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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
 
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
Commission File Number: 000-51999
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
 
42-6000149
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
 
909 Locust Street
Des Moines, IA
(Address of principal executive offices)
50309
(Zip code)
Registrant’s telephone number, including area code: (515) 412-2100
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
 
Accelerated filer
☐
Non-accelerated filer
☒
 
Smaller reporting company
☐
 
 
 
Emerging growth company
☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Shares outstanding as of October 31, 2019
 
Class B Stock, par value $100
 
48,239,537
 
 
 
 
 
 
 
 
 



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)
(Unaudited)
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
209

 
$
119

Interest-bearing deposits
 
2

 
1

Securities purchased under agreements to resell
 
8,000

 
4,700

Federal funds sold
 
5,635

 
4,150

Investment securities
 
 
 
 
Trading securities (Note 3)
 
901

 
915

Available-for-sale securities (Note 4)
 
17,373

 
19,019

Held-to-maturity securities (fair value of $2,566 and $3,021) (Note 5)
 
2,491

 
2,992

Total investment securities
 
20,765

 
22,926

Advances (Note 7)
 
85,009

 
106,323

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Notes 8 and 9)
 
8,952

 
7,835

Accrued interest receivable
 
210

 
290

Derivative assets, net (Note 10)
 
132

 
58

Other assets
 
234

 
113

TOTAL ASSETS
 
$
129,148

 
$
146,515

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
1,114

 
$
976

Non-interest-bearing
 
166

 
94

Total deposits
 
1,280

 
1,070

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
26,716

 
42,879

Bonds
 
93,611

 
93,772

Total consolidated obligations
 
120,327

 
136,651

Borrowings from other FHLBanks
 
—

 
500

Mandatorily redeemable capital stock (Note 12)
 
202

 
255

Accrued interest payable
 
279

 
268

Affordable Housing Program payable
 
158

 
153

Derivative liabilities, net (Note 10)
 
1

 
9

Other liabilities
 
58

 
61

TOTAL LIABILITIES
 
122,305

 
138,967

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 47 and 54 issued and outstanding shares
 
4,676

 
5,414

Retained earnings
 
 
 
 
Unrestricted
 
1,647

 
1,623

Restricted
 
484

 
427

Total retained earnings
 
2,131

 
2,050

Accumulated other comprehensive income (loss)
 
36

 
84

TOTAL CAPITAL
 
6,843

 
7,548

TOTAL LIABILITIES AND CAPITAL
 
$
129,148

 
$
146,515

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

3
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
569

 
$
633

 
$
1,997

 
$
1,761

Interest-bearing deposits
 
1

 
—

 
2

 
1

Securities purchased under agreements to resell
 
57

 
21

 
139

 
49

Federal funds sold
 
37

 
34

 
122

 
79

Trading securities
 
7

 
7

 
22

 
23

Available-for-sale securities
 
118

 
132

 
394

 
364

Held-to-maturity securities
 
19

 
22

 
63

 
65

Mortgage loans held for portfolio
 
72

 
64

 
211

 
185

Total interest income
 
880

 
913


2,950

 
2,527

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
166

 
212

 
684

 
506

Consolidated obligations - Bonds
 
579

 
535

 
1,810

 
1,517

Deposits
 
4

 
4

 
12

 
9

Mandatorily redeemable capital stock
 
2

 
6

 
9

 
15

Total interest expense
 
751

 
757


2,515

 
2,047

NET INTEREST INCOME
 
129

 
156


435

 
480

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
8

 
(9
)
 
36

 
(33
)
Net gains (losses) on derivatives and hedging activities
 
(12
)
 
9

 
(45
)
 
43

Other, net
 
7

 
7

 
20

 
13

Total other income (loss)
 
3


7


11

 
23

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
16

 
15

 
48

 
46

Contractual services
 
4

 
3

 
12

 
9

Professional fees
 
9

 
6

 
24

 
13

Other operating expenses
 
8

 
6

 
24

 
17

Federal Housing Finance Agency
 
2

 
2

 
7

 
7

Office of Finance
 
2

 
2

 
5

 
5

Other, net
 
2

 
2

 
5

 
4

Total other expense
 
43

 
36


125

 
101

NET INCOME BEFORE ASSESSMENTS
 
89

 
127


321


402

Affordable Housing Program assessments
 
9

 
14

 
33

 
42

NET INCOME
 
$
80

 
$
113


$
288


$
360

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

4
Table of Contents


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
80

 
$
113

 
$
288

 
$
360

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
(17
)
 
(19
)
 
(48
)
 
9

Total other comprehensive income (loss)
 
(17
)
 
(19
)

(48
)

9

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
63

 
$
94


$
240


$
369

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




5
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)
(Unaudited)
 
Capital Stock Class B (putable)
 
Shares
 
Par Value
BALANCE, JUNE 30, 2018
54

 
$
5,420

Comprehensive income (loss)
—

 
—

Proceeds from issuance of capital stock
18

 
1,822

Repurchases/redemptions of capital stock
(20
)
 
(2,069
)
Net shares reclassified (to) from mandatorily redeemable capital stock
—

 
(10
)
Cash dividends on capital stock
—

 
—

BALANCE, SEPTEMBER 30, 2018
52

 
$
5,163

 
 
 
 
BALANCE, JUNE 30, 2019
53

 
$
5,304

Comprehensive income (loss)
—

 
—

Proceeds from issuance of capital stock
19

 
1,869

Repurchases/redemptions of capital stock
(25
)
 
(2,497
)
Net shares reclassified (to) from mandatorily redeemable capital stock
—

 
—

Cash dividends on capital stock
—

 
—

BALANCE, SEPTEMBER 30, 2019
47

 
$
4,676

 
 
 
 
BALANCE, DECEMBER 31, 2017
51

 
$
5,068

Comprehensive income (loss)
—

 
—

Proceeds from issuance of capital stock
58

 
5,837

Repurchases/redemptions of capital stock
(57
)
 
(5,693
)
Net shares reclassified (to) from mandatorily redeemable capital stock
—

 
(49
)
Cash dividends on capital stock
—

 
—

BALANCE, SEPTEMBER 30, 2018
52

 
$
5,163

 
 
 
 
BALANCE, DECEMBER 31, 2018
54

 
$
5,414

Comprehensive income (loss)
—

 
—

Proceeds from issuance of capital stock
54

 
5,378

Repurchases/redemptions of capital stock
(61
)
 
(6,107
)
Net shares reclassified (to) from mandatorily redeemable capital stock
—

 
(9
)
Cash dividends on capital stock
—

 
—

BALANCE, SEPTEMBER 30, 2019
47

 
$
4,676

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

6
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)
(Unaudited)
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Capital
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JUNE 30, 2018
 
$
1,593

 
$
384

 
$
1,977

 
$
142

 
$
7,539

Comprehensive income (loss)
 
90

 
23

 
113

 
(19
)
 
94

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
1,822

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(2,069
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(10
)
Cash dividends on capital stock
 
(71
)
 
—

 
(71
)
 
—

 
(71
)
BALANCE, SEPTEMBER 30, 2018
 
$
1,612

 
$
407

 
$
2,019

 
$
123

 
$
7,305

 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE, 2019
 
$
1,652

 
$
468

 
$
2,120

 
$
53

 
$
7,477

Comprehensive income (loss)
 
64

 
16

 
80

 
(17
)
 
63

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
1,869

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(2,497
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
—

Cash dividends on capital stock
 
(69
)
 
—

 
(69
)
 
—

 
(69
)
BALANCE, SEPTEMBER 30, 2019
 
$
1,647

 
$
484

 
$
2,131

 
$
36

 
$
6,843

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
 
$
1,504

 
$
335

 
$
1,839

 
$
114

 
$
7,021

Comprehensive income (loss)
 
288

 
72

 
360

 
9

 
369

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
5,837

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(5,693
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(49
)
Cash dividends on capital stock
 
(180
)
 
—

 
(180
)
 
—

 
(180
)
BALANCE, SEPTEMBER 30, 2018
 
$
1,612

 
$
407

 
$
2,019

 
$
123

 
$
7,305

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2018
 
$
1,623

 
$
427

 
$
2,050

 
$
84

 
$
7,548

Comprehensive income (loss)
 
231

 
57

 
288

 
(48
)
 
240

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
5,378

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(6,107
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(9
)
Cash dividends on capital stock
 
(207
)
 
—

 
(207
)
 
—

 
(207
)
BALANCE, SEPTEMBER 30, 2019
 
$
1,647

 
$
484

 
$
2,131

 
$
36

 
$
6,843

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


7
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
288

 
$
360

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
(85
)
 
31

Net (gains) losses on trading securities
 
(36
)
 
33

Net change in derivatives and hedging activities
 
(96
)
 
142

Other adjustments
 
4

 
—

Net change in:
 
 
 
 
Accrued interest receivable
 
(11
)
 
(128
)
Other assets
 
(5
)
 
3

Accrued interest payable
 
11

 
32

Other liabilities
 
5

 
19

Total adjustments
 
(213
)
 
132

Net cash provided by (used in) operating activities
 
75

 
492

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(219
)
 
91

Securities purchased under agreements to resell
 
(3,300
)
 
(500
)
Federal funds sold
 
(1,485
)
 
(2,140
)
Trading securities
 
 
 
 
Proceeds from maturities
 
50

 
241

Available-for-sale securities
 
 
 
 
Proceeds from maturities
 
1,981

 
2,467

Purchases
 
—

 
(1,365
)
Held-to-maturity securities
 
 
 
 
Proceeds from maturities
 
371

 
521

Advances
 
 
 
 
Repaid
 
222,201

 
228,179

Originated or purchased
 
(200,553
)
 
(226,534
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
1,024

 
700

Originated or purchased
 
(2,152
)
 
(1,169
)
Other investing activities, net
 
(5
)
 
(18
)
Net cash provided by (used in) investing activities
 
17,913

 
473

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

8
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
(Unaudited)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
173

 
(180
)
Borrowings from other FHLBanks
 
(500
)
 
(600
)
Net payments on derivative contracts with financing elements
 
—

 
(1
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
93,081

 
130,226

Bonds
 
44,913

 
31,217

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(109,141
)
 
(124,838
)
Bonds
 
(45,426
)
 
(36,944
)
Proceeds from issuance of capital stock
 
5,378

 
5,837

Payments for repurchases/redemptions of capital stock
 
(6,107
)
 
(5,693
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(62
)
 
(157
)
Cash dividends paid
 
(207
)
 
(180
)
Net cash provided by (used in) financing activities
 
(17,898
)
 
(1,313
)
Net increase (decrease) in cash and due from banks
 
90

 
(348
)
Cash and due from banks at beginning of the period
 
119

 
503

Cash and due from banks at end of the period
 
$
209

 
$
155

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
2,637

 
$
2,010

Affordable Housing Program payments
 
28

 
30

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
95

 
66

Mortgage loan charge-offs
 
—

 
1

Transfers of mortgage loans to other assets
 
2

 
3

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
9

 
49

Initial right-of-use lease asset recognition
 
3

 
—

Initial lease liability recognition
 
3

 
—

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

9
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks’ Office of Finance, effective July 30, 2008. The Finance Agency’s mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available source of funding and liquidity to its member institutions and eligible housing associates in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets, subject to a minimum and maximum amount, as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank.

The Bank’s current and former members own all of the outstanding capital stock of the Bank. Former members own capital stock (included in mandatorily redeemable capital stock) to support business transactions still carried on the Bank’s Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank’s Board of Directors.




10
Table of Contents

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2018, which are contained in the Bank’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 15, 2019 (2018 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Reclassifications

Certain amounts in the Bank’s 2018 financial statements have been reclassified to conform to the presentation as of September 30, 2019. These amounts were not deemed to be material.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the nine months ended September 30, 2019, with the exception of the policies noted below. Descriptions of all significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2018 Form 10-K.

Investment Securities

Available-for-Sale. Securities that are not classified as trading or held-to-maturity (HTM) are classified as AFS and carried at fair value. The Bank records changes in the fair value of these securities through accumulated other comprehensive income (loss) (AOCI) as “Net unrealized gains (losses) on available-for-sale securities.” Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivative and hedging activities for qualifying hedges, including fair value hedges of AFS securities. For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the security related to the risk being hedged in AFS interest income together with the related change in fair value of the derivative, and records the remainder of the change in fair value through AOCI as “Net unrealized gains (losses) on available-for-sale securities.” Prior to January 1, 2019, for AFS securities that were hedged and qualified as a fair value hedge, the Bank recorded the portion of the change in the fair value of the security related to the risk being hedged together with the related change in fair value of the derivative through other income (loss) as “Net gains (losses) on derivative and hedging activities.”
Derivatives

Accounting for Fair Value Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting. Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, which represented the amount by which the change in the fair value of the derivative differed from the change in fair value of the hedged item was recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”








11
Table of Contents

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16)
On October 25, 2018, the Financial Accounting Standards Board (FASB) issued amended guidance to include the SOFR OIS rate as a U.S. benchmark interest rate for hedge accounting purposes. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the London Interbank Offered Rate (LIBOR) to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate, and are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019. The Bank adopted this guidance on January 1, 2019, however, the Bank did not implement any new SOFR OIS hedge strategies. It will continue to assess opportunities to expand its eligible hedge strategies in the future.
Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income (OCI). In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
•
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
•
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
•
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.
•
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate.
This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019. This guidance did not affect the Bank’s application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul method for its short-cut hedge strategies, which did not impact the Bank’s financial condition, results of operations, or cash flows. This guidance prospectively affected the Bank’s income statement presentation for fair value hedge relationships and required certain new disclosures. Prior period comparative financial information was not reclassified to conform to current presentation. The impact of recording changes in fair value of the derivative hedging instrument and the hedged item for designated fair value hedges in the same line as the earnings effect of the hedged item decreased net interest income by $4 million and $6 million for the three and nine months ended September 30, 2019; however, it had no impact on total net income reported for the period. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

On March 30, 2017, the FASB issued guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, this guidance requires the premium to be amortized to the earliest call date. This guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019, and was adopted on a modified retrospective basis. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, or cash flows.


12
Table of Contents

Leases (ASU 2016-02)

On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires a lessee, of operating or finance leases, to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019, and was adopted on a modified retrospective basis. Upon adoption, the Bank recorded right-of-use assets and lease liabilities for its operating leases of $3 million on its statements of condition. The adoption of this guidance did not have a material effect on the Bank’s results of operations or cash flows.

ISSUED ACCOUNTING GUIDANCE
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
On August 29, 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance.
The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance outlined in ASC Topic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. They require the customer to expense the capitalized implementation costs over the term of the hosting arrangement. The amendments also require the customer to present the expense in the same line item in the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Lastly, capitalized implementation costs should be presented in the statement of condition in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2020, and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted; however, the Bank does not intend to early adopt this guidance. The Bank has evaluated this guidance and its effect on the Bank’s financial condition, results of operations, and cash flows is not expected to be material.
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for defined benefit plans to improve disclosure effectiveness. This guidance becomes effective for the Bank for annual periods ending on December 31, 2020. Early adoption is permitted; however, the Bank does not intend to early adopt this guidance. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance becomes effective for the Bank for interim and annual periods beginning on January 1, 2020. Early adoption is permitted; however, the Bank does not intend to early adopt this guidance. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.

13
Table of Contents

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:
•
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

•
Entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of purchased credit deterioration (PCD) since origination that is measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price of the assets acquired.

•
Entities to record credit losses relating to AFS debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.

•
Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).

On April 25, 2019, the FASB issued an amendment (ASU 2019-04) to clarify the scope of the credit losses standard and address issues including, but not limited to, accrued interest receivable balances, recoveries, variable interest rates, and prepayments. All of this guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted; however, the Bank does not plan to early adopt this guidance. This guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Bank has evaluated the impact of this guidance on all of its financial instruments to which it applies, and expects zero credit losses on its advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products) as well as agency and GSE debt securities. Immaterial credit losses are expected on the Bank’s remaining investment portfolio and mortgage loans held for portfolio. The final effect of this guidance on the Bank’s financial condition, results of operations, and cash flows will depend upon the composition of financial assets held by the Bank at the adoption date as well as the economic conditions and forecasts at that time.



14
Table of Contents

Note 3 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Non-mortgage-backed securities
 
 
 
U.S. obligations1
$
153

 
$
159

GSE and Tennessee Valley Authority obligations
62

 
57

Other2
263

 
266

     Total non-mortgage-backed securities
478

 
482

Mortgage-backed securities
 
 
 
GSE multifamily
423

 
433

Total fair value
$
901

 
$
915


1
Represents investment securities backed by the full faith and credit of the U.S. Government.

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the three and nine months ended September 30, 2019 and 2018. During the three and nine months ended September 30, 2019, the Bank recorded net holding gains of $8 million and $36 million on its trading securities compared to net holding losses of $9 million and $33 million for the same periods in 2018.


15
Table of Contents

Note 4 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
September 30, 2019
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
2,277

 
$
4

 
$
(2
)
 
$
2,279

GSE and Tennessee Valley Authority obligations
1,086

 
16

 
—

 
1,102

State or local housing agency obligations
786

 
—

 
(5
)
 
781

Other3
280

 
9

 
—

 
289

Total non-mortgage-backed securities
4,429

 
29

 
(7
)
 
4,451

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
4,161

 
19

 
(2
)
 
4,178

GSE single-family
687

 
5

 
(1
)
 
691

GSE multifamily
8,057

 
17

 
(21
)
 
8,053

Total mortgage-backed securities
12,905

 
41

 
(24
)
 
12,922

Total
$
17,334

 
$
70

 
$
(31
)
 
$
17,373


 
December 31, 2018
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
2,597

 
$
8

 
$
(3
)
 
$
2,602

GSE and Tennessee Valley Authority obligations
1,012

 
26

 
—

 
1,038

State or local housing agency obligations
820

 
—

 
(6
)
 
814

Other3
264

 
11

 
—

 
275

Total non-mortgage-backed securities
4,693

 
45

 
(9
)
 
4,729

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
4,459

 
25

 
(1
)
 
4,483

GSE single-family
794

 
6

 
(4
)
 
796

GSE multifamily
8,986

 
36

 
(11
)
 
9,011

Total mortgage-backed securities
14,239

 
67

 
(16
)
 
14,290

Total
$
18,932

 
$
112

 
$
(25
)
 
$
19,019



1
Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.

3
Consists of taxable municipal bonds and/or Private Export Funding Corporation (PEFCO) bonds.



16
Table of Contents

UNREALIZED LOSSES

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
September 30, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations1
$
652

 
$
(1
)
 
$
680

 
$
(1
)
 
$
1,332

 
$
(2
)
State or local housing agency obligations
—

 
—

 
625

 
(5
)
 
625

 
(5
)
Total non-mortgage-backed securities
652

 
(1
)
 
1,305

 
(6
)
 
1,957

 
(7
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
462

 
(1
)
 
474

 
(1
)
 
936

 
(2
)
GSE single-family
254

 
(1
)
 
17

 
—

 
271

 
(1
)
GSE multifamily
2,346

 
(11
)
 
2,506

 
(10
)
 
4,852

 
(21
)
Total mortgage-backed securities
3,062

 
(13
)
 
2,997

 
(11
)
 
6,059

 
(24
)
Total
$
3,714

 
$
(14
)
 
$
4,302

 
$
(17
)
 
$
8,016

 
$
(31
)

 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations1
$
533

 
$
(1
)
 
$
311

 
$
(2
)
 
$
844

 
$
(3
)
State or local housing agency obligations
211

 
—

 
586

 
(6
)
 
797

 
(6
)
Total non-mortgage-backed securities
744

 
(1
)
 
897

 
(8
)
 
1,641

 
(9
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
646

 
(1
)
 
—

 
—

 
646

 
(1
)
GSE single-family
115

 
—

 
209

 
(4
)
 
324

 
(4
)
GSE multifamily
3,239

 
(8
)
 
718

 
(3
)
 
3,957

 
(11
)
Total mortgage-backed securities
4,000

 
(9
)
 
927

 
(7
)
 
4,927

 
(16
)
Total
$
4,744

 
$
(10
)
 
$
1,824

 
$
(15
)
 
$
6,568

 
$
(25
)


1
Represents investment securities backed by the full faith and credit of the U.S. Government.





17
Table of Contents

CONTRACTUAL MATURITY

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
112

 
$
112

 
$
74

 
$
74

Due after one year through five years
 
1,981

 
1,989

 
1,314

 
1,323

Due after five years through ten years
 
1,604

 
1,611

 
2,497

 
2,506

Due after ten years
 
732

 
739

 
808

 
826

Total non-mortgage-backed securities
 
4,429

 
4,451

 
4,693

 
4,729

Mortgage-backed securities
 
12,905

 
12,922

 
14,239

 
14,290

Total
 
$
17,334

 
$
17,373

 
$
18,932

 
$
19,019





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Table of Contents

Note 5 — Held-to-Maturity Securities

MAJOR SECURITY TYPES

HTM securities were as follows (dollars in millions):
 
September 30, 2019
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
385

 
$
78

 
$
—

 
$
463

State or local housing agency obligations
223

 
2

 
(1
)
 
224

Total non-mortgage-backed securities
608

 
80

 
(1
)
 
687

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
5

 
—

 
—

 
5

U.S. obligations commercial2
1

 
—

 
—

 
1

GSE single-family
1,869

 
3

 
(7
)
 
1,865

Private-label residential
8

 
—

 
—

 
8

Total mortgage-backed securities
1,883

 
3

 
(7
)
 
1,879

Total
$
2,491

 
$
83

 
$
(8
)
 
$
2,566


 
December 31, 2018
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
389

 
$
48

 
$
(2
)
 
$
435

State or local housing agency obligations
391

 
1

 
(1
)
 
391

Total non-mortgage-backed securities
780

 
49

 
(3
)
 
826

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
9

 
—

 
—

 
9

U.S. obligations commercial2
1

 
—

 
—

 
1

GSE single-family
2,192

 
4

 
(21
)
 
2,175

Private-label residential
10

 
—

 
—

 
10

Total mortgage-backed securities
2,212

 
4

 
(21
)
 
2,195

Total
$
2,992

 
$
53

 
$
(24
)
 
$
3,021


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion or amortization.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.



19
Table of Contents

UNREALIZED LOSSES

The following tables summarize HTM securities with unrealized losses by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
September 30, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency obligations
$
12

 
$
—

 
$
150

 
$
(1
)
 
$
162

 
$
(1
)
Total non-mortgage-backed securities
12

 
—

 
150

 
(1
)
 
162

 
(1
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
6

 
—

 
—

 
—

 
6

 
—

GSE single-family
544

 
(1
)
 
950

 
(6
)
 
1,494

 
(7
)
Private-label residential
—

 
—

 
5

 
—

 
5

 
—

Total mortgage-backed securities
550

 
(1
)
 
955

 
(6
)
 
1,505

 
(7
)
Total
$
562

 
$
(1
)
 
$
1,105

 
$
(7
)
 
$
1,667

 
$
(8
)

 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
69

 
$
(2
)
 
$
—

 
$
—

 
$
69

 
$
(2
)
State or local housing agency obligations
50

 
—

 
152

 
(1
)
 
202

 
(1
)
Total non-mortgage-backed securities
119

 
(2
)
 
152

 
(1
)
 
271

 
(3
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
3

 
—

 
—

 
—

 
3

 
—

U.S. obligations commercial1
—

 
—

 
1

 
—

 
1

 
—

GSE single-family
611

 
(1
)
 
1,008

 
(20
)
 
1,619

 
(21
)
Private-label residential
—

 
—

 
6

 
—

 
6

 
—

Total mortgage-backed securities
614

 
(1
)
 
1,015

 
(20
)
 
1,629

 
(21
)
Total
$
733

 
$
(3
)
 
$
1,167

 
$
(21
)
 
$
1,900

 
$
(24
)


1
Represents investment securities backed by the full faith and credit of the U.S. Government.


20
Table of Contents

CONTRACTUAL MATURITY

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
—

 
$
—

 
$
9

 
$
9

Due after one year through five years
 
—

 
—

 
64

 
65

Due after five years through ten years
 
271

 
309

 
332

 
353

Due after ten years
 
337

 
378

 
375

 
399

Total non-mortgage-backed securities
 
608

 
687

 
780

 
826

Mortgage-backed securities
 
1,883

 
1,879

 
2,212

 
2,195

Total
 
$
2,491

 
$
2,566

 
$
2,992

 
$
3,021



Note 6 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis. As part of its evaluation of securities for OTTI, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired. The analysis of the Bank’s AFS and HTM investment securities in an unrealized loss position at September 30, 2019 is discussed below:

•
U.S. obligations and GSE obligations. The strength of the issuers’ guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations. The Bank expects to recover the amortized cost bases on these securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at September 30, 2019.

•
State or local housing agency obligations. The creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations. The Bank does not intend to sell these securities nor is it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at September 30, 2019.

•
Private-label residential mortgage-backed securities. On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label mortgage-backed securities (private-label MBS). As of September 30, 2019, the Bank compared the present value of cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss existed. At September 30, 2019, the Bank’s cash flow analyses for private-label MBS did not project any credit losses. The Bank does not intend to sell its private-label MBS nor is it more likely than not that the Bank will be required to sell its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at September 30, 2019.


21
Table of Contents

Note 7 — Advances

REDEMPTION TERM

The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
Redemption Term
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
2

 
3.09
%
 
$
2

 
3.63
%
Due in one year or less
 
38,840

 
2.24

 
50,561

 
2.61

Due after one year through two years
 
19,931

 
2.42

 
23,946

 
2.61

Due after two years through three years
 
12,449

 
2.47

 
17,582

 
2.73

Due after three years through four years
 
4,826

 
2.55

 
4,091

 
2.73

Due after four years through five years
 
5,894

 
2.40

 
6,814

 
2.76

Thereafter
 
2,823

 
2.86

 
3,417

 
2.96

Total par value
 
84,765

 
2.36
%
 
106,413

 
2.66
%
Premiums
 
28

 
 
 
38

 
 
Discounts
 
(7
)
 
 
 
(8
)
 
 
Fair value hedging adjustments
 
223

 
 
 
(120
)
 
 
Total
 
$
85,009

 
 
 
$
106,323

 
 


The following table summarizes all advances by year of redemption term or next call date for callable advances, and by year of redemption term or next put date for putable advances (dollars in millions):
 
 
Redemption Term
or Next Call Date
 
Redemption Term
or Next Put Date
 
 
September 30,
2019
 
December 31, 2018
 
September 30,
2019
 
December 31, 2018
Overdrawn demand deposit accounts
 
$
2

 
$
2

 
$
2

 
$
2

Due in one year or less
 
56,644

 
77,931

 
39,518

 
50,617

Due after one year through two years
 
9,475

 
11,087

 
20,210

 
24,060

Due after two years through three years
 
9,317

 
10,423

 
12,452

 
17,628

Due after three years through four years
 
3,478

 
2,357

 
4,821

 
4,078

Due after four years through five years
 
3,916

 
2,444

 
4,951

 
6,722

Thereafter
 
1,933

 
2,169

 
2,811

 
3,306

Total par value
 
$
84,765

 
$
106,413

 
$
84,765

 
$
106,413


 
The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may require a prepayment fee or credit that makes the Bank financially indifferent to the prepayment of the advance. At September 30, 2019 and December 31, 2018, the Bank had callable advances outstanding totaling $20.5 billion and $35.6 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on the predetermined exercise dates. Generally, these put options are exercised when interest rates increase relative to contractual rates. At September 30, 2019 and December 31, 2018, the Bank had putable advances outstanding totaling $1.3 billion and $283 million.


22
Table of Contents

PREPAYMENT FEES

The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of fair value hedging adjustments in advance income in the Statements of Income. During both the three and nine months ended September 30, 2019, the Bank recorded prepayment fees on advances, net of $2 million and $3 million compared to $2 million and $8 million for the same periods in 2018.

CREDIT RISK EXPOSURE AND SECURITY TERMS

The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions, and insurance companies. At September 30, 2019 and December 31, 2018, the Bank had outstanding advances of $30.9 billion and $49.6 billion to one member that individually held 10 percent or more of the Bank’s advances, which represents 37 percent and 47 percent of total outstanding advances. For information related to the Bank’s credit risk exposure on advances, refer to “Note 9 — Allowance for Credit Losses.”

Note 8 — Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) and the Mortgage Purchase Program (MPP). The MPF program, which represents 97 percent of the Bank’s mortgage loans held for portfolio at September 30, 2019, involves investment by the Bank in single-family mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank’s MPF PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. MPF PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the MPF PFI to a designated mortgage service provider.

Under the MPP, the Bank acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to the Bank. The MPP program represents three percent of the Bank’s mortgage loans held for portfolio at September 30, 2019. The Bank does not currently purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.

The following table presents information on the Bank’s mortgage loans held for portfolio (dollars in millions):
 
September 30,
2019
 
December 31, 2018
Fixed rate, long-term single-family mortgage loans
$
7,951

 
$
6,860

Fixed rate, medium-term1 single-family mortgage loans
877

 
874

Total unpaid principal balance
8,828

 
7,734

Premiums
122

 
105

Discounts
(4
)
 
(5
)
Basis adjustments from mortgage loan purchase commitments
7

 
2

Total mortgage loans held for portfolio
8,953

 
7,836

Allowance for credit losses
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
$
8,952

 
$
7,835



1
Medium-term is defined as a term of 15 years or less.


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The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
 
September 30,
2019
 
December 31, 2018
Conventional mortgage loans
$
8,333

 
$
7,231

Government-insured mortgage loans
495

 
503

Total unpaid principal balance
$
8,828

 
$
7,734


For information related to the Bank’s credit risk exposure on mortgage loans held for portfolio, refer to “Note 9 — Allowance for Credit Losses.”

Note 9 — Allowance for Credit Losses

The Bank has established an allowance for credit losses methodology for each of its financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, MPF and MPP conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell.

CREDIT PRODUCTS

The Bank manages its credit exposure to credit products through an approach that includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower’s financial condition in conjunction with the Bank’s collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, the Bank lends to eligible borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

The Bank is required by regulation to obtain sufficient collateral to fully secure its advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including mortgage-backed securities (MBS) issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with the Bank, and (iv) other real estate-related collateral acceptable to the Bank, such as second lien mortgages, home equity lines of credit, tax-exempt municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

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 also require additional or substitute collateral to protect its security interest. The Bank periodically evaluates and makes changes to its collateral guidelines and collateral haircuts.

Borrowers may pledge collateral to the Bank by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

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Table of Contents

Under a blanket pledge agreement, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral from blanket agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At September 30, 2019 and December 31, 2018, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.

At September 30, 2019 and December 31, 2018, none of the Bank’s credit products were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings (TDRs) related to credit products during the nine months ended September 30, 2019 and 2018.

The Bank has never experienced a credit loss on its credit products. Based upon the Bank’s collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on its credit products as of September 30, 2019 and December 31, 2018. Accordingly, the Bank has not recorded any allowance for credit losses for its credit products.

GOVERNMENT-INSURED MORTGAGE LOANS

The Bank invests in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at September 30, 2019 and December 31, 2018. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

CONVENTIONAL MORTGAGE LOANS

The Bank’s management of credit risk in the MPF and MPP programs involves several layers of legal loss protection that are defined in agreements among the Bank and its participating PFIs. These loss layers may vary depending on the product alternatives selected and credit profile of the loans. The Bank’s loss protection consists of the following loss layers, in order of priority:

•
Homeowner Equity.

•
Primary Mortgage Insurance (PMI). At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

•
First Loss Account (FLA). For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA.

•
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time an MPF mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit the Bank’s loss exposure to that of an investor in an investment grade MBS. PFIs pledge collateral to secure this obligation.



25
Table of Contents

Allowance Methodology

The Bank utilizes an allowance for credit losses to reserve for estimated losses in its conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of the Bank’s MPF and MPP allowance for credit losses is determined by the following:

•
reviewing similar conventional mortgage loans for impairment on a collective basis. This evaluation is primarily based on the following factors: (i) current loan delinquencies, (ii) loans migrating to collateral-dependent status, and (iii) actual historical loss severities;

•
reviewing conventional mortgage loans for impairment on an individual basis; and

•
estimating additional credit losses in the conventional mortgage loan portfolio. These losses result from other factors that may not be captured in the methodology previously described at the balance sheet date, which include but are not limited to certain quantifiable economic factors, such as unemployment rates and home prices impacting housing markets.

The following table summarizes the allowance for credit losses and the recorded investment of the Bank’s conventional mortgage loan portfolio by impairment methodology (dollars in millions):
 
September 30,
2019
 
December 31, 2018
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
1

 
$
1

 
 
 
 
Recorded investment1
 
 
 
Collectively evaluated for impairment
$
8,439

 
$
7,306

Individually evaluated for impairment, without a related allowance
51

 
54

Total recorded investment
$
8,490

 
$
7,360


1    Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.


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Table of Contents

CREDIT QUALITY INDICATORS

Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The tables below summarize the Bank’s key credit quality indicators for mortgage loans (dollars in millions):
 
September 30, 2019
 
Conventional MPF/MPP
 
Government-Guaranteed or -Insured6
 
Total
Past due 30 - 59 days
$
44

 
$
16

 
$
60

Past due 60 - 89 days
13

 
5

 
18

Past due 90 - 179 days
9

 
4

 
13

Past due 180 days or more
10

 
4

 
14

Total past due mortgage loans
76

 
29

 
105

Total current mortgage loans
8,414

 
479

 
8,893

Total recorded investment of mortgage loans1
$
8,490

 
$
508

 
$
8,998

 
 
 
 
 
 
In process of foreclosure (included above)2
$
7

 
$
1

 
$
8

Serious delinquency rate3
—
%
 
2
%
 
—
%
Past due 90 days or more and still accruing interest4
$
—

 
$
8

 
$
8

Non-accrual mortgage loans5
$
31

 
$
—

 
$
31


 
December 31, 2018
 
Conventional MPF/MPP
 
Government- Guaranteed or -Insured6
 
Total
Past due 30 - 59 days
$
49

 
$
17

 
$
66

Past due 60 - 89 days
14

 
5

 
19

Past due 90 - 179 days
11

 
4

 
15

Past due 180 days or more
13

 
4

 
17

Total past due mortgage loans
87

 
30

 
117

Total current mortgage loans
7,273

 
486

 
7,759

Total recorded investment of mortgage loans1
$
7,360

 
$
516

 
$
7,876

 
 
 
 
 
 
In process of foreclosure (included above)2
$
8

 
$
2

 
$
10

Serious delinquency rate3
—
%
 
2
%
 
—
%
Past due 90 days or more and still accruing interest4
$
—

 
$
8

 
$
8

Non-accrual mortgage loans5
$
36

 
$
—

 
$
36



1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.

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 depending on their payment status.

3
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment.

4
Represents government-insured mortgage loans that are 90 days or more past due.

5
Represents conventional mortgage loans that are 90 days or more past due or TDRs.

6
The Bank did not record any allowance for credit losses on government-guaranteed or -insured mortgage loans at September 30, 2019 and December 31, 2018.

INDIVIDUALLY EVALUATED IMPAIRED LOANS

As previously described, the Bank evaluates certain conventional mortgage loans for impairment individually. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

The Bank did not recognize any interest income on impaired loans during the three and nine months ended September 30, 2019 and 2018.


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Table of Contents

During the three and nine months ended September 30, 2019, the average recorded investment of conventional impaired loans without an allowance was $51 million and $53 million as compared to $58 million and $59 million for the same periods in 2018.

TERM SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will decrease accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for its term securities purchased under agreements to resell at September 30, 2019 and December 31, 2018.

OFF-BALANCE SHEET CREDIT EXPOSURES

At September 30, 2019 and December 31, 2018, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the Bank’s off-balance sheet credit exposures, see “Note 14 — Commitments and Contingencies.”

Note 10 — 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 its related funding sources. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank’s risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:

•
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

•
preserve an interest rate spread between the yield of an asset and the cost of the related liability. Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the asset does not match a change in the interest rate on the liability;

•
mitigate the adverse earnings effects of the shortening or extension of certain assets and liabilities;

•
manage embedded options in assets and liabilities; and

•
reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation.


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Table of Contents

TYPES OF DERIVATIVES

The Bank may use the following derivative instruments:

•
interest rate swaps;

•
options;

•
swaptions;

•
interest rate caps and floors; and

•
futures/forwards contracts.

The Bank may have the following types of hedged items:

•
investment securities;

•
advances;
       
•
mortgage loans;
  
•
consolidated obligations; and
  
•
firm commitments.

For additional information on the Bank’s derivative and hedging accounting policy, see “Note 1 — Basis of Presentation” in this Form 10-Q as well as “Note 1 — Summary of Significant Accounting Policies” in the 2018 Form 10-K.

FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.


29
Table of Contents

The following table summarizes the Bank’s notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
 
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
37,521

 
$
37

 
$
198

 
$
47,316

 
$
83

 
$
115

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
1,088

 
8

 
56

 
1,321

 
20

 
24

Forward settlement agreements (TBAs)
 
409

 
1

 
—

 
98

 
—

 
—

Mortgage loan purchase commitments
 
423

 
—

 
—

 
101

 
1

 
—

Total derivatives not designated as hedging instruments
 
1,920

 
9

 
56

 
1,520

 
21

 
24

Total derivatives before netting and collateral adjustments
 
$
39,441

 
46

 
254

 
$
48,836

 
104

 
139

Netting adjustments and cash collateral1
 
 
 
86

 
(253
)
 
 
 
(46
)
 
(130
)
Total derivative assets and derivative liabilities
 
 
 
$
132

 
$
1

 
 
 
$
58

 
$
9


1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. At September 30, 2019 and December 31, 2018, cash collateral posted by the Bank and related accrued interest was $339 million and $121 million. At September 30, 2019, the Bank did not hold any cash collateral or related accrued interest from clearing agents or counterparties. At December 31, 2018, the Bank held cash collateral and related accrued interest from clearing agents and/or counterparties of $37 million.

Beginning on January 1, 2019, as a result of the adoption of ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, or the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item, was recorded in other income (loss) in “Net gains (losses) on derivative and hedging activities.” For additional information, refer to “Note 2 — Recently Adopted and Issued Accounting Guidance — Targeted Improvements to Accounting for Hedging Activities.”


30
Table of Contents

The following tables summarize the income effect from fair value hedging relationships recorded in either net interest income or other income as well as total income (expense) by product recorded in the Statements of Income (dollars in millions):
 
 
For the Three Months Ended September 30, 2019
 
 
Interest Income (Expense)
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
Total interest income (expense) recorded in the Statements of Income1
 
$
569

 
$
118

 
$
(579
)
Net interest income effect from fair value hedging relationships
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
   Derivatives2
 
$
(48
)
 
$
(72
)
 
$
21

   Hedged items3
 
60

 
63

 
(52
)
Total net interest income effect from fair value hedging relationships
 
$
12

 
$
(9
)
 
$
(31
)

 
 
For the Three Months Ended September 30, 2018
 
 
Interest Income (Expense)
 
Other Income
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
 
Net Gains (Losses) on Derivatives and Hedging Activities
Total income (expense) recorded in the Statements of Income1
 
$
633

 
$
132

 
$
(535
)
 
$
9

Net income effect from fair value hedging relationships
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
Derivatives4
 
$
18

 
$
(3
)
 
$
(59
)
 
$
92

Hedged items5
 
—

 
1

 
—

 
(92
)
Total net income effect from fair value hedging relationships
 
$
18

 
$
(2
)
 
$
(59
)
 
$
—


1
Amounts shown to give context to the disclosure and include total interest income (expense) of the products indicated, including coupon, prepayment fees, amortization, and derivative net interest settlements. In 2019, interest income (expense) amounts also include gains and losses on derivatives and hedged items in fair value hedging relationships. In 2018, gains and losses on derivatives and hedged items in fair value hedging relationships were recorded in other income in “net gains (losses) on derivatives and hedging activities” along with gains and losses on economic derivatives.

2
Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.

3     Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.

4
Interest income (expense) amounts include net interest settlements on derivatives and amortization of the financing element of off-market derivatives. Other income amounts include changes in fair value.
    
5
Interest income (expense) amounts include amortization/accretion of basis adjustments on closed hedge relationships. Other income amounts include changes in fair value.


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Table of Contents

The following tables summarize the income effect from fair value hedging relationships recorded in either net interest income or other income as well as total income (expense) by product recorded in the Statements of Income (dollars in millions):
 
 
For the Nine Months Ended September 30, 2019
 
 
Interest Income (Expense)
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
Total interest income (expense) recorded in the Statements of Income1
 
$
1,997

 
$
394

 
$
(1,810
)
Net interest income effect from fair value hedging relationships
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
   Derivatives2
 
$
(288
)
 
$
(299
)
 
$
217

   Hedged items3
 
344

 
294

 
(375
)
Total net interest income effect from fair value hedging relationships
 
$
56

 
$
(5
)
 
$
(158
)
 
 
For the Nine Months Ended September 30, 2018
 
 
Interest Income (Expense)
 
Other Income
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
 
Net Gains (Losses) on Derivatives and Hedging Activities
Total income (expense) recorded in the Statements of Income1
 
$
1,761

 
$
364

 
$
(1,517
)
 
$
43

Net income effect from fair value hedging relationships
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
Derivatives4
 
$
30

 
$
(22
)
 
$
(153
)
 
$
301

Hedged items5
 
7

 
2

 
(1
)
 
(294
)
Total net income effect from fair value hedging relationships
 
$
37

 
$
(20
)
 
$
(154
)
 
$
7


1
Amounts shown to give context to the disclosure and include total interest income (expense) of the products indicated, including coupon, prepayment fees, amortization, and derivative net interest settlements. In 2019, interest income (expense) amounts also include gains and losses on derivatives and hedged items in fair value hedging relationships. In 2018, gains and losses on derivatives and hedged items in fair value hedging relationships were recorded in other income in “net gains (losses) on derivatives and hedging activities” along with gains and losses on economic derivatives.

2
Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.

3     Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.

4
Interest income (expense) amounts include net interest settlements on derivatives and amortization of the financing element of off-market derivatives. Other income amounts include changes in fair value.
    
5
Interest income (expense) amounts include amortization/accretion of basis adjustments on closed hedge relationships. Other income amounts include changes in fair value.

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The following table summarizes cumulative fair value hedging adjustments and the related amortized cost of the hedged items (dollars in millions):
 
 
September 30, 2019
Line Item in Statements of Condition
 
Amortized Cost of Hedged Asset/ Liability1
 
Changes in Fair Value for Active Hedging Relationships Included in Amortized Cost
 
Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost
 
Cumulative Amount of Fair Value Hedging Adjustments
Advances
 
$
15,522

 
$
211

 
$
12

 
$
223

Available-for-sale securities
 
6,542

 
237

 
—

 
237

Consolidated obligation bonds
 
18,991

 
34

 
(15
)
 
19


1    Includes the portion of amortized cost representing the hedged items in fair value hedging relationships.

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented in the Statements of Income (dollars in millions). For periods prior to January 1, 2019, net gains (losses) representing hedge ineffectiveness for fair value hedging relationships were recorded in “Net gains (losses) on derivatives and hedging activities.” Beginning on January 1, 2019, changes in the fair value of the derivative and the hedged item in a fair value hedge relationship are recorded in net interest income.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
 
 
Interest rate swaps
 
 
$
—

 
 
 
$
7

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
 
 
Interest rate swaps
$
(12
)
 
8

 
$
(45
)
 
36

Forward settlement agreements (TBAs)
(2
)
 
1

 
(6
)
 
3

Mortgage loan purchase commitments
2

 
(1
)
 
6

 
(2
)
Net interest settlements
—

 
(1
)
 
—

 
(4
)
Total net gains (losses) related to derivatives not designated as hedging instruments
(12
)
 
7

 
(45
)
 
33

  Price alignment amount1
—

 
2

 
—

 
3

Net gains (losses) on derivatives and hedging activities
$
(12
)
 
$
9

 
$
(45
)
 
$
43



1
This amount represents interest on variation margin which is a component of the derivative fair value for cleared transactions. The amounts reported for the three and nine months ended September 30, 2019 reflect the price alignment amounts on variation margin for daily settled derivative contracts not designated as hedging instruments. The price alignment amounts on variation margin for daily settled derivative contracts designated as hedging instruments are recorded in the same line item as the earnings effect of the hedged item. The amounts reported for the three and nine months ended September 30, 2018 reflect the price alignment amounts on variation margin for all daily settled derivative contracts. The amounts recorded for the three and nine months ended September 30, 2019 were less than $1 million.

MANAGING CREDIT RISK ON DERIVATIVES

The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative contracts. The Bank manages credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in the Bank’s policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearings agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Bank is not a derivative dealer and does not trade derivative for short-term profit.


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Table of Contents

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in the derivative contracts to mitigate the risk. The Bank requires collateral agreements on its uncleared derivatives.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a nationally recognized statistical rating organization (NRSRO), the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at September 30, 2019 was $1 million, for which the Bank was not required to post collateral in the normal course of business. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would not have been required to deliver additional collateral to its uncleared derivative counterparties at September 30, 2019.
 
For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.

The Clearinghouse determines initial margin requirements which are considered cash collateral. 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 agent, based on credit considerations, at September 30, 2019. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.

The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the fair value of cleared derivatives is posted daily through a clearing agent.

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

The Bank presents derivative instruments, related cash collateral received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. Additional information regarding these agreements is provided in “Note 1 — Summary of Significant Accounting Policies” in the 2018 Form 10-K.

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the 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 Clearinghouse.

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Table of Contents

The following tables present the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):
 
 
September 30, 2019
 
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
 
Gross Amount Recognized1
 
Gross Amount of Netting Adjustments and Cash Collateral
 
Derivative Instruments Not Meeting Netting Requirements2
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
45

 
$
(42
)
 
$
—

 
$
3

   Cleared derivatives
 
1

 
128

 
—

 
129

Total
 
$
46

 
$
86

 
$
—

 
$
132

Derivative Liabilities
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
252

 
$
(251
)
 
$
—

 
$
1

   Cleared derivatives
 
2

 
(2
)
 
—

 
—

Total
 
$
254

 
$
(253
)
 
$
—

 
$
1

 
 
December 31, 2018
 
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
 
Gross Amount Recognized1
 
Gross Amount of Netting Adjustments and Cash Collateral
 
Derivative Instruments Not Meeting Netting Requirements2
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
96

 
$
(96
)
 
$
1

 
$
1

   Cleared derivatives
 
7

 
50

 
—

 
57

Total
 
$
103

 
$
(46
)
 
$
1

 
$
58

Derivative Liabilities
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
119

 
$
(110
)
 
$
—

 
$
9

   Cleared derivatives
 
20

 
(20
)
 
—

 
—

Total
 
$
139

 
$
(130
)
 
$
—

 
$
9


1    Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral.

2    Represents mortgage loan purchase commitments not subject to enforceable master netting requirements.

Note 11 — Consolidated Obligations

Consolidated obligations consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Bonds are issued primarily to raise intermediate- and long-term funds for the Bank and are not subject to any statutory or regulatory limits on their maturity. Discount notes are issued primarily to raise short-term funds for the Bank and have original maturities of up to one year. Discount notes sell at or below their face amount and are redeemed at par value when they mature.

Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At September 30, 2019 and December 31, 2018, the total par value of outstanding consolidated obligations of the FHLBanks was $1,010.3 billion and $1,031.6 billion.


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Table of Contents

DISCOUNT NOTES

The following table summarizes the Bank’s discount notes (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Par value
$
26,785

 
2.03
%
 
$
43,052

 
2.34
%
Discounts and concessions1
(69
)
 
 
 
(173
)
 
 
Total
$
26,716

 
 
 
$
42,879

 
 


1
Concessions represent fees paid to dealers in connections with the issuance of certain consolidated obligation discount notes.

BONDS

The following table summarizes the Bank’s bonds outstanding by contractual maturity (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Due in one year or less
 
$
61,643

 
2.00
%
 
$
53,247

 
2.08
%
Due after one year through two years
 
12,731

 
2.11

 
22,326

 
2.50

Due after two years through three years
 
7,505

 
2.32

 
9,478

 
1.97

Due after three years through four years
 
3,031

 
2.39

 
1,881

 
2.53

Due after four years through five years
 
3,505

 
3.08

 
2,224

 
2.58

Thereafter
 
5,026

 
3.13

 
4,868

 
3.51

Total par value
 
93,441

 
2.15
%
 
94,024

 
2.26
%
Premiums
 
189

 
 
 
152

 
 
Discounts and concessions1
 
(38
)
 
 
 
(48
)
 
 
Fair value hedging adjustments
 
19

 
 
 
(356
)
 
 
Total
 
$
93,611

 
 
 
$
93,772

 
 


1
Concessions represent fees paid to dealers in connections with the issuance of certain consolidated obligation bonds.

The following table summarizes the Bank’s bonds outstanding by call features (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Non-callable or non-putable
$
89,259

 
$
89,549

Callable
4,182

 
4,475

Total par value
$
93,441

 
$
94,024



The following table summarizes the Bank’s bonds outstanding by year of contractual maturity or next call date (dollars in millions):
Year of Contractual Maturity or Next Call Date
September 30,
2019
 
December 31,
2018
Due in one year or less
$
64,394

 
$
55,672

Due after one year through two years
13,117

 
22,696

Due after two years through three years
7,805

 
9,333

Due after three years through four years
2,746

 
1,656

Due after four years through five years
3,219

 
1,864

Thereafter
2,160

 
2,803

Total par value
$
93,441

 
$
94,024





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Table of Contents

Note 12 — Capital

CAPITAL STOCK

The Bank’s capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. The Bank generally issues a single class of capital stock (Class B stock) and has two subclasses of capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding in the Bank’s Statements of Condition. All capital stock issued is subject to a notice of redemption period of five years.

The capital stock requirements established in the Bank’s Capital Plan are designed so that the Bank can remain adequately capitalized as member activity changes. The Bank’s Board of Directors may make adjustments to the capital stock requirements within ranges established in the Capital Plan.
 
EXCESS STOCK

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At September 30, 2019 and December 31, 2018, the Bank’s excess capital stock outstanding was less than $1 million.

MANDATORILY REDEEMABLE CAPITAL STOCK

The Bank reclassifies capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.

At September 30, 2019 and December 31, 2018, the Bank’s mandatorily redeemable capital stock totaled $202 million and $255 million. During the three and nine months ended September 30, 2019, interest expense on mandatorily redeemable capital stock was $2 million and $9 million. Interest expense on mandatorily redeemable capital stock was $6 million and $15 million for the three and nine months ended September 30, 2018.

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 will have their memberships terminated no later than February 19, 2021. On the effective date of the final rule, the Bank reclassified the total outstanding capital stock held by all of the captive insurance companies that were Bank members, to mandatorily redeemable capital stock.


37
Table of Contents

The following tables summarize changes in mandatorily redeemable capital stock (dollars in millions):
 
For the Three Months Ended September 30,
 
2019
 
2018
Balance, beginning of period
$
203

 
$
373

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
—

 
10

Net payments for repurchases/redemptions of mandatorily redeemable capital stock
(1
)
 
(106
)
Balance, end of period
$
202

 
$
277


 
For the Nine Months Ended September 30,
 
2019
 
2018
Balance, beginning of period
$
255

 
$
385

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
9

 
49

Net payments for repurchases/redemptions of mandatorily redeemable capital stock
(62
)
 
(157
)
Balance, end of period
$
202

 
$
277


The following table summarizes the Bank’s mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):
Year of Contractual Redemption1
 
September 30,
2019
 
December 31, 2018
Due in one year or less
 
$
2

 
$
2

Due after one year through two years
 
1

 
—

Due after two years through three years
 
11

 
1

Due after three years through four years
 
4

 
10

Due after four years through five years
 
1

 
18

Thereafter2
 
170

 
210

Past contractual redemption date due to outstanding activity with the Bank
 
13

 
14

Total
 
$
202

 
$
255


1
At the Bank’s election, the mandatorily redeemable capital stock may be redeemed prior to the expiration of the five year redemption period that commences on the date of the notice of redemption, or in the case of captive insurance company members, on the date of the membership termination.

2
Represents mandatorily redeemable capital stock resulting from the Finance Agency rule previously discussed that makes captive insurance companies ineligible for FHLBank membership. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the member's termination.

RESTRICTED RETAINED EARNINGS

The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends. At September 30, 2019 and December 31, 2018, the Bank’s restricted retained earnings account totaled $484 million and $427 million.


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Table of Contents

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes changes in AOCI (dollars in millions):
 
Net unrealized gains (losses) on AFS securities (Note 4)
 
Pension and postretirement benefits
 
Total AOCI
Balance, June 30, 2018
$
146

 
$
(4
)
 
$
142

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(19
)
 
—

 
(19
)
Net current period other comprehensive income (loss)
(19
)
 
—

 
(19
)
Balance, September 30, 2018
$
127

 
$
(4
)
 
$
123

 
 
 
 
 
 
Balance, June 30, 2019
$
56

 
$
(3
)
 
$
53

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(17
)
 
—

 
(17
)
Net current period other comprehensive income (loss)
(17
)
 
—

 
(17
)
Balance, September 30, 2019
$
39

 
$
(3
)
 
$
36

 
 
 
 
 
 
Balance, December 31, 2017
$
118

 
$
(4
)
 
$
114

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
9

 
—

 
9

Net current period other comprehensive income (loss)
9

 
—

 
9

Balance, September 30, 2018
$
127

 
$
(4
)
 
$
123

 
 
 
 
 
 
Balance, December 31, 2018
$
87

 
$
(3
)
 
$
84

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(48
)
 
—

 
(48
)
Net current period other comprehensive income (loss)
(48
)
 
—

 
(48
)
Balance, September 30, 2019
$
39

 
$
(3
)
 
$
36



REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to three regulatory capital requirements:

•
Risk-based capital. The Bank must maintain at all times permanent capital greater than or equal to the sum of its credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement.

•
Regulatory capital. The Bank is required to maintain a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B stock (including mandatorily redeemable capital stock) and retained earnings. It does not include AOCI.

•
Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. The Bank did not hold any nonpermanent capital at September 30, 2019 and December 31, 2018.

If the Bank’s capital falls below the required levels, the Finance Agency has authority to take actions necessary to return it to levels that it deems to be consistent with safe and sound business operations.


39
Table of Contents

The following table shows the Bank’s compliance with the Finance Agency’s regulatory capital requirements (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements
 
 
 
 
 
 
 
Risk-based capital
$
1,039

 
$
7,009

 
$
1,146

 
$
7,719

Regulatory capital
$
5,166

 
$
7,009

 
$
5,861

 
$
7,719

Leverage capital
$
6,457

 
$
10,513

 
$
7,326

 
$
11,579

Capital-to-assets ratio
4.00
%
 
5.43
%
 
4.00
%
 
5.27
%
Leverage ratio
5.00
%
 
8.14
%
 
5.00
%
 
7.90
%


Note 13 — Fair Value

Fair value amounts are determined by the Bank using available market information and reflect the Bank’s best judgment of appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., and exit price). The fair value hierarchy requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of 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 Bank can access on the measurement date. An active market for an asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

•
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: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) 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 (iv) market-corroborated inputs.

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

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications would be reported as transfers in/out as of the beginning of the quarter in which the changes occur. The Bank had no transfers of assets or liabilities between fair value levels during the nine months ended September 30, 2019 and 2018.


40
Table of Contents

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at September 30, 2019 (dollars in millions). The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio on a non-recurring basis. The Bank records all other financial assets and liabilities at amortized cost. The fair values do 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
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 

Cash and due from banks
 
$
209

 
$
209

 
$
—

 
$
—

 
$
—

 
$
209

Interest-bearing deposits
 
2

 
—

 
2

 
—

 
—

 
2

Securities purchased under agreements to resell
 
8,000

 
—

 
8,000

 
—

 
—

 
8,000

Federal funds sold
 
5,635

 
—

 
5,635

 
—

 
—

 
5,635

Trading securities
 
901

 
—

 
901

 
—

 
—

 
901

Available-for-sale securities
 
17,373

 
—

 
17,373

 
—

 
—

 
17,373

Held-to-maturity securities
 
2,491

 
—

 
2,558

 
8

 
—

 
2,566

Advances
 
85,009

 
—

 
85,201

 
—

 
—

 
85,201

Mortgage loans held for portfolio, net
 
8,952

 
—

 
9,053

 
53

 
—

 
9,106

Accrued interest receivable
 
210

 
—

 
210

 
—

 
—

 
210

Derivative assets, net
 
132

 
—

 
46

 
—

 
86

 
132

Other assets
 
32

 
32

 
—

 
—

 
—

 
32

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,280
)
 
—

 
(1,280
)
 
—

 
—

 
(1,280
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(26,716
)
 
—

 
(26,719
)
 
—

 
—

 
(26,719
)
Bonds
 
(93,611
)
 
—

 
(94,096
)
 
—

 
—

 
(94,096
)
Total consolidated obligations
 
(120,327
)
 
—

 
(120,815
)
 
—

 
—

 
(120,815
)
Mandatorily redeemable capital stock
 
(202
)
 
(202
)
 
—

 
—

 
—

 
(202
)
Accrued interest payable
 
(279
)
 
—

 
(279
)
 
—

 
—

 
(279
)
Derivative liabilities, net
 
(1
)
 
—

 
(254
)
 
—

 
253

 
(1
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

41
Table of Contents

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2018 (dollars in millions):
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
119

 
$
119

 
$
—

 
$
—

 
$
—

 
$
119

Interest-bearing deposits
 
1

 
—

 
1

 
—

 
—

 
1

Securities purchased under agreements to resell
 
4,700

 
—

 
4,700

 
—

 
—

 
4,700

Federal funds sold
 
4,150

 
—

 
4,150

 
—

 
—

 
4,150

Trading securities
 
915

 
—

 
915

 
—

 
—

 
915

Available-for-sale securities
 
19,019

 
—

 
19,019

 
—

 
—

 
19,019

Held-to-maturity securities
 
2,992

 
—

 
3,011

 
10

 
—

 
3,021

Advances
 
106,323

 
—

 
106,317

 
—

 
—

 
106,317

Mortgage loans held for portfolio, net
 
7,835

 
—

 
7,749

 
57

 
—

 
7,806

Accrued interest receivable
 
290

 
—

 
290

 
—

 
—

 
290

Derivative assets, net
 
58

 
—

 
104

 
—

 
(46
)
 
58

Other assets
 
27

 
27

 
—

 
—

 
—

 
27

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,070
)
 
—

 
(1,070
)
 
—

 
—

 
(1,070
)
Borrowings from other FHLBanks
 
(500
)
 
—

 
(500
)
 
—

 
—

 
(500
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(42,879
)
 
—

 
(42,870
)
 
—

 
—

 
(42,870
)
Bonds
 
(93,772
)
 
—

 
(93,828
)
 
—

 
—

 
(93,828
)
Total consolidated obligations
 
(136,651
)
 
—

 
(136,698
)
 
—

 
—

 
(136,698
)
Mandatorily redeemable capital stock
 
(255
)
 
(255
)
 
—

 
—

 
—

 
(255
)
Accrued interest payable
 
(268
)
 
—

 
(268
)
 
—

 
—

 
(268
)
Derivative liabilities, net
 
(9
)
 
—

 
(139
)
 
—

 
130

 
(9
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

SUMMARY OF VALUATION TECHNIQUES AND PRIMARY INPUTS
 
The valuation techniques and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the Statements of Condition are outlined below.

Trading and AFS Investment Securities. The Bank’s valuation technique incorporates prices from multiple designated third-party pricing vendors, when available. The pricing vendors generally use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, benchmark securities and yields, reported trades, dealer estimates, issuer spreads, bids, offers, and other market-related data. Since many investment securities 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 process in place to challenge investment valuations, which facilitates resolution of questionable prices identified by the Bank. Annually, the Bank conducts reviews of its pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies, and control procedures for investment securities.


42
Table of Contents

The Bank’s valuation technique for estimating the fair values of its investment securities 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. All 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. Alternatively, if 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. In limited instances, when no prices are available from one of the designated pricing services, the Bank obtains prices from dealers.

As of September 30, 2019 and December 31, 2018, multiple prices were received for the majority of the Bank’s trading and AFS investment securities. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its 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.

Impaired Mortgage Loans Held for Portfolio. The fair value of impaired mortgage loans held for portfolio is estimated by obtaining property values from an external pricing vendor. This vendor utilizes multiple pricing models that generally factor in market observable inputs, including actual sales transactions and home price indices. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. In limited instances, the Bank may estimate the fair value of an impaired mortgage loan by calculating the present value of expected future cash flows discounted at the loan’s effective interest rate.  

Derivative Assets and Liabilities. The fair value of derivatives is generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments, and includes variation margin payments for daily settled contracts. In limited instances, fair value estimates for interest-rate related derivatives may be obtained using an external pricing model that utilizes observable market data. The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. To mitigate credit risk on uncleared derivatives, the Bank enters into master netting agreements with its counterparties as well as collateral agreements that have collateral delivery thresholds. The Bank has evaluated the potential for the fair value of its derivatives to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements.

The fair values of the Bank’s derivative assets and derivative liabilities include accrued interest receivable/payable and related cash collateral remitted to/received from clearing agents and/or 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 clearing agent and/or counterparty if the netting requirements are met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.

The Bank’s discounted cash flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). The Bank uses the following inputs for measuring the fair value of interest-related derivatives:

•
Discount rate assumption. The Bank utilizes the OIS curve. 

•
Forward interest rate assumption. The Bank utilizes the LIBOR swap curve.

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

For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage loan purchase commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.
 
Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.

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Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods previously described 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.

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at September 30, 2019 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
$
—

 
$
153

 
$
—

 
$
—

 
$
153

GSE and Tennessee Valley Authority obligations
 
—

 
62

 
—

 
—

 
62

Other non-MBS
 
—

 
263

 
—

 
—

 
263

GSE multifamily MBS
 
—

 
423

 
—

 
—

 
423

Total trading securities
 
—

 
901

 
—

 
—

 
901

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
—

 
2,279

 
—

 
—

 
2,279

GSE and Tennessee Valley Authority obligations
 
—

 
1,102

 
—

 
—

 
1,102

State or local housing agency obligations
 
—

 
781

 
—

 
—

 
781

Other non-MBS
 
—

 
289

 
—

 
—

 
289

U.S. obligations single-family MBS
 
—

 
4,178

 
—

 
—

 
4,178

GSE single-family MBS
 
—

 
691

 
—

 
—

 
691

GSE multifamily MBS
 
—

 
8,053

 
—

 
—

 
8,053

Total available-for-sale securities
 
—

 
17,373

 
—

 
—

 
17,373

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
45

 
—

 
86

 
131

Forward settlement agreements (TBAs)
 
—

 
1

 
—

 
—

 
1

Total derivative assets, net
 
—

 
46

 
—

 
86

 
132

Other assets
 
32

 
—

 
—

 
—

 
32

Total recurring assets at fair value
 
$
32

 
$
18,320

 
$
—

 
$
86

 
$
18,438

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(254
)
 
—

 
253

 
(1
)
Total derivative liabilities, net
 
—

 
(254
)
 
—

 
253

 
(1
)
Total recurring liabilities at fair value
 
$
—

 
$
(254
)
 
$
—

 
$
253

 
$
(1
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.


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Table of Contents

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2018 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
$
—

 
$
159

 
$
—

 
$
—

 
$
159

GSE and Tennessee Valley Authority obligations
 
—

 
57

 
—

 
—

 
57

Other non-MBS
 
—

 
266

 
—

 
—

 
266

GSE multifamily MBS
 
—

 
433

 
—

 
—

 
433

Total trading securities
 
—

 
915

 
—

 
—

 
915

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
—

 
2,602

 
—

 
—

 
2,602

GSE and Tennessee Valley Authority obligations
 
—

 
1,038

 
—

 
—

 
1,038

State or local housing agency obligations
 
—

 
814

 
—

 
—

 
814

Other non-MBS
 
—

 
275

 
—

 
—

 
275

U.S. obligations single-family MBS
 
—

 
4,483

 
—

 
—

 
4,483

GSE single-family MBS
 
—

 
796

 
—

 
—

 
796

GSE multifamily MBS
 
—

 
9,011

 
—

 
—

 
9,011

Total available-for-sale securities
 
—

 
19,019

 
—

 
—

 
19,019

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
103

 
—

 
(46
)
 
57

Mortgage loan purchase commitments
 
—

 
1

 
—

 
—

 
1

Total derivative assets, net
 
—

 
104

 
—

 
(46
)
 
58

Other assets
 
27

 
—

 
—

 
—

 
27

Total recurring assets at fair value
 
$
27

 
$
20,038

 
$
—

 
$
(46
)
 
$
20,019

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(139
)
 
—

 
130

 
(9
)
Total derivative liabilities, net
 
—

 
(139
)
 
—

 
130

 
(9
)
Total recurring liabilities at fair value
 
$
—

 
$
(139
)
 
$
—

 
$
130

 
$
(9
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

FAIR VALUE ON A NON-RECURRING BASIS

The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. At September 30, 2019 and December 31, 2018, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $2 million and $1 million. These fair values were as of the date the fair value adjustment was recorded during the nine months ended September 30, 2019 and year-ended December 31, 2018.


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Note 14 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At September 30, 2019 and December 31, 2018, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately $890.1 billion and $894.5 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Expire
within one year
 
Expire
after one year
 
Total
 
Total
Standby letters of credit1
$
8,728

 
$
179

 
$
8,907

 
$
9,094

Standby bond purchase agreements
55

 
818

 
873

 
675

Commitments to purchase mortgage loans
423

 
—

 
423

 
101

Commitments to issue bonds
917

 
—

 
917

 
60

Commitments to fund advances
466

 
1

 
467

 
50



1
Excludes commitments to issue standby letters of credit of $24 million and $3 million at September 30, 2019 and December 31, 2018.

Standby Letters of Credit. The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. All standby letters of credit, similar to advances, are fully collateralized at the time of issuance and subject to member borrowing limits as established by the Bank. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary’s draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank’s discretion, the amount drawn may be converted into a collateralized advance to the member. The original terms of standby letters of credit range from less than one month to 13 years, currently no later than 2025. The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” in the Statements of Condition and amounted to $2 million at both September 30, 2019 and December 31, 2018.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these standby letters of credit. All standby letters of credit are subject to the same collateralization and borrowing limits that apply to advances and are fully collateralized at the time of issuance.

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds. At September 30, 2019, the Bank had standby bond purchase agreements with seven housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2025. During both the nine months ended September 30, 2019 and 2018, the Bank was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not to exceed 45 business days. These commitments are considered derivatives and their estimated fair value at September 30, 2019 and December 31, 2018 is reported in “Note 10 — Derivatives and Hedging Activities” as mortgage loan purchase commitments.

Commitments to Issue Bonds. At September 30, 2019 and December 31, 2018, the Bank had commitments to issue $917 million and $60 million of consolidated obligation bonds.




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Commitments to Fund Advances. The Bank enters into commitments to fund additional advances up to 24 months in the future. At September 30, 2019 and December 31, 2018, the Bank had commitments to fund advances of $467 million and $50 million.

Other Commitments. For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $131 million and $115 million at September 30, 2019 and December 31, 2018.
Legal Proceedings. As a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. The Bank appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, the Bank filed petitions for discretionary review of the appellate court’s rulings in December 2017 related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018. In June 2018, the Bank filed a petition for discretionary review of the appellate court’s ruling in May 2018 on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million.
On October 3, 2019, the Washington Supreme Court reversed the judgment of the appellate court on the four certificates covered by the Bank’s petition of January 2018 and reinstated the Bank’s claims on those four certificates. The Bank anticipates that the Washington Supreme Court will now grant the petition for review on the fifth certificate and then reverse that judgment and reinstate the claim on that certificate as well. Other than the private-label MBS litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement.  During the three and nine months ended September 30, 2019 and 2018, the Bank did not recognize net gains on private-label MBS litigation settlements.

Note 15 — Activities with Stockholders

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets, subject to a minimum and maximum amount, as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank. All transactions with stockholders are entered into in the ordinary course of business.

TRANSACTIONS WITH DIRECTORS’ FINANCIAL INSTITUTIONS

In the normal course of business, the Bank extends credit to its members whose directors and officers serve as Bank directors (Directors’ Financial Institutions). Finance Agency regulations require that transactions with Directors’ Financial Institutions be made on the same terms and conditions as those with any other member.

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The following table summarizes the Bank’s outstanding transactions with Directors’ Financial Institutions (dollars in millions):
 
 
September 30, 2019
 
December 31, 2018
 
 
Amount
 
% of Total
 
Amount
 
% of Total
Advances
 
$
5,817

 
7
 
$
6,991

 
7
Mortgage loans
 
207

 
2
 
96

 
1
Deposits
 
18

 
1
 
12

 
1
Capital stock
 
281

 
6
 
328

 
6


BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At September 30, 2019 and December 31, 2018, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
September 30, 2019
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
1,247

 
26
 
$
30,900

 
$
22

 
$
904

Superior Guaranty Insurance Company3
 
16

 
—
 
—

 
370

 
—

Total
 
$
1,263

 
26
 
$
30,900

 
$
392

 
$
904



 
 
December 31, 2018
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
1,994

 
35
 
$
49,575

 
$
25

 
$
1,167

Superior Guaranty Insurance Company3
 
18

 
—
 
—

 
420

 
—

Total
 
$
2,012

 
35
 
$
49,575

 
$
445

 
$
1,167


1
Pursuant to applicable Finance Agency regulations, the Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank’s capital stock.
 
2
Represents interest income earned on advances during the nine months ended September 30, 2019 and the year ended December 31, 2018. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

3
Superior Guaranty Insurance Company is an affiliate of Wells Fargo Bank, N.A.


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Note 16 — Activities with Other FHLBanks

Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The following table summarizes loan activity to other FHLBanks during the nine months ended September 30, 2019 and 2018 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Loans
 
Principal
Repayment
 
Ending
Balance
2019
 
 
 
 
 
 
 
 
Atlanta
 
$
—

 
$
565

 
$
(565
)
 
$
—

Indianapolis
 
—

 
550

 
(550
)
 
—

Topeka
 
—

 
150

 
(150
)
 
—

 
 
$
—

 
$
1,265

 
$
(1,265
)
 
$
—

 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
Boston
 
$
—

 
$
800

 
$
(800
)
 
$
—

San Francisco
 
—

 
300

 
(300
)
 
—

Dallas
 
—

 
500

 
(500
)
 
—

 
 
$
—

 
$
1,600

 
$
(1,600
)
 
$
—


    
The following table summarizes borrowing activity from other FHLBanks during the nine months ended September 30, 2019 and 2018 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Borrowing
 
Principal Payment
 
Ending
Balance
2019
 
 
 
 
 
 
 
 
Atlanta
 
$
500

 
$
400

 
$
(900
)
 
$
—

 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
Atlanta
 
$
200

 
$
—

 
$
(200
)
 
$
—

Boston
 
400

 
—

 
(400
)
 
—

 
 
$
600

 
$
—

 
$
(600
)
 
$
—



At September 30, 2019 and 2018, none of the previous transactions were outstanding on the Bank’s Statements of Condition. The interest income and expense related to this activity were immaterial.

Note 17 — Subsequent Events

Subsequent events have been evaluated from October 1, 2019, through the time of the Form 10-Q filing with the Securities and Exchange Commission. No material subsequent events requiring disclosure were identified.



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our MD&A and Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (SEC) on March 15, 2019 (2018 Form 10-K). Our MD&A is designed to provide information that will help the reader develop a better understanding of our financial statements, key financial statement changes from quarter to quarter, and the primary factors driving those changes. Our MD&A is organized as follows:
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

FORWARD-LOOKING INFORMATION

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These risks and uncertainties include, but are not limited to, the following:
 
•
political or economic events, including legislative, regulatory, monetary, judicial, or other developments that affect us, our members, our counterparties, and/or our investors in the consolidated obligations of the 11 Federal Home Loan Banks (FHLBanks);

•
the ability to meet capital and other regulatory requirements;

•
disruptions in the credit and debt markets and the effect on future funding costs, sources, and availability;

•
the ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, cyber-attacks and other business interruptions;

•
risks related to the other FHLBanks that could trigger our joint and several liability for debt issued by the other FHLBanks;

•
general economic and market conditions that could impact the volume of business we do with our members, including, but not limited to, the timing and volatility of market activity, inflation/deflation, employment rates, housing prices, the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments, and the condition of the capital markets on our consolidated obligations;

•
ineffective use of hedging strategies or the availability of derivative instruments in the types and quantities needed for risk management purposes from acceptable counterparties;

•
changes in the relative attractiveness of consolidated obligations due to actual or perceived changes in the FHLBanks’ credit ratings as well as the U.S. Government’s long-term credit rating;

•
competitive forces, including without limitation, other sources of funding available to our borrowers that could impact the demand for our advances, other entities purchasing mortgage loans in the secondary mortgage market, and other entities borrowing funds in the capital markets;

•
the volatility of credit quality, market prices, interest rates, and other indices that could affect the value of collateral held by us as security for borrower and counterparty obligations;

•
reliance on a relatively small number of member institutions for a large portion of our advance business;

•
the ability to attract and retain key personnel;

•
significant business interruptions resulting from third party failures;

•
the volatility of reported results due to changes in the fair value of certain assets, liabilities, and derivative instruments;

•
member consolidations and failures;

•
increases in delinquency or loss estimates on mortgage loans; and

•
replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate and transition to an alternative benchmark.




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Table of Contents

For additional information regarding these and other risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements, see “Item 1A. Risk Factors” in this quarterly report and in our 2018 Form 10-K. You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements apply only as of the date they are made, and we undertake no obligation to update or revise any forward-looking statement.

EXECUTIVE OVERVIEW

Our Bank is a member-owned cooperative serving shareholder members in our district. Our mission is to be a reliable provider of funding, liquidity, and services for our members so that they can meet the housing, business, and economic development needs of the communities they serve. We strive to achieve our mission within an operating principle that balances the trade-off between attractively priced products, reasonable returns on capital stock, maintaining an adequate level of capital to meet regulatory capital requirements, and maintaining adequate retained earnings to preserve par value of member-owned capital stock. Our members include commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs).

Financial Results
For the three and nine months ended September 30, 2019, we reported net income of $80 million and $288 million compared to $113 million and $360 million for the same periods in 2018. The decline in our net income for the three and nine months ended September 30, 2019, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was primarily driven by a decrease in net interest income and an increase in other expense. Net income was also impacted by a decrease in other income.

Net interest income totaled $129 million and $435 million for the three and nine months ended September 30, 2019 compared to $156 million and $480 million for the same periods last year. The decline during the three and nine months ended September 30, 2019 was primarily due to a decrease in net interest margin and a decline in average advance volumes. Our net interest margin was 0.38 percent and 0.41 percent during the three and nine months ended September 30, 2019 compared to 0.42 percent and 0.43 percent for the same periods in 2018. The decrease in net interest margin was primarily attributable to lower asset liability spreads.

We recorded net gains of $3 million and $11 million in other income (loss) for the three and nine months ended September 30, 2019 compared to net gains of $7 million and $23 million for the same periods last year. Other income (loss) was impacted by net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities.

Other expense totaled $43 million and $125 million for the three and nine months ended September 30, 2019 compared to $36 million and $101 million for the same periods in 2018. Other expense was driven primarily by increased professional fees and other operating expenses for the three and nine months ended September 30, 2019.
    
Our total assets decreased to $129.1 billion at September 30, 2019, from $146.5 billion at December 31, 2018, driven by a decrease in advances, offset partially by an increase in investments. Advances at September 30, 2019 decreased by $21.3 billion from December 31, 2018 due primarily to a decrease in borrowings by large depository institution members. Investments at September 30, 2019 increased by $2.6 billion from December 31, 2018 primarily due to an increase in money market investments as a result of increased liquidity holdings.

Our total liabilities decreased to $122.3 billion at September 30, 2019, from $139.0 billion at December 31, 2018, primarily driven by a decrease in the amount of consolidated obligations needed to fund our assets.

Total capital decreased to $6.8 billion at September 30, 2019 from $7.5 billion at December 31, 2018, primarily due to a decrease in capital stock resulting from a decline in member activity. Our regulatory capital ratio increased to 5.43 percent at September 30, 2019, from 5.27 percent at December 31, 2018, and was above the required regulatory limit at each period end. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, and retained earnings.

Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition” for additional discussion on our financial condition.

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Table of Contents

Adjusted Earnings

As part of evaluating our financial performance, we adjust GAAP net interest income and GAAP net income before assessments for the impact of (i) market adjustments relating to derivative and hedging activities and instruments held at fair value, (ii) realized gains (losses) on investment securities, and (iii) other non-routine and unpredictable items, including net asset prepayment fee income and mandatorily redeemable capital stock interest expense. The resulting non-GAAP measure, referred to as our adjusted earnings, reflects both adjusted net interest income and adjusted net income.
Because our business model is primarily one of holding assets and liabilities to maturity, management believes that the adjusted earnings measure is helpful in understanding our operating results and provides a meaningful period-to-period comparison of our economic performance in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility on financial instruments recorded at fair value or transactions that are considered to be unpredictable or not routine. As a result, management uses the adjusted earnings measure to assess performance under our incentive compensation plans. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. While these non-GAAP measures can be used to assist in understanding the components of our earnings, they should not be considered a substitute for results reported under GAAP.

The adjusted net income methodology is calculated on a post Affordable Housing Program (AHP) assessment basis. Management believes AHP assessments are a fundamental component of our business and believes this assessment should be included in our adjusted net income calculation. In addition, this treatment aligns the adjusted net income results to our strategic business plan which is calculated on a post AHP assessment basis.

As indicated in the tables that follow, our adjusted net interest income and adjusted net income decreased during the three and nine months ended September 30, 2019 when compared to the same periods in 2018. The decline was driven by lower adjusted net interest income due primarily to lower net interest margin and lower average advance volumes as previously noted.

The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
GAAP net interest income
$
129

 
$
156

 
$
435

 
$
480

Exclude:
 
 
 
 
 
 
 
Prepayment fees on advances, net1
3

 
1

 
4

 
7

Prepayment fees on investments, net2
1

 
1

 
4

 
9

Mandatorily redeemable capital stock interest expense
(2
)
 
(6
)
 
(9
)
 
(15
)
Market value adjustments on fair value hedges3
(4
)
 
—

 
(6
)
 
—

Total adjustments
(2
)
 
(4
)
 
(7
)
 
1

Include items reclassified from other income (loss):
 
 
 
 
 
 
 
Net interest expense on economic hedges
—

 
(1
)
 
—

 
(4
)
Adjusted net interest income
$
131

 
$
159


$
442

 
$
475

Adjusted net interest margin
0.39
%
 
0.42
%
 
0.42
%
 
0.43
%

1
Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Effective January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Prior to January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships were reported in other income (loss). Amounts for 2019 do not include the amortization of the financing element of off-market derivatives.


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The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
GAAP net income before assessments
$
89

 
$
127

 
$
321

 
$
402

Exclude:
 
 
 
 
 
 
 
Prepayment fees on advances, net1
3

 
1

 
4

 
7

Prepayment fees on investments, net2
1

 
1

 
4

 
9

Mandatorily redeemable capital stock interest expense
(2
)
 
(6
)
 
(9
)
 
(15
)
Market value adjustments on fair value hedges3
(4
)
 
—

 
(6
)
 
—

Net gains (losses) on trading securities
8

 
(9
)
 
36

 
(33
)
Net gains (losses) on derivatives and hedging activities
(12
)
 
9

 
(45
)
 
43

Include:
 
 
 
 
 
 
 
Net interest expense on economic hedges
—

 
(1
)
 
—

 
(4
)
Adjusted net income before assessments
95

 
130

 
337

 
387

Adjusted AHP assessments4
10

 
14

 
34

 
39

Adjusted net income
$
85

 
$
116

 
$
303

 
$
348


1
Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Effective January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Prior to January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships were reported in other income (loss). Amounts for 2019 do not include the amortization of the financing element of off-market derivatives.

4
Adjusted AHP assessments for this non-GAAP measure are calculated as 10 percent of adjusted net income before assessments. For additional discussion on AHP assessments, refer to “Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing Program” in our 2017 10-K.

For additional discussion on items impacting our GAAP earnings, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

Replacement of the LIBOR Benchmark Interest Rate

In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

As noted throughout this report, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021.We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement on an ongoing basis. We have developed a transition plan that will change with market developments and member needs and addresses considerations such as LIBOR exposure, member products, fallback language, which provides for contractual alternatives to the use of LIBOR when LIBOR cannot be determined based on the method provided in the agreement, operational preparedness, and balance sheet management.
In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language. We have added or adjusted fallback language to our advance agreements with members and added fallback language to our consolidated obligation agreements. We continue to monitor the market-wide efforts to address fallback language related to derivatives and investment securities as well as fallback language for new activities and issuances of financial instruments. We are in the process of assessing our operational readiness, including updating our processes and information technology systems to support the transition from LIBOR to an alternative reference rate.


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Table of Contents

Market activity in SOFR-indexed financial instruments continues to increase and we continue to offer SOFR-indexed advances and issue SOFR-indexed debt. While we have reduced our use of derivatives, we continue to execute LIBOR-indexed derivatives to manage interest-rate risk and to monitor market wide efforts to address fallback language related to LIBOR-linked derivative transactions.
The Finance Agency recently issued a supervisory letter to all FHLBanks providing LIBOR transition guidance. The supervisory letter states that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021 for all product types other than investments. For investments, the supervisory letter indicated the FHLBanks, by December 31, 2019, should stop purchasing investments that reference LIBOR and mature after December 31, 2021. We have not purchased any LIBOR-indexed investments during 2019. For additional information on the Finance Agency’s supervisory letter, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”
The following table summarizes our variable rate advances, investments, consolidated obligation bonds and derivatives by interest-rate index at September 30, 2019 (in millions):
 
LIBOR
 
SOFR
 
Other
 
Total
Advances, principal amount
$
27,244

 
$
1,250

 
$
16,175

 
$
44,669

Investment securities
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
2,204

 
—

 
—

 
2,204

Mortgage-backed securities, principal amount
9,743

 
—

 
1

 
9,744

Total investment securities
11,947

 
—

 
1

 
11,948

Consolidated bonds, principal amount
52,957

 
4,717

 
—

 
57,674

Total variable rate financial instruments amount
$
92,148

 
$
5,967

 
$
16,176

 
$
114,291

 
 
 
 
 
 
 
 
Derivatives, notional amount
$
38,609

 
$
—

 
$
—

 
$
38,609

The following table presents our exposure to LIBOR-indexed advances, investments, consolidated obligation bonds and derivatives at September 30, 2019 (in millions):
 
Due in 2019
 
Due in 2020
 
Due in 2021
 
Thereafter
Advances, principal amount by redemption term
$
7,680

 
$
10,390

 
$
8,586

 
$
588

Investment securities, by contractual maturity1
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
—

 
12

 
—

 
2,192

Mortgage-backed securities, principal amount
—

 
—

 
14

 
9,729

Total investment securities
—

 
12

 
14

 
11,921

Consolidated bonds, principal amount by contractual maturity
16,037

 
35,580

 
1,340

 
—

Total financial instruments amount
$
23,717

 
$
45,982

 
$
9,940

 
$
12,509

 
 
 
 
 
 
 
 
Derivatives, notional amount by termination date
$
6,048

 
$
6,407

 
$
10,657

 
$
15,497

1
MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
For a summary of our risks on the possible replacement of the LIBOR benchmark interest rate, refer to “Item 1A. Risk Factors” in our 2018 Form 10-K.

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Table of Contents

CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

Economic and market data received since the Federal Open Market Committee (FOMC or Committee) meeting in July of 2019 indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and measures excluding food and energy prices are running below the FOMC’s target of two percent. Market-based measures of inflation compensation remain low, and survey-based measures of longer-term inflation expectations are little changed.

In its September 18, 2019 statement, the FOMC stated it continues to seek to foster maximum employment and price stability. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s two percent objective as the most likely outcomes, but uncertainties about this outlook remain.

Mortgage Markets

The housing market improved with stronger sales during the third quarter of 2019 and home prices continued to appreciate nationwide. Mortgage rates decreased during the third quarter, resulting in an increase in refinance activity versus purchase activity. 

Interest Rates

The following table shows information on key market interest rates1:
 
Third Quarter 2019
3-Month Average
 
Third Quarter 2018
3-Month Average
 
Third Quarter 2019
9-Month Average
 
Third Quarter 2018
9-Month Average
 
September 30, 2019
Ending Rate
 
December 31, 2018
Ending Rate
Federal funds
2.20
%
 
1.92
%
 
2.33
%
 
1.70
%
 
1.90
%
 
2.40
%
Three-month LIBOR
2.20

 
2.34

 
2.46

 
2.21

 
2.09

 
2.81

SOFR2
2.28

 
1.93

 
2.38

 
—

 
2.35

 
3.00

2-year U.S. Treasury
1.69

 
2.66

 
2.10

 
2.43

 
1.62

 
2.49

10-year U.S. Treasury
1.80

 
2.92

 
2.26

 
2.87

 
1.67

 
2.69

30-year residential mortgage note
3.66

 
4.56

 
4.02

 
4.46

 
3.64

 
4.55


1
Source: Bloomberg.

2
The Federal Reserve Bank of New York began publishing the SOFR rate on April 2, 2018. As a result, the 9-month average for 2018 is not available.

In its September 2019 meeting, the FOMC decided to lower the Federal Reserve’s key target interest rate, the Federal funds rate, at a range of 1.75 to 2.00 percent compared to a range of 2.00 to 2.25 percent for the same period in 2018. In determining the timing and size of future adjustments to the target range for the Federal funds rate, the FOMC stated that it will assess realized and expected economic conditions relative to its maximum employment and a two percent inflation rate. The assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments.

In mid-September 2019, interest rates for U.S. Treasury repurchase agreements spiked, and the effective Federal funds rate briefly moved above the FOMC’s target range. To counter these pressures, the FOMC began conducting temporary open market operations in order to keep the Federal funds rate in the target range and to alleviate money market strains more generally. Despite the interest rate spike, we continued to meet our funding needs in response to demand for advances.

The 10-year U.S. Treasury yields have declined and mortgage rates were lower on average in the third quarter of 2019 when compared to the same period in the prior year. The yield curve remained inverted during the quarter with the average Federal funds rate at 2.20 percent while the ten-year Treasury average rate was 1.80 percent. An inversion of the yield curve is historically an indicator of an economic slowdown and reflects market participant views that interest rates will decline in the future. As interest rates declined and the yield curve inverted, our net income was negatively impacted.



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Table of Contents


Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)1:
 
Third Quarter 2019
3-Month
Average
 
Third Quarter 2018
3-Month
Average
 
Third Quarter 2019
9-Month
Average
 
Third Quarter 2018
9-Month
Average
 
September 30, 2019
Ending Spread
 
December 31, 2018
Ending Spread
3-month
(15.2
)
 
(25.5
)
 
(18.1
)
 
(34.5
)
 
(19.1
)
 
(33.2
)
2-year
5.1

 
(12.2
)
 
(0.7
)
 
(14.7
)
 
3.4

 
(8.9
)
5-year
13.0

 
(1.5
)
 
9.2

 
(1.5
)
 
13.0

 
11.8

10-year
41.4

 
29.5

 
40.2

 
29.5

 
36.3

 
45.4


1
Source: The Office of Finance.

The following table reflects our funding spreads to U.S. Treasuries (basis points)1:
 
Third Quarter 2019
3-Month
Average
 
Third Quarter 2018
3-Month
Average
 
Third Quarter 2019
9-Month
Average
 
Third Quarter 2018
9-Month
Average
 
September 30, 2019
Ending Spread
 
December 31, 2018
Ending Spread
3-month
5.8

 
4.4
 
5.1

 
4.8

 
9.9

 
12.9

2-year
6.3

 
6.3
 
5.9

 
7.3

 
5.5

 
6.5

5-year
8.6

 
11.6
 
10.6

 
9.8

 
9.3

 
17.5

10-year
32.6

 
36.4
 
37.0

 
33.9

 
26.0

 
48.0


1
Source: The Office of Finance.

As a result of our credit quality and government-sponsored enterprise (GSE) status, we generally have ready access to funding at relatively competitive interest rates. During the third quarter of 2019, our funding spreads to LIBOR deteriorated on average when compared to the prior year, but remained steady relative to U.S. Treasuries. During the nine months ended September 30, 2019, we utilized term fixed and floating rate, callable, and step-up consolidated obligation bonds in addition to consolidated obligation discount notes in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements.

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Table of Contents

SELECTED FINANCIAL DATA

The following tables present selected financial data for the periods indicated (dollars in millions):
Statements of Condition
September 30,
2019
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
Cash and due from banks
$
209

 
$
218

 
$
81

 
$
119

 
$
155

Investments1
34,402

 
39,140

 
38,271

 
31,777

 
35,139

Advances
85,009

 
101,288

 
99,228

 
106,323

 
100,787

Mortgage loans held for portfolio, net2
8,952

 
8,324

 
7,943

 
7,835

 
7,549

Total assets
129,148

 
149,474

 
146,043

 
146,515

 
144,095

Consolidated obligations
 
 
 
 
 
 
 
 
 
Discount notes
26,716

 
36,934

 
44,994

 
42,879

 
42,101

Bonds
93,611

 
103,223

 
91,979

 
93,772

 
92,998

Total consolidated obligations3
120,327

 
140,157

 
136,973

 
136,651

 
135,099

Mandatorily redeemable capital stock
202

 
203

 
237

 
255

 
277

Total liabilities
122,305

 
141,997

 
138,684

 
138,967

 
136,790

Capital stock — Class B putable
4,676

 
5,304

 
5,182

 
5,414

 
5,163

Retained earnings
2,131

 
2,120

 
2,092

 
2,050

 
2,019

Accumulated other comprehensive income (loss)
36

 
53

 
85

 
84

 
123

Total capital
6,843

 
7,477

 
7,359

 
7,548

 
7,305

Regulatory capital ratio4
5.43

 
5.10

 
5.14

 
5.27

 
5.18

 
For the Three Months Ended
Statements of Income5
September 30,
2019
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
Net interest income
$
129

 
$
147

 
$
159

 
$
155

 
$
156

Other income (loss)6
3

 
3

 
5

 
(3
)
 
7

Other expense7
43

 
43

 
39

 
41

 
36

AHP assessments
9

 
11

 
13

 
11

 
14

Net income
80

 
96

 
112

 
100

 
113

Selected Financial Ratios5,8
 
 
 
 
 
 
 
 
 
Net interest spread9
0.25
%
 
0.27
%
 
0.31
%
 
0.31
%
 
0.31
%
Net interest margin10
0.38

 
0.40

 
0.45

 
0.42

 
0.42

Return on average equity (annualized)
4.57

 
5.13

 
6.16

 
5.31

 
6.16

Return on average capital stock (annualized)
6.66

 
7.23

 
8.70

 
7.47

 
8.69

Return on average assets (annualized)
0.23

 
0.26

 
0.31

 
0.27

 
0.31

Average equity to average assets
5.13

 
5.05

 
5.08

 
5.14

 
4.98

Dividend payout ratio11
87.28

 
70.34

 
62.02

 
68.85

 
62.85


1
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale (AFS) securities, and held-to-maturity (HTM) securities.

2
Includes an allowance for credit losses of $1 million at September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, and September 30, 2018.

3
The total par value of outstanding consolidated obligations of the 11 FHLBanks was $1,010.3 billion, $1,048.4 billion, $1,010.9 billion, $1,031.6 billion, and $1,019.1 billion at September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, and September 30, 2018, respectively.

4
Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock), and retained earnings.

5
Beginning January 1, 2019, the fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are reported in net interest income. Prior to January 1, 2019, these amounts were reported in other income (loss).

6
Other income (loss) includes, among other things, net gains (losses) on investment securities and net gains (losses) on derivatives and hedging activities.

7
Other expense includes, among other things, compensation and benefits, professional fees and contractual services.

8
Amounts used to calculate selected financial ratios are based on numbers in actuals. Accordingly, recalculations using numbers in millions may not produce the same results.

9
Represents annualized yield on total interest-earning assets minus annualized cost of total interest-bearing liabilities.

10
Represents net interest income expressed as a percentage of average interest-earning assets.

11
Represents dividends declared and paid in the stated period expressed as a percentage of net income in the stated period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense in our Statements of Income.

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Table of Contents

RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the three and nine months ended September 30, 2019 and 2018 (dollars in millions). See further discussion of these items in the sections that follow.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
Net interest income
$
129

 
$
156

 
$
(27
)
 
(17
)%
 
$
435

 
$
480

 
$
(45
)
 
(9
)%
Other income (loss)
3

 
7

 
(4
)
 
(57
)
 
11

 
23

 
(12
)
 
(52
)
Other expense
43

 
36

 
7

 
19

 
125

 
101

 
24

 
24

AHP assessments
9

 
14

 
(5
)
 
(36
)
 
33

 
42

 
(9
)
 
(21
)
Net income
$
80

 
$
113

 
$
(33
)
 
(29
)%
 
$
288

 
$
360

 
$
(72
)
 
(20
)%

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Table of Contents

Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields and costs. The following table presents average balances and annualized yields/costs of major asset and liability categories (dollars in millions):    
 
For the Three Months Ended September 30,
 
20191
 
20181
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
301

 
1.56
%
 
$
1

 
$
117

 
0.97
%
 
$
—

Securities purchased under agreements to resell
9,886

 
2.28

 
57

 
4,153

 
1.96

 
21

Federal funds sold
6,722

 
2.22

 
37

 
7,069

 
1.95

 
34

Mortgage-backed securities3,4
15,530

 
2.68

 
105

 
17,400

 
2.62

 
115

    Other investments3,4,5
5,650

 
2.79

 
39

 
6,167

 
2.99

 
46

Advances4
86,937

 
2.60

 
569

 
103,599

 
2.42

 
633

Mortgage loans6
8,653

 
3.26

 
72

 
7,431

 
3.39

 
64

     Loans to other FHLBanks
6

 
2.26

 
—

 
—

 
—

 
—

Total interest-earning assets
133,685

 
2.61

 
880

 
145,936

 
2.48

 
913

Non-interest-earning assets
1,015

 
—

 
—

 
1,198

 
—

 
—

Total assets
$
134,700

 
2.59
%
 
$
880

 
$
147,134

 
2.46
%
 
$
913

Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,018

 
1.43
%
 
$
4

 
$
942

 
1.59
%
 
$
4

Consolidated obligations
 
 
 
 
 
 
 

 
 

 
 

Discount notes
28,622

 
2.29

 
166

 
41,855

 
2.01

 
212

Bonds4
96,671

 
2.38

 
579

 
95,413

 
2.23

 
535

Other interest-bearing liabilities7
215

 
5.31

 
2

 
355

 
6.62

 
6

Total interest-bearing liabilities
126,526

 
2.36

 
751

 
138,565

 
2.17

 
757

Non-interest-bearing liabilities
1,259

 
—

 
—

 
1,248

 
—

 
—

Total liabilities
127,785

 
2.33

 
751

 
139,813

 
2.15

 
757

Capital
6,915

 
—

 
—

 
7,321

 
—

 
—

Total liabilities and capital
$
134,700

 
2.21
%
 
$
751

 
$
147,134

 
2.04
%
 
$
757

Net interest income and spread8
 
 
0.25
%
 
$
129

 
 
 
0.31
%
 
$
156

Net interest margin9
 
 
0.38
%
 
 
 
 
 
0.42
%
 
 
Average interest-earning assets to interest-bearing liabilities
 
 
105.66
%
 
 
 
 
 
105.32
%
 
 

1
For 2019, interest income and expense amounts reported for advances, mortgage-backed securities (MBS), other investments, and consolidated obligation bonds include gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period amounts do not conform to new hedge accounting guidance adopted on January 1, 2019.

2
Average balances are calculated on a daily weighted average basis and do not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.

3
The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

4
Average balances reflect the impact of fair value hedging adjustments and/or fair value option adjustments.

5
Other investments primarily include U.S. obligations, GSE obligations and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and Private Export Funding Corporation (PEFCO) bonds.

6
Non-accrual loans are included in the average balance used to determine the average yield.

7
Other interest-bearing liabilities consists primarily of mandatorily redeemable capital stock.

8
Represents annualized yield on total interest-earning assets minus annualized yield on total interest-bearing liabilities.

9
Represents net interest income expressed as a percentage of average interest-earning assets.









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Table of Contents


    
The following table presents average balances and annualized yields/costs of major asset and liability categories (dollars in millions):
 
For the Nine Months Ended September 30,
 
20191
 
20181
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
201

 
1.50
%
 
$
2

 
$
133

 
0.95
%
 
$
1

Securities purchased under agreements to resell
7,784

 
2.38

 
139

 
3,807

 
1.72

 
49

Federal funds sold
6,950

 
2.36

 
122

 
6,171

 
1.73

 
79

Mortgage-backed securities3,4
16,073

 
2.89

 
347

 
17,481

 
2.43

 
317

    Other investments3,4,5
5,780

 
3.06

 
132

 
6,447

 
2.79

 
135

Advances4
97,056

 
2.75

 
1,997

 
107,349

 
2.19

 
1,761

Mortgage loans6
8,218

 
3.43

 
211

 
7,245

 
3.41

 
185

     Loans to other FHLBanks
5

 
2.37

 
—

 
6

 
1.60

 
—

Total interest-earning assets
142,067

 
2.78

 
2,950

 
148,639

 
2.27

 
2,527

Non-interest-earning assets
970

 
—

 
—

 
1,197

 
—

 
—

Total assets
$
143,037

 
2.76
%
 
$
2,950

 
$
149,836

 
2.26
%
 
$
2,527

Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
946

 
1.69
%
 
$
12

 
$
940

 
1.34
%
 
$
9

Consolidated obligations
 
 
 
 
 
 
 

 
 

 
 

Discount notes
37,773

 
2.42

 
684

 
38,585

 
1.75

 
506

Bonds4
95,716

 
2.53

 
1,810

 
101,385

 
2.00

 
1,517

Other interest-bearing liabilities7
232

 
5.44

 
9

 
366

 
5.42

 
15

Total interest-bearing liabilities
134,667

 
2.50

 
2,515

 
141,276

 
1.94

 
2,047

Non-interest-bearing liabilities
1,095

 
—

 
—

 
1,168

 
—

 
—

Total liabilities
135,762

 
2.48

 
2,515

 
142,444

 
1.92

 
2,047

Capital
7,275

 
—

 
—

 
7,392

 
—

 
—

Total liabilities and capital
$
143,037

 
2.35
%
 
$
2,515

 
$
149,836

 
1.83
%
 
$
2,047

Net interest income and spread8
 
 
0.28
%
 
$
435

 
 
 
0.33
%
 
$
480

Net interest margin9
 
 
0.41
%
 
 
 
 
 
0.43
%
 
 
Average interest-earning assets to interest-bearing liabilities
 
 
105.50
%
 
 
 
 
 
105.21
%
 
 

1
For 2019, interest income and expense amounts reported for advances, mortgage-backed securities (MBS), other investments, and consolidated obligation bonds include gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period amounts do not conform to new hedge accounting guidance adopted on January 1, 2019.

2
Average balances are calculated on a daily weighted average basis and do not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.

3
The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

4
Average balances reflect the impact of fair value hedging adjustments and/or fair value option adjustments.

5
Other investments primarily include U.S. obligations, GSE obligations and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and PEFCO bonds.

6
Non-accrual loans are included in the average balance used to determine the average yield.

7
Other interest-bearing liabilities consists primarily of mandatorily redeemable capital stock.

8
Represents annualized yield on total interest-earning assets minus annualized yield on total interest-bearing liabilities.

9
Represents net interest income expressed as a percentage of average interest-earning assets.


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Table of Contents

The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019 vs. September 30, 2018
 
September 30, 2019 vs. September 30, 2018
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Volume
 
Rate
 
 
Volume
 
Rate
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
1

 
$
—

 
$
1

 
$
—

 
$
1

 
$
1

Securities purchased under agreements to resell
32

 
4

 
36

 
66

 
24

 
90

Federal funds sold
(2
)
 
5

 
3

 
11

 
32

 
43

Mortgage-backed securities
(13
)
 
3

 
(10
)
 
(27
)
 
57

 
30

Other investments
(3
)
 
(4
)
 
(7
)
 
(15
)
 
12

 
(3
)
Advances
(108
)
 
44

 
(64
)
 
(181
)
 
417

 
236

Mortgage loans
10

 
(2
)
 
8

 
25

 
1

 
26

Total interest income
(83
)
 
50

 
(33
)
 
(121
)
 
544

 
423

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Deposits
—

 
—

 
—

 
—

 
3

 
3

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(73
)
 
27

 
(46
)
 
(11
)
 
189

 
178

Bonds
7

 
37

 
44

 
(89
)
 
382

 
293

Other interest-bearing liabilities
(3
)
 
(1
)
 
(4
)
 
(6
)
 
—

 
(6
)
Total interest expense
(69
)
 
63

 
(6
)
 
(106
)
 
574

 
468

Net interest income
$
(14
)
 
$
(13
)
 
$
(27
)
 
$
(15
)
 
$
(30
)
 
$
(45
)
    
NET INTEREST SPREAD

Net interest spread equals the annualized yield on total interest-earning assets minus the annualized cost of total interest-bearing liabilities. For the three and nine months ended September 30, 2019, our net interest spread was 0.25 percent and 0.28 percent compared to 0.31 percent and 0.33 percent during the same periods in 2018. Our net interest spread during the three and nine months ended September 30, 2019 was primarily impacted by a higher cost on total interest-bearing liabilities, partially offset by a higher yield on total interest-earning assets. The primary components of our interest income and interest expense are discussed below.

NET INTEREST MARGIN

Net interest margin equals net interest income expressed as a percentage of average interest-earning assets. For the three and nine months ended September 30, 2019, our net interest margin was 0.38 percent and 0.41 percent compared to 0.42 percent and 0.43 percent during the same periods in 2018. Our net interest margin decreased during the three and nine months ended September 30, 2019 compared to the same periods in 2018 and was primarily attributable to lower asset liability spreads.

Advances

Interest income on advances decreased during the three months ended September 30, 2019 when compared to the same period in 2018 due primarily to lower average advance balances due largely to a decline in advances from large depository institution members. Interest income on advances increased during the nine months ended September 30, 2019 when compared to the same period in 2018 due to the higher interest rate environment on average, partially offset by lower average advance balances due primarily to a decline in advances from large depository institution members and captive insurance company members.


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Table of Contents

Investments

Interest income on investments increased during the three and nine months ended September 30, 2019 when compared to the same periods in 2018 due primarily to higher average money market investment balances and the higher interest rate environment on average. During the nine months ended September 30, 2019, the increase was offset in part by lower average MBS and other investment balances.

Bonds

Interest expense on bonds increased during the three and nine months ended September 30, 2019 when compared to the same periods in 2018 due primarily to the higher interest rate environment on average. During the nine months ended September 30, 2019, the increase was offset in part by lower average bond balances.

Discount Notes

Interest expense on discount notes decreased during the three months ended September 30, 2019 when compared to the same period in 2018 primarily due to lower average discount note balances, offset in part by the higher interest rate environment on average. Interest expense on discount notes increased during the nine months ended September 30, 2019 when compared to the same period in 2018 primarily due to the higher interest rate environment on average.

For additional information on how we manage the difference between our asset and liability maturities, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Other Income (Loss)

The following table summarizes the components of other income (loss) (dollars in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net gains (losses) on trading securities
$
8

 
$
(9
)
 
$
36

 
$
(33
)
Net gains (losses) on derivatives and hedging activities
(12
)
 
9

 
(45
)
 
43

Other, net
7

 
7

 
20

 
13

Total other income (loss)
$
3

 
$
7

 
$
11

 
$
23

    
Other income (loss) can be volatile from period to period depending on the type of activity recorded. We recorded net gains of $3 million and $11 million during the three and nine months ended September 30, 2019 compared to net gains of $7 million and $23 million during the same periods in 2018. Other income (loss) was impacted by net gains (losses) on derivatives and hedging activities, net gains (losses) on trading securities, and other, net as described below.

During the three and nine months ended September 30, 2019, we recorded net losses of $12 million and $45 million on our derivatives and hedging activities through other income (loss) compared to net gains of $9 million and $43 million during the same periods in 2018. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities” for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.

During the three and nine months ended September 30, 2019, we recorded net gains on trading securities of $8 million and $36 million compared to net losses of $9 million and $33 million during the same periods in 2018. These changes in fair value were primarily due to the impact of interest rates and credit spreads on our fixed rate trading securities. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

During the three and nine months ended September 30, 2019, we recorded other income, net of $7 million and $20 million compared to other income, net of $7 million and $13 million for the same periods in 2018. The increase for the nine months ended September 30, 2019, was primarily driven by a loss on the disposition of fixed assets during the prior year and an increase in the market value of our Benefit Equalization defined benefit plan during 2019.

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Table of Contents

Hedging Activities

We use derivatives to manage interest rate risk. Accounting rules affect the timing and recognition of income and expense on derivatives and therefore we may be subject to income statement volatility.

If a hedging activity qualifies for hedge accounting treatment (fair value hedge), the net interest settlements of interest receivables or payables related to the derivative are recognized as interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. Beginning January 1, 2019, as a result of the adoption of ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, the fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are also recognized as interest income or expense. Prior to January 1, 2019, any hedge ineffectiveness, or the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item, was recorded in other income (loss). Amortization of basis adjustments from terminated hedges and the amortization of the financing element of off-market derivatives are recorded in interest income or expense.

If a hedging activity does not qualify for hedge accounting treatment (economic hedge), the net interest settlements of interest receivables or payables related to the derivative as well as the fair value gains and losses on the derivative are recorded as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities;” however, there is no fair value adjustment for the corresponding asset or liability being hedged unless changes in the fair value of the asset or liability are normally marked to fair value through earnings (i.e., trading securities and fair value option instruments).

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Three Months Ended September 30, 2019
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
1

 
$
(2
)
 
$
(1
)
 
$
(1
)
 
$
(3
)
Net gains (losses) on fair value hedges2
 
—

 
(4
)
 
—

 
2

 
(2
)
Net interest settlements on derivatives
 
11

 
(3
)
 
—

 
(32
)
 
(24
)
Total impact to net interest income
 
12

 
(9
)
 
(1
)
 
(31
)
 
(29
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on economic hedges3
 
—

 
(12
)
 
—

 
—

 
(12
)
Net gains (losses) on trading securities4
 
—

 
8

 
—

 
—

 
8

Total impact to other income (loss)
 
—

 
(4
)
 
—

 
—

 
(4
)
Total net effect of hedging activities5
 
$
12

 
$
(13
)
 
$
(1
)
 
$
(31
)
 
$
(33
)

1
Represents the amortization/accretion of basis adjustments on closed hedge relationships.

2
Effective January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Net gains (losses) on fair value hedges also includes the amortization of the financing element of off-market derivatives. Prior to January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships were reported in other income (loss).

3
Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” in the Statements of Income.

4
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

5
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


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Table of Contents

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Three Months Ended September 30, 2018
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Bonds
 
Other
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
2

 
$
4

 
$
(2
)
 
$
—

 
$
4

Net interest settlements
 
16

 
(4
)
 
(57
)
 
—

 
(45
)
Total impact to net interest income
 
18

 
—

 
(59
)
 
—

 
(41
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
 
—

 
1

 
(1
)
 
—

 
—

Net gains (losses) on economic hedges
 
—

 
7

 
—

 
—

 
7

Price alignment amount on derivatives2
 
—

 
—

 
—

 
2

 
2

Total net gains (losses) on derivatives and hedging activities
 
—

 
8

 
(1
)
 
2

 
9

Net gains (losses) on trading securities3
 
—

 
(9
)
 
—

 
—

 
(9
)
Total impact to other income (loss)
 
—

 
(1
)
 
(1
)
 
2

 
—

Total net effect of hedging activities4
 
$
18

 
$
(1
)
 
$
(60
)
 
$
2

 
$
(41
)

1
Represents the amortization/accretion of basis adjustments on closed hedge relationships and the amortization of the financing element of off-market derivatives.

2
This amount represents interest on variation margin which is a component of the derivative fair value for cleared transactions.

3
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

4
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


65
Table of Contents

The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Nine Months Ended September 30, 2019
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
1

 
$
(1
)
 
$
(1
)
 
$
(2
)
 
$
(3
)
Net gains (losses) on fair value hedges2
 
1

 
(3
)
 
—

 
(1
)
 
(3
)
Net interest settlements on derivatives
 
54

 
(1
)
 
—

 
(155
)
 
(102
)
Total impact to net interest income
 
56

 
(5
)
 
(1
)
 
(158
)
 
(108
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on economic hedges3
 
—

 
(45
)
 
—

 
—

 
(45
)
Net gains (losses) on trading securities4
 
—

 
36

 
—

 
—

 
36

Total impact to other income (loss)
 
—

 
(9
)
 
—

 
—

 
(9
)
Total net effect of hedging activities5
 
$
56

 
$
(14
)
 
$
(1
)
 
$
(158
)
 
$
(117
)

 
 
For the Nine Months Ended September 30, 2018
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Other
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion6
 
$
9

 
$
10

 
$
(1
)
 
$
(7
)
 
$
—

 
$
11

Net interest settlements
 
28

 
(27
)
 
—

 
(147
)
 
—

 
(146
)
Total impact to net interest income
 
37

 
(17
)
 
(1
)
 
(154
)
 
—

 
(135
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
 
2

 
5

 
—

 
—

 
—

 
7

Net gains (losses) on economic hedges
 
—

 
32

 
1

 
—

 
—

 
33

Price alignment amount on derivatives7
 
—

 
—

 
—

 
—

 
3

 
3

Total net gains (losses) on derivatives and hedging activities
 
2

 
37

 
1

 
—

 
3

 
43

Net gains (losses) on trading securities4
 
—

 
(33
)
 
—

 
—

 
—

 
(33
)
Total impact to other income (loss)
 
2

 
4

 
1

 
—

 
3

 
10

Total net effect of hedging activities5
 
$
39

 
$
(13
)
 
$
—

 
$
(154
)
 
$
3

 
$
(125
)

1
Represents the amortization/accretion of basis adjustments on closed hedge relationships.

2
Effective January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Net gains (losses) on fair value hedges also includes the amortization of the financing element of off-market derivatives. Prior to January 1, 2019, gains (losses) on derivatives and hedged items in qualifying hedging relationships were reported in other income (loss).

3
Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” in the Statements of Income.

4
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

5
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.

6
Represents the amortization/accretion of basis adjustments on closed hedge relationships and the amortization of the financing element of off-market derivatives.

7
This amount represents interest on variation margin which is a component of the derivative fair value for cleared derivatives.

NET AMORTIZATION/ACCRETION

Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships.

NET INTEREST SETTLEMENTS

Net interest settlements represent the interest component on derivatives that qualify for fair value hedge accounting. These amounts vary from period to period depending on our hedging activities and interest rates and are partially offset by the interest component on the related hedged item within net interest income. The hedging activity tables do not include the impact of the interest component on the related hedged item.


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Table of Contents

NET GAINS (LOSSES) ON FAIR VALUE HEDGES

Beginning January 1, 2019, the fair value gains and losses of derivatives and hedged items in designated fair value hedge relationships are recorded in net interest income. Prior to January 1, 2019, the portion of fair value gains and losses of derivatives and hedged items representing hedge ineffectiveness were recorded in other income (loss). Gains (losses) on fair value hedges are driven by changes in the benchmark interest rate, volatility, and the divergence in the valuation curves used to value our assets, liabilities, and derivatives.

NET GAINS (LOSSES) ON ECONOMIC HEDGES

We utilize economic derivatives to manage certain risks in our Statements of Condition. Gains and losses on economic derivatives are driven primarily by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. The following discussion highlights key items impacting gains and losses on economic investment derivatives.

Investments
 
We utilize interest rate swaps to economically hedge a portion of our trading securities against changes in fair value. Gains and losses on these economic derivatives are due primarily to changes in interest rates. Gains and losses on our trading securities are also due primarily to changes in interest rates and credit spreads.

The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Gains (losses) on interest rate swaps economically hedging our investments
$
(12
)
 
$
8

 
$
(45
)
 
$
36

Interest settlements
—

 
(1
)
 
—

 
(4
)
Net gains (losses) on investment derivatives
(12
)
 
7

 
(45
)
 
32

Net gains (losses) on related trading securities
8

 
(9
)
 
36

 
(33
)
Net gains (losses) on economic investment hedge relationships
$
(4
)
 
$
(2
)
 
$
(9
)
 
$
(1
)


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Other Expense
The following table shows the components of other expense (dollars in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Compensation and benefits
$
16

 
$
15

 
$
48

 
$
46

Contractual services
4

 
3

 
12

 
9

Professional fees
9

 
6

 
24

 
13

Other operating expenses
8

 
6

 
24

 
17

Total operating expenses
37

 
30

 
108

 
85

Federal Housing Finance Agency
2

 
2

 
7

 
7

Office of Finance
2

 
2

 
5

 
5

Other, net
2

 
2

 
5

 
4

Total other expense
$
43

 
$
36

 
$
125

 
$
101


Other expense increased for the three and nine months ended September 30, 2019 compared to the same periods last year. The increase in other expense was driven primarily by an increase in professional fees and other operating expenses. The increase in professional fees was the result of hiring external resources to assist with multiple ongoing technology and operational initiatives. The increase in other operating expenses was primarily due to increased amortization due to a reduction in useful life of one of the Bank’s information technology (IT) systems and an increase in depreciation expense, mainly due to the depreciation of furnishings associated with the new building we moved into in late 2018.



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STATEMENTS OF CONDITION

Financial Highlights

Our total assets decreased to $129.1 billion at September 30, 2019 from $146.5 billion at December 31, 2018. Our total liabilities decreased to $122.3 billion at September 30, 2019 from $139.0 billion at December 31, 2018. Total capital decreased to $6.8 billion at September 30, 2019 from $7.5 billion at December 31, 2018. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At September 30, 2019, our total cash balance was $209 million compared to $119 million at December 31, 2018. Our cash balance is influenced by our liquidity needs, member advance activity, market conditions, and the availability of attractive investment opportunities.

Advances

The following table summarizes our advances by type of institution (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Commercial banks
$
52,545

 
$
75,561

Savings institutions
1,796

 
1,318

Credit unions
6,142

 
5,801

Non-captive insurance companies
20,242

 
18,604

Captive insurance companies
3,638

 
4,453

Community development financial institutions
20

 
4

Total member advances
84,383

 
105,741

Housing associates
98

 
58

Non-member borrowers
284

 
614

Total par value
$
84,765

 
$
106,413


Our total advance par value decreased $21.6 billion or 20 percent at September 30, 2019 when compared to December 31, 2018. The decrease in total par value was primarily due to a decrease in borrowings by large depository institution members.

As a result of the final rule on membership issued by the Federal Housing Finance Agency (Finance Agency) effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance company members ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 will have their memberships terminated no later than February 19, 2021. The magnitude of the impact of the final rule at that date will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances. As of September 30, 2019, we had six captive insurance company members with total advances outstanding of $3.6 billion, which represented four percent of our total advances outstanding. One captive insurance company member was included in our five largest member borrowers at September 30, 2019 within this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances.”


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The following table summarizes our advances by product type (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Amount
 
% of Total
 
Amount
 
% of Total
Variable rate
$
44,669

 
53
 
$
66,561

 
62
Fixed rate
37,867

 
45
 
38,039

 
36
Amortizing
2,229

 
2
 
1,813

 
2
Total par value
84,765

 
100
 
106,413

 
100
Premiums
28

 
 
 
38

 
 
Discounts
(7
)
 
 
 
(8
)
 
 
Fair value hedging adjustments
223

 
 
 
(120
)
 
 
Total advances
$
85,009

 
 
 
$
106,323

 
 

Fair value hedging adjustments changed $343 million at September 30, 2019 when compared to December 31, 2018 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.

At September 30, 2019 and December 31, 2018, 24 percent and 33 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying index or our current offering rate of our underlying cost of funds. In addition, we retain the flexibility to adjust the spread relative to our cost of funds for a material percentage of these variable rate advances on each reset date. We generally fund our variable rate callable advances with either discount notes or short-term floating rate debt. For additional discussion on our funding strategies, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

At September 30, 2019 and December 31, 2018, advances outstanding to our five largest member borrowers totaled $43.9 billion and $64.2 billion, representing 52 percent of our total advances outstanding for both periods. The following table summarizes advances outstanding to our five largest member borrowers at September 30, 2019 (dollars in millions):
 
Amount
 
% of Total
Wells Fargo Bank, N.A.
$
30,900

 
36
Principal Life Insurance Company
4,000

 
5
Truman Insurance Company1
3,588

 
4
Zions Bancorporation, National Association
3,150

 
4
Midland National Life Insurance Company2
2,274

 
3
Total par value
$
43,912

 
52

1
Represents a captive insurance company whose membership will terminate within five years of the Finance Agency’s final rule on membership that became effective February 19, 2016.

2
Excludes $1.3 billion of advances with North American Company for Life and Health Insurance, an affiliate of Midland National Life Insurance Company.    

We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower’s financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the Federal Home Loan Bank Act of 1932 (FHLBank Act), Finance Agency regulations, and other applicable laws and regulations.

The FHLBank Act requires that we obtain sufficient collateral on advances to protect against losses. We have never experienced a credit loss on an advance to a member or eligible housing associate. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no probable credit losses on our advances as of September 30, 2019 and December 31, 2018. Accordingly, we have not recorded any allowance for credit losses on our advances. See additional discussion regarding our collateral requirements in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”


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Mortgage Loans

The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):
 
September 30,
2019
 
December 31, 2018
Fixed rate conventional loans
$
8,333

 
$
7,231

Fixed rate government-insured loans
495

 
503

Total unpaid principal balance
8,828

 
7,734

Premiums
122

 
105

Discounts
(4
)
 
(5
)
Basis adjustments from mortgage loan purchase commitments
7

 
2

Total mortgage loans held for portfolio
8,953

 
7,836

Allowance for credit losses
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
$
8,952

 
$
7,835


Our total mortgage loans increased $1.1 billion or 14 percent at September 30, 2019 when compared to December 31, 2018 due to loan purchases exceeding principal paydowns. Loan purchases increased due to the addition of new participating financial institutions (PFIs) and higher refinance activity driven by lower rates. For additional discussion on our mortgage loan credit risk, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Assets.”


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Investments

The following table summarizes the carrying value of our investments (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Amount
 
% of Total
 
Amount
 
% of Total
Short-term investments1
 
 
 
 
 
 
 
Interest-bearing deposits
$
2

 
—
 
$
1

 
—
Securities purchased under agreements to resell
8,000

 
23
 
4,700

 
15
Federal funds sold
5,635

 
17
 
4,150

 
13
Total short-term investments
13,637

 
40
 
8,851

 
28
Long-term investments2
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
GSE single-family
2,560

 
7
 
2,988

 
9
GSE multifamily
8,476

 
25
 
9,444

 
30
U.S. obligations single-family3
4,183

 
12
 
4,492

 
14
U.S. obligations commercial3
1

 
—
 
1

 
—
Private-label residential
8

 
—
 
10

 
—
Total mortgage-backed securities
15,228

 
44
 
16,935

 
53
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations3
2,432

 
7
 
2,761

 
9
GSE and Tennessee Valley Authority obligations
1,549

 
4
 
1,484

 
5
State or local housing agency obligations
1,004

 
3
 
1,205

 
4
Other
552

 
2
 
541

 
1
Total non-mortgage-backed securities
5,537

 
16
 
5,991

 
19
Total long-term investments
20,765

 
60
 
22,926

 
72
Total investments
$
34,402

 
100
 
$
31,777

 
100

1
Short-term investments have original maturities equal to or less than one year.

2
Long-term investments have original maturities of greater than one year.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.

Our investments increased $2.6 billion or 8 percent at September 30, 2019 when compared to December 31, 2018. Investments increased primarily due to an increase in money market investments as a result of increased liquidity holdings during 2019. At September 30, 2019, we had state or local housing agency obligations with a total par value of $122 million that had called but not yet settled. As a result, a trade date receivable has been recorded as “other assets” in our Statements of Condition.

The Finance Agency limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. Our ratio of MBS to regulatory capital was 2.17 and 2.19 at September 30, 2019 and December 31, 2018.

We evaluate AFS and HTM securities in an unrealized loss position for other-than-temporary-impairment (OTTI) on at least a quarterly basis. As part of our OTTI evaluation, we consider our intent to sell each debt security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we will recognize an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, we perform analyses to determine if any of these securities are other-than-temporarily impaired. At September 30, 2019 and December 31, 2018 we did not consider any of these securities to be other-than-temporarily-impaired. Refer to “Item 1. Financial Statements — Note 6 — Other-Than-Temporary Impairment” for additional information on our OTTI analysis performed at September 30, 2019.

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Consolidated Obligations

Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At September 30, 2019 and December 31, 2018, the carrying value of consolidated obligations for which we are primarily liable totaled $120.3 billion and $136.7 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Par value
$
26,785

 
$
43,052

Discounts and concession fees1
(69
)
 
(173
)
Total
$
26,716

 
$
42,879


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.
    
Our discount notes decreased $16.2 billion or 38 percent at September 30, 2019 when compared to December 31, 2018. We decreased our usage of discount notes as we experienced a reduction in total assets, primarily due to a decline in advance balances.

BONDS

The following table summarizes information on our bonds (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Total par value
$
93,441

 
$
94,024

Premiums
189

 
152

Discounts and concession fees1
(38
)
 
(48
)
Fair value hedging adjustments
19

 
(356
)
Total bonds
$
93,611

 
$
93,772


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.

Our bonds remained relatively stable at September 30, 2019 when compared to December 31, 2018. As a result of increased liquidity holdings and market conditions, we continued our usage of short-term floating rate consolidated obligation bonds relative to discount notes. Fair value hedging adjustments changed $375 million at September 30, 2019 when compared to December 31, 2018 due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.
 
For additional information on our bonds, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”


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Capital

The following table summarizes information on our capital (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Capital stock
$
4,676

 
$
5,414

Retained earnings
2,131

 
2,050

Accumulated other comprehensive income (loss)
36

 
84

Total capital
$
6,843

 
$
7,548


Our capital decreased at September 30, 2019 when compared to December 31, 2018. The decrease was primarily due to a decrease in capital stock resulting from a decline in member activity. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Stock” for additional information on our capital stock.

Derivatives

We use derivatives to manage interest rate risk. The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor our overall exposure to credit and market risk.

The following table categorizes the notional amount of our derivatives by type (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Interest rate swaps
 
 
 
Noncallable
$
36,722

 
$
46,671

Callable by counterparty
1,641

 
1,773

Callable by the Bank
246

 
193

Total interest rate swaps
38,609

 
48,637

Forward settlement agreements (TBAs)
409

 
98

Mortgage loan purchase commitments
423

 
101

Total notional amount
$
39,441

 
$
48,836

    
The notional amount of our derivative contracts declined at September 30, 2019 when compared to December 31, 2018. We have reduced our use of derivatives while we prepare to move to an alternative benchmark rate other than LIBOR as part of our LIBOR transition plan. In addition, during 2019, we reduced our use of swapped consolidated obligation bonds in response to market conditions which favored issuance of LIBOR and SOFR-based floating rate debt.

For additional discussion regarding our use of derivatives, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Derivatives.”

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Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of funds to meet current and projected future operating financial commitments, as well as regulatory, liquidity, and capital requirements.

Liquidity

SOURCES OF LIQUIDITY

We utilize several sources of liquidity to carry out our business activities. These include, but are not limited to, proceeds from the issuance of consolidated obligations, payments collected on advances and mortgage loans, proceeds from investment securities, member deposits, the issuance of capital stock, and current period earnings.

Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During the nine months ended September 30, 2019, proceeds from the issuance of bonds and discount notes were $44.9 billion and $93.1 billion compared to $31.2 billion and $130.2 billion for the same period in 2018. We continued to issue term fixed and floating rate, callable, and step-up rate consolidated obligation bonds as well as shorter-term discount notes in an effort to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

We maintained continual access to funding and issued debt to meet the needs of our members, which generally favored the issuance of shorter-term debt. Access to debt markets has been reliable because investors, driven by increased liquidity preference and our government affiliation, have sought the FHLBanks’ debt as an asset of choice, which has led to advantageous funding opportunities. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.

We are focused on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities and work collectively with the other FHLBanks to manage the system-wide liquidity and funding needs. We monitor our debt refinancing risk and liquidity position primarily by tracking the maturities of financial assets and financial liabilities. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments). External factors, including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities. Refer to “Item 1. Financial Statements” for additional information regarding the contractual maturities of certain of our financial assets and liabilities.

Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of October 31, 2019, our consolidated obligations were rated AA+/A-1+ by Standard and Poor’s and Aaa/P-1 by Moody’s and both ratings had a stable outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors” in our 2018 Form 10-K.

Although we are primarily liable for the portion of consolidated obligations that are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At September 30, 2019 and December 31, 2018, the total par value of outstanding consolidated obligations for which we are primarily liable was $120.2 billion and $137.1 billion. At September 30, 2019 and December 31, 2018, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was approximately $890.1 billion and $894.5 billion.

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or his designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of October 31, 2019, no purchases had been made by the U.S. Treasury under this authorization.


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USES OF LIQUIDITY

We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During the nine months ended September 30, 2019, repayments of consolidated obligations totaled $154.6 billion compared to $161.8 billion for the same period in 2018. A portion of these payments were due to the call of certain bonds in an effort to better match our projected asset cash flows. During the nine months ended September 30, 2019, we called bonds with a total par value of $644 million. We did not call any bonds during the nine months ended September 30, 2018.

During the nine months ended September 30, 2019, advance disbursements totaled $200.6 billion compared to $226.5 billion for the same period in 2018. Advance disbursements will vary from period to period depending on member needs. During the nine months ended September 30, 2019, investment purchases (excluding overnight investments) totaled $122.0 billion compared to $75.8 billion for the same period in 2018. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements in an effort to manage our liquidity position.

We also use liquidity to purchase mortgage loans, redeem member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, pay expenses, and pay dividends.

LIQUIDITY REQUIREMENTS
Finance Agency regulations mandate three liquidity requirements. First, we are required to maintain contingent liquidity sufficient to meet our liquidity needs, which shall, at a minimum, cover five calendar days of inability to access the consolidated obligation debt markets. Second, we are required to have available at all times an amount greater than or equal to members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in total consolidated obligations outstanding. At September 30, 2019 and December 31, 2018, we were in compliance with all three of the Finance Agency liquidity requirements.
In addition to the liquidity measures previously discussed, during 2018, the Finance Agency finalized a new Advisory Bulletin on FHLBank liquidity (the Liquidity Guidance AB) and other guidance which specifies the scenario required for measuring liquidity. Beginning at March 31, 2019, we began reporting only one scenario, “Base Case Scenario.” The Base Case Scenario assumes that we cannot access the capital markets to issue debt, and during that time we will automatically renew maturing and called advances for all members, including very large highly-rated members, and we hold additional liquid assets equal to one percent of our letters of credit balances. We were required to hold a minimum of 10 days of liquidity at September 30, 2019 and will be required to hold a minimum of 20 days of liquidity at December 31, 2019. At September 30, 2019, we were in compliance with this liquidity guidance.
The new Liquidity Guidance AB also specifies new guidance for appropriate funding gap limits to address the risks associated with a FHLBank having too large a mismatch between the contractual maturities of its assets and liabilities. The Liquidity Guidance AB provides funding gap limits within the range of negative 10 percent to negative 20 percent for a three-month horizon and negative 25 percent to negative 35 percent for a one-year horizon. Initial guidance was set at a trailing three-month average of negative 15 percent for the three-month horizon and a trailing three-month average of negative 30 percent for the one-year horizon. At September 30, 2019 and December 31, 2018 we adhered to this liquidity guidance. For a discussion of this Liquidity Guidance AB, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments” in our 2018 Form 10-K.
The Finance Agency previously provided us with guidance to maintain sufficient liquidity in an amount at least equal to our anticipated cash outflows under two different scenarios. At December 31, 2018, we were in compliance with this liquidity guidance. For additional information on our previous liquidity requirements, refer to “Item 7. Management’s Discussion and Analysis — Liquidity and Capital Resources” in our 2018 Form 10-K.


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Capital

CAPITAL REQUIREMENTS

We are subject to three regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock, (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock) and retained earnings. It does not include accumulated other comprehensive income (AOCI). Third, the FHLBank Act imposes a five percent minimum leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. At September 30, 2019 and December 31, 2018, we did not hold any nonpermanent capital. At September 30, 2019 and December 31, 2018, we were in compliance with all three of the Finance Agency’s regulatory capital requirements. Refer to “Item 1. Financial Statements — Note 12 — Capital” for additional information.

CAPITAL STOCK
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B stock) and have two subclasses of Class B capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10.0 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding. All Class B capital issued is subject to a notice of redemption period of five years.

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) when a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

The capital stock requirements established in our Capital Plan are designed so that we can remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under our Capital Plan, we, at our discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. We, at our discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At September 30, 2019 and December 31, 2018, our excess capital stock outstanding was less than $1 million.
        
The following table summarizes our regulatory capital stock by type of member (dollars in millions):
 
September 30,
2019
 
December 31,
2018
Commercial banks
$
2,949

 
$
3,829

Savings institutions
130

 
104

Credit unions
544

 
495

Non-captive insurance companies
882

 
775

Captive insurance companies
170

 
210

Community development financial institutions
1

 
1

Total GAAP capital stock
4,676

 
5,414

Mandatorily redeemable capital stock
202

 
255

Total regulatory capital stock
$
4,878

 
$
5,669


The decrease in regulatory capital stock held at September 30, 2019 when compared to December 31, 2018 was due to a decrease in capital stock resulting from a decrease in member activity.


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Retained Earnings
Our risk management policies include a target level of retained earnings based on the amount we believe necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to achieve our targeted level of retained earnings. At September 30, 2019, our actual retained earnings exceeded our retained earnings target.
We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other Federal Home Loan Banks in 2011. Under the JCE Agreement, we are required to allocate 20 percent of our quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At September 30, 2019 and December 31, 2018, our restricted retained earnings balance totaled $484 million and $427 million. One percent of our average balance of outstanding consolidated obligations for the three months ended June 30, 2019 was $1.4 billion.
Dividends

Our current dividend philosophy is to pay a membership capital stock dividend similar to a reference rate of interest, such as average three-month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Our dividend rates seek to strike a balance between providing reasonable returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations.

The following table summarizes dividend-related information (dollars in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Aggregate cash dividends paid1
$
69

 
$
71

 
$
207

 
$
180

Effective combined annualized dividend rate paid on capital stock2
5.24
%
 
5.28
%
 
5.25
%
 
4.53
%
Annualized dividend rate paid on membership capital stock
3.25
%
 
3.25
%
 
3.25
%
 
2.50
%
Annualized dividend rate paid on activity-based capital stock
5.75
%
 
5.75
%
 
5.75
%
 
5.00
%
Average three-month LIBOR
2.20
%
 
2.34
%
 
2.46
%
 
2.21
%

1
Includes aggregate cash dividends paid during the period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense in our Statements of Income.

2
Effective combined annualized dividend rate is paid on total capital stock, including mandatorily redeemable capital stock.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies and estimates, refer to our 2018 Form 10-K. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2019, with the exception of the policy noted below.
Derivatives and Hedging Activities

Accounting for Fair Value Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting. Beginning January 1, 2019, we adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, or the amount by which the change in the fair value of the derivative differed from the change in fair value of the hedged item, was recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”


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LEGISLATIVE AND REGULATORY DEVELOPMENTS

Advisory Bulletin 2019-03 Capital Stock Management
On August 14, 2019, the Finance Agency issued an Advisory Bulletin (the AB) providing guidance that augments existing statutory and regulatory capital requirements to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank. Beginning in February 2020, the Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLBank’s capital management practices. We do not expect the AB to have a material effect on our capital management practices, financial condition, and/or results of operations.

Finance Agency Supervisory Letter - Planning for LIBOR Phase-Out
On September 27, 2019, the Finance Agency issued a Supervisory Letter (the Supervisory Letter) to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provides that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directs the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020 in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. Acknowledging that there may be LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes for the FHLBanks that do not currently have readily available alternatives, the Supervisory Letter permits the FHLBanks to jointly submit a single list of LIBOR-linked products maturing after 2021 that they would like to continue to use after March 31, 2020.

As a result of the Supervisory Letter, beginning March 31, 2020, we expect to suspend transactions in certain advance products which create LIBOR exposure for the Bank and mature after December 31, 2021. In addition, beginning March 31, 2020, we expect to no longer enter into derivatives or debt transactions indexed to LIBOR that terminate after December 31, 2021. We have already ceased purchasing investments that reference LIBOR and mature after December 31, 2021.
We continue to evaluate the potential impact of the Supervisory Letter on our financial condition and results of operations, but we may experience some changes in aggregate advance balances and/or specific advance product balances as the breadth of floating rate and structured advance product offerings are reduced going forward.




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RISK MANAGEMENT
    
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy. Our primary risk management objective is to manage our assets and liabilities in ways that protect the par redemption value of our capital stock. We periodically evaluate our risk management policies in order to respond to changes in our financial position and general market conditions.

Market Risk

We define market risk as the risk that changes in market prices may adversely affect our financial condition and performance. Interest rate risk is the principal type of market risk to which we are exposed as our cash flows, and therefore earnings and equity value, can change significantly as interest rates change. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which, taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate changes and spread and volatility movements.

Our key risk measures are Market Value of Capital Stock (MVCS) Sensitivity and Projected Income Sensitivity.

MARKET VALUE OF CAPITAL STOCK SENSITIVITY
  
We define MVCS as an estimate of the market value of assets minus the market value of liabilities (excluding mandatorily redeemable capital stock) divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. It represents an estimation of the “liquidation value” of one share of our capital stock if all assets and liabilities were liquidated at current market prices. MVCS does not represent our long-term value, as it takes into account short-term market price fluctuations. These fluctuations are often unrelated to the long-term value of the cash flows from our assets and liabilities.

The MVCS calculation uses market prices which are computed using interest rates, spreads, and volatilities, and assumes a run-off balance sheet. The timing and variability of balance sheet cash flows are calculated by an internal model. To ensure the accuracy of the MVCS calculation, we reconcile the computed market prices of complex instruments, such as derivatives and mortgage assets, to market observed prices or dealers’ quotes.

Interest rate risk stress tests of MVCS involve instantaneous parallel and non-parallel changes in interest rates. The resulting percentage change in MVCS from the base case value is an indication of longer-term repricing risk and option risk embedded in the balance sheet.

In an effort to protect the MVCS from large interest rate swings, we manage the interest rate risk of our balance sheet by using hedging transactions, such as issuing consolidated obligation bonds, including floating rate, simple bullet, callable, or other structured features and entering into or canceling interest rate swaps, caps, floors, and swaptions.

We monitor and manage to the MVCS policy limits in an effort to ensure the stability of the Bank’s value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate change scenarios. Any policy limit breach requires a prompt action to address the measure outside of the policy limit and the breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the MVCS policy limits at September 30, 2019 and December 31, 2018.

Our down 200 basis point policy limit is suspended when the 10-year swap rate is below 2.50 percent and remains so for five consecutive days. At September 30, 2019, the 10-year swap rate was 1.56 percent and had been below 2.50 percent for five consecutive days, and therefore the associated policy limit was suspended. At December 31, 2018, the 10-year swap rate was 2.71 percent and the associated policy limit was in effect.

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The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous parallel changes in interest rates at September 30, 2019 and December 31, 2018:
 
Market Value of Capital Stock Assuming Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019
$
141.1

 
$
141.7

 
$
143.0

 
$
143.3

 
$
142.8

 
$
141.8

 
$
139.2

December 31, 2018
$
135.3

 
$
137.2

 
$
137.3

 
$
136.8

 
$
136.1

 
$
135.0

 
$
132.6

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019
(1.5
)%
 
(1.1
)%
 
(0.2
)%
 
—
%
 
(0.4
)%
 
(1.1
)%
 
(2.9
)%
December 31, 2018
(1.1
)%
 
0.2
 %
 
0.3
 %
 
—
%
 
(0.6
)%
 
(1.3
)%
 
(3.1
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019 and December 31, 2018
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous non-parallel changes in interest rates at September 30, 2019 and December 31, 2018:
 
Market Value of Capital Stock Assuming Non-Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019
$
139.8

 
$
141.3

 
$
142.5

 
$
143.3

 
$
143.5

 
$
143.3

 
$
141.9

December 31, 2018
$
136.1

 
$
137.0

 
$
137.1

 
$
136.8

 
$
136.2

 
$
135.2

 
$
132.6

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019
(2.5
)%
 
(1.4
)%
 
(0.6
)%
 
—
%
 
0.2
 %
 
—
 %
 
(1.0
)%
December 31, 2018
(0.5
)%
 
0.1
 %
 
0.2
 %
 
—
%
 
(0.5
)%
 
(1.2
)%
 
(3.1
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
September 30, 2019 and December 31, 2018
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%

Our base case MVCS was 143.3 at September 30, 2019 when compared to 136.8 at December 31, 2018. The change was primarily attributable to the following factors:

•
Increase in retained earnings: We recorded net income of $288 million during the nine months ended September 30, 2019, which was primarily driven by net interest income of $435 million. Dividend payments for the nine months ended September 30, 2019 totaled $207 million. The earnings in excess of dividends paid had a positive impact on the market value of our assets, thereby increasing MVCS.

•
Decreased shares of capital stock: Our capital stock balance decreased at September 30, 2019 when compared to December 31, 2018 due primarily to a decrease in member activity. As we repurchased this capital stock at par, which is below our current MVCS value, our MVCS was positively impacted.



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PROJECTED INCOME SENSITIVITY

Effective May 1, 2019, we revised our key risk measures to align our risk metrics with our internal business profitability objectives and measurements. As a result, beginning May 1, 2019, our projected 24-month income sensitivity was revised to projected return on average capital stock over average three-month LIBOR. Projected return on average capital stock over average three-month LIBOR is measured as the change in spread between projected 24-month return on average capital stock (ROACS) and average projected three-month LIBOR.

We monitored and managed projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity was based on the forward interest rates, business, and risk management assumptions.

Our primary income sensitivity policy specifies a limit on our change in 24-month projected ROACS spread to average projected three-month LIBOR from base spread of -200 and -300 basis points for the up and down 100 and 200 basis points parallel interest rate change scenarios. In addition, our income sensitivity policy specifies a limit of -150 basis points for the up and down 100 basis points non-parallel interest rate change scenarios. Additionally, there is a limit on our change from base ROACS of -250 basis points for certain basis shock scenarios to limit basis risk exposure. Any policy limit breach requires a prompt action to address the measure outside of the policy limit. We were in compliance with the projected 24-month income sensitivity policy limits as of September 30, 2019.

Prior to May 1, 2019, we monitored the Bank’s projected 24-month income sensitivity through our review of the projected return on capital stock measure. Projected return on capital stock was computed as an annualized ratio of projected net income over a 24 month period to average projected capital stock over the same period. We were in compliance with the former projected 24-month income sensitivity policy limits at December 31, 2018. For more information on our former Projected Income Sensitivity measure, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Projected Income Sensitivity” in our 2018 10-K.

CAPITAL ADEQUACY

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measures are MVCS and regulatory capital in order to maintain capital levels in accordance with Finance Agency regulations. In addition, we monitor retained earnings. For a discussion of our key capital adequacy measure, MVCS, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity.”

RETAINED EARNINGS TARGET LEVEL AND REGULATORY CAPITAL REQUIREMENTS

Our risk management policies include a target level of retained earnings based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We are also subject to three regulatory capital requirements. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our financial obligations as they come due or meet the credit needs of our members in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”

Credit Risk

We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. Our primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.


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ADVANCES

We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower’s financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

We are required by regulation to obtain sufficient collateral to fully secure our advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in such collateral. Community Financial Institutions (CFIs) may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each borrower’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Borrowers may pledge collateral to us by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

Under a blanket pledge agreement, we are granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, we do not initially take delivery of collateral pledged by blanket pledge agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.

Although management has policies and procedures in place to manage credit risk, we may be exposed to this risk if our outstanding advance value exceeds the liquidation value of our collateral. We mitigate this risk by applying collateral discounts or haircuts to the unpaid principal balance or market value, if available, of the collateral to determine the advance equivalent value of the collateral securing each borrower’s obligation. The amount of these discounts will vary based on the type of collateral and security agreement. We determine these discounts or haircuts using data based upon historical price changes, discounted cash flow analyses, and loan level modeling.
 
At September 30, 2019 and December 31, 2018, borrowers pledged $353.9 billion and $333.5 billion of collateral (net of applicable discounts) to support activity with us, including advances. At September 30, 2019 and December 31, 2018, all of our advances met the requirement to be collateralized at a minimum of 100 percent, net of applicable discounts. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.


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The following table shows our total exposure, including advances, as well as the collateralization percentage of outstanding exposure by borrower type (dollars in millions):
 
September 30, 2019
 
December 31, 2018
 
Sum of Total Exposure
 
% Collateralized
 
Sum of Total Exposure
 
% Collateralized
Commercial banks
$
60,832

 
446
%
 
$
84,072

 
303
%
Savings institutions
1,879

 
469

 
1,396

 
597

Credit unions
6,854

 
335

 
6,479

 
305

Non-captive insurance companies
20,266

 
140

 
18,644

 
143

Captive insurance companies
3,638

 
100

 
4,453

 
100

Community development financial institutions
20

 
107

 
3

 
313

Housing associates
98

 
204

 
59

 
252

Non-member borrowers
293

 
145

 
615

 
121

Total borrowers
$
93,880

 
358
%
 
$
115,721

 
272
%

Based upon our collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on our credit products as of September 30, 2019 and December 31, 2018. Accordingly, we have not recorded any allowance for credit losses on our credit products.

MORTGAGE LOANS

We are exposed to credit risk through our participation in the Mortgage Partnership Finance (MPF) program and the Mortgage Purchase Program (MPP). Mortgage loan credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage loans is affected by a number of factors, including loan type, borrower’s credit history, and other factors such as home price fluctuations, unemployment levels, and other economic factors in the local market or nationwide.

Through our participation in the MPF program, which represents 97 percent of our mortgage loans held for portfolio at September 30, 2019, we invest in conventional and government-insured residential mortgage loans that are acquired through or purchased from a PFI. In addition, MPF Xtra, MPF Direct, and MPF Government MBS are off-balance sheet loan products that are passed through to a third-party investor and are not maintained in our Statements of Condition.

Under the MPP, we acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to us. The MPP represents three percent of our mortgage loans held for portfolio at September 30, 2019. We currently do not purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.

The following table presents the unpaid principal balance of our mortgage loan portfolio by product type (dollars in millions):
Product Type
 
September 30,
2019
 
December 31,
2018
Conventional
 
$
8,333

 
$
7,231

Government
 
495

 
503

Total mortgage loan unpaid principal balance
 
$
8,828

 
$
7,734


We manage the credit risk on mortgage loans acquired in the MPF program and MPP by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iv) establishing an allowance for credit losses to reflect management’s estimate of probable credit losses inherent in the portfolio.

Government-Insured Mortgage Loans. For our government-insured mortgage loans, our loss protection consists of the loan guarantee, the ability of the loan servicer to repurchase any government-insured loan once it reaches 90 days delinquent, and the contractual obligation of the loan servicer to liquidate a government-insured loan in full upon sale of the REO property if not repurchased previously. Therefore, we have not recorded any allowance for credit losses on government-insured mortgage loans.
                                                                                                                                            

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Conventional Mortgage Loans. For our conventional mortgage loans, we have several layers of legal loss protection that are defined in agreements among us and our PFIs. These loss layers may vary depending on the product alternatives selected and credit profile of the loans. Loss layers may consist of (i) homeowner equity, (ii) primary mortgage insurance (PMI), (iii) a first loss account (FLA), if applicable, and (iv) a credit enhancement obligation of the PFI, if applicable.

Allowance for Credit Losses. We utilize an allowance for credit losses to reserve for estimated losses in our conventional mortgage loan portfolios at the balance sheet date. The measurement of our allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing conventional mortgage loans for impairment on an individual basis, and (iii) estimating additional credit losses in the conventional mortgage loan portfolio. The allowance for credit losses on our conventional mortgage loans was $1 million at both September 30, 2019 and December 31, 2018.

Non-Accrual Loans and Delinquencies. We place a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. We do not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee of the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. Refer to “Item 1. Financial Statements — Note 9 — Allowance for Credit Losses” for additional information on our loss layers, allowance for credit losses, and a summary of our non-accrual loans and mortgage loan delinquencies.

INVESTMENTS

We maintain an investment portfolio primarily to provide investment income and liquidity. Our primary credit risk on investments is the counterparties’ ability to meet repayment terms. We mitigate this credit risk by purchasing investment quality securities. We define investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security. We consider a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, nationally recognized statistical rating organization (NRSRO) credit ratings, and/or the financial health of the underlying issuer.

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our 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. Our 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. At September 30, 2019, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. These limits are 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 our 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 we may offer for extensions of unsecured credit, excluding overnight Federal funds sold, ranges from three to 15 percent based on the counterparty’s credit rating. Our total unsecured exposure to a counterparty, including overnight Federal funds sold, may not exceed twice that amount, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. At September 30, 2019, we were in compliance with the regulatory limits established for unsecured credit.

Our short-term portfolio may include, but is not limited to, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. Treasury bill obligations. Our long-term portfolio may include, but is not limited to, U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. We face credit risk from unsecured exposures primarily within our short-term portfolio. We consider investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC to be of the highest credit quality and therefore those exposures are not monitored with other unsecured investments.


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We primarily limit unsecured credit exposure to the following overnight investment types:

•
Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions.

•
Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.

At September 30, 2019, our unsecured short-term investment exposure consisted of overnight Federal funds sold. The following table presents our unsecured short-term investment exposure by counterparty credit rating and domicile at September 30, 2019 (excluding accrued interest receivable) (dollars in millions):
 
 
Credit Rating1,2
Domicile of Counterparty
 
AA
 
A
 
BBB
 
Total
Domestic
 
$
—

 
$
310

 
$
300

 
$
610

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

Australia
 
1,250

 
—

 
—

 
1,250

Canada
 
—

 
950

 
—

 
950

Finland
 
600

 
—

 
—

 
600

Germany
 
650

 
—

 
—

 
650

Netherlands
 
—

 
525

 
—

 
525

Norway
 
400

 
—

 
—

 
400

Sweden
 
650

 
—

 
—

 
650

Total U.S. branches and agency offices of foreign commercial banks
 
3,550

 
1,475

 
—

 
5,025

Total unsecured short-term investment exposure
 
$
3,550

 
$
1,785

 
$
300

 
$
5,635


1
Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Table excludes investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC.


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Investment Ratings

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
September 30, 2019
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB or Lower
 
Unrated
 
Total
Interest-bearing deposits
$
—

 
$
2

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2

Securities purchased under agreements to resell
—

 
—

 
1,750

 
—

 
—

 
6,250

 
8,000

Federal funds sold
—

 
3,550

 
1,785

 
300

 
—

 
—

 
5,635

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
—

 
2,560

 
—

 
—

 
—

 
—

 
2,560

GSE multifamily
—

 
8,476

 
—

 
—

 
—

 
—

 
8,476

U.S. obligations single-family2
—

 
4,183

 
—

 
—

 
—

 
—

 
4,183

U.S. obligations commercial2
—

 
1

 
—

 
—

 
—

 
—

 
1

Private-label residential
—

 
5

 
1

 
1

 
1

 
—

 
8

Total mortgage-backed securities
—

 
15,225

 
1

 
1

 
1

 
—

 
15,228

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations2
—

 
2,432

 
—

 
—

 
—

 
—

 
2,432

GSE and Tennessee Valley Authority obligations
—

 
1,549

 
—

 
—

 
—

 
—

 
1,549

State or local housing agency obligations
795

 
209

 
—

 
—

 
—

 
—

 
1,004

Other
451

 
101

 
—

 
—

 
—

 
—

 
552

Total non-mortgage-backed securities
1,246

 
4,291

 
—

 
—

 
—

 
—

 
5,537

Total investments3
$
1,246

 
$
23,068

 
$
3,536

 
$
301

 
$
1

 
$
6,250

 
$
34,402


1
Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.

3
At September 30, 2019, 16 percent of our total short-term investments were unsecured.

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The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2018
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Unrated
 
Total
Interest-bearing deposits
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Securities purchased under agreements to resell
—

 
200

 
250

 
500

 
—

 
3,750

 
4,700

Federal funds sold
—

 
1,700

 
2,080

 
370

 
—

 
—

 
4,150

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
—

 
2,988

 
—

 
—

 
—

 
—

 
2,988

GSE multifamily
—

 
9,444

 
—

 
—

 
—

 
—

 
9,444

U.S. obligations single-family2
—

 
4,492

 
—

 
—

 
—

 
—

 
4,492

U.S. obligations commercial2
—

 
1

 
—

 
—

 
—

 
—

 
1

Private-label residential
—

 
4

 
—

 
5

 
1

 
—

 
10

Total mortgage-backed securities
—

 
16,929

 
—

 
5

 
1

 
—

 
16,935

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations2
—

 
2,761

 
—

 
—

 
—

 
—

 
2,761

GSE and Tennessee Valley Authority obligations
—

 
1,484

 
—

 
—

 
—

 
—

 
1,484

State or local housing agency obligations
967

 
238

 
—

 
—

 
—

 
—

 
1,205

Other
443

 
98

 
—

 
—

 
—

 
—

 
541

Total non-mortgage-backed securities
1,410

 
4,581

 
—

 
—

 
—

 
—

 
5,991

Total investments3
$
1,410

 
$
23,411

 
$
2,330

 
$
875

 
$
1

 
$
3,750

 
$
31,777


1
Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.

3
At December 31, 2018, 13 percent of our total short-term investments were unsecured.

Our total investments increased $2.6 billion or 8 percent at September 30, 2019 when compared to December 31, 2018. Investments increased primarily due to an increase in money market investments as a result of increased liquidity holdings during 2019.

At September 30, 2019 and December 31, 2018, we did not consider any of our investments to be other-than-temporarily impaired. For more information on our evaluation of OTTI, refer to “Item 1. Financial Statements — Note 6 — Other-Than-Temporary Impairment.”

Mortgage-Backed Securities

We limit our investments in MBS to those guaranteed by the U.S. Government or issued by a GSE. Further, our risk management policies prohibit new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues. At September 30, 2019 and December 31, 2018, we owned $15.2 billion and $16.9 billion of MBS, of which approximately 99.9 percent were guaranteed by the U.S. Government or issued by GSEs and 0.1 percent were private-label MBS at each period end.

We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide.

DERIVATIVES

We execute most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).



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We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in our policies and Finance Agency regulations.

Uncleared Derivatives. Due to risk of nonperformance by the counterparties to our derivative agreements, we generally require collateral on uncleared derivative agreements. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty or a contractually established threshold level. A counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative agreements.

Cleared Derivatives. For cleared derivatives, the Derivative Clearing Organization (Clearinghouse) is our counterparty. We are subject to risk of nonperformance by the Clearinghouse and clearing agent. The requirement that we post initial and variation margin through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. However, the use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives.

The contractual or notional amount of derivatives reflects our involvement in the various classes of financial instruments. Our maximum credit risk is the estimated cost of replacing derivatives if there is a default, minus the value of any related collateral. In determining maximum credit risk, we consider accrued interest receivables and payables as well as our ability to net settle positive and negative positions with the same counterparty and/or clearing agent when netting requirements are met.

The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
September 30, 2019
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
 to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
A
 
$
409

 
$
1

 
$
—

 
$
1

Cleared derivatives
 
15,657

 
—

 
111

 
111

Liability positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
AA2
 
140

 
(35
)
 
35

 
—

A
 
4,881

 
(120
)
 
121

 
1

BBB
 
1,801

 
(45
)
 
46

 
1

Cleared derivatives3
 
15,227

 
—

 
18

 
18

Total derivative positions with credit exposure to non-member counterparties
 
38,115

 
(199
)
 
331

 
132

Member institutions2,4
 
231

 
—

 
—

 
—

Total
 
38,346

 
$
(199
)
 
$
331

 
$
132

Derivative positions without credit exposure
 
1,095

 
 
 
 
 
 
Total notional
 
$
39,441

 
 
 
 
 
 

1
Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.

2
Net credit exposure is less than $1 million.

3
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at September 30, 2019.

4
Represents mortgage loan purchase commitments with our member institutions.

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The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2018
 
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Liability positions with credit exposure
 
 
 
 
 
 
 


Cleared derivatives1
 
$
40,940

 
$
(13
)
 
$
70

 
$
57

Total derivative positions with credit exposure to non-member counterparties
 
40,940

 
(13
)
 
70

 
57

Member institutions2
 
100

 
1

 
—

 
1

Total
 
41,040

 
$
(12
)
 
$
70

 
$
58

Derivative positions without credit exposure
 
7,796

 
 
 
 
 


Total notional
 
$
48,836

 


 


 



1
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA- by Standard and Poor’s at December 31, 2018.

2
Represents mortgage loan purchase commitments with our member institutions.


Operational Risk

We define operational risk as the risk arising from inadequate or failed processes, people, and/or systems, including those emanating from external sources. All of our activities and processes generate operational risk, including legal risk. Management has established policies, procedures, and controls to reduce the likelihood of operational risk. We perform annual risk assessments to identify, assess, mitigate, and report on operational risks outside of the Board’s risk appetite. Due to the manual nature of many of our processes, our operational risk exposure is closely monitored. As previously disclosed in our 2018 Form 10-K, we identified two material weaknesses in our internal controls over financial reporting resulting from control deficiencies in our IT general controls in the areas of user access and IT change management. We are actively working to remediate the identified material weaknesses and strengthen our internal controls over financial reporting. As a result of the control deficiencies and our ongoing remediation efforts, our operational risk remains elevated.

Model Risk

We define model risk as the risk of adverse consequences from decisions based on incorrect and misused model outputs. Throughout the course of our day-to-day activities, we utilize external and internal pricing and financial models as important inputs into business and risk management decision-making processes.

Information Security Risk

We define information security risk as the risk arising from unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems. Importantly, this definition includes the security of both digital and non-digital information as well as associated information systems and processes.

Information security risk includes the risk that cyber incidents could result in a failure or interruption of our business operations. We have not experienced any such disruption with a material adverse impact. However, we do rely heavily on internal and third-party information systems and other technology to conduct and manage our business and any disruptions to those items could have a material adverse impact on our financial condition and results of operations. We mitigate cybersecurity risk utilizing the concept of defense in depth, where multiple layers of security controls are implemented. Administrative, physical, and logical controls are in place for identifying, monitoring, and controlling system access, sensitive data, and system changes. In addition, we employ thorough security testing and training that includes regular third party facilitated penetration testing, as well as mandatory staff training on cyber risks. Given the importance of cybersecurity and ever-increasing sophistication of potential cyber-attacks, we expect to continue to strengthen our cyber-defenses. As a result of the control deficiencies previously disclosed, our information security risk remains elevated.


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Compliance Risk

We define compliance risk as the risk of violations of laws, rules, regulations, regulatory and supervisory guidance, and internal policies and procedures. Our Legal and Compliance departments are responsible for coordinating with our various business units in connection with its identification, evaluation, and mitigation of our compliance risks.

Strategic Risk

We define strategic risk as the risk arising from adverse strategic business decisions, poor implementation of strategic business plan, or a disproportionate response to changes in the industry and operating environment. We consider legislative and reputational risks to be components of strategic risk. From time to time, proposals are made, or legislative and regulatory changes are considered, which could affect our cost of doing business or other aspects of our business. We mitigate strategic risk through strategic business planning and monitoring of our external and internal environment. For additional information on some of the more important risks we face, refer to “Item 1A. Risk Factors” in our 2018 Form 10-K.

    


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk” and the sections referenced therein for quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our President and chief executive officer (CEO), and chief financial officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our President and CEO, and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this report. Based on that evaluation, and management’s previous identification of material weaknesses in our internal control over financial reporting at December 31, 2018, our President and CEO, and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2019.
As previously reported in our 2018 Form 10-K, management identified two material weaknesses in our internal control over financial reporting:

1.
We did not maintain effective user access controls to ensure appropriate segregation of duties and adequate restrictions on user and privileged access to the Bank’s IT applications, programs, and data. Specifically, we identified control deficiencies related to the provisioning, internal transfer, and removal of user access. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.

2.
We did not maintain effective control over IT change management, including controls to monitor developers’ access to production and testing of program changes. These controls are necessary to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented appropriately. We identified control deficiencies related to the approval of changes, execution of quality assurance reviews, and the monitoring of unauthorized system changes. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
Management is committed to improving our overall system of internal control over financial reporting, including taking necessary steps to fully remediate the identified material weaknesses. The following briefly describes certain remediation actions we have taken or plan to take to address these material weaknesses:

1.
Management is re-evaluating IT governance and controls and updating procedures related to access management. In addition, we are in the process of implementing controls over an automated access management system to facilitate the provisioning, deprovisioning, and certification of access to Bank systems, programs, and data.

2.
Management is re-evaluating IT governance and controls and updating procedures related to change management.

3.
Training will be provided to IT personnel focusing on controls related to user access and change-management over IT systems. In addition, training will be provided to ensure understanding of Bank policies and procedures.
Management believes that the measures described above should be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. We cannot assure you, however, that these steps will remediate such weaknesses, nor can we be certain of the timing or whether additional actions will be required or the costs of any such actions.

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Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2019, management continued to take the steps described above to remediate the material weaknesses identified at December 31, 2018. Other than these remediation steps, as outlined above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
    
As a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in certain legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairments of certain private-label MBS, as described below. The private-label MBS litigation is described below. After consultation with legal counsel, other than the private-label MBS litigation, we do not believe any legal proceedings to which we are a party could have a material impact on our financial condition, results of operations, or cash flows.

Private-Label MBS Litigation

As the Seattle Bank previously reported, in December of 2009, it filed 11 complaints in the Superior Court of Washington for King County relating to private-label MBS that it purchased from various dealers and financial institutions in an aggregate original principal amount of approximately $4 billion. The Seattle Bank’s complaints under Washington State law requested rescission of its purchases of the securities and repurchases of the securities by the defendants for the original purchase prices plus eight percent per annum (plus related costs), minus distributions on the securities received by the Seattle Bank. The Seattle Bank asserted that the defendants made untrue statements and omitted important information in connection with their sales of the securities to the Seattle Bank.

Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. We appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, we filed petitions for discretionary review of the appellate court’s rulings in December 2017 related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018. In June 2018, we filed a petition for discretionary review of the appellate court’s ruling in May 2018 on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million.

On October 3, 2019, the Washington Supreme Court reversed the judgment of the appellate court on the four certificates covered by our petition of January 2018 and reinstated our claims on those four certificates. We anticipate that the Washington Supreme Court will now grant the petition for review on the fifth certificate and then reverse that judgment and reinstate the claim on that certificate as well.

Litigation Settlement Gains

Litigation settlement gains are considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
We record legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. We incur and recognize these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. During the three and nine months ended September 30, 2019 and 2018, we did not record any net gains on litigation settlements.



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ITEM 1A. RISK FACTORS

For a discussion of our risk factors, refer to our 2018 Form 10-K. There have been no material changes to our risk factors during the nine months ended September 30, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Executive Changes

On September 13, 2019, we provided a notice of termination of employment without cause to Dusan Stojanovic, Executive Vice President and Chief Operating Officer. The effective date of Mr. Stojanovic’s separation from the Bank is November 13, 2019.

In connection with the departure of Mr. Stojanovic, effective October 1, 2019, we engaged Mr. Zeeshan Kazmi as Interim Chief Information Officer (“Interim CIO”) on a contract basis. Mr. Kazmi is currently the President/CEO of Zygotek, Inc., a management consulting firm and has previously held a number of different roles in management consulting, IT governance, cyber security, and technology engineering. Mr. Kazmi was the Chief Information Security Officer and led the Enterprise Architecture function as Chief Technology Officer for Gemological Institute of America in California from 2015 to 2019. From 2001 to 2015, he held various leadership roles in IT Risk & Governance, IT Portfolio Management, technology engineering, and cyber security. In his interim role, Mr. Kazmi will oversee the Bank’s information technology, information security and associated project management departments.




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ITEM 6. EXHIBITS
3.1
3.2
4.1
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

1
Incorporated by reference to our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).

2
Incorporated by reference to our Form 8-K filed with the SEC on December 17, 2018 (Commission File No. 000-51999).









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SIGNATURES

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 DES MOINES
 
 
(Registrant)
 
 
 
 
 
 
 
Date:
 
November 7, 2019
 
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Michael L. Wilson
 
 
 
 
Michael L. Wilson
President and Chief Executive Officer
 
 
 
 
 
 
 
By:
 
/s/ Donna S. Stone
 
 
 
 
Donna S. Stone
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
 
 
 


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