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, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
(Exact name of registrant as specified in its charter)
Federally Chartered Corporation | 25-6001324 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
601 Grant Street Pittsburgh, PA 15219 (Address of principal executive offices) | 15219 (Zip Code) |
(412) 288-3400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x]Yes []No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes [] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer | o Accelerated filer | |
x Non-accelerated filer | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [] Yes [x] No
There were 27,999,854 shares of common stock with a par value of $100 per share outstanding at April 30, 2014.
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 |
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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, changes in real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; risks related to mortgage-backed securities (MBS); changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and Capital Plan adjustments and amendments; technology risks; and timing and volume of market activity. This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Bank's unaudited interim financial statements and notes and Risk Factors included in Part II, Item 1A of this Form 10-Q, as well as the Bank's 2013 Form 10-K (2013 Form 10-K), including Risk Factors included in Item 1A of that report.
Executive Summary
Overview. In the first quarter of 2014, some impediments to growth in the U.S. economy persisted as the labor market and businesses reacted cautiously due to their concerns surrounding the political debate over the U.S. government’s funding and the U.S. Treasury debt limits. In early February, the debt ceiling crisis was once again averted before the impending deadline. Economic data such as non-farm payrolls, fourth quarter 2013 GDP, and housing starts came in below expectations, with much of the blame being placed on the excessively cold winter in the U.S.
The Bank's financial condition and results of operations are influenced by the interest rate environment, global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets. Although the period-end balance for advances was down from year-end, during the first quarter of 2014 the Bank's average advance portfolio increased 30% from first quarter 2013, while net income rose to $79.9 million, compared with $28.6 million in the first quarter of 2013. The increase in net income includes $36.6 million, which is net of legal fees and expenses, from the settlement of claims against certain defendants arising from investments the Bank made in private label MBS. In February and April 2014, the Bank declared quarterly dividends of 2.5% and 4.0% on an annualized basis, respectively. The Bank continues to repurchase excess capital stock monthly.
Interest Rate Environment. During the first quarter of 2014, the debt markets stabilized compared to fourth quarter of 2013 as market participants began to incorporate the impacts of reduced Federal Reserve purchasing as well as a negotiated federal budget deal. The Federal Open Market Committee (FOMC) continued to link future monetary policy tightening to threshold levels on unemployment and inflation but also indicated that it will move away from them and toward an approach of assessing the realized and expected progress in meeting these thresholds. The market's reaction resulted in a rise in interest rates across the yield curve. The Federal Reserve also continued tapering its monthly purchase of Agency mortgage-backed securities and longer-term U.S. Treasuries (i.e., quantitative easing) and is expected to conclude the program later in 2014. The increases in interest rates impacted the Bank's risk measures (i.e., duration of equity, earned dividend spread (EDS), and market
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value of equity to par value of capital stock (MV/CS)) which is discussed further in the "Risk Management" section of this Form 10-Q.
The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. The Bank expects its near-term ability to generate significant earnings on short-term investments will be limited in light of the Federal Reserve announcement regarding the Federal funds rate noted below. 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.
With ample liquidity available in the domestic banking system, the effective rate on Federal funds remained in a narrow range and averaged approximately 7 basis points during the first quarter of 2014. If the Federal funds effective rate remains in this expected lower range, the Bank's earnings on capital which are invested in short-term assets will continue to be low. The Federal Reserve anticipates the target range for the Federal funds rate to remain at zero to 25 basis points for a considerable time after its asset purchase program ends later in 2014 and that economic conditions are likely to warrant exceptionally low levels for the Federal funds rate at least through mid-2015.
The following table presents key market interest rates.
1st Quarter 2014 Average | 4th Quarter 2013 Average | 1st Quarter 2013 Average | |||||
Federal funds effective rate | 0.07% | 0.08% | 0.14% | ||||
3-month LIBOR | 0.24% | 0.24% | 0.29% | ||||
2-year U.S. Treasury | 0.36% | 0.32% | 0.26% | ||||
5-year U.S. Treasury | 1.59% | 1.43% | 0.81% | ||||
10-year U.S. Treasury | 2.76% | 2.73% | 1.93% | ||||
15-year mortgage current coupon (1) | 2.51% | 2.49% | 1.84% | ||||
30-year mortgage current coupon (1) | 3.45% | 3.41% | 2.57% |
Notes:
(1) Simple average of Fannie Mae and Freddie Mac MBS current coupon rates.
Interest Rates and Yield Curve Shifts. 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. During the first quarter of 2014, the yield curve remained steep with average short-term U.S. Treasury rates decreasing slightly and the average 10-year Treasury rate increasing. As of March 31, 2014 the spread between average 2-year and 10-year U.S. Treasuries decreased one basis point compared to the prior quarter and remained relatively wide at 240 basis points. In the first quarter of 2014, average 3-month LIBOR remained unchanged from the previous quarter, while 3-month U.S. Treasury bills decreased 3.5 basis points.
Mortgage application and refinancing activities decreased during the first quarter of 2014 as compared to the same prior year period. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. The Bank continues to adjust its prepayment estimates in its models to better reflect actual borrower activity in this extended period of historically low rates. In addition, when higher coupon mortgage loans prepay, the unscheduled return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining loan portfolio and a possible decrease in the net interest margin.
The Federal Housing Finance Agency (Finance Agency), along with Fannie Mae and Freddie Mac, continue to support the Home Affordable Refinance Program (HARP) in an effort to assist more eligible borrowers who can benefit from refinancing their home mortgage. The Finance Agency has directed Fannie Mae and Freddie Mac to extend HARP through December 31, 2015. Other federal agencies have implemented other programs in recent years to prevent foreclosure (including the Home Affordable Modification Program and the Principal Reduction Alternative). In addition, for borrowers meeting certain criteria, the Bank offers a loan modification program for its Mortgage Partnership Finance® (MPF®) Program. The Bank does not
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expect the HARP changes, the Bank's MPF loan modification program, or existing foreclosure prevention programs to have a significant impact on the Bank's mortgage portfolios. However, program execution and related changes, as well as any additional new programs at the local, state, or federal level, including new principal reduction programs or local or state use of eminent domain power, may alter this perspective.
The volatility of yield curve shifts may also have an effect on the Bank's duration of equity and the cost of maintaining duration within limits. Volatility in interest rates may cause management to take action to maintain compliance with these limits, even though a subsequent, sudden reversal in rates may make such hedges unnecessary. Volatility in interest rate levels and the shape of the yield curve may increase the cost of compliance with the Bank's duration limits. In the past few years, the typical cash flow variability of mortgage assets has become less pronounced. If this trend continues, the duration of assets could be extended and the cost to fund these assets could increase.
Housing Trends. During the first quarter of 2014, the housing market momentum continued but was affected by the combination of higher mortgage rates, low inventories and unfavorable weather conditions impacting sales and building activity. Home price appreciation remained strong in the first quarter, but it is expected to transition to a slower, more sustainable pace as the year progresses.
Results of Operations. During the first quarter of 2014, the Bank recorded net income of $79.9 million, up $51.3 million from $28.6 million in the first quarter of 2013. This increase includes $36.6 million from the settlement of claims against certain defendants arising from investments the Bank made in private label MBS and is net of legal fees and expenses. The additional increase in net income was driven primarily by higher net interest income.
Net Interest Income. Net interest income for the first quarter of 2014 was $62.3 million, up $16.9 million compared to $45.4 million for the first quarter of 2013. The increase in net interest income was primarily due to lower interest expense on consolidated obligation bonds. The provision (benefit) for credit losses was $(3.9) million for the first quarter of 2014 compared to $(0.1) million in the same period in 2013 due to a decrease in delinquencies, overall improvement in the housing market and a refinement of the allowance estimate methodology. The net interest margin for the first quarter of 2014 was 37 basis points compared to 31 basis points in the first quarter of 2013. The six basis point improvement was due primarily to lower funding costs on bonds.
Financial Condition. Advances. Advances totaled $46.1 billion at March 31, 2014 down from $50.2 billion at December 31, 2013, which included short-term advance demand from large members that was paid down or partially refinanced in the first quarter. As the size of the advance portfolio decreased during the first three months of 2014, the average life of an advance has increased. At March 31, 2014, approximately 66% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 55% at December 31, 2013.
The ability to grow and/or maintain the advance portfolio is affected by, among other things: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) advance pricing; (4) current and future credit market conditions; (5) housing market trends; and (6) the shape of the yield curve.
Investments. At March 31, 2014, the Bank held $14.0 billion of total investments, including trading, available-for-sale (AFS) and held-to-maturity (HTM) investment securities, as well as interest-bearing deposits and Federal funds sold. These investments totaled $13.9 billion at December 31, 2013. In terms of the Bank's private label MBS portfolio, the Bank has experienced overall improvement in the fair value of these investments since the low point at the end of 2008. Prices can change for many reasons, and the Bank is unable to predict future prices on these investments. The balance of the private label MBS continues to decline due to paydowns; the Bank has not purchased any new private label MBS since 2007.
Consolidated Obligations of the FHLBank System. During the first quarter of 2014, the FHLBanks continued to maintain sufficient access to funding. As the market gained more clarity on Federal Reserve tapering and the debt ceiling expiration was avoided, interest rates settled into a range. In addition, with the start of a new year, dealer balance sheets seemed more readily available to position FHLBank System debt. The combination of these factors contributed to a $29 billion increase in FHLBank System bond trading volume in the first quarter of 2014 when compared to the fourth quarter 2013. On a weighted average basis, when compared to 3-month LIBOR, FHLBank System weighted average quarterly swapped bond funding costs improved by four basis points from fourth quarter 2013. In addition, during the first quarter of 2014, consolidated obligations outstanding decreased by $13 billion with a $26 billion decline in discount notes partially offset by a $13 billion increase in bonds outstanding.
The Bank's consolidated obligations totaled $59.8 billion at March 31, 2014, a decrease of $6.1 billion from December 31, 2013. This decrease in consolidated obligations was due to a $6.3 billion decrease in discount notes. The decrease in discount
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notes was primarily due to a decline in short-term advance activity. At March 31, 2014, bonds represented 63% of the Bank's consolidated obligations, compared with 57% at December 31, 2013. Discount notes represented 37% of the Bank's consolidated obligations at March 31, 2014 compared with 43% at year-end 2013.
Capital Position and Regulatory Requirements. Total retained earnings at March 31, 2014 were $748.8 million, up from $685.7 million at December 31, 2013 reflecting the Bank's net income for the first three months of 2014 partially offset by dividends paid. Total accumulated other comprehensive income (AOCI) was $70.3 million at March 31, 2014, an increase of $26.0 million from December 31, 2013. This improvement was primarily due to a decrease in net unrealized losses on Agency securities in the AFS portfolio.
In the Finance Agency's most recent determination, as of December 31, 2013 the Bank was deemed "adequately capitalized." As provided for under the Finance Agency's final rule on FHLBank capital classification and critical capital levels, the Director of the Finance Agency has discretion to reclassify the Bank's capital classification even if the Bank meets or exceeds the regulatory requirements established. 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, 2014. The Bank exceeded its risk-based, total and leverage capital requirements at March 31, 2014, as presented in the Capital Resources section of this Item 2.
The Bank measures capital adequacy with the key risk indicator MV/CS. See the "Risk Governance" discussion in the Risk Management section of this report and the Bank's 2013 Form 10-K for additional details regarding this risk metric.
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Financial Highlights
The following financial highlights for the Condensed Statement of Condition as of December 31, 2013 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements except for the three months ended December 31, 2013 which have been derived from the Bank's 2013 Form 10-K.
Condensed Statement of Income
Three months ended | |||||||||||||||||||
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||||
(in millions, except per share data) | 2014 | 2013 | 2013 | 2013 | 2013 | ||||||||||||||
Net interest income | $ | 62.3 | $ | 60.1 | $ | 47.5 | $ | 42.1 | $ | 45.4 | |||||||||
Provision (benefit) for credit losses | (3.9) | 0.2 | (0.7 | ) | (1.2) | (0.1 | ) | ||||||||||||
Other noninterest income: | |||||||||||||||||||
Net OTTI losses, credit portion (1) | — | — | — | — | (0.4 | ) | |||||||||||||
Net gains (losses) on derivatives and hedging activities | (9.2) | 16.1 | 5.4 | 7.1 | 1.6 | ||||||||||||||
Net gains on extinguishment of debt | — | — | 9.6 | — | — | ||||||||||||||
Gains on litigation settlements, net | 36.6 | — | — | 1.5 | — | ||||||||||||||
Net gains (losses) on trading securities | 9.8 | (5.1 | ) | 0.2 | 0.1 | 0.2 | |||||||||||||
Other, net | 4.5 | 4.0 | 2.6 | 2.3 | 2.3 | ||||||||||||||
Total other noninterest income | 41.7 | 15.0 | 17.8 | 11.0 | 3.7 | ||||||||||||||
Other expense | 19.1 | 26.3 | 17.7 | 18.6 | 17.4 | ||||||||||||||
Income before assessments | 88.8 | 48.6 | 48.3 | 35.7 | 31.8 | ||||||||||||||
Affordable Housing Program (AHP) assessment (2) | 8.9 | 4.9 | 4.8 | 3.7 | 3.2 | ||||||||||||||
Net income | $ | 79.9 | $ | 43.7 | $ | 43.5 | $ | 32.0 | $ | 28.6 | |||||||||
Earnings per share (3) | $ | 2.75 | $ | 1.64 | $ | 1.61 | $ | 1.14 | $ | 1.03 |
Dividends (4) | $ | 16.8 | $ | 10.2 | $ | 7.0 | $ | 2.0 | $ | 2.2 | ||||||||||
Dividend payout ratio (5) | 21.02 | % | 23.37 | % | 16.15 | % | 6.20 | % | 7.69 | % | ||||||||||
Return on average equity | 8.76 | % | 5.11 | % | 5.11 | % | 3.65 | % | 3.39 | % | ||||||||||
Return on average assets | 0.48 | % | 0.27 | % | 0.29 | % | 0.21 | % | 0.20 | % | ||||||||||
Net interest margin (6) | 0.37 | % | 0.37 | % | 0.32 | % | 0.28 | % | 0.31 | % | ||||||||||
Regulatory capital ratio (7) | 5.32 | % | 5.16 | % | 5.10 | % | 6.23 | % | 6.30 | % | ||||||||||
Total capital ratio (at period-end) (8) | 5.42 | % | 5.22 | % | 5.17 | % | 5.89 | % | 5.81 | % | ||||||||||
Total average equity to average assets | 5.43 | % | 5.24 | % | 5.63 | % | 5.81 | % | 5.77 | % |
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(3) Calculated based on net income.
(4) The Bank paid a dividend of 2.50% annualized on February 21, 2014, 1.50% annualized on October 30, 2013, 1.00% annualized on July 30, 2013, 0.29% annualized on April 30, 2013, and 0.32% annualized on February 22, 2013.
(5) Represents dividends paid as a percentage of net income for the respective periods presented.
(6) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(7) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(8) Total capital ratio is capital stock plus retained earnings and AOCI as a percentage of total assets at period-end.
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Condensed Statement of Condition
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
(in millions) | 2014 | 2013 | 2013 | 2013 | 2013 | |||||||||||||||
Cash and due from banks | $ | 1,141.3 | $ | 3,121.3 | $ | 3,063.1 | $ | 933.1 | $ | 545.7 | ||||||||||
Investments (1) | 13,978.5 | 13,875.2 | 15,531.7 | 15,686.2 | 15,955.5 | |||||||||||||||
Advances | 46,063.9 | 50,247.5 | 39,505.9 | 40,569.6 | 39,994.0 | |||||||||||||||
Mortgage loans held for portfolio, net (2) | 3,174.3 | 3,224.1 | 3,277.7 | 3,387.5 | 3,482.8 | |||||||||||||||
Total assets | 64,555.7 | 70,670.9 | 61,562.8 | 60,753.3 | 60,136.6 | |||||||||||||||
Consolidated obligations, net: | ||||||||||||||||||||
Discount notes | 21,942.2 | 28,236.3 | 21,983.0 | 17,702.8 | 18,300.6 | |||||||||||||||
Bonds | 37,901.4 | 37,698.3 | 35,225.4 | 37,949.1 | 36,496.6 | |||||||||||||||
Total consolidated obligations, net (3) | 59,843.6 | 65,934.6 | 57,208.4 | 55,651.9 | 54,797.2 | |||||||||||||||
Deposits | 780.4 | 694.4 | 780.7 | 821.2 | 1,022.8 | |||||||||||||||
Mandatorily redeemable capital stock | 1.9 | — | — | 257.0 | 368.8 | |||||||||||||||
AHP payable | 43.9 | 36.3 | 33.4 | 29.2 | 26.2 | |||||||||||||||
Total liabilities | 61,055.2 | 66,978.7 | 58,380.2 | 57,177.4 | 56,640.1 | |||||||||||||||
Capital stock - putable | 2,681.4 | 2,962.2 | 2,487.6 | 2,913.3 | 2,832.0 | |||||||||||||||
Unrestricted retained earnings | 672.7 | 625.6 | 600.9 | 573.1 | 549.5 | |||||||||||||||
Restricted retained earnings | 76.1 | 60.1 | 51.3 | 42.7 | 36.2 | |||||||||||||||
AOCI | 70.3 | 44.3 | 42.8 | 46.8 | 78.8 | |||||||||||||||
Total capital | 3,500.5 | 3,692.2 | 3,182.6 | 3,575.9 | 3,496.5 |
Notes:
(1) Includes trading, AFS and HTM investment securities, securities purchased under agreements to resell, Federal funds sold and interest-bearing deposits.
(2) Includes allowance for credit losses of $7.3 million at March 31, 2014, $11.4 million at December 31, 2013, $11.3 million at September 30, 2013, $12.2 million at June 30, 2013 and $13.4 million at March 31, 2013.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $753.9 billion at March 31, 2014, $766.8 billion at December 31, 2013, $720.7 billion at September 30, 2013, $704.5 billion at June 30, 2014, and $666.0 billion at March 31, 2013.
Earnings Performance
The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2014 and 2013, 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 2013 Form 10-K.
Summary of Financial Results
Net Income and Return on Average Equity. The Bank recorded net income of $79.9 million for the first quarter of 2014, compared to $28.6 million for the first quarter of 2013. This increase includes $36.6 million from the settlement of claims against certain defendants arising from investments the Bank made in private label MBS and is net of legal fees and expenses. The additional increase in net income was driven primarily by higher net interest income. Net interest income was $62.3 million for the first quarter of 2014 compared to $45.4 million in the first quarter of 2013, an increase of $16.9 million. This increase was primarily due to lower interest expense on consolidated obligation bonds. The Bank's return on average equity for the first quarter of 2014 was 8.76%, compared to 3.39% for the first quarter of 2013.
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Net Interest Income
The following tables summarize the yields on interest-earning assets, rates paid on interest-bearing liabilities, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three months ended March 31, 2014 and 2013.
Average Balances and Interest Yields/Rates Paid
Three months ended March 31, | |||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||
(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) | $ | 5,664.9 | $ | 0.6 | 0.05 | $ | 6,535.8 | $ | 2.0 | 0.13 | |||||||||||
Interest-bearing deposits (2) | 504.6 | 0.1 | 0.07 | 341.2 | 0.1 | 0.14 | |||||||||||||||
Investment securities (3) | 10,769.0 | 54.7 | 2.06 | 11,841.4 | 55.9 | 1.91 | |||||||||||||||
Advances (4) | 47,319.7 | 63.1 | 0.54 | 36,379.5 | 57.5 | 0.64 | |||||||||||||||
Mortgage loans held for portfolio (5) | 3,206.5 | 33.4 | 4.22 | 3,530.3 | 37.6 | 4.32 | |||||||||||||||
Total interest-earning assets | 67,464.7 | 151.9 | 0.91 | 58,628.2 | 153.1 | 1.06 | |||||||||||||||
Allowance for credit losses | (13.4 | ) | (16.4 | ) | |||||||||||||||||
Other assets (6) | 633.8 | 685.1 | |||||||||||||||||||
Total assets | $ | 68,085.1 | $ | 59,296.9 | |||||||||||||||||
Liabilities and capital: | |||||||||||||||||||||
Deposits (2) | $ | 729.7 | $ | 0.1 | 0.03 | $ | 1,015.4 | $ | 0.1 | 0.05 | |||||||||||
Consolidated obligation discount notes | 25,534.7 | 6.0 | 0.10 | 17,581.9 | 5.2 | 0.12 | |||||||||||||||
Consolidated obligation bonds (7) | 37,207.3 | 83.5 | 0.91 | 35,877.2 | 102.1 | 1.15 | |||||||||||||||
Other borrowings | 6.1 | — | 1.08 | 410.5 | 0.3 | 0.29 | |||||||||||||||
Total interest-bearing liabilities | 63,477.8 | 89.6 | 0.57 | 54,885.0 | 107.7 | 0.80 | |||||||||||||||
Other liabilities | 907.2 | 990.8 | |||||||||||||||||||
Total capital | 3,700.1 | 3,421.1 | |||||||||||||||||||
Total liabilities and capital | $ | 68,085.1 | $ | 59,296.9 | |||||||||||||||||
Net interest spread | 0.34 | 0.26 | |||||||||||||||||||
Impact of noninterest-bearing funds | 0.03 | 0.05 | |||||||||||||||||||
Net interest income/net interest margin | $ | 62.3 | 0.37 | $ | 45.4 | 0.31 |
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 Statement of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.5 billion and $0.8 billion in 2014 and 2013, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The non-credit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $(44.2) million and $186.2 million in 2014 and 2013, respectively.
Net interest income for the first quarter of 2014 increased $16.9 million from the first quarter of 2013 primarily due to lower interest expense. The rate paid on interest-bearing liabilities declined 23 basis points due to lower funding costs on bonds primarily due to an increase in the level of discount notes relative to the total debt portfolio. Interest earning assets increased 15% with higher demand for advances being partially offset by lower purchases of investments and mortgage loans. Lower interest income on investments and mortgage loans held for portfolio was mostly offset by higher interest income on advances. Interest income on advances increased as advance volume more than offset a decline in yield. Interest income on investment securities declined due to lower volume while interest income on mortgage loans declined due to both lower volume and the run-off of higher-yielding assets that have been replaced with lower-yielding assets.
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Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three months ended March 31, 2014 and 2013.
Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume | ||||||||||||
2014 compared to 2013 | ||||||||||||
(in millions) | Volume | Rate | Total | |||||||||
Federal funds sold | $ | (0.3 | ) | $ | (1.1 | ) | $ | (1.4 | ) | |||
Investment securities | (5.3 | ) | 4.1 | (1.2 | ) | |||||||
Advances | 15.5 | (9.9 | ) | 5.6 | ||||||||
Mortgage loans held for portfolio | (3.3 | ) | (0.9 | ) | (4.2 | ) | ||||||
Total interest-earning assets | $ | 6.6 | $ | (7.8 | ) | $ | (1.2 | ) | ||||
Consolidated obligation discount notes | 2.0 | (1.2 | ) | 0.8 | ||||||||
Consolidated obligation bonds | 3.6 | (22.2 | ) | (18.6 | ) | |||||||
Other borrowings | (0.5 | ) | 0.2 | (0.3 | ) | |||||||
Total interest-bearing liabilities | $ | 5.1 | $ | (23.2 | ) | $ | (18.1 | ) | ||||
Total increase (decrease) in net interest income | $ | 1.5 | $ | 15.4 | $ | 16.9 |
Due primarily to rate declines partially offset by volume increases, interest income and interest expense decreased in the first quarter of 2014 compared to the first quarter of 2013. There was a small decline in interest income while the larger decrease in interest expense was primarily related to a decrease in rates paid on consolidated obligation bonds. Since first quarter of 2013, high cost debt of approximately $1.5 billion of consolidation obligations with a weighted average yield of 4.8% has matured.
Average investment balances decreased year-over-year. The decline was driven by lower MBS, certificates of deposit and U.S. Treasury bill balances partially offset by increases in Agency notes. MBS balances decreased as Agency MBS balances decreased as the run-off of the existing portfolio exceeded purchases and the private label MBS portfolio continues its planned run-off; there have not been any purchases of private label MBS since late 2007. The rate increase was primarily related to the reduced levels of lower-yielding certificates of deposit and U.S. Treasury bills in the portfolio.
The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2014 and 2013. These balances do not reflect any hedge accounting adjustments.
(in millions) | Three months ended March 31, | ||||||||
Product | 2014 | 2013 | |||||||
Repo/Mid-Term Repo | $ | 16,506.3 | $ | 13,183.4 | |||||
Core (Term) | 28,127.3 | 19,930.9 | |||||||
Convertible Select | 2,150.0 | 2,467.1 | |||||||
Total par value | $ | 46,783.6 | $ | 35,581.4 |
The increase in advance volume led to an increase in interest income; however, that was partially offset by a decrease in the yield. Attractive advance rates and members' liquidity needs contributed to the increase in advance balances. The yield on this portfolio declined in the first quarter of 2014 compared to the first quarter of 2013 as the first quarter 2014 portfolio was comprised of more short-term and variable rate advances with relatively lower yields.
The average mortgage loans held for portfolio balance declined in the first quarter of 2014 compared to the first quarter of 2013 due to the continued run-off of the MPF Plus portfolio as the Bank has not purchased loans into this portion of the portfolio since July 2006, which more than offset purchases of new loans into the MPF Original portion of the portfolio. Interest income decreased due to the lower average portfolio balances and a lower yield on the remaining portfolio. The yield decrease was primarily due to new lower yielding mortgage loans replacing the run-off of higher yielding loans.
The average consolidated obligations portfolio balance increased in the first quarter of 2014 compared to the first quarter of 2013 as average discount note and bond balances both increased. However, interest expense on bonds declined due to a decrease in rates paid, which more than offset the volume increase. The rate decrease was primarily due to longer term debt that
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was called or matured and then replaced with lower cost bonds. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore, as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.
During the first quarter of 2014, short-term funding spreads were relatively stable. However, long-term funding spreads improved considerably as the unfavorable market conditions present during much of 2013 began to recede.
Interest Income Derivative Effects. The following tables separately quantify the effects of the Bank's derivative activities on its interest income and interest expense for the three months ended March 31, 2014 and 2013. Derivative and hedging activities are discussed below.
Three Months Ended March 31, 2014 (dollars in millions) | Average Balance | Interest Inc./ Exp. with Derivatives | Avg. Yield/ Rate (%) | Interest Inc./ Exp. without Derivatives | Avg. Yield/ Rate (%) | Impact of Derivatives(1) | Incr./ (Decr.) (%) | ||||||||||||||||||
Assets: | |||||||||||||||||||||||||
Advances | $ | 47,319.7 | $ | 63.1 | 0.54 | $ | 127.1 | 1.09 | $ | (64.0 | ) | (0.55 | ) | ||||||||||||
Mortgage loans held for portfolio | 3,206.5 | 33.4 | 4.22 | 34.1 | 4.30 | (0.7 | ) | (0.08 | ) | ||||||||||||||||
All other interest-earning assets | 16,938.5 | 55.4 | 1.33 | 58.0 | 1.39 | (2.6 | ) | (0.06 | ) | ||||||||||||||||
Total interest-earning assets | $ | 67,464.7 | $ | 151.9 | 0.91 | $ | 219.2 | 1.32 | $ | (67.3 | ) | (0.41 | ) | ||||||||||||
Liabilities: | |||||||||||||||||||||||||
Consolidated obligation bonds | $ | 37,207.3 | $ | 83.5 | 0.91 | $ | 145.7 | 1.59 | $ | (62.2 | ) | (0.68 | ) | ||||||||||||
All other interest-bearing liabilities | 26,270.5 | 6.1 | 0.09 | 6.1 | 0.09 | — | — | ||||||||||||||||||
Total interest-bearing liabilities | $ | 63,477.8 | $ | 89.6 | 0.57 | $ | 151.8 | 0.97 | $ | (62.2 | ) | (0.40 | ) | ||||||||||||
Net interest income/net interest spread | $ | 62.3 | 0.34 | $ | 67.4 | 0.35 | $ | (5.1 | ) | (0.01 | ) |
Three Months Ended March 31, 2013 (dollars in millions) | Average Balance | Interest Inc./ Exp. with Derivatives | Avg. Yield/ Rate (%) | Interest Inc./ Exp. without Derivatives | Avg. Yield/ Rate (%) | Impact of Derivatives(1) | Incr./ (Decr.) (%) | |||||||||||||||||
Assets: | ||||||||||||||||||||||||
Advances | $ | 36,379.5 | $ | 57.5 | 0.64 | $ | 121.9 | 1.36 | $ | (64.4 | ) | (0.72 | ) | |||||||||||
Mortgage loans held for portfolio | 3,530.3 | 37.6 | 4.32 | 38.6 | 4.44 | (1.0 | ) | (0.12 | ) | |||||||||||||||
All other interest-earning assets | 18,718.4 | 58.0 | 1.26 | 58.0 | 1.26 | — | — | |||||||||||||||||
Total interest-earning assets | $ | 58,628.2 | $ | 153.1 | 1.06 | $ | 218.5 | 1.51 | $ | (65.4 | ) | (0.45 | ) | |||||||||||
Liabilities: | ||||||||||||||||||||||||
Consolidated obligation bonds | $ | 35,877.2 | $ | 102.1 | 1.15 | $ | 160.4 | 1.81 | $ | (58.3 | ) | (0.66 | ) | |||||||||||
All other interest-bearing liabilities | 19,007.8 | 5.6 | 0.12 | 5.6 | 0.12 | — | — | |||||||||||||||||
Total interest-bearing liabilities | $ | 54,885.0 | $ | 107.7 | 0.80 | $ | 166.0 | 1.23 | $ | (58.3 | ) | (0.43 | ) | |||||||||||
Net interest income/net interest spread | $ | 45.4 | 0.26 | $ | 52.5 | 0.28 | $ | (7.1 | ) | (0.02 | ) |
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The impact of derivatives reduced net interest income for the three months ended March 31, 2014 and 2013. The use of derivatives had comparatively little impact on the net interest spread for the same periods.
The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of investments, advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.
The Bank uses many different funding and hedging strategies. One strategy involves closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.
Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for the first quarter of 2014 was $(3.9) million compared to $(0.1) million for the same period in 2013. The benefit was primarily due to a decrease in delinquencies, overall improvement in the housing market and a change in the allowance estimation methodology as a result of the adoption of AB 2012-02 which is discussed in more detail in the Financial Condition section of this Item 2.
Other Noninterest Income
Three months ended March 31, | |||||||
(in millions) | 2014 | 2013 | |||||
Total OTTI losses | $ | — | $ | — | |||
OTTI losses reclassified (from) AOCI | — | (0.4 | ) | ||||
Net OTTI losses, credit portion | — | (0.4 | ) | ||||
Net gains on trading securities | 9.8 | 0.2 | |||||
Net gains (losses) on derivatives and hedging activities | (9.2 | ) | 1.6 | ||||
Gains on litigation settlements, net | 36.6 | — | |||||
Other, net | 4.5 | 2.3 | |||||
Total other noninterest income | $ | 41.7 | $ | 3.7 |
The Bank's higher total other noninterest income for the first quarter of 2014 compared to the same prior year period was due primarily to the settlement of claims, net of legal fees and expenses, in the first quarter of 2014 against certain defendants arising from investments the Bank made in private label MBS, as well as higher net gains on trading securities partially offset by a net loss on derivatives and hedging activities. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank's trading portfolio. The activity related to derivatives and hedging activities is discussed in more detail below.
Derivatives and Hedging Activities. The Bank enters into interest rate swaps, caps, floors and swaption agreements, referred to collectively as interest rate exchange agreements and more broadly as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives fair values are either recorded in the Statement of Income or AOCI within the Capital section of the Statement of Condition, depending on the hedging strategy.
The Bank's hedging strategies consist of fair value and cash flow accounting hedges as well as economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but they do not qualify for hedge accounting. 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
10
gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.
The following tables detail the net effect of derivatives and hedging activities for the three months ended March 31, 2014 and 2013.
Three months ended March 31, 2014 | ||||||||||||||||||||||||
(in millions) | Advances | Investments | Mortgage Loans | Bonds | Discount Notes | Total | ||||||||||||||||||
Net interest income: | ||||||||||||||||||||||||
Amortization/accretion of hedging activities in net interest income (1) | $ | (3.6 | ) | $ | — | $ | (0.7 | ) | $ | 7.7 | $ | — | $ | 3.4 | ||||||||||
Net interest settlements included in net interest income (2) | (60.4 | ) | (2.6 | ) | — | 54.5 | — | (8.5 | ) | |||||||||||||||
Total effect on net interest income | $ | (64.0 | ) | $ | (2.6 | ) | $ | (0.7 | ) | $ | 62.2 | $ | — | $ | (5.1 | ) | ||||||||
Net gains (losses) on derivatives and hedging activities: | ||||||||||||||||||||||||
Gains (losses) on fair value hedges | $ | 0.8 | $ | (0.4 | ) | $ | — | $ | 0.1 | $ | — | $ | 0.5 | |||||||||||
Gains (losses) on derivatives not receiving hedge accounting | (1.9 | ) | (22.8 | ) | (4.4 | ) | 19.1 | 0.3 | (9.7 | ) | ||||||||||||||
Total net gains (losses) on derivatives and hedging activities | $ | (1.1 | ) | $ | (23.2 | ) | $ | (4.4 | ) | $ | 19.2 | $ | 0.3 | $ | (9.2 | ) | ||||||||
Total net effect of derivatives and hedging activities | $ | (65.1 | ) | $ | (25.8 | ) | $ | (5.1 | ) | $ | 81.4 | $ | 0.3 | $ | (14.3 | ) |
Three months ended March 31, 2013 | |||||||||||||||||||
(in millions) | Advances | Investments | Mortgage Loans | Bonds | Total | ||||||||||||||
Net interest income: | |||||||||||||||||||
Amortization/accretion of hedging activities in net interest income (1) | $ | (2.5 | ) | $ | — | $ | (1.0 | ) | $ | 8.3 | $ | 4.8 | |||||||
Net interest settlements included in net interest income (2) | (61.9 | ) | — | — | 50.0 | (11.9 | ) | ||||||||||||
Total effect on net interest income | $ | (64.4 | ) | $ | — | $ | (1.0 | ) | $ | 58.3 | $ | (7.1 | ) | ||||||
Net gains (losses) on derivatives and hedging activities: | |||||||||||||||||||
Gains (losses) on fair value hedges | $ | (2.5 | ) | $ | — | $ | — | $ | 1.4 | $ | (1.1 | ) | |||||||
Gains (losses) on derivatives not receiving hedge accounting | — | 0.3 | 4.1 | (1.7 | ) | 2.7 | |||||||||||||
Total net gains (losses) on derivatives and hedging activities | $ | (2.5 | ) | $ | 0.3 | $ | 4.1 | $ | (0.3 | ) | $ | 1.6 | |||||||
Total net effect of derivatives and hedging activities | $ | (66.9 | ) | $ | 0.3 | $ | 3.1 | $ | 58.0 | $ | (5.5 | ) |
Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) Represents interest income/expense on derivatives included in net interest income.
Fair Value Hedges. The Bank uses fair value hedge accounting treatment for most of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). During the first quarter of 2014, total ineffectiveness related to these fair value hedges resulted in net gains of $0.5 million compared to net losses of $(1.1) million during the first quarter of 2013. The total notional amount increased to $25.7 billion at March 31, 2014 from $25.4 billion at December 31, 2013. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time.
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Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as “economic hedges,” the Bank includes the net interest income and the changes in the fair value of the hedges in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. For economic hedges, the Bank recorded net losses of $(9.7) million in the first quarter of 2014 compared to net gains of $2.7 million for the first quarter of 2013. The total notional amount of economic hedges was $13.3 billion at March 31, 2014 and $11.8 billion at December 31, 2013.
Other Expense
The Bank's total other expenses increased $1.7 million, to $19.1 million, for the three months ended March 31, 2014 compared to the same prior year period and reflected higher compensation and benefits primarily related to a $1.5 million voluntary contribution to the Bank's pension plan in the first quarter of 2014. The Bank's 2013 Form 10-K has additional information regarding the Bank's defined benefit pension plan, including the impact of the Moving Ahead for Progress in the 21st Century Act (MAP-21) legislation on the plan's funded status.
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 2013 Form 10-K.
Assets
Total assets were $64.6 billion at March 31, 2014, compared to $70.7 billion at December 31, 2013. The decline was primarily due to a decrease of $4.1 billion in advances and $2.0 billion in short-term liquidity balances. Short-term liquidity balances, which include cash and Federal funds sold, decreased to $4.0 billion at March 31, 2014 from $6.0 billion at December 31, 2013. The following provides additional details regarding the primary components of the Statement of Condition.
As previously noted, the Finance Agency has communicated its interest in keeping all of the FHLBanks focused on activities related to their missions, such as making advances. The Finance Agency continues to engage in dialog with the FHLBanks regarding their housing finance mission and levels of mission-related assets.
Advances. Advances (par) totaled $45.6 billion at March 31, 2014 compared to $49.7 billion at December 31, 2013. This decrease was due to a significant decline in the fixed rate product type (Repo/Mid-Term Repo and Returnables), partially offset by an increase in the adjustable/variable-rate indexed product type (Core (Term)). At March 31, 2014, the Bank had advances outstanding to 180 borrowing members, compared to 181 borrowing members at December 31, 2013. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members represented 75.3% of total advances as of March 31, 2014 compared to 77.4% at December 31, 2013.
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The following table provides information (at par excluding discounts, deferred prepayment fees, and hedging adjustments as reflected in the Statement of Condition) on advances by different product type at March 31, 2014 and December 31, 2013.
March 31, | December 31, | |||||
in millions | 2014 | 2013 | ||||
Adjustable/variable-rate indexed: | ||||||
Repo/Mid-Term Repo | $ | 7,435.0 | $ | 7,435.0 | ||
Core (Term) | 13,023.7 | 10,520.7 | ||||
Total adjustable/variable-rate indexed | $ | 20,458.7 | $ | 17,955.7 | ||
Fixed rate: | ||||||
Repo/Mid-Term Repo | $ | 12,476.0 | $ | 17,415.1 | ||
Core (Term) | 6,855.7 | 6,839.2 | ||||
Returnables | 3,500.0 | 5,000.0 | ||||
Total fixed rate | $ | 22,831.7 | $ | 29,254.3 | ||
Convertible | $ | 2,040.0 | $ | 2,255.0 | ||
Amortizing/mortgage-matched: | ||||||
Core (Term) | $ | 250.2 | $ | 249.0 | ||
Total par balance | $ | 45,580.6 | $ | 49,714.0 |
The Bank had no putable advances at March 31, 2014 or December 31, 2013.
The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding average advance balance during the three months ended March 31, 2014 and the year ended December 31, 2013.
March 31, | December 31, | |||||
Member Asset Size | 2014 | 2013 | ||||
Less than $100 million | 5 | 24 | ||||
Between $100 million and $500 million | 55 | 117 | ||||
Between $500 million and $1 billion | 57 | 50 | ||||
Between $1 billion and $5 billion | 66 | 27 | ||||
Greater than $5 billion | 23 | 18 | ||||
Total borrowing members during the year | 206 | 236 | ||||
Total membership | 300 | 297 | ||||
Percentage of members borrowing during the period | 68.7 | % | 79.5 | % | ||
Total borrowing members with outstanding loan balances at period-end | 180 | 181 | ||||
Percentage of members borrowing at period-end | 60.0 | % | 60.9 | % |
During 2014, the Bank has experienced a net increase of three members. The Bank added five new members and lost two members. One member was placed into receivership with its charter being dissolved, and one member merged with another institution within the Bank's district.
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The following table provides information at par on advances by member classification at March 31, 2014, December 31, 2013 and December 31, 2012. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and Community Financial Institutions (CFI) (under $1.1 billion).
(in thousands) | March 31, 2014 | December 31, 2013 | December 31, 2012 | March 31, 2014 vs. December 31, 2013 | December 31, 2013 vs. December 31, 2012 | ||||||||
Member Classification | |||||||||||||
Large | $ | 33,115.1 | $ | 36,945.1 | $ | 30,505.2 | (10.4 | )% | 21.1 | % | |||
Regional | 6,033.7 | 5,567.7 | 4,030.7 | 8.4 | 38.1 | ||||||||
Mid-size | 2,223.6 | 2,765.5 | 1,851.6 | (19.6 | ) | 49.4 | |||||||
CFI | 3,244.8 | 3,547.3 | 2,740.2 | (8.5 | ) | 29.5 | |||||||
Insurance | 957.9 | 882.9 | 492.9 | 8.5 | 79.1 | ||||||||
Non-member | 5.5 | 5.5 | 50.2 | — | (89.0 | ) | |||||||
Total | $ | 45,580.6 | $ | 49,714.0 | $ | 39,670.8 | (8.3 | )% | 25.3 | % |
As of March 31, 2014, total advances declined 8.3% compared with balances at December 31, 2013. The decline was attributable to lower demand from the large members and to a lesser degree by the Mid-size and CFI members. The change in the Mid-size and Regional member groups was primarily driven by a reclassification of one member bank between categories. The Bank experienced increased demand for advances in 2013 from all of its member classification groups. Although the greatest volume increase was generated by the larger members, the Regional, Mid-size, CFI and Insurance members generated a greater percentage increase.
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, 2014.
Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses, decreased $49.8 million, to $3.2 billion at March 31, 2014. This decline was primarily driven by the continued net runoff of the MPF Plus Portfolio as the Bank has not purchased loans into this portion of the portfolio since July 2006, which more than offset purchases of new loans into the MPF Original portion of the portfolio. The Bank’s focus is on purchasing MPF loans directly originated by community and regional member banks in its district rather than large national originators.
Balances regarding the Bank’s loan products and mortgage loans held are summarized below. The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status and 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 recording interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for participating financial institutions (PFIs) under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.
March 31, | December 31, | |||||||
(in millions) | 2014 | 2013 | ||||||
Advances(1) | $ | 46,063.9 | $ | 50,247.5 | ||||
Mortgage loans held for portfolio, net(2) | 3,174.3 | 3,224.1 | ||||||
Nonaccrual mortgage loans(3) | 55.9 | 57.8 | ||||||
Mortgage loans 90 days or more delinquent and still accruing interest(4) | 8.3 | 8.3 | ||||||
BOB loans, net | 11.2 | 11.4 | ||||||
Nonaccrual BOB loans | 0.3 | 0.5 |
Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses. Includes TDRs of $10.8 million and $12.0 million at March 31, 2014 and December 31, 2013, respectively.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and does not include TDRs.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.
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The performance of the mortgage loans in the Bank’s MPF Program has remained stable since year-end 2013. As of March 31, 2014, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.7% of the MPF Original portfolio and 4.3% of the MPF Plus portfolio compared with 0.6% and 4.2%, respectively, at December 31, 2013. The actual amount of MPF Plus seriously delinquent loans and foreclosures has fallen from December 31, 2013 to March 31, 2014, but due to the run-off of the MPF Plus portfolio, the percentages have increased.
The allowance for credit losses (ACL) on mortgage loans is based on the losses inherent in the Bank's mortgage loan portfolio after taking into consideration the credit enhancement (CE) structure of the MPF Program. The losses inherent in the portfolio are based on either an individual or collective assessment of the mortgage loans.
The Bank evaluates certain conventional mortgage loans for impairment individually. Prior to January 1, 2014, these loans were limited to TDRs. Beginning January 1, 2014, the Bank adopted the classification provisions of AB 2012-02. As a result, the population of individually evaluated mortgage loans expanded to include impaired loans considered collateral-dependent, which are comprised primarily of MPF loans that are 180 days or more delinquent and loans that are not severely delinquent, but where the borrower has filed for bankruptcy. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property.
The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability and loss given default. Probability of default and loss given default are based on the actual 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is based on realized losses incurred on the sale of mortgage loan collateral including a factor that reduces estimated proceeds from primary mortgage insurance (PMI) given the credit deterioration experienced by those companies. The resulting estimated loss is reduced by the CE structure of the MPF Program, discussed below.
The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the first loss account (FLA). Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at March 31, 2014 and December 31, 2013.
MPF CE structure March 31, 2014 | ACL March 31, 2014 | ||||||||||||||
(in millions) | FLA | Available CE | Estimate of Credit loss | Reduction to the ACL due to CE | ACL | ||||||||||
MPF Original | $ | 2.8 | $ | 136.8 | $ | 2.6 | $ | (2.1 | ) | $ | 0.5 | ||||
MPF Plus | 22.1 | 42.1 | 13.9 | (7.1 | ) | 6.8 | |||||||||
Total | $ | 24.9 | $ | 178.9 | $ | 16.5 | $ | (9.2 | ) | $ | 7.3 |
MPF CE structure December 31, 2013 | ACL December 31, 2013 | ||||||||||||||
(in millions) | FLA | Available CE | Estimate of Credit loss | Reduction to the ACL due to CE | ACL | ||||||||||
MPF Original | $ | 2.7 | $ | 133.9 | $ | 2.3 | $ | (1.7 | ) | $ | 0.6 | ||||
MPF Plus | 22.8 | 42.7 | 23.3 | (12.5 | ) | 10.8 | |||||||||
Total | $ | 25.5 | $ | 176.6 | $ | 25.6 | $ | (14.2 | ) | $ | 11.4 |
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Investments. At March 31, 2014, the sum of the Bank's interest-bearing deposits and Federal funds sold decreased approximately $47.3million from December 31, 2013 as the Bank's liquidity needs declined in the first three months of 2014. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements.
Investment securities (trading, AFS, and HTM securities) totaled $11.1 billion at March 31, 2014 compared to $11.0 billion at December 31, 2013. Details of the investment securities portfolio follow.
Carrying Value | ||||||||
(in millions) | March 31, 2014 | December 31, 2013 | ||||||
Trading securities: | ||||||||
Mutual funds | $ | 4.8 | $ | 4.6 | ||||
GSE and Tennessee Valley Authority (TVA) obligations | 254.7 | 234.6 | ||||||
Total trading securities | $ | 259.5 | $ | 239.2 | ||||
AFS securities: | ||||||||
Mutual funds | $ | 2.0 | $ | 2.0 | ||||
GSE and TVA obligations | 2,115.5 | 2,096.2 | ||||||
State or local agency obligations | 14.0 | 14.0 | ||||||
MBS: | ||||||||
Other U.S. obligations residential MBS | 371.8 | 385.3 | ||||||
GSE MBS | 3,466.8 | 3,122.2 | ||||||
Private label residential MBS | 1,077.0 | 1,123.6 | ||||||
Private label home equity line of credit (HELOCs) | 14.0 | 14.4 | ||||||
Total AFS securities | $ | 7,061.1 | $ | 6,757.7 | ||||
HTM securities: | ||||||||
GSE securities | $ | 15.2 | $ | 16.2 | ||||
State or local agency obligations | 241.7 | 242.9 | ||||||
MBS: | ||||||||
Other U.S. obligations residential MBS | 1,358.4 | 1,435.5 | ||||||
GSE MBS | 1,374.8 | 1,417.9 | ||||||
Private label residential MBS | 832.3 | 873.3 | ||||||
HELOCs | — | 9.7 | ||||||
Total HTM securities | $ | 3,822.4 | $ | 3,995.5 | ||||
Total investment securities | $ | 11,143.0 | $ | 10,992.4 |
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The following table presents the maturity and yield characteristics for the investment securities portfolio, assuming no principal prepayments, as of March 31, 2014. Contractual maturity of MBS is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligation at any time.
(dollars in millions) | Due in 1 year or less | Due after 1 year through 5 years | Due after 5 years through 10 years | Due after 10 years | Carrying Value | |||||||||||||||
Trading securities: | ||||||||||||||||||||
Mutual funds | $ | 4.8 | $ | — | $ | — | $ | — | $ | 4.8 | ||||||||||
GSE and TVA obligations | — | — | 180.0 | 74.7 | 254.7 | |||||||||||||||
Total trading securities | $ | 4.8 | $ | — | $ | 180.0 | $ | 74.7 | $ | 259.5 | ||||||||||
Yield on trading securities (%) | n/a | n/a | 2.64 | 3.68 | 2.88 | |||||||||||||||
AFS securities: | ||||||||||||||||||||
Mutual funds | $ | 2.0 | $ | — | $ | — | $ | — | $ | 2.0 | ||||||||||
GSE and TVA obligations | 200.2 | 1,152.1 | 578.8 | 184.4 | 2,115.5 | |||||||||||||||
State or local agency obligations | — | — | 1.0 | 13.0 | 14.0 | |||||||||||||||
MBS: | ||||||||||||||||||||
Other U.S. obligations residential MBS | — | — | — | 371.8 | 371.8 | |||||||||||||||
GSE MBS | — | 418.1 | 435.7 | 2,613.0 | 3,466.8 | |||||||||||||||
Private label residential MBS | — | — | — | 1,077.0 | 1,077.0 | |||||||||||||||
HELOCs | — | — | — | 14.0 | 14.0 | |||||||||||||||
Total AFS securities | $ | 202.2 | $ | 1,570.2 | $ | 1,015.5 | $ | 4,273.2 | $ | 7,061.1 | ||||||||||
Yield on AFS securities (%) | 0.29 | 1.10 | 2.67 | 2.00 | 1.85 | |||||||||||||||
HTM securities: | ||||||||||||||||||||
GSE securities | $ | — | $ | 15.2 | $ | — | $ | — | $ | 15.2 | ||||||||||
State or local agency obligations | — | — | 41.5 | 200.2 | 241.7 | |||||||||||||||
MBS: | ||||||||||||||||||||
Other U.S. obligations residential MBS | — | — | 311.6 | 1,046.8 | 1,358.4 | |||||||||||||||
GSE MBS | — | 119.7 | 740.6 | 514.5 | 1,374.8 | |||||||||||||||
Private label residential MBS | — | 33.4 | — | 798.9 | 832.3 | |||||||||||||||
Total HTM securities | $ | — | $ | 168.3 | $ | 1,093.7 | $ | 2,560.4 | $ | 3,822.4 | ||||||||||
Yield on HTM securities (%) | n/a | 3.82 | 2.56 | 1.74 | 2.06 | |||||||||||||||
Total investment securities | $ | 207.0 | $ | 1,738.5 | $ | 2,289.2 | $ | 6,908.3 | $ | 11,143.0 | ||||||||||
Yield on investment securities (%) | 0.29 | 1.36 | 2.62 | 1.92 | 1.95 | |||||||||||||||
Interest-bearing deposits | 5.5 | — | — | — | 5.5 | |||||||||||||||
Federal funds sold | 2,830.0 | — | — | — | 2,830.0 | |||||||||||||||
Total investments | $ | 3,042.5 | $ | 1,738.5 | $ | 2,289.2 | $ | 6,908.3 | $ | 13,978.5 |
As of March 31, 2014, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions) | Total Book Value | Total Fair Value | ||||||
Freddie Mac | $ | 3,376.5 | $ | 3,410.5 | ||||
Fannie Mae | 2,514.8 | 2,532.7 | ||||||
Ginnie Mae | 1,418.6 | 1,425.9 | ||||||
Federal Farm Credit Banks | 1,266.4 | 1,266.4 | ||||||
Total | $ | 8,576.3 | $ | 8,635.5 |
For additional information on the credit risk of the investment portfolio, see “Credit and Counterparty Risk - Investments” discussion in the Risk Management section of this Item 2.
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Liabilities and Capital
Commitments and Off-Balance Sheet Items. As of March 31, 2014, the Bank was obligated to fund approximately $5.7 million in additional advances and BOB loans, $15.1 million of mortgage loans and $15.5 billion in outstanding standby letters of credit, and to issue $532.3 million in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.
Capital and Retained Earnings. The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of its retained earnings.
Management monitors capital adequacy, including the level of retained earnings, through the evaluation of 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 five risk elements that comprise the Bank's total retained earnings target: (1) AFS private label MBS risk (HTM is included in market risk); (2) market risk; (3) credit risk; (4) operating risk; and (5) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. For example, a further sharp deterioration in expected performance of loans underlying private label MBS would likely cause the Bank to adopt a higher target, whereas stabilization or improvement of the performance of these loans may lead to a reduction in the retained earnings target. This framework generated a retained earnings target of $535.0 million as of March 31, 2014. The Bank exceeded its retained earnings target as of March 31, 2014 as it had $748.8 million of retained earnings. The framework also assists management in its overall analysis of the level of future dividends.
Retained earnings increased $63.1 million, to $748.8 million, at March 31, 2014 compared to $685.7 million at December 31, 2013. The increase in retained earnings during the first three months of 2014 reflected net income partially offset by $16.8 million of dividends paid. Total retained earnings at March 31, 2014 included unrestricted retained earnings of $672.7 million and restricted retained earnings (RRE) of $76.1 million.
Capital Resources
The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q and the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2013 Form 10-K.
Capital Plan. Under the Bank’s Capital Plan, members are required to purchase and maintain a certain level of activity-based capital stock to obtain advances and engage in other business transactions. The amount of this stock requirement can be periodically modified by the Bank, with Board of Directors approval.
In light of the growth in retained earnings over the last several years, in February 2014, the Board approved a reduction in the capital stock purchase requirement on letters of credit from 1.60% to 0.75%. This change was effective March 18, 2014 and applies to both letters of credit outstanding as of the effective date and those issued after the effective date.
In addition, the Bank has initiated the process of amending its Capital Plan. The goal of this Capital Plan amendment is to make the plan an active tool to shape the structure of the balance sheet, including the level of member activity with the Bank. Under the proposed amendment, the Bank's capital stock would be divided into two subclasses: (1) a membership stock subclass and (2) an activity-stock subclass. The establishment of subclasses will enable the Bank to make dividend distinctions between the subclasses. For example, the Bank could pay a dividend tied to a benchmark on the membership stock subclass and pay a higher dividend on the activity-stock subclass. Additionally, the proposed amendment would expand the letter of credit stock purchase requirement range and prospectively establish a capital stock purchase requirement for forward starting advances. As required by Finance Agency regulation and the terms of the Capital Plan, any amendment must be approved by the Finance Agency prior to becoming effective.
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Risk-Based Capital (RBC)
The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent (or "regulatory") capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
March 31, | December 31, | |||||||
(in millions) | 2014 | 2013 | ||||||
Permanent capital: | ||||||||
Capital stock (1) | $ | 2,683.3 | $ | 2,962.2 | ||||
Retained earnings | 748.8 | 685.7 | ||||||
Total permanent capital | $ | 3,432.1 | $ | 3,647.9 | ||||
RBC requirement: | ||||||||
Credit risk capital | $ | 559.9 | $ | 580.2 | ||||
Market risk capital | 198.3 | 229.5 | ||||||
Operations risk capital | 227.4 | 242.9 | ||||||
Total RBC requirement | $ | 985.6 | $ | 1,052.6 | ||||
Excess permanent capital over RBC requirement | $ | 2,446.5 | $ | 2,595.3 | ||||
Note: | ||||||||
(1) Capital stock includes mandatorily redeemable capital stock. |
The Bank continues to maintain excess permanent capital over the RBC requirement. Total excess permanent capital decreased $148.8 million from year-end primarily due to the decrease in capital stock.
On March 20, 2014, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2013. 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, 2014.
Regulatory Capital and Leverage Ratios
In addition to the RBC requirements, the Finance Agency has mandated maintenance of total regulatory capital and leverage ratios of at least 4.0% and 5.0% of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements. The Bank exceeded all regulatory capital requirements at March 31, 2014.
March 31, | December 31, | |||||||
(dollars in millions) | 2014 | 2013 | ||||||
Regulatory Capital Ratio | ||||||||
Minimum regulatory capital (4.0% of total assets) | $ | 2,582.2 | $ | 2,826.8 | ||||
Regulatory capital | 3,432.1 | 3,647.9 | ||||||
Total assets | 64,555.7 | 70,670.9 | ||||||
Regulatory capital ratio (regulatory capital as a percentage of total assets) | 5.3 | % | 5.2 | % | ||||
Leverage Ratio | ||||||||
Minimum leverage capital (5.0% of total assets) | $ | 3,227.8 | $ | 3,533.5 | ||||
Leverage capital (regulatory capital multiplied by a 1.5 weighting factor) | 5,148.1 | 5,471.9 | ||||||
Leverage ratio (leverage capital as a percentage of total assets) | 8.0 | % | 7.7 | % |
The increase in the regulatory capital and leverage ratios from December 31, 2013 to March 31, 2014 was primarily due to a decrease in capital stock outstanding and total assets.
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The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
March 31, | December 31, | ||||||||||
(dollars in millions) | 2014 | 2013 | |||||||||
Commercial banks | 179 | $ | 2,256.7 | 179 | $ | 2,540.0 | |||||
Thrifts | 76 | 280.9 | 78 | 284.1 | |||||||
Insurance companies | 8 | 92.3 | 7 | 88.9 | |||||||
Credit unions | 37 | 51.5 | 33 | 49.2 | |||||||
Total member institutions / total GAAP capital stock | 300 | 2,681.4 | 297 | 2,962.2 | |||||||
Mandatorily redeemable capital stock | 1.9 | — | |||||||||
Total capital stock | $ | 2,683.3 | $ | 2,962.2 |
Critical Accounting Policies
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 2013 Form 10-K describes the most significant accounting policies used by the Bank. In addition, the Bank's critical accounting policies are presented in Item 7. Management's Discussion and Analysis in the Bank's 2013 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.
During the three months ended March 31, 2014, the Bank updated its Critical Accounting Policy for its Allowance for Credit Losses on Mortgage Loans Held for Portfolio as a result of adoption of the classification provisions of the Finance Agency Advisory Bulletin 2012-02, as clarified by Advisory Bulletin 2013-02 (AB 2012-02). AB 2012-02 establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures, excluding investment securities. As a result of this adoption, the Bank began to obtain values of collateral for certain MPF loans, primarily those that are 180 days or more delinquent and loans that are not severely delinquent, but where the borrower has filed for bankruptcy. These values are now incorporated into the Bank's calculation of incurred losses on its MPF portfolio and the related allowance for credit losses. This adoption resulted in an immaterial benefit to the Bank's allowance on MPF loans at March 31, 2014.
During the three months ended March 31, 2014, the Bank also updated its Critical Accounting Policy for Guarantees and Consolidated Obligations as a result of the adoption of recently-issued FASB guidance for joint and several liabilities. The Bank's joint and several obligation associated with its consolidated obligations is within the scope of this guidance. This guidance requires the Bank to measure its obligation as the sum of (1) the amount the Bank agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the Bank expects to pay on behalf of its co-obligors. This adoption had no impact on the Bank's financial statements at March 31, 2014.
The Bank made no other changes to its critical accounting policies during the three months ended March 31, 2014.
Proposed and Recently Issued Accounting Guidance. See Note 1 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the unaudited financial statements in this Form 10-Q for information on new accounting pronouncements impacting the financial statements or that will become effective for the Bank in future periods.
In addition to the above, AB 2012-02 requires the Bank to charge off the portion of a loan deemed to be a "loss." However, this is not required until January 1, 2015. Upon adoption of the charge-off provisions, the Bank's allowance for loan losses will be eliminated and a corresponding investment will be reduced, unless the loss is expected to be recovered by the CE of the MPF Program, for which the Bank will establish a CE Fee Receivable. The ultimate losses realized on the Bank's loan portfolio will be the same; however, the timing of when the losses are recognized will differ. The Bank does not expect the charge-off provisions to have a material impact on the Bank's financial statements.
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Legislative and Regulatory Developments
The legislative and regulatory environment in which the Bank and its members operate continues to evolve as a result of regulations enacted pursuant to the Housing and Economic Recovery Act of 2008, as amended (Housing Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.
Finance Agency Proposed Rule on Responsibilities of Boards of Directors; Corporate Practices and Corporate Governance Matters. On January 28, 2014, the Finance Agency published a proposed rule to relocate and consolidate existing Federal Housing Finance Board and Office of Federal Housing Enterprise Oversight regulations pertaining to director responsibilities, corporate practices, and corporate governance matters for Fannie Mae, Freddie Mac, and the FHLBanks (each a "regulated entity"). The proposed rule would make certain amendments or additions to the corporate governance rules currently applicable to the FHLBanks, including provisions to:
• | revise existing risk management provisions to better align them with more recent proposals of the Federal Reserve Board, including requirements that each regulated entity adopt an enterprise wide risk management program and appoint a chief risk officer with certain enumerated responsibilities; |
• | require each regulated entity to maintain a compliance program headed by a compliance officer who reports directly to the chief executive officer and must regularly report to the board of directors (or a board committee); |
• | require each regulated entity’s board to establish committees specifically responsible for the following matters: (a) risk management; (b) audit; (c) compensation; and (d) corporate governance; |
• | require each FHLBank to designate in its bylaws a body of law to follow for its corporate governance practices and procedures that may arise for which no federal law controls, choosing from (a) the law of the jurisdiction in which the FHLBank maintains its principal office; (b) the Delaware General Corporation Law; or (c) the Revised Model Business Corporation Act. The proposed rule states that the Finance Agency has the authority to review a regulated entity’s indemnification policies, procedures and practices and may limit or prohibit indemnification payments in support of the safe and sound operations of the regulated entity. |
Comments on the proposed rule are due by May 15, 2014.
Finance Agency Final Rule on Executive Compensation. On January 28, 2014, the Finance Agency issued a final rule setting forth requirements and processes with respect to compensation provided to executive officers of the FHLBanks and the Office of Finance. The final rule addresses the authority of the Director of the Finance Agency to review the compensation arrangements of executive officers of the FHLBanks. The final rule addresses the authority of the Director of the Finance Agency to review the compensation arrangements of executive officers of the FHLBanks and to prohibit an FHLBank or the Office of Finance from providing compensation to any executive officer that the Director determines is not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. The final rule also addresses the Director’s authority to approve, in advance, agreements or contracts of executive officers that provide compensation in connection with termination of employment. The final rule became effective on February 27, 2014.
Finance Agency Final Rule on Golden Parachute Payments. On January 28, 2014, the Finance Agency issued a final rule setting forth the standards that the Director of the Finance Agency will take into consideration when determining whether to limit or prohibit golden parachute payments. The primary impact of this final rule is to better conform existing Finance Agency regulations on golden parachutes with FDIC golden parachute regulations and to further limit golden parachute payments made by an FHLBank or the Office of Finance that is assigned a less than satisfactory composite Finance Agency examination rating. The final rule became effective on February 27, 2014.
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 a Risk Governance Policy and a Member Products Policy, both of which are reviewed regularly and re-approved at least annually. The Risk Governance Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operating risk, and business risk in accordance with Finance Agency regulations and consistent with the Bank’s risk appetite. The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.
21
Risk Governance
The Bank’s lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operating and business risk, among others, including those described in Item 1A. Risk Factors in the Bank's 2013 Form 10-K. The Bank’s risks are affected by current and projected financial and residential mortgage market trends, which are discussed in the Executive Summary portion of this Item 2.
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 2013 Form 10-K.
Capital Adequacy Measures. MV/CS provides a current assessment of the liquidation value of the balance sheet and measures the Bank's current ability to honor the par put redemption feature of its capital stock. This is one of the risk metrics used to evaluate the adequacy of retained earnings and develop dividend payment recommendations.
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. When MV/CS is above the established floor, additional analysis of the adequacy of retained earnings is performed. See the “Capital and Retained Earnings” discussion in Financial Condition in this Item 2 for details regarding the Bank’s retained earnings policy.
The MV/CS ratio was 135.7% at March 31, 2014 and 128.0% at December 31, 2013. This improvement was primarily due to increased retained earnings and a lower capital stock balance.
Subprime and Nontraditional Loan Exposure. The Bank policy definitions of subprime and nontraditional residential mortgage loans and securities are consistent with Federal Financial Institutions Examination Council (FFIEC) and Finance Agency guidance. According to policy, loans identified as subprime are not eligible to be included in the member’s collateral position. However, the policy allows for low FICO loans with reasonable mitigating credit factors (i.e. low loan-to-value or debt-to-income ratios). Therefore, the Bank’s definition of a subprime loan is a loan with a low FICO score that does not possess reasonable mitigating credit factors.
Limits have been established for exposure to low FICO and nontraditional residential mortgages. A limit of 25% has been established for the percentage of member collateral that is categorized as low FICO (with acceptable mitigating factors for unknown and missing FICO score loans) or nontraditional loans and securities. A limit of 25% has also been established for total exposure including low FICO and nontraditional member collateral, subprime and nontraditional private label MBS, and low FICO whole mortgage loans acquired through the Bank’s MPF program.
In addition, an enhanced reporting process has been established to aggregate the volume of the aforementioned loans and securities. Lastly, all members are required to identify subprime, low FICO score and nontraditional loans that are included in their collateral and provide periodic certification that they comply with the FFIEC guidance.
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 Models. 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.
The Bank regularly validates the models used to measure market risk. Such model validations are generally performed by third-party specialists and are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group that is independent of the business unit measuring risk and conducting the transactions.
22
Results of the validation process, as well as any changes in valuation methodologies, are reported to the Bank's Asset Liability Committee (ALCO), which is responsible for reviewing and approving the approaches used in the evaluation of such risks to ensure that they are well controlled and effective, and result in reasonable fair values.
Duration of Equity. One key risk metric used by the Bank, which is commonly used throughout the financial services industry, 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 measured in months or 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 continually evaluates its market risk management strategies.
Management developed an alternative risk profile to better reflect the underlying interest rate risk and accommodate prudent management of the Bank's balance sheet. The alternate methodology removes the interest rate sensitivity of impaired private label MBS and more fully reflects the credit-intensive nature of the securities and resulting low correlation of price changes to interest rates in the current environment.
The following table presents the Bank's duration of equity exposure calculated in accordance with the alternate methodology and the actual duration of equity at March 31, 2014 and December 31, 2013. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" and "down 100 basis points" cannot be meaningfully measured for these periods and is therefore not presented.
(in years) | Base Case | Up 100 basis points | Up 200 basis points |
Alternate duration of equity: | |||
March 31, 2014 | 0.6 | 1.0 | 1.5 |
December 31, 2013 | 0.4 | 0.9 | 1.2 |
Actual duration of equity: | |||
March 31, 2014 | 1.4 | 1.8 | 2.3 |
December 31, 2013 | 1.2 | 1.6 | 2.0 |
The modest duration of equity increases from prior year-end primarily reflect the net effect of maturing fixed-rate debt, which was partially offset by lower long-term interest rates.
The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes may have on duration of equity and other market risk measures, and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.
Earned Dividend Spread (EDS). The Bank's asset/liability management policy also measures interest rate risk based on an EDS. EDS is defined as the Bank's return on average capital stock in excess of the average return of an established benchmark market index, 3-month LIBOR in the Bank's case, for the period measured. The EDS Floor represents the minimum acceptable return under the selected interest rate scenarios, for both Year 1 and Year 2. The EDS Floor is 3-month LIBOR plus 15 basis points. EDS Volatility is a measure of the variability of the Bank's EDS in response to shifts in interest rates, specifically the change in EDS for a given time period and interest rate scenario compared to the current base forecasted EDS. EDS is measured over both a rolling forward one to 12 month time period (Year 1) and a 13 to 24 month time period (Year 2), for selected interest rate scenarios.
The following table presents the Bank's EDS level and volatility as of March 31, 2014 and December 31, 2013. These metrics are presented as spreads over 3-month LIBOR. The steeper and flatter yield curve shift scenarios shown below are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the current low rate environment, management replaced the “down 200 basis points parallel” rate scenario with an additional non-parallel rate scenario that reflects a decline in longer term rates. The Bank was in compliance with the EDS Floor and EDS Volatility limits across all selected interest rate shock scenarios at March 31, 2014 and December 31, 2013.
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EDS Yield Curve Shifts (expressed in basis points) | |||||||||
Down 100 bps Longer Term Rate Shock | 100 bps Steeper | Forward Rates | 100 bps Flatter | Up 200 bps Parallel Shock | |||||
EDS | Volatility | EDS | Volatility | EDS | EDS | Volatility | EDS | Volatility | |
Year 1 Return Volatility | |||||||||
March 31, 2014 | 552 | (78) | 643 | 13 | 630 | 683 | 53 | 694 | 64 |
December 31, 2013 | 531 | (29) | 576 | 16 | 560 | 633 | 73 | 613 | 53 |
Year 2 Return Volatility | |||||||||
March 31, 2014 | 633 | (15) | 686 | 38 | 648 | 672 | 24 | 663 | 15 |
December 31, 2013 | 554 | 1 | 563 | 10 | 553 | 580 | 27 | 578 | 25 |
Projected EDS in all scenarios increased for both Year 1 and Year 2 mainly due to lower projected capital stock requirements and higher earnings from higher advance and agency investment projections, lower assumed hedging costs and maturity of high yield debt. EDS volatility changes were mainly the result of maturing fixed rate debt and floating rate reset risk and mark-to-market position changes.
Earnings-at-Risk (EaR). The Bank employs an EaR framework for certain mark-to-market positions, including economic hedges. This framework establishes a forward-looking, scenario-based exposure limit based on interest rate and volatility shocks that would apply to any existing or proposed transaction that is marked to market through the income statement without an offsetting mark arising from a qualifying hedge relationship. The Bank's Capital Markets and Corporate Risk Management departments also monitor the actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis.
The daily exposure limit of EaR as approved by the Board is $3.3 million. The Bank's ALCO has established a lower exposure limit as an operating guideline at $2.7 million. The daily forward-looking exposure was below the applicable Board limit and operating guidelines during the first three months of 2014. At March 31, 2014, EaR measured $1.8 million.
Credit and Counterparty Risk - Total Credit Exposure (TCE) and Collateral
TCE. The Bank manages the credit risk on the basis of a member’s total credit exposure to the Bank or TCE, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; member derivatives; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all member obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. This may include collateral pledged by a member’s affiliate. At March 31, 2014, TCE was $61.8 billion, comprised of approximately $45.6 billion in advance principal outstanding, $15.9 billion in letters of credit, and $0.3 billion in accrued interest, prepayment, MPF credit enhancement and other fees. In addition, at March 31, 2014, the Bank had approximately $4.7 million in advance commitments. 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. Refer to the Collateral Policies and Practices section below for recent revisions to MBC requirements. Details regarding this Policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2013 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position.
The financial condition of all members and 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) that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member’s asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results for the previous four quarters are used, with the most recent quarter’s results given a higher weighting. Additionally, a member’s credit score can be adjusted for various qualitative factors, such as the
24
financial condition of the member’s holding company. While financial scores and resulting ratings are calculations based only upon point-in-time financial data and the resulting ratios, a rating in one of the higher (i.e., worse) categories indicates that a member exhibits defined financial weaknesses. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. A separate financial analysis method is used to analyze insurance company exposure. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on varying forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.
During the first three months of 2014, there were five failures of FDIC-insured institutions nationwide. One of those was a member of the Bank. With no credit exposure outstanding to the Bank, the institution was closed by the Pennsylvania Department of Banking on February 28, 2014. The FDIC was appointed receiver, and it entered into a purchase and assumption agreement with an out-of-district institution to assume all of the deposits and substantially all of the assets of the failed institution.
Management believes that it has adequate policies and procedures in place to effectively manage credit risk exposure related to member TCE. These credit and collateral policies balance the Bank’s dual goals of meeting members’ needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms in response to deterioration in creditworthiness. The Bank has never experienced a loss on its member advance exposure.
The following table presents the Bank’s top ten borrowers with respect to their TCE at March 31, 2014.
March 31, 2014 | |||||
(dollars in millions) | TCE | % of Total | |||
PNC Bank, National Association, DE (1) | $ | 18,708.1 | 30.3 | % | |
Chase Bank USA, N.A., DE | 9,976.1 | 16.1 | |||
Santander Bank, N.A, DE (2) | 8,321.3 | 13.5 | |||
TD Bank, National Association, DE | 7,320.2 | 11.8 | |||
Ally Bank, UT (3) | 3,751.6 | 6.1 | |||
Susquehanna Bank, PA | 1,235.1 | 2.0 | |||
Customers Bank, PA | 909.0 | 1.5 | |||
Fulton Bank, N.A., PA | 890.9 | 1.4 | |||
Northwest Savings Bank, PA | 722.1 | 1.2 | |||
Wilmington Savings Fund Society FSB, DE | 654.9 | 1.1 | |||
$ | 52,489.3 | 85.0 | % | ||
Other borrowers | 9,277.9 | 15.0 | |||
Total TCE outstanding | $ | 61,767.2 | 100.0 | % |
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(3) For Bank membership purposes, principal place of business is Horsham, PA.
The TCE of the majority of the top ten borrowers was primarily outstanding advance balances at March 31, 2014, except for one member whose TCE consisted entirely of letters of credit.
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Member Advance Concentration Risk. The following table lists the Bank’s top ten borrowers based on advance balances at par as of March 31, 2014.
March 31, 2014 | |||||
(dollars in millions) | Advance Balance | % of Total | |||
PNC Bank, National Association, DE (1) | $ | 12,435.1 | 27.3 | % | |
Chase Bank USA, N.A., DE | 9,975.0 | 21.9 | |||
Santander Bank, N.A, DE (2) | 6,955.0 | 15.3 | |||
Ally Bank, UT (3) | 3,750.0 | 8.2 | |||
Susquehanna Bank, PA | 1,225.0 | 2.7 | |||
Customers Bank, PA | 905.0 | 2.0 | |||
Fulton Bank, N.A., PA | 742.7 | 1.6 | |||
Northwest Savings Bank, PA | 725.4 | 1.6 | |||
Wilmington Savings Fund Society FSB, DE | 654.8 | 1.4 | |||
First Commonwealth Bank, PA | 570.4 | 1.2 | |||
$ | 37,938.4 | 83.2 | % | ||
Other borrowers | 7,642.2 | 16.8 | |||
Total advances | $ | 45,580.6 | 100.0 | % |
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(3) For Bank membership purposes, principal place of business is Horsham, PA.
The average year-to-date March 31, 2014 balances for the ten largest borrowers totaled $38.9 billion, or 83.2% of total average advances outstanding. During the three months ended March 31, 2014, the maximum outstanding balance to any one borrower was $12.4 billion. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank does not expect to incur any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.
Letters of Credit. The following table presents the Bank’s total outstanding letters of credit as of March 31, 2014 and December 31, 2013. The letter of credit product is collateralized under the same procedures and guidelines that apply to advances.
(dollars in millions) | March 31, 2014 | December 31, 2013 | ||||
Letters of credit: | ||||||
Public unit deposit | $ | 15,856.2 | $ | 14,766.4 | ||
Tax exempt bonds | 15.4 | 15.4 | ||||
Other | 23.9 | 37.6 | ||||
Total (1) | $ | 15,895.5 | $ | 14,819.4 | ||
Expiration terms: | ||||||
One year or less (1) | $ | 10,914.3 | $ | 10,055.9 | ||
After one year through five years (2) | 4,981.2 | 4,763.5 | ||||
Total | $ | 15,895.5 | $ | 14,819.4 |
Notes:
(1) Includes approved requests to issue future standby letters of credit of $417.8 million and $154.1 million, respectively.
(2) These letters of credit have a final expiration date exceeding one year but are subject to non-renewal every year or less.
At March 31, 2014, the Bank had a concentration of letters of credit with two members totaling $13.5 billion or 85.1% of the total outstanding amount. At December 31, 2013, $12.8 billion or 86.6% were concentrated with two members.
Collateral Policies and Practices. All members are required to maintain collateral to secure their TCE. Recent revisions to the Bank’s Collateral Policy include acceptance of municipal bonds with a Nationally Recognized Statistical Rating Organization (NRSRO) rating of A or better, as eligible collateral at the following collateral weightings: AAA = 92%, AA =
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90% and A = 88%. The securities must have a real estate nexus. Additionally, Resolution Funding Corporation (REFCORP) bonds will be accepted at a 97% collateral weighting. Refer to the Risk Management section of the Bank's 2013 Form 10-K for additional information related to the Bank’s Collateral Policy.
Collateral Agreements and Valuation. The Bank provides members with two options regarding 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 agreement, the Bank obtains a lien against specified eligible collateral assets of the member or its affiliate (as 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. 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 2013 Form 10-K.
For all of the Bank's members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of March 31, 2014 and December 31, 2013. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions) | March 31, 2014 | December 31, 2013 | ||||||||
All members | Amount | Percentage | Amount | Percentage | ||||||
One-to-four single family residential mortgage loans | $ | 73,963.4 | 44.0 | % | $ | 70,295.5 | 43.6 | % | ||
High quality investment securities(1) | 5,470.6 | 3.3 | 6,874.5 | 4.3 | ||||||
ORERC(2)/CFI(3) eligible collateral | 75,618.4 | 45.0 | 72,882.9 | 45.2 | ||||||
Multi-family residential mortgage loans | 12,873.8 | 7.7 | 11,142.9 | 6.9 | ||||||
Total eligible collateral value | $ | 167,926.2 | 100.0 | % | $ | 161,195.8 | 100.0 | % | ||
Total TCE | $ | 61,767.2 | $ | 65,255.3 | ||||||
Collateralization ratio (eligible collateral value to TCE outstanding) | 271.9 | % | 247.0 | % |
Note:
(1) High quality investment securities are defined in the Collateral section of the Bank's 2013 Form 10-K. In addition, as of March 31, 2014, municipal securities and REFCORP bonds have been added to the Bank's definition of high quality investment securities.
(2) Other real estate related collateral
(3) Community Financial Institution
For only member borrowers, the following tables present information on a combined basis regarding the type of collateral securing the outstanding credit exposure and the collateral status as of March 31, 2014 and December 31, 2013.
March 31, 2014 | ||||||||||||||||||||
(dollars in millions) | Blanket Lien | Listing | Delivery | Total | ||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||
One-to-four single family residential mortgage loans | $ | 57,972.4 | 39.5 | % | $ | 11,240.7 | 88.0 | % | $ | 250.0 | 38.8 | % | $ | 69,463.1 | 43.4 | % | ||||
High quality investment securities(1) | 3,767.0 | 2.6 | 1,537.4 | 12.0 | 44.4 | 6.9 | 5,348.8 | 3.3 | ||||||||||||
ORERC/CFI eligible collateral | 72,367.6 | 49.3 | — | — | 329.9 | 51.2 | 72,697.5 | 45.4 | ||||||||||||
Multi-family residential mortgage loans | 12,632.3 | 8.6 | — | — | 19.6 | 3.1 | 12,651.9 | 7.9 | ||||||||||||
Total eligible collateral value | $ | 146,739.3 | 100.0 | % | $ | 12,778.1 | 100.0 | % | $ | 643.9 | 100.0 | % | $ | 160,161.3 | 100.0 | % | ||||
Total TCE | $ | 50,767.7 | 82.2 | % | $ | 10,943.0 | 17.7 | % | 56.5 | 0.1 | % | $ | 61,767.2 | 100.0 | % | |||||
Number of members | 201 | 93.1 | % | 7 | 3.2 | % | 8 | 3.7 | % | 216 | 100.0 | % |
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December 31, 2013 | ||||||||||||||||||||
(dollars in millions) | Blanket Lien | Listing | Delivery | Total | ||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||
One-to-four single family residential mortgage loans | $ | 54,268.4 | 38.9 | % | $ | 10,965.9 | 88.5 | % | $ | 459.9 | 33.2 | % | $ | 65,694.2 | 42.8 | % | ||||
High quality investment securities(1) | 5,329.4 | 3.8 | 1,420.3 | 11.5 | 43.3 | 3.1 | 6,793.0 | 4.4 | ||||||||||||
ORERC/CFI eligible collateral | 69,066.1 | 49.5 | — | — | 845.1 | 61.1 | 69,911.2 | 45.6 | ||||||||||||
Multi-family residential mortgage loans | 10,904.5 | 7.8 | — | — | 35.9 | 2.6 | 10,940.4 | 7.2 | ||||||||||||
Total eligible collateral value | $ | 139,568.4 | 100.0 | % | $ | 12,386.2 | 100.0 | % | $ | 1,384.2 | 100.0 | % | $ | 153,338.8 | 100.0 | % | ||||
Total TCE | $ | 54,288.7 | 83.2 | % | $ | 10,864.1 | 16.6 | % | $ | 102.4 | 0.2 | % | $ | 65,255.3 | 100.0 | % | ||||
Number of members | 200 | 92.0 | % | 6 | 3.0 | % | 10 | 5.0 | % | 216 | 100.0 | % |
Note:
(1) High quality investment securities are defined in the Collateral section of the Bank's 2013 Form 10-K. In addition, as of March 31, 2014, municipal securities and REFCORP bonds have been added to the Bank's definition of high quality investment securities.
Credit and Counterparty Risk - Investments
The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. As of March 31, 2014 and December 31, 2013, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $2.2 billion and $2.3 billion, respectively.
Investment External Credit Ratings. The following tables present the Bank’s investment carrying values as of March 31, 2014 and December 31, 2013 based on the lowest rating from the NRSROs (Moody’s, S&P and Fitch). Carrying values for AFS and trading securities represent fair value.
March 31, 2014 (1) (2) (3) | ||||||||||||||||||
Long-Term Rating | ||||||||||||||||||
(in millions) | AAA | AA | A | BBB | Below Investment Grade | Total | ||||||||||||
Money market investments: | ||||||||||||||||||
Federal funds sold | $ | — | $ | 1,600.0 | $ | 1,000.0 | $ | 230.0 | $ | — | $ | 2,830.0 | ||||||
Total money market investments | — | 1,600.0 | 1,000.0 | 230.0 | — | 2,830.0 | ||||||||||||
Investment securities: | ||||||||||||||||||
GSE and TVA obligations | — | 2,385.4 | — | — | — | 2,385.4 | ||||||||||||
State or local agency obligations | 14.0 | 241.7 | — | — | — | 255.7 | ||||||||||||
Total non-MBS | 14.0 | 2,627.1 | — | — | — | 2,641.1 | ||||||||||||
Other U.S. obligations residential MBS | — | 1,730.2 | — | — | — | 1,730.2 | ||||||||||||
GSE MBS | — | 4,841.6 | — | — | — | 4,841.6 | ||||||||||||
Private label residential MBS | — | 6.5 | 39.3 | 352.0 | 1,507.4 | 1,905.2 | ||||||||||||
HELOCs | — | — | — | — | 14.0 | 14.0 | ||||||||||||
Total MBS | — | 6,578.3 | 39.3 | 352.0 | 1,521.4 | 8,491.0 | ||||||||||||
Total investments | $ | 14.0 | $ | 10,805.4 | $ | 1,039.3 | $ | 582.0 | $ | 1,521.4 | $ | 13,962.1 |
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December 31, 2013 (1) (2) (3) | ||||||||||||||||||
Long-Term Rating | ||||||||||||||||||
(in millions) | AAA | AA | A | BBB | Below Investment Grade | Total | ||||||||||||
Money market investments: | ||||||||||||||||||
Federal funds sold | $ | — | $ | 1,300.0 | $ | 1,300.0 | $ | 275.0 | $ | — | $ | 2,875.0 | ||||||
Total money market investments | — | 1,300.0 | 1,300.0 | 275.0 | — | 2,875.0 | ||||||||||||
Investment securities: | ||||||||||||||||||
GSE and TVA obligations | — | 2,347.0 | — | — | — | 2,347.0 | ||||||||||||
State or local agency obligations | 14.0 | 242.9 | — | — | — | 256.9 | ||||||||||||
Total non-MBS | 14.0 | 2,589.9 | — | — | — | 2,603.9 | ||||||||||||
Other U.S. obligations residential MBS | — | 1,820.8 | — | — | — | 1,820.8 | ||||||||||||
GSE MBS | — | 4,540.1 | — | — | — | 4,540.1 | ||||||||||||
Private label residential MBS | — | 12.4 | 38.0 | 369.7 | 1,572.8 | 1,992.9 | ||||||||||||
HELOCs | — | — | 9.7 | — | 14.4 | 24.1 | ||||||||||||
Total MBS | — | 6,373.3 | 47.7 | 369.7 | 1,587.2 | 8,377.9 | ||||||||||||
Total investments | $ | 14.0 | $ | 10,263.2 | $ | 1,347.7 | $ | 644.7 | $ | 1,587.2 | $ | 13,856.8 |
(1) Various deposits not held as investments as well as mutual fund equity investments held by the Bank through Rabbi trusts which are not generally assigned a credit rating are excluded from the tables above. The mutual fund equity investment balances totaled $6.8 million and $6.6 million at March 31, 2014 and December 31, 2013, respectively.
(2) Balances exclude $4.1 million private label MBS security which was not rated both at March 31, 2014 and December 31, 2013.
(3) Balances exclude total accrued interest of $16.5 million and $19.6 million at March 31, 2014 and December 31, 2013, respectively.
As of March 31, 2014, there were credit rating agency actions affecting a total of two private label MBS in the investment portfolio resulting in downgrades of at least one credit rating level since December 31, 2013. These securities had a total par value of $73.0 million as of March 31, 2014.
The Bank also manages credit risk based on an internal credit rating system. For purposes of determining the internal credit rating, the Bank measures credit exposure through a process which includes internal credit review and various external factors, including placement of the counterparty on negative watch by one or more NRSROs. For internal reporting purposes, the incorporation of negative credit watch into the credit rating analysis of an investment may translate into a downgrade of one credit rating level from the external rating. The Bank does not rely solely on any NRSRO rating in deriving its final internal credit rating.
Short-term Investments. The Bank maintains a short-term investment portfolio to provide funds to meet the credit needs of its members and to maintain liquidity. The FHLBank Act and Finance Agency regulations set liquidity requirements for the FHLBanks. In addition, the Bank maintains a contingency liquidity plan in the event of operational disruptions at the Bank and the Office of Finance (OF). See the Liquidity and Funding Risk section of this Item 2 for a discussion of the Bank’s liquidity management.
Within the portfolio of short-term investments, the Bank faces credit risk from unsecured exposures. The Bank's unsecured credit investments have maturities generally ranging between overnight and six months and 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; |
• | Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer on demand. |
Under the Bank’s Risk Governance Policy, the Bank can place money market investments, which include those investment types listed above, on an unsecured basis with large financial institutions with long-term credit ratings no lower than BBB. Management actively monitors the credit quality of these counterparties.
As of March 31, 2014, the Bank had unsecured exposure to six counterparties totaling $2.8 billion, or an average of $471.7 million per counterparty, with unsecured exposure to four counterparties exceeding 10% of the total exposure.
29
The following table presents the Banks' unsecured credit exposure with private counterparties by investment type at March 31, 2014 and December 31, 2013. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions) | ||||||
Carrying Value (1) | March 31, 2014 | December 31, 2013 | ||||
Federal funds sold | $ | 2,830.0 | $ | 2,875.0 | ||
Total | $ | 2,830.0 | $ | 2,875.0 |
Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
As of March 31, 2014, 92% of the Bank’s unsecured investment credit exposure in Federal funds sold 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. The percentage that the Bank may offer for term extensions of unsecured credit ranges from 1% to 15% 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, 2014, 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. Bank management has limited its unsecured investment activity with all European private counterparties to overnight maturities only.
30
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 parent for U.S. 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. The Bank mitigates this credit risk by generally investing in unsecured investments of highly-rated counterparties and limits foreign exposure to those countries rated AA or higher.
(in millions) | ||||||||||||
March 31, 2014 (1) (2) | ||||||||||||
Carrying Value | ||||||||||||
Domicile of Counterparty | Investment Grade (3) (4) | |||||||||||
AA | A | BBB | Total | |||||||||
Domestic | $ | — | $ | — | $ | 80.0 | $ | 80.0 | ||||
U.S. subsidiaries of foreign commercial banks | — | — | 150.0 | 150.0 | ||||||||
Total domestic and U.S. subsidiaries of foreign commercial banks | — | — | 230.0 | 230.0 | ||||||||
U.S. branches and agency offices of foreign commercial banks: | ||||||||||||
Australia | 800.0 | — | — | 800.0 | ||||||||
Canada | — | 1,000.0 | — | 1,000.0 | ||||||||
Netherlands | 800.0 | — | — | 800.0 | ||||||||
Total U.S. branches and agency offices of foreign commercial banks | 1,600.0 | 1,000.0 | — | 2,600.0 | ||||||||
Total unsecured investment credit exposure | $ | 1,600.0 | $ | 1,000.0 | $ | 230.0 | $ | 2,830.0 |
(in millions) | ||||||||||||
December 31, 2013 (1) (2) | ||||||||||||
Carrying Value | ||||||||||||
Domicile of Counterparty | Investment Grade (3) (4) | |||||||||||
AA | A | BBB | Total | |||||||||
Domestic | $ | — | $ | 500.0 | $ | 125.0 | $ | 625.0 | ||||
U.S. subsidiaries of foreign commercial banks | — | — | 150.0 | 150.0 | ||||||||
Total domestic and U.S. subsidiaries of foreign commercial banks | — | 500.0 | 275.0 | 775.0 | ||||||||
U.S. branches and agency offices of foreign commercial banks: | ||||||||||||
Australia | 800.0 | — | — | 800.0 | ||||||||
Canada | — | 500.0 | — | 500.0 | ||||||||
Netherlands | 500.0 | — | — | 500.0 | ||||||||
Norway | — | 300.0 | — | 300.0 | ||||||||
Total U.S. branches and agency offices of foreign commercial banks | 1,300.0 | 800.0 | — | 2,100.0 | ||||||||
Total unsecured investment credit exposure | $ | 1,300.0 | $ | 1,300.0 | $ | 275.0 | $ | 2,875.0 |
Notes:
(1) Does not reflect any changes in ratings, outlook or watch status occurring after March 31, 2014.
(2) These ratings represent the lowest rating available for each security owned by the Bank based on the NRSROs used by the Bank. The Bank’s internal ratings may differ from those obtained from the NRSROs.
(3) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(4) Represents the NRSRO rating of the counterparty not the country. There were no AAA rated investments at either March 31, 2014 or December 31, 2013.
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The following table presents the remaining contractual maturity of the Bank's unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks. The Bank also mitigates the credit risk on investments by generally investing in investments that have short-term maturities. At March 31, 2014 all the unsecured investments held by the Bank had overnight maturities.
(in millions) | |||||||||||||
March 31, 2014 | |||||||||||||
Carrying Value (1) | |||||||||||||
Domicile of Counterparty | Overnight (2) | Due 2 days through 30 days | Due 31 days through 90 days | Total | |||||||||
Domestic | $ | 80.0 | $ | — | $ | — | $ | 80.0 | |||||
U.S. subsidiaries of foreign commercial banks | 150.0 | — | — | 150.0 | |||||||||
Total domestic and U.S. subsidiaries of foreign commercial bank | 230.0 | — | — | 230.0 | |||||||||
U.S. branches and agency offices of foreign commercial banks: | |||||||||||||
Australia | 800.0 | — | — | 800.0 | |||||||||
Canada | 1,000.0 | — | — | 1,000.0 | |||||||||
Netherlands | 800.0 | — | — | 800.0 | |||||||||
Total U.S. branches and agency offices of foreign commercial banks | 2,600.0 | — | — | 2,600.0 | |||||||||
Total unsecured investment credit exposure | $ | 2,830.0 | $ | — | $ | — | $ | 2,830.0 |
(in millions) | |||||||||||||
December 31, 2013 | |||||||||||||
Carrying Value (1) | |||||||||||||
Domicile of Counterparty | Overnight (2) | Due 2 days through 30 days | Due 31 days through 90 days | Total | |||||||||
Domestic | $ | 625.0 | $ | — | $ | — | $ | 625.0 | |||||
U.S. subsidiaries of foreign commercial banks | 150.0 | — | — | 150.0 | |||||||||
Total domestic and U.S. subsidiaries of foreign commercial bank | 775.0 | — | — | 775.0 | |||||||||
U.S. branches and agency offices of foreign commercial banks: | |||||||||||||
Australia | 800.0 | — | — | 800.0 | |||||||||
Canada | 500.0 | — | — | 500.0 | |||||||||
Netherlands | 500.0 | — | — | 500.0 | |||||||||
Norway | 300.0 | — | — | 300.0 | |||||||||
Total U.S. branches and agency offices of foreign commercial banks | 2,100.0 | — | — | 2,100.0 | |||||||||
Total unsecured investment credit exposure | $ | 2,875.0 | $ | — | $ | — | $ | 2,875.0 |
Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(2) Overnight category represents Federal funds sold at March 31, 2014 and December 31, 2013.
The Bank did not have any other overnight securities at March 31, 2014.
U.S. Treasury Bills, Agency, GSE Securities and State and Local Agency Obligations. In addition to U.S. Treasury bills and securities issued or guaranteed by U.S. agencies or U.S government corporations, the Bank invests in and is subject to credit risk related to GSE securities and state and local agency obligations. The Bank maintains a portfolio of U.S. Treasury, U.S. agency and GSE/TVA securities as a secondary liquidity portfolio. Further, the Bank maintains a portfolio of state and local agency obligations to invest in mission-related assets and enhance net interest income. These portfolios totaled $2.6 billion both at March 31, 2014 and December 31, 2013.
Agency and GSE MBS. The Bank invests in and is subject to credit risk related to MBS issued or guaranteed by Federal agencies and GSEs that are directly supported by underlying mortgage loans. The Bank’s total agency and GSE MBS portfolio increased $210.9 million from December 31, 2013 to $6.6 billion at March 31, 2014. This increase was due to purchases of $386.1 million of AFS securities partially offset by paydowns of $175.3 million.
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Private Label MBS. The Bank also holds investments in private label MBS, which are also 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. The carrying value of the Bank’s private label MBS portfolio decreased $97.8 million from December 31, 2013 to $1.9 billion at March 31, 2014. This decline was primarily due to repayments, partially offset by an increase in the fair value of private label MBS held as AFS.
The slight increase in prices on OTTI securities during the first three months of 2014 increased the unrealized gains in AOCI from $77.6 million at December 31, 2013 to $79.1 million as of March 31, 2014. The weighted average price on these OTTI securities increased slightly from 86.0 at December 31, 2013 to 86.2 at March 31, 2014. These fair values are determined using unobservable inputs (i.e., Level 3) and are fundamentally the average prices derived from four third-party pricing services. The Bank uses the unadjusted prices received from the third-party pricing services in its process relating to fair value calculations and methodologies as described further in the Critical Accounting Policies section in Item 7. Management’s Discussion and Analysis in the Bank's 2013 Form 10-K.
Approximately 23% of the Bank’s MBS portfolio at March 31, 2014 was issued by private label issuers. The Bank generally focused its private label MBS purchases on credit-enhanced, senior tranches of securities in which the subordinate classes of the securities provide credit support for the senior class of securities. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the senior class of securities would experience any credit losses. In late 2007, the Bank discontinued the purchase of private label MBS.
The prospectuses and offering memoranda for the private label MBS in the Bank’s portfolio contain representations and warranties that the mortgage loans in the collateral pools were underwritten to certain standards. Based on the performance of the mortgages in some of the collateral pools, among other information, it appears that the failure to adhere to the stated underwriting standards was so routine that the underwriting standards were all but completely abandoned. The issuers, underwriters and rating agencies all failed to disclose that the underwriting standards that were represented in the offering documents were routinely not followed or had been abandoned altogether. This failure resulted in the Bank owning certain private label MBS on which it has recognized losses and is more fully explained in the discussion on OTTI later on in this Risk Management section. The Bank has filed lawsuits against certain issuers, underwriters and rating agencies, some of which were settled in the first quarter of 2014 as more fully discussed in Part II, Item 1. Legal Proceedings in this Form 10-Q.
Participants in the mortgage market often characterize 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 is no universally accepted definition of these segments or classifications. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories, and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than Prime loans. Further, many mortgage participants classify single family loans with credit characteristics that range between Prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category or may be underwritten with low or no documentation compared to a full documentation mortgage loan. Industry participants often use this classification principally to describe loans for which the underwriting process is less rigorous and to reduce the documentation requirements of the borrower. It should be noted that generally Alt-A and subprime mortgages are not being widely originated in the market today.
The following table presents the par value of the private label MBS portfolio by various categories of underlying collateral and by interest rate payment terms. Unless otherwise noted, the private label MBS exposures below, and throughout this report, reflect the most conservative classification provided by the credit rating agencies at the time of issuance.
March 31, 2014 | December 31, 2013 | |||||||||||||||||
(dollars in millions) | Fixed Rate | Variable Rate | Total | Fixed Rate | Variable Rate | Total | ||||||||||||
Private label residential MBS: | ||||||||||||||||||
Prime | $ | 161.6 | $ | 1,005.1 | $ | 1,166.7 | $ | 175.6 | $ | 1,052.8 | $ | 1,228.4 | ||||||
Alt-A | 429.4 | 499.5 | 928.9 | 447.7 | 527.6 | 975.3 | ||||||||||||
Subprime | — | 6.2 | 6.2 | — | 6.2 | 6.2 | ||||||||||||
Total private label MBS - par value | $ | 591.0 | $ | 1,510.8 | $ | 2,101.8 | $ | 623.3 | $ | 1,586.6 | $ | 2,209.9 |
Certain MBS securities have a fixed-rate component for a specified period of time and then have a rate reset on a given date. When the rate is reset, the security is then considered to be a variable-rate security. Examples include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid adjustable-rate mortgages (ARMs). In addition, certain of these securities may have
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a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are all reported as variable-rate, regardless of whether the rate reset date has occurred.
Private Label MBS Collateral Statistics. The following tables provide collateral performance and credit enhancement information for the Bank’s private label MBS portfolio by par, collateral type, and the security's credit rating as of March 31, 2014. The Bank has not purchased any private label MBS since 2007.
Private Label MBS by Vintage - Prime | |||||||||||||||
(dollars in millions) | 2007 | 2006 | 2005 | 2004 and earlier | Total | ||||||||||
Par by lowest external long- term rating: | |||||||||||||||
AA | $ | — | $ | — | $ | — | $ | 6.5 | $ | 6.5 | |||||
A | — | — | — | 12.3 | 12.3 | ||||||||||
BBB | — | — | 24.7 | 220.1 | 244.8 | ||||||||||
Below investment grade: | |||||||||||||||
BB | — | 13.8 | 37.1 | 120.0 | 170.9 | ||||||||||
B | — | — | 32.1 | 104.0 | 136.1 | ||||||||||
CCC | — | 7.9 | 6.8 | 30.9 | 45.6 | ||||||||||
CC | 0.5 | 24.9 | 7.6 | — | 33.0 | ||||||||||
C | 21.3 | 106.4 | — | — | 127.7 | ||||||||||
D | 242.5 | 96.3 | 46.9 | — | 385.7 | ||||||||||
Unrated | — | — | — | 4.1 | 4.1 | ||||||||||
Total | $ | 264.3 | $ | 249.3 | $ | 155.2 | $ | 497.9 | $ | 1,166.7 | |||||
Amortized cost | $ | 201.9 | $ | 216.4 | $ | 145.4 | $ | 494.8 | $ | 1,058.5 | |||||
Gross unrealized losses | — | (0.3 | ) | (3.7 | ) | (4.7 | ) | (8.7 | ) | ||||||
Fair value | 228.4 | 230.1 | 148.3 | 493.4 | 1,100.2 | ||||||||||
OTTI (1): | |||||||||||||||
Total OTTI losses | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
OTTI losses reclassified (from) AOCI | — | — | — | — | — | ||||||||||
Net OTTI losses, credit portion | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Weighted average fair value/par | 86.4 | % | 92.3 | % | 95.6 | % | 99.1 | % | 94.3 | % | |||||
Original weighted average credit support | 7.2 | 8.2 | 4.4 | 5.4 | 6.3 | ||||||||||
Weighted-average credit support - current | 0.1 | 1.4 | 6.0 | 11.8 | 6.2 | ||||||||||
Weighted avg. collateral delinquency(2) | 13.7 | 13.1 | 11.3 | 8.9 | 11.2 |
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Private Label MBS by Vintage - Alt-A (3) | |||||||||||||||
(dollars in millions) | 2007 | 2006 | 2005 | 2004 and earlier | Total | ||||||||||
Par by lowest external long- term rating: | |||||||||||||||
A | $ | — | $ | 7.9 | $ | — | $ | 19.1 | $ | 27.0 | |||||
BBB | — | — | 5.0 | 99.4 | 104.4 | ||||||||||
Below investment grade: | |||||||||||||||
BB | — | — | — | 13.2 | 13.2 | ||||||||||
B | — | — | 30.1 | 8.9 | 39.0 | ||||||||||
CCC | — | 82.7 | 50.2 | 40.0 | 172.9 | ||||||||||
CC | — | 42.9 | 8.5 | 2.2 | 53.6 | ||||||||||
D | 193.1 | 271.9 | 53.8 | — | 518.8 | ||||||||||
Total | $ | 193.1 | $ | 405.4 | $ | 147.6 | $ | 182.8 | $ | 928.9 | |||||
Amortized cost | $ | 146.6 | $ | 318.3 | $ | 139.3 | $ | 176.5 | $ | 780.7 | |||||
Gross unrealized losses | — | (1.3 | ) | (3.2 | ) | (0.8 | ) | (5.3 | ) | ||||||
Fair value | 151.6 | 340.9 | 137.3 | 181.3 | 811.1 | ||||||||||
OTTI (1): | |||||||||||||||
Total OTTI losses | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
OTTI losses reclassified (from) AOCI | — | — | — | — | — | ||||||||||
Net OTTI losses, credit portion | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Weighted average fair value/par | 78.5 | % | 84.1 | % | 93.0 | % | 99.2 | % | 87.3 | % | |||||
Original weighted average credit support | 13.4 | 10.0 | 5.9 | 5.1 | 9.1 | ||||||||||
Weighted-average credit support - current | 0.0 | 0.4 | 6.6 | 19.0 | 5.2 | ||||||||||
Weighted avg. collateral delinquency(2) | 21.9 | 20.3 | 12.1 | 10.5 | 17.4 |
Notes:
(1) For the three months ended March 31, 2014.
(2) Delinquency information is presented at the cross-collateralization level.
(3) Includes HELOCs.
The Bank’s subprime private label MBS balances are immaterial to the overall portfolio; therefore, the related collateral statistics for these private label MBS are not presented.
Private Label MBS Issuers and Servicers. The following tables provide information regarding the issuers and master servicers of the Bank’s private label MBS portfolio that exceeded 5% of the total portfolio as of March 31, 2014. Management actively monitors the credit quality of the portfolio’s master servicers. For further information on the Bank’s MBS master servicer risks, see additional discussion in Item 1A. Risk Factors in the Bank's 2013 Form 10-K.
March 31, 2014 | ||||||
Original Issuers (in millions) | Total Carrying Value | Total Fair Value | ||||
Lehman Brothers Holdings Inc. (1) | $ | 466.8 | $ | 466.5 | ||
J.P. Morgan Chase & Co. | 395.6 | 395.6 | ||||
Countrywide Financial Corp. (2) | 228.7 | 224.8 | ||||
Wells Fargo & Co. | 197.3 | 198.3 | ||||
Citigroup Inc. | 131.6 | 128.4 | ||||
GMAC LLC | 116.4 | 116.3 | ||||
Other | 386.9 | 386.6 | ||||
Total | $ | 1,923.3 | $ | 1,916.5 |
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March 31, 2014 | ||||||
Current Master Servicers (in millions) | Total Carrying Value | Total Fair Value | ||||
Wells Fargo Bank, NA | $ | 648.2 | $ | 649.1 | ||
Nationstar Mortgage Inc. | 466.8 | 466.5 | ||||
Bank of America Corp. | 264.5 | 260.4 | ||||
U.S. Bank NA | 154.6 | 154.6 | ||||
CitiMortgage, Inc. | 131.6 | 128.4 | ||||
Other | 257.6 | 257.5 | ||||
Total | $ | 1,923.3 | $ | 1,916.5 |
(1)Lehman Brothers Holdings Inc. filed for bankruptcy in 2008. Nationstar Mortgage Inc. is now servicing all but one of the bonds, and five different trustees have assumed responsibility for these 20 bonds. However, the Bank believes the original issuer is more relevant with respect to understanding the bond underwriting criteria.
(2)Bank of America acquired Countrywide Financial Corp and Countrywide Home Loan Servicing LP following issuance of certain private label MBS. The Bank believes the original issuer is more relevant with respect to understanding the bond underwriting criteria. However, Bank of America is currently servicing these private label MBS.
Private Label MBS in Unrealized Loss Positions. The following table provides information on the portion of the private label MBS portfolio in an unrealized loss position at March 31, 2014.
(dollars in millions) | Par | Amortized Cost | Gross Unrealized Losses | Weighted Average Collateral Delinquency Rate(1) | |||||||
Private label MBS backed by: | |||||||||||
Prime loans: | |||||||||||
First lien | $ | 307.5 | $ | 306.7 | $ | (8.7 | ) | 11.6 | % | ||
Alt-A and other: | |||||||||||
Alt-A other | 166.0 | 159.1 | (5.3 | ) | 12.8 | % | |||||
Subprime loans: | |||||||||||
First lien | 3.9 | 3.9 | (0.2 | ) | 24.3 | % |
Notes:
(1) Delinquency information is presented at the cross-collateralization level.
OTTI. The Bank did not recognize any credit-related OTTI charges in earnings during the three months ended March 31, 2014 and recognized $0.4 million during the three months ended March 31, 2013. Because the Bank does not intend to sell and it is not more likely than not that the Bank will be required to sell any OTTI securities before anticipated recovery of their amortized cost basis, the Bank does not have an additional OTTI charge for the difference between amortized cost and fair value. The Bank has not recorded OTTI on any other type of security (i.e., U.S. Agency MBS or non-MBS securities).
The Bank’s estimate of cash flows has a significant impact on the determination of credit losses. Cash flows expected to be collected are based on the performance and type of private label MBS and the Bank’s expectations of the economic environment. To ensure consistency in determination of the OTTI for private label MBS among all FHLBanks, each quarter the Bank coordinates with the OTTI Governance Committee to update its OTTI analysis based on actual loan performance and current housing market assumptions in the collateral loss projection models, which generate the estimated cash flows from the Bank’s private label MBS. This process is described in Note 5 - OTTI to the unaudited financial statements included in this Form 10-Q.
36
The Bank’s quarterly OTTI analysis is based on current and forecasted economic trends. Significant assumptions used on the Bank’s private label MBS as part of its first quarter 2014 analysis are presented below.
Significant Inputs for Private Label Residential MBS | |||||||||
Prepayment Rates | Default Rates | Loss Severities | Current Credit Enhancement | ||||||
Year of securitization | Weighted Avg % | Weighted Avg % | Weighted Avg % | Weighted Avg % | |||||
Prime: | |||||||||
2007 | 10.8 | 16.6 | 39.8 | 0.1 | |||||
2006 | 10.8 | 13.8 | 36.1 | 1.3 | |||||
2005 | 14.0 | 5.4 | 31.0 | 7.4 | |||||
2004 and prior | 16.9 | 3.0 | 30.9 | 10.3 | |||||
Total Prime | 13.3 | 9.4 | 34.3 | 5.0 | |||||
Alt-A: | |||||||||
2007 | 12.2 | 26.9 | 39.6 | 0.0 | |||||
2006 | 12.0 | 22.8 | 44.1 | 0.1 | |||||
2005 | 11.2 | 13.7 | 39.2 | 0.4 | |||||
2004 and prior | 14.0 | 8.8 | 32.1 | 17.2 | |||||
Total Alt-A | 12.6 | 19.0 | 39.2 | 5.2 | |||||
Subprime: | |||||||||
2004 and prior | 8.3 | 25.0 | 65.8 | 36.8 | |||||
Total Residential MBS | 13.0 | 13.7 | 36.6 | 5.2 |
The Bank’s life-to-date credit losses are concentrated in its 2006 and 2007 vintage bonds. These vintages represent 92% of life-to-date credit losses, of which 48% relates to Prime and 44% relates to Alt-A, with the remainder in subprime and HELOC.
At March 31, 2014, the Bank had 48 private label MBS that have had OTTI charges during their life. The Bank has recognized $240.5 million of credit losses on these securities life-to-date. The life-to-date credit loss excludes actual cash losses realized, which are recorded as a reduction to credit loss and par. The Bank has realized $106.4 million of actual cash losses life-to-date, of which $5.5 million was incurred during the first quarter of 2014. Also during 2014, one OTTI security that had life-to-date credit losses of $0.1 million matured for which the Bank received all of the cash flows to which it was contractually entitled. The life-to-date credit loss excludes $106.0 million of credit losses related to securities sold in previous quarters for which the Bank recognized gains on sale of $15.6 million.
By comparison, at March 31, 2013, the Bank had 49 private label MBS that have had OTTI charges during their life. The Bank has recognized $279.0 million of credit losses on these securities life-to-date. The Bank recognized $68.0 million of actual cash losses life-to-date, of which $15.0 million was incurred during the first quarter of 2013. Also, during 2013, one OTTI security, which had life-to-date credit losses of $0.1 million matured, for which the Bank received all of the cash flows to which it was contractually entitled.
The following tables present the amount of credit-related and non-credit-related OTTI charges the Bank recorded on its private label MBS portfolio, on both newly impaired and previously impaired securities in the first quarter of 2013. The Bank did not have OTTI charges on its private label MBS for the first quarter of 2014.
March 31, 2013 | |||||||||
(in millions) | Credit Losses | Net Non-credit Losses | Total Losses | ||||||
Securities newly impaired during the period | $ | — | $ | — | $ | — | |||
Securities previously impaired prior to current period | (0.4 | ) | 0.4 | — | |||||
Total | $ | (0.4 | ) | $ | 0.4 | $ | — |
Each quarter the Bank updates its estimated cash flow projections and determines if there is an increase in the estimated cash flows the Bank will receive. If there is an increase in estimated cash flows and it is deemed significant, it is recorded as an increase in the yield on the Bank’s investment and is recognized as interest income over the life of the investment. Significant
37
increases in cash flows caused an increase in the yield of certain OTTI private label MBS. Interest income on these securities was $5.9 million and $1.9 million for the first quarter of 2014 and 2013, respectively. The same private label MBS can have multiple increases in cash flows that are deemed to be significant.
The Bank transfers private label MBS from HTM to AFS when an OTTI credit loss is recorded on a security. The Bank believes that a credit loss constitutes evidence of deterioration in the credit quality of the security. The Bank believes that the transfer increases its flexibility to potentially sell other-than-temporarily-impaired securities if it makes economic sense. There were no transfers during the first three months of 2014 and 2013.
Management will continue to evaluate all impaired securities, including those private label MBS on which OTTI has been recorded. Material credit losses have occurred on private label MBS and may occur in the future. The specific amount of credit losses will depend on the actual performance of the underlying loan collateral as well as the Bank’s future modeling assumptions. The Bank cannot estimate the future amount of any additional credit losses.
As discussed above, the projection of cash flows expected to be collected on private label MBS involves significant judgment with respect to key modeling assumptions. Therefore, on all private label MBS, including HELOC investments, the Bank performed a cash flow analysis under one additional scenario which was agreed to by the OTTI Governance Committee that represented meaningful, plausible and more adverse external assumptions. This more adverse scenario decreases the short-term forecast by five percentage points, and slows housing price recovery rates 33%. The adverse scenario estimated cash flows were generated using the same model (Prime, Alt-A or subprime) as the base scenario. Using a model with more severe assumptions could increase the estimated credit loss recorded by the Bank. The securities included in this stress scenario were only those that were in an unrealized loss position at March 31, 2014. Additionally, the maximum credit loss under the adverse case was limited to the amount of the security's unrealized loss. The adverse case housing price forecast is not management’s current best estimate of cash flows and is therefore not used as a basis for determining OTTI. The results of the analysis were immaterial for the three months ended March 31, 2014.
Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives
Mortgage Loans. The Finance Agency has authorized the Bank to hold mortgage loans under the MPF Program whereby the Bank acquires mortgage loans from participating members in a shared credit risk structure. These assets carry CEs, which give them the approximate equivalent of a AA credit rating at the time of purchase by the Bank, although the CE is not actually rated. The Bank had net mortgage loans held for portfolio $3.2 billion, both at March 31, 2014 and December 31, 2013, respectively, after an allowance for credit losses of $7.3 million and $11.4 million, respectively.
Mortgage Insurers. The Bank’s MPF Program currently has credit exposure to 10 mortgage insurance companies which provide Primary Mortgage Insurance (PMI) and/or Supplemental Mortgage Insurance (SMI) for the Bank’s various products. The Bank closely monitors the financial condition of these mortgage insurers. PMI for MPF Program loans must be issued by a mortgage insurance company on the Bank's approved mortgage insurance company list whenever PMI coverage is required.
None of the Bank’s mortgage insurers currently maintain a rating of BBB+ or better by at least one NRSRO. Given the credit deterioration of PMI providers, the estimate of the allowance for credit losses includes projected reduced claim payments. As required by the MPF Program, for ongoing PMI, the ratings model currently requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below A+. All PFIs have met this requirement.
The MPF Plus product required SMI under the MPF Program when each pool was established. At March 31, 2014, eight of the 14 MPF Plus pools still have SMI policies in place. The Bank does not currently offer the MPF Plus product and has not purchased loans under MPF Plus Commitments since July 2006. Per MPF Program guidelines, the existing MPF Plus product exposure is required to be secured by the PFI once the SMI company is rated below AA-. The Finance Agency guidelines require mortgage insurers that underwrite SMI to be rated AA- or better. This requirement has been temporarily waived by the Finance Agency provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of March 31, 2014, $61.7 million of SMI exposure had been secured by two PFIs.
The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of March 31, 2014 was $18.1 million and $7.1 million, respectively. As of December 31, 2013, these amounts were $18.9 million and $7.5 million, respectively.
38
BOB Loans. The Bank's BOB loan program is targeted to small businesses in the Bank's district to assist in the growth and development of small businesses, including both start-up and expansion. The Bank makes funds available to members to extend credit to an approved small business borrower, thereby enabling small businesses to qualify for credit that otherwise may not be available. See Item 1. Business in the Bank's 2013 Form 10-K for additional information about the BOB loan program. The allowance for credit losses on BOB loans was $2.1 million and $2.2 million at March 31, 2014 and December 31, 2013, respectively.
Derivative Counterparties. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Over-the-counter derivative transactions may be either executed with a counterparty (referred to as bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (Clearing Houses). The latter are types of derivatives referred to as cleared derivatives. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
The Bank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements. The Bank is also required to follow the requirements set forth by applicable regulation.
Bilateral Derivatives. The Bank is subject to non-performance by counterparties to its bilateral derivative transactions. The Bank requires collateral on bilateral derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative transactions with counterparties as of March 31, 2014.
Cleared Derivatives. The Bank is subject to credit risk due to non-performance by the Clearing Houses and clearing agent. The requirement that the Bank post initial and variation margin, through the clearing agent, to the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market. The Bank's use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of March 31, 2014.
The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments. The maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables as well as the netting requirements to net assets and liabilities. The following table presents the derivative positions with non-member counterparties and member institutions to which the Bank has credit exposure at March 31, 2014 and December 31, 2013.
39
(in millions) | March 31, 2014 | ||||||||||||||
Credit Rating (1) | Notional Amount | Net Derivatives Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparties | Non-cash Collateral Pledged To (From) Counterparties | Net Credit Exposure to Counterparties | ||||||||||
Non-member counterparties | |||||||||||||||
Asset positions with credit exposure: | |||||||||||||||
Bilateral derivatives | |||||||||||||||
AA | $ | 300.0 | $ | 7.3 | $ | — | $ | — | $ | 7.3 | |||||
A | 1,433.6 | 8.1 | (5.8 | ) | — | 2.3 | |||||||||
BBB | 655.2 | 13.8 | (13.2 | ) | — | 0.6 | |||||||||
Liability positions with credit exposure: | |||||||||||||||
A | 2,995.0 | (86.8 | ) | 88.6 | — | 1.8 | |||||||||
Cleared derivatives (2) | 14,057.9 | (130.4 | ) | 177.1 | — | 46.7 | |||||||||
Total derivative positions with credit exposure to non-member counterparties | 19,441.7 | (188 | ) | 246.7 | — | 58.7 | |||||||||
Member institutions (3) | 15.1 | 0.2 | — | — | 0.2 | ||||||||||
Total | $ | 19,456.8 | $ | (187.8 | ) | $ | 246.7 | $ | — | $ | 58.9 | ||||
Derivative positions without credit exposure | 19,535.9 | ||||||||||||||
Total notional | $ | 38,992.7 |
40
(in millions) | December 31, 2013 | ||||||||||||||
Credit Rating (1) | Notional Amount | Net Derivatives Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparties | Non-cash Collateral Pledged To (From) Counterparties | Net Credit Exposure to Counterparties | ||||||||||
Non-member counterparties | |||||||||||||||
Asset positions with credit exposure: | |||||||||||||||
Bilateral derivatives | |||||||||||||||
AA | $ | 300.0 | $ | 9.6 | $ | — | $ | — | $ | 9.6 | |||||
A | 3,550.5 | 22.5 | (4.8 | ) | (13.8 | ) | 3.9 | ||||||||
Cleared derivatives (2) | 10,035.1 | 8.5 | (2.7 | ) | — | 5.8 | |||||||||
Liability positions with credit exposure: | |||||||||||||||
A | 3,724.0 | (132.3 | ) | 133.4 | — | 1.1 | |||||||||
Cleared derivatives (2) | — | — | 25.6 | — | 25.6 | ||||||||||
Total derivative positions with credit exposure to non-member counterparties | 17,609.6 | (91.7 | ) | 151.5 | (13.8 | ) | 46.0 | ||||||||
Member institutions (3) | 12.3 | 0.2 | — | — | 0.2 | ||||||||||
Total | $ | 17,621.9 | $ | (91.5 | ) | $ | 151.5 | $ | (13.8 | ) | $ | 46.2 | |||
Derivative positions without credit exposure | 19,629.8 | ||||||||||||||
Total notional | $ | 37,251.7 |
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after March 31, 2014 . The ratings presented in this table represent the lowest long-term counterparty credit rating available for each counterparty based on the NRSRO's used by the Bank.
(2) Represents derivative transactions cleared through Clearing Houses, which are not rated.
(3) Member institutions include mortgage delivery commitments. Collateral held with respect to derivatives with member institutions represents the minimum amount of eligible collateral physically held by or on behalf of the Bank or eligible collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.
The following tables summarize the Bank’s bilateral derivative counterparties which represent more than 10% of the Bank’s total notional amount outstanding and net credit exposure as of March 31, 2014 and December 31, 2013.
Notional Greater Than 10% | March 31, 2014 | December 31, 2013 | ||||||||
(dollars in millions) Derivative Counterparty | Credit Rating | Notional | % of Notional | Credit Rating | Notional | % of Notional | ||||
Deutsche Bank AG | A | $ | 6,024.6 | 24.2 | A | $ | 5,751.1 | 21.1 | ||
JP Morgan Chase Bank, NA | A | 3,386.4 | 13.6 | A | 3,366.9 | 12.4 | ||||
Morgan Stanley Capital | BBB | 2729.2 | 10.9 | (1) | (1) | (1) | ||||
Credit Suisse International | (1) | (1) | (1) | A | 3,284.0 | 12.1 | ||||
BNP Paribas | (1) | (1) | (1) | A | 2,738.7 | 10.1 | ||||
All others | n/a | 12,794.6 | 51.3 | n/a | 12,075.9 | 44.3 | ||||
Total | $ | 24,934.8 | 100.0 | $ | 27,216.6 | 100.0 | ||||
41
Net Credit Exposure Greater Than 10% | March 31, 2014 | December 31, 2013 | ||||||||
(dollars in millions) Derivative Counterparty | Credit Rating | Net Credit Exposure | % of Net Credit Exposure | Credit Rating | Net Credit Exposure | % of Net Credit Exposure | ||||
Royal Bank of Canada | AA | $ | 7.3 | 60.1 | AA | $ | 9.6 | 65.0 | ||
HSBC Bank USA, NA | A | 2.2 | 18.4 | A | 3.1 | 20.8 | ||||
Credit Suisse International | A | 1.3 | 10.4 | (2) | (2) | (2) | ||||
All others | n/a | 1.3 | 11.1 | n/a | 2.1 | 14.2 | ||||
Total | $ | 12.1 | 100.0 | $ | 14.8 | 100.0 |
Notes:
(1) The percentage of notional was not greater than 10%.
(2) The counterparty had less than 10% credit exposure as of December 31, 2013.
To manage market risk, the Bank enters into derivative contracts. Some of these derivatives are with U.S. branches of financial institutions located in Europe. In terms of counterparty credit risk exposure, European financial institutions are exposed to the Bank as shown below.
(in millions) | March 31, 2014 | December 31, 2013 | ||||||||||||||||
Country of Counterparty | Market Value of Total Exposure | Collateral Obligation (Net Exposure) | Collateral Pledged by the Bank | Market Value of Total Exposure | Collateral Obligation (Net Exposure) | Collateral Pledged by the Bank | ||||||||||||
Switzerland | $ | 84.4 | $ | 84.4 | $ | 84.8 | $ | 126.1 | $ | 126.1 | $ | 126.3 | ||||||
United Kingdom | 35.3 | 30.3 | 30.1 | 41.7 | 36.7 | 37.4 | ||||||||||||
Germany | 54.7 | 39.7 | 38.5 | 86.9 | 71.9 | 71.3 | ||||||||||||
France | 0.7 | — | — | — | — | — | ||||||||||||
Total | $ | 175.1 | $ | 154.4 | $ | 153.4 | $ | 254.7 | $ | 234.7 | $ | 235.0 |
Note: The average maturity of these derivative contracts is January 2019 and February 2019 at March 31, 2014 and December 31, 2013, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.
In addition, the Bank is exposed to counterparty credit risk with U.S. branches of European financial institutions, as presented in the tables below.
(in millions) | March 31, 2014 | December 31, 2013 | ||||||||||||||||
Country of Counterparty | Market Value of Total Exposure | Collateral Obligation (Net Exposure) | Collateral Pledged to the Bank | Market Value of Total Exposure | Collateral Obligation (Net Exposure) | Collateral Pledged to the Bank | ||||||||||||
France | $ | 5.0 | $ | 5.0 | $ | 5.8 | $ | 4.4 | $ | 4.4 | $ | 4.8 | ||||||
United Kingdom | 17.6 | 15.3 | 14.6 | 9.6 | 8.6 | 13.1 | ||||||||||||
Total | $ | 22.6 | $ | 20.3 | $ | 20.4 | $ | 14.0 | $ | 13.0 | $ | 17.9 |
Note: The average maturity of these derivative contracts is July 2018 and December 2018 at March 31, 2014 and December 31. 2013, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.
To appropriately assess potential credit risk to its European holdings, the Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications for changes to credit quality. The Bank also actively monitors its counterparties' approximate indirect exposure to European sovereign debt and considers this exposure as a component of its credit risk review process.
Liquidity and Funding Risk
As a wholesale bank, the Bank employs financial strategies that are designed to enable it to expand and contract its assets, liabilities and capital in response to changes in member credit demand, membership composition and other market factors. The Bank's liquidity resources are designed to support these strategies and are described further in the Bank's 2013 Form 10-K.
42
Consolidated obligations bonds and discount notes are rated Aaa with stable outlook/P-1 by Moody’s and AA+ with stable outlook/A-1+ by S&P, as of March 31, 2014. These ratings measure the likelihood of timely payment of principal and interest. At March 31, 2014, the Bank’s consolidated obligation bonds outstanding increased to $37.9 billion compared to $37.7 billion at December 31, 2013. The Bank also issues discount notes, which are shorter-term consolidated obligations, to support its short-term member loan portfolio and other short-term asset funding needs. Total discount notes outstanding at March 31, 2014 decreased to $21.9 billion compared to $28.2 billion at December 31, 2013, primarily due to a decrease in short-term advance activity. Access and funding levels have fluctuated with conditions in the global financial markets over the past several years. During the first three months of 2014, short-term funding levels remained relatively stable. Long-term funding levels improved considerably as the unfavorable market conditions present in the latter half of 2013 began to recede. Consolidated obligation bonds often have investor-determined features. The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating-rate assets. At March 31, 2014, callable bonds issued by the Bank were $12.8 billion, up approximately $1.6 billion from December 31, 2013. Note 10 - Consolidated Obligations to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank’s consolidated obligations.
The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. The requirements are designed to enhance the Bank’s protection against temporary disruptions in access to the debt markets. The Bank was in compliance with these requirements at March 31, 2014 .
Contingency Liquidity. In their asset/liability management planning, members may look to the Bank to provide standby liquidity. The Bank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. To satisfy these requirements and objectives, the Bank’s primary sources of liquidity are the issuance of new consolidated obligation bonds and discount notes and short-term investments, such as Federal funds sold and overnight securities purchased under agreements to resell. At March 31, 2014 and December 31, 2013, excess contingency liquidity was approximately $15.8 billion and $13.8 billion, respectively.
Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2013 Form 10-K for additional information.
Joint and Several Liability. Although the Bank is primarily liable for its portion of consolidated obligations, (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. The Finance Agency, in its discretion and notwithstanding any other provisions, may at any time order any FHLBank to make principal or interest payments due on any consolidated obligation, even in the absence of default by the primary obligor. To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-paying FHLBank, which has a corresponding obligation to reimburse the FHLBank to the extent of such assistance and other associated costs. However, if the Finance Agency determines that the non-paying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and authorize the FHLBanks to issue consolidated obligations, through the OF as its agent. The Bank is not permitted to issue individual debt without Finance Agency approval. See Note 14 - Consolidated Obligations of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2013 Form 10-K for additional information.
Operating and Business Risks
The Bank is exposed to various operating and business risks. Operating risk is defined as the risk of unexpected loss resulting from human error, system malfunctions, man-made or natural disasters, fraud, legal risk, compliance risk, or circumvention or failure of internal controls and are categorized as compliance, fraud, legal, information and personnel operating risks. Business risk is the risk of an adverse impact on the Bank’s profitability or financial or business strategies resulting from external factors that may occur in the short-term and/or long-term. The Bank has established operating policies and procedures to manage each of the specific operating and business risks. For additional information, on operating and business risks, see the "Operating and Business Risks" discussion in the Risk Management section of Item 7. in the Bank's 2013 Form 10-K.
43
Item 1: Financial Statements (unaudited)
Federal Home Loan Bank of Pittsburgh
Statement of Income (unaudited)
Three months ended March 31, | |||||||
(in thousands, except per share amounts) | 2014 | 2013 | |||||
Interest income: | |||||||
Advances | $ | 59,973 | $ | 55,780 | |||
Prepayment fees on advances, net | 3,091 | 1,713 | |||||
Interest-bearing deposits | 83 | 117 | |||||
Securities purchased under agreements to resell | 13 | 576 | |||||
Federal funds sold | 705 | 1,463 | |||||
Trading securities | 1,838 | 60 | |||||
Available-for-sale (AFS) securities | 32,884 | 28,765 | |||||
Held-to-maturity (HTM) securities | 19,970 | 27,024 | |||||
Mortgage loans held for portfolio | 33,364 | 37,634 | |||||
Total interest income | 151,921 | 153,132 | |||||
Interest expense: | |||||||
Consolidated obligations - discount notes | 6,036 | 5,245 | |||||
Consolidated obligations - bonds | 83,525 | 102,057 | |||||
Mandatorily redeemable capital stock | 14 | 289 | |||||
Deposits | 55 | 131 | |||||
Other borrowings | 3 | 7 | |||||
Total interest expense | 89,633 | 107,729 | |||||
Net interest income | 62,288 | 45,403 | |||||
Provision (benefit) for credit losses | (3,873 | ) | (121 | ) | |||
Net interest income after provision (benefit) for credit losses | 66,161 | 45,524 | |||||
Other noninterest income (loss): | |||||||
Total OTTI losses (Note 5) | — | — | |||||
OTTI losses reclassified (from) AOCI (Note 5) | — | (442 | ) | ||||
Net OTTI losses, credit portion (Note 5) | — | (442 | ) | ||||
Net gains on trading securities (Note 2) | 9,792 | 231 | |||||
Net gains (losses) on derivatives and hedging activities (Note 9) | (9,199 | ) | 1,584 | ||||
Gains on litigation settlements, net | 36,610 | — | |||||
Other, net | 4,471 | 2,327 | |||||
Total other noninterest income | 41,674 | 3,700 | |||||
Other expense: | |||||||
Compensation and benefits | 10,822 | 9,230 | |||||
Other operating | 6,104 | 6,029 | |||||
Finance Agency | 1,249 | 1,172 | |||||
Office of Finance | 893 | 954 | |||||
Total other expense | 19,068 | 17,385 | |||||
Income before assessments | 88,767 | 31,839 | |||||
Affordable Housing Program (AHP) assessment | 8,878 | 3,213 | |||||
Net income | $ | 79,889 | $ | 28,626 | |||
Earnings per share: | |||||||
Weighted avg shares outstanding (excludes mandatorily redeemable capital stock) | 29,072 | 27,783 | |||||
Basic and diluted earnings per share | $ | 2.75 | $ | 1.03 | |||
Dividends per share | $ | 0.58 | $ | 0.08 |
The accompanying notes are an integral part of these financial statements.
44
Federal Home Loan Bank of Pittsburgh
Statement of Comprehensive Income (unaudited)
Three months ended March 31, | ||||||
(in thousands) | 2014 | 2013 | ||||
Net income | $ | 79,889 | $ | 28,626 | ||
Other comprehensive income (loss): | ||||||
Net unrealized gains (losses) on AFS securities: | ||||||
Unrealized gains (losses) | 24,528 | (4,838 | ) | |||
Net non-credit portion of OTTI gains (losses) on AFS securities: | ||||||
Net change in fair value of OTTI securities | 2,018 | 14,364 | ||||
Unrealized gains (losses) | (575 | ) | 15,060 | |||
Reclassification of non-credit portion included in net income | — | 442 | ||||
Total net non-credit portion of OTTI gains (losses) on AFS securities | 1,443 | 29,866 | ||||
Pension and post-retirement benefits | 39 | 26 | ||||
Total other comprehensive income | 26,010 | 25,054 | ||||
Total comprehensive income | $ | 105,899 | $ | 53,680 |
The accompanying notes are an integral part of these financial statements.
45
Federal Home Loan Bank of Pittsburgh
Statement of Condition (unaudited)
(in thousands) | March 31, 2014 | December 31, 2013 | ||||
ASSETS | ||||||
Cash and due from banks | $ | 1,141,287 | $ | 3,121,345 | ||
Interest-bearing deposits | 5,459 | 7,795 | ||||
Federal funds sold | 2,830,000 | 2,875,000 | ||||
Investment securities: | ||||||
Trading securities (Note 2) | 259,446 | 239,190 | ||||
AFS securities, at fair value, include $79,233 pledged as collateral that may be repledged at December 31, 2013 (Note 3) | 7,061,145 | 6,757,717 | ||||
HTM securities; fair value of $3,868,330 and $4,034,830, respectively (Note 4) | 3,822,403 | 3,995,530 | ||||
Total investment securities | 11,142,994 | 10,992,437 | ||||
Advances (Note 6) | 46,063,912 | 50,247,435 | ||||
Mortgage loans held for portfolio (Note 7), net of allowance for credit losses of $7,318 and $11,359, respectively (Note 8) | 3,174,294 | 3,224,091 | ||||
Banking on Business (BOB) loans, net of allowance for credit losses of $2,142 and $2,231, respectively (Note 8) | 11,161 | 11,400 | ||||
Accrued interest receivable | 82,651 | 95,374 | ||||
Premises, software and equipment, net | 10,159 | 11,136 | ||||
Derivative assets (Note 9) | 70,889 | 59,973 | ||||
Other assets | 22,850 | 24,933 | ||||
Total assets | $ | 64,555,656 | $ | 70,670,919 |
46
Federal Home Loan Bank of Pittsburgh
Statement of Condition (unaudited)
(continued)
(in thousands, except par value) | March 31, 2014 | December 31, 2013 | |||||
LIABILITIES AND CAPITAL | |||||||
Liabilities | |||||||
Deposits: | |||||||
Interest-bearing | $ | 752,293 | $ | 660,598 | |||
Noninterest-bearing | 28,062 | 33,754 | |||||
Total deposits | 780,355 | 694,352 | |||||
Consolidated obligations, net: (Note 10) | |||||||
Discount notes | 21,942,198 | 28,236,257 | |||||
Bonds | 37,901,394 | 37,698,302 | |||||
Total consolidated obligations, net | 59,843,592 | 65,934,559 | |||||
Mandatorily redeemable capital stock (Note 11) | 1,861 | 40 | |||||
Accrued interest payable | 143,873 | 97,689 | |||||
Affordable Housing Program payable | 43,883 | 36,353 | |||||
Derivative liabilities (Note 9) | 89,010 | 177,488 | |||||
Other liabilities | 152,557 | 38,236 | |||||
Total liabilities | 61,055,131 | 66,978,717 | |||||
Commitments and contingencies (Note 14) | |||||||
Capital (Note 11) | |||||||
Capital stock - putable ($100 par value) issued and outstanding 26,814 and 29,622 shares | 2,681,356 | 2,962,143 | |||||
Retained earnings: | |||||||
Unrestricted | 672,758 | 625,636 | |||||
Restricted | 76,061 | 60,083 | |||||
Total retained earnings | 748,819 | 685,719 | |||||
Accumulated other comprehensive income (AOCI) | 70,350 | 44,340 | |||||
Total capital | 3,500,525 | 3,692,202 | |||||
Total liabilities and capital | $ | 64,555,656 | $ | 70,670,919 |
The accompanying notes are an integral part of these financial statements.
47
Federal Home Loan Bank of Pittsburgh
Statement of Cash Flows (unaudited)
Three months ended March 31, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 79,889 | $ | 28,626 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | (13,480 | ) | (8,138 | ) | ||||
Change in net fair value adjustment on derivative and hedging activities | (15,998 | ) | (15,962 | ) | ||||
Net OTTI credit losses | — | 442 | ||||||
Other adjustments | (3,874 | ) | (122 | ) | ||||
Net change in: | ||||||||
Trading securities | (30,147 | ) | 149,866 | |||||
Accrued interest receivable | 12,731 | 7,993 | ||||||
Other assets | 949 | 2,177 | ||||||
Accrued interest payable | 46,185 | 34,012 | ||||||
Other liabilities | 2,516 | (2,590 | ) | |||||
Total adjustments | (1,118 | ) | 167,678 | |||||
Net cash provided by operating activities | $ | 78,771 | $ | 196,304 | ||||
INVESTING ACTIVITIES | ||||||||
Net change in: | ||||||||
Interest-bearing deposits (including $2,336 and $5,945 from other FHLBanks for mortgage loan program) | $ | (4,398 | ) | $ | (2,285 | ) | ||
Securities purchased under agreements to resell | — | 1,650,000 | ||||||
Federal funds sold | 45,000 | 1,050,000 | ||||||
Premises, software and equipment, net | (83 | ) | (656 | ) | ||||
AFS securities: | ||||||||
Proceeds | 565,159 | 393,448 | ||||||
Purchases | (701,512 | ) | (871,676 | ) | ||||
HTM securities: | ||||||||
Net change in short-term | — | 400,000 | ||||||
Proceeds from long-term maturities | 173,892 | 346,286 | ||||||
Advances: | ||||||||
Proceeds | 140,789,202 | 63,962,411 | ||||||
Made | (136,655,622 | ) | (63,520,661 | ) | ||||
Mortgage loans held for portfolio: | ||||||||
Proceeds | 108,277 | 220,470 | ||||||
Purchases | (54,609 | ) | (171,029 | ) | ||||
Net cash provided by investing activities | $ | 4,265,306 | $ | 3,456,308 |
48
Federal Home Loan Bank of Pittsburgh
Statement of Cash Flows (unaudited)
(continued)
Three months ended March 31, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
FINANCING ACTIVITIES | ||||||||
Net change in: | ||||||||
Deposits and pass-through reserves | $ | 100,584 | $ | 19,195 | ||||
Net payments for derivative contracts with financing element | (7,989 | ) | (7,877 | ) | ||||
Net proceeds from issuance of consolidated obligations: | ||||||||
Discount notes | 20,904,544 | 92,667,949 | ||||||
Bonds (none from other FHLBanks) | 3,291,720 | 6,680,644 | ||||||
Payments for maturing and retiring consolidated obligations: | ||||||||
Discount notes | (27,199,729 | ) | (98,515,095 | ) | ||||
Bonds | (3,117,510 | ) | (5,253,385 | ) | ||||
Proceeds from issuance of capital stock | 349,394 | 253,265 | ||||||
Payments for repurchase/redemption of mandatorily redeemable capital stock | (157 | ) | (63,441 | ) | ||||
Payments for repurchase/redemption of capital stock | (628,203 | ) | (236,507 | ) | ||||
Cash dividends paid | (16,789 | ) | (2,274 | ) | ||||
Net cash (used in) financing activities | $ | (6,324,135 | ) | $ | (4,457,526 | ) | ||
Net (decrease) in cash and cash equivalents | $ | (1,980,058 | ) | $ | (804,914 | ) | ||
Cash and cash equivalents at beginning of the period | 3,121,345 | 1,350,594 | ||||||
Cash and cash equivalents at end of the period | $ | 1,141,287 | $ | 545,680 | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 54,438 | $ | 84,275 | ||||
AHP payments, net | 1,348 | 1,493 | ||||||
Transfers of mortgage loans to real estate owned | 3,508 | 5,813 |
The accompanying notes are an integral part of these financial statements.
49
Federal Home Loan Bank of Pittsburgh
Statement of Changes in Capital (unaudited)
Capital Stock - Putable | Retained Earnings | |||||||||||||||||||||||
(in thousands) | Shares | Par Value | Unrestricted | Restricted | Total | AOCI | Total Capital | |||||||||||||||||
December 31, 2012 | 28,160 | $ | 2,815,965 | $ | 528,767 | $ | 30,508 | $ | 559,275 | $ | 53,705 | $ | 3,428,945 | |||||||||||
Issuance of capital stock | 2,532 | 253,265 | — | — | — | — | 253,265 | |||||||||||||||||
Repurchase/redemption of capital stock | (2,365 | ) | (236,507 | ) | — | — | — | — | (236,507 | ) | ||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (7 | ) | (698 | ) | — | — | — | — | (698 | ) | ||||||||||||||
Comprehensive income | — | — | 22,901 | 5,725 | 28,626 | 25,054 | 53,680 | |||||||||||||||||
Cash dividends | — | — | (2,202 | ) | — | (2,202 | ) | — | (2,202 | ) | ||||||||||||||
March 31, 2013 | 28,320 | $ | 2,832,025 | $ | 549,466 | $ | 36,233 | $ | 585,699 | $ | 78,759 | $ | 3,496,483 |
Capital Stock - Putable | Retained Earnings | |||||||||||||||||||||||
(in thousands) | Shares | Par Value | Unrestricted | Restricted | Total | AOCI | Total Capital | |||||||||||||||||
December 31, 2013 | 29,622 | $ | 2,962,143 | $ | 625,636 | $ | 60,083 | $ | 685,719 | $ | 44,340 | $ | 3,692,202 | |||||||||||
Issuance of capital stock | 3,494 | 349,394 | — | — | — | — | 349,394 | |||||||||||||||||
Repurchase/redemption of capital stock | (6,282 | ) | (628,203 | ) | — | — | — | — | (628,203 | ) | ||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (20 | ) | (1,978 | ) | — | — | — | — | (1,978 | ) | ||||||||||||||
Comprehensive income | — | — | 63,911 | 15,978 | 79,889 | 26,010 | 105,899 | |||||||||||||||||
Cash dividends | — | — | (16,789 | ) | — | (16,789 | ) | — | (16,789 | ) | ||||||||||||||
March 31, 2014 | 26,814 | $ | 2,681,356 | $ | 672,758 | $ | 76,061 | $ | 748,819 | $ | 70,350 | $ | 3,500,525 |
The accompanying notes are an integral part of these financial statements.
50
Federal Home Loan Bank of Pittsburgh
Notes to Financial Statements (unaudited)
Background Information
The Bank, a federally chartered corporation, is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by increasing the availability of credit for residential mortgages and community development. The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank. All holders of the Bank’s capital stock may, to the extent declared by the Board, receive dividends on their capital stock. Regulated financial depositories and insurance companies engaged in residential housing finance that maintain their principal place of business in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet membership regulation standards are also eligible to become Bank members. State and local housing associates that meet certain statutory and regulatory criteria may also borrow from the Bank. While eligible to borrow, state and local housing associates are not members of the Bank and, as such, are not required to hold capital stock.
All members must purchase stock in the Bank. The amount of capital stock a member owns is based on outstanding advances, letters of credit, membership asset value, and the principal balance of certain residential mortgage loans sold to the Bank. The Bank considers those members with capital stock balances in excess of 10% of total capital stock outstanding to be related parties. See Note 12 - Transactions with Related Parties for additional information.
The Federal Housing Finance Agency (Finance Agency) is the independent regulator of the FHLBanks. The mission of the Finance Agency is to provide effective supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. Each FHLBank operates as a separate entity with its own management, employees and board of directors. The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.
As provided by the Housing and Economic Recovery Act of 2008 as amended (Housing Act), or Finance Agency regulation, the Bank’s debt instruments, referred to as consolidated obligations, are the joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBanks. These funds are primarily used to provide advances, purchase mortgages from members through the MPF Program and purchase certain investments. See Note 10 - Consolidated Obligations for additional information. The Office of Finance (OF) is a joint office of the FHLBanks established to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare the combined quarterly and annual financial reports of all 12 FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The Bank primarily invests these funds in short-term investments to provide liquidity. The Bank also provides member institutions with correspondent services, such as wire transfer, safekeeping and settlement.
The accounting and financial reporting policies of the Bank conform to U.S. Generally Accepted Accounting Principles (GAAP). Preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In addition, from time to time certain amounts in the prior period may be reclassified to conform to the current presentation. These reclassifications did not have a material impact on the Bank's financial statements. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in the Bank's 2013 Form 10-K.
51
Notes to Financial Statements (continued)
Note 1 – Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. In April 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02 or Advisory Bulletin), which is applicable to Fannie Mae, Freddie Mac and the FHLBanks. The Advisory Bulletin establishes guidelines for adverse classification of various assets, primarily MPF loans at the Bank. Among other requirements, this Advisory Bulletin requires that the Bank classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). The Bank implemented these classification provisions effective January 1, 2014. During the first quarter 2014, the Bank incorporated estimates of fair values on loans as applicable under the Advisory Bulletin in its calculation of the required “loss” on MPF loans. This change in the Bank's accounting estimate resulted in an immaterial benefit to the Bank's Allowance for Loan Losses at March 31, 2014. See Note 8 - Allowance for Loan Losses for more information.
The Advisory Bulletin also requires the Bank to charge-off the portion of the loan classified as a “loss.” The Advisory Bulletin specifies that, if the Bank subsequently receives full or partial payment of a previously charged-off loan, it may report a recovery of the amount either through loss reserves or as a reduction in foreclosed property expenses. As required, the Bank plans to adopt the charge-off provisions of the Advisory Bulletin on January 1, 2015. Upon adoption of the charge-off provisions, the Bank’s allowance for loan losses on the impacted loans will be eliminated and the corresponding recorded investment in the loan will be reduced by the amounts that are charged-off, unless it is expected to be recovered through credit enhancement (CE), for which the Bank will recognize a CE Fee Receivable. Under the Bank’s existing accounting practices and upon adoption of the Advisory Bulletin, the ultimate amount of losses realized on the Bank’s loan portfolio will be the same over time; however, the timing of when the Bank recognizes the losses in its financial statements will differ.
The Bank does not expect the adoption of the charge-off provisions of the Advisory Bulletin to have a material impact on its Statement of Income, Statement of Comprehensive Income, and Statement of Condition.
Obligations Resulting from Joint and Several Liability Arrangements. In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure such obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This guidance was effective for the Bank beginning January 1, 2014. The Bank's joint and several obligation associated with its consolidated obligations is within the scope of this guidance. However, this guidance had no impact on the Bank’s Statement of Income, Statement of Comprehensive Income, or Statement of Condition.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. In January 2014, the FASB issued guidance clarifying when a loan should be de-recognized and the related real estate property recognized. This guidance will allow the Bank to recognize properties as real estate owned once the borrower has voluntarily conveyed interest in the property to the Bank through a deed in lieu of foreclosure or similar agreement. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2015.
52
Notes to Financial Statements (continued)
Note 2 – Trading Securities
The following table presents trading securities as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||
Non-MBS: | ||||||
Mutual funds | $ | 4,798 | $ | 4,576 | ||
GSE and Tennessee Valley Authority obligations | 254,648 | 234,614 | ||||
Total | $ | 259,446 | $ | 239,190 |
The mutual funds are held in a Rabbi trust to generate returns that seek to offset changes in liabilities related to market risk of certain deferred compensation agreements. These deferred compensation liabilities were $4.9 million and $4.7 million at March 31, 2014 and December 31, 2013, respectively, as reported in Other liabilities in the Statement of Condition.
The following table presents net gains (losses) on trading securities for the first quarter of 2014 and 2013.
Three months ended March 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Net unrealized gains on trading securities held at period-end | $ | 9,706 | $ | 267 | |||
Net realized gains (losses) on securities sold/matured during the period | 86 | (36 | ) | ||||
Net gains on trading securities | $ | 9,792 | $ | 231 |
Note 3 – Available-for-Sale (AFS) Securities
The following tables present AFS securities as of March 31, 2014 and December 31, 2013.
March 31, 2014 | |||||||||||||||||||
(in thousands) | Amortized Cost (1) | OTTI Recognized in AOCI (2) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||
Non-MBS: | |||||||||||||||||||
Mutual funds | $ | 1,993 | $ | — | $ | 5 | $ | — | $ | 1,998 | |||||||||
GSE and Tennessee Valley Authority obligations | 2,110,888 | — | 9,617 | (4,997 | ) | 2,115,508 | |||||||||||||
State or local agency obligations | 15,020 | — | 64 | (1,085 | ) | 13,999 | |||||||||||||
Total non-MBS | $ | 2,127,901 | $ | — | $ | 9,686 | $ | (6,082 | ) | $ | 2,131,505 | ||||||||
MBS: | |||||||||||||||||||
Other U.S. obligations residential MBS | $ | 372,881 | $ | — | $ | 40 | $ | (1,118 | ) | $ | 371,803 | ||||||||
GSE MBS (3) | 3,477,079 | — | 12,455 | (22,741 | ) | 3,466,793 | |||||||||||||
Private label MBS: | |||||||||||||||||||
Private label residential MBS | 1,001,005 | (1,670 | ) | 77,879 | (193 | ) | 1,077,021 | ||||||||||||
HELOCs | 11,147 | (89 | ) | 2,965 | — | 14,023 | |||||||||||||
Total private label MBS | 1,012,152 | (1,759 | ) | 80,844 | (193 | ) | 1,091,044 | ||||||||||||
Total MBS | $ | 4,862,112 | $ | (1,759 | ) | $ | 93,339 | $ | (24,052 | ) | $ | 4,929,640 | |||||||
Total AFS securities | $ | 6,990,013 | $ | (1,759 | ) | $ | 103,025 | $ | (30,134 | ) | $ | 7,061,145 |
53
Notes to Financial Statements (continued)
December 31, 2013 | |||||||||||||||||||
(in thousands) | Amortized Cost (1) | OTTI Recognized in AOCI (2) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||
Non-MBS: | |||||||||||||||||||
Mutual funds | $ | 1,993 | $ | — | $ | 5 | $ | — | 1,998 | ||||||||||
GSE and Tennessee Valley Authority obligations | 2,103,847 | — | 1,160 | (8,830 | ) | 2,096,177 | |||||||||||||
State or local agency obligations | 15,430 | — | 35 | (1,422 | ) | 14,043 | |||||||||||||
Total non-MBS | $ | 2,121,270 | $ | — | $ | 1,200 | $ | (10,252 | ) | $ | 2,112,218 | ||||||||
MBS: | |||||||||||||||||||
Other U.S. obligations residential MBS | $ | 386,169 | $ | — | $ | 27 | $ | (900 | ) | 385,296 | |||||||||
GSE MBS (3) | 3,144,543 | — | 11,389 | (33,781 | ) | 3,122,151 | |||||||||||||
Private label MBS: | — | ||||||||||||||||||
Private label residential MBS | 1,048,893 | (3,723 | ) | 78,618 | (164 | ) | 1,123,624 | ||||||||||||
HELOCs | 11,681 | (109 | ) | 2,856 | — | 14,428 | |||||||||||||
Total private label MBS | 1,060,574 | (3,832 | ) | 81,474 | (164 | ) | 1,138,052 | ||||||||||||
Total MBS | $ | 4,591,286 | $ | (3,832 | ) | $ | 92,890 | $ | (34,845 | ) | $ | 4,645,499 | |||||||
Total AFS securities | $ | 6,712,556 | $ | (3,832 | ) | $ | 94,090 | $ | (45,097 | ) | $ | 6,757,717 |
Notes:
(1) Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, previous OTTI recognized in earnings, and/or fair value hedge accounting adjustments.
(2) Represents the non-credit portion of an OTTI recognized during the life of the security.
(3) Includes amortized cost of $2.7 billion of 1-4 family MBS and $0.8 billion of multi-family MBS at March 31, 2014. The respective amounts at December 31, 2013 were $2.3 billion and $0.8 billion.
The Bank has established a Rabbi trust to secure a portion of the benefits under its supplemental retirement plan. The Rabbi trust assets are invested in mutual funds. These obligations were $5.4 million at both March 31, 2014 and December 31, 2013, as reported in Other liabilities in the Statement of Condition.
As of March 31, 2014, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $8.9 million, credit losses of $240.5 million and OTTI-related accretion adjustments of $4.5 million. As of December 31, 2013, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $8.4 million and credit losses of $246.1 million and OTTI-related accretion adjustments of $1.4 million.
The following table presents a reconciliation of the AFS OTTI loss recognized through AOCI to the total net non-credit portion of OTTI gains on AFS securities in AOCI as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||
Non-credit portion of OTTI losses | $ | (1,759 | ) | $ | (3,832 | ) |
Net unrealized gains on OTTI securities since their last OTTI credit charge | 80,844 | 81,474 | ||||
Net non-credit portion of OTTI gains on AFS securities in AOCI | $ | 79,085 | $ | 77,642 |
54
Notes to Financial Statements (continued)
The following tables summarize the AFS securities with unrealized losses as of March 31, 2014 and December 31, 2013. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
March 31, 2014 | |||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | |||||||||||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses (1) | |||||||||||||||||
Non-MBS: | |||||||||||||||||||||||
GSE and Tennessee Valley Authority obligations | $ | 836,085 | $ | (4,829 | ) | $ | 124,825 | $ | (168 | ) | $ | 960,910 | $ | (4,997 | ) | ||||||||
State or local agency obligations | 4,090 | (360 | ) | 8,496 | (725 | ) | 12,586 | (1,085 | ) | ||||||||||||||
Total non-MBS | $ | 840,175 | $ | (5,189 | ) | $ | 133,321 | $ | (893 | ) | $ | 973,496 | $ | (6,082 | ) | ||||||||
MBS: | |||||||||||||||||||||||
Other U.S. obligations residential MBS | $ | 251,407 | $ | (683 | ) | $ | 100,867 | $ | (435 | ) | $ | 352,274 | $ | (1,118 | ) | ||||||||
GSE MBS | 1,294,357 | (22,096 | ) | 81,694 | (645 | ) | 1,376,051 | (22,741 | ) | ||||||||||||||
Private label: | |||||||||||||||||||||||
Private label residential MBS | 8,448 | (251 | ) | 44,422 | (1,612 | ) | 52,870 | (1,863 | ) | ||||||||||||||
HELOCs | — | — | 1,643 | (89 | ) | 1,643 | (89 | ) | |||||||||||||||
Total private label MBS | 8,448 | (251 | ) | 46,065 | (1,701 | ) | 54,513 | (1,952 | ) | ||||||||||||||
Total MBS | $ | 1,554,212 | $ | (23,030 | ) | $ | 228,626 | $ | (2,781 | ) | $ | 1,782,838 | $ | (25,811 | ) | ||||||||
Total | $ | 2,394,387 | $ | (28,219 | ) | $ | 361,947 | $ | (3,674 | ) | $ | 2,756,334 | $ | (31,893 | ) |
December 31, 2013 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses (1) | ||||||||||||||||||
Non-MBS: | ||||||||||||||||||||||||
GSE and Tennessee Valley Authority obligations | $ | 1,350,088 | $ | (8,830 | ) | $ | — | $ | — | $ | 1,350,088 | $ | (8,830 | ) | ||||||||||
State or local agency obligations | 3,994 | (456 | ) | 8,664 | (966 | ) | 12,658 | (1,422 | ) | |||||||||||||||
Total non-MBS | $ | 1,354,082 | $ | (9,286 | ) | $ | 8,664 | $ | (966 | ) | $ | 1,362,746 | $ | (10,252 | ) | |||||||||
MBS: | ||||||||||||||||||||||||
Other U.S. obligations residential MBS | $ | 317,394 | $ | (806 | ) | $ | 28,803 | $ | (94 | ) | $ | 346,197 | $ | (900 | ) | |||||||||
GSE MBS | 1,142,806 | (33,495 | ) | 64,515 | (286 | ) | 1,207,321 | (33,781 | ) | |||||||||||||||
Private label: | ||||||||||||||||||||||||
Private label residential MBS | 66,847 | (648 | ) | 42,306 | (3,239 | ) | 109,153 | (3,887 | ) | |||||||||||||||
HELOCs | — | — | 1,679 | (109 | ) | 1,679 | (109 | ) | ||||||||||||||||
Total private label MBS | 66,847 | (648 | ) | 43,985 | (3,348 | ) | 110,832 | (3,996 | ) | |||||||||||||||
Total MBS | $ | 1,527,047 | $ | (34,949 | ) | $ | 137,303 | $ | (3,728 | ) | $ | 1,664,350 | $ | (38,677 | ) | |||||||||
Total | $ | 2,881,129 | $ | (44,235 | ) | $ | 145,967 | $ | (4,694 | ) | $ | 3,027,096 | $ | (48,929 | ) |
Note:
(1) Total unrealized losses equal the sum of “OTTI Recognized in AOCI” and “Gross Unrealized Losses” in the first two tables of this Note 3.
Securities Transferred. The Bank may transfer investment securities from HTM to AFS when an OTTI credit loss has been recorded on the security. The Bank believes that a credit loss constitutes evidence of a significant decline in the issuer’s creditworthiness. The Bank transfers these securities to increase its flexibility to sell the securities if management determines it is prudent to do so. Refer to description in Note 4 - Held-to-Maturity Securities. The Bank transferred no private label MBS from HTM to AFS during the first three months of 2014 and 2013.
55
Notes to Financial Statements (continued)
Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of March 31, 2014 and December 31, 2013 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||||||||||
Year of Maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 201,993 | $ | 202,224 | $ | 201,992 | $ | 202,104 | ||||||||
Due after one year through five years | 1,154,740 | 1,152,104 | 1,226,635 | 1,223,399 | ||||||||||||
Due after five years through ten years | 575,202 | 579,756 | 524,313 | 521,278 | ||||||||||||
Due in more than ten years | 195,966 | 197,421 | 168,330 | 165,437 | ||||||||||||
AFS securities excluding MBS | 2,127,901 | 2,131,505 | 2,121,270 | 2,112,218 | ||||||||||||
MBS | 4,862,112 | 4,929,640 | 4,591,286 | 4,645,499 | ||||||||||||
Total AFS securities | $ | 6,990,013 | $ | 7,061,145 | $ | 6,712,556 | $ | 6,757,717 |
Interest Rate Payment Terms. The following table details interest payment terms at March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Amortized cost of AFS securities other than MBS: | ||||||||
Fixed-rate | $ | 1,618,365 | $ | 1,536,763 | ||||
Variable-rate | 509,536 | 584,507 | ||||||
Total non-MBS | $ | 2,127,901 | $ | 2,121,270 | ||||
Amortized cost of AFS MBS: | ||||||||
Fixed-rate | $ | 2,099,896 | $ | 2,155,940 | ||||
Variable-rate | 2,762,216 | 2,435,346 | ||||||
Total MBS | $ | 4,862,112 | $ | 4,591,286 | ||||
Total amortized cost of AFS securities | $ | 6,990,013 | $ | 6,712,556 |
Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument would include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may have a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is then considered to be variable-rate.
56
Notes to Financial Statements (continued)
Note 4 – Held-to-Maturity (HTM) Securities
The following tables present HTM securities as of March 31, 2014 and December 31, 2013.
March 31, 2014 | ||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
Non-MBS: | ||||||||||||||||
GSE securities | $ | 15,185 | $ | 621 | $ | — | $ | 15,806 | ||||||||
State or local agency obligations | 241,746 | 3,792 | (11,613 | ) | 233,925 | |||||||||||
Total non-MBS | $ | 256,931 | $ | 4,413 | $ | (11,613 | ) | $ | 249,731 | |||||||
MBS: | ||||||||||||||||
Other U.S. obligations residential MBS | $ | 1,358,400 | $ | 8,704 | $ | — | $ | 1,367,104 | ||||||||
GSE MBS (1) | 1,374,752 | 51,411 | (121 | ) | 1,426,042 | |||||||||||
Private label residential MBS | 832,320 | 5,374 | (12,241 | ) | 825,453 | |||||||||||
Total MBS | $ | 3,565,472 | $ | 65,489 | $ | (12,362 | ) | $ | 3,618,599 | |||||||
Total HTM securities | $ | 3,822,403 | $ | 69,902 | $ | (23,975 | ) | $ | 3,868,330 |
December 31, 2013 | ||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
Non-MBS: | ||||||||||||||||
GSE securities | $ | 16,220 | $ | 721 | $ | — | $ | 16,941 | ||||||||
State or local agency obligations | 242,934 | 3,817 | (10,753 | ) | 235,998 | |||||||||||
Total non-MBS | $ | 259,154 | $ | 4,538 | $ | (10,753 | ) | $ | 252,939 | |||||||
MBS: | ||||||||||||||||
Other U.S. obligations residential MBS | $ | 1,435,458 | $ | 8,869 | $ | (15 | ) | $ | 1,444,312 | |||||||
GSE MBS (1) | 1,417,926 | 49,097 | (215 | ) | 1,466,808 | |||||||||||
Private label MBS: | ||||||||||||||||
Private label residential MBS | 873,325 | 4,300 | (15,732 | ) | 861,893 | |||||||||||
HELOCs | 9,667 | — | (789 | ) | 8,878 | |||||||||||
Total private label MBS | 882,992 | 4,300 | (16,521 | ) | 870,771 | |||||||||||
Total MBS | $ | 3,736,376 | $ | 62,266 | $ | (16,751 | ) | $ | 3,781,891 | |||||||
Total HTM securities | $ | 3,995,530 | $ | 66,804 | $ | (27,504 | ) | $ | 4,034,830 |
Notes:
(1) Includes $525.3 million of 1-4 family MBS and $849.5 million of multi-family MBS at March 31, 2014. The respective amounts at December 31, 2013 were $561.6 million and $856.3 million.
57
Notes to Financial Statements (continued)
The following tables summarize the HTM securities with unrealized losses as of March 31, 2014 and December 31, 2013. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
March 31, 2014 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Non-MBS: | ||||||||||||||||||||||||
State or local agency obligations | $ | 18,534 | $ | (104 | ) | $ | 131,436 | $ | (11,509 | ) | $ | 149,970 | $ | (11,613 | ) | |||||||||
MBS: | ||||||||||||||||||||||||
GSE MBS | $ | 52,716 | $ | (12 | ) | $ | 12,722 | $ | (109 | ) | $ | 65,438 | $ | (121 | ) | |||||||||
Private label residential MBS | 213,680 | (2,336 | ) | 187,337 | (9,905 | ) | 401,017 | (12,241 | ) | |||||||||||||||
Total MBS | $ | 266,396 | $ | (2,348 | ) | $ | 200,059 | $ | (10,014 | ) | $ | 466,455 | $ | (12,362 | ) | |||||||||
Total | $ | 284,930 | $ | (2,452 | ) | $ | 331,495 | $ | (21,523 | ) | $ | 616,425 | $ | (23,975 | ) |
December 31, 2013 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Non-MBS: | ||||||||||||||||||||||||
State or local agency obligations | $ | 18,367 | $ | (271 | ) | $ | 132,463 | $ | (10,482 | ) | $ | 150,830 | $ | (10,753 | ) | |||||||||
MBS: | ||||||||||||||||||||||||
Other U.S. obligations residential MBS | $ | 37,984 | $ | (15 | ) | $ | — | $ | — | $ | 37,984 | $ | (15 | ) | ||||||||||
GSE MBS | 93,356 | (112 | ) | 13,369 | (103 | ) | 106,725 | (215 | ) | |||||||||||||||
Private label: | ||||||||||||||||||||||||
Private label residential MBS | 292,159 | (3,829 | ) | 197,089 | (11,903 | ) | 489,248 | (15,732 | ) | |||||||||||||||
HELOCs | — | — | 8,878 | (789 | ) | 8,878 | (789 | ) | ||||||||||||||||
Total private label MBS | 292,159 | (3,829 | ) | 205,967 | (12,692 | ) | 498,126 | (16,521 | ) | |||||||||||||||
Total MBS | $ | 423,499 | $ | (3,956 | ) | $ | 219,336 | $ | (12,795 | ) | $ | 642,835 | $ | (16,751 | ) | |||||||||
Total | $ | 441,866 | $ | (4,227 | ) | $ | 351,799 | $ | (23,277 | ) | $ | 793,665 | $ | (27,504 | ) |
Securities Transferred. The Bank had no transfers of securities from HTM to AFS during the first three months of 2014 and 2013.
Changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the transfer or sale of an HTM security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to transfer or sell an HTM security without necessarily calling into question its intent to hold other debt securities to maturity.
58
Notes to Financial Statements (continued)
Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of March 31, 2014 and December 31, 2013 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||||||||||
Year of Maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Non-MBS: | ||||||||||||||||
Due after one year through five years | $ | 15,185 | $ | 15,806 | $ | 16,221 | $ | 16,941 | ||||||||
Due after five years through ten years | 41,486 | 43,039 | 40,043 | 41,530 | ||||||||||||
Due after ten years | 200,260 | 190,886 | 202,890 | 194,468 | ||||||||||||
HTM securities excluding MBS | 256,931 | 249,731 | 259,154 | 252,939 | ||||||||||||
MBS | 3,565,472 | 3,618,599 | 3,736,376 | 3,781,891 | ||||||||||||
Total HTM securities | $ | 3,822,403 | $ | 3,868,330 | $ | 3,995,530 | $ | 4,034,830 |
Interest Rate Payment Terms. The following table details interest rate payment terms at March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Amortized cost of HTM securities other than MBS: | ||||||||
Fixed-rate | $ | 94,346 | $ | 96,569 | ||||
Variable-rate | 162,585 | 162,585 | ||||||
Total non-MBS | $ | 256,931 | $ | 259,154 | ||||
Amortized cost of HTM MBS: | ||||||||
Fixed-rate | $ | 1,258,506 | $ | 1,303,424 | ||||
Variable-rate | 2,306,966 | 2,432,952 | ||||||
Total MBS | $ | 3,565,472 | $ | 3,736,376 | ||||
Total HTM securities | $ | 3,822,403 | $ | 3,995,530 |
Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument would include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may have a provision within the structure that permits the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is then considered to be variable-rate.
Note 5 – Other-Than-Temporary Impairment (OTTI)
The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of this process, the Bank considers its intent to sell each debt security and whether it is more likely than not the Bank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank recognizes the maximum OTTI loss in earnings, which is equal to the entire difference between the security’s amortized cost basis and its fair value at the Statement of Condition date. For securities in an unrealized loss position that meet neither of these conditions, the Bank evaluates whether there is OTTI by performing an analysis to determine if any of these securities will incur a credit loss, which could be up to the difference between the security’s amortized cost basis and its fair value and records the difference in its Statement of Income.
Private Label Residential MBS and HELOCs. The Bank invests in MBS, which were rated AAA at the time of purchase with the exception of one pre-2004 vintage security that was rated AA at the time of purchase. Each MBS may contain one or more forms of credit protection/enhancements, including but not limited to guarantee of principal and interest, subordination, over-collateralization, and excess interest and insurance wrap.
To ensure consistency among the FHLBanks, the Bank completes its OTTI analysis of private label MBS based on the methodologies and key modeling assumptions provided by the OTTI Governance Committee. The OTTI analysis is a cash flow analysis that is run on a common platform. The Bank performs the cash flow analysis on all of its private label MBS portfolio that have available data. Private label MBS backed by HELOCs and certain other securities where underlying collateral data is not available are not able to be cash flow tested using the FHLBanks’ common platform. For these securities, alternate
59
Notes to Financial Statements (continued)
procedures, as prescribed by the OTTI Governance Committee, are used by the Bank to assess these securities for OTTI. Securities evaluated using alternative procedures were approximately 5% of the par balance of private label MBS at March 31, 2014.
The Bank’s evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of all available information, including the structure of the applicable security and certain assumptions, to determine whether the Bank will recover the entire amortized cost basis of the security, such as:
• | the remaining payment terms for the security; |
• | prepayment speeds and default rates; |
• | loss severity based on underlying loan-level borrower and loan characteristics; |
• | expected housing price changes; and |
• | interest-rate assumptions. |
To determine the amount of the credit loss, the Bank compares the present value of the cash flows expected to be collected from its private label residential MBS to its amortized cost basis. For the Bank’s private label residential MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. To calculate the present value of the estimated cash flows for fixed rate bonds the Bank uses the effective interest rate for the security prior to impairment. To calculate the present value of the estimated cash flows for variable-rate and hybrid private label MBS, the Bank uses the contractual interest rate plus a fixed spread that sets the present value of cash flows equal to amortized cost before impairment. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis and uses the previous effective rate or spread until there is a significant increase in cash flows. When the Bank determines there is a significant increase in cash flows, the effective rate is increased.
The Bank performed a cash flow analysis using two third-party models to assess whether the amortized cost basis of its private label residential MBS will be recovered. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions about future changes in home prices and interest rates to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) which are based upon an assessment of the individual housing markets. CBSAs refer collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The OTTI Governance Committee developed a short-term housing price forecast using whole percentages ranging from (3.0)% to 9.0% over the 12 month period beginning January 1, 2014. This forecast is CBSA based and is an input into the first model described above. For the vast majority of markets the short-term forecast has changes from (1.0)% to 4.0%. Thereafter, home prices were projected to recover using one of five different recovery paths that have a recovery range of:
Recovery Ranges of Housing Price Change | |||
Months | Annualized Rates % | ||
1 - 6 | 0.0% | - | 3.0% |
7 - 12 | 1.0% | - | 4.0% |
13 - 18 | 2.0% | - | 4.0% |
19 - 30 | 2.0% | - | 5.0% |
31 - 54 | 2.0% | - | 6.0% |
Thereafter | 2.3% | - | 5.6% |
The month-by-month projection of future loan performance derived from the first model is the mean of 100 projections and reflects projected prepayments, defaults and loss severities. These projections are input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate scenario.
All of the Bank's other-than-temporarily impaired securities were classified as AFS at March 31, 2014. The "Total OTTI securities" balances below summarize the Bank’s securities as of March 31, 2014 for which an OTTI has been recognized during the life of the security. The "Private label MBS with no OTTI" balances below represent AFS securities on which an OTTI was not taken. The sum of these two totals reflects the entire AFS private label MBS portfolio.
60
Notes to Financial Statements (continued)
OTTI Recognized During the Life of the Security | ||||||||||||
(in thousands) | Unpaid Principal Balance | Amortized Cost (1) | Fair Value | |||||||||
Private label residential MBS: | ||||||||||||
Prime | $ | 573,399 | $ | 468,273 | $ | 514,087 | ||||||
Alt-A | 669,884 | 527,448 | 557,725 | |||||||||
Subprime | 2,316 | 1,387 | 1,505 | |||||||||
HELOCs | 16,108 | 11,147 | 14,023 | |||||||||
Total OTTI securities | 1,261,707 | 1,008,255 | 1,087,340 | |||||||||
Private label MBS with no OTTI | 3,897 | 3,897 | 3,704 | |||||||||
Total AFS private label MBS | $ | 1,265,604 | $ | 1,012,152 | $ | 1,091,044 |
Notes:
(1) Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, and/or previous OTTI recognized in earnings.
The following table presents the rollforward of the amounts related to OTTI credit losses recognized during the life of the security for which a portion of the OTTI charges was recognized in AOCI for the three ended March 31, 2014 and 2013.
(in thousands) | Three months ended March 31, | ||||||||
2014 | 2013 | ||||||||
Beginning balance | $ | 314,224 | $ | 326,024 | |||||
Additions: | |||||||||
Additional OTTI credit losses for which an OTTI charge was previously recognized (1) | — | 442 | |||||||
Reductions: | |||||||||
Securities sold and matured during the period | (76 | ) | (59 | ) | |||||
Increases in cash flows expected to be collected, recognized over the remaining life of the securities (2) | (5,948 | ) | (1,925 | ) | |||||
Ending balance | $ | 308,200 | $ | 324,482 |
Notes:
(1) For the three months ended March 31, 2014 and 2013, OTTI "previously recognized" represents securities that were impaired prior to January 1, 2014 and 2013.
(2) This activity represents the increase in cash flows recognized in interest income during the period.
All Other AFS and HTM Investments. At March 31, 2014, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions and neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell the security before its anticipated recovery. As a result, the Bank did not consider any of these other investments to be other-than-temporarily impaired at March 31, 2014.
Note 6 – Advances
General Terms. The Bank offers a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to LIBOR or other specified indices.
At March 31, 2014 and December 31, 2013, the Bank had advances outstanding, including AHP advances, with interest rates ranging from zero to 7.40%. AHP subsidized loans have interest rates ranging between zero and 5.50%.
61
Notes to Financial Statements (continued)
The following table details the Bank’s advances portfolio by year of contractual maturity as of March 31, 2014 and December 31, 2013.
(dollars in thousands) | March 31, 2014 | December 31, 2013 | ||||||||||||
Year of Contractual Maturity | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||
Due in 1 year or less | $ | 15,716,010 | 0.46 | % | $ | 22,169,669 | 0.41 | % | ||||||
Due after 1 year through 2 years | 9,468,247 | 0.61 | 10,343,245 | 1.36 | ||||||||||
Due after 2 years through 3 years | 6,686,913 | 1.77 | 6,865,608 | 1.68 | ||||||||||
Due after 3 years through 4 years | 10,091,283 | 1.30 | 6,073,540 | 1.21 | ||||||||||
Due after 4 years through 5 years | 3,113,463 | 2.43 | 3,690,006 | 2.12 | ||||||||||
Thereafter | 504,669 | 2.88 | 571,970 | 2.89 | ||||||||||
Total par value | 45,580,585 | 1.03 | % | 49,714,038 | 1.04 | % | ||||||||
Discount on AHP advances | (120 | ) | (141 | ) | ||||||||||
Deferred prepayment fees | (11,450 | ) | (12,371 | ) | ||||||||||
Hedging adjustments | 494,897 | 545,909 | ||||||||||||
Total book value | $ | 46,063,912 | $ | 50,247,435 |
The Bank also offers convertible advances. Convertible advances allow the Bank to convert an advance from one interest rate structure to another. When issuing convertible advances, the Bank may purchase put options from a member that allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed-rate advance without the conversion feature. Variable to fixed-rate convertible advances have a defined lockout period during which the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances may convert to fixed-rate advances. The fixed rates on the converted advances are determined at origination. At March 31, 2014 and December 31, 2013, the Bank had convertible advances outstanding of $2.0 billion and $2.3 billion, respectively.
The Bank offers certain advances to members that provide a member the right, based upon predetermined option exercise dates, to call the advance prior to maturity without incurring prepayment or termination fees (returnable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the member pays a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed-rate advance. If the call option is exercised, replacement funding may be available. At March 31, 2014 and December 31, 2013, the Bank had returnable advances of $3.5 billion and $5.0 billion, respectively.
The following table summarizes advances by (i) year of contractual maturity or next call date and (ii) year of contractual maturity or next convertible date as of March 31, 2014 and December 31, 2013.
Year of Contractual Maturity or Next Call Date | Year of Contractual Maturity or Next Convertible Date | ||||||||||||||
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2014 | December 31, 2013 | |||||||||||
Due in 1 year or less | $ | 15,716,010 | $ | 22,169,669 | $ | 17,634,010 | $ | 24,308,669 | |||||||
Due after 1 year through 2 years | 9,468,247 | 10,343,245 | 9,345,247 | 10,219,245 | |||||||||||
Due after 2 years through 3 years | 6,686,913 | 6,865,608 | 5,538,413 | 5,752,108 | |||||||||||
Due after 3 years through 4 years | 10,091,283 | 6,073,540 | 9,591,283 | 5,481,540 | |||||||||||
Due after 4 years through 5 years | 3,113,463 | 3,690,006 | 2,992,463 | 3,406,006 | |||||||||||
Thereafter | 504,669 | 571,970 | 479,169 | 546,470 | |||||||||||
Total par value | $ | 45,580,585 | $ | 49,714,038 | $ | 45,580,585 | $ | 49,714,038 |
62
Notes to Financial Statements (continued)
Interest Rate Payment Terms. The following table details interest rate payment terms for advances as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Fixed rate – overnight | $ | 2,334,934 | $ | 1,284,394 | ||||
Fixed rate – term: | ||||||||
Due in 1 year or less | 10,437,291 | 17,801,335 | ||||||
Thereafter | 10,795,337 | 10,778,131 | ||||||
Total fixed rate | 23,567,562 | 29,863,860 | ||||||
Variable rate: | ||||||||
Due in 1 year or less | 2,943,785 | 3,083,940 | ||||||
Thereafter | 19,069,238 | 16,766,238 | ||||||
Total variable rate | 22,013,023 | 19,850,178 | ||||||
Total par value | $ | 45,580,585 | $ | 49,714,038 |
Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of March 31, 2014, the Bank had advances of $34.3 billion outstanding to its five largest borrowers, which represented 75.3% of total advances outstanding. Of these five, three had outstanding advance balances in excess of 10% of the total portfolio at March 31, 2014.
As of December 31, 2013, the Bank had advances of $38.5 billion outstanding to the five largest borrowers, which represented 77.4% of total advances outstanding. Of these five, four had outstanding advance balances in excess of 10% of the total portfolio at December 31, 2013.
See Note 8 for information related to the Bank's allowance for credit losses.
63
Notes to Financial Statements (continued)
Note 7 – Mortgage Loans Held for Portfolio
Under the MPF Program, the Bank invests in mortgage loans, which it purchases from its participating members and housing associates. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are then sold to the Bank. See Note 12 for further information regarding transactions with related parties.
The following table presents balances as of March 31, 2014 and December 31, 2013 for mortgage loans held for portfolio.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Fixed-rate medium-term single-family mortgages (1) | $ | 466,753 | $ | 488,334 | ||||
Fixed-rate long-term single-family mortgages (1) | 2,649,827 | 2,682,255 | ||||||
Total par value | 3,116,580 | 3,170,589 | ||||||
Premiums | 49,780 | 50,436 | ||||||
Discounts | (5,848 | ) | (6,147 | ) | ||||
Hedging adjustments | 21,100 | 20,572 | ||||||
Total mortgage loans held for portfolio | $ | 3,181,612 | $ | 3,235,450 |
Note:
(1) Medium-term is defined as a term of 15 years or less at origination. Long-term is defined as greater than 15 years at origination.
The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Government-guaranteed/insured loans | $ | 299,996 | $ | 306,025 | ||||
Conventional loans | 2,816,584 | 2,864,564 | ||||||
Total par value | $ | 3,116,580 | $ | 3,170,589 |
See Note 8 - Allowance for Credit Losses for information related to the Bank's credit risk on mortgage loans and allowance for credit losses.
Note 8 – Allowance for Credit Losses
The Bank has established an allowance methodology for each of the Bank’s portfolio segments: credit products, government-guaranteed or insured mortgage loans held for portfolio, conventional MPF loans held for portfolio, and BOB loans.
Credit Products. The Bank manages its total credit exposure or TCE, which includes advances, letters of credit, advance commitments, and other credit product exposure, through an integrated approach. This generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition and is coupled with collateral/lending policies to limit risk of loss while balancing each borrower's need for a reliable source of funding. In addition, the Bank lends to its members in accordance with the Housing Act and Finance Agency regulations. Specifically, the Act requires the Bank to obtain collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral weightings, or haircuts, to the value of the collateral. The Bank accepts cash, certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture, and community development loans. The Bank’s capital stock owned by the borrowing member is pledged as secondary collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can require additional or substitute collateral to protect its security interest. Management of the Bank believes that these policies effectively manage the Bank’s respective credit risk from credit products.
Based upon the financial condition of the member, the Bank either allows a member to retain physical possession of the collateral assigned to the Bank or requires the member to specifically deliver physical possession or control of the collateral to the Bank or its custodians. However, notwithstanding financial condition, the Bank always takes possession or control of securities used as collateral if they are used for maximum borrowing capacity (MBC) or to secure advances. The Bank perfects its security interest in all pledged collateral. The Act affords any security interest granted to the Bank by a member (or an
64
Notes to Financial Statements (continued)
affiliate of a member) priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
Using a risk-based approach, the Bank considers the payment status, collateral types and concentration levels, and borrower’s financial condition to be indicators of credit quality on its credit products. At March 31, 2014 and December 31, 2013, the Bank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.
The Bank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. At March 31, 2014 and December 31, 2013, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, there were no credit products considered to be troubled debt restructurings (TDRs).
Based upon the collateral held as security, its credit extension policies, collateral policies, management’s credit analysis and the repayment history on credit products, the Bank has not incurred any credit losses on credit products since inception. Accordingly, the Bank has not recorded any allowance for credit losses for these products. Additionally, at March 31, 2014 and December 31, 2013, the Bank has not recorded any allowance for credit losses for off-balance sheet credit products.
Mortgage Loans - Government-Guaranteed or Insured. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) of the Department of Agriculture and/or by Housing and Urban Development (HUD). Any losses from such loans are expected to be recovered from those entities. If not, losses from such loans must be contractually absorbed by the servicers. Therefore, there is no allowance for credit losses on government-guaranteed or insured mortgage loans.
Mortgage Loans - Conventional MPF. The allowances for conventional loans are determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses includes: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; and/or (3) reviewing homogeneous pools of residential mortgage loans.
The Bank’s allowance for credit losses takes into consideration the CE associated with conventional mortgage loans under the MPF Program. Specifically, the determination of the allowance generally considers expected Primary Mortgage Insurance (PMI), Supplemental Mortgage Insurance (SMI), and other CE amounts. Any incurred losses that are expected to be recovered from the CE reduce the Bank’s allowance for credit losses.
For conventional MPF loans, credit losses that are not fully covered by PMI are allocated to the Bank up to an agreed upon amount, referred to as the first loss account (FLA). The FLA functions as a tracking mechanism for determining the point after which the PFI is required to cover losses. The Bank pays the PFI a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the second layer of losses up to an agreed-upon CE amount. The CE amount may be a direct obligation of the PFI and/or an SMI policy paid for by the PFI, and may include performance-based fees which can be withheld to cover losses allocated to the Bank (referred to as recaptured CE fees). The PFI is required to pledge collateral to secure any portion of its CE amount that is a direct obligation. A receivable which is assessed for collectability is generally established for losses expected to be recovered by withholding CE fees. Estimated losses exceeding the CE and SMI, if any, are incurred by the Bank. At March 31, 2014 and December 31, 2013, the MPF exposure under the FLA was $24.5 million and $25.2 million, respectively. This exposure includes both accrual and nonaccrual loans. The Bank records CE fees paid to PFIs as a reduction to mortgage loan interest income. The Bank incurred CE fees of $0.8 million and $0.9 million during the first quarter 2014 and 2013, respectively.
Collectively Evaluated Mortgage Loans. The Bank collectively evaluates the homogeneous mortgage loan portfolio for impairment. The allowance for credit loss methodology for mortgage loans considers loan pool specific attribute data, applies loss severities and incorporates the CEs of the MPF Program and PMI. The probability of default and loss given default are based on the actual 12-month historical performance of the Bank’s mortgage loans. Actual probability of default was determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default was determined based on realized losses incurred on the sale of mortgage loan collateral over the previous 12 months. Given the credit deterioration experienced by PMI companies, estimated future claim payments from these companies have been reduced and factored into estimated loan losses in determining the allowance for
65
Notes to Financial Statements (continued)
credit losses. The resulting estimated losses after PMI are then reduced by the CEs the Bank expects to be eligible to receive. The CEs are contractually set and calculated by Master Commitment. Losses in excess of the CEs are incurred by the Bank.
Individually Evaluated Mortgage Loans. The Bank evaluates certain conventional mortgage loans for impairment individually. Prior to January 1, 2014, these loans were limited to TDRs. Beginning January 1, 2014, the Bank adopted the classification provisions required by AB 2012-02 as described in Note 1 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations. As a result, the population of individually evaluated mortgage loans expanded to include impaired loans considered collateral-dependent, which are comprised primarily of MPF loans that are 180 days or more delinquent and loans that are not severely delinquent, but where the borrower has filed for bankruptcy. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property.
The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual basis. The incurred loss on each loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs. The estimated fair value is determined based on a value provided by a third party's Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations, which may differ from the retail-based AVMs. The resulting loss is then reduced by available CE and PMI.
Rollforward of Allowance for Credit Losses. Mortgage Loans - Conventional MPF.
Three months ended March 31, | |||||||||
(in thousands) | 2014 | 2013 | |||||||
Balance, January 1 | $ | 11,359 | $ | 14,163 | |||||
Charge-offs | — | (622 | ) | ||||||
Provision (benefit) for credit losses | (4,041 | ) | (148 | ) | |||||
Balance, March 31 | $ | 7,318 | $ | 13,393 |
Ending balance, individually evaluated for impairment | $ | 5,593 | $ | 687 | |||||
Ending balance, collectively evaluated for impairment | 1,725 | 12,706 | |||||||
Total allowance for credit losses | $ | 7,318 | $ | 13,393 | |||||
Recorded investment balance, end of period: | |||||||||
Individually evaluated for impairment, with or without a related allowance | $ | 78,405 | $ | 12,911 | |||||
Collectively evaluated for impairment | 2,808,857 | 3,148,406 | |||||||
Total recorded investment | $ | 2,887,262 | $ | 3,161,317 |
BOB Loans. Both the probability of default and loss given default are determined and used to estimate the allowance for credit losses on BOB loans. Loss given default is considered to be 100% due to the fact that the BOB program has no collateral or credit enhancement requirements. The probability of default is based on the actual performance of the BOB program. The Bank considers BOB loans that are delinquent to be nonperforming assets.
Rollforward of Allowance for Credit Losses. BOB Loans.
Three months ended March 31, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
Balance, January 1 | $ | 2,231 | $ | 2,481 | ||||
(Charge-offs) Recoveries | (200 | ) | 9 | |||||
Provision for credit losses | 111 | 13 | ||||||
Balance, March 31 | $ | 2,142 | $ | 2,503 |
66
Notes to Financial Statements (continued)
Ending balance, individually evaluated for impairment | $ | 28 | $ | 183 | ||||
Ending balance, collectively evaluated for impairment | 2,114 | 2,320 | ||||||
Total allowance for credit losses | $ | 2,142 | $ | 2,503 | ||||
Recorded investment balance, end of period: | ||||||||
Individually evaluated for impairment, with or without a related allowance | $ | 63 | $ | 313 | ||||
Collectively evaluated for impairment | 13,355 | 14,863 | ||||||
Total recorded investment | $ | 13,418 | $ | 15,176 |
Credit Quality Indicators. Key credit quality indicators for mortgage and BOB loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans.
(in thousands) | March 31, 2014 | |||||||||||||||
Recorded investment: (1) | Conventional MPF Loans | Government-Guaranteed or Insured Loans | BOB Loans | Total | ||||||||||||
Past due 30-59 days | $ | 44,438 | $ | 14,049 | $ | — | $ | 58,487 | ||||||||
Past due 60-89 days | 9,682 | 4,528 | — | 14,210 | ||||||||||||
Past due 90 days or more | 54,590 | 8,599 | 240 | 63,429 | ||||||||||||
Total past due loans | $ | 108,710 | $ | 27,176 | $ | 240 | $ | 136,126 | ||||||||
Total current loans | 2,778,552 | 283,726 | 13,178 | 3,075,456 | ||||||||||||
Total loans | $ | 2,887,262 | $ | 310,902 | $ | 13,418 | $ | 3,211,582 | ||||||||
Other delinquency statistics: | ||||||||||||||||
In process of foreclosures, included above (2) | $ | 40,853 | $ | 2,832 | $ | — | $ | 43,685 | ||||||||
Serious delinquency rate (3) | 1.9 | % | 2.8 | % | 1.8 | % | 2.0 | % | ||||||||
Past due 90 days or more still accruing interest | $ | — | $ | 8,599 | $ | — | $ | 8,599 | ||||||||
Loans on nonaccrual status (4) | $ | 57,267 | $ | — | $ | 303 | $ | 57,570 |
(in thousands) | December 31, 2013 | |||||||||||||||
Recorded investment: (1) | Conventional MPF Loans | Government-Guaranteed or Insured Loans | BOB Loans | Total | ||||||||||||
Past due 30-59 days | $ | 52,689 | $ | 18,580 | $ | 151 | $ | 71,420 | ||||||||
Past due 60-89 days | 13,522 | 5,860 | 82 | 19,464 | ||||||||||||
Past due 90 days or more | 55,508 | 8,556 | 219 | 64,283 | ||||||||||||
Total past due loans | $ | 121,719 | $ | 32,996 | $ | 452 | $ | 155,167 | ||||||||
Total current loans | 2,813,435 | 284,104 | 13,290 | 3,110,829 | ||||||||||||
Total loans | $ | 2,935,154 | $ | 317,100 | $ | 13,742 | $ | 3,265,996 | ||||||||
Other delinquency statistics: | ||||||||||||||||
In process of foreclosures, included above (2) | $ | 43,953 | $ | 2,401 | $ | — | $ | 46,354 | ||||||||
Serious delinquency rate (3) | 1.9 | % | 2.7 | % | 1.6 | % | 2.0 | % | ||||||||
Past due 90 days or more still accruing interest | $ | — | $ | 8,556 | $ | — | $ | 8,556 | ||||||||
Loans on nonaccrual status (4) | $ | 59,244 | $ | — | $ | 452 | $ | 59,696 |
Notes:
(1) The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or unaccreted discounts, adjustments for fair value hedges and direct write-downs. The recorded investment is not net of any valuation allowance.
(2) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.
(4) Generally represents mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest.
67
Notes to Financial Statements (continued)
Real Estate Owned (REO). The Bank had $7.6 million and $8.8 million of REO reported in Other assets on the Statement of Condition at March 31, 2014 and December 31, 2013, respectively.
TDRs. TDRs are considered to have occurred when a concession is granted to the debtor that otherwise would not have been considered had it not been for economic or legal reasons related to the debtor's financial difficulties. The Bank also considers a TDR to have occurred when a borrower files for Chapter 7 bankruptcy, the bankruptcy court discharged the borrower’s obligation and the borrower did not reaffirm the debt.
Mortgage Loans - Conventional MPF. The Bank offers a loan modification program for its MPF Program. The loans modified under this program are considered TDRs. The loan modification program modifies borrower's monthly payment for a period of up to 36 months so that the ratio of the borrower's housing expense to monthly income is no more than 31%. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years and a housing expense ratio not to exceed 31%. This will result in a balloon payment at the original maturity date of the loan as the maturity date and number of remaining monthly payments is unchanged in the modified loan. If the 31% ratio is still not met, the interest rate is reduced for up to 36 months in 0.125% increments below the original note rate, to a floor rate of 3%, resulting in reduced monthly principal and interest payments during the 36 month period, until the target housing expense ratio is met or the interest rate floor is hit.
BOB Loans. The Bank offers a BOB loan deferral which the Bank considers a TDR. A deferred BOB loan is not required to pay principal or accrue interest for up to a one-year period. The credit loss is measured by factoring expected shortfalls incurred as of the reporting date. BOB loan TDRs are not significant for any periods presented and are excluded from the tables that follow.
TDR Modifications. The following table presents the pre-modification and post-modification recorded investment balance, as of the modification date, for loans that became TDRs during the three ended March 31, 2014 and 2013.
Three months ended March 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
(in thousands) | Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | ||||||||||||
Conventional MPF loans | $ | 2,356 | $ | 2,356 | $ | 2,903 | $ | 2,903 |
Certain TDRs may experience a payment default, which the Bank considers to have occurred when a loan is 60 days or more delinquent. Conventional MPF loans totaling $1.2 million and $1.9 million had experienced a payment default during the three months ended March 31, 2014, and March 31, 2013, respectively. The Bank had $4.3 million and $3.5 million of TDRs on nonaccrual status at March 31, 2014 and December 31, 2013, respectively.
Individually Evaluated Impaired Loans. Information regarding individually evaluated impaired loans is as follows. As indicated above, these loans include impaired loans considered collateral-dependent.
March 31, 2014 | ||||||||||||
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance for Credit Losses | |||||||||
With no related allowance: | ||||||||||||
Conventional MPF loans | $ | 38,162 | $ | 37,753 | $ | — | ||||||
With a related allowance: | ||||||||||||
Conventional MPF loans | 40,243 | 40,106 | 5,593 | |||||||||
Total: | ||||||||||||
Conventional MPF loans | $ | 78,405 | $ | 77,859 | $ | 5,593 |
68
Notes to Financial Statements (continued)
December 31, 2013 | ||||||||||||
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance for Credit Losses | |||||||||
With no related allowance: | ||||||||||||
Conventional MPF loans | $ | 501 | $ | 498 | $ | — | ||||||
With a related allowance: | ||||||||||||
Conventional MPF loans | 15,070 | 15,004 | 795 | |||||||||
Total: | ||||||||||||
Conventional MPF loans | $ | 15,571 | $ | 15,502 | $ | 795 |
The table below presents the average recorded investment of individually impaired loans and related interest income recognized. The Bank included the individually impaired loans as of the date on which they became impaired.
Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||||||||||
(in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Conventional MPF loans | $ | 79,993 | $ | 322 | $ | 11,927 | $ | 159 |
Purchases, Sales and Reclassifications. During the three months ended March 31, 2014 and 2013, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.
Note 9 – Derivatives and Hedging Activities
Nature of Business Activity. The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and funding sources that finance these assets. The goal of the Bank's interest rate risk management strategies is not to eliminate interest rate risk but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources. For additional information on the Bank's derivative transactions, see Note 11 to the audited financial statements in the Bank's 2013 Form 10-K.
The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Over-the-counter derivative transactions may be either executed with a counterparty (referred to as bilateral derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearing House), the derivative transaction is novated and the executing counterparty is replaced with the Clearing House. The Clearing House notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the Bank of the required initial and variation margin. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
69
Notes to Financial Statements (continued)
Financial Statement Effect and Additional Financial Information. The following tables summarize the notional and fair value of derivative instruments as of March 31, 2014 and December 31, 2013.
March 31, 2014 | ||||||||||||
(in thousands) | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | |||||||||
Derivatives in hedge accounting relationships: | ||||||||||||
Interest rate swaps | $ | 25,697,235 | $ | 155,219 | $ | 668,698 | ||||||
Derivatives not in hedge accounting relationships: | ||||||||||||
Interest rate swaps | $ | 12,165,934 | $ | 55,461 | $ | 26,831 | ||||||
Interest rate swaptions | 25,000 | 428 | — | |||||||||
Interest rate caps | 1,089,500 | 6,178 | — | |||||||||
Mortgage delivery commitments | 15,084 | 171 | 4 | |||||||||
Total derivatives not in hedge accounting relationships | $ | 13,295,518 | $ | 62,238 | $ | 26,835 | ||||||
Total derivatives before netting and collateral adjustments | $ | 38,992,753 | $ | 217,457 | $ | 695,533 | ||||||
Netting adjustments | (124,426 | ) | (124,426 | ) | ||||||||
Cash collateral and related accrued interest | (22,142 | ) | (482,097 | ) | ||||||||
Total collateral and netting adjustments (1) | (146,568 | ) | (606,523 | ) | ||||||||
Derivative assets and derivative liabilities as reported on the Statement of Condition | $ | 70,889 | $ | 89,010 |
December 31, 2013 | ||||||||||||
(in thousands) | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | |||||||||
Derivatives in hedge accounting relationships: | ||||||||||||
Interest rate swaps | $ | 25,443,924 | $ | 169,718 | $ | 800,078 | ||||||
Derivatives not in hedge accounting relationships: | ||||||||||||
Interest rate swaps | $ | 10,730,985 | $ | 72,519 | $ | 34,829 | ||||||
Interest rate caps | 1,064,500 | 7,182 | — | |||||||||
Mortgage delivery commitments | 12,279 | 160 | — | |||||||||
Total derivatives not in hedge accounting relationships | $ | 11,807,764 | $ | 79,861 | $ | 34,829 | ||||||
Total derivatives before netting and collateral adjustments | $ | 37,251,688 | $ | 249,579 | $ | 834,907 | ||||||
Netting adjustments | (182,045 | ) | (182,045 | ) | ||||||||
Cash collateral and related accrued interest | (7,561 | ) | (475,374 | ) | ||||||||
Total collateral and netting adjustments (1) | (189,606 | ) | (657,419 | ) | ||||||||
Derivative assets and derivative liabilities as reported on the Statement of Condition | $ | 59,973 | $ | 177,488 |
Note:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.
70
Notes to Financial Statements (continued)
The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statement of Income.
Three months ended March 31, | |||||||
(in thousands) | 2014 | 2013 | |||||
Derivatives and hedged items in fair value hedging relationships: | |||||||
Interest rate swaps - fair value hedge ineffectiveness | $ | 512 | $ | (1,099 | ) | ||
Derivatives not designated as hedging instruments: | |||||||
Economic hedges: | |||||||
Interest rate swaps | $ | (15,773 | ) | $ | (4,936 | ) | |
Interest rate swaptions | (48 | ) | — | ||||
Interest rate caps | (1,554 | ) | 194 | ||||
Net interest settlements | 6,411 | 4,297 | |||||
Mortgage delivery commitments | 1,246 | 3,124 | |||||
Other | 7 | 4 | |||||
Total net gains (losses) related to derivatives not designated as hedging instruments | $ | (9,711 | ) | $ | 2,683 | ||
Net gains (losses) on derivatives and hedging activities | $ | (9,199 | ) | $ | 1,584 |
The following tables present, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the first quarter of 2014 and 2013.
(in thousands) | Gains/(Losses) on Derivative | Gains/(Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Three months ended March 31, 2014 | ||||||||||||||||
Hedged item type: | ||||||||||||||||
Advances | $ | 48,010 | $ | (47,263 | ) | $ | 747 | $ | (60,390 | ) | ||||||
Consolidated obligations – bonds | 45,796 | (45,655 | ) | 141 | 54,437 | |||||||||||
AFS securities | (9,137 | ) | 8,761 | (376 | ) | (2,544 | ) | |||||||||
Total | $ | 84,669 | $ | (84,157 | ) | $ | 512 | $ | (8,497 | ) |
(in thousands) | Gains/(Losses) on Derivative | Gains/(Losses) on Hedged Item | Net Fair Value Hedge Ineffectiveness | Effect of Derivatives on Net Interest Income (1) | ||||||||||||
Three months ended March 31, 2013 | ||||||||||||||||
Hedged item type: | ||||||||||||||||
Advances | $ | 57,970 | $ | (60,481 | ) | $ | (2,511 | ) | $ | (61,858 | ) | |||||
Consolidated obligations – bonds | (49,055 | ) | 50,467 | 1,412 | 49,946 | |||||||||||
Total | $ | 8,915 | $ | (10,014 | ) | $ | (1,099 | ) | $ | (11,912 | ) |
Note:
(1)Represents the net interest settlements on derivatives in fair value hedge relationships presented in the interest income/expense line item of the respective hedged item. These amounts do not include $3.5 million and $4.8 million of amortization/accretion of the basis adjustment related to discontinued fair value hedging relationships for the three months ended March 31, 2014 and 2013, respectively.
The Bank had no active cash flow hedging relationships during the first three months of 2014 or 2013. As of March 31, 2014, the deferred net gains (losses) on derivative instruments in AOCI expected to be reclassified to earnings during the next twelve months, as well as the losses reclassified from AOCI into income, were not material.
Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The Bank manages counterparty credit risk through credit analysis, collateral
71
Notes to Financial Statements (continued)
requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations. For bilateral derivatives, the degree of credit risk depends on the extent to which netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all bilateral derivatives.
For cleared derivatives, the Clearing Houses are the Bank's counterparties. The requirement that the Bank post initial and variation margin through the clearing agent, on behalf of the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their respective obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, for changes in the value of cleared derivatives. However, due to the nature of initial and variation margin, the Bank will always be over-collateralized with the Clearing Houses. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and believes that the exercise of those offsetting rights by a non-defaulting party under these transactions would be upheld under applicable law upon an event of default including a bankruptcy, insolvency or similar proceeding involving the Clearing Houses or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearing House.
Based on credit analyses and collateral requirements, the Bank does not anticipate credit losses related to its derivative agreements. See Note 13 - Estimated Fair Values for discussion regarding the Bank's fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.
Generally, the Bank’s ISDA agreements for bilateral derivatives contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in its credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on bilateral derivative instruments in net liability positions. The aggregate fair value of all bilateral derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2014 was $393.4 million for which the Bank has posted cash and securities collateral with a fair value of approximately $305.0 million in the normal course of business. If the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would have been required to deliver up to an additional $56.1 million of collateral to its derivative counterparties at March 31, 2014.
For cleared derivatives, the Clearing House determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agents at March 31, 2014.
Offsetting of Derivative Assets and Derivative Liabilities. The Bank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. The following tables presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
72
Notes to Financial Statements (continued)
Derivative Assets | ||||||||
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Derivative instruments meeting netting requirements: | ||||||||
Gross recognized amount: | ||||||||
Bilateral derivatives | $ | 210,960 | $ | 234,156 | ||||
Cleared derivatives | 6,326 | 15,264 | ||||||
Total gross recognized amount | 217,286 | 249,420 | ||||||
Gross amounts of netting adjustments and cash collateral: | ||||||||
Bilateral derivatives | (186,933 | ) | (205,752 | ) | ||||
Cleared derivatives | 40,365 | 16,146 | ||||||
Total gross amounts of netting adjustments and cash collateral | (146,568 | ) | (189,606 | ) | ||||
Net amounts after netting adjustments: | ||||||||
Bilateral derivatives | 24,027 | 28,404 | ||||||
Cleared derivatives | 46,691 | 31,410 | ||||||
Total net amounts after netting adjustments | 70,718 | 59,814 | ||||||
Derivative instruments not meeting netting requirements: (1) | ||||||||
Bilateral derivatives | 171 | 159 | ||||||
Cleared derivatives | — | — | ||||||
Derivative instruments not meeting netting requirements (1) | 171 | 159 | ||||||
Total derivative assets | ||||||||
Bilateral derivatives | 24,198 | 28,563 | ||||||
Cleared derivatives | 46,691 | 31,410 | ||||||
Total derivative assets as reported in the Statement of Condition | 70,889 | 59,973 | ||||||
Non-cash collateral received or pledged not offset: | ||||||||
Can be sold or repledged | ||||||||
Bilateral derivatives | (12,094 | ) | (13,778 | ) | ||||
Net unsecured amount: | ||||||||
Bilateral derivatives | 12,104 | 14,785 | ||||||
Cleared derivatives | 46,691 | 31,410 | ||||||
Total net unsecured amount | $ | 58,795 | $ | 46,195 |
73
Notes to Financial Statements (continued)
Derivative Liabilities | ||||||||
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Derivative instruments meeting netting requirements: | ||||||||
Gross recognized amount: | ||||||||
Bilateral derivatives | $ | 558,830 | $ | 828,187 | ||||
Cleared derivatives | 136,699 | 6,720 | ||||||
Total gross recognized amount | 695,529 | 834,907 | ||||||
Gross amounts of netting adjustments and cash collateral: | ||||||||
Bilateral derivatives | (469,824 | ) | (650,699 | ) | ||||
Cleared derivatives | (136,699 | ) | (6,720 | ) | ||||
Total gross amounts of netting adjustments and cash collateral | (606,523 | ) | (657,419 | ) | ||||
Net amounts after netting adjustments: | ||||||||
Bilateral derivatives | 89,006 | 177,488 | ||||||
Cleared derivatives | — | — | ||||||
Total net amounts after offsetting adjustments | 89,006 | 177,488 | ||||||
Derivative instruments not meeting netting requirements: (1) | ||||||||
Bilateral derivatives | 4 | — | ||||||
Total derivative liabilities | ||||||||
Bilateral derivatives | 89,010 | 177,488 | ||||||
Cleared derivatives | — | — | ||||||
Total derivative liabilities as reported in the Statement of Condition | 89,010 | 177,488 | ||||||
Non-cash collateral received or pledged not offset: | ||||||||
Can be sold or repledged | ||||||||
Bilateral derivatives | — | (79,233 | ) | |||||
Net unsecured amount: | ||||||||
Bilateral derivatives | 89,010 | 98,255 | ||||||
Net unsecured amount | $ | 89,010 | $ | 98,255 |
Notes:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments and certain interest-rate futures or forwards).
74
Notes to Financial Statements (continued)
Note 10 – Consolidated Obligations
Detailed information regarding consolidated obligations including general terms and interest rate payment terms can be found in Note 14 to the audited financial statements in the Bank's 2013 Form 10-K.
The following table details interest rate payment terms for consolidated obligation bonds as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Par value of consolidated bonds: | ||||||||
Fixed-rate | $ | 28,525,638 | $ | 29,062,248 | ||||
Step-up | 3,512,500 | 3,052,500 | ||||||
Floating-rate | 5,830,000 | 5,580,000 | ||||||
Total par value | 37,868,138 | 37,694,748 | ||||||
Bond premiums | 78,753 | 87,961 | ||||||
Bond discounts | (13,037 | ) | (14,019 | ) | ||||
Hedging adjustments | (32,460 | ) | (70,389 | ) | ||||
Total book value | $ | 37,901,394 | $ | 37,698,302 |
Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of March 31, 2014 and December 31, 2013.
March 31, 2014 | December 31, 2013 | |||||||||||||
(dollars in thousands) Year of Contractual Maturity | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||
Due in 1 year or less | $ | 12,525,045 | 1.10 | % | $ | 12,576,595 | 0.94 | % | ||||||
Due after 1 year through 2 years | 6,603,915 | 1.67 | 7,979,165 | 1.75 | ||||||||||
Due after 2 years through 3 years | 3,344,355 | 1.94 | 2,711,605 | 2.29 | ||||||||||
Due after 3 years through 4 years | 2,948,100 | 2.00 | 2,040,700 | 2.25 | ||||||||||
Due after 4 years through 5 years | 4,895,800 | 1.49 | 4,594,700 | 1.50 | ||||||||||
Thereafter | 7,012,990 | 2.20 | 7,151,890 | 2.14 | ||||||||||
Index amortizing notes | 537,933 | 4.46 | 640,093 | 4.54 | ||||||||||
Total par value | $ | 37,868,138 | 1.65 | % | $ | 37,694,748 | 1.64 | % |
The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Noncallable | $ | 25,118,138 | $ | 26,549,748 | ||||
Callable | 12,750,000 | 11,145,000 | ||||||
Total par value | $ | 37,868,138 | $ | 37,694,748 |
75
Notes to Financial Statements (continued)
The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of March 31, 2014 and December 31, 2013.
(in thousands) Year of Contractual Maturity or Next Call Date | March 31, 2014 | December 31, 2013 | ||||||
Due in 1 year or less | $ | 25,030,045 | $ | 23,436,595 | ||||
Due after 1 year through 2 years | 6,623,915 | 7,914,165 | ||||||
Due after 2 years through 3 years | 2,159,355 | 2,196,605 | ||||||
Due after 3 years through 4 years | 1,559,600 | 1,437,200 | ||||||
Due after 4 years through 5 years | 1,036,800 | 1,150,700 | ||||||
Thereafter | 920,490 | 919,390 | ||||||
Index amortizing notes | 537,933 | 640,093 | ||||||
Total par value | $ | 37,868,138 | $ | 37,694,748 |
Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The following table details the Bank’s consolidated obligation discount notes as of March 31, 2014 and December 31, 2013.
(dollars in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Book value | $ | 21,942,198 | $ | 28,236,257 | ||||
Par value | 21,947,181 | 28,242,236 | ||||||
Weighted average interest rate (1) | 0.10 | % | 0.09 | % |
Note:
(1) Represents an implied rate.
Note 11 – Capital
The Bank is subject to three capital requirements under its current Capital Plan structure and the Finance Agency rules and regulations: (1) risk-based capital; (2) total regulatory capital; and (3) leverage capital. Regulatory capital does not include AOCI but does include mandatorily redeemable capital stock. See details regarding these requirements and the Bank’s Capital Plan in Note 17 to the audited financial statements in the Bank’s 2013 Form 10-K.
At March 31, 2014, the Bank was in compliance with all regulatory capital requirements. Mandatorily redeemable capital stock is considered capital for determining the Bank's compliance with its regulatory requirements. At March 31, 2014 and December 31, 2013, all of the Bank's capital stock outstanding was Class B stock.
The following table demonstrates the Bank’s compliance with these capital requirements at March 31, 2014 and December 31, 2013.
March 31, 2014 | December 31, 2013 | |||||||||||||||
(dollars in thousands) | Required | Actual | Required | Actual | ||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk-based capital | $ | 985,589 | $ | 3,432,036 | $ | 1,052,654 | $ | 3,647,902 | ||||||||
Total capital-to-asset ratio | 4.0 | % | 5.3 | % | 4.0 | % | 5.2 | % | ||||||||
Total regulatory capital | 2,582,226 | 3,432,036 | 2,826,837 | 3,647,902 | ||||||||||||
Leverage ratio | 5.0 | % | 8.0 | % | 5.0 | % | 7.7 | % | ||||||||
Leverage capital | 3,227,783 | 5,148,053 | 3,533,546 | 5,471,853 |
The increase in the ratios from December 31, 2013 to March 31, 2014 was primarily due to the decrease in both capital stock and total assets. When the Finance Agency implemented the prompt corrective action provisions of the Housing Act, it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On March 20, 2014, the Bank received final notification from the Finance
76
Notes to Financial Statements (continued)
Agency that it was considered to be "adequately capitalized" for the quarter ended December 31, 2013. 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, 2014.
Capital Concentrations. The following tables present member holdings of 10% or more of the Bank’s total capital stock including mandatorily redeemable capital stock outstanding as of March 31, 2014 and December 31, 2013.
(dollars in thousands) | March 31, 2014 | ||||||
Member (1) | Capital Stock | % of Total | |||||
PNC Bank, N.A., Wilmington, DE | $ | 588,905 | 22.0 | % | |||
Chase Bank USA, N.A., Wilmington, DE | 439,831 | 16.4 | |||||
Santander Bank, N.A., Wilmington, DE | 333,234 | 12.4 |
(dollars in thousands) | December 31, 2013 | ||||||
Member (1) | Capital Stock | % of Total | |||||
PNC Bank, N.A., Wilmington, DE | $ | 601,605 | 20.3 | % | |||
Chase Bank USA, N.A., Wilmington, DE | 439,802 | 14.8 | |||||
Santander Bank, N.A., Wilmington, DE | 416,685 | 14.1 | |||||
Ally Bank, Midvale, UT | 307,800 | 10.4 |
Note:
(1) For Bank membership purposes, the principal place of business for PNC Bank, N.A. is Pittsburgh, PA. For Ally Bank, the principal place of business is Horsham, PA.
Mandatorily Redeemable Capital Stock. Each FHLBank is a cooperative whose member financial institutions and former members own all of the relevant FHLBank's issued and outstanding shares of capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at its $100 per share par value, as mandated by each FHLBank's capital plan.
At March 31, 2014 and December 31, 2013, the Bank had $1.9 million and $40 thousand, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements. For the three months ended March 31, 2014 and 2013, estimated dividends on mandatorily redeemable capital stock totaling $14 thousand and $289 thousand, respectively, were recorded as interest expense.
The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the three months ended March 31, 2014 and 2013.
Three months ended March 31, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
Balance, beginning of the period | $ | 40 | $ | 431,566 | ||||
Capital stock subject to mandatory redemption reclassified from capital stock: | ||||||||
Due to withdrawals (includes mergers) | 1,978 | 698 | ||||||
Redemption of mandatorily redeemable capital stock: | ||||||||
Other redemptions (1) | (157 | ) | (63,441 | ) | ||||
Balance, end of the period | $ | 1,861 | $ | 368,823 |
Note:
(1) Reflects the impact on mandatorily redeemable capital stock related to excess capital stock repurchases.
As of March 31, 2014, the total mandatorily redeemable capital stock reflected the balance for two institutions. One institution was merged out of district and is considered to be a nonmember. This capital stock supports an advance. One other institution notified the Bank of its intention to voluntarily redeem their capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.
77
Notes to Financial Statements (continued)
The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at March 31, 2014 and December 31, 2013.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Due in 1 year or less | $ | — | $ | — | ||||
Due after 1 year through 2 years | 40 | 40 | ||||||
Due after 2 years through 3 years | — | — | ||||||
Due after 3 years through 4 years | — | — | ||||||
Due after 4 years through 5 years | 1,821 | — | ||||||
Total | $ | 1,861 | $ | 40 |
The year of redemption in the table above is the end of the five-year redemption period for the mandatorily redeemable capital stock. Under the Finance Agency regulations and the terms of the Bank's Capital Plan, capital stock supporting advances and other activity with the Bank (e.g., letters of credit, mortgage loans, etc.) is not redeemable prior to the payoff or maturity of the associated advance or other activity, which may extend beyond five years.
Dividends and Retained Earnings. Each FHLBank is required to contribute 20% of its net income each quarter to a restricted retained earnings (RRE) account until the balance of that account equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. At March 31, 2014, retained earnings were $748.8 million, including $672.8 million of unrestricted retained earnings and $76.1 million of RRE.
The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with
consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of the Bank’s retained earnings. The Bank’s retained earnings policy and capital adequacy metric utilize this guidance.
Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. In February and April 2014, the Bank declared quarterly dividends of 2.5% and 4.0% on an annualized basis, respectively. Currently, the Bank's practice is to repurchase all excess capital stock on a monthly basis.
78
Notes to Financial Statements (continued)
The following table summarizes the changes in AOCI for three months ended March 31, 2014 and 2013.
(in thousands) | Net Unrealized Gains(Losses) on AFS | Non-credit OTTI Gains(Losses) on AFS | Non-credit OTTI Gains(Losses) on HTM | Net Unrealized Gains on Hedging Activities | Pension and Post-Retirement Plans | Total | ||||||||||||||||||
December 31, 2012 | $ | 35,390 | $ | 18,999 | $ | — | $ | 286 | $ | (970 | ) | $ | 53,705 | |||||||||||
Other comprehensive income (loss) before reclassification: | ||||||||||||||||||||||||
Net unrealized gains (losses) | (4,838 | ) | 15,060 | — | — | — | 10,222 | |||||||||||||||||
Net change in fair value of OTTI securities | — | 14,364 | — | — | — | 14,364 | ||||||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||||||
Noncredit OTTI to credit OTTI | — | 442 | — | — | — | 442 | ||||||||||||||||||
Amortization - pension and post-retirement | — | — | — | — | 26 | 26 | ||||||||||||||||||
March 31, 2013 | $ | 30,552 | $ | 48,865 | $ | — | $ | 286 | $ | (944 | ) | $ | 78,759 | |||||||||||
December 31, 2013 | $ | (32,481 | ) | $ | 77,642 | $ | — | $ | 287 | $ | (1,108 | ) | $ | 44,340 | ||||||||||
Other comprehensive income (loss) before reclassification: | ||||||||||||||||||||||||
Net unrealized gains (losses) | 24,528 | (575 | ) | — | — | — | 23,953 | |||||||||||||||||
Net change in fair value of OTTI securities | — | 2,018 | — | — | — | 2,018 | ||||||||||||||||||
Reclassifications from OCI to net income: | ||||||||||||||||||||||||
Amortization - pension and post-retirement | — | — | — | — | 39 | 39 | ||||||||||||||||||
March 31, 2014 | $ | (7,953 | ) | $ | 79,085 | $ | — | $ | 287 | $ | (1,069 | ) | $ | 70,350 |
79
Notes to Financial Statements (continued)
Note 12 – Transactions with Related Parties
The following table includes significant outstanding related party member balances.
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Federal funds sold | $ | — | $ | 45,000 | ||||
Investments | 167,720 | 168,905 | ||||||
Advances | 30,353,457 | 37,978,850 | ||||||
Letters of credit | 7,480,653 | 7,206,562 | ||||||
MPF loans | 1,558,205 | 1,633,238 | ||||||
Deposits | 11,756 | 10,422 | ||||||
Capital stock | 1,426,849 | 1,834,397 |
The following table summarizes the effects on the Statement of Income corresponding to the related party member balances above. Amounts related to Federal funds sold, interest income on investments, and interest expense on deposits were immaterial for the periods presented.
Three months ended March 31, | |||||||||
(in thousands) | 2014 | 2013 | |||||||
Interest income on advances (1) | $ | 32,803 | $ | 31,122 | |||||
Interest income on MPF loans | 21,306 | 28,186 | |||||||
Letter of credit fees | 1,882 | 19 | |||||||
Prepayment fees on advances | 3,090 | — |
Note:
(1) For the three months ended March 31, 2014, balances include contractual interest income of $83.6 million, net interest settlements on derivatives in fair value hedge relationships of $(48.7) million and total amortization of basis adjustments of $(2.1) million. For the three months ended March 31, 2013, balances include contractual interest income of $83.9 million, net interest settlements on derivatives in fair value hedge relationships of $(52.0) million and total amortization of basis adjustments of $(0.8) million.
The following table includes the MPF activity of the related party members.
Three months ended March 31, | |||||||||
(in thousands) | 2014 | 2013 | |||||||
Total MPF loan volume purchased | $ | 889 | $ | 2,262 |
The following table summarizes the effect of the MPF activities with FHLBank of Chicago.
Three months ended March 31, | |||||||||
(in thousands) | 2014 | 2013 | |||||||
Servicing fee expense | $ | 237 | $ | 217 | |||||
Interest income on MPF deposits | — | 4 |
(in thousands) | March 31, 2014 | December 31, 2013 | ||||||
Interest-bearing deposits maintained with FHLBank of Chicago | $ | 5,459 | $ | 7,795 |
From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three months ended March 31, 2014 and 2013, there was no borrowing or lending activity between the Bank and other FHLBanks.
Subject to mutually agreed upon terms, on occasion, an FHLBank may transfer its primary debt obligations to another FHLBank, which becomes the primary obligor on the transferred debt upon completion of the transfer. During the three months ended March 31, 2014 and 2013, there were no transfers of debt between the Bank and another FHLBank.
80
Notes to Financial Statements (continued)
From time to time, a member of one FHLBank may be acquired by a member of another FHLBank. When such an acquisition occurs, the two FHLBanks may agree to transfer at fair value the loans of the acquired member to the FHLBank of the surviving member. The FHLBanks may also agree to the purchase and sale of any related hedging instrument. The Bank had no such activity during the three months ended March 31, 2014 and 2013.
Additional discussions regarding related party transactions can be found in Note 19 to the audited financial statements in the Bank's 2013 Form 10-K.
Note 13 – Estimated Fair Values
Fair value amounts have been determined by the Bank using available market information and appropriate valuation methods. These estimates are based on pertinent information available to the Bank at March 31, 2014 and December 31, 2013. Although the management of the Bank believes that the valuation methods used are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values.
The carrying value and estimated fair value of the Bank’s financial instruments at March 31, 2014 and December 31, 2013 are presented in the table below. This table does not represent an estimate of the overall market value of the Bank as a going-concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
Fair Value Summary Table | |||||||||||||||||||||||
March 31, 2014 | |||||||||||||||||||||||
(in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | Netting Adjust. | Estimated Fair Value | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | 1,141,287 | $ | 1,141,287 | $ | — | $ | — | $ | — | $ | 1,141,287 | |||||||||||
Interest-bearing deposits | 5,459 | — | 5,459 | — | — | 5,459 | |||||||||||||||||
Federal funds sold | 2,830,000 | — | 2,829,993 | — | — | 2,829,993 | |||||||||||||||||
Trading securities | 259,446 | 4,798 | 254,648 | — | — | 259,446 | |||||||||||||||||
AFS securities | 7,061,145 | 1,998 | 5,968,103 | 1,091,044 | — | 7,061,145 | |||||||||||||||||
HTM securities | 3,822,403 | — | 3,042,877 | 825,453 | — | 3,868,330 | |||||||||||||||||
Advances | 46,063,912 | — | 46,193,744 | — | — | 46,193,744 | |||||||||||||||||
Mortgage loans held for portfolio, net | 3,174,294 | — | 3,321,489 | — | — | 3,321,489 | |||||||||||||||||
BOB loans, net | 11,161 | — | — | 11,161 | — | 11,161 | |||||||||||||||||
Accrued interest receivable | 82,651 | — | 82,651 | — | — | 82,651 | |||||||||||||||||
Derivative assets | 70,889 | — | 217,457 | — | (146,568 | ) | 70,889 | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | $ | 780,355 | $ | — | $ | 780,357 | $ | — | $ | — | $ | 780,357 | |||||||||||
Discount notes | 21,942,198 | — | 21,943,859 | — | — | 21,943,859 | |||||||||||||||||
Bonds | 37,901,394 | — | 38,067,644 | — | — | 38,067,644 | |||||||||||||||||
Mandatorily redeemable capital stock | 1,861 | 1,861 | — | — | — | 1,861 | |||||||||||||||||
Accrued interest payable | 143,873 | — | 143,873 | — | — | 143,873 | |||||||||||||||||
Derivative liabilities | 89,010 | — | 695,533 | — | (606,523 | ) | 89,010 |
81
Notes to Financial Statements (continued)
December 31, 2013 | |||||||||||||||||||||||
(in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | Netting Adjust. | Estimated Fair Value | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | 3,121,345 | $ | 3,121,345 | $ | — | $ | — | $ | — | $ | 3,121,345 | |||||||||||
Interest-bearing deposits | 7,795 | — | 7,795 | — | — | 7,795 | |||||||||||||||||
Federal funds sold | 2,875,000 | — | 2,874,983 | — | — | 2,874,983 | |||||||||||||||||
Trading securities | 239,190 | 4,576 | 234,614 | — | — | 239,190 | |||||||||||||||||
AFS securities | 6,757,717 | 1,998 | 5,617,667 | 1,138,052 | 6,757,717 | ||||||||||||||||||
HTM securities | 3,995,530 | — | 3,164,059 | 870,771 | — | 4,034,830 | |||||||||||||||||
Advances | 50,247,435 | — | 50,346,040 | — | — | 50,346,040 | |||||||||||||||||
Mortgage loans held for portfolio, net | 3,224,091 | — | 3,351,450 | — | — | 3,351,450 | |||||||||||||||||
BOB loans, net | 11,400 | — | — | 11,400 | — | 11,400 | |||||||||||||||||
Accrued interest receivable | 95,374 | — | 95,374 | — | — | 95,374 | |||||||||||||||||
Derivative assets | 59,973 | — | 249,579 | — | (189,606 | ) | 59,973 | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | $ | 694,352 | $ | 694,357 | $ | — | $ | — | $ | 694,357 | |||||||||||||
Discount notes | 28,236,257 | — | 28,238,042 | — | — | 28,238,042 | |||||||||||||||||
Bonds | 37,698,302 | — | 37,847,493 | — | — | 37,847,493 | |||||||||||||||||
Mandatorily redeemable capital stock | 40 | 40 | — | — | — | 40 | |||||||||||||||||
Accrued interest payable | 97,689 | — | 97,689 | — | — | 97,689 | |||||||||||||||||
Derivative liabilities | 177,488 | — | 834,907 | — | (657,419 | ) | 177,488 |
Fair Value Hierarchy. The Bank records trading securities, AFS securities, derivative assets and derivative liabilities at fair value. The fair value hierarchy is used to prioritize the inputs used to measure fair value for those assets and liabilities carried at fair value on the Statement of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for the asset or liability.
The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification within the fair value hierarchy of certain assets or liabilities. These reclassifications are reported as transfers in/out of the level as of the beginning of the quarter in which the changes occur. There were no such transfers during the three months ended March 31, 2014 and 2013.
82
Notes to Financial Statements (continued)
Summary of Valuation Methodologies and Primary Inputs
Cash and Due from Banks. The fair values equal the carrying values.
Interest Bearing Deposits. The fair value is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.
Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms.
Investment Securities – non-MBS. The Bank uses the income approach to determine the estimated fair value of non-MBS investment securities. The significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves used by the Bank and the related instrument types they measure are as follows:
• | Treasury curve: U.S. Treasury obligations |
• | LIBOR Swap curve: certificates of deposit |
• | CO curve: Government-sponsored enterprises, state and local agency, and other U.S. obligations |
Investment Securities – MBS. To value MBS holdings, the Bank obtains prices from 4 designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many MBS do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.
During the year, the Bank conducts reviews of the four pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures for agency and private label MBS. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.
The Bank's valuation technique first requires the establishment of a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
As an additional step, the Bank reviewed the final fair value estimates of its private-label MBS holdings as of March 31, 2014 for reasonableness using an implied yield test. On certain securities, the Bank calculated an implied yield using the estimated fair value derived from the process described above and the security's projected cash flows from the Bank's OTTI process and compared such yield to the market yield for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.
As of March 31, 2014, four vendor prices were received for a majority of the Bank's MBS holdings, and the final prices for a majority of those securities were computed by averaging the four prices. Based on the Bank's reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes the final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. Based on the current lack of significant market activity for private label residential MBS, the Bank believes as of March 31, 2014 private label residential MBS inputs should be classified as Level 3.
83
Notes to Financial Statements (continued)
Mutual Funds Offsetting Deferred Compensation and Employee Benefit Plan Obligations. Fair values for publicly traded mutual funds are based on quoted market prices.
Advances. The Bank determines the fair value by calculating the present value of expected future cash flows from the advances. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine fair value of advances are the LIBOR curve, a volatility assumption for advances with optionality, and a spread adjustment.
Mortgage Loans Held For Portfolio. The fair value is determined based on quoted market prices for new MBS issued by U.S. GSEs. Prices are then adjusted for differences in coupon, seasoning and credit quality between the Bank’s mortgage loans and the referenced MBS. The prices of the referenced MBS are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in the prepayment rates can have a material effect on the fair value estimates. Prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.
Accrued Interest Receivable and Payable. The fair values approximate the carrying values.
Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. Because these estimates are made as of a specific point in time, they are susceptible to material near-term changes.
The Bank is subject to credit risk on bilateral derivatives transactions due to the potential nonperformance by the derivatives counterparties, all of which are highly rated institutions. To mitigate this risk, the Bank has entered into netting arrangements for its derivative transactions. In addition, the Bank has entered into bilateral security agreements with all active derivatives counterparties that provide for delivery of collateral at specified levels tied to those counterparties’ credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. For cleared derivatives, the Bank's credit risk exposure is mitigated because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives. The Bank has evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.
The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by counterparty pursuant to the provisions of each of the Bank’s netting agreements. If these netted amounts are positive, they are classified as an asset; if negative, a liability.
The discounted cash flow analysis used to determine the fair value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:
Interest-rate related:
• | Discount rate assumption. Overnight Index Swap (OIS) curve. |
• | Forward interest rate assumption. LIBOR Swap Curve. |
• | Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options. |
Mortgage delivery commitments:
• | To Be Announced (TBA) securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement. |
BOB Loans. The fair value approximates the carrying value.
Deposits. The Bank determines the fair value by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the cost of deposits with similar terms.
84
Notes to Financial Statements (continued)
Consolidated Obligations. The Bank’s internal valuation model determines fair values of consolidated obligations bonds and discount notes by calculating the present value of expected cash flows using market-based yield curves. The inputs used to determine fair value of consolidated obligations are a CO curve and a LIBOR swap curve, a volatility assumption for consolidated obligations with optionality, and a spread adjustment.
Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value as indicated by contemporaneous member purchases and sales at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently-declared dividend. FHLBank stock can only be acquired and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System's cooperative structure.
Commitments. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of the Bank's commitments to extend credit for advances and letters of credit was immaterial at March 31, 2014 and December 31, 2013.
Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. These estimates are susceptible to material near term changes because they are made as of a specific point in time.
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Notes to Financial Statements (continued)
Fair Value on a Recurring Basis. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring basis on its Statement of Condition at March 31, 2014 and December 31, 2013.
March 31, 2014 | ||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Total | |||||||||||||||
Assets: | ||||||||||||||||||||
Trading securities: | ||||||||||||||||||||
Non MBS: | ||||||||||||||||||||
GSE and TVA Obligations | $ | — | $ | 254,648 | $ | — | $ | — | $ | 254,648 | ||||||||||
Mutual funds | 4,798 | — | — | — | 4,798 | |||||||||||||||
Total trading securities | $ | 4,798 | $ | 254,648 | $ | — | $ | — | $ | 259,446 | ||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA Obligations | $ | — | $ | 2,115,508 | $ | — | $ | — | $ | 2,115,508 | ||||||||||
State or local agency obligations | — | 13,999 | — | — | 13,999 | |||||||||||||||
Mutual funds | 1,998 | — | — | — | 1,998 | |||||||||||||||
Other U.S. obligations residential MBS | — | 371,803 | — | — | 371,803 | |||||||||||||||
GSE MBS | — | 3,466,793 | — | — | 3,466,793 | |||||||||||||||
Private label MBS: | ||||||||||||||||||||
Private label residential MBS | — | — | 1,077,021 | — | 1,077,021 | |||||||||||||||
HELOCs | — | — | 14,023 | — | 14,023 | |||||||||||||||
Total AFS securities | $ | 1,998 | $ | 5,968,103 | $ | 1,091,044 | $ | — | $ | 7,061,145 | ||||||||||
Derivative assets: | ||||||||||||||||||||
Interest rate related | $ | — | $ | 217,286 | $ | — | $ | (146,568 | ) | $ | 70,718 | |||||||||
Mortgage delivery commitments | — | 171 | — | — | 171 | |||||||||||||||
Total derivative assets | $ | — | $ | 217,457 | $ | — | $ | (146,568 | ) | $ | 70,889 | |||||||||
Total assets at fair value | $ | 6,796 | $ | 6,440,208 | $ | 1,091,044 | $ | (146,568 | ) | $ | 7,391,480 | |||||||||
Liabilities: | ||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest rate related | $ | — | $ | 695,529 | $ | — | $ | (606,523 | ) | $ | 89,006 | |||||||||
Mortgage delivery commitments | — | 4 | — | — | 4 | |||||||||||||||
Total derivative liabilities (2) | $ | — | $ | 695,533 | $ | — | $ | (606,523 | ) | $ | 89,010 |
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Notes to Financial Statements (continued)
December 31, 2013 | ||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Total | |||||||||||||||
Assets: | ||||||||||||||||||||
Trading securities: | ||||||||||||||||||||
GSE and TVA Obligations | $ | — | $ | 234,614 | $ | — | $ | — | $ | 234,614 | ||||||||||
Mutual funds | 4,576 | — | — | — | 4,576 | |||||||||||||||
Total trading securities | $ | 4,576 | $ | 234,614 | $ | — | $ | — | $ | 239,190 | ||||||||||
AFS securities: | ||||||||||||||||||||
GSE and TVA Obligations | — | 2,096,177 | 2,096,177 | |||||||||||||||||
State or local agency obligations | — | 14,043 | — | — | 14,043 | |||||||||||||||
Mutual funds | 1,998 | — | — | — | 1,998 | |||||||||||||||
Other U.S. obligations residential MBS | — | 385,296 | — | — | 385,296 | |||||||||||||||
GSE MBS | — | 3,122,151 | — | — | 3,122,151 | |||||||||||||||
Private label MBS: | ||||||||||||||||||||
Private label residential MBS | — | — | 1,123,624 | — | 1,123,624 | |||||||||||||||
HELOCs | — | — | 14,428 | — | 14,428 | |||||||||||||||
Total AFS securities | $ | 1,998 | $ | 5,617,667 | $ | 1,138,052 | $ | — | $ | 6,757,717 | ||||||||||
Derivative assets: | ||||||||||||||||||||
Interest rate related | $ | — | $ | 249,419 | $ | — | $ | (189,606 | ) | $ | 59,813 | |||||||||
Mortgage delivery commitments | — | 160 | — | — | 160 | |||||||||||||||
Total derivative assets | $ | — | $ | 249,579 | $ | — | $ | (189,606 | ) | $ | 59,973 | |||||||||
Total assets at fair value | $ | 6,574 | $ | 6,101,860 | $ | 1,138,052 | $ | (189,606 | ) | $ | 7,056,880 | |||||||||
Liabilities: | ||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||
Interest rate related | $ | — | $ | 834,907 | $ | — | $ | (657,419 | ) | $ | 177,488 | |||||||||
Total derivative liabilities (2) | $ | — | $ | 834,907 | $ | — | $ | (657,419 | ) | $ | 177,488 |
Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.
(2) Derivative liabilities represent the total liabilities at fair value.
There were no transfers between Levels 1 and 2 during the first three months of 2014 or 2013.
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Notes to Financial Statements (continued)
Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statement of Condition using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur. Transfers are reported as of the beginning of the period.
(in thousands) | AFS Private Label MBS-Residential Three Months Ended March 31, 2014 | AFS Private Label MBS- HELOCs Three Months Ended March 31, 2014 | ||||||
Balance at January 1 | $ | 1,123,624 | $ | 14,428 | ||||
Total gains (losses) (realized/unrealized) included in: | ||||||||
Accretion of credit losses in interest income | 2,936 | 330 | ||||||
Net unrealized (losses) on AFS in OCI | (30 | ) | — | |||||
Net change in fair value on OTTI AFS in OCI | 1,998 | 20 | ||||||
Unrealized gains (losses) on OTTI AFS and included in OCI | (684 | ) | 109 | |||||
Purchases, issuances, sales, and settlements: | ||||||||
Settlements | (50,823 | ) | (864 | ) | ||||
Balance at March 31 | $ | 1,077,021 | $ | 14,023 | ||||
Total amount of (losses) for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at March 31, 2014 | $ | 2,936 | $ | 330 |
(in thousands) | AFS Private Label MBS-Residential Three Months Ended March 31, 2013 | AFS Private Label MBS- HELOCs Three Months Ended March 31, 2013 | ||||||
Balance at January 1 | $ | 1,410,476 | $ | 14,758 | ||||
Total gains (losses) (realized/unrealized) included in: | ||||||||
Accretion of credit losses in interest income | (1,494 | ) | 224 | |||||
Net OTTI losses, credit portion | (345 | ) | (97 | ) | ||||
Net unrealized gains on AFS in OCI | 175 | — | ||||||
Reclassification of non-credit portion included in net income | 345 | 97 | ||||||
Net change in fair value on OTTI AFS in OCI | 14,323 | 41 | ||||||
Unrealized gains on OTTI AFS and included in OCI | 14,898 | 162 | ||||||
Purchases, issuances, sales, and settlements: | ||||||||
Settlements | (82,025 | ) | (904 | ) | ||||
Balance at March 31 | $ | 1,356,353 | $ | 14,281 | ||||
Total amount of (losses) for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at March 31, 2013 | $ | (1,839 | ) | $ | 127 |
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Notes to Financial Statements (continued)
Note 14 – Commitments and Contingencies
The following table presents the Bank's various off-balance sheet commitments which are described in detail below.
(in thousands) | March 31, 2014 | December 31, 2013 | |||||||||||
Notional amount | Final Expiration Date Within One Year | Final Expiration Date After One Year (3) | Total | Total | |||||||||
Standby letters of credit outstanding (1) | $ | 10,496,515 | $ | 4,981,164 | $ | 15,477,679 | $ | 14,665,346 | |||||
Commitments to fund additional advances and BOB loans | 5,664 | — | 5,664 | 411,249 | |||||||||
Commitments to fund or purchase mortgage loans | 15,084 | — | 15,084 | 12,279 | |||||||||
Unsettled consolidated obligation bonds, at par (2) | 532,300 | — | 532,300 | 32,000 | |||||||||
Unsettled consolidated obligation discount notes, at par | — | — | — | 750,000 |
Notes:
(1) Excludes approved requests to issue future standby letters of credit of $417.8 million and $154.1 million at March 31, 2014 and December 31, 2013, respectively.
(2) Includes $500.0 million and $15.0 million of consolidated obligation bonds which were hedged with associated interest rate swaps at March 31, 2014 and December 31, 2013, respectively.
(3) These letters of credit have a final expiration date exceeding one year but are subject to non-renewal every year or less.
Commitments to Extend Credit on Standby Letters of Credit, Additional Advances and BOB Loans. Standby letters of credit are issued on behalf of members for a fee. A standby letter of credit is a financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member’s Demand Deposit Account (DDA). Any remaining amounts not covered by the withdrawal from the member’s DDA are converted into a collateralized advance. The original terms of these standby letters of credit, including related commitments, range from less than one month to 5 years.
The Bank has included in Other Income, net, standby letters of credit fees of $4.0 million and $1.9 million for the first quarter of 2014 and 2013, respectively. Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $3.1 million and $3.7 million as of March 31, 2014 and December 31, 2013, respectively. The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. The Bank has established parameters for the review, assessment, monitoring and measurement of credit risk related to these standby letters of credit.
Based on management’s credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policy and Finance Agency regulations, the Bank has not recorded any additional liability on these commitments and standby letters of credit. Excluding BOB, commitments and standby letters of credit are collateralized at the time of issuance. The Bank records a liability with respect to BOB commitments, which is reflected in Other liabilities on the Statement of Condition.
The Bank does not have any legally binding or unconditional unused lines of credit for advances at March 31, 2014 and December 31, 2013. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding at March 31, 2014 and December 31, 2013 of $6.9 billion and $6.4 billion, respectively.
Commitments to Fund or Purchase Mortgage Loans. The Bank may enter into commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF program. These delivery commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives.
Pledged Collateral. The Bank has pledged securities, as collateral, related to derivatives. Refer to Note 9 - Derivatives and Hedging Activities in this Form 10-Q for additional information about the Bank's pledged collateral and other credit risk-related contingent features.
Legal Proceedings. The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a
material effect on its financial condition or results of operations.
Notes 6, 10, 11, and 12 also discuss other commitments and contingencies.
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Item 3: Quantitative and Qualitative Disclosures about Market Risk
See the Risk Management section in Part I, Item 2. Management’s Discussion and Analysis in this Form 10-Q.
Item 4: Controls and Procedures
Under the supervision and with the participation of the Bank’s management, including the chief executive officer and chief accounting officer, the Bank conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 1934 Act). Based on this evaluation, the Bank’s chief executive officer and chief accounting officer concluded that the Bank’s disclosure controls and procedures were effective as of March 31, 2014.
Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the first quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1: Legal Proceedings
As previously disclosed in the Bank's current report on Form 8-K dated January 22, 2014, the Bank settled for $36.6 million (net of legal fees and expenses) its claims relating to its purchases of private label MBS against defendants J.P. Morgan Securities, Inc. (J.P. Morgan) and Fitch, Inc. Information regarding the Bank's remaining litigation involving its purchases of private label MBS is set forth below.
The Bank's complaints filed on September 23, 2009 continue in state court in the Court of Common Pleas of Allegheny County, Pennsylvania (Court) against defendants Moody’s Corporation; Moody’s Investors Service Inc. and The McGraw-Hill Companies, Inc. for the recovery of the Bank’s losses relating to nine private label MBS that had an aggregate original principal amount of approximately $1.68 billion.
The Bank's complaint filed on October 2, 2009, in the Court continues against: The McGraw-Hill Companies, Inc.; Moody’s Corporation; and Moody’s Investors Service, Inc. for the recovery of the Bank's losses relating to certain private label MBS purchased by the Bank in the aggregate original principal amount of approximately $640.0 million.
The Bank's complaint filed on October 13, 2009, in the Court continues against: Countrywide Securities Corporation, Countrywide Home Loans, Inc., and various other Countrywide related entities (Countrywide); Moody’s Corporation; Moody’s Investors Service, Inc.; and The McGraw-Hill Companies, Inc. for the recovery of the Bank's losses relating to five Countrywide private label MBS in the aggregate original principal amount of approximately $366.0 million.
The Bank maintains its claims against Countrywide for fraud and negligent misrepresentation. The Bank maintains its claims against Moody’s Corporation; Moody’s Investors Service, Inc.; and The McGraw-Hill Companies, Inc. for fraud.
Item 1A: Risk Factors
For a complete discussion of Risk Factors, see Item 1A. Risk Factors in the Bank’s 2013 Form 10-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
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Item 3: Defaults upon Senior Securities
None.
Item 4: Mine Safety Disclosures
Not applicable.
Item 5: Other Information
None
Item 6: Exhibits
Exhibit 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer | |
Exhibit 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting Officer | |
Exhibit 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer | |
Exhibit 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting Officer | |
Exhibit 101 | Interactive Data File (XBRL) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Bank of Pittsburgh
(Registrant)
Date: May 8, 2014
By: /s/ Edward V. Weller
Edward V. Weller
Chief Accounting Officer
(Principal Financial Officer)
91