of that report. Information on the Bank's websites referred to in this Form 10-Q is not incorporated in, or a part of, this Form 10-Q.

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. See additional discussion below in this Executive Summary for the impact on the Bank's operations and financial condition due to the spread of the coronavirus (COVID-19 pandemic).

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 in connection with advances and debt, the Bank executes interest-rate exchange agreements. 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

1


curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products.

The COVID-19 pandemic caused the markets to be volatile toward the end of the first quarter of 2020. To address the effects of it on the U.S. economy, in March the Federal Reserve Board (Federal Reserve) took a number of steps to lower the Federal funds target rate, falling eventually to a range between 0% to 0.25%. In addition, the Federal Reserve put a variety of measures in place to respond to the turbulence in the markets, provide liquidity, and bolster the economy.  Key actions included expanded overnight repurchase agreement operations and a commitment to purchase $500 billion in U.S. Treasuries and $200 billion in MBS over the next several months.

Furthermore, the Federal Reserve established the Primary and Secondary Market Corporate Credit Facilities to support corporate bond lending. It brought back the Term-Asset Backed Securities Loan Facility (TALF) to support credit for asset-backed loans; expanded the Money Market Mutual Fund Liquidity Facility (MMLF) to support municipal bonds; and established the Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses.

Due to the interest rate cuts, yields on U.S. Treasuries dropped substantially during the first quarter of 2020 relative to the prevailing yields at the end of the fourth quarter of 2019. When compared to 3-month LIBOR, the Bank’s swapped bond funding costs widened in the first quarter of 2020 compared to the fourth quarter of 2019. The Bank’s short-term funding costs improved relative to 3-month LIBOR due to the Secured Overnight Financing Rate (SOFR) rate decline and increased investor demand for the Bank's discount notes.

Results of Operations. The Bank's net income totaled $35.9 million for the first quarter of 2020, compared to $98.0 million for the first quarter of 2019. This $62.1 million decrease was driven primarily by the following:

Net interest income was $95.7 million for the first quarter of 2020, a decline of $34.2 million from $129.9 million in the same prior year period of 2019.
Interest income was $465.9 million for the first quarter of 2020, compared to $729.5 million for the first quarter of 2019. This decrease was largely the result of lower average interest-earning asset balances as well as lower yields, driven by lower short-term interest rates.
Interest expense was $370.2 million for the first quarter of 2020, compared to $599.6 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligations balances as well as lower rates paid, driven by lower short-term interest rates.
Other noninterest income was a loss of $31.3 million in the first quarter of 2020, compared to a gain of $4.1 million in the same prior-year period. This $35.4 million decrease was driven primarily by net losses on derivatives and hedging activities, partially offset by net gains on investment securities.

The net interest margin was 41 basis points and 51 basis points for the first quarter of 2020 and 2019, respectively.

Financial Condition. Advances. Advances totaled $78.1 billion at March 31, 2020, an increase of $12.5 billion compared to $65.6 billion at December 31, 2019. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. The growth of advances in the first quarter of 2020 was driven primarily by the large member classification which saw loan demand from their customers increase due to the economic effects of the COVID-19 pandemic. While the advance portfolio increased compared to December 31, 2019, the term of advances decreased. At March 31, 2020, approximately 28% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 37% at December 31, 2019.

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. The Bank maintains liquidity to meet member borrowing needs and regulatory standards. Liquidity is comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury obligations classified as trading or available-for-sale (AFS). At March 31, 2020, the Bank held $18.5 billion of liquid assets compared to $10.9 billion at December 31, 2019. Larger balances held by the Bank in its liquidity portfolio reflected the Bank's ability to stand ready for its members during the COVID-19 pandemic, as further discussed below.


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Investments. To enhance earnings, the Bank also maintains investments classified as AFS and held-to-maturity (HTM) as well as certain trading securities. The Bank held $13.3 billion in its investment portfolio at March 31, 2020 compared with $13.7 billion at December 31, 2019, a decrease of $0.4 billion.

Consolidated Obligations. The Bank's consolidated obligations totaled $109.0 billion at March 31, 2020, an increase of $19.1 billion from December 31, 2019. At March 31, 2020, bonds represented 52% of the Bank's consolidated obligations, compared with 74% at December 31, 2019. Discount notes represented 48% of the Bank's consolidated obligations at March 31, 2020 compared with 26% at year-end 2019. The increase in discount notes during the period reflects the 35% increase in advances maturing in less than one year, as shorter term debt was used to fund the demand for shorter term advances. The overall increase in consolidated obligations is largely consistent with the change in advances, increased liquidity and total assets.

Capital Position and Regulatory Requirements. Total capital at March 31, 2020 was $5.0 billion, compared to $4.5 billion at December 31, 2019. Total retained earnings at March 31, 2020 were $1.3 billion, relatively unchanged from year-end 2019. Accumulated other comprehensive income (AOCI) was $24.7 million at March 31, 2020, a decrease of $67.1 million from December 31, 2019. This decrease was primarily due to declines in the fair values of securities within the AFS portfolio.

In February 2020, the Bank paid quarterly dividends of 7.75% annualized on activity stock and 4.50% annualized on membership stock. These dividends were based on stockholders' average balances for the fourth quarter of 2019.

In April 2020, the Bank paid quarterly dividends of 6.25% annualized on activity stock and 3.00% annualized on membership stock. The dividends were based on average member capital stock held for the first quarter of 2020. While the Bank anticipated maintaining dividend levels similar to those paid in 2019, the payment and level of any dividends are always subject to changing market and business conditions. Given rapidly falling interest rates and lower net income, the dividend rates based on first quarter 2020 financial results are reflective of, and in line with, the Bank’s performance during the quarter. The dividend rates also demonstrate that the Bank continues to return value to its members. Throughout the remainder of the year, the Bank will continue to assess the impact of market and business conditions on the Bank's financial performance and level of dividends. Those conditions can be unpredictable, and their impact on the Bank’s results of operations and financial condition may result in the potential for lower dividend levels.

The Bank met all of its capital requirements as of March 31, 2020, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of December 31, 2019, the Bank was deemed "adequately capitalized."

Impact of COVID-19 Pandemic on Operations and Financial Condition. Executive leadership and the Board of Directors have been focused on two priorities, the health and safety of the Bank's staff and being a reliable and readily available liquidity provider for members. This focus has enabled the Bank to be in the best position to help its members and the communities that they serve during the COVID-19 pandemic.

The Bank is considered an essential business and has remained operational during the pandemic. For the health and safety of staff, beginning in March, the Bank split the staff supporting essential business functions between the main office and the business continuity facility, while all other employees worked remotely. Currently, nearly all Bank staff are working remotely. The Bank continues to monitor guidance from government authorities to determine whether, and in what manner, it is prudent for staff to return to its office locations.

The Bank continues to monitor the ongoing impact of the COVID-19 pandemic and has made some enhancements to its advance products in the form of a short-term pricing special and increased community lending program funds availability. From a credit and collateral perspective, the Bank has made collateral policy changes and clarifications including accepting Paycheck Protection Program (PPP) loans guaranteed by the Small Business Administration (SBA) as eligible collateral. For additional discussion of collateral policy changes, refer to the Credit and Counterparty Risk - Total Credit Exposure (TCE) and Collateral section of this Form 10-Q. The Bank will continue to monitor credit and collateral conditions and make adjustments as needed. For the Mortgage Partnership Finance® (MPF®) program, the Bank has made enhancements regarding delinquent loans, forbearance and other program parameters as it relates to troubled borrowers. Additional information regarding the Bank's future pandemic-related changes and announcements, will be posted and archived in the “Coronavirus Updates” section of the Bank's website, www.fhlb-pgh.com.

In addition, the Bank’s 2019 Form 10-K outlines several drivers of lower performance that could result in lower financial performance in 2020, such as a lower level of interest rates due to the Federal Reserve's actions to stimulate economic growth, generally and in response to the COVID-19 pandemic; the potential for lower advance levels for the year; increasing expenses; and a change in the Bank’s operating landscape as a result of legislative and regulatory actions. The Bank had originally anticipated the t

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rend towards lower advance levels to continue. However, in response to the COVID-19 pandemic, member advance demand increased during the first quarter of 2020 as noted above. The prevailing expectation of prolonged lower interest rates will likely result in lower net income. Paydown of the high-yielding MBS and MPF portfolio could also weigh on financial performance. However, the significance of the impact will be influenced by borrowers’ ability to refinance mortgages. Finally, the Bank continues to prudently manage expenses and is well-capitalized with significant retained earnings. For more information regarding risks related to the COVID-19 pandemic, refer to Part II. Other Information – Item 1A. Risk Factors of this Form 10-Q.

Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2019 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
 
March 31,
December 31,
September 30,
June 30,
March 31,
(in millions)
2020
2019
2019
2019
2019
Net interest income
$
95.7

$
104.2

$
109.1

$
110.6

$
129.9

Provision (benefit) for credit losses (1)
3.4

(0.5
)
0.4

1.0

0.4

Other noninterest income (loss)
(31.3
)
17.0

(6.7
)
(11.4
)
4.1

Other expense
20.4

31.1

23.2

22.6

24.6

Income before assessments
40.6

90.6

78.8

75.6

109.0

Affordable Housing Program (AHP) assessment (2)
4.7

9.7

8.5

7.9

11.0

Net income
$
35.9

$
80.9

$
70.3

$
67.7

$
98.0

 
 
 
 
 
 
Dividends (in millions)
$
56.1

$
63.7

$
63.5

$
70.0

$
69.6

Dividends per share
1.99

2.11

1.87

2.04

1.83

Weighted average dividend rate
7.43
%
7.46
%
7.44
%
7.46
%
7.44
%
Dividend payout ratio (3)
156.28
%
78.70
%
90.40
%
103.39
%
71.01
%
Return on average equity
3.39
%
7.26
%
5.79
%
5.61
%
7.66
%
Return on average assets
0.15
%
0.33
%
0.26
%
0.27
%
0.38
%
Net interest margin (4)
0.41
%
0.43
%
0.41
%
0.45
%
0.51
%
Regulatory capital ratio (5)
4.53
%
4.94
%
4.88
%
4.70
%
4.99
%
GAAP capital ratio (6)
4.29
%
4.67
%
4.65
%
4.49
%
5.07
%
Total average equity to average assets
4.53
%
4.53
%
4.47
%
4.80
%
5.01
%
Notes:
(1) Effective January 1, 2020, the Bank adopted ASU 2016-13: Financial Instruments - Credit Losses, as amended (ASU 2016-13). The 2020 amount includes provision for private label MBS held in the AFS portfolio, the MPF portfolio and Banking on Business (BOB) loans.
(2) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(3) Represents dividends paid as a percentage of net income for the respective periods presented.
(4) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(5) Regulatory capital ratio is the sum of capital stock, mandatorily redeemable capital stock and retained earnings as a percentage of total assets at period-end.
(6) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.


4


Condensed Statements of Condition
 
March 31,
December 31,
September 30,
June 30,
March 31,
(in millions)
2020
2019
2019
2019
2019
Cash and due from banks
$
3,946.6

$
21.5

$
13.8

$
66.2

$
79.9

Investments (1)
27,900.6

24,572.0

27,277.4

25,515.7

21,491.1

Advances
78,092.9

65,610.1

70,325.9

81,827.2

75,233.0

Mortgage loans held for portfolio, net
5,237.6

5,114.6

4,827.2

4,666.4

4,526.2

Total assets
115,658.2

95,724.1

102,913.7

112,520.8

101,772.0

Consolidated obligations:
 
 
 
 
 
Discount notes
52,062.5

23,141.4

28,155.7

35,010.0

26,731.3

Bonds
56,953.3

66,807.8

68,452.7

70,881.3

68,628.8

Total consolidated obligations
109,015.8

89,949.2

96,608.4

105,891.3

95,360.1

Deposits
812.6

573.4

556.2

559.0

623.2

Total liabilities
110,697.7

91,251.3

98,128.0

107,464.9

96,613.4

Capital stock - putable
3,629.9

3,055.0

3,372.9

3,643.2

3,745.6

Retained earnings
1,305.9

1,326.0

1,308.8

1,298.6

1,304.3

Total capital
4,960.5

4,472.8

4,785.7

5,055.9

5,158.6

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

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2020 and 2019, 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 2019 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank's net income totaled $35.9 million for the first quarter of 2020, compared to $98.0 million for the first quarter of 2019. This $62.1 million decrease was driven primarily by the following:

Net interest income was $95.7 million for the first quarter of 2020, a decline of $34.2 million from $129.9 million in the same prior year period of 2019.
Interest income was $465.9 million for the first quarter of 2020, compared to $729.5 million for the first quarter of 2019. This decrease was largely the result of lower average interest-earning asset balances as well as lower yields, driven by lower short-term interest rates.
Interest expense was $370.2 million for the first quarter of 2020, compared to $599.6 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligations balances as well as lower rates paid, driven by lower short-term interest rates.
Other noninterest income was a loss of $31.3 million in the first quarter of 2020, compared to a gain of $4.1 million in the same prior-year period. This $35.4 million decrease was driven primarily by net losses on derivatives and hedging activities, partially offset by net gains on investment securities.

The Bank's return on average equity for the first quarter of 2020 was 3.39% compared to 7.66% for the first quarter of 2019.



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Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three months ended March 31, 2020 and 2019.

Average Balances and Interest Yields/Rates Paid
 
Three Months Ended March 31,
 
2020
 
2019
(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)
$
10,275.3

$
32.6

1.28

 
$
6,706.9

$
40.5

2.45

Interest-bearing deposits (2)
1,446.4

5.0

1.39

 
1,961.8

12.0

2.48

Investment securities (3)
16,756.5

100.0

2.40

 
12,437.8

96.7

3.15

Advances (4)
59,614.7

283.3

1.91

 
77,019.5

538.3

2.83

Mortgage loans held for portfolio (5)
5,191.3

45.0

3.49

 
4,499.3

42.0

3.79

Total interest-earning assets
93,284.2

465.9

2.01

 
102,625.3

729.5

2.88

Other assets (6)
751.6

 

 

 
965.8

 
 
Total assets
$
94,035.8

 

 

 
$
103,591.1

 
 
Liabilities and capital:
 

 

 

 
 
 
 
Deposits (2)
$
585.7

$
1.8

1.23

 
$
493.9

$
2.7

2.19

Consolidated obligation discount notes
28,631.9

101.1

1.42

 
31,144.9

187.0

2.43

Consolidated obligation bonds (7)
59,627.0

261.2

1.76

 
65,803.7

409.3

2.52

Other borrowings
318.9

6.1

7.75

 
32.9

0.6

7.39

Total interest-bearing liabilities
89,163.5

370.2

1.67

 
97,475.4

599.6

2.49

Other liabilities
607.9

 
 
 
927.5

 
 
Total capital
4,264.4

 
 
 
5,188.2

 
 
Total liabilities and capital
$
94,035.8

 
 
 
$
103,591.1

 
 
Net interest spread
 
 
0.34

 
 
 
0.39

Impact of noninterest-bearing funds
 
 
0.07

 
 
 
0.12

Net interest income/net interest margin
 
$
95.7

0.41

 
 
$
129.9

0.51

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.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $267.5 million and $(102.7) million in 2020 and 2019, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) Beginning January 1, 2020, the Bank adopted ASU 2016-13. Other assets include allowance for credit losses on investment securities and MPF. Prior to January 1, 2020, Other assets included the allowance for credit losses and the noncredit portion of OTTI losses on investment securities.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $46.1 million and $(101.5) million in 2020 and 2019, respectively.

Net interest income for the first quarter of 2020 decreased $34.2 million from the same prior year period due to a decrease in interest income, partially offset by lower interest expense. Interest-earning assets decreased 9.1% due to lower average advances, partially offset by higher average investments, increased purchases of Federal funds sold and securities purchased under agreements to resell, and increased purchases of mortgage loans held for portfolio. The rate earned on interest-earning assets decreased 87 basis points due to lower yields across all categories. Interest income on advances and interest-bearing deposits declined due to both lower volume and a decrease in yield. Interest income on investments and mortgage loans held fo

6


r portfolio increased due to higher volume. Interest income increased on investment securities and mortgage loans held in portfolio due to higher volumes. Interest income on Federal funds sold and securities purchased under agreements to resell decreased due to a decline in yield.

The rate paid on interest-bearing liabilities decreased 82 basis points due to lower funding costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds decreased 5 basis points due to lower 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 three months ended March 31, 2020 and 2019.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2020 compared to 2019
 
Three Months Ended March 31,
(in millions)
Volume
Rate
Total
Federal funds sold
$
16.3

$
(24.2
)
$
(7.9
)
Interest-bearing deposits
(2.6
)
(4.4
)
(7.0
)
Investment securities
29.4

(26.1
)
3.3

Advances
(103.9
)
(151.1
)
(255.0
)
Mortgage loans held for portfolio
6.4

(3.4
)
3.0

Total interest-earning assets
$
(54.4
)
$
(209.2
)
$
(263.6
)
Interest-bearing deposits
$
0.4

$
(1.3
)
$
(0.9
)
Consolidated obligation discount notes
(13.8
)
(72.1
)
(85.9
)
Consolidated obligation bonds
(34.9
)
(113.2
)
(148.1
)
Other borrowings
5.5


5.5

Total interest-bearing liabilities
$
(42.8
)
$
(186.6
)
$
(229.4
)
Total decrease in net interest income
$
(11.6
)
$
(22.6
)
$
(34.2
)

Interest income and interest expense both decreased in the first quarter of 2020 compared to the first quarter of 2019. Lower rates and lower volumes drove the decreases. The rate decrease was primarily due to a decrease in market interest rates as the Federal funds target rate decreased multiple times in 2020.

Interest expense on total average consolidated obligations decreased quarter–over–quarter. The decline was primarily due to lower rates paid on both discount notes and bonds given lower market interest rates in 2020. A portion of the bond portfolio is currently swapped to a variable rate; therefore, as the variable 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 “Derivatives Effects on Interest Income” discussion below.

The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2020 and 2019. These balances do not reflect any hedge accounting adjustments.
(in millions)
Three Months Ended March 31,
Product
2020
2019
RepoPlus/Mid-Term Repo
$
18,350.1

$
21,138.6

Core (Term)
40,979.0

55,963.7

Convertible Select
20.0

20.0

Total par value
$
59,349.1

$
77,122.3


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


7


Derivative Effects on Interest Income. The following tables quantify the effects of the Bank's derivative activities on interest income and interest expense for the three months ended March 31, 2020 and 2019.
Three Months Ended
March 31, 2020
(dollars in millions)
Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)
Impact of
Derivatives
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
59,614.7

$
283.3

1.91

$
301.1

2.03

$
(17.8
)
(0.12
)
Mortgage loans held for portfolio
5,191.3

45.0

3.49

45.4

3.52

(0.4
)
(0.03
)
All other interest-earning assets
28,478.2

137.6

1.94

143.7

2.03

(6.1
)
(0.09
)
Total interest-earning assets
$
93,284.2

$
465.9

2.01

$
490.2

2.11

$
(24.3
)
(0.10
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation bonds
$
59,627.0

$
261.2

1.76

$
271.3

1.83

$
(10.1
)
(0.07
)
All other interest-bearing liabilities
29,536.5

109.0

1.48

109.0

1.48



Total interest-bearing liabilities
$
89,163.5

$
370.2

1.67

$
380.3

1.72

$
(10.1
)
(0.05
)
Net interest income/net
 interest spread
 
$
95.7

0.34

$
109.9

0.39

$
(14.2
)
(0.05
)
Three Months Ended
March 31, 2019
(dollars in millions)
Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)
Impact of
Derivatives
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 

Advances
$
77,019.5

$
538.3

2.83

$
514.4

2.71

$
23.9

0.12

Mortgage loans held for portfolio
4,499.3

42.0

3.79

42.9

3.87

(0.9
)
(0.08
)
All other interest-earning assets
21,106.5

149.2

2.87

149.7

2.88

(0.5
)
(0.01
)
Total interest-earning assets
$
102,625.3

$
729.5

2.88

$
707.0

2.79

$
22.5

0.09

Liabilities:
 
 
 
 
 
 
 
Consolidated obligation bonds
$
65,803.7

$
409.3

2.52

$
379.8

2.34

$
29.5

0.18

All other interest-bearing liabilities
31,671.7

190.3

2.44

190.3

2.44



Total interest-bearing liabilities
$
97,475.4

$
599.6

2.49

$
570.1

2.37

$
29.5

0.12

Net interest income/net
 interest spread
 
$
129.9

0.39

$
136.9

0.42

$
(7.0
)
(0.03
)

The use of derivatives negatively impacted both net interest income and net interest spread for the three months ended March 31, 2020 and 2019. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average 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 benchmark interest rates. 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 variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.
The Bank uses many different funding and hedging strategies. These strategies involve closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision for Credit Losses. Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1- Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

8



The provision for credit losses was $3.4 million for the first quarter of 2020 compared to $0.4 million for the first quarter of 2019. The increase was primarily due to the $2.8 million provision for credit losses for private label MBS classified as AFS. Beginning January 1, 2020, with the adoption of ASU 2016-13, the provision for credit losses includes expected credit losses on private label MBS. Prior to January 1, 2020, expected credit losses on private label MBS were included in Other Noninterest Income, Net OTTI Losses. The provision for credit losses on private label MBS was driven by a decrease in market values. Credit losses on securities classified as AFS are limited to their unrealized loss.

Other Noninterest Income
 
Three Months Ended March 31,
(in millions)
2020
2019
Net gains (losses) on investment securities
$
62.5

$
10.1

Net gains (losses) on derivatives and hedging activities
(97.4
)
(13.0
)
Standby letters of credit fees
5.4

5.8

Other, net
(1.8
)
1.2

Total other noninterest income (loss)
$
(31.3
)
$
4.1


The Bank's total other noninterest loss for the first quarter of 2020 compared to total other noninterest income in the same prior year period was primarily due to the increase in net losses on derivatives and hedging activities partially offset by an increase in net gains on investment securities. As discussed in Executive Summary in this Form 10-Q, there were actions taken by the Federal Reserve to lower interest rates toward the end of the first quarter of 2020 to mitigate the economic impacts of the COVID-19 pandemic. These significant interest rate declines and related market volatility during the first quarter of 2020 impacted the Bank’s investments and derivatives due to mark-to-market (fair value) adjustments on these instruments. The activity related to derivatives and hedging activities is discussed in more detail below. The net gains on investment securities reflects the impact of fair market value changes on Agency and U.S. Treasury investments held in the Bank's trading portfolio.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, TBAs, interest rate caps and floors and swaption agreements, referred to 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.

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

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

The following tables detail the net effect of derivatives and hedging activities on noninterest income for the three months ended March 31, 2020 and 2019.
 
Three months ended March 31, 2020
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$
(16.7
)
$
(89.6
)
$
(13.4
)
$
14.4

$
7.7

$

$
(97.6
)
Other (1)





0.2

0.2

Total net gains (losses) on derivatives and hedging activities
$
(16.7
)
$
(89.6
)
$
(13.4
)
$
14.4

$
7.7

$
0.2

$
(97.4
)

9


 
Three months ended March 31, 2019
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$
(4.5
)
$
(13.1
)
$
(9.7
)
$
14.7

$

$

$
(12.6
)
Other (1)





(0.4
)
(0.4
)
Total net gains (losses) on derivatives and hedging activities
$
(4.5
)
$
(13.1
)
$
(9.7
)
$
14.7

$

$
(0.4
)
$
(13.0
)
Notes:
(1) Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(97.6) million in the first quarter of 2020 compared to net losses of $(12.6) million for the first quarter of 2019. The higher net losses observed during the first quarter of 2020 were primarily on the Bank’s asset swaps and were attributed to significantly larger decreases in interest rates compared to the interest rate decreases observed during the first quarter of 2019. Refer to Executive Summary in this Form 10-Q for additional discussion of Federal Reserve actions to lower interest rates to mitigate the economic impacts of the COVID-19 pandemic. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $11.3 billion at March 31, 2020 and $11.8 billion at December 31, 2019.

Other Expense

The Bank's total other expenses decreased $4.2 million to $20.4 million for the first quarter of 2020, compared to the same prior year period. The decrease was primarily due to lower compensation and benefits expenses. The Bank made a $2.0 million voluntary contribution to the Bank's defined benefit pension plan in the first quarter of 2019 but made no such contribution in the first quarter of 2020. In addition, compensation and benefits expenses decreased due to the mark-to-market impact on deferred compensation.

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 2019 Form 10-K.

Assets

Total assets were $115.7 billion at March 31, 2020, compared with $95.7 billion at December 31, 2019, an increase of $20.0 billion. The increase was primarily due to higher advances activity and increased balances in the liquidity portfolio. Advances totaled $78.1 billion at March 31, 2020, an increase of $12.5 billion compared to $65.6 billion at December 31, 2019.

The Bank's core mission activities include the issuance of advances and acquiring member assets through the MPF® program. The core mission asset ratio, defined as the ratio of par amount of advances and MPF loans relative to consolidated obligations adjusted for high quality liquid assets using full year average balances, was 75.9% and 82.2% as of March 31, 2020 and December 31, 2019, respectively. The decrease in the core mission asset ratio was due to the decrease in average advances and the Bank holding additional liquidity in the first quarter of 2020 to address volatility in member advance demand. This was done by purchasing liquidity investments which are not core mission assets.

Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1- Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

Advances. Advances (par) totaled $77.6 billion at March 31, 2020 compared to $65.4 billion at December 31, 2019. At March 31, 2020 the Bank had advances to 172 borrowing members, compared to 161 borrowing members at December 31,

10


2019. 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 increased to 78.2% of total advances as of March 31, 2020, compared to 77.7% at December 31, 2019.

The following table provides information on advances at par by redemption terms at March 31, 2020 and December 31, 2019.
(in millions)
March 31, 2020
December 31, 2019
Fixed-rate
 
 
Due in 1 year or less (1)
$
28,572.0

$
21,783.1

Due after 1 year through 3 years
13,850.8

13,523.4

Due after 3 years through 5 years
2,632.9

2,012.5

Thereafter
137.1

594.4

Total par value
$
45,192.8

$
37,913.4

 
 
 
Fixed-rate, callable or prepayable(1)
 
 
Due in 1 year or less
$
250.0

$

Due after 1 year through 3 years
50.0

20.0

Total par value
$
300.0

$
20.0

 
 
 
Variable-rate
 
 
Due in 1 year or less (1)
$
15,674.7

$
14,129.5

Due after 1 year through 3 years
4,025.0

5,025.0

Due after 3 years through 5 years
53.1

53.1

Total par value
$
19,752.8

$
19,207.6

 
 
 
Variable-rate, callable or prepayable(2)
 
 
Due in 1 year or less
$
11,035.0

$
5,225.0

Due after 1 year through 3 years
910.0

2,635.0

Due after 3 years through 5 years
40.0

40.0

Total par value
$
11,985.0

$
7,900.0

 
 
 
Other(3)
 
 
Due in 1 year or less
$
117.1

$
123.7

Due after 1 year through 3 years
136.4

147.4

Due after 3 years through 5 years
69.6

69.7

Thereafter
53.6

57.3

Total par value
$
376.7

$
398.1

Total par balance
$
77,607.3

$
65,439.1

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

The Bank had no putable advances at March 31, 2020 or December 31, 2019.

11


The following table provides a distribution of the number of members, categorized by individual member asset size (as reported quarterly), that had an outstanding advance balance during the three months ended 2020 and 2019. 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).
Member Classification
March 31, 2020
March 31, 2019
Large
5

6

Regional
13

14

Mid-size
27

26

CFI (1)
127

143

Insurance
15

12

Total borrowing members during the period
187

201

Total membership
286

288

Percentage of members borrowing during the period
65.4
%
69.8
%
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

The following table provides information at par on advances by member classification at March 31, 2020 and December 31, 2019.
(in millions)
March 31, 2020
December 31, 2019
Member Classification
Large
$
53,920.0

$
43,165.0

Regional
5,807.6

5,256.1

Mid-size
4,164.8

4,197.7

CFI
3,179.6

2,887.3

Insurance
3,019.6

1,416.5

Non-member
7,515.7

8,516.5

Total
$
77,607.3

$
65,439.1


As of March 31, 2020, total advances increased 18.6% compared with balances at December 31, 2019. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. The growth of advances in the first quarter of 2020 was driven primarily by the large member classification which saw loan demand from their customers increase due to the economic effects of the COVID-19 pandemic.

See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of this Item 2 for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of March 31, 2020.

Allowance for Credit Losses (ACL) - Advances. The Bank evaluates its advances for an allowance for credit losses on a collective, or pooled basis unless an individual assessment is deemed necessary because the instruments do not possess similar risk characteristics. The Bank pools advances by member type. Based on the collateral held as security, the Bank's credit extension and collateral policies and repayment history on advances, including that the Bank has not incurred any credit losses since inception, the Bank has not recorded any ACL at March 31, 2020 and December 31, 2019. For additional information on the allowance methodology, see Note 3 - Advances in this Form 10-Q.

Mortgage Loans Held for Portfolio, Net. Mortgage loans held for portfolio, net of ACL, totaled $5.2 billion and $5.1 billion at March 31, 2020 and December 31, 2019, 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.

12


The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank. The Bank is continuing to evaluate the impact of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on its mortgage portfolio. However, as of March 31, 2020, the Bank did not have any impacted loans.

Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest was immaterial for both the Bank's mortgage loans and BOB loans for the first quarter of 2020 and 2019. Balances regarding the Bank’s loan products are summarized below.
(in millions)
March 31, 2020
December 31, 2019
Advances (1)
$
78,092.9

$
65,610.1

Mortgage loans held for portfolio, net (2)
5,237.6

5,114.6

Nonaccrual mortgage loans (3)
15.0

15.6

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

3.3

BOB loans, net
19.4

19.7

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

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of March 31, 2020, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.4% of the MPF Original portfolio and 1.7% of the MPF Plus portfolio compared with 0.4% and 2.2%, respectively, at December 31, 2019. The MPF 35 portfolio delinquency remains minimal at 0.07% and 0.03%, at March 31, 2020 and December 31, 2019, respectively. The Bank is continuing to evaluate the impact of forbearance programs in response to the COVID-19 pandemic on the accounting and reporting related to its mortgage portfolio. However, as of March 31, 2020, the Bank did not have any impacted loans.

ACL - Conventional MPF. 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. Expected credit losses are evaluated based on either an individual or collective assessment of the loans, depending on whether the loans share similar risk characteristics. 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 determines its ACL through consideration of various loan portfolio and collateral-related characteristics, including past performance, current conditions, and reasonable and supportable forecasts of economic conditions. To estimate credit losses, the Bank uses a third-party model which incorporates certain assumptions, including forecasted housing prices and interest rates, as well as historical borrower behavior. The Bank may incorporate a qualitative adjustment to the model results, if deemed appropriate, based on current market conditions or results. The estimate of the expected credit losses includes coverage of certain losses by primary mortgage insurance (PMI), if applicable. Certain loans deemed to be collateral dependent are evaluated for credit losses based on the difference between the estimated fair value of the underlying collateral, less selling costs and PMI, and the amortized cost basis of the loan. The related credit loss, if any, is charged-off against the reserve. However, if the estimated loss can be recovered through credit enhancement (CE), a receivable is established, resulting in a net charge-off.

With the adoption of ASU 2016-13, the Bank is permitted to recognize a recovery when expected credit losses are less than the amounts previously charged-off. Expected recoveries of prior charge-offs, if any, are included as a reduction to the ACL through the Bank's provision for credit losses. The reduction to the ACL is partially offset by a reversal of expected CE, resulting in a net impact to the Bank's provision for credit losses.

The Bank's conventional MPF loans held for portfolio are required to be credit enhanced as determined through the use of a validated model so the risk of loss is limited to the losses within the Bank's risk tolerance. 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 CE provided by PFIs (available CE) until

13


exhausted. Certain losses incurred by the Bank on MPF 35 and MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank.

The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at March 31, 2020 and December 31, 2019.
 
MPF CE structure
March 31, 2020
ACL
March 31, 2020
(in millions)
FLA
Available CE
Estimate of Credit Loss
Estimate of Recovery (1)
Charge-offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
6.2

$
84.4

$
4.0

$
(2.2
)
$
(0.6
)
$
(1.7
)
$
(0.5
)
MPF 35
11.3

115.3

4.1

(0.2
)

(3.7
)
0.2

MPF Plus
15.4

5.6

7.3

(2.2
)

(0.5
)
4.6

Total
$
32.9

$
205.3

$
15.4

$
(4.6
)
$
(0.6
)
$
(5.9
)
$
4.3

 
MPF CE structure
December 31, 2019
ACL
December 31, 2019
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge-offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
6.1

$
82.6

$
3.9

$
(1.3
)
$
(2.2
)
$
0.4

MPF 35
10.3

107.1

0.7


(0.7
)

MPF Plus
15.6

5.6

9.0


(1.6
)
7.4

Total
$
32.0

$
195.3

$
13.6

$
(1.3
)
$
(4.5
)
$
7.8

Note:
(1) Expected recoveries of amounts previously charged-off based on the Bank's quarterly estimate of expected lifetime credit losses.

The ACL on mortgage loans decreased $3.5 million during the first three months of 2020 primarily due to recoveries in the MPF Original and MPF Plus products as a result of the adoption of ASU 2016-13, which was effective for the Bank January 1, 2020. At adoption, the Bank recorded a decrease in its ACL of $3.9 million, which was largely offset by a reversal of expected CE of $3.8 million, resulting in a net impact of $0.1 million.

During the first quarter of 2020, the COVID-19 pandemic resulted in financial market deterioration and substantial uncertainty about the future short-term economic environment. The Bank appropriately incorporated considerations related to potential economic impacts resulting from the pandemic into its first quarter 2020 assessment of expected credit losses on its MPF portfolio. The Bank continues to monitor developments and assess the potential impact the pandemic may have on the Bank's MPF portfolio, including with respect to market assumptions, borrower performance, and regulatory relief and forbearance programs.



14


Cash and Investments. 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. Excess cash is typically invested in overnight investments. The Bank also maintains an investment portfolio to enhance earnings. These investments may be classified as trading, AFS or HTM.

The Bank maintains a liquidity portfolio comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell and U.S. Treasury obligations classified as trading or AFS. The liquidity portfolio at March 31, 2020 increased by approximately $7.6 billion compared to December 31, 2019. Larger balances held by the Bank in its liquidity portfolio reflected the Bank's ability to stand ready to meet its members' needs during the COVID-19 pandemic.

The Bank's investment portfolio is comprised of trading, AFS and HTM investments (excluding those investments included in the liquidity portfolio). The investments must meet the Bank's risk guidelines and certain other requirements, such as yield. The Bank's investment portfolio totaled $13.3 billion and $13.7 billion at March 31, 2020 and December 31, 2019, respectively.

Investment securities, including trading, AFS, and HTM securities, totaled $16.8 billion at March 31, 2020, compared to $17.1 billion at December 31, 2019. Details of the investment securities portfolio follow.
 
Carrying Value
(in millions)
March 31, 2020
December 31, 2019
Trading securities:
 
 
Non-MBS:
 
 
U.S. Treasury obligations
$
3,479.4

$
3,390.7

Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
252.0

240.9

Total trading securities
$
3,731.4

$
3,631.6

Yield on trading securities
1.92
%
2.02
%
AFS securities:
 
 
GSE and TVA obligations
1,617.7

1,550.7

State or local agency obligations
248.5

247.9

MBS:
 
 
      U.S. obligations single-family MBS
763.7

807.6

      GSE single-family MBS
4,087.0

4,055.8

      GSE multifamily MBS
3,848.8

4,109.6

Private label residential MBS
280.4

326.2

Total AFS securities
$
10,846.1

$
11,097.8

Yield on AFS securities
2.23
%
2.58
%
HTM securities:
 
 
State or local agency obligations
94.3

94.3

MBS:
 
 
      U.S. obligations single-family MBS
209.9

250.2

      GSE single-family MBS
1,141.5

1,156.6

      GSE multifamily MBS
648.2

770.8

Private label residential MBS
115.0

123.8

Total HTM securities
$
2,208.9

$
2,395.7

Yield on HTM securities
3.07
%
3.22
%
Total investment securities
$
16,786.4

$
17,125.1

Yield on investment securities
2.27
%
2.55
%


15


As of March 31, 2020, 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
Fannie Mae
$
6,660.3

$
6,685.7

U.S. Treasury
3,479.4

3,479.4

Freddie Mac
3,091.0

3,148.5

Federal Farm Credit Banks
1,757.0

1,757.0

Ginnie Mae
927.5

927.3

Total
$
15,915.2

$
15,997.9


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.

ACL - Investments. The Bank invests in interest-bearing deposits and Federal funds sold which are unsecured investments. At March 31, 2020 and December 31, 2019, all investments in interest-bearing deposits and Federal funds sold were repaid according to the contractual terms. No ACL was recorded for these assets at March 31, 2020.

AFS securities are evaluated quarterly for expected credit losses on an individual security basis. In assessing whether a credit loss exists, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. The allowance is limited to the amount of the AFS security’s unrealized loss, if any. If the AFS security is in an unrealized gain, the ACL is zero. The ACL on AFS private label MBS was $2.8 million at March 31, 2020.

HTM securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An ACL is recorded with a corresponding adjustment to the provision for credit losses. There was no ACL at March 31, 2020.

For additional information on the allowance methodology, see Note 2 - Investments in this Form 10-Q.

Liabilities and Capital

Deposits. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at March 31, 2020 increased to $812.6 million from $573.4 million at December 31, 2019.

Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $109.0 billion at March 31, 2020, an increase of $19.1 billion from December 31, 2019.

Discount notes outstanding at March 31, 2020 increased to $52.1 billion from $23.1 billion at December 31, 2019. The significant increase in discount notes during the period reflects the 35% increase in advances maturing in less than one year, as shorter term debt was used to fund the demand for shorter term advances.

At March 31, 2020, the Bank’s bonds outstanding decreased to $57.0 billion compared to $66.8 billion at December 31, 2019 and was primarily due to the Bank's use of discount notes to fund advances during the first quarter of 2020 as noted above. Note also that 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 13 to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data of the Bank's 2019 Form 10-K.

Commitments and Off-Balance Sheet Items. As of March 31, 2020, the Bank was obligated to fund approximately $32.3 million in additional advances and BOB loans, $99.3 million of mortgage loans, and to issue $786.5 million in consolidated obligations. In addition, the Bank had $17.4 billion in outstanding standby letters of credit as of March 31, 2020. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.


16


Capital and Retained Earnings. The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
(dollars in millions)
 
March 31, 2020
December 31, 2019
Commercial banks
 
139

$
3,214.6

140

$
2,729.6

Savings institutions
 
53

172.7

53

148.2

Insurance companies
 
31

173.1

31

109.3

Credit unions
 
61

69.1

60

67.5

Community Development Financial Institution (CDFI)
 
2

0.4

2

0.4

Total member institutions / total GAAP capital stock
 
286

$
3,629.9

286

$
3,055.0

Mandatorily redeemable capital stock
 
 
303.4

 
343.6

Total capital stock
 
 
$
3,933.3

 
$
3,398.6


The total number of members as of March 31, 2020 remained the same compared to December 31, 2019. The Bank lost one member in the first three months of 2020 due to a merger with another institution within the Bank's district and added one new member.

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 March 31, 2020 and December 31, 2019.
(dollars in thousands)
March 31, 2020
December 31, 2019
Member (1)
Capital Stock
% of Total
Capital Stock
% of Total
PNC Bank, N.A., Wilmington, DE
$
1,068.6

27.2
%
$
746.6

22.0
%
Ally Bank, Midvale, UT
793.2

20.2

700.8

20.6

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.

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 $470 million as of March 31, 2020. The Bank's retained earnings were $1,305.9 million at March 31, 2020.

Retained earnings decreased $20.1 million to $1,305.9 million at March 31, 2020, compared to $1,326.0 million at December 31, 2019. The decrease in retained earnings during the first three months of 2020 reflected net income that was more than offset by dividends paid. Total retained earnings at March 31, 2020 included unrestricted retained earnings of $883.4 million and restricted retained earnings (RRE) of $422.5 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 2019 Form 10-K.


17


Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
(in millions)
March 31, 2020
December 31, 2019
Permanent capital:
 
 
Capital stock (1)
$
3,933.3

$
3,398.6

Retained earnings
1,305.9

1,326.0

Total permanent capital
$
5,239.2

$
4,724.6

RBC requirement:
 
 
Credit risk capital
$
322.6

$
337.9

Market risk capital
176.1

131.8

Operations risk capital
149.6

140.9

Total RBC requirement
$
648.3

$
610.6

Excess permanent capital over RBC requirement
$
4,590.9

$
4,114.0

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

The higher total RBC requirement as of March 31, 2020 is mainly related to the change in the market risk capital component. The change was primarily driven by revisions by the Finance Agency to the market risk scenario methodology which were implemented in the first quarter of 2020. Reductions in the credit risk capital charges from capital regulation changes which became effective in the first quarter of 2020 were mostly offset by the impact of higher advances and Federal funds sold. The Bank continues to maintain significant excess permanent capital over the RBC requirement.

On March 19, 2020, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2019. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended March 31, 2020.

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 2019 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 2019 Form 10-K. Certain of these policies require management to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the Bank's reported results and financial position for the period or in future periods. Management views these policies as critical accounting policies.

The Bank made no changes to its critical accounting policies during the three months ended March 31, 2020.

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.


18


Legislative and Regulatory Developments

Finance Agency Final Rule on Stress Testing. On March 24, 2020, the Finance Agency issued a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule (i) raises the minimum threshold for entities regulated by the Finance Agency to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets; (ii) removes the requirements for FHLBanks to conduct stress testing; and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the Finance Agency reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the Finance Agency’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by EGRRCPA.

This rule will eliminate these stress testing requirements for the Bank, unless the Finance Agency exercises its discretion to require stress testing in the future. The Bank does not expect this rule to have a material effect on its financial condition or results of operations. The results of the Bank’s most recent annual severely adverse economic conditions stress test were published to the Bank's public website on November 15, 2019.

Finance Agency Supervisory Letter - Planning for LIBOR Phase-Out. On September 27, 2019, the Finance Agency issued a Supervisory Letter (Supervisory Letter) to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provided that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directed the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020 in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The Bank has ceased purchasing investments that reference LIBOR and mature after December 31, 2021.

As a result of the recent market volatility triggered in part by the COVID-19 pandemic, the FHLBanks’ authority to enter into LIBOR-based instruments that mature after December 31, 2021 has been extended from March 31, 2020 to June 30, 2020, except for investments and option embedded products. In addition, the requirement to update pledged collateral certification reporting requirements was extended from March 31, 2020 to September 30, 2020. The Bank does not expect the Supervisory Letter to have a material impact on the Bank’s financial condition or results of operations.

Advisory Bulletin 2020-01 FHLBank Risk Management of Acquired Member Assets (AMA). On January 31, 2020, the Finance Agency released guidance on risk management of acquired member assets. The guidance communicates the Finance Agency’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that the FHLBank serves as a liquidity source for members, and it should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance sets forth that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations. The Bank continues to evaluate the potential impact of this advisory bulletin on its financial condition and results of operations.

Legislative and Regulatory Developments Related to COVID-19 Pandemic

Finance Agency Supervisory Letter - Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On April 23, 2020, the Finance Agency issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities”, given the Small Business Administration’s (SBA) 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.

19



The Bank has reviewed the PPP Supervisory Letter and decided to accept PPP loans as collateral.  On April 30, 2020, following the Finance Agency’s issuance of the PPP Supervisory Letter, the Bank issued a member communication detailing the terms on which the Bank would accept such collateral.  The Bank does not expect the PPP Supervisory Letter to materially affect its financial condition or results of operations.

Coronavirus Aid, Relief, and Economic Security Act. The CARES Act was signed into law on March 27, 2020. The $2.2 trillion package is the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:

assistance to businesses, states, and municipalities;
creates a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives;
provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act;
direct payments to eligible taxpayers and their families;
expands eligibility for unemployment insurance and payment amounts; and
includes mortgage forbearance provisions and a foreclosure moratorium.

Funding for the PPP, which was created by the CARES Act, was increased on April 24, 2020 with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act.  Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. The Bank is evaluating the potential impact of the CARES Act on its business, including its impact to the U.S. economy, which is unknown; impacts to mortgages held or serviced by the Bank’s members and that the Bank accepts as collateral; and impacts on the Bank's MPF program.

Additional COVID-19 Legislative and Regulatory Developments. In light of the COVID-19 pandemic, governmental agencies, including the Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Association, Commodity Futures Trading Commission and the Finance Agency, as well as state governments and agencies, have taken actions to provide various forms of relief from and guidance regarding the financial, operational, credit, market and other effects of the pandemic, some of which may have a direct or indirect impact on the Bank and/or its members. Many of these actions are temporary in nature. The Bank is monitoring these actions and guidance and evaluating their potential impact on 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, business risk and various forms of operational and technology risk, in accordance with Finance Agency regulations and consistent with the Bank’s risk appetite. The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.

Risk Governance

The Bank’s lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include, market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operational and business risks. These include risks such as use and reliance on models and end-user computing tools, technology and information security risk, among others. 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 2019 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 2019 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

20


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 131.1% at March 31, 2020 and 145.1% at December 31, 2019. The decrease was primarily due to the severe widening of agency term debt and mortgage asset spreads resulting from the economic and financial disruption brought upon by the COVID-19 pandemic along with the increase in capital stock as a result of higher 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. During the first quarter of 2020, there were no significant changes to the Bank's market risk models. However, as the COVID-19 pandemic and associated economic impact continues to evolve, including actions taken by governmental authorities, the performance of the Bank's models used to measure market risk will likely be affected. Management will consider the potential impact of the pandemic on key market risk measures and may make changes as deemed appropriate in future periods.

The Bank regularly validates the models used to measure market risk. Such model validations are performed by the Bank's model risk management department, which is separate from the model owner. These model validations may include third-party specialists when appropriate. The model validations are supplemented by performance monitoring by the model owner which is reported to the Bank's model risk management department. In addition, the Bank benchmarks model-derived fair values to those provided by third-party services or alternative internal valuation models. The benchmarking analysis is performed by a group that is separate from the model owner. Results of the model validations and benchmarking analysis, as well as any changes to the valuation methodologies and inputs, are reported to the Bank's Asset and Liability Committee (ALCO) (or subcommittee of), which is responsible for overseeing market risk.

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

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

The following table presents the Bank's duration of equity exposure at March 31, 2020 and December 31, 2019. 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. In addition, the Bank temporarily suspended the "Down 100 basis points" metric as of March 31, 2020.
(in years)
Down 100 basis points
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual Duration of Equity:
 
 
 
 
March 31, 2020
(1.2)
(0.1)
1.4
December 31, 2019
0.1
0.1
1.3
2.3


21


Duration of equity changes in the first three months of 2020 were mainly the result of the significant decline in interest rates and issuance of term funding. 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 the current 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 the projected Federal funds rate. Management converted the benchmark index from 3-month LIBOR to the Federal funds rate during the first quarter of 2020. The change in benchmark, which was driven by the planned discontinuation of LIBOR as a published rate, had no impact on the reported results given the nature of the shocks employed and the short-term nature of both rates.

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 the projected Federal funds rate. 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 points longer term rate shock" as an additional non-parallel rate scenario that reflects a decline in longer-term rates.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term
Rate Shock
Down 100 bps Parallel Shock
100 bps Steeper
100 bps Flatter
Up 200 bps
Parallel Shock
March 31, 2020
20
(23)
(31)
75
146
December 31, 2019
(22)
22
53
(9)
(18)

Changes in ROE spread volatility in the first three months of 2020 primarily reflect the impact of significantly lower interest rates and issuance of term funding. For each scenario, the Board's limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at March 31, 2020 and December 31, 2019.

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.


22


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

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure (TCE) to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. At March 31, 2020, aggregate TCE was $96.7 billion, comprised of approximately $77.6 billion in advance principal outstanding, $18.6 billion in letters of credit (including forward commitments), $29.5 million in advance commitments, and $434.5 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 2019 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position. At March 31, 2020 and December 31, 2019, 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 Bank's 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.


23


The following table presents the Bank’s top five financial entities with respect to their TCE at March 31, 2020.
 
March 31, 2020
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
23,515.4

24.3
%
Ally Bank, UT (2)
18,799.2

19.4

TD Bank, National Association, DE
11,674.1

12.1

Santander Bank, National Association, DE (3)
9,074.7

9.4

JP Morgan Chase Bank, N.A., OH (4)
7,006.1

7.2

 
70,069.5

72.4

Other financial institutions
26,636.8

27.6

Total TCE outstanding
$
96,706.3

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.
(4) In 2019, the Bank's member Chase Bank USA, N.A. merged into JP Morgan Chase Bank, N.A., a non-member of the Bank, with a principal place of business in Columbus, OH.

Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of March 31, 2020.
 
March 31, 2020
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
23,490.0

30.3
%
Ally Bank, UT (2)
18,760.0

24.2

Santander Bank, National Association, DE (3)
8,435.0

10.9

JP Morgan Chase Bank, N.A., OH (4)
7,000.0

9.0

First National Bank of Pennsylvania, PA
2,985.0

3.8

 
60,670.0

78.2

Other borrowers
16,937.3

21.8

Total advances
$
77,607.3

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.
(4) In 2019, the Bank's member Chase Bank USA, N.A. merged into JP Morgan Chase Bank, N.A., a non-member of the Bank, with a principal place of business in Columbus, OH.

The average year-to-date March 31, 2020 balances for the five largest borrowers totaled $59.3 billion, or 75.6% 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 letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances. Outstanding letters of credit totaled $17.4 billion at both March 31, 2020 and December 31, 2019, primarily related to public unit deposits. Available master standby letters of credit of $1.1 billion and $1.4 billion at March 31, 2020 and December 31, 2019, respectively, are not included in these totals. The Bank had a concentration of letters of credit with one member (TD Bank) of $10.8 billion or 62% of the total at March 31, 2020 and $9.8 billion or 56% of the total at December 31, 2019.

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 2019 Form 10-K for additional information related to the Bank’s Collateral Policy.


24


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 2019 Form 10-K.

During 2020, the Bank communicated several key Collateral Policy changes and clarifications in response to the impact of the COVID-19 pandemic. These updates were intended to relax certain requirements related to expanded collateral and provide greater flexibility in the current economic environment.  The Bank now recognizes the following as eligible collateral:

Loans that are past due up to 89 days and that are not on nonaccrual.
Performing TDRs. This includes loans considered to be TDRs that are performing to agreed-upon terms after a prudent forbearance period.
Loans with a forbearance period up to 12 months for all eligible loan types.
PPP loans guaranteed by the SBA in accordance with the Finance Agency supervisory standards.

Consistent with previous policy stipulations, 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 daily ratings reviews. Reported amount also includes pledged cash deposits with the Bank.

For member borrowers, the following tables present information on a combined basis regarding the type of collateral securing their outstanding credit exposure and the collateral status as of March 31, 2020 and December 31, 2019.
 
March 31, 2020
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single-family residential
  mortgage loans
$
93,761.7

44.1
%
$
5,483.5

61.1
%
$
8,225.0

79.4
%
$
107,470.2

46.4
%
High quality investment securities
4,783.8

2.3

3,387.7

37.7

1,954.1

18.9

10,125.6

4.4

ORERC/CFI eligible collateral
93,413.0

44.0

99.8

1.1

171.2

1.7

93,684.0

40.4

Multi-family residential mortgage
  loans
20,409.6

9.6

6.3

0.1

1.5


20,417.4

8.8

Total eligible collateral value
$
212,368.1

100.0
%
$
8,977.3

100.0
%
$
10,351.8

100.0
%
$
231,697.2

100.0
%
Total TCE
$
85,638.0

88.6
%
$
3,099.4

3.2
%
$
7,968.9

8.2
%
$
96,706.3

100.0
%
Number of members
179

84.0
%
17

8.0
%
17

8.0
%
213

100.0
%

25


 
December 31, 2019
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single-family residential
  mortgage loans
$
90,403.5

43.8
%
$
5,658.5

81.2
%
$
9,267.4

87.8
%
$
105,329.4

47.1
%
High quality investment securities
4,452.4

2.2

1,306.4

18.8

1,265.6

12.0

7,024.4

3.1

ORERC/CFI eligible collateral
91,434.3

44.3



20.2

0.2

91,454.5

40.9

Multi-family residential mortgage
  loans
19,956.5

9.7



0.1


19,956.6

8.9

Total eligible collateral value
$
206,246.7

100.0
%
$
6,964.9

100.0
%
$
10,553.3

100.0
%
$
223,764.9

100.0
%
Total TCE
$
74,267.6

87.7
%
$
1,494.0

1.8
%
$
8,922.5

10.5
%
$
84,684.1

100.0
%
Number of members
179

88.2
%
10

4.9
%
14

6.9
%
203

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

Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of March 31, 2020 and December 31, 2019, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
 
March 31, 2020(1)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Unrated
Total
Money market investments:
 
 
 
 
 
 
 
  Interest-bearing deposits
$

$

$
1,508.4

$

$

$

$
1,508.4

  Federal funds sold

2,300.0

6,650.0

650.0



9,600.0

Total money market investments

2,300.0

8,158.4

650.0



11,108.4

Investment securities:
 
 
 
 
 
 
 
  U.S. Treasury obligations

3,479.4





3,479.4

  GSE and TVA obligations

1,869.7





1,869.7

  State or local agency obligations
25.5

317.3





342.8

Total non-MBS
25.5

5,666.4





5,691.9

  U.S. obligations single-family MBS

973.6





973.6

  GSE single-family MBS

5,228.5





5,228.5

  GSE multifamily MBS

4,497.0





4,497.0

  Private label MBS

18.8

25.4

33.7

129.0

188.5

395.4

Total MBS

10,717.9

25.4

33.7

129.0

188.5

11,094.5

Total investments
$
25.5

$
18,684.3

$
8,183.8

$
683.7

$
129.0

$
188.5

$
27,894.8


26


 
December 31, 2019 (1)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Unrated
Total
Money market investments:
 
 
 
 
 
 
 
  Interest-bearing deposits
$

$

$
1,471.7

$

$

$

$
1,471.7

  Securities purchased under agreements to resell
600.0


1,000.0

600.0



2,200.0

  Federal funds sold

800.0

2,820.0

150.0



3,770.0

Total money market investments
600.0

800.0

5,291.7

750.0



7,441.7

Investment securities:
 
 
 
 
 
 
 
  U.S. Treasury obligations

3,390.7





3,390.7

  GSE and TVA obligations

1,791.6





1,791.6

  State or local agency obligations
25.6

316.6





342.2

Total non-MBS
25.6

5,498.9





5,524.5

  U.S. obligations single-family MBS

1,057.8





1,057.8

  GSE single-family MBS

5,212.4





5,212.4

  GSE multifamily MBS

4,880.4





4,880.4

  Private label MBS

20.1

27.8

36.3

152.1

213.7

450.0

Total MBS

11,170.7

27.8

36.3

152.1

213.7

11,600.6

Total investments
$
625.6

$
17,469.6

$
5,319.5

$
786.3

$
152.1

$
213.7

$
24,566.8

Notes:
(1) Balances exclude total accrued interest of $44.5 million and $46.7 million for March 31, 2020 and December 31, 2019, respectively.

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 NRSRO analysis. 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 March 31, 2020, the Bank had unsecured exposure to 21 counterparties totaling $11.1 billion, with one counterparty exceeding 10% of the total exposure. The following table presents the Bank's unsecured credit exposure with non-governmental counterparties by investment type at March 31, 2020 and December 31, 2019. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
 
 
Carrying Value (1)
March 31, 2020
December 31, 2019
Interest-bearing deposits
$
1,508.4

$
1,471.7

Federal funds sold
9,600.0

3,770.0

Total
$
11,108.4

$
5,241.7

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

27



As of March 31, 2020, 60% 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 March 31, 2020, the Bank was in compliance with the regulatory limits established for unsecured credit.

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

The following table presents the long-term credit ratings of the unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's immediate parent for U.S. subsidiaries or branches and agency offices of foreign commercial banks based on the NRSROs used. This table does not reflect the foreign sovereign government's credit rating.
(in millions)
 
 
 
 
March 31, 2020 (1) (2)
 
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
AA
A
BBB
Total
Domestic
$

$
3,758.4

$
650.0

$
4,408.4

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

  Australia
1,250.0



1,250.0

  Canada
500.0

1,300.0


1,800.0

  Finland
250.0



250.0

  France

1,000.0


1,000.0

  Germany

500.0


500.0

  Netherlands

800.0


800.0

  Norway
300.0



300.0

  Switzerland

800.0


800.0

  Total U.S. branches and agency offices of foreign commercial banks
2,300.0

4,400.0


6,700.0

Total unsecured investment credit exposure
$
2,300.0

$
8,158.4

$
650.0

$
11,108.4


28


(in millions)
 
 
 
 
December 31, 2019 (1) (2)
 
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
AA
A
BBB
Total
Domestic
$

$
1,471.7

$
150.0

$
1,621.7

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
  Australia
500.0



500.0

  Canada

1,270.0


1,270.0

  Finland
300.0



300.0

  Netherlands

750.0


750.0

  Norway

100.0


100.0

  Switzerland

700.0


700.0

  Total U.S. branches and agency offices of foreign commercial banks
800.0

2,820.0


3,620.0

Total unsecured investment credit exposure
$
800.0

$
4,291.7

$
150.0

$
5,241.7

Notes:
(1) Ratings are as of the respective dates.
(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 March 31, 2020 or December 31, 2019.

At March 31, 2020 and December 31, 2019, all of the unsecured investments held by the Bank had overnight maturities.

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 $3.5 billion and $3.4 billion at March 31, 2020 and December 31, 2019, respectively.

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 $12.6 billion at March 31, 2020 and $12.9 billion at December 31, 2019.

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 $342.8 million and $342.2 million at March 31, 2020 and December 31, 2019, 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, which was rated AA at the time of purchase. However, since the time of purchase, there have been significant downgrades. In 2007, the Bank discontinued the purchase of private label MBS. The carrying value of the Bank’s private label MBS portfolio at March 31, 2020 was $395.4 million, which was a decrease of $54.6 million from December 31, 2019. This decline was primarily due to repayments.

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.


29


Credit Losses. The Bank evaluates its private label MBS for expected credit losses quarterly, based on whether there is an expectation of a shortfall in receiving all cash flows contractually due. Beginning January 1, 2020, with the adoption of ASU 2016-13, for private label MBS for which the Bank expects a shortfall, an ACL is recorded, limited to the amount of a security's unrealized loss, if any. If the security is in an unrealized gain position, the ACL is zero. Prior to January 1, 2020, credit losses were recorded through OTTI as a direct write-down of the security's amortized cost.

The Bank's provision for credit losses on its private label MBS was $2.8 million for the three months ended March 31, 2020. The Bank recorded an insignificant amount of credit-related OTTI charges in earnings during the three months ended March 31, 2019. 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 securities with recorded credit losses before anticipated recovery of their amortized cost basis, the Bank did not write down any of its private label MBS securities amortized cost basis for the difference between amortized cost and fair value. The Bank has not recorded credit losses 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. To assess for expected credit losses, the Bank evaluates the projected cash flows to determine whether there is an expected shortfall in receiving all cash flows contractually due. The Bank uses a third-party model which incorporates various assumptions, such as expected housing price changes and interest rates among others, to produce cash flows that represent the Bank's best estimate of cash flows expected to be collected during the life of the securities.

The Bank’s life-to-date credit losse